KEY SUCCESS VARIABLES & MEASURES OF PERFORMANCE

MCS / 4

INTRODUCTION
A key variable is a significant indicator of business activity, whose sudden and unpredictable change warrants immediate action by management. A small change in a key variable will have significant impact on the performance of the organization. E.g.: profitability, market position.

KEY VARIABLES
Sources of key variables: Industry characteristics. Environmental factors. Competitive strategy. Stake holders. Significant functions.

KEY VARIABLES
Industry characteristics: In a given industry, there are certain general requirements for success, which apply to all the firms. E.g.: in insurance industry, the basic requirement for the success of a firm is a positive investment performance.

KEY VARIABLES
Environmental factors: The economic and political climate consist of environmental factors which determine key variables. E.g.: publishers who depend on the postal services are affected by postal rates.

KEY VARIABLES
Competitive strategy: The strategy that a company adapts usually determines the variables that must be monitored and emphasized. An organization that follows a low- cost strategy will require an analysis of the product cost structure.

KEY VARIABLES
Stake holders: Aspects of the business that are important to key stake holders, namely customers, executives, suppliers may be considered as key variables.

KEY VARIABLES
Significant functions: In an organization with a function based structure, every manager can identify one or a few key variables related to the function of the unit.

KEY VARIABLES
Identification of key variables 1. Input variables: Raw material availability. Raw material quality. Raw material costs. 2. Production variables: Capacity utilization. Losses. Quality control. Maintenance. Costs. Delivery.

KEY VARIABLES
Marketing variables: Order book position. Market share. Institutional sales. Asset management variables. Asset turnover. Working capital turnover.

KEY VARIABLES
Types of variables broadly classified as: Strategy. Structural. Process. Environmental.

KEY SUCCESS VARIABLES

KEY SUCCESS FACTORS / VARIABLES What are they? FINANCIAL & NON-FINANCIAL measures NON-FINANCIAL measures:1. CUSTOMER-FOCUSED: Bookings, Backorders, Market Share, Key a/c orders, Customer satisfaction / retention / loyalty. 2. INTERNAL BUSINESS PROCESS: Capacity utilization, On-time Delivery, Inventory turnover, Quality, Cycle time(processing + storage + movement + inspection)

IMPLEMENTING

PMS

It involves 4 general steps. 1. Define STRATEGY. 2. Define MEASURES OF STRATEGY. 3. Integrate measures into the MANAGEMENT SYSTEM. 4. REVIEW MEASURES & RESULTS frequently.

IMPLEMENTING

PMS

Difficulties in Implementing PMS 1. Poor Correlation between Nonfinancial Measures & Results 2. Fixation on Financial Results 3. Measures not updated 4. Measurement overload 5. Difficulty in establishing trade-offs

EVA
In corporate finance, Economic Value Added or EVA, 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). 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.