PERFORMANCE

MANAGEMENT CONCEPT
DEPARTMENT OF INDUSTRIAL ENGINEERING
INSTITUT TEKNOLOGI SEPULUH NOPEMBER (ITS)
SURABAYA
 The increasing The revolution
importance in information
(and volatility) and
of financial communication
The technologies
markets
globalization The war for
of markets talent

TURBULENT AND COMPLEX BUSINESS

ENVIRONMENT
 Business
environment
changes
P.T INDONESIA PERFORMANCE STATUS drastically

COLDSTORAGE PERFORMANCE STATUS POULTRY PERFORMANCE STATUS

Management must
make decisions
under turbulent
business
environment

MANAGEMENT TEAM
 STABLE ENVIRONMENT

?
PAST FUTURE
NOW
REAL MEASURES PROXY MEASURES

PERFORMANCE
REPORTS
 TURBULENT ENVIRONMENT

?
PAST FUTURE
NOW
REAL MEASURES PROXY MEASURES

PERFORMANCE
REPORTS
TURBULENT BUSINESS ENVIRONMENT
Greater
Greater risk in
uncertainty and
decision making
unpredictability

Past performance becomes less valuable for

guiding future strategic options

Making
‘wrong’
decisions can
be disastrous
The Challenge of Sustaining High Shareholder Returns
(1990–99)

Source: Strategos Institute (2001)

 COMPANY’S LACKING

Having a clear vision The importance of

and a well-defined adequate
The inability of Companies find it
strategy are not
companies to extremely difficult to
enough à the performance
efficiently and define a unique management systems
ability to execute
effectively define strategic position in as a critical success
strategy is more
and create customer an ever-changing factor for
important than the
(shareholder) value competitive arena
quality of the implementing
strategy itself strategy
 Functional organisation

Specialisation

Scientific Management:
standard labour grade, standard labour
The development hour/unit, standard material quantity/unit
in that era

Development of transportation and

telecommunication systems

Hierarchical
organisation structure

The invention of steam

engine and steel making
process
Cost/lb, Cost/hour, Cost/ton-mile and inventory
Performance stock-turn are used to measure the efficiency of
measurement internal processes, but are not used to measure the Standard product costs based on standard
system profitability of the company labour and material costs are used to measure
Profit gain is measured from market the internal processes and managers’
transaction performance

Frederick W. Taylor
New England Textile Mills Percy Longmuir
Fra Pacioli ( 15 th century ) Andrew Carnegie (Carnegie Steel Company) Harrington Emerson
Actors Albert Fink (Louisville &Nashville) G. Charter Harrison
Macy, Marshall Field, Sears (Distribution and Hamilton Church
retailing) G.P. Norton

Era
Artisan Shops Single Activity organisation Scientific Management

Period 1800 1880 1900

 Cheap micro-computer Customers are more
CIM, FMS
critical
Robotics
More producers Benchmarking
Just-In-Time compete in the market

Business Process
Total Quality Management
Re-engineering
Free trade agreements

The requirement of integrated

and audited financial report for
Product external parties Global market is more
diversification competitive

Multi-divisional
organisation
Requirement for more flexible
and reliable manufacturing system

The invention of
high speed process
technology

Individual, non-financial performance measures are used in addition

ROI is used to measure the
performance of unit operations
and the whole organisation
ROI is used to measure
to financial performance measures
divisions and the whole
organisation
Financial accounting based performance measures

Du Pont Powder Co. ~Quality: Costs of quality (Feigenbaum, Crossby), Malcolm

(F. Donaldson Brown, Pierre
Du Pont General Motor
Du Pont)
(William C. Durrant, Pierre
Du Pont, Alfred P. Sloan)
No significant development of performance Baldrige National Quality Award, European Quality
measurement system, traditional performance Award, Six Sigma (Motorola), M. Zairi
measurement system produces distorted, ~Time: Stalk, Hout, Azzone
irrelevant and late information ~Flexibility: Gerwin, Slack

The use of individual, non-financial

Vertically Integration: Multi-divisional
Centralised-Departmentalised Relevance lost performance measures in addition to
organisation
enterprises financial measures

1900 1920 1925 1980 1987

TRADITIONAL
PERFORMANCE MEASUREMENT SYSTEM

Financial-Accounting
based Performance
Measure § Financial Ratios
§ Market Value Added
§ Economic Value Added
To track how well
organization is doing
CRITICSM OF TRADITIONAL PERFORMANCE MEASUREMENT
SYSTEM (PMS)

• Financial performance measures lack the requisite variety to give decision-makers

the range of information they need to manage processes
• Performance measurement systems based primarily on financial performance
measures lack the focus and robustness needed for internal management and
control (Atkinson et al., 1997)
• Traditional PMS crisis measurement myopia, which essentially stems from the fact
that the wrong things were being measured (Andy Neely and Rob Austin, 2002)
 TRADITIONAL
PERFORMANCE MEASUREMENT SYSTEM:

§ Lack of relevance
§ Lagging metrics
§ Short-termism
§ Inflexible
§ Does not foster improvement
§ Cost distortion

Traditional performance measurement systems produce information that are too

late, too aggregate, and too distorted to be relevant for managers planning and
control decisions (Kaplan and Johnson)
The Need of Strategic Controls
§ Strategic control focuses on the dual questions of whether:
1) The strategy is being implemented as planned; and
2) The results produced by the strategy are those intended (Schendel and Hofer, 1979).

• Good strategic controls:

1) There should be a clear link between an organization’s strategy and its performance
measures
2) Good performance measures should predict the long-term financial success of the
business.
Reason for New Strategic Performance
Measurement System

Source: Gates (1999)

 Franchising

Extended Enterprises

Agile Manufacturing

Lean Manufacturing

Integrated performance measurement system

?
Activity-based Costing and
Throughput Accounting

B. Maskell, S. Globerson, J. R. Dixon, A. J. Nanni, T. E. Vollmann,

~R. Cooper R. S. Kaplan, D. P. Norton, Wang System, Cambridge Research Group,
~ Galloway, Waldron Strathclyde Research Group, Loughborough Research Group, Cranfield
Research Group

Cost accounting Future performance

improvement New performance measurement systems
measurement systems

1987 1990 1996 Future

DEFINITIONS (1)
• Performance management (PM) is all about improvement—synchronizing
improvement to create value for and from customers with the result of economic
value creation to stockholders and owners.
• Performance management is ‘‘the translation of plans into results—execution’’
• It is the process of managing an organization’s strategy because PM gives an
organization the capability to quickly anticipate, react, and respond to uncertain
changes.
DEFINITIONS (2)
• Performance measure is a metric used to quantify the efficiency and
effectiveness on an action
• Performance measurement is the process of quantifying the efficiency and
effectiveness of an action
• Performance measurement system is a set of structured metrics and
procedures to quantify both effectiveness and efficiency of activities
INTEGRATED PERFORMANCE MEASUREMENT SYSTEM

Performance management will only

deliver sustained success if it is integrated All (performance management) processes
and activities should be linked to the
organization’s strategy.
“STRATEGICALLY ALIGNED”

Integrated Performance Management

Systems

Competitive Long-term
Advantage Growth
PERFORMANCE MANAGEMENT CYCLE
(Closed loop system)
• Objective/target setting • Resource deployment
• Objective deployment • Training/coaching
• Resource bargaining • Continuous
improvement

Performance Performance
Planning Accomplishment

Performance Performance
Improvement Measurement

• Area of improvement • KPIs

• Causal factors • Structuring
• Action Plan • Prioritising
• Measurement
• Review
 Performance Planning

Last year Strategic plan Business environment

performance changes
(Improvement Programs)

Company Objectives Target Company

Objectives Setting Setting Target

Department Objectives Target Department

Objectives Deployment Deployment Target

Activity Plan Define Resources Resources

- Routines Bargaining
Activity Requirement
- Improvements
 Performance Accomplishment

Activity Plan Resources

- Routines Requirement
- Improvements

Progress Activity Plan Resources

Reports Execution Deployment
 Performance Measurement

Balanced Scorecard
Model

Identification of
Business Process
Key Performance Indicator (KPI) Key Performance Indicator
Map
Corporate, Business Unit
Corporate, Business Units

Identification of Key Performance Indicator

Activity Plan
B. Process, Activity
- Routines Key Performance Indicator (KPI)
- Improvements Business Process, Activity

Performance Reports
Performance Measurement Corporate, B. Unit,
Company B.Process, Activity
Target
Performance Review

Department Performance Problems

Target
 Performance Improvement

Performance Identification of
Problems
Causal Factors

Setting
Improvement Programmes

Improvement Programmes
- Target
- Schedule
- Resources
- Responsibility
 Implementation of performance
management leads to
continuous improvement

Performance
management

Performance
management
Performance
management
Performance
management

Better performance
 SITUATION
Business environment
changes

Managers should :

✓Understand exactly the nature of the competition

- Order qualifier criteria
- Order winner criteria

✓ Know precisely the critical business processes

✓ Ensure that the critical business processes are

executed properly
Company
performance
management
Order Qualifier and Order Winner
Criteria
• Order QualifierCriteria : the attributes of products/services
which enable them to enter to a particular market.
• All products or services compete in market fulfill Order Qualifier
Criteria, the winner is the one which also fulfill Order Winner
Criteria.
• Order Winner Criteria : the attributes of product/service which
make customers to buy that product/service, not the others.
 Exercise

Identify order qualifier and order winner criteria of “Sepeda motor bebek”
business.

Order qualifier criteria :

Order winner criteria :