Types Of Performance Measurement Techniques In Businesses

Many business people complain about big spending in the early days of business development. Large expenditures cause businesses to become vulnerable to failure and not be able to survive for a long time. Actually, this can be overcome by business budgeting. Business budgeting makes every company's income and expenditure predictable and measurable so that it helps businesses determine the direction of their business in the future. Budgeting is a plan that is arranged systematically and covers all activities of the company, expressed in a monetary unit, and applies within a certain period in the future. “Active participation in the setting of budgetary goals encourages employees to have clearly defined goals in mind and be willing to accept these goals as part of their responsibilities, as well as to strive toward their accomplishment. Employees need to be informed and provide feedback as to whether budget goals have been achieved or not, as it is an important motivational variable.” Kenis (1979) also said “Budgetary evaluation is referred to as the extent to which budget variances are traced back to individual departmental heads and used in evaluating their performance. The ways in which budgets are used in performance evaluation tend to influence behaviors, attitudes, and the performance of employees”.

Benchmarking

“Benchmarking is the process of comparing one's business processes and performance metrics to industry bests and/or best practices from other industries. Dimensions typically measured are quality, time, and cost. Improvements from learning mean doing things better, faster, and cheaper”. Most organizations only compare the benchmarking analysis with their competitors within the same industry, this is a common mistake. As Langdale & Holland (2012) said, “Before looking outside our own organization, we need to consider looking internally across our organization for a best practice approach to a specific activity.”

Balance Scorecards (BSC)

According to Kaplan (1996), “Balanced Scorecard (BSC) provides managers with the instrumentation they need to navigate to future competitive success”. The basic principal of BSC is being a measurement point of view of a company not only in financial aspect but also in addition of other measurement aspects such as customer satisfaction rate, internal operations process, and the ability to innovate. Innovative organizations use BSC as a strategic management system to manage their long term strategy, clearing and translating business vision and strategy, communicate and correlate various initiative, and increase feedback from strategic learning.

In BSC, there are four strategic and measurement perspectives:• Financial PerspectiveBSC uses some common indicator have been used by many organizations such as return on investment (ROI), return on equity (ROE), economic value added, and etc. These measurements are to have clear visualization on whether all the strategic implementations actually have significant impact on business operation.

Internal Business Process Perspective

In this perspective companies/ organizations usually try to identify business process while it is running, and the possibilities for improvement on the current business process or creating a new process. Some parameters often used are response speed rate, service time, delivery time, shipping problems, and etc.

Customer Perspective

Companies/ organizations are mostly depend on their customer. Hence they have to be fully aware on any issues that have probability on affecting their customer relationship. In this perspective, companies/ organizations identify their market segment where the company/ organization will compete with their competitors within the same industry. Some parameters often used are customer satisfaction, customer retention, new customer acquisition, customer profitability, and etc.

Innovation Perspective

Running a company is like a continuous learning. Without learning, one cannot grow. This perspective is usually also called learning and growth. The focus of this perspective is the future performance and factors that support it. While three previous perspectives were all about identifying company goals in the future, innovation perspective describes on what kind of organization is needed to achieve those goals. Some parameters often used are employee’s satisfaction, employee’s suggestions, employee’s feedback, and etc.

Product Life Cycle costing (PLCC)

“The life cycle cost of an item is the sum of all funds expended in support of the item from its conception and fabrication through its operation to the end of its useful life.” In terms of effectiveness, strategic management of costs is affected by changes in the company’s environment. Life cycle costing was created to support company in controlling their costs, returns, and profits accumulated throughout the whole economic lifetime of a product. Product life cycle costing is an approach used to provide a long-term picture of product line profitability, feedback on the effectiveness of the life cycle planning and cost data to clarify the economic impact on alternative chosen in the design, engineering phase etc. It is also considered as a way to enhance the control of manufacturing costs.

Target Costing (TC)

Target costing is a “system of profit planning and cost management that is price led, customer focused, and design centered and cross-functional.” Target costing “initiates cost management at the earliest stages of product development and applies it throughout the product life cycle by actively involving the entire value chain”. According to Cooper & Slagmulder (1999), target costing allows companies to “prevent costs during design rather than reducing costs after the fact”. In this way, it keeps management focused on strategic issues rather than in activities aimed at fixing strategies or operations, but at the same time, emphasizes the fundamental role of controlling.

Throughput accounting (TA)

TA has evolved as one of the emerging accounting practices, which aims at improving profitability by considering the constraints that prevent the organization to achieve its desired throughput. Throughput accounting is a simplified, principle-based approach that offers managers supporting information for their decision-making in order to improve company profit. Throughput accounting provides the business intelligence used for maximizing profits. Conceptually, throughput accounting attempts to increase the speed or rate at which throughput is generated by the company’s products and services with respect to a company's constraint, whether that constraint is internal or external to the company.

Value Chain Analysis (VCA)

Value chains are complex sets of interrelated elements (public and private agents, domestic and foreign markets, inputs, outputs, production factors, institutions, environment and natural resources, etc).

Value Chain Analysis is the assessment of a portion of an economic system where upstream agents in production and distribution processes are linked to downstream partners by technical, economic, territorial, institutional and social relationships. A central concern of value chain analysis is to “unpack” the relationships between global lead firms and local producers – and the opportunities and constraints that result from entering such relationships.

Comparing BSC with other performance management system resulted that BSC has the ability over other system to present the different dimensions of the performance. The BSC has been a highly regarded performance measurement tools, which can measure different aspects in the company. The first companies which adopted BSC such as Mobil Oil Corporation’s North America Marketing and Refining, CIGNA Corporation’s Property & Casualty Division, Chemical Retail Bank, and Brown & Root Energy Services’ Rock water Division- these organizations used the Balanced Scorecard to create strategy focused organizations and have got successful strategy execution.