The Nature of Performance Management

1 Introduction

This chapter looks at what is meant by “performance management”. It is essential to understand that term if you are going to succeed in this paper as questions are directed at describing, improving and reporting on performance management systems.

2 Performance management

It is presumably obvious that organisations will want to improve their performance. However, it is not at all obvious how good performance should be defined. This will differ between organisations and departments within those organisations, and will often vary over time within a single organisation or department.

For example:

You might disagree with some of the signs of good performance listed. For example, not everyone might think that good sports performance is relevant to schools; others feel strongly that it is. Some people might believe that vaccination is wrong. Additionally, some indicators can be contradictory. For example, the relationship between increasing profits, increasing dividends and increasing share value is complex.

Furthermore, identifying desirable performance such as an increasing share price does not say anything about what behaviours are needed to produce that. For example, it could be dependent on more advertising, cost cutting, moving-up market, withdrawing certain products and from certain markets, spending on research and development to invent new unique and popular products. If increased share price depends on innovation then successful innovation becomes essential performance.

So, to where do managers look to see what might be regarded as markers of performance? The answer is that they must look to the organisation’s mission and its stakeholders.

Once desirable performances have been defined, the next step is to manage it so that individuals, cost centres, divisions and subsidiaries all work towards achieving those behaviours and targets. This requires three steps:

1. Design ways in which to measure the desired behaviours and achievements
   

2. Measure them
   

3. Provide suitable feedback
   

There can be many measures in a large company, but the most important are called key performance indicators (KPIs). These are just what the name implies: measurements, or indicators, of performance where the organisation must do well if it is to succeed. Achievement of the KPIs should be high on everyone’s agenda.

3 The mission statement, goals and objectives

3.1 The mission statement

In section 2, above, we asked how good performance could be identified or defined and the mission or mission statement is very important here.

The mission statement is an expression of the overall purpose and scope of the organisation, which is in line with the values and expectations of the stakeholders.

It answers the question:   What sort of business are we, or do we want to be?

A mission statement will generally contain four elements:

So a mission and mission statement is a public statement about what the organisation is for, how it intends to achieve those aims and also statements about its ethics and values.

Achieving the mission can therefore be taken as a strong indication of what is meant by of good performance.

Examples of three ‘real-life’ mission statements are reproduced below:

So, performance in The Walt Disney Company includes:

• Creativity

• Innovation

• Differentiated content

• Profit
  

McDonalds lists:

• Quality

• Service

• Cleanliness

• Value

• Customer satisfaction (smiles!)
  

No doubt profit is also important to McDonalds, but some companies are reluctant to refer to that in their mission statements.

The mission of the Office of the United Nations High Commissioner for Human Rights (OHCHR) is to protect and promote all human rights for all is somewhat fuzzy. It would be better if it were more precise in defining human rights and how it might resolve conflicting views.

Although the purpose of the Mission Statement is to communicate to stakeholders the nature of the organisation, and to focus strategy, in practice they are often full of meaningless phrases!

3.2 Goals and objectives

Missions can be very grand and not very specific. It’s all very well for a company to say that it has ‘quality’ as one of its mission, but what does quality mean? What frequency and type of defect must be eliminated and which will be tolerated? By when must a quality level be attained? Something more specific is needed.

Goals and objectives are often put together with no distinction made between them. However, strictly speaking, goals are statements of general intentions (not that much different to a mission), whereas objectives are more specific.

An example of a goal is to improve profits

An example of an objective is to achieve a Return on Capital Employed of 25% within two years.

3.3 Good’ objectives should be SMART:

Specific: sales, rejects, cost per unit are all specific. Better and improve are not

Measurable: usually that the specific aspects of performance have to be quantified

Agreed/accepted/achievable: imposing an unrealistic or impossible target will be ineffective

Relevant: relevant to the person responsible (ie they can affect it); relevant to the organisation’s mission. If objectives are seen as irrelevant, arbitrary and merely an exercise in management power they will fall into disrepute.

Time-bound: objectives should be attained within a specified time frame.

An example of ‘real-life’ objectives is printed below:

3.4 Critical success factors

An organisation can easily end up with many objectives and there is a danger that the more easily attained objectives is what people concentrate on. However, there are some objectives which are more important or fundamental to success than others. These are the organisation’s critical success factors.

Here are two definitions:

Johnson, Scholes & Whittington:

• 'Those product features that are particularly valued by a group of customers, and, therefore, where the organisation must excel to outperform the competition‘
  

  Or:

• Where an organisation must perform well if it is to succeed.
  

The second definition is simpler, but the first is more useful because is places emphasis on the idea that success is caused by customers: it is vital (critical) to meet customers’ expectations.

Controlling and planning critical success factors
Sometimes it is essential that current targets are met - and particularly important if these targets relate to critical success factors. The target has become a KPI.

For example, if a company’s success relies on its reputation for high quality then it must maintain that reputation by ensuring methodologies are put in place to measure that quality so that remedial action can be taken quickly if needed. That would be an example of a controlling CSF and its associated KPI.

Sometimes, however, a company might have decided that its future depends on change. Perhaps its products have become dated and to survive the company must have a successful program of innovation. Innovation requires careful (and risky) planning but it might be essential. CSF and KPIs (eg two new, innovative products within 12 months) must be established and incorporated into the planning process.

Both controlling activities and planning activities are necessary and a careful balance is needed between them. Enough resources must be dedicated to the future whilst not jeopardising current profitable operations.

Examples of critical factors could be:

• Profitability

• Market position

• Reputation

• Market share

• Productivity

• Product leadership

• Personnel development

• Employee attitudes

• Public responsibility
  

They depend on:

• Structure of the industry

• Competitive strategy

• Industry position

• Geographical location

• Environmental factors

• Temporary factors

• Functional managerial position
  

Classification:

• Internal eg inventory control; delivery times

• External eg exchange rates

• Monitoring eg actual vs budget

• Building eg targets to launch new products or updates
  

Johnson and Scholes suggested a six step process for developing CSFs:

• Identify the success factors that are critical for profitability.
  

• Identify what is necessary (the ‘critical competencies’) in order to achieve a superior performance in the critical success factors.
  

• Develop the level of critical competence so that a competitive advantage is obtained.
  

• Identify appropriate key performance indicators for each critical competence.
  

• Give emphasis to developing critical competencies that competitors will find it difficult to match.
  

• Monitor the firm’s and competitors’ achievement.

3.5 Stakeholders

A stakeholder is anyone, or any organisation, affected by an organisation.

Stakeholders include: shareholders, employees, suppliers, customers, the local populace, government. Stakeholders have different requirements and these will affect what is meant by performance. Consideration of stakeholders is important because:

• Generally, the organisation is being run for the benefit of at least some stakeholders. For example, a profit-seeking organisation is run primarily for the benefit of shareholders; a hospital is run primarily for the benefit of patients.
  

• Other stakeholders can influence the success of the organisation. For example, if employees go on strike then this will put the organisation’s profits at risk or might prevent further admissions of patients to a hospital
  

Therefore, when devising strategies, managers must bear in mind:

• What the principal stakeholders want
  

• What the stakeholders will tolerate.
  

Mendelow’s matrix can help managers to decide on how best to handle stakeholders:

Power = the amount of power a stakeholder can exercise

Interest = how likely a stakeholder is to take action

The four categories of stakeholder are:

• Key players: these people have the power and will take action. Therefore management needs to keep them happy.
  

• Keep satisfied: they have power but are reluctant to exercise that power provided they are kept satisfied. If really unhappy, they might turn into key players.
  

• Keep informed: no power, but lots of noise. Management will aim to keep them informed as a matter of politeness.
  

• Minimal effort: this group is at the back of the queue when management is making decisions.