Differences In Perspectives

Traditionally, managers have measured performance based almost solely on financial results. But concentrating on financial results alone is analogous to a baseball player, in hopes of playing well, focusing solely on the scoreboard. Both the game score and financial measures reflect the results of past decisions. Achieving success when playing baseball and when managing a business requires that considerable attention be placed on actionable steps for effectively competing in the stadium, whether it is the baseball stadium or the global marketplace. The baseball player must focus on hitting, fielding, and pitching; the company must focus on performing well in activities such as customer service, product development, manufacturing, marketing, and delivery. Performance measurement for improving the conduct of these activities requires tracking of statistical data about the actionable steps that the activities involve.4

Managing for the long run has commonly been viewed as managing a series of short runs. Theory held that if a firm performed well in each of its short runs, then its future was secure. Although this approach has some appeal, it fails when the firm has not kept pace with long-range technical and competitive improvement trends. An organization needs time to improve its technology, human resources, and modes of operations. If managers think solely in terms of short-run performance and ignore the time required to make long-term improvements, the firm may be doomed in the global competitive environment. Some problems with traditional short-term financial performance measurements are listed in Exhibit 20-1.

• Unrelated to strategic goals

• Irrelevant to managerial decision making

• Add little or no value to business or customer

• Clog the information systems

• Send false positive signals

• Create barriers to improvements

• Send wrong messages source: Lakshmi U. Tatikonda and Rao J. Tatikonda, "We Need Dynamic Performance Measures," Management Accounting (September 1998), p. 50. Copyright by Institute of Management Accountants, Montvale, N.J.

3 Ibid.

4 Joseph Fisher, "Use of Nonfinancial Performance Measures," Journal of Cost Management (Spring 1992), p. 31.

In a sense, the long run never arrives: Future periods become the short run as soon as they become current and other periods replace them as the future. Even so, managers must focus on continuous improvements for the long run so that when the future becomes "now," the company will be strategically able to survive and prosper. For example, in the 1950s, Japan's automobile manufacturing companies were poorly financed and struggling to survive. Product quality was extremely low. Managers in these firms were motivated to adopt approaches such as kaizen, total quality management, and just-in-time processes to efficiently raise quality and lower costs. Such methods normally require years of dedication and commitment before implementation is truly effective and substantial benefits can be realized. This strategy was based on a belief that profitability and liquidity, both short-run measures, would result as the long run became the present. By making this commitment to the long run, these companies gained significant market share. Managing the long run requires building long-term relationships, proactively making investments in people and technology, and exerting effort according to a plan confidently believed to yield beneficial results in the future.

Short-run objectives generally reflect a focus on the effective and efficient management of current operating, financing, and investing activities. Although these objectives are predominantly financial, they may also be concerned with immediate customer satisfaction issues such as quality, delivery, cost, and service. In contrast, a firm's long-term objectives involve resource investments and proactive efforts made to enhance the firm's competitive position. Unfortunately, competitive position results from the interaction of a variety of factors. This situation requires that the firm be able to identify what factors are the most important contributors to the achievement of a particular long-run objective. Thus, as discussed in Chapter 4 relative to costs, the firm needs to determine the underlying drivers of competitive position, not just the predictors. For example, predictors of increased market share might include increased spending on employee training or capital improvements. But the true drivers of increased market share are likely to be an organization's product and service quality, speed of delivery, and reputation relative to those similar attributes of its competitors.

During each short-run period, the organization is striving not only for short-run success, but also toward achieving its long-run objectives. Although achievement will not be known until the future has become the present, the organization should establish its performance measurement system to ascertain long-run progress. The measurements used may need to be nonfinancial ones rather than the financial ones typically used to determine short-run success. One way to classify these nonfinancial measures is into the following four categories5:

operational measures (including administration, customer service, and human resources), customer measures (including product development, order processing, and inventory), soft measures (including shortages frequency, late shipments, and delivery errors), and employee measures (including staff turnover and staff morale).

Such nonfinancial metrics are appropriate in the performance measurement system under the following circumstances: if they can be clearly articulated and defined; if they are relevant to the objective; if responsibility can be ascertained; if valid data can be gathered; if targets can be set; and if internal and/or external benchmarks can be established. Under these conditions, such measurements are appropriate for the managerial purposes of planning, controlling, decision making, and evaluating performance.

5 Andrew Campbell, "Performance Measurement—Keeping the Engine Humming," Business Quarterly (Summer 1997), pp. 40-47.

Baseball For Boys

Baseball For Boys

Since World War II, there has been a tremendous change in the makeup and direction of kid baseball, as it is called. Adults, showing an unprecedented interest in the activity, have initiated and developed programs in thousands of towns across the United States programs that providebr wholesome recreation for millions of youngsters and are often a source of pride and joy to the community in which they exist.

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