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MANAGEMENT
(Strictly as per the Syllabus of Pune University for
MBA, Semester – III)
Published by : Mrs. Meena Pandey for Himalaya Publishing House Pvt. Ltd.,
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Preface
It is our indeed pleasure and privilege to offer this book, ‘Enterprise Performance Management’
to our young, dynamic and beloved readers and students of management studies.
In the recent past, Enterprise Performance Management has emerged as a commanding for the
entire corporate world where the business world is more and more competitive. Now, the corporate
cannot afford only to workout plans or strategies without its ground reality.
Hence, the corporate managers have to be familiar with the basics of Enterprise Performance
Management as it would facilitate the corporate to gain, retain and sustain competitive advantage and
ensure the long-term success and prosperity. This book has been written in a lucid and simple
language with a view to facilitating and understanding of the basic concepts and their applications
from the viewpoint of decision making.
We express our deep gratitude towards our Vice-Chancellor Dr. W.N. Gade, Dean, Faculty of
Management; Dr. E.B. Khedkar, Father Founder and President of MAEER’s MIT; Dr. V.D. Karad,
Vice President and Executive Director of MAEER’s MIT; Dr. Mangesh T. Karad and Principal
Dr. R.V. Pujeri for his timely guidance and motivation for completion and writing of this book. A
successful achiever has to work on all possible parameters to maintain work-life balance. One
important parameter is ‘time’. Our parents kept reminding and encouraging us about the timely
completion of this book.
Our students, colleagues and readers have always appreciated our writings. They are the ultimate
‘value drivers’. Their ‘value expectations’ assess our performance towards quality of work. As an
author, our indebtedness to all of them is perpetual.
At the end, how do we forget the ‘almighty’ who reminds us of our inner strength!
We also take an opportunity to express our sincere thanks to publisher, Himalaya Publishing
House Pvt. Ltd., Mr. S.K. Srivastav, Mr. Abhijit Mane and their entire staff for their encouragement,
active co-operation and help in bringing out this publication.
Readers are most welcome to help us to improve the contents and presentation of this book. Let
‘creative thinking’ continue endlessly, so that the purpose and quality of book, ‘Enterprise
Performance Management’ improve perpetually.
Course Objective:
1. To acquaint the students with a perspective of different facets of management of an enterprise.
2. To provide inputs with reference to the Investment Decisions along with the techniques for those decisions.
3. To inculcate the evaluation parameters of enterprise in terms of expenses, control system and pricing.
4. To develop the knowledge of the concept of auditing and its applicability as performance management tool.
Unit Number of
Contents
Number Sessions
Unit - 1 1.1 Performance Management: Concept, Need, Linkages with Strategic Planning, 7+2
Management Control and Operational Control.
1.2 Performance Evaluation Parameters: Financial – Responsibility Accounting – Concept
of Responsibility Centres, Revenue Centre, Expense Centre – Engineered and Discretionary
Costs – Committed Costs, Profit Centre, Investment Centres. ROI, ROA, MVA, EVA –
DuPont Analysis (Numerical Not Expected – Interpretation Only) Limitations of Financial
Measures.
1.3 Performance Evaluation Parameters: Non-financial Performance Measures – Balanced
Scorecard, Malcolm Baldrige Framework.
1.4 Measuring SBU Level Performance: Concept, Need, Linkages with Enterprise
Performance Management – Goal Congruence. Transfer Pricing – Objective, Concept,
Methods – Cost Based, Market Price Based and Negotiated, Applicability of Transfer Pricing.
Unit - 2 2.1 Capital Expenditure Control: Concept, Need, Process of Capital Budgeting, Types of 7+2
Capital Expenditure Decisions – Pre-sanction, Operational and Post-sanction Control of
Capital Expenditure.
2.2 Tools and Techniques of Capital Expenditure Control: Performance Index, Technical
Performance Measurement, Post Completion Audit.
Unit - 3 3.1 Performance Evaluation Parameters for Banks: Customer Base, NPAs, Deposits, RoI, 7+2
Financial Inclusion, Spread, Credit Appraisal, Investments.
3.2 Performance Evaluation Parameters for Retail: ABC Analysis, Sell Through Analysis,
Multiple Attribute Method, Gross Margin Return on Investment (GMROI), GMROI as Gross
Margin/Average Inventory at Cost.
Unit - 4 4.1 Performance Evaluation Parameters for Projects: Project Control Process: Setting Base 7+2
Line Plan, Measuring Progress and Performance, Comparing Plan against Action, Taking
Action, Schedule Variance (Time Overruns), Project Cost Variance (Cost Overruns).
4.2 Performance Evaluation Parameters for Non-profit: Features of Non-profit
Organisations, Fund Accounting, Governance, Product Pricing, Strategic Planning and Budget
Preparations, Social Audit.
Unit - 5 5.1 Audit Function as a Performance Measurement Tool: Financial Audit, Internal Audit, 7+2
Cost Audit, Management Audit – Principles and Objectives (Audit Reports/Formats are
Expected to be Discussed in the Class From a Performance Measurement Perspective).
Contents
PERFORMANCE MANAGEMENT
Introduction
The world is fast becoming boundaryless. It is now evident that nations cannot be isolated from
others and prosper independently. Be it the sub-prime crises of 2008 in the US or the situation faced
by the South East Asian economies, it has a cascading effect the world over. Many nations are opening
doors for FDIs in different sectors which encourage the transnational movement of businesses and
organisations more swiftly.
India too has witnessed a similar situation after 1991. The acceptance of LPG policy (Libera-
lisation, Privatisation and Globalisation) has been helpful in eradicating the license raaj from India
and opening the doors of Indian Economy for Foreign Direct Investment in many public sector as well
as private sector organisations.
The License Raaj
Before the process of reform began in 1991, the government attempted to close the Indian economy
to the outside world. The Indian currency, the rupee, was inconvertible and high tariffs and import
licensing prevented foreign goods from reaching the markets. India also operated a system of central
planning for the economy in which firms required licenses to invest and develop. The labyrinthine
bureaucracy often led to absurd restrictions — up to 80 agencies had to be satisfied before a firm could
be granted a license to produce and the state would decide what was produced, how much, at what price
and what sources of capital were used. The government also prevented firms from laying-off workers or
closing factories. The central pillar of the policy was import substitution, the belief that India needed to
rely on internal markets for development, not international trade — a belief generated by a mixture of
socialism and the experience of colonial exploitation. Planning and the state, rather than markets, would
determine how much investment was needed in which sectors.
The LPG Policy
Liberalisation: It refers to slackening of Government Regulations. Some characteristics of Libera-
lisation are as under.
Reduction in import tariffs
Deregulation of markets
Reduction of taxes
Greater Foreign Investment
Privatisation: It allows the private businesses or services to take up the ownership of public
sector units or government enterprises.
Globalisation: It refers to joining with different economies to maximise progress.
The key recommendations of the Narasimha Rao Committee on LPG policy were as under:
● Bringing in the Security Regulations (Modified) and the SEBI Act of 1992 which rendered
the legitimate power to the Securities Exchange Board of India to record and control all the
mediators in the capital market.
● Doing away with the Controller of Capital matters in 1992 that determined the rates and
number of stocks that companies were supposed to issue in the market.
● Launching of the National Stock Exchange in 1994 in the form of a computerised share
buying and selling system which acted as a tool to influence the restructuring of the other
stock exchanges in the country. By the year 1996, the National Stock Exchange surfaced as
the biggest stock exchange in India.
● In 1992, the equity markets of the country were made available for investment through
overseas corporate investors. The companies were allowed to raise funds from overseas
markets through issuance of GDRs or Global Depository Receipts.
● Promoting FDI (Foreign Direct Investment) by means of raising the highest cap on the
contribution of international capital in business ventures or partnerships to 51 per cent from
40 per cent. In high priority industries, 100 per cent international equity was allowed.
● Cutting down duties from a mean level of 85 per cent to 25 per cent, and withdrawing
quantitative regulations. The rupee or the official Indian currency was turned into an exchange-
able currency on trading account.
● Reorganisation of the methods for sanction of FDI in 35 sectors. The boundaries for
international investment and involvement were demarcated.
The Impact of LPG Policy on Indian Organisations
The greatest threat the Indian organisations faced was FDI. It was allowed not only through
partnerships but the foreign organisations were allowed to start up their campuses in India. These
organisations came up with their set ups, state of the art technologies, cultures, styles of management,
policies, practices and none the less pay packages. They created a cut throat competition for the
indigenous organisations. The Indian organisations had a pressure to perform and provide quality
products and services to sustain the competition. Thus the challenges before the Indian Organisations
were to be
Cost Effective/Efficient
Competitive
Restructuring themselves
Involved in R&D
Managing professionally
Attracting and retaining talent
Building brand
Gaining market share
Thinking globally and acting locally
In short to be successful in the struggle for their existence, what the Indian organisations
needed the most was an effective performance management.
PERFORMANCE MANAGEMENT
Managing employee or system performance and aligning their objectives facilitates the effective
delivery of strategic and operational goals. Some proponents argue that there is a clear and immediate
correlation between using performance management programmes or software and improved business
and organisational results. In the public sector, the effects of performance management systems have
differed from positive to negative, suggesting that differences in the characteristics of performance
management systems and the contexts into which they are implemented play an important role to the
success or failure of performance management.
Concept of Performance Management
Performance Management in simple term means managing the performance of an organisation.
Any organisation operating in a business environment works for achieving the vision, mission and
objectives. Also it aims at creating a position and brand for itself in the market so that it can gain
maximum market share and be more effective and efficient. An effective method of performance
management helps in achieving these objectives.
Management basically means doing right things and doing things rightly. For doing the things
rightly a manager has to plan, direct, organise and control the resources of an organisation. This helps
in getting the job done right at the first time with minimum or no wastage and increasing the profit.
For doing the right things the manager has to have complete understanding of organisation’s vision
and mission, complete understanding of organisation’s strengths and weaknesses, effective strategy
formulation, effective planning and forecasting of business goals and objectives, effective manage-
ment of finances and effective management of supply chain so that the goods reach the customers in
time.
For both the above mentioned activities that is doing right things and doing things rightly, a
manager has to establish the value or standards of “right” and then compare the actual with the
standards so that the gap can be understood and then take corrective action to bridge the gap or match
the variance.
Performance management is all about improvement—Synchronising improvement to create value
for and from customer with the result of economic value creation to stakeholders and owners.
Performance Management can be broadly defined as assessment of employee, process, equip-
ment or other factors to gauge progress towards predetermined goals.
Definitions of Performance Management by Different Authors
A means of getting better results by understanding about what is to be achieved and of managing and
developing people in a way which increases the probability that it will be achieved in the short and the
longer term. – Armstrong
Performance management is a “process by which the company manages its performance in line with
its corporate and functional strategies and objectives”. This definition is often used in management
research studies. – Bititci, Carrie & McDevitt, 1997
Performance management is the objective of that process to provide an integrated control system,
where the corporate and functional strategies are deployed to all business processes, activities, tasks and
personnel, and feedback is obtained through the performance measurement system to enable appropriate
management decisions. The ultimate purpose of that process is to improve company performance.
– Bititci, Carrie & McDevitt
Performance management is both a strategic and an integrated approach to delivering successful
results in organisations by improving the performance and developing the capabilities of teams and
individuals. – Armstrong and Baron
Aims of Performance Management
As Armstrong and Baron (2005, p.2) stated that “the overall purpose of performance
management is to contribute to the achievement of high performance by organisation and its people.”
High performance is referred to the means of acquiring the desired targets by developing the capacity
and potentials of present people who are contributing in the achievement of the organisational goals.
On the other hand, according to (Lockett, 1992), performance management is aiming at
developing the people concerned with the required commitment and competencies for working
towards the shared objectives within the organisational structure.
The structure is designed with the main aim of improving both the individual and organisational
performance by providing developmental feedback, assisting employees, giving them the proper tools
and equipment to deliver good quality tasks and moving on the path to a better performance.
Performance management does make sure that there is improvement in the organisation’s process
on a continuous basis in order to raise the competency bar of the subordinates by enhancing their own
skills and knowledge in terms of roles, responsibilities, accountabilities and the expected behaviours.
The continuous review will drive the people towards doing the right things at the right time.
Teamwork cannot be left behind in the main aim of performance management, as it contributes in
accomplishing optimum results through people.
Below is a summarised list of the major aims of performance management:
To enable the employees towards achievement of better-quality standards of work perfor-
mance.
To help the employees in identifying the knowledge and skills required for performing the
job efficiently as this would drive their focus towards performing the right task in the right
way.
Boosting the performance of the employees by encouraging employee empowerment,
motivation and implementation of an effective reward system.
Promoting a two-way system of communication between the supervisors and the employees
for clarifying expectations about the roles and accountabilities, communicating the
functional and organisational goals, providing a regular and a transparent feedback for
improving employee performance and continuous coaching.
Identifying the barriers to effective performance and resolving those barriers through
constant monitoring, coaching and development interventions.
Creating a basis for several administrative decisions strategic planning, succession planning,
promotions and performance based payment.
Promoting personal growth and advancement in the career of the employees by helping them
in acquiring the desired knowledge and skills.
Therefore, we can say that performance management approach has become a fundamental tool in
the hands of the corporate as it ensures that the people maintain the corporate values and tread in the
path of accomplishment of the ultimate corporate vision and mission. It is a forward-looking process
as it involves both the supervisor and also the employee in a process of joint planning and goal setting
in the beginning of the year.
Process of Performance Management
Planning
Establishing standards
of performance
Comparing actual
against standards