PERFORMANCE MANAGEMENT SYSTEM

MAF651/JUN2018 (QUESTION 2)

Answer from group adda:

a. Write a report to the management of Mandiri Berhad (MB) explaining three (3) advantages of
exercising internal benchmarking. (10 marks)
1. Less expensive and time consuming
Internal benchmarking are cheaper compared to the external benchmarking and it is suitable for
the company that want to get the result of the benchmarking in a short time. This is because internal
benchmarking did not required the company to hire the expert to analyse data and the data needed
by them are already available in the company system. Based on the case of MB, the company
reduced its cost by exercising the internal benchmarking and the benchmarking can be done in a
short time.
2. Easier to get data and information
Internal benchmarking also make it easier for the analyst to get data and information they need
since the procedure to get the data and information is easier compared to the external
benchmarking. Based on the case of MB, the company is able to get the data and information
needed for the exercising the internal benchmarking directly from each department in the company.

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 3. Easier to understand information
Information that we get through the internal benchmarking are easier to understand since the data
are standardize and easy to understand compared to the external benchmarking that the analyst
need to know the format of the data first and then interpret it into the way that they can understand.
Based on the case of MB, the analyst for the company can analyse the company performance
easily since the data and information has been standardize and it is easier for them to understand
it since they are not required to study a various kind of information format that has been interpret
by each of the department in the company.

b. Give three (3) reasons why the current performance monitoring and benchmarking system
implemented by MB is inappropriate. Explain to the management how its performance
management and control can be improved by suggesting the most appropriate benchmarking
exercise. (15 marks)

1. Internal benchmarking is lacks external focus and may foster complacency and lack of seriousness.
Since the company are neglect the external focus, their customer satisfaction is low.
2. Internal weaknesses, such as cultural problem, leadership problem and other problems.
If the company are having problems in their internal control, the internal benchmarking will not be
appropriate benchmark to use. This is because the company will benchmark their performance based
on the problematic system and they will repeat the same problem over and over.
3. The results are generally marginal or just adequate improvement is visible.
From the internal benchmarking, the company performance only increases a little. The company
performance increase as what they had have and they are not looking for the other competitor’s
achievement. So, every year, the company cannot improve their performance as higher as it can since
they improvement are only base on their current performance and not base on the what the other
competitors has achieve in the industry.

Based on the three disadvantage of internal benchmarking that I had highlighted, the best approach for
the company of Mandiri Berhad is to exercising the industry benchmarking to replace the current
benchmarking, which is internal benchmarking. This is because the industry benchmarking is more focus
to the external factors that can influence the improvement of the company by comparing the performance
of MB with the industry so that the company can make a change with an extraordinary improvement in
their yearly performance.

c. Suggest five (5) non-financial performance measures for service industry, that top management
of MB could use to assess the performance of QSV. Discuss the above proposed measures in
detail. (15 marks)
Non-financial performance measures are parameters that are used to evaluate non-financial
performance aspects of an organization. There are many types of non-financial performance measures
for service industry that top management of MB could use to assess the performance of QSV.

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 1. Customer satisfaction measures the degree to which customer expectations of service quality and
price.
It can measure using a survey that contains a series of questions designed to gauge aspects of the
service delivery to the customer. It can be conducted every three months. For example, Mandiri
Berhad could measure customer satisfaction by the number of customer re-visit QSV Resta to
evaluate the customer satisfaction.
2. multi-skilling of employee which measures the number of employees who have completed training
and acquired skills that allow them to undertake their own task as well as other tasks.
Mandiri Berhad measures the number of skill of each employee in QSV Resta. For example, one
employee can take an order from the customers and at the same time, he also has skills to make
chocolate milk shake.
3. Machine downtime also one of the non-financial performance measures.
It measures the number of hours that machines are unable to operate or percentage of total production
hours lost in a given period. The number of hours of milk shake machine in QSV Resta unable to
operate lead to decrease in the production. So, they need maintenance their milk shake machine to
reduce their machine downtime.
4. Schedule adherence or delivery on time is a non-financial performance measures.
It measure of whether the required products or services were provided to the customers by a certain
targeted time. Mandiri Berhad measures this performance by how many minute customers able to get
their order in QSV Resta.

MAF651/JAN2018 (QUESTION 2)

Answer from Farissa group:

A. Types of benchmarking
i. Strategic benchmarking
 The other companies are doing in terms of top management capabilities, strategic initiatives,
competitive product development and other long-term qualities and processes that have
proved successful.

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  For strategic benchmarking it use lag indicator as a performance measure since it is concern
with the long term quality and process.
 The management of private hospital apply the benchmark by using the process measure as
a performance measurement, its objectives is to improve the quality of care of a hospital,
monitor performance of healthcare, identify poor performers to protect public safety as well
as to provide information to consumers to facilitate the choice of hospital.
 A process measure lends itself to a straightforward interpretation for example is the more
people without contra-indications who receive a specific treatment, the better.
 The necessary remedial action is clearer such as use the treatment more often.
ii. Competitive benchmarking.
 It involves a company identifying the strengths and weaknesses of competitors in order to
assist them to prioritize the areas for performance.
 The objective is to catch up the competitors’ performance using continuous improvement
process.
 This benchmarking using lead indicator as a performance measures in order to achieve the
short term objective. The management of private hospital are comparing their hospital with
the other hospitals and clinic that serving in the same geographic area to ensure that they
are competitive against those in their market.
 They look at the hospitals and clinics that serve a different market or in different geographic
location.
 Since they are not competing against these entities, they can use the data to learn from one
another and further improve their processes.
iii. Internal benchmarking
Benchmarking between business units within the same company. For a private hospital, internal
benchmarking takes place between departments, division and offices within the same hospital
because many healthcare organization have many location and branches. Privates’ hospital who
has branches at different locations can make of the branch as a benchmark to other. The
management of private hospital is a user internal benchmarking. Internal benchmarking using the
lead indicator as performance measures in order to achieve the short term objective. This is one of
the simplest form since it only between the organization which is easy to access or get information
in the management.

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 B. Discuss with Linda any four (4) characteristics of a good performance measurement system and
one (1) reason on how continuous improvement can be part of performance measurement
system. (15 marks)
1. Link to strategy and the goals of the organizations.
It helps to promote goals congruence and ensure that employees are encourage to focus their
effort in the right direction.
2. Keeping it simple.
It is means the measures should be understandable and easy to communicate to employees. The
employees who are using and being evaluate by, a measure must be able to understand how the
measure was calculated and what they need to do to improve their performance in such area.
3. Recognizing controllability.
The measure should relate to the activities and process that are under the control of employees
who are responsible for achieving certain performance measure.
4. Emphasizing the positive.
The performance should be expressed in positive rather than negative terms in order to motivate
the improvement.

One of the reasons on how continuous improvement can be part of performance measurement system
is selecting relevant performance measures. The emphasis on continuous improvement means that, as
changes are made throughout the business, some performance measures should be dropped and others
added. Some companies focus their improvement efforts on problem areas and then refocus on other
areas when performances have improved.

i. Develop a BSC for Impiana Hotel showing clearly the objectives as well as the lag and lead
indicators for each of the four BSC perspectives. (12 marks)
 Financial objective is reflect the view of the shareholder or other stakeholder.
 Customer objective is specific customer objective may focus on market or sales performance.
 Internal business processes objective is formulated for specific processes that contribute to achieving
customer and financial objective.
 Learning and growth is focuses on the capabilities of the organization that must be developed to
achieve superior internal processes that create both customer value and shareholder value.

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 Perspective BSC Objective Lag indicator Lead indicator
Financial Increase profits Profitability Cost per room
Customer Increase customer Customer Number of
satisfaction satisfaction complaints
Internal business Improve the quality Number of new Service
processes of service service development time
Learning and growth Improve employee Employee Improvement
satisfaction satisfaction survey management hotel
facilities

ii. Suggest three (3) reasons why the balanced scorecard implementation may at times lead to an
unsuccessful outcome. (3 marks)
 Cause and effect assumptions may be too simplistic. Balanced scorecard are a simplification of the
complex workings of an organization and its business environment and its simple assumptions may
hold in practice.
 May encourage managers to manage numbers rather than observing operations directly.
 The timing between lag and lead indicators may be uncertain and will differ between perspectives.

MAF651/JULY17 (QUESTION 3)

Answer Scheme:

a. Explain four (4) advantages and one (1) disadvantages of non-financial based on measures in
manufacturing company: (15 marks)
Advantages:
1. As a link to long term organizational strategies
Financial evolution systems generally focus on annual or short term performance against accounting
yardsticks. For example, in manufacturing company, new product development may be important
strategic goals but may hinder short term accounting performance. By supplementing accounting
measures with non-financial data about strategic performance and implementation of strategic plans,
companies can communicate objectives and provide incentives for managers to address long term
strategy.
2. As an indicator for future financial performance
Even when the ultimate goals maximizing financial performance, current financial measures may be
capture long-term benefits from decisions made now. For example, when the company made
investment in research and development or customer satisfactions programs, it will incur large amount
of money. But successful research improve future profits if it can be brought to market. Non-financial
data can provide the missing link between these beneficial activities and financial result by providing
forward looking information on accounting.

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 3. As communication objective of the companies
By supplementing accounting measures with non-financial data about strategic performance and
implementation of strategic plans, companies can communicate objectives and provide incentives for
managers to address long term strategy.
4. Non-financial measures take into account the “intangible asset”.
“Intangible asset” such as intellectual capital and customer loyalty, that are omitted in financial
performance measures. Non-financial data can provide indirect, quantitative indicators of a firm’s
intangible assets. It found that measures related to innovation, management capability, employee
relation, quality and brand value explained a significant proportion of a company’s value, even allowing
for accounting assets and liabilities. By including these intangible asset elements in performance
assessment, it can encourage managers to make better decisions.
5. Non-financial measures take into account the qualitative measures.
Quantitative measures such as satisfaction especially among customer and employees. Investments
in customer satisfactions can improve subsequent economic performance by increasing revenue
loyalty of existing customer, attracting new customers and reducing transaction costs. Non-financial
data can provide the missing link between these beneficial activities and financial results by providing
forward looking information on accounting or stock performance. For example, interim research results
or customer indices may offer an indication of future cash flows that would not be captured otherwise.
6. Non-financial measures also provide information about managerial actions
Non- financial measures also provide information about managerial action and level of “noise” in the
measures. Noise refer to the performance measures beyond that are beyond the control of the
manager or organization, ranging from changes in economy. Managers must aware of how much
success is due to their actions or they will not have the signals they need to maximize their effect on
performance. Since, many non-financial measures are less susceptible to external noise than
accounting measures, their use may improve manager’s performance by providing more precise
evaluation of their actions
One disadvantages of using non-financial measures:
It is difficult to measures because most of the factors are not easily measures quantitatively. Thus it is
not easy to form an accurate evaluation on certain situation. Thus, the results may lead to sub-optimal
actions/decisions that may jeopardize the company’s performance in the future.

b. Three (3) characteristics of a successful balance scorecard in translate a strategy into

measurements are: (15 marks)
1. Must have cause and effect relationship
A correctly built balanced scorecard should tell the story about business unit’s strategy in such a
sequence within the realm of cause and effect relationships. The cause effect relationship is the main
features of the balance scorecard which distinguish it from other management systems that are only
a collection of financial and non-financial indicators without any attempt to draw link between them.

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 2. Must have outcomes and performances drives
These two elements cannot be separated from one to another, if only the outcome measures are
employed without considering performers drivers, it will not communicate how the outcome can be
accomplished. Every indication about whether the strategy had been successfully implemented or not
also fails to be provided. On the other hand when only performance drivers are utilized, it may allow
the business unit to be able to achieve short term operational improvement, but will fail to lead which
driver indicator that makes this improvement achievable. Thus, a good balance scorecard should
consists of appropriate mix of outcome that have been customized into business unit’s strategy.

3. Linkages to financials
The balance scorecard is complementary to the traditional system because it adds new non-financial
indicators and retains the financial measures within the systems. The scorecard keeps a strong
emphasis on outcome particularly financial ones, for instance Return on Investment (ROI) or
Economic Value Added (EVA). Many managers that utilize programs like Total Quality Management
(TQM), cycle time reduction and employee empowerment fails to link specific targets for improving
customers and ultimately financial performance. As a result, those organizations become disappointed
from the lack of tangible payoffs from their change programs in the end, all measures within the
balanced scorecard should be linked to financial objectives.

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 Performance dimensions The measures that can be applied

Financial performance: - Average profit per product line

- Cash flow per product line per month/year
It can be measured by looking at the efficiency of
- Average unit cost per product line
the business in managing its financial resources
- Labour cost total cost

Competitive advantage: - Number of floral arrangements

- Number of online visitors for website per day
The competitiveness of the business as compared
- Sales growth rate
to the other competitors it the market
- Number of boxes of roses

Resources utilisation: - Number of order complete

- Number of hours taken to complete order
How effective the business in utilizing its resources
- Number of hours taken to deliver order
and the efficiency of its operation
- Number of phone calls receive per month

Quality of service - Number of customer complaints

- Number of repeat orders
The ability of the business to meet the expectations
- Staff turnover rate
of customers
- Number of training days per employee

Innovation - Number of courses attended by workers

- Performance of innovation flowers
The ability of the business to apply new idea/system
- Performance of individual innovation
onto their products/services as well as in their
- Total investment new system
processes
- Total investment new equipment
- Number of innovation floral arrangements

LANGFIELD QUESTION:

PROBLEM 14.36

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PROBLEM 14.37

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PROBLEM 14.38

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PROBLEM 14.39

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PROBLEM 14.40

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LESSON PLAN (NOTES BASED ON LANGFIELD):

 THE PURPOSES OF PERFORMANCE MEASUREMENT

1. Organization level
Communicate the strategy and plans of the business and align employees’ goal with those
of the organization.
2. Individual level
Managers use performance measures to track their own performance against targets and
take corrective actions
3. Consideration performance measurement
Evaluate subordinates performance and provide rewards
4. Operation level
Guide senior managers in developing future strategies and operations.

 LIMITATION/DISADVANTAGES OF FINANCIAL PERFORMANCE MEASURES

 Financial measures emphasise only one perspective performance
 Conventional financial performance measures focus on consequences not the cause
 Financial performance measures provide limited guidance for future actions
 Financial performance measures may encourage actions which decrease both shareholder
and customer value

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  NON-FINANCIAL MEASURES:
 Advantages/benefit:
1. Emphasis strategy
Example: if a company’s business strategy is based on providing superior customer
service, it makes sense to measure the level of customer satisfaction
2. Can be the drivers’ future financial performance.
Example: managers may measure high product quality and customer satisfaction as
they believe that high performance in these areas will flow through to improved
financial performance
3. More actionable
Easier to investigate the source of low performance, compared to source of low cost
variance.
4. More timely
Some measures can be reported very quickly after a performance period and lead to
immediate correction of problem areas
5. More understandable and easier to relate to particularly t the operational level.

 Limitation/disadvantages/problem:
 Wide choice of non-financial measures available
 Inclusion of non-financial can be ad hoc and undirected
 Managers must necessarily make trade-offs between achieving some measures and
not others
 Some non-financial measure lack of integrity which is difficult to verify accuracy of
measures and potential for measures to be inaccurate, incomplete and manipulated
 Some measures may not easily translate into financial outcomes

 SELECTING OPERATIONAL MEASURES

1. Customer satisfaction: measured by survey administered to customers
2. Number of defects from this plant found at final line: measurement of faults in a product
that occur during the manufacturing process. It is better that defects are detected early in
the production process rather than later to minimal resources
3. Internal qualify audits: periodic inspections or testing of products
4. Productivity: the ratio of outputs produce per unit of input. Productivity is a driver of cots
that support a cost leadership strategy.

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 5. Stock status: the balance of inventory on hand. The inventory available high enough to
satisfy demand but not high to reduce storage cost
6. Accident report: this measures is often called a “safety report” and may be measured as
the number of accidents that employees experience per day or per week in the production
plant
7. Multi-skilling: number of employees who have attained skills to allow them to undertake a
range of operational tasks
8. Machine downtime: number of hours that machine unable to operate. Setup time is the
time that it takes to get the machine and materials ready to start producing a product
9. Schedule adherence, or delivery on time: prompt delivery to customers is an important
driver of customer value

 STRATEGIC PERFORMNCE MEASUREMENT SYSTEMS (SPMSs)

 A system that translates strategy into an integrated set of financial and non-financial
measures across a range of perspective
 Examples: balance scorecard, performance prism, intangible asset scorecard
 All are driven by the goals and strategic priorities of the organization and provide the
potential to identify case and effect relationships between a variety of measures, including
financial performance

 THE BALANCE SCORECARD

- A tool that translate an organization’s mission, objectives and strategies into performance
measures that can be used to monitor and manage performance.
- Used to implement strategy and to monitor and manage organizational performance
- May form part of the organization’s planning cycle

 Stages involved in the development and use of the BSC:

1. Articulate the mission, overall goas or objectives and strategic priorities of the
organizations
2. Develop specific objectives for each perspective and formulate a strategy map
3. Choose performance measures for each perspective
4. Develop targets for each performance measure
5. Cascade the BSC down the organization to divisions and other units
6. Plan and undertake initiatives and activities to implement the chosen strategies to
support the achievement of the objectives

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 7. Generate reports to monitor and manage actual performance against targets for units
and the organization as whole, assign units and personal balance scorecard to
specific managers to enhance accountability and improve performance

 The four (4) perspectives of the balance scorecard

1. Financial perspective
- Reflects perspective of the shareholder
- Summarizes the financial outcomes of decision and actions
- Measures include cost and product, ROI, cash flow measures, shareholders
value measure
2. Customer perspective
- Measures the company’s success in achieving customer value
- Outcome (lag) measures include customer profitability, market share, number
of new customer
- Lead indicators include on time delivery, number of defects
3. Internal business process
- Objectives relate to specific process that contribute to customer and financial
objectives
- Measures of cost, product quality, time based measures, new product
development
4. Learning and growth
- Focus is on the capabilities of the organization to achieve superior internal
process that create both customer and shareholders value
- Delivers long term growth and improvement
- Measures focus on employee capabilities, capabilities of information systems
and organizational climate

 How successful balance scorecard

General Characteristics:
- Cause and effect assumptions may be too simplistic
- May encourage managers to manage the numbers rather than observing operations
directly
- The timing between lag and lead indicators may be uncertain and will differ between
perspectives

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 Design and Implementation Issue
- Top down design may lead to limited manager buy in (organization culture that the
lower level acceptance)
- Linkages between measures may not have been rigorously tested and validated
- Implementation may involve major change and resistance
- Unrealistic expectations for improvements by managers

 STRTEGY MAPS
 A visual representation that explains the cause and effect relationships that link the
objectives of the perspectives of the balance scorecard and the organization’s objective
 Causal linkages within strategic performance measurement system (SPMS)
Lag Indicators
- Measures that help managers monitor progress toward objectives
- Provide limited information to help managers monitor performance directly
- Aggregated financial measures, market share, customer satisfactions measures
Lead Indicators
- Measures of the factors that drive outcomes and which provide information that is
actionable
- Relate to the process and activities of the business
- Improvements in these measures should, over time, flow through to improvements in
lag indicators
 SPMS may rely on cause and effect linkages between measures in different perspectives
 In practice:
- Not all organizations use lag an lead indicators
- Lag indicators may be called outcome measures or key performance indicators (KPI)
- Lead indicators may be called driver measures or key performance drivers (KPD)
- Some organizations identify and measures critical success factors
- The number and types of perspectives in balance scorecard will differ across
organization

 NON FINANCIAL PERFORMANCE LEAD TO FINANCIAL PERFORMANCE

Improvements in non-financial performance will not result in improve in profit if:
1. The wrong strategist priorities emphasis
The performance measurement systems may be directing employees to focus on areas
that will not lead to the achievement of the company goal.

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 2. The failure to utilise freed up resources
Many improvements in areas such as productivity and quality effectively expand the
productive capacity of the business.
3. A lag between non-financial and financial performance
Sometimes an improvement in areas such as customer satisfaction and quality may not
result in improved financial performance in the same time period.
4. Incentives to engage in dysfunctional behaviour
Came from manager behaviour such as manipulating measures. The design of the
performance measurement system can provide incentives to maximize performance in
some area of the business but maybe expenses of other areas.

 BENCHMARKING
 Benchmarking: a process of comparing the products, functions and activities of an
organization against other business to identify areas for improvements and to implement
continuous improvement
 Best practices companies is the business that are high performance in relation to a
particular practice or process

 Steps in benchmarking process:

1. Identifying the functions or activities to be benchmarked and performance measured.
The functions and activities to be benchmarked will be those that are vital to the
achievement of the business objectives.
2. Selecting benchmarking
These are organizations that are regarded as the best performers in particular areas
they are not always in the same industry.
3. Data collection and analysis
The objective of this phase to identify performance gap which is the extent to which
a business needs to improve to reach best practice.
4. Establishing performance goals
This involves planning new process and practices to achieve performance goals and
narrow the performance gap.
5. Implementing plans.
Implementation of improved practices requires ongoing measurement of performance
to assess the extent of the performance gap, and taking corrective actions to improve
performance where necessary.

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  Forms of benchmarking
1. Internal benchmarking: benchmarking operations hat are internal to the larger
business group
2. Competitive benchmarking: benchmarking with companies in the same industry
3. Industry benchmarking: against companies that have similar interest and
technologies within an industry which the performance measures and practices
directly comparable
4. Best in class or process benchmarking: benchmarking against the best practices that
occur in any industry. Some businesses try to normalise the measures to make them
directly comparable. Normalisation refers to the practice of removing the effect of
factors outside the control organization, so that narrowing the performance gap is
achievable.

 Benchmarking against competitors cost structures

- cost can be inferred by using publically available information, such as sales volume,
market share, product mix
- industry sponsored databases
- stockbroking firms
- specialist benchmarking consulting firms may provide data

 DESIGNNING COTEMPRORARY PERFORMANCE MEASUREMENTS SYSTEM

 Characteristics of effective performance measurement systems
 Link to strategy and the goals of the organizations
This helps to promote goals congruence and ensure that employees are encouraged
to focus their efforts in the right directions
 Keep it simple
Measures should be understandable and easy to communicate to employees
 Recognise controllability
When employees are responsible for achieving certain performance measure, these
performance measures should relate to activities and process that under their control
 Emphasise the positive
To motivate the improvements, performance measures should be express in positive
rather than negative terms

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  Be timely
Performance measures should be reported as close as possible to the period to which
they related
 Include benchmarking
To lift performance to meet the demands of the customer and competition, it is
important that performance measures are benchmarked to high external standards
 Embrace participation and empowerment
To encourage managers and employees to accept performance measures as fair, it
is important that they are involved in their formulation and operation
 Include only few performance measures
Too many performance measures can confuse and obscure real performance
 Link to rewards
Many companies believe that performance measures are more motivational if they
are lined to the reward system

 Designing measures for continuous improvement

Continuous improvement is the ongoing search for improved methods to reduce or
eliminate waste and improve performance in areas such as cost, quality and customer
service. Continuous improvement can be built into performance measurement system by:
1. Selecting relevant performance measure
Some companies focus their improvement efforts on problems areas and then
refocus on other areas when performance are improved.
2. Defining and redefine the measures.
The company should design loose measure opportunity to improve performance. If
the measures is perceived as not too difficult, employees may be motivated to
achieve this measure. As the performance improves, there become little room for
improvement, so the measure is made more challenging to provide a new
improvement cycle.
3. Making the targets more challenging
Employees may be set performance targets that increase in difficulty over time.

28 | N U R A ’ D H I A H B I N T I Z U L K I F L I – U I T M K A M P U S M A C H A N G