Management Control Systems (2nd Edition)

Strategic Performance Control : Overview

The ability of the organization to craft strategies which effectively leverage on its resources or strengths and align them with the environment in which it operates depends on how well it addresses its critical success factors (CSFs). According to Rockart, CSFs are "the limited number of areas in which results, if they are satisfactory, will ensure successful competitive performance for the organization. They are the few key areas where things must go right for the business to flourish." They are "areas of activity that should receive constant and careful attention from management."

Each industry and, in turn, each organization, has a different set of CSFs. The alignment between the mission and strategic goals which determine the CSFs is ensured by strategic controls. Performance measures are required to track and monitor the activities which lead to the achievement of the CSFs. Performance measures are of three types: performance indicators (lead or lag indicators), key performance indicators, and key result indicators.

Performance indicators clearly identify the specific areas which need control intervention to improve organizational performance. Good performance indicators are Specific, Measurable, Attainable, Realistic, and have a Time perspective. Key performance indicators are identified from the performance indicators. Key performance indicators deal with aspects which, when improved upon, lead to radical performance improvements. If a key performance indicator is improved upon, it will have a positive ripple effect on most of the other performance indicators. Key result indicators indicate whether the approach toward achieving performance is appropriate but do not indicate the means or method to achieve better performance or outcomes. Key result indicators are useful for governance and are usually reported to the top management and the board on a monthly or quarterly basis.

The continuous monitoring/reporting of various performance measures has been greatly facilitated by advancements in information technology and systems (IT&S). Some of the business contexts in which IT&S is of strategic significance are: nature of operations (printing press, dairy processing); information intensity (hotels, airlines, banks, financial services companies); extent of geographical and operations spread (diversified conglomerates); and nature of industry (electronic chip design, software products, automobile manufacturing, pharmaceuticals).

'The Balanced Scorecard (BSC)' was proposed by Robert Kaplan and David Norton in 1992. It is a concept which combines financial and non-financial measures, short-term and long-term goals, the organization's market performance and internal improvements, past outputs and ongoing requirements. The BSC framework considers the customer perspective (To achieve our vision, how should we appear to our customers?); internal business process perspective (To satisfy our customers and shareholders, what business processes must we excel at?); and the innovation/learning and growth perspective (To achieve our vision, how will we sustain our ability to change and improve?); in addition to the financial perspective (To succeed financially, how should we appear to our shareholders?). In the implementation of the BSC, these perspectives are seen and evaluated in an interconnected manner and not as standalone perspectives. The BSC is useful as a tool for strategic performance control and strategic learning.

Chapter 3 : Overview