Corporate Performance Management

David Wade, Ron Recardo

• Publisher: Routledge
• Year: 2009
• Print ISBN:
  9781138146990
• eBook ISBN:
  9781136413896
• Topic: Business
• Subtopic: Business General
• Index: Business

Business experts, business economists, and organizational psychologists agree that a specific business strategy must be chosen for a corporation to excel. Beyond the strategy, companies must have a performance measurement system that ties every aspect of the organization - from the boardroom to the factory floor - to the strategy. In their book 'Corporate Performance Management', noted authors David Wade and Ron Recardo show companies how to craft a strategic focus and create sound business strategy by using a unique and pragmatic performance-measurement system. Concepts in the book are illustrated by 'real world' case studies. It provides tools and techniques to show how to apply the concepts within an organization. David Wade is the director of performance measurement for Aetna, Inc., and the author of several business-related books and articles. Ron Recardo is the founder and managing partner of The Catalyst Consulting Group, L.L.C. The author of several articles and books, he is a frequent speaker at meetings of professional associations, trade groups, and senior executives.

Corporate Performance Management: An Overview

What We Know

Business management fads come and go on a regular basis. During the last 70 years, we have seen everything from scientific management and theory “Y,” to empowerment, results-based management, and spiritualism in the workplace. There are four basic concepts at the heart of corporate performance management. Managers with the highest return on equity embrace these concepts:

1. Top managers adopt a well-defined and communicated business strategy.¹

2. Top managers close gaps between organization, technology, and process architectures. Closely aligning each element, within each architecture, greatly enhances company performance.

3. Top managers align all the activities from top to bottom within the organization. If an activity doesn't add value, managers outsource or eliminate it.

4. Top managers adopt a specific set (more than 10, less than 30) of key performance measures covering a diverse set of performance categories (e.g., employee satisfaction, customer satisfaction, productivity, growth and innovation, financial results).²

Business experts, business economists, and organizational psychologists all agree that management must choose a specific business strategy for a corporation to excel. Leading American managers, from multi-industry General Electric to retailer Wal-Mart, have discovered that extraordinary financial results flow from a strategy and a detailed plan to implement it. Beyond having a strategy, the managers of these top financial performers emphasize something else: a performance measurement system that ties every aspect of the organization—from the boardroom to the factory floor—to the strategy. This is known as “alignment management.”

Alignment management occurs when all activities of a company bear a direct relationship to the business strategy. The combination of choosing a business strategy and adding the discipline of alignment leads to superior financial results—greater than 15% return on equity over multiple years. Companies that have consistently met that mark over the past five years by combining strategy with alignment include: Allied Signal, Coca-Cola, General Electric, Hewlett-Packard, JP Morgan, Merck, Motorola, and Wal-Mart.

Traditional corporate-level performance measures—financial and gross productivity results—have failed most corporations. Managers have become disillusioned with these “trailing” performance measures, because they have not helped them run the business. Savvy companies have learned that performance measures, diligently used, significantly affect organizational alignment. CEOs want performance measures that offer predictive power and provide a better understanding of the real costs associated with each process. Additionally, institutional investors are becoming more concerned with the long-term health and overall performance of the companies in which they invest. According to the Conference Board, many institutional investors are insisting that their portfolio companies develop a more balanced performance measurement system. Alignment management can help achieve that balance using three distinct levels of performance measures.

Strategic Focus

Frankly, for too long companies have tried to be all things to all people. They have not embraced any particular strategic focus. The business strategy is the first and most important performance measure. Take a look at General Electric. By the end of 1999, GE's stock was up 86% over a five-year period making it the most valuable company on earth, with a total market capitalization of $157 billion. And with earnings expected to hit $7.4 billion in the year 2000, it is poised to become America's most profitable company. What is GE doing right? Over a decade ago, GE determined that its business strategy was to be a product-focused company.

Exhibit 1.1
Three Levels of Performance Measures

Level/ Outcomes	Objectives	Design	Measurement Perspective
Organization	• The Overarching strategy • The value migration • Organizational alignment • The business plan	• Strategy-driven functions • EVA or CVA value of functions • Permeability of boundries • ABC/ABM-driven	• Financial perspective • Customer perspective • Organizational perspective • Operations perspective • Growth & innovations
Process	• Conformance to customer standards	• Process owner • Inputs • Outputs • Service level agreementrs • Boundary crossings	• Cost • Cycle time • Quantity • Conformance to standards
Job	• Report cards • Easy access • Motivation • Selection	• Process maps • Function charts • Task analysis	• Activities • Outcomes • Target measures • Data sources

With the strong backing of its management, GE set out to differentiate itself from industry competitors by producing extremely high-quality durable products and establishing a strong product image. The entire company was oriented toward implementing that strategy. By the Fall of 1995, GE began to face slower domestic growth and cutthroat pricing abroad for its big-ticket manufacturing items. GE responded by choosing another strategy—being customer-focused—and began transforming itself into a service-oriented company, from servicing hospital equipment, locomotives and jet engines to management consulting. Today, nearly 60% of GE's profits come from services, up from 16.4% in 1980.

What GE accomplished is extraordinary, but other companies also became leaders in their industries by selecting a strategic focus and implementing it through the discipline of alignment. Strategic focus directs how a company will deploy resources. The strategic focus is the criterion against which all activity within a company should be tested. There are three basic business strategic focuses: (1) cost-focused, (2) product-focused, and (3) customer-focused.

Cost-Focused Strategy. The cost leader strategic focus is directed at producing the least costly goods and services within a specific industry. A company must command prices that are lower but close to the industry's averages, while producing goods and services well below industry costs and equal to industry quality standards. No single way to achieve this strategic focus exists, and maintaining it requires iron discipline. The most common methods for achieving this strategy are the reduction of key processes’ cycle time; reduction in fully-loaded labor cost; activity-based management; and saturation of the market with standard products. Wal-Mart, GEICO, and the former U.S. Healthcare are examples of companies following a cost leader strategy.

Product-Focused Strategy. The product-focused strategy differentiates products and services along specific criteria that provide customers with unique, value-added features sold at a premium price. This means filling a niche not served by the cost leaders. The costs of products and services are still relatively important, and costs to the customer must be within one standard deviation of industry averages. Successful market-focused companies reduce the cost of any activities that don't affect their products’ and services’ unique qualities. Tactics for implementing this strategy include: better customer service, better distribution channels, and customization of products and services, availability of parts, and product/service image. Merck, JP Morgan and Hewlett-Packard are examples of companies following a product-focused strategy.

Customer-Focused Strategy. This strategy also involves differentiating products/services that provide customers with unique, value-added features sold at a premium price and filling a niche not served by the cost leaders. Nordstrom is the epitome of a customer-focused strategy: it offers fewer goods than other retailers but provides customers with the highest levels of service in the retail industry. Customers expect to pay a premium for that service.

Corporate Initiatives

Corporate initiatives are imposed either externally (e.g., regulations of a government agency) or internally (policies handed down by senior management). They require that a process or policy either change or be scrapped for a new one. Corporate initiatives, therefore, compete with other priorities for capital resources. Since these initiatives also affect performance, companies must implement measures that influence behavioral changes to fulfill the mandate. Most corporate initiatives are short-lived, because they are designed and implemented to close a very specific gap in a company's performance. Unfortunately, corporate initiatives often fail, because senior management doesn't develop or incorporate performance measures to hold managers accountable for implementing and sustaining the corporate initiatives.

Balanced (Corporate) Scorecards

We've seen that a strategy plus alignment management is necessary to achieve high levels of success. A third key component is to measure the critical things a company does in multiple ways. The balanced scorecard (sometimes called the corporate scorecard), is a relative newcomer to the business world. The corporate scorecard is the grouping of the major categories of key performance measures. This grouping can include financial, customer, organizational, technology and innovation, or operational key performance measures. Corporate score-cards became popular as managers increasingly realized the limitations of traditional financial performance measures. In business, most financial measures are trailing or historical (statistically, dependent variables). Most companies typically look only at financial results to measure performance. But top performing firms today use a balanced set of key performance measures.

Key performance measures guide both management and employees in their effort to increase customer satisfaction and shareholder value. The purpose of corporate scorecard is to communicate strategic direction; establish performance categories, baselines and targets; identify which business processes directly impact cash flow; and provide the links between strategy, the business plan, and employees’ activities. Corporate scorecards are often inter-related and must be in harmony with each other. A company cannot forsake research and development and customer satisfaction for the sake of quarterly profits and expect to exist as a growing concern.

Companies that focus only on financial performance measures constantly look over their shoulders, examining past performance, which is over and done. Corporate scorecards, on the other hand, include both leading and trailing performance measures. Trailing measures (statistically, dependent variables) generally include all of the financial performance measures. Leading performance measures (statistically, independent variables) might include customer satisfaction, productivity, growth and innovation, and human resource management performance measures. Leading measures can be manipulated to affect financial results.

The next section briefly examines the five major categories of key performance measures. It is important to note that the actual categories of measures used are situational and, therefore, may be quite different than the categories presented in Kaplan's book on the balanced scorecard.

Financial Perspective. Financial results are critical of course, but what are the most important financial measures? Cash flow is the vital sign of a company, according to Jack Welch, CEO of GE. Many economists would agree, arguing that increased cash flow directly results from tapping the needs of the market. Following are some of the most common old and new financial key performance measures. Note the absence of profit as a key performance measure—profit is important, but a company may go broke if managers chase it. Many companies would be better off if managers focused greater attention on the acquisition and retention of customers, the source of all profit, than forever wondering why they didn't make their margin numbers.

Customer Perspective. Customer satisfaction is at or near the top of leading companies’ key performance measures. The acquisition and retention of customers is the key to making money. Customer satisfaction is defined on a company-by-company basis. At McDonald's, which manages by a low-cost leader strategy, it means spending as little time as possible with the customer, i.e. quick service. At Nordstrom, which manages by using a customer focus strategy, it means being empathetic wi...

Table of contents

• Front Cover
• Halftitle
• Title Page
• Copyright
• Content
• Foreword
• Acknowledgments
• 1 Corporate Performance Management: An Overview
• 2 The Strategic Focus: The Context for All Performance Measures
• 3 Creating and Implementing a Strategy
• 4 Organizational Architecture
• 5 Technological Architecture
• 6 Process Architecture
• 7 The Corporate (or Balanced) Scorecard
• 8 The Business Planning Process
• 9 Process Performance Measures
• 10 Job and Individual Performance Measures and Management
• Conclusion
• Index