Welcome to "Other Approaches to Performance Review"!
Hi there! Welcome to a really exciting part of your P2 journey. So far, you’ve probably spent a lot of time looking at financial numbers—profits, variances, and ROI. But here’s a secret: numbers only tell half the story.
Imagine looking at a car's dashboard. The speedometer tells you how fast you're going (the financial result), but it doesn't tell you if the engine is overheating or if you're about to run out of oil. To manage a modern business successfully, we need a wider view. In this chapter, we explore tools that look beyond the balance sheet to help organizations stay competitive and healthy.
1. Benchmarking: Learning from the Best
Benchmarking is the continuous process of measuring your products, services, and practices against the toughest competitors or those recognized as industry leaders. Think of it as a "reality check" to see where you stand.
Types of Benchmarking
Don't worry if these sound similar at first; the trick is to look at who you are comparing yourself to:
1. Internal Benchmarking: Comparing one department or branch against another within the same company. (Example: A bank comparing its London branch to its Manchester branch.)
2. Competitive Benchmarking: Comparing your performance directly against your direct rivals. (Example: Ford looking at Toyota’s production times.)
3. Functional Benchmarking: Comparing a specific function (like HR or Logistics) against a non-competitor who is "best-in-class" in that specific area. (Example: An airline looking at how a Formula 1 pit crew changes tires to improve their own plane turnaround times.)
4. Generic Benchmarking: Comparing basic business processes that are the same regardless of industry. (Example: Any company looking at how Amazon handles customer returns.)
Quick Review: The Benchmarking Process
To do this right, you usually follow these steps:
1. Plan: What are we measuring?
2. Collect Data: How are we doing? How are they doing?
3. Analyze: Identify the "gap" (the difference between us and them).
4. Adapt: Change our processes to close that gap.
Key Takeaway: Benchmarking isn't just about copying; it's about learning and improving by looking outside your immediate bubble.
2. Non-Financial Performance Indicators (NFPIs)
Financial numbers are often "lagging" indicators—they tell you what happened last month. NFPIs are often "leading" indicators—they tell you what is likely to happen next month.
Why bother with NFPIs?
If customer satisfaction (non-financial) drops today, your sales (financial) will likely drop tomorrow. By watching NFPIs, managers can act before the financial crisis hits.
Common Examples:
- Quality: Number of defects, number of customer complaints.
- Delivery: Percentage of on-time deliveries.
- Innovation: Number of new products launched.
- Employees: Staff turnover rate or number of training days per employee.
Did you know? High staff turnover is a huge "hidden cost." It might not show up as a single line on your P&L, but the cost of recruiting and training new people eats away at your profit!
3. The Balanced Scorecard (Kaplan & Norton)
This is a superstar topic in the CIMA syllabus! The Balanced Scorecard (BSC) suggests that we should view the organization from four different "perspectives" to get a balanced view of performance.
The Four Perspectives
1. Financial Perspective: "To succeed financially, how should we appear to our shareholders?"
(KPIs: ROI, Profit Margin, Cash Flow)
2. Customer Perspective: "To achieve our vision, how should we appear to our customers?"
(KPIs: Market share, Customer retention, Brand awareness)
3. Internal Business Process Perspective: "To satisfy our shareholders and customers, at what business processes must we excel?"
(KPIs: Unit cost, Cycle time, Quality levels)
4. Learning and Growth Perspective: "To achieve our vision, how will we sustain our ability to change and improve?"
(KPIs: Employee suggestions, Access to data, Skills training)
Memory Aid: "FCIL"
Think of F-C-I-L: Financial, Customer, Internal, Learning. Or remember: "Financial Cuccess Involves Learning."
Common Mistake to Avoid: Don't treat these four boxes as separate silos. They are linked. If you train your staff (Learning), they improve the processes (Internal), which makes customers happy (Customer), which eventually leads to more profit (Financial)!
4. The Building Block Model (Fitzgerald & Moon)
This model is specifically designed for service businesses (like hotels, hair salons, or software companies). Since services are "intangible" (you can't drop them on your foot!), we need a special way to measure them.
The model is made of three "blocks":
Block 1: Dimensions
These are the things we measure. They are split into:
- Results (Lagging): Financial Performance and Competitiveness.
- Determinants (Leading): Quality, Flexibility, Resource Utilization, and Innovation.
Block 2: Standards
How do we set the targets? They should be:
- Ownership: Do managers feel the target is "theirs"?
- Achievability: Is it realistic? (Demotivation happens if it's impossible).
- Equity: Is it fair across different departments?
Block 3: Rewards
How do we motivate people to meet the standards? The reward system should have:
- Clarity: Is it easy to understand?
- Motivation: Does it actually make people want to work harder?
- Controllability: Are managers only rewarded for things they can actually control?
Key Takeaway: If you want to improve Results, you must focus on the Determinants (the things that "determine" success).
5. The Performance Pyramid (Lynch & Cross)
This model helps link Corporate Strategy (the big picture) down to Day-to-Day Operations (the shop floor). It ensures everyone is pulling in the same direction.
The pyramid has several levels:
- Top: Corporate Vision (What do we want to be?)
- Middle: Market and Financial targets (How do we win in the market?)
- Bottom: Quality, Delivery, Process Time, and Cost (What do we do every day?).
The cool thing about the pyramid is that it shows how external effectiveness (customer satisfaction) and internal efficiency (low costs) must work together.
Summary & Final Tips
In this chapter, we've moved away from just looking at money. We've learned that:
- Benchmarking helps us stay competitive.
- NFPIs act as early warning signals.
- The Balanced Scorecard gives us a 360-degree view.
- Building Blocks help service companies focus on what drives success.
- The Pyramid aligns top-level strategy with bottom-level action.
Exam Tip: When you see a scenario question, ask yourself: "Is this company only looking at profit?" If yes, they are missing the "leading indicators." Suggest using a Balanced Scorecard to help them see the full picture!
Quick Formula Check: Remember that even in these models, we still use basic financial math. For example, ROI is still a key "Financial Perspective" metric:
\( ROI = \frac{\text{Controllable Profit}}{\text{Capital Employed}} \times 100 \)
Keep going! You're doing great. Understanding these frameworks is the key to moving from a "number cruncher" to a strategic "business partner."