Welcome to Alternative Views of Performance!

Hi there! In your journey through Advanced Performance Management (APM), you’ve probably noticed that traditional accounting measures (like profit or ROI) don’t tell the whole story. In this chapter, we are going to look at alternative frameworks that help managers see the "big picture."

Think of it like training for a marathon. If you only look at your weight (a traditional measure), you might miss the fact that your lung capacity is improving or your running technique is getting better. To win, you need to look at more than just one number! Let’s dive in.


1. Why do we need "Alternative" Views?

For a long time, businesses only cared about financial indicators. However, these have some big flaws:

  • They are "Lagging" Indicators: They tell you what happened in the past, not what will happen in the future.
  • Short-termism: Managers might cut costs (like training or research) just to make this month's profit look good, even if it hurts the company later.
  • Manipulation: Accounting profits can sometimes be "massaged" through different accounting policies.

Quick Review: Alternative views move away from just "the bottom line" and look at quality, flexibility, and customer satisfaction.


2. The Building Block Model (Fitzgerald and Moon)

Don’t worry if this seems complex at first! This model was specifically designed for service businesses (like banks, hotels, or airlines) where traditional manufacturing measures don't always fit.

It is called the "Building Block" model because it suggests that performance is built on three main blocks:

A. Dimensions (What are we measuring?)

These are divided into two categories:

1. Results (The Lagging Indicators): These show the outcome of your past efforts. They include Financial Performance and Competitiveness.

2. Determinants (The Leading Indicators): These are the "drivers" of future success. If you get these right, the results will follow! They include:

  • Quality: Does the service meet expectations?
  • Flexibility: Can the business adapt to changes?
  • Resource Utilization: Are we using our people and machines efficiently?
  • Innovation: Are we coming up with new ideas?

B. Standards (How do we set targets?)

For the measures to work, the targets (standards) must be:

  • Ownership: Do the managers "own" the targets? (Did they help set them?)
  • Achievability: Are the targets realistic? (If they are impossible, people give up).
  • Equity: Are the targets fair across the whole company?

C. Rewards (How do we motivate people?)

To make people work toward the targets, the reward system should be:

  • Clarity: Do employees understand how to get the reward?
  • Motivation: Is the reward something people actually want?
  • Controllability: Are employees rewarded for things they can actually influence?

Memory Aid: Think of DR. ARM (Dimensions, Results, Achievability, Rewards, Motivation). Actually, just remember: Dimensions, Standards, Rewards.

Key Takeaway: The Building Block Model links what we measure (Dimensions) to how we set targets (Standards) and how we motivate staff (Rewards).


3. The Performance Prism

The Performance Prism, developed by Neely and Adams, is a bit different because it starts by looking at Stakeholders rather than just the strategy. Think of a glass prism: when you shine a light through it, it reflects in different directions.

The Prism has five facets (sides):

  1. Stakeholder Satisfaction: Who are our stakeholders (customers, employees, suppliers, etc.) and what do they want?
  2. Strategies: What strategies do we need to put in place to satisfy those stakeholders?
  3. Processes: What business processes do we need to execute our strategies?
  4. Capabilities: What skills, systems, and assets (capabilities) do we need to operate our processes?
  5. Stakeholder Contribution: This is a "two-way street." What do we want from our stakeholders (e.g., customer loyalty, employee hard work)?

Example: If a stakeholder (Customer) wants "Fast Delivery" (Satisfaction), the company needs a "Rapid Logistics Strategy," a "Streamlined Warehouse Process," and "Advanced GPS Software" (Capabilities).

Did you know? Unlike the Balanced Scorecard, the Performance Prism explicitly asks what the company needs from its stakeholders, not just what it can do for them.

Key Takeaway: The Performance Prism is unique because it considers a wider range of stakeholders (including suppliers and regulators) and emphasizes the "contribution" they make back to the firm.


4. Non-Financial Performance Indicators (NFPIs)

In APM, you will often be asked to suggest NFPIs. These are qualitative measures that often predict future financial success.

Common NFPI categories:

  • Quality: Number of defects, number of customer complaints, or "mystery shopper" scores.
  • Customer Loyalty: Percentage of repeat customers or Net Promoter Score (NPS).
  • Employee Performance: Staff turnover rates or days of training per employee.
  • Brand Strength: Market share or brand awareness surveys.

The "Bridge" Analogy: Financial measures tell you if the bridge is standing today. NFPIs (like checking for rust or cracks) tell you if the bridge will still be standing in five years.

Common Mistake to Avoid: Don't just list NFPIs. In an exam, you must explain why that specific measure is relevant to the scenario provided. Don't just say "measure quality"—say "measure the percentage of hotel rooms that require a second cleaning."


5. Short-termism and Performance Management

One of the biggest hurdles in performance evaluation is Short-termism. This is when managers focus on short-term results at the expense of long-term wealth.

How to combat Short-termism:
  • Use non-financial measures: It's harder to "fake" high customer satisfaction than it is to fake a one-off profit.
  • Adjust the Reward System: Give bonuses based on three-year performance rather than three-month performance.
  • Value-Based Management: Focus on measures like Economic Value Added \( (EVA^{\text{TM}}) \), which charge managers for the capital they use.

Summary Checklist

Before moving on, make sure you can answer these:

  • Can I explain why financial measures alone are insufficient?
  • Can I list the three "Blocks" in Fitzgerald and Moon’s model?
  • Do I understand that the Performance Prism starts with Stakeholder needs?
  • Can I suggest at least three non-financial measures for a service company?

Final Encouragement: APM is about judgment. There is rarely one "perfect" answer. As long as you can justify why a certain view or measure is useful for a specific business, you are doing great! Keep practicing those past papers!