Performance Management, Globalization, and Competitive Strategy - Research Paper Example

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Integrating Strategy, Management and Change Table of Contents Table of Contents 2 Performance Management, Globalization and Competitive Strategy 4 Two Theoretical Perspectives for Strategic Performance Measurement 5 Strategic Control and Performance Measurement 6 Strategy and Measurement 7 Performance Prism 8 Balanced Scorecard 9 Clarifying Strategy 10 Communicating Strategic Objectives 10 Aligning Strategic Initiatives 10 Key Performance Gaps 10 Customers 11 Financial Perspective 11 Internal Business Process 12 Learning and Growth 13 Key Success Factor for Balance Scorecard 14 Use of Balanced Scorecard in Developing and Refining Strategy 15 Implicit Success Model 15 Market 18 Product 18 Resource 19 Operational System 19 Management System 19 Corporate Culture 20 Global Challenges 21 Australian Perspective 21 George Yip Model 22 Cost Globalization Driver 23 Government Globalization Driver 23 Market Globalization Driver 23 Competitive Globalization Driver 25 Conclusion 25 Reference 26 Performance Management, Globalization and Competitive Strategy Performance measurement has emerged as an important perspective of management in recent years. Academic researchers have pointed out significance of performance measurement in terms of both practical and theoretical perspective. The concept of performance measurement is multidimensional because the model incorporates not only accounting literature but other management fields like operation & production management, marketing and strategic management also. Organizational theory model played crucial role in developing performance measurement models such as Key Performance Indicator, Balance Scorecard and Performance Prism. Problem with the literature review of performance measurement is isolation because of disparate and fragmented findings of research scholars. Researchers have tried to create a link between Organizational effectiveness (OE) and performance measurement but unfortunately only a few of them have succeeded. Academic scholars have argued that organizational effectiveness plays cordial role for designing non financial elements of performance measurement tools. In 2000, Flamholtz and Aksehirli proposed a relationship between financial aspect of performance measurement and organizational success model. They analyzed both financial and non financial elements of balanced scorecard in order to test the hypothesized relationship. They tested eight pairs of companies of various industries and Average Return on Equity was used as an indicator of financial performance. They used Friedman two way variance analysis and found statistically significant relationship between financial aspect of performance measurement and organizational success model (Flamholtz, 2003, pp. 15-26). Two Theoretical Perspectives for Strategic Performance Measurement Multidimensionality of performance always creates rift for deploying strategic performance measurement models. Multidimensionality of performance is exemplified due to involvement of complex financial and non financial elements. There is a common belief in the field of performance measurement that if the new models such as Balance scorecard or Performance prism are implemented, there will be overall organizational performance improvement (Bourne et al., 1999, pp. 373-95). Unfortunately the belief is partially true because impact of performance management is very much influenced by organizational objective. The study will be incomplete without mentioning impact subsystems in performance measurement. Researchers have pointed out that deploying enterprise strategic performance management is far more effective in comparison to strategic performance measurement. In 2005, Neely has argued business leaders need to adopt dynamic, flexible and capable strategic performance measurement model in order to cope with dynamics of external environment (Neely, 2005, pp. 1264-77). In 1993, Platts has presented a holistic approach of strategic performance measurement in terms of virtuous cycle of learning organization. Research scholars (Slack, 2000 and Teece, 1997) have pointed out that learning organization concept can be used to develop strategic performance measurement. In 2005, Neely et al. defined strategic performance measurement as a tool for quantifying efficiency of performance based action. In accordance with them it can be said that performance measurement system has close relationship with matrix structure of an organization. In 1978, Mintzberg argued that consistent action is needed in order to identify competitive strategy. Performance measurement system can be classified as the interaction between actions and competitive strategy (Mintzberg, 1978, pp. 934-48). The following section will discuss two theoretical perspective of strategic performance measurement. Strategic Control and Performance Measurement Various research scholars (Nelly in 1999 and Ittner & Larcker in 2003) have pointed out three perspectives of performance measurement. Three perspectives of strategic performance measurement can be explained in the following way. Performance measurement helps allocating resources Performance measurement communicate and assess progress of strategic objective Performance measurement evaluate managerial performance There is a relationship between Strategic Development Process model and performance measurement. For example, balance scorecard is a process of measuring financial and non financial perspective of strategic development process. In 1998, Dyson and O’Brien have designed a conceptual framework complemented by strategic control and performance measurement. The model shows interlinked connection between performance measurement and strategic control. The model describes that performance measurement increases strategic control over financial and non financial variables for top level management. Performance measurement creates a sustainable framework for organization to implement future strategy. The model is given in the following section: (Source: Tapinos, Dyson, and Meadows, 2005, pp. 370 - 384) Strategy and Measurement In 1971, Skinner has argued that performance measurement can motivate leaders to decide future strategy. Performance measurement is an integral part of strategic control cycle hence controlling aspect of management has direct influence on performance measurement. This model will help managers to decide following strategies. Managing good practices in accordance with the industry standards Establishing equilibrium between profit and investment Providing strategic stretch targets to individual employees Intervening in deteriorating business performance by corporate management In 2000, Kaplan and Norton have pointed out that performance measurement should fulfill following strategic objectives: The model must be sensitive to internal and external change in organizational environment The model should review and reprioritize internal environment of the organization Measurement model needs to focus on organizational alignment in order to deploy changes in internal objective of organizations Multidimensionality of performance measure must induce consistency in strategic decision making Balance score card concept was developed by Norton and Kaplan and the model works fine from the view point of Mintzberg’s strategic management theory. Corporate are using business level strategy performance management system to bring consistency in business level strategy (Amaratunga and Baldry, 2002, pp. 327 – 336). Performance Prism According to Teddy Wivel (Partner of Ernst & Young) there is a close relationship between shareholder value and stakeholder value (Neely, 2007, pp. 151-155). The Performance Prism deals with stake holder centric aspects of strategic performance measurement. Performance prism does not put equal importance to all the stakeholders. This model has identified the difference between stakeholder satisfaction and stakeholder contribution. Customers are the biggest stakeholders for an organization. In recent years research scholars have suggested that organizations need to shift focus from customer satisfaction to customer loyalty. This is a clear shift from stakeholder satisfaction to stakeholder contribution. Performance Prism helps the organization to answer five fundamental questions. • Identifying stakeholders for the business and fulfilling their needs. • Identifying contribution margin required from stakeholders. • Designing strategy to fulfill needs of stakeholders. • Applying the strategy by designing process map in order to achieve objective of change management. • Identifying capabilities like technology, human resource, financial resources and infrastructure required to put strategy into action. Balanced Scorecard Balanced scorecard is a strategic choice for organization in order to evaluate performance of various financial and non financial elements. It gives the much required strategic framework to organizations and increases implementation scope. Survey conducted by fortune magazine shows that more than 70% of top 500 companies in the world are using balanced scorecard. Furthermore Harvard business Review has described balanced scorecard as the most significant strategic management tool in the last 50 years. Balance scorecard delivers new ideas in the field of strategic performance measurement. The model is complemented by four perspectives such as Learning & Growth Perspective, Business Process Perspective, Customer Perspective and Financial Perspective. Initially balanced scorecard was taken as the advanced system to measure performance of the organizations but the model gained importance as an effective tool to implement strategy within few years of its inception. Balance Scorecard gives following strategic advantages to organizations. Clarifying Strategy Balance scorecard provides a clear strategic framework in terms of financial and non financial variables to organization. Organizations use number of models such as Business level strategy, corporate level strategy and functional level strategy for achieving sustainable growth. Balance scorecard helps organization to select suitable strategy in accordance to their resource capability. Communicating Strategic Objectives Balanced scorecard can be used to decode organizational objectives into operational effectiveness. The model also helps to communicate the strategy across all development blocks of organization. Aligning Strategic Initiatives Balanced Scorecard helps managers to align strategic initiatives to long term objectives. It helps the management to design achievable and ambitious targets for employees. Strategic learning process also plays crucial role to sustain the benefits of balance score card. Organization try to learn from their mistakes and balance score card is the guideline for them to measure impact of previous mistakes in terms of both qualitative and quantitative manner. Key Performance Gaps Balance Scorecard can be used for addressing following performance gaps. Customers Performance gap in terms of customer retention rate, customer profitability, customer satisfaction level and others are measured by balance scorecard. Companies identify customer and market segment in order to fulfill financial objective of the company. Business unit managers need to translate strategy in accordance to demand of particular customer segment. In many cases organizations show poor performance in maintain profitable relationship with customers. In such cases balance scorecard can be a guideline for organizations to design a customer centric strategy. Generic value proposition model is used in order to measure customer perspective of balance scorecard. The model can be depicted in the following manner: (Source: Kaplan and Norton, 1996, pp. 47-92) Financial Perspective Balance scorecard helps organization to measure financial validity of their business strategy. Performance gap is measured in terms of numerous activities such as return on investment, revenue growth; cost reduction, asset utilization etc. A 3*3 matrix is given below in order to explain financial performance gaps. Strategic Themes Revenue Growth Cost Reduction Asset Utilization Business Unit Strategy Growth Revenue increased or decreased due to launch of new product line Revenue earned by each employee Percentage of sales revenue invested in research and development Sustain Revenue increased or decreased due to cross selling Measuring indirect expenses and cost reduction rate Measuring cash to cash cycle or working capital ratio Harvest Measuring customer and product line profitability Measuring unit cost per transaction Analyzing payback throughput (Source: Kaplan and Norton, 1996, pp. 47-92) Internal Business Process In internal business process perspective balance scorecard focuses on critical issues for achieving stakeholder’s objective. Companies use cross functional measurements in order to measure integrated business process. Performance gap in the generic value chain can be identified with the help of balance scorecard. The value chain is complemented by three issues such as innovation, operation and post sale service. Performance gap in the generic value chain is explained in the following model. Innovation Operation After Sales Service Customer Need Identified Identify the performance gap in terms of market selection and creation of product offering Identify the performance gap in terms supply and logistic services Identify performance gap in terms of service delivery time and service quality Customer Need Satisfied Learning and Growth This section provides the guideline for investment that should be made by the organization to facilitate long term objectives. It considers factors such as capability of the employees, organizational information system and other relevant developing factors. Learning and growth has direct relationship with organizational structure. This perspective measures performance gap in terms business strategy specifications. Many organizations use learning organization concept to foster control over non financial elements of balance scorecard. Senge has proposed a systematic learning model for correcting performance gaps. Leaders need to motivate employees to use personal mastery to facilitate individual objectives. Creative tension between reality and management objective is required to facilitate scope of balance scorecard. Top level management needs to create a common vision statement for employees to increase collective capability. This will trigger greater commitment and higher degree of ownership among employees. This strategy will decrease performance gaps of balance scorecard. Key Success Factor for Balance Scorecard Norton and Kaplan have identified obstacles that lead to the failure of balanced scorecard. Defining key success factors for balance scorecard is critical because the model changes its dimensions in accordance dynamics of external environment. Key success issues for balance scorecard can be explained in the following manner. The scorecard emphasizes only four perspective of management. Perspectives such as Learning & Growth, Business, Customer, and Financial measures are not sufficient to define every aspects of performance management. Organizations need introduce more perspectives in order create a holistic performance management framework. Balance scorecard emphasizes on balancing the performance instead of reflecting viable strategy for the organization. The model needs to create a quantitative linkage between the expected financial outcomes and the non financial indicators. The model fails to indicate commitment from the senior management. Only few people involved in the implementation phase of balanced scorecard. This situation decreases communication transparency and motivation level among internal stake holders. Implementing balance scorecard is a time consuming process without much guarantee of future business success. Use of Balanced Scorecard in Developing and Refining Strategy Implicit Success Model Second component of balanced scorecard deals with organizational success model proposed by Kaplan and Norton. According to many research scholars the model is incomplete due to explicit and implicit factors. At the initial stage the model was developed to measure financial performance of the organization. Interesting fact is that there is no empirical and normative evidence behind four perspectives proposed by Kaplan and Norton. The balance scorecard model can be depicted in the following manner: (Source: Kaplan and Norton, 1996, p. 76) Norton and Kaplan have introduced the term "learning and growth" without giving proper justification. Unfortunately there is very little scope for practical implementation of balance scorecard due to rigid theoretical matrix. In 2000, Turner has criticized the implementation of "learning and growth" and the scholar also proposed a more balanced "face validity" perspective of balance scorecard (Turner, 2000, pp. 31-34. Implicit aspect of balance scorecard is explained in the following model. (Source: Flamholtz, 2003, pp. 15-26) In 2000, Flamholtz & Aksehirili have proposed a balance scorecard complemented by six strategic building blocks to develop and refine strategy. The model is explained in the following diagram. (Source: Flamholtz, 2003, pp. 15-26) Market Organizations need to identify market needs for particular service and product in order to develop a sustainable strategy. For example, Howard Schultz (Chief Global Strategist of Starbucks Coffee) has followed the neo classical of approach of balance scorecard with the intention of upscale product portfolio of Starbucks Coffee. Main challenge for organization to identify "market niche" in order achieve sustainable competitive advantage over competitors. Strategic market plan is needed to be incorporated in order to identify target customers and decide suitable strategy to fulfill their requirement. Product The new model of balance scorecard also focuses on developing product in accordance with market demand. Product perspective of balance scorecard deals with manufacturing and design phases of production process. For example, product for Starbucks Coffee Company not only includes coffee beans or shakes but the entire drinking experience also. Firms decide pricing strategy for a particular product in accordance to economic structure of macro environment. For example, Starbucks has decided pricing strategy for coffee (read $ 2.00 to $3.50 for each cup) for customers with an intention of providing them "affordable luxury." Balance scorecard should measure the success of product strategy in terms of economic perspective. Resource Balance score card should provide a process map of resource allocation for a company. In management resources are classified as inputs required facilitating production process. Resources like financial resources, talented human resource pool, capital equipment and state of art technology help organizations to achieve business excellence. Economics theory suggests that business leaders need to give importance on three assumptions before planning Resource Based Model. • Resources are costly to reproduce. • Competitor firms cannot achieve company’s resources in a cost effective manner. • Resources are non substitutable due to their functional non equivalence. For example, key resource for P&G is talented human resource pool and research & development capability. Such explicit framework of balance scorecard can help managers to decrease performance gap in the area of resource allocation. Operational System Balance scorecard can be implemented on basic day to day operational activities such as personnel recruiting, billing, collection, supply chain operations, advertising, production, sales and computer information systems. Strategic measurement of daily activities will help the organization to decrease performance gap. Management System Balance score model should be integrated with different variables of management system such as planning, controlling, organizing and management development. Incorporating budgeting operation in balance scorecard will enhance the scope for corporate level strategy implementation. Contingency planning approach can help the organization to decrease performance gap. Corporate Culture Cultural audit in terms of shared values, customer service, quality norms and employee empowerment can help organization to develop a sustainable framework of balanced scorecard. Mckinsey 7S model can be used to address cultural perspective of balanced scorecard. Empowering employees will help the company to decrease performance gap for organizations. The neo classical model of balanced scorecard helps organizations to refine and develop competitive strategy. The six key building blocks of the model can help organizations to design strategy complemented by better financial performance. Aforementioned six variables are necessary to refine strategy in accordance with need of local market hence it can be said that balance scorecard can act as foundation of competitive strategy. “Face validity” of the proposed model is significant because it delivers much reasonable financial performance in contrast to traditional balance scorecard model proposed by Kaplan and Norton. The strategic balance scorecard model can be depicted in the following manner. (Source: Flamholtz, 2003, pp. 15-26) Global Challenges Australian Perspective Tim Harcourt (Chief Economist at the Australian Trade Commission) has argued that import and tariff are major trade issues for Australia. Exporter community plays vital role on deciding the dynamics of Australian economy. Companies need to export more products to foreign market in order to decrease trade deficit. Economists have created a valid argument backed by macroeconomic and microeconomic models for urgency of increasing export activities. UNCTAD or United Nations Conference on Trade and Development has pointed out the importance of foreign direct investment in Australian economy. In 1999, DFAT or Department of Foreign Affairs and Trade have suggested that global companies need to invest more money in the Australia in order to achieve sustainable business growth. Close link between FDI and export will fillip the productivity and growth in Australia (Harcourt, 2001). FDI and export are the major challenge for both domestic and global players planning to expand business in Australia. Developing a strategy which can work in synchronization with trade policy of Australian government can be a daunting task for companies doing business in the country. George Yip Model In 2006, Walsh et al have proposed George Yip model of globalization as building block of defining challenges regarding constantly changing global environment (Walsh, Lok, and Jones, 2006, p. 41). The model is complemented by four building blocks. These strategic blocks can be explained in the following manner. Cost Globalization Driver Government Globalization Driver Market Globalization Driver Competitive Globalization Driver These four globalization drivers can be classified as four major challenges for companies developing strategies to implement performance measurement on global context. Cost Globalization Driver Global players need to follow low cost strategy of Wal-Mart in order to increase penetration in both mature and emerging market. Operating expense for Wal-Mart is 30% lower in comparison to other retail players. Goldman Sachs has identified that companies need to decrease cost of goods sold or COGS in order to increase sustainability. Companies face challenges in terms of adopting Cost Orientation strategy (decreasing cost in each step of value chain) due to stringent global business norms. Study shows that companies need to increase sales volume by 50% in order to decrease sales margin by 10%. Report presented by A. C Nielsen shows that value chain maintenance cost is almost 40% lower South and South East Asian countries in comparison to countries like Australia and New Zealand. Government Globalization Driver Government norms of particular countries motivate global players to make entry in foreign shore. Corporate tax rate plays cordial role on deciding market attractiveness for foreign players. Government of Australia is supporting local firms to match step with globalization. They have created an online platform for local traders in order to assist them to do business online. Government of Australia needs to build ‘knowledge capital’ for promoting international trade and investment and developing trade education among local players. Market Globalization Driver Goldman Sachs has pointed out that market attractiveness in Brazil, Russia, India and China or simply BRIC is growing at phenomenal pace. Market attractiveness of BRIC can be understood with the help of following diagram. (Source: Goldman Sachs, 2009) Companies need to change their performance measurement strategy in accordance with market attractiveness of particular country. Foreign players such as IKEA, Wal-Mart has already planned to enter in South Asian market hence they need to change their performance measurement strategy in accordance to South Asian context. Rise of per capita income in BRIC is increasing and it can be explained in the following manner. (Source: Goldman Sachs, 2009) Competitive Globalization Driver Companies planning to expand business in foreign market will face competitive threat from not only other global players but from local players also. Big players need to us vendor management software and Radio Frequency Identity or RFID in order to decrease power of local suppliers. Global needs to deploy technology integration in order to overcome challenge from local players. Conclusion Companies need to use CAGE framework proposed by Pankaj Ghemawat in order to define strategy to overcome above mentioned challenges. CAGE framework will provide a comprehensive view of global business opportunity to companies eying on increasing international operation. Reference Amaratunga, D. and Baldry, D., 2002. Performance Measurement in Facililities Management and its Relationships with Management Theory and Motivation. Facilities [e-journal] Vol. 20 Iss: 10 Available through: Emerald database [Accessed 21 November 2012]. Bourne, M. C. S., Kennerley, M. and Franco-Santos, M., 2005. Managing through Measures: A Study of Impact on Performance. Journal of Manufacturing Technology Management [e-journal] Vol. 16 No. 4 Available through: Emerald database [Accessed 21 November 2012]. Flamholtz, E. G., 2003. Putting Balance and Validity into the Balanced Scorecard. 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