New Performance Measurement Analysis

New Performance Measurement Analysis

1.0 Introduction

The term ‘performance’ is a familiar term used in many aspects of everyday life. Most dictionaries define it as the manner or quality of functioning and it is appropriate to apply it to organizations, with regard to monitoring and quantifying their operating capabilities. Performance measurement system will be those traditional, financially-based performance measures which periodically summarize the organization’s performance for the benefit of shareholders, lenders, creditors and statutory authorities.

Performance measures are used to evaluate, control and improve production processes in order for companies to ensure achievement of their goals and objectives. Performance measures are also used to compare the performance of different organizations, plants, departments, teams and individuals, and to assess employees. Performance measurement is an important aid to make judgments and decisions.

Most of the performance measurement systems are used as a reporting mechanism (e.g. financial reports) while other systems are employed for controlling the performance of products, employees and other resources within an organization (e.g. costing systems, staff appraisal and reward systems). Performance measurement systems are also employed increasingly to develop an understanding about the competitive position of an organization within its business environment (e.g. customer satisfaction and competitor ranking systems).

2.0 Reasons move towards the New Performance Measurement System

The research literatures claim that many organizations have found traditional performance measures to be insufficient guides for decision making in today's rapidly changing and competitive environment. Traditionally, performance measures have been primarily based on financial data like return on investment, return on sales, price variances, and others. Traditional performance measures do not support and even inhibit the implementation of new strategies and practices. The traditional financial measures of performance are most useful in conditions of relative certainty and low complexity but may not suitable for the conditions faced by many organizations today (Govindarajan and Gupta 1985). Sole reliance on financial measures of performance does not reflect the importance of current resource decisions for future financial performance (Dearden 1969).

A common criticism of managing organizations based on financial measures of performance is that these measures induce managers to make short-run decisions. They will tend to focus on the current impacts of decisions without a clear link between short-run actions and long-run strategy (Dixon et al. 1990). By expensing costs of many improvements, the traditional financial measures also work against strategies based on quality, flexibility, and minimization of manufacturing time. For many lower-level employees, they might need non-financial performance measures that are more directly and accurately relate to outcomes that they can influence (McKenzie and Schilling 1998).

Some firms have recognized the importance of non-financial measures of performance many years ago such as General Electric in the 1950s, growing international competition and the rise of the Balance Scorecard (BSC) also have upheld the importance of non-financial performance measures. The BSC is a popular performance measurement system that uses multiple measures (Kaplan and Norton, 2001). Thus, recent innovations in performance measurement system seem to emphasize on the use of non-financial and integrated measures as well as on linking with strategies.

3.0 Compare and contrast traditional performance and non traditional Performance Measurement System.

There are several different in the traditional performance measurement and non traditional performance system.

1. Based on outdated traditional accounting system VS based on company strategy

The most significant feature of traditional performance measures is that they are based on traditional accounting systems. In contrast, the modern performance measurement is normally based on the strategy of the company. The overall objective of the modern type performance measurement is focus on how the company used it resource in achieving the company strategy. The traditional performance measures objectives have been to minimize costs, increase labour efficiency and machine utilization.

2. Mainly financial measures VS Mainly non-financial measures

Traditionally, performance measures focus on financial data (i.e. return on investment, return on sales, price variances, sales per employee,