Strategic performance measurement

1 . Introduction

It is often said that ‘whatever you measure, you change’. The corollary is presumably that ‘whatever you don’t measure, you won’t change’. Employee performance and behaviour need to change continually, both to improve current activities and to direct effort towards new activities. If that is to happen, performance must be measured, and feedback and incentives provided to encourage the outcomes the strategy needs.

This chapter covers the strategic control side of the syllabus: turning a formulated strategy into action plans and targets, choosing critical success factors (CSFs) and key performance indicators (KPIs), aligning incentives to performance, allocating resources to support implementation, and measuring performance across financial, non-financial and sustainability dimensions – including the role of integrated reporting.

YouTube videoPlay video

2 . What is performance?

Performance can be defined as a task or operation seen in terms of how successfully it is performed. As soon as ‘how successfully’ enters the definition, measurement is implied: we need to decide which tasks, operations and behaviours matter, measure them, and then manage them.

Organisations differ greatly in what constitutes good performance. The aim could be to make profits, to increase the share price, to cure patients in a hospital, or to clear household rubbish. The primary required tasks are often found in the organisation’s mission statement, because that is where the organisation’s purpose is defined. The word ‘primary’ matters: although the primary task of a profit-seeking business is to make profits, this rests on subsidiary tasks such as good design, low cost per unit, quality, flexibility and successful marketing – many of which are non-financial achievements.

Some aspects of performance are merely ‘nice to have’; others are critical success factors. The standard of an airline’s meals and entertainment ranks well behind punctuality, reliability and safety, all of which are likely to be critical to the airline’s success.

3 . From strategy to action: plans and targets

3.1 Developing action plans

Chapter 8 traced the route from mission and objectives towards action plans; this chapter builds that into the full performance management system. A strategy is only a statement of intent until it is converted into action plans: specific programmes of work that say what will be done, by whom, by when, with what resources, and how success will be recognised. Developing action plans means cascading the strategy downwards:

1. Corporate objectives are broken into business-unit objectives, and those into functional and team objectives, so that every unit can see its contribution to the whole.

2. Each objective is turned into concrete initiatives with named owners, milestones, deadlines and budgets.

3. Dependencies between initiatives are identified (a new product launch may depend on an IT project and a recruitment plan), so that sequencing is realistic.

4. Measures and reporting arrangements are attached to each initiative so that implementation can be monitored (section 5).

3.2 Communicating action plans

Plans that stay in the boardroom change nothing. Communication serves two purposes: it tells people what to do, and – done well – it explains why, which is what wins commitment. Good practice includes communicating the strategic reasoning and not just the tasks; tailoring the message to the audience (the board needs milestones and risks, a production team needs its specific targets); using multiple channels (briefings, team meetings, dashboards); and providing a route for feedback, because the people doing the work often spot flaws in a plan first. Communication is also a change-management issue – Chapter 14 deals with resistance to change and the change leader’s communication role.

3.3 Target setting

Each measure needs a target: the level of performance that counts as success. Well-set targets are challenging but achievable, and are accepted by the people who must deliver them – ideally through participation in setting them. Targets should be:

• Specific and measurable – ‘improve punctuality to 95% of trains on time’ rather than ‘be more punctual’;

• Time-bound – with a date attached;

• Consistent with each other – a cost target must not silently destroy a quality target;

• Reviewed – updated as circumstances and strategy change.

Targets that are too tight demotivate, and invite gaming and the misreporting of data; targets that are too loose pull performance down. Benchmarking helps to set the level: internal benchmarking uses previous periods or other branches/divisions, but can breed complacency, so where an organisation competes, benchmarks should be aligned to competitors’ performance.

4 . CSFs, performance indicators and KPIs

A critical success factor (CSF) is an area in which an organisation must perform well if it is to succeed. Performance indicators (or performance measures) are the methods used to assess performance. For example:

In profit-seeking organisations:

• Profit

• Earnings per share

• Return on capital employed

In not-for-profit organisations:

• Exam grades (a school)

• Waiting times for admission (a health service)

• Condition of roads (a local government highways department)

The prime financial indicators allow performance to be measured but say little about how it was achieved. High profits depend on a satisfactory combination of sales volumes, prices and costs – so those factors must be measured too, and compared with standards and budgets. The same logic applies in not-for-profit organisations: if good literacy on leaving school is a CSF, and it depends on pupil–teacher ratios, attendance and teacher experience, then those contributing factors need measuring and monitoring as well.

Not all performance indicators are created equal. The indicators that measure the most important aspects of performance – broadly, how well the CSFs are being achieved – are the key performance indicators (KPIs); other indicators measure everything else. To be useful a KPI should be clearly defined, derived from a CSF, measurable at acceptable cost, capable of being influenced by the people held responsible for it, and reported promptly enough for action to follow.

4.1 Pitfalls in designing performance measures

• Not enough measures. Directors and employees are judged on measured results, and ‘whatever you don’t measure you don’t change’: areas of behaviour that are not assessed tend to be ignored.

• Too many measures, especially where none are ranked or identified as KPIs. Every measure must be calculated, reported and explained; too many divert time from important work, and employees gravitate to the easy, trivial measures rather than the difficult, vital ones.

• The wrong measures. Applying strict cost measures in a business selling luxury products (a differentiation strategy) detracts from strategic success.

• Too tight or too loose measures. As with targets: too difficult demotivates and invites gaming and misrepresentation; too loose pulls performance down.

5 . A practical framework for each performance measure

To establish a performance measurement system, something like the following is needed for each measure:

1. A meaningful title

2. Its purpose, and how that purpose relates to strategic success

3. Other measures it may affect, how, and how conflicts are resolved

4. Who is held responsible for it

5. The source data, who supplies it, and how the measure is calculated

6. What investigations and explanations are required, and from whom

7. The target, and how it was determined

8. How often the target is updated

9. How often the measure is reported

10. Reporting and action

For example, consider a passenger train company, TTTE:

6 . Aligning incentives to performance

Measurement changes behaviour fastest when something depends on the result. Aligning incentives means linking rewards – bonuses, profit shares, share options, promotion, recognition – to the performance the strategy actually needs:

• Line of sight. People should be rewarded for results they can influence. A branch manager rewarded on group share price has no line of sight; one rewarded on branch contribution and customer satisfaction does.

• Balance. Rewarding a single financial measure invites the behaviour the measure ignores: rewarding profit alone encourages cutting training, maintenance and development spending – actions that raise this year’s profit and damage the strategy. Incentives should span a balanced set of measures (see the balanced scorecard below), increasingly including non-financial and sustainability targets.

• Time horizon. Strategic success is long term, so part of the reward should be deferred or tied to multi-year measures, not just this year’s numbers.

• Gaming risk. Any rewarded measure will be managed – sometimes manipulated. Targets must be verifiable, data sources controlled, and the measure-set reviewed for unintended behaviour.

7 . Allocating resources to support implementation

Strategy implementation consumes resources – money, people, equipment, management time – and the syllabus expects candidates to advise on resource availability and on aligning allocation to strategic choices.

7.1 Audit of key resources and capabilities

The starting point is an audit of the resources and capabilities the strategy will require, compared with what the organisation has (Chapter 6 covered resources and competences). Useful questions: What resources does each strategic initiative need, and when? Which existing resources – people with particular skills, production capacity, distribution, data and systems, finance – can be redeployed? What is missing, and is the gap to be filled by recruiting, training, buying, partnering or outsourcing (Chapter 11’s methods apply to capabilities as well as to whole businesses)?

7.2 Matching resource allocation to strategic choices

The harder task is usually not finding new resources but re-aligning existing ones. Established units and projects have budgets, headcounts and internal advocates; new strategic priorities usually start with none of these. If resource allocation simply repeats last year’s budget plus a percentage, the old strategy keeps the resources and the new strategy starves. Matching allocation to strategy means:

• making the strategic priorities explicit and ranking initiatives against them, so allocation follows the strategy rather than historical entitlement;

• deliberately moving resources away from activities the strategy has de-prioritised – closing or shrinking projects and units, and redeploying people and money to the chosen options (this is where the BCG logic of Chapter 11 bites: harvest the cash cows to fund the question marks);

• using zero-based reviews for support activities from time to time, so that budgets are justified by need rather than history;

• recognising the change-management consequences – losing resources feels like losing status, so resistance is predictable (Chapter 14).

8 . Performance measures and the strategy toolkit

Performance indicators connect to almost every model met earlier in this subject. The point of the list below is exam technique: whenever a scenario uses one of these models, ask what should be measured as a result.

• Mission statements define the important aspects of performance that sum up the organisation’s purpose. If the mission promises quality, innovation or service, each of those has to be measured.

• Stakeholder analysis recognises that different stakeholders define good performance differently – and what key players want may differ from the mission. Their requirements need measures too.

• Generic strategies: a cost leader must monitor all its costs relentlessly; a differentiator must measure the enhanced features, quality and satisfaction on which its premium depends.

• The value chain asks where value is added. If value is added by promising fantastic quality, quality is a CSF and the defect rate is a KPI. Linkages matter as well: if money is spent on training, measure the performance improvement it buys.

• The BCG matrix (Chapter 11): for a question mark being built towards star status, the immediate imperative – and the right measure – is market-share growth, not profit; return on investment may stay low for a while. Once a product reaches cash-cow status, the measures shift to revenue, cost and profit.

• PESTEL and Porter’s five forces: the macro and competitive environments change continuously, so measures are needed to track them – customer loyalty and churn (buyer power), competitors’ prices, costs and product launches, and compliance with new laws (for example, a legal maximum of 60 days for paying suppliers needs a payment-period measure).

• The product life cycle: different stages demand different measures – growth trajectory early on; cost per unit and market share at maturity; the speed of decline when judging exit.

• Company structure: divisionalised businesses need divisional measures such as return on investment, residual income or economic value added.

• Information technology: downtime, response times, usability, website conversion rates – and remember that sophisticated technology does not guarantee better performance, as costs can outweigh benefits.

• Human resource management: measures for training effectiveness, job performance and satisfaction, recruitment and retention – plus careful thought about how remuneration links to performance (section 6).

9 . Non-financial performance: the balanced scorecard

Accountants naturally concentrate on financial measures. But a rising gross-profit percentage or an improved return on capital employed says nothing about what caused the improvement. Performance improvements arise from changes in how the business is run and in what it offers; the financial results then keep the score. Kaplan and Norton’s balanced scorecard is the best-known framework for extending measurement beyond the financial:

The four perspectives form a hierarchy of cause and effect:

• Financial perspective – the reward of success: good profits, rising share price, high return on capital employed.

• Customer perspective – the immediate cause of financial success is a happy customer base. Customers are the only source of revenue: repeat business, loyalty, growing orders and willing referrals are the prerequisites of good profits, so how happy customers are must be measured.

• Internal business perspective – customers are happy when the organisation does well what it promises to do: lowest cost per unit for one business, near-perfect quality or three-hour delivery for another. Whatever the value chain promises, measure it.

• Innovation and learning perspective – this supports and sustains all the others. The organisation may be the best supplier today, but competitors are trying to overtake it; without continual learning and innovation it will fall behind, then lose customers, then lose profits. Measures include new products launched, patents filed and staff development – and without such measures, managers can quietly cut this spending to flatter short-term results: the classic short-term/long-term trap.

Performance needs measuring across all the perspectives: if you believe customers come back because of your production quality, it makes no sense not to measure that quality.

10 . Sustainability in performance measurement

The modern CGMA syllabus treats sustainability as a strategic issue, not a public-relations afterthought: it is a driver of change in the ecosystem (Chapter 4), a source of risk and opportunity, and part of an organisation’s ‘permission to play’ granted by society and regulators. If sustainability matters to strategy, the logic of this whole chapter applies to it: it must be measured, targeted and incentivised. Typical measures include:

• Environmental – greenhouse-gas emissions (with progress against net-zero commitments), energy and water consumption, waste and recycling rates, share of materials from sustainable sources;

• Social – employee health and safety, diversity and pay-gap measures, staff turnover, supply-chain labour standards, community impact;

• Governance – board composition and independence, ethical breaches, data-protection incidents.

Investors, lenders, regulators and customers increasingly demand this information, and executive incentives increasingly include sustainability targets alongside financial ones. A scorecard that ignores sustainability now fails the ‘balance’ test: it omits measures on which the organisation’s long-term value – and its licence to operate – depends.

11 . Integrated reporting and integrated thinking

11.1 The six capitals

The Integrated Reporting (<IR>) Framework views an organisation as creating (or destroying) value using six capitals – stocks of value that its business model draws on and transforms:

An integrated report explains how the organisation’s strategy, governance, performance and prospects create value over the short, medium and long term across these capitals – showing the trade-offs, such as spending financial capital on training to build human capital, or depleting natural capital to grow manufactured capital.

11.2 Integrated thinking vs integrated reporting

• Integrated thinking is the management behaviour: deliberately considering the relationships between the organisation’s units and all six capitals when making decisions, instead of managing in silos. It is what Chapter 11 required when individual strategic choices were combined into one coherent strategy.

• Integrated reporting is the output: the periodic report that communicates the value-creation story to providers of financial capital and other stakeholders.

The framework was originally developed by the International Integrated Reporting Council (IIRC). The IIRC merged into the Value Reporting Foundation in 2021, which was in turn absorbed into the IFRS Foundation in 2022 – so the <IR> Framework now sits with the IFRS Foundation, alongside the International Sustainability Standards Board (ISSB) and its IFRS Sustainability Disclosure Standards. Do not describe the IIRC as the current standard-setter.

11.3 The role of integrated reporting in strategic control

The syllabus asks specifically what role integrated reporting can play in strategic performance management. Three answers:

1. It widens the measure-set. Reporting against six capitals forces the organisation to define measures and targets for resources – people, relationships, knowledge, nature – that financial reporting ignores, which is exactly where many CSFs and intangible value drivers live.

2. It disciplines trade-offs. Making capital trade-offs visible (this year’s profit versus training, emissions versus output) supports integrated thinking in resource-allocation and incentive decisions, and discourages hitting financial targets by silently depleting other capitals.

3. It communicates strategy to stakeholders. An integrated report links the business model, strategy and KPIs into one story, helping investors and other stakeholders judge whether value creation is sustainable – and holding management publicly to the targets it has set.

12 Test your knowledge

Two short exercises close the chapter in the online notes: ten flashcards on the terms and frameworks above, and ten practice questions with worked feedback on every option. Work through the cards first, then the questions.