Use of non-financial Use of non-financial measures in performance measures in performance evaluationevaluation

ContentContent

Traditional Financial PerformanceTraditional Financial Performance DefinitionsDefinitions ExamplesExamples Pros and Cons of Non-financial Pros and Cons of Non-financial

measuresmeasures Mistakes and SolutionsMistakes and Solutions ConclusionConclusion

Traditional Financial Traditional Financial PerformancePerformance

They only tell what has happened They only tell what has happened over a limited period in the over a limited period in the immediate past;immediate past;

They give you no indication of what They give you no indication of what is going to happen in the future;is going to happen in the future;

They do not relate to the strategic They do not relate to the strategic management of the business etc.management of the business etc.

DefinitionsDefinitions

The financial measures show the The financial measures show the impact of the firm’s policies and impact of the firm’s policies and procedures on the firm’s procedures on the firm’s current current financial positionfinancial position and its and its currentcurrent return on shareholders.return on shareholders.

The nonfinancial factors show the The nonfinancial factors show the firm’s firm’s current and potential current and potential competitive position. competitive position.

Examples:Examples:

Financial Measures of SuccessFinancial Measures of Success Non-financial Measures of SuccessNon-financial Measures of Success

Sales growth Sales growth Earning growthEarning growthDividend growthDividend growthBond and credit ratingsBond and credit ratingsCash flowCash flowIncrease in stock priceIncrease in stock price

Customer MeasuresCustomer MeasuresMarket share and growth in market shareMarket share and growth in market shareOn-time deliveryOn-time deliveryCustomer satisfactionCustomer satisfactionBrand recognitionBrand recognitionPosition in favorable marketsPosition in favorable marketsInternal Business ProcessesInternal Business ProcessesHigh product qualityHigh product qualityManufacturing innovationManufacturing innovationHigh manufacturing productivityHigh manufacturing productivityCycle timeCycle timeYield and reduction in wasteYield and reduction in wasteLearning and Innovation (Human Resources)Learning and Innovation (Human Resources)Competence and integrity of managersCompetence and integrity of managersMorale and firmwide cultureMorale and firmwide cultureEducation and trainingEducation and trainingInnovation and new products and manufacturing methodsInnovation and new products and manufacturing methods

A process is a sequence of activities A process is a sequence of activities linked together for performing a linked together for performing a particular task. particular task.

Example:Example:

Input Activity or Process Output

Inputs:Employee training

Employee experienceNumber of new menu items

Number of employeesFryer reliability

Fountain supply availability

Activity Counter service

Outputs:Line wait

Percent order accuracyFriendly service score

Advantages Advantages

Closer link to long-term Closer link to long-term organizational strategies;organizational strategies;

CCan provide indirect, quantitative an provide indirect, quantitative indicators of a firm's intangible indicators of a firm's intangible assetsassets;;

CCan be better indicators of future an be better indicators of future financial performancefinancial performance;;

LLess susceptible to external noise ess susceptible to external noise than accounting measures than accounting measures

DisadvantagesDisadvantages

Time and Cost;Time and Cost; Measures in many ways;Measures in many ways; Lack of causal links;Lack of causal links; Lack of statistical reliabilityLack of statistical reliability ““Measurement disintegration”Measurement disintegration”

MistakesMistakes

Not linking measures to strategyNot linking measures to strategy Not validating the linksNot validating the links Not setting the right performance Not setting the right performance

targetstargets Measuring incorrectlyMeasuring incorrectly

SolutionsSolutions

Develop a casual model;Develop a casual model; Pull together the data;Pull together the data; Turn data into information;Turn data into information; Continually refine the model;Continually refine the model; Base actions on findings.Base actions on findings.

ConclusionConclusion Non-financial measures are increasingly Non-financial measures are increasingly

important in decision – making and important in decision – making and performance evaluation;performance evaluation;

Companies should not simply copy Companies should not simply copy measures used by others;measures used by others;

The choice of measures must me linked The choice of measures must me linked to factors such as corporate strategy, to factors such as corporate strategy, value drivers, organizational objectives value drivers, organizational objectives and the competitive environment. and the competitive environment.

Performance measurement is a dynamic Performance measurement is a dynamic process, etc.process, etc.

Thank you very much for your Thank you very much for your attention!attention!