Business Policy

Chapter 4
Key Performance Measures
A performance indicator or key performance indicator (KPI) is industry jargon for a
type of performance measurement. An organization may use KPIs to evaluate its
success, or to evaluate the success of a particular activity in which it is engaged.
Sometimes success is defined in terms of making progress toward strategic goals,
but often success is simply the repeated, periodic achievement of some level of
operational goal (e.g. zero defects, 10/10 customer satisfaction, etc.).
4 Primary Control Structure
1. Cost Production function, manager is only responsible for inputs
2. Expenses no production function, manager only control input consumed in
achieving goals (R&D and Accounting)
3. Profit Pricing function, manager controls marketing mix, pricing decisions,
advertising and commission structure.
4. Investment capital function, manager controls capital and working capital
decisions (inventory, receivables, payables)
Benchmarking and Determining Current Performance
Benchmarking - "The process of continuously comparing and measuring an
organization against private and public sector leaders anywhere within and outside
themselves, in order to gain information that will help them take action to improve
their performance."
Benchmarking forces functions to analyze themselves against the best in class and
to incorporate those practices into their operations. Business Improvement
Architects engages organizations in benchmarking in order to:
1.
2.
3.
4.

Satisfy customers
Set performance standards and targets based on what others are achieving
Pick up new ideas
Exceed the achievements of the best in the field

Many organizations that we work with have found significant savings by undertaking
a benchmarking study because it forces them to map their processes and eliminate
waste, old practices and redundancies before they feel prepared to begin an
external comparison.
The Business Process Improvement Benchmarking Process includes:
1. Identifying what is be benchmarked
2. Validating that the internal benchmark is clear, well documented and
measured

3.
4.
5.
6.

Identifying external benchmark organizations around the world

Determining the best approach to collect the data
Collecting and analyzing the benchmarking data
Incorporating the benchmark findings into the organizations internal
benchmark process, structure, etc.

Financial Performance Measurement It measures the results of a firm's

policies and operations in monetary terms. These results are reflected in the firm's
return on investment, return on assets, value added, etc.
1. Economic Value Added - is an estimate of a firm's economic profit being
the value created in excess of the required return of the company's investors
(being shareholders and debt holders). Quite simply, EVA is the profit earned
by the firm less the cost of financing the firm's capital. The idea is that value
is created when the return on the firm's economic capital employed is greater
than the cost of that capital. This amount can be determined by making
adjustments to GAAP accounting. There are potentially over 160 adjustments
that could be made but in practice only five or seven key ones are made,
depending on the company and the industry it competes in.
2. Return on Investment (ROI) - is the concept of an investment of some
resource yielding a benefit to the investor. As a performance measure, it is
used to evaluate the efficiency of an investment or to compare the efficiency
of a number of different investments.
3. Free Cash Flow (FCF) - is cash flow available for distribution among all the
securities holders of an organization. They include equity holders, debt
holders, preferred stock holders, convertible security holders, and so on.
4. Profit Zone The arena of the companys economic activity where high
profit organization to sustain profitability and ultimately appreciate in value.
Organization must identify profit zone in which they operate both at the
corporate and divisional levels.
5. Stock Price The economic performance measures mentioned previously
are vital to success of an organization, but traditional measures of financial
performance should not be overlooked. EVA and other related metrics
represent a new paradigm for firms and incorporating stock price as part of
the over-all equation may help to make those in the organization more
comfortable.
Customer Performance Measurement (CPM) is the acquisition, analysis and
the evaluation of performance-related customer information and an important
task of (analytical) Customer Relationship Management (CRM).

A Customer Performance Measurement System (CPMS) is therefore a CRM

system used to analyse, evaluate, control and communicate customer
performance and customer strategies.
CPM is an important instrument of analytical Customer Relationship Management
(aCRM) in order to improve the efficiency and effectiveness of process and
customer management.
Hearth of the aCRM resp. CPM is a relational customer database and a customer
data warehouse.

CPMs Includes
1. Feedback and Complaints - the more you know about what your customers
think and want, the easier it will be to cater for growing numbers of them.
Look for as many ways of capturing this information as possible, including:
a) sales data - what your customers choose to buy (or not to buy) provides
the clearest indication of their preferences
b) complaints - but remember that many customers will simply switch
suppliers before making a complaint
c) questionnaires and comment cards - a very useful source of
information, so consider using incentives to encourage more customers to
complete them
d) mystery shopping - having someone pose as a customer for research
purposes can give a very clear sense of how well you are performing
2. Customer Tracking - One of the most significant benefits of using a
customer tracking system is that it frees you up from the daily, mundane
activities of record keeping. It gives you and your employees more time to
focus on sales. Your customer tracking system should give you access to:
a. An easy way to track two-way communications between you and your
customers

b. Reports that will show you when and how your customers respond to
marketing touch points, outlining specific responses
c. A way to manage leads generated, with the best customer tracking
systems allowing you to view activity within the program, and alerting
you with high priority responses
d. Instant alerts when a customer has an urgent need or request, which
lets you respond immediately, increasing business from existing
customers
e. Monthly alerts that summarize less-urgent customer needs with their
timeframe of interest for each particular need, so you can prioritize
tasks
f. Customer activity around the clock, so you can view the schedule of
your marketing campaigns and look at each customers existing
activity
3. Customer profitability (CP) - is the difference between the revenues
earned from and the costs associated with the customer relationship in a
specified period.
4. Customer satisfaction Rating - a term frequently used in marketing, is a
measure of how products and services supplied by a company meet or
surpass customer expectation. Customer satisfaction is defined as "the
number of customers, or percentage of total customers, whose reported
experience with a firm, its products, or its services (ratings) exceeds specified
satisfaction goals.