The use of Performance Measurement systems to realize strategic alignment within the business architecture.

Transcription

1 GHENT UNIVERSITY FACULTY OF ECONOMICS AND BUSINESS ADMINISTRATION ACADEMIC YEAR The use of Performance Measurement systems to realize strategic alignment within the business architecture. Thesis presented to obtain the degree of Master of Science in Business Economics Carl Vansteenbrugge under the supervision of Prof. Dr. Geert Poels

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3 III GHENT UNIVERSITY FACULTY OF ECONOMICS AND BUSINESS ADMINISTRATION ACADEMIC YEAR The use of Performance Measurement systems to realize strategic alignment within the business architecture. Thesis presented to obtain the degree of Master of Science in Business Economics Carl Vansteenbrugge under the supervision of Prof. Dr. Geert Poels

4 IV PERMISSION The undersigned declares that the content of this master thesis may be consulted and/or reproduced, provided that the source is cited. Carl Vansteenbrugge

5 V Abstract Gedurende de voorbije twee decennia is er een stijgende interesse opgetreden in de onderzoekswereld voor het meten en analyseren van de prestaties van bedrijven. Voorgaand onderzoek heeft immers uitgewezen dat er een positieve relatie is tussen het gebruik van een prestatiemeetsysteem en de prestaties van een onderneming. Het doel van prestatiemanagement is om een systeem te ontwikkelen dat in staat is om de vooropgestelde strategie en doelstellingen te vertalen naar operationele meetindicatoren voor alle processen, taken, personeel, De prestaties op al deze meetindicatoren kunnen vervolgens als feedback dienen bij het nemen van beslissingen door het management van het bedrijf. Het onderzoeksveld van prestatiemanagement is een heel breed domein, waarin tal van verschillende disciplines samen komen. Verschillende auteurs hebben de voorbije jaren bijgedragen tot dit onderzoeksveld, maar weinigen hebben echt een impact nagelaten. Een overzicht van de gepubliceerde literatuur gedurende de voorbije jaren in dit domein dringt zich op. Hoewel er een wijd aanbod is aan prestatiemeetsystemen, geniet vooral de Balanced Scorecard het meest aandacht in de literatuur en in de praktijk. Deze thesis is uitgewerkt rond drie onderzoeksvragen. Eerst wordt een systematic literature review uitgevoerd rond het thema prestatiemeting in bedrijven. Vervolgens worden de meest onderzochte en gebruikte prestatiemeetsystemen besproken. De laatste onderzoeksvraag richt zich op de link tussen prestatiemeting en bedrijfsarchitectuur. Er wordt nagegaan (i) op welk(e) niveau(s) van de bedrijfsarchitectuur de verschillende prestatiemeetsystemen actief zijn en (ii) in welke mate de prestatiemeetsystemen kunnen bijdragen tot strategic alignment tussen de verschillende lagen van de bedrijfsarchitectuur binnen een onderneming. Deze laatste onderzoeksvraag zal uitgevoerd worden door middel van een case study. Uit dit onderzoek blijkt dat vier van de negen onderzochte prestatiemeetsystemen voldoen aan alle criteria voor het versterken van strategic alignment binnen een onderneming. Het gaat om de SMART Performance Pyramid, BSC, IDPMS en Performance Prism. Wanneer we deze frameworks linken aan de bedrijfsarchitectuur zien we dat vijf ervan (RDF, SMART, BSC, IDPMS, Performance Prism) op alle drie de lagen (strategische laag, waardelaag en operationele laag) focussen. De BSC focust wel iets meer op de strategisch laag. De overige vier frameworks kunnen niet op alle drie de lagen gesitueerd worden en focussen specifiek op één of twee lagen. Veel hangt uiteraard af van de context waarin of het doel waarmee de modellen werden gecreëerd.

6 VI Preface Before I started my study of Master of Science in Business Economics at the Ghent University, I completed a four-year study of Master of Science in Physical Education and Movement Sciences. Needless to say, there is a big gap between these two studies. Not only the campus and professors differed, even the way of teaching and the interaction between the students felt totally different. However, the biggest difference obviously, was the content of the curriculum. For someone with very little economic or management knowledge at the start of this academic year, I knew it was not going to be evident to write a master thesis right away. Luckily, I could count on the excellent support of my thesis mentor Ben Roelens. Throughout the entire year, he assisted me with great guidance and feedback. Without his help and expertise, the completion of this master thesis would not have been possible. I would also like to thank my promotor Prof. Dr. Geert Poels, for his feedback during this year.

7 VII Table of Contents 1. Introduction Methodology Literature Review Introduction Definition History of Performance Measurement Key characteristics The features The roles The processes Implementation of a Performance Measurement System Dynamic Performance Measurement Review of Performance Measurement Frameworks The Performance Measurement Questionnaire The Performance Measurement Matrix and the Results-Determinants Framework The SMART Performance Pyramid The Balanced Scorecard The EFQM Excellence Model The Integrated Dynamic Performance Measurement System The Integrated Performance Measurement Framework The Performance Prism Case Study The case: Rolls-Royce Applying the case to the different PMSs The Performance Measurement Questionnaire (PMQ)... 49

8 VIII The Results-Determinants Framework (RDF) The SMART Performance Pyramid The Balanced Scorecard (BSC) The EFQM Excellence Model The Integrated Dynamic Performance Measurement System (IDPMS) The Integrated Performance Measurement Framework (IPMF) The Performance Prism The Dynamic Multi-dimensional Performance Framework (DMPF) Conclusion Reference List... 71

9 IX Table of Abbreviations PM PMP PMS PMQ PMM RDF SMART BSC EFQM IDPMS PIT IPMF PMG DMPF SAIC EHM Definition Performance Measurement Performance Management Process Performance Measurement System Performance Measurement Questionnaire Performance Measurement Matrix Results-Determinants Framework Strategic Measurement Analysis and Reporting Technique Balanced Scorecard European Foundation for Quality Management Integrated Dynamic Performance Measurement System Process Improvement Team Integrated Performance Measurement Framework Performance Measurement Grid Dynamic Multi-dimensional Performance Framework Science Applications International Corporation Engine Health Management

10 X List of Tables Table 1 - Factors that influence the management through PM (Franco-Santos & Bourne, 2005).23 Table 2 - The Performance Measurement Questionnaire part 1 (Dixon et al., 1990). 26 Table 3 - The Performance Measurement Questionnaire part 2 (Dixon et al., 1990).27 Table 4 - The Results-Determinants Framework (Fitzgerald et al., 1991) Table 5 - The selection of performance measures in the IPMF (Medori, 1998).39 Table 6 - The twelve potential baseline measures of the DMPF (Maltz et al., 2003). 43 Table 7 - The PMQ put to practice part Table 8 - The PMQ put to practice part 2 50 Table 9 - The RDF put to practice Table 10 - The SMART Performance Pyramid put to practice...53 Table 11 - The BSC put to practice.55 Table 12 - The EFQM Excellence Model put to practice...57 Table 13 - The IDPMS put to practice 59 Table 14 - The IPMF put to practice...61 Table 15 - The Performance Prism put to practice..63 Table 16 - The DMPF put to practice..65

11 XI List of Figures Figure 1 - The closed loop deployment and feedback system for the PMP (Bititci et al., 1997).15 Figure 2 - The performance pyramid (Cross & Lynch, 1991) 29 Figure 3 - The four perspectives of the balanced scorecard (Kaplan & Norton, 2007) 31 Figure 4 - The four processes of the balanced scorecard (Kaplan & Norton, 2007) 32 Figure 5 - The Model criteria (EFQM, 2012) 35 Figure 6 - The RADAR Logic (EFQM, 2012) 36 Figure 7 - Integrated dynamic performance measurement system (Ghalayini et al., 1997) 38 Figure 8 - The Performance Prism (Neely et al., 2001)..40 Figure 9 - Three dimensions of business architecture 47

12 12 1. Introduction During the past two decades, there has been a growing interest in the domain of performance measurement and management within organizations. Before the 1990 s, management used to rely solely on financial measures. Luckily however, people involved in the domain of performance measurement started to understand that these figures did not give a reliable view of the current performance of the organization and were unable to predict future performance. The field of performance measurement is very broad and authors of diverse disciplines contribute to it. However, according to Marr & Schiuma (2003), only a few authors and papers have heavily influenced this research domain. They state that many make contribution, but with little impact to the field as a whole (Marr & Schiuma, 2003, p. 683). This also means that lots of research questions still remain unanswered in this domain and that further cumulative efforts are recommended. This master thesis contributes to the field of performance measurement by identifying and evaluating the main research efforts that have been made. This enables researchers to get a structured overview of this field, which can guide the identification of future research opportunities. The goal of this thesis is threefold: 1. Firstly, a literature review on the subject of performance measurement within an organization will be performed. 2. Secondly, an overview of the most commonly used and discussed performance measurement systems will be given. These frameworks were obtained through the same literature review. Only the frameworks that met the three specified criteria were selected. 3. Finally, an evaluation will be made of (i) what level(s) of business architecture (strategic, value and operational) these different frameworks are focusing on and (ii) how they can serve as a tool for enhancing strategic alignment between these three levels of business architecture within an organization. This will be done by applying them to a case, selected from the literature. This master thesis starts with the description of the methodology. In chapter three, a review on the current literature concerning performance measurement is performed. In chapter four, the selected frameworks are reviewed and in the following chapter, they are applied to the selected case. This master thesis ends with a brief conclusion, mainly focusing on the third research question.

13 13 2. Methodology To gather the existing relevant literature for the first and second research question, a systematic literature review was performed. The aim of the systematic literature review was to find as many primary studies relating to the research question as possible using an unbiased search strategy (Kitchenham, 2004). To answer the first research question, the process of performance measurement (PM) was researched. The goal was to give an overview of how PM can be defined, how it has evolved over the years, what its key characteristics are, etc. The primary studies for this research question were obtained by using the digital library Web of Science. This database was searched using the keywords performance measurement, performance measurement systems and performance measures. The list of articles found using this searching strategy was over-abundant. Firstly, the relevance of the articles was evaluated solely on the title of the article. When there was still doubt about the relevance of an article for this research question, the abstract was analyzed. The following articles were considered relevant for this research question: Articles on the definition of PM Articles on the process of PM Articles on the history of PM Articles on the link between PM and strategy formulation Articles on the dynamics of PM Articles on the implementation of PM Any other articles on PM The following articles were excluded for this research question: Articles on PM in a specific business sector (e.g. IT) Articles on PM of one specific aspect of a company (e.g. customer satisfaction) Articles on the affect PM can have on one specific aspect of the company (e.g. leadership) After this selection was made, 19 primary studies (3,4,5,6,7,9,10,17,20,22,23,29,30,47,51,57,61,62,78) that provide direct evidence about the research question were selected for the first research question. During the actual writing of this first part of this thesis, relevant articles from the reference lists of these primary studies were added. Articles that specifically reviewed one or more PMS, were not used as primary studies. These articles were used for the second research question, which focused on the description and

14 14 reviewing of the most commonly used and discussed PM frameworks. All the different PM frameworks that were encountered during the literature review were evaluated on three characteristics: 1. Is the framework applicable for the entire organization? 2. Does the framework offer a holistic, multi-dimensional approach? 3. Was the framework designed during or after 1990? In other words, frameworks that were designed to evaluate the performance of a specific part of an organization were not selected. Also, frameworks that focus solely on financial measures were excluded. After this evaluation, nine frameworks were retained. The following frameworks were reviewed: 1. The Performance Measurement Questionnaire (Dixon et al., 1990) 2. The Performance Measurement Matrix and the Results-Determinants Framework (Fitzgerald et al., 1991) 3. The SMART Performance Pyramid (Cross & Lynch, 1991) 4. The Balanced Scorecard (Kaplan & Norton, 1992) 5. The EFQM Excellence Model (EFQM, 1992) 6. The Integrated Dynamic Performance Measurement System (Ghalayini et al., 1997) 7. The Integrated Performance Measurement Framework (Medori, 1998) 8. The Performance Prism (Neely & Adams, 2001) 9. The Dynamic Multi-dimensional Performance Framework (Maltz et al., 2003) The last research question is aimed at evaluating how these systems contribute to the strategic alignment within the business architecture of an organization. Here, a case study was performed. A case was selected from the literature and adapted to this specific subject. The different PMSs were applied on the organization of this case, which should led to an evaluation from a more practical point of view. Four criteria were used to determine whether a framework can enhance strategic alignment within an organization.

15 15 3. Literature Review 3.1 Introduction The Performance Management Process (PMP) is the process by which a company manages its performance in line with its corporate and functional strategies and objectives. The objective of this process is to provide a proactive, closed loop control system, where the corporate and functional strategies are deployed to all business processes, activities, tasks and personnel. Feedback is obtained through the performance measurement system to enable appropriate management decisions (Bititci et al., 1997, p.524). In other words, a performance measurement system should enable a company to deploy the strategic and tactical objectives of the business and provide a structured framework to allow feedback of relevant information. Doing so, the processes of decision making and controlling the organization can be facilitated (Bititci et al., 1997). Figure 1 - The closed loop deployment and feedback system for the PMP (Bititci et al., 1997) The figure above clearly shows the two main pathways of performance management. The deployment arrow starts at the top of the organization, where the vision is defined. This is a statement of what the company wants to be in the long-term future. The board then outlines the business objectives that should help to realize this vision statement in the long term. These business objectives are then narrowed down to the strategic goals. These are more concrete than the business objectives and more useful on an operational level. Subsequently, critical success factors are selected for every strategic goal. They give an indication of how a company wants to achieve its objectives, whereas the strategic goals indicate what it wants to achieve. Finally, action plans are designed to reach the different critical success factors.

16 16 To evaluate whether a company is able to achieve its goals, performance measures will have to be selected for every action plan. This is also the start of the second arrow, the feedback system. These performance measures form the fundamental elements of any performance measurement system. According to Atkinson (1998), the process of PM consists of 4 steps: 1. Identifying the primary objectives (as established by the owners or principals). 2. Analyzing the roles that different stakeholders play as the organization pursues its primary objectives 3. Identifying what each stakeholder requires in exchange for supporting the organization s strategy 4. Determining how to measure the objectives and the stakeholder roles. The PMP can only occur, when a company has selected and implemented a Performance Measurement System (PMS). PMSs are concise sets of metrics [ ] that support the decision-making processes of an organization by gathering, processing and analyzing quantified information about its performance, and presenting it in the form of a succinct overview (Bisbe & Malagueno, 2012, p.297). By acquiring and analyzing relevant information, a company can gain better insight in its current performance. Therefore, the implementation of a PMS can stimulate managerial changes and promote organizational learning (Garengo et al., 2007). In other words, the ultimate goal is not quantification but stimulating change (Neely et al., 2005). A PMS generally speaking consists of two features: the measures and the supporting infrastructure (Franco-Santos et al., 2007). The challenge is to select the measures and parts of the supporting infrastructure that are worth their costs (Grosswiele et al., 2013). Numerous practitioners of a PMS indicate that they sometimes experience an overload of information. The cause of this problem is the fact that many systems contain irrelevant information for an organization. The consequences are excessive operating costs and unnecessary complexity of the processes (Grosswiele et al., 2013). Especially in small and medium-sized organizations, the cost of measurement is a big concern (Neely et al., 2005). 3.2 Definition Management researchers in areas as diverse as strategy management, operations management, human resources, information systems, marketing, management accounting and

17 17 organizational behavior are contributing to the field of PM (Marr & Schiuma, 2003). As a result, the use of a PMS is a multi-disciplinary concept, including many different approaches (Franco-Santos et al., 2007). Within this broad research field, Franco-Santos et al. (2007) state that 3 different perspectives could be used to define PMSs: 1. From an operations perspective, PMSs could be seen as a set of metrics used to quantify both the efficiency and effectiveness of actions (Neely et al., 1995) or as the reporting process that gives feedback to employees on the outcome of actions (Bititci et al., 1997). 2. From a strategic control perspective, 2 different aspects are highlighted. Firstly, a PMS allows an organization to cascade down those performance metrics used to implement the strategy within the organization (Gates, 1999). It also provides the organization with the information necessary to challenge the content and validity of the strategy (Ittner et al., 2003). 3. From a management accounting perspective, a PMS is considered to be synonymous with management planning and budgeting (Otley, 1999). In this thesis, these first two perspectives will be the most important ones, since the processes and strategy play a dominant role when we will discuss the architecture of a firm. As will be explained below, the relation between management accounting and performance measurement has decreased during the past decades. 3.3 History of Performance Measurement According to Johnson (1972), current management accounting developed in the USA between the 1850 s and 1920 s. After the First World War, some major organizations started using sophisticated budgeting and management accounting techniques, such as standard costing, variance analysis, flexible budgets, return on investment and other key management ratios (Chandler, 1962). However, between 1925 and the 1980 s, there were no significant developments in management accounting and by the 1980 s, traditional accounting measures were being criticized for encouraging short-term decision making (Johnson & Kaplan, 1987). Bourne & Neely (2003) state, based on previous research, that the traditional accountingbased performance measures have been characterized as being too much internally focused, backward looking and more concerned with local departmental performance than with the overall health or performance of the business. Measuring performance by solely relying on

18 18 financial measures led to destruction of Western manufacturing business (Hayes & Abernathy, 1980; Johnson & Kaplan, 1987). Consequently, in the late 1980 s the desire to develop more balanced PMSs started growing (Bourne & Neely, 2003; Bourne, 1999). This lead to the creation of many new frameworks, which overcome many of the shortcomings of traditional financially-based accounting systems. These PM frameworks can be classified into models of the first and the second generation (Yadav et al., 2013). Roughly, frameworks of the first generation were developed between 1990 and 2000, while frameworks of the second generation were developed after As stated above, non-financial measures became important in the 1990s. The dimensions of performance measures covered by PM frameworks focused on quality, people-related issues, customer satisfaction, competitiveness, etc. (Yadav et al., 2013). Also, the quality of the financial measures was examined (Ittner & Lancker, 1998). These frameworks of the first generation were mainly used in the manufacturing organizations. Frameworks of the second generation were more focused on the need for a holistic and integrated model for enterprise performance. More emphasis was placed on (i) the alignment of current performance with future performance, (ii) aligning individual performance with enterprise performance, and (iii) integrating operational, functional and strategic aspects of enterprise performance. Also, implementation of PM frameworks started becoming more and more popular in the service sector. In conclusion, it could be stated that in the past two decades PM evolved from (i) operations to strategy, (ii) measurement to management, (iii) static to dynamic and (iv) economic-profit to stakeholder focus (Srimai et al., 2011). 3.4 Key characteristics Franco-Santos et al. (2007) tried identifying the key characteristics of a PMS, by reviewing and synthesizing the different definitions that exist in the literature. This research only focused on Business PMSs, as opposed to Organizational PMSs. This meant that the public and non-profit sectors were excluded from their research. The different definitions of PMSs were compared with each other on 3 levels: 1) The features: the different properties or elements which make up the PMS.

19 19 2) The roles: purposes or functions that are performed by the PMS. 3) The processes: the series of actions that combine together to constitute the PMS. The definitions they encountered, demonstrated a great diversity and a lack of consensus. Each definition provided a different perspective on the concept, no two definitions agreed on the precise characteristics. However, some characteristics were more frequent than others The features Franco-Santos et al. argue that there are 3 elements that seem necessary in a PMS. These are (i) performance measures, (ii) objectives/goals and (iii) supporting infrastructure. The goals that are selected by an organization can be either strategic goals, operational goals or even critical success factors. The supporting infrastructure exists of methods for recording data, supporting procedures (Neely, 1998) and human resources required to support the systems (Kerssens-Van Drongelen & Fisscher, 2003). Which measures a company will adopt in its PMS, greatly depends on the importance of the different stakeholders. Different stakeholders have different expectations. Sometimes, this can produce conflicts. Therefore, high performance is not about exceptional achievements on one or two measures but gaining satisfactory results along a broad set of criteria, each of which partly competes with others over time (Doyle, 1994, p.131). Developing a hierarchy of measurements for each group of stakeholders and interlinking them to form one comprehensive PMS, is therefore needed to reflect the whole value system of an organization (Feurer & Chaharbaghi, 1995). Neely et al. (1997), based on prior research, state that measures of performance should: Be simple to understand and clearly defined Be visible to all Be derived from strategy and relate to specific, achievable goals Provide timely and accurate feedback Be quantitative (and the organization should be able to influence these numbers) According to Bourne & Neely (2003) PMSs should include (i) both financial and nonfinancial measures, (ii) both internal and external measures and (iii) both measures which quantify what has been achieved as well as measures which are used to help predict the future.

20 20 Financial & non-financial In the past, there has been a tendency to focus too much on financial measures, as already stated above. Especially Western companies seemed to rely on financial measures (Doyle, 1994). Sometimes organizations use an absolute measure of profits, but more often it is a ratio such as earnings per share, return on investment or return on shareholder funds. These indices easily allow benchmarking against competitors over time. However, picking just one financial measure to evaluate success or failure is a dangerous thought, since this leads to a biased and misleading picture of overall performance of the company. First of all performance is only viewed from the perspective of the shareholders and only their interests are being satisfied (Doyle, 1994). In other words, the main goal of the organization is to maximize the value for these shareholders. However, maximizing shareholder value can cause conflicts of interest with other stakeholders. Secondly, when an organization strives to maximize on a financial measure, this implies that other measures are being neglected (Doyle, 1994). In other words, when an organization pursues excellence in one domain, trade-off effects will occur, which can damage the organization quite severely. Many companies that consider non-financial measures as important are not capturing data on these measures (Stivers, 1998). A possible reason could be that companies perceive these measures to be immeasurable and therefore useless. Another reason could be the lack of the information systems capability to collect the correct data (Manoochehri, 1999). Nevertheless, since non-financial measures have proved their value, there is a need for investing some effort in developing information systems that can actually measure these intangibles (Franco-Santos & Bourne, 2005). Internal & external A study of Kagono (1985) showed that at the time, growth of market share rather than profitability was the dominant objective in most Japanese companies. Apparently, there was a difference in focus between these and Western organizations. Market share objectives received less priority in Western companies because, at least in the short term, they conflict with the profitability goal (Doyle, 1994). However, when companies focus too much on their

21 21 internal efficiencies rather than on what is happening in the market, they may lack the knowledge needed for making adequate management decisions (Bourne, 1999). Past & future Most of the common financial measures have measurement problems, which make them bad predictors of future performance (Doyle, 1994). Also, different accounting methods can have a big influence on the reported losses or profits. Therefore, financial measures do not give a reliable indication of the opportunities for an organization in the future, they merely give an image of the performance in the past. For example, profits can be quickly raised by trading off the future for the present. By cutting back on expenses such as Research & Development or brand support, earnings are boosted for a few years. However, there is a big chance that this decision will lead to a worse performance in the future. Similarly, firing employees and cutting back on education and training will certainly affect the current profitability. However, this will have a very negative influence on the service quality of the organization in the future The roles The roles that were mentioned most frequently in the literature were (i) strategy implementation/execution, (ii) focus attention/provide alignment, (iii) internal communication and (iv) measure performance. It s also worth noting that only 1 definition mentioned the role of strategy formulation. Franco-Santos et al. (2007) propose five different categories of PMS roles, being: 1) Measure performance: monitor progress and measure/evaluate performance; 2) Strategy management: comprises the roles of planning, strategy formulation, strategy implementation/execution and strategic alignment; 3) Communication: comprises the roles of internal and external communication, benchmarking and compliance with regulations; 4) Influence behavior: comprises the roles of rewarding or compensating behavior, managing relationships and control; 5) Learning and improvement: comprises the roles of feedback, double-loop learning and improvement of the systems and processes. De Lima et al. (2013) add two extra roles. Firstly, they believe that a PMS can provide a better understanding of market needs. Secondly, the implementation of a PMS in an organization can produce a positive change in organizational culture.

22 The processes Based on the analysis made by Franco-Santos et al. (2007), PMSs can include 12 different processes. Again, the authors proposed five different categories of necessary PMS processes: 1) Selection and design of measures 2) Collection and manipulation of data 3) Information management (information provision, interpretation, decision making) 4) Performance evaluation and rewards 5) System review (ensure feedback loop within the system) 3.5 Implementation of a Performance Measurement System Managing the performance measurement of an organization is not just about selecting the relevant measures for that firm. The next step is putting all the ideas into action. Fitzgerald et al. (1991) split up the process in three steps: 1. Developing business objectives: analyzing the needs of the customers and the other stakeholders; 2. Designing measures: design them in such a way that it reinforces the achievement of the business objectives; 3. Managing through measurement: procedures must be put in place so that the measures are collected, analyzed, reviewed and acted upon on a regular basis over a sustained period of time (Bourne, 1999). Implementing a PMS means that the system will have to interact with a wider environment (Neely et al., 2005). There are two dimensions in this environment: internal and external. The internal environment relates to the organization itself, the external environment relates to the market within which the organization competes. The latter consists of two elements: customers and competitors. Some organizations are better in managing through measures than others. In other words, while some companies find it difficult to act upon their results, others systematically use theirs to support the decision-making processes within the organization. Franco-Santos & Bourne (2005) carried out a systematic review on this topic, their findings were based on 73 studies.

23 23 Franco-Santos & Bourne (2005) argue that there are 16 factors that have an impact on the way organizations manage through measures. These are split up in 11 process factors and 5 context factors. Below, you can find a schematic representation of these factors. Table 1 - Factors that influence the management through performance measurement (Franco-Santos & Bourne, 2005) The main process factors can be subdivided into those factors related to an effective design of a PMS, those factors related to an effective implementation of a PMS, and those factors related to the use of a PMS (Bourne et al., 2000). The contextual factors have been categorized as internal and external context factors. Although most of the sub-factors are evident, others need some explanation. Alignment and integration is a sub-factor that can be split up into 2 different aspects. First of all, it relates to the integration and alignment of an organization s mission, vision and strategy when designing a PMS. Secondly, it relates to the integration of a PMS with other key management systems such as planning and budgeting, rewards, or information systems. To effectively implement a PMS, people must be empowered, enabled and encouraged (Frigo & Krumwiede, 1999). Empower refers to the need for people s involvement in the development of a PMS. Enable refers to the need for people s education and training on the measures and on the related tools and procedures. Encourage refers to the need for actions

24 24 or activities that actually motivate people to use the data provided by a PMS in their day-today work, create the right attitude towards the system and reduce the levels of resistance. The few studies that exist on the impact of rewards on the use of PMSs, conflict in their findings (Franco-Santos & Bourne, 2005). Some authors argue that rewards are necessary to encourage the use of a PMS and, doing so, achieving better results (Kaplan & Norton, 1996; Malina & Selto, 2002; Gates, 1999). Others argue that linking performance on certain measures and rewards may lead to subjectivity and may have a negative impact on the effectiveness of the PMS (Ho & Mckay, 2002; Ittner et al., 2003). 3.6 Dynamic Performance Measurement As already stated above (see supra p. 13), during the 1980 s, there was a growing need for more relevant, integrated and balanced PMSs. This lead to the creation of numerous new frameworks. However, it could be argued whether these frameworks are sufficiently advanced to create a truly dynamic PMS. According to Bititci et al. (2000) most organizations use a static PMS, instead of a dynamic one. This has a negative effect on the integrity of the PMS as well as on the agility and responsiveness of the organization. Bititci et al. (2000) state that the three main barriers to adopt a more dynamic approach are: (i) the lack of a structured framework, (ii) the absence of a flexible platform to allow organizations to effectively and efficiently manage the dynamics of their PMSs and (iii) the inability to quantify the relationships between measures within a system. In this context, the use of a company-wide IT-platform could be very useful. The fact that PMSs need to achieve alignment with strategic priorities is well established within the literature (Dixon et al., 1990; Neely et al., 1995). However, it is also recognized that the external and internal environment of an organization is not static but is constantly changing (Bititci et al., 2000). Therefore, according to Bititci et al., a dynamic PMS should have: An external monitoring system, which continuously monitors developments and changes in the external environment; An internal monitoring system, which continuously monitors developments and changes in the internal environment and raises warning when certain performance limits or thresholds are reached;

25 25 A review system, which uses the information provided by the internal and external monitors and the objectives and priorities set by higher level systems, to decide internal objectives and priorities; An internal deployment system to deploy the revised objectives and priorities to critical parts of the system.

26 26 4. Review of Performance Measurement Frameworks In this chapter, the aforementioned PMSs will be reviewed. They are ordered in chronological order. 4.1 The Performance Measurement Questionnaire The Performance Measurement Questionnaire (PMQ) was developed by Dixon et al. (1990). The PMQ helps managers (i) identify the improvement needs of their organization, (ii) to determine the extent to which the existing performance measures support improvements, and (iii) to establish an agenda for performance measure improvements (Pun & White, 2005). The framework is structured in two main parts. Part 1 is aimed at evaluating the specific improvement areas of the organization and how effectively the current performance measures evaluate improvement. Originally, Dixon et al. (1990) classified the improvement areas in three categories, i.e. Quality, Labour Efficiency and Machine Efficiency. Management is given a list of possible improvement areas for the organization. On a Likert scale, they have to indicate (i) the long-term importance of each improvement area for the organization and (ii) whether the current measures support improvement (Park et al., 1998). How much improvement is required in the long term? None >>> Great IMPROVEMENT AREAS Do current measures support improvement? Inhibit >>> Support Improvement area Improvement area Improvement area Table 2 - The Performance Measurement Questionnaire part 1 (Dixon et al., 1990) Part 2 is aimed at evaluating how achieving excellence for different performance improvement factors (= measures) will lead to long-term health of the organization and to which extent the organization already places emphasis on the most crucial factors (Bourne & Neely, 2003). The procedure is the same as for the improvement areas, management has to indicate (i) whether achieving excellence in a certain measure is important for the long-run health of the organization and (ii) whether the organization emphasizes this performance factor (Park et al., 1998).

27 27 Of how much importance is this performance factor? None >>> Great PERFORMANCE IMPROVEMENT FACTORS How much emphasis is currently placed on measuring this performance factor? Inhibit >>> Support Performance improvement factor Performance improvement factor Performance improvement factor Table 3 - The Performance Measurement Questionnaire part 2 (Dixon et al., 1990) The PMQ can also be used as a step in the process of performance measurement within another framework. This is, for instance, the case in the Integrated Dynamic Performance Measurement System. It could be argued that the PMQ cannot be considered a comprehensive measurement system (Ghalayini et al., 1997). Unlike the other models, the PMQ is not built around a fixed framework. Also, the PMQ does not provide identification of specific performance measures that are related to the strategy of the organization (Jagdev et al., 2004). 4.2 The Performance Measurement Matrix and the Results-Determinants Framework Another older PM framework is the Performance Measurement Matrix (PMM), which was developed by Keegan et al. (1989). The strength of the PMM lies in the fact that it tries to integrate different dimensions of performance, being internal and external, financial and nonfinancial (Striteska & Spickova, 2012). However, the PMM does not make the links between the different dimensions of business performance (Neely et al., 2000). Fitzgerald et al. (1991) developed a modified system of the PMM, called the Results-Determinants Framework (RDF). The RDF tries to overcome the criticism about the PMM. This framework was designed to be used in service businesses. The RDF classifies measures into two categories: measures that relate to the results of the strategy (financial performance and competitiveness) and measures that are determinants of that strategy s success (resource utilization, quality of service, innovation and flexibility). The results obtained are a function of past performance. Therefore, they could be seen as lagging indicators, whereas determinants are leading indicators (Neely

28 28 et al., 2000). For the six dimensions, relevant measures are selected. Between the dimensions, there will be interactions and trade-offs. This should lead to better balanced strategic plans during the process of strategy formulation (Brignall & Balantine, 1996). Below is a schematic overview of the RDF model. Measure 1 Competitiveness Measure 2 Results Measure 1 Financial Measure 2 performance Measure 1 Quality Measure 2 Measure 1 Flexibility Measure 2 Determinants Measure 1 Resource utilization Measure 2 Measure 1 Innovation Measure 2 Table 4 - The Results-Determinants Framework (Fitzgerald et al., 1991) Given that many large service organizations diversified on an organizational and geographical level, Fitzgerald et al. (1991) recommend that strategic business units (SBUs) become the main focus of performance measurement. A SBU could be defined as: an operating unit which sells a distinct set of products or services to an identifiable group of customers in competition with a defined set of organizations (Fitzgerald et al., 1991, p.21). For every SBU, the manager s task is to select and implement a strategy to beat the competition while satisfying organizational performance requirements (Brignall & Balantine, 1996).

29 29 RDF reflects the concept of causality, which means it acknowledges that the results obtained today are a function of past business performance in relation to specific determinants (Neely, 2007). 4.3 The SMART Performance Pyramid The SMART (Strategic Measurement Analysis and Reporting Technique) Performance Pyramid was created by Cross & Lynch (1991). The aim of this model is to connect the organization s strategy with its operations, by translating objectives from the top down and measures from the bottom up. The pyramid contains four levels of objectives that affect the organization s external effectiveness and simultaneously its internal efficiency. Figure 2 - The performance pyramid (Cross & Lynch, 1991) At the first level, an overall corporate vision is defined. This is then divided into individual business unit objectives. At the second level of the pyramid, short-term, financial targets are defined, as well as the long-term goals of growth and market position. The third level contains day-to-day operational measures (concerning customer satisfaction, flexibility and productivity). The last level includes four key indicators of performance measures: quality, delivery, cycle time and waste (Striteska & Spickova, 2012). Although the SMART performance pyramid attempts to integrate corporate objectives with operational indicators, it does not provide any mechanism to identify these key performance

30 30 indicators. Also, it does not explicitly integrate the concept of continuous improvement (Striteska & Spickova, 2012). 4.4 The Balanced Scorecard The most commonly used framework for performance measurement, is the Balanced Scorecard (BSC) (Susilawati et al., 2013; Neely et al., 2001). The BSC was created in 1992 by Robert S. Kaplan and David P. Norton. The authors state that the BSC revolutionized conventional thinking about performance measurement, by going beyond the traditional measures of financial performance. Non-financial metrics are valuable because they predict future financial performance rather than simply report what has already happened (see supra p. 15). The BSC is based on four different perspectives that provide an organization s performance measures and four management processes that contribute to linking long-term strategic objectives with short-term actions. First, the four perspectives of the BSC will be discussed. The traditional financial performance measures worked well for the industrial era, but they are out of step with the skills and competencies that companies are trying to master today. Nowadays, managers want a balanced presentation of both financial and operational measures. Kaplan and Norton complemented the financial measures with operational measures on customer satisfaction, internal processes and the organization s innovation and improvement activities (see Figure 3). These operational measures are the drivers of future financial performance (Kaplan & Norton, 1992).

31 31 Figure 3 - The four perspectives of the balanced scorecard (Kaplan & Norton, 2007) A. Customer Perspective: How do customers see us? This perspective has become more and more important for the management of an organization in the past decades. The BSC demands that managers translate their general mission statement on customer service into specific measures that reflect the factors that really matter to customers. These concerns are subdivided into four categories: time, quality, performance and service. B. Internal Business Perspective: What must we excel at? Excellent customer performance derives from processes, decisions and actions occurring throughout the organization. Therefore, managers need to focus on those critical internal operations that enable them to satisfy customer needs (Kaplan & Norton, 1992). The measures that are implemented in a company s BSC should have a direct relation with the internal business processes that have the greatest impact on customer satisfaction. Companies should also attempt to identify and measure their company s core competencies, these are the critical technologies needed to ensure continued market leadership (Kaplan & Norton, 1992, p. 75). In conclusion, organizations must evaluate which processes are most important and select relevant measures for every process.

32 32 C. Innovation and Learning Perspective: Can we continue to improve and create value? Growing global competition requires that organizations are able to continually improve their products and introduce new products to the market (Kaplan & Norton, 1992). Only by continually launching new products, creating more value for customers, and improving operating efficiency can a company penetrate new markets and increase revenues and margins. D. Financial Perspective: How do we look to shareholders? Some critics argue that by making fundamental improvements in operations, the financial numbers will take care of themselves. In other words, companies should stop navigating by financial measures (Kaplan & Norton, 1992). However, there is always some uncertainty between an organization s operational performance and the financial results. In reality, improved operational performance does not necessarily lead to an improvement of financial performance. Therefore, a well-designed financial control system can be a tool for improving quality management. As stated above, the BSC relies on four processes to bind short-term activities to long-term objectives and strategy (see Figure 4). These were not added in the original BSC, but added later. The management processes are discussed below. Figure 4 - The four processes of the balanced scorecard (Kaplan & Norton, 2007)

33 33 A. Translating the Vision This process focuses on the formulation of the company s vision and strategy. For people to act on the vision and strategy statements, these statements must be expressed as an integrated set of objectives and measures. These measures must describe an organization s long-term drivers of success and are agreed upon by the top-management (Kaplan & Norton, 2007). B. Communicating and Linking The second process lets managers communicate their strategy up and down the organization and link it to departmental and individual objectives. By developing personal scorecards, employees will have a better understanding on how their own productivity supports the overall strategy. To align employees individual performances with the overall strategy, scorecard users generally engage in three activities: (i) communicating and educating, (ii) setting goals and (iii) linking rewards to performance measures (Kaplan & Norton, 2007). C. Business Planning In the third process, companies integrate their business and financial plans, ensuring that the financial budgets support the strategic goals. Organizations identify the most influential drivers for the selected performance measures. Subsequently, milestones are set for every driver to enable evaluation of the progress that has been made with these drivers (Kaplan & Norton, 2007). D. Feedback and Learning The fourth process gives companies the capacity for what is called strategic learning. The BSC allows organizations to modify their strategies to reflect real-time learning. An organization that has implemented the BSC can monitor short-term results from the three operational perspectives and evaluate the current strategy in the light of this performance (Kaplan & Norton, 2007). 4.5 The EFQM Excellence Model The European Foundation for Quality Management (EFQM) is a non-profit organization that was established in 1988 with the mission Being a stimulus of sustainable excellence. The EFQM Excellence Model was presented as an outline framework in 1992 (EFQM, 2012). The framework can be used by different kinds of companies and has a flexible approach. Not all businesses or business-units should apply the same prescriptive template, they can apply a

34 34 customized framework with specific measures to fit their goals, mission or strategy (Wongrassamee et al., 2003). The EFQM Excellence Model gives people an insight in how a company s actions and decision have an impact on the company s results. It allows an organization to assess its effectiveness in developing and delivering a stakeholder-focused strategy. The model allows constant improvement by determining the shortcomings and encouraging appropriate solutions for them (EFQM, 2012). To ensure sustainable financial growth, it s necessary for a company to achieve adequate levels of customer satisfaction. The EFQM Excellence Model aims to achieve this by finding a balance between the most important stakeholder needs. The model acknowledges 4 types of stakeholders: Society, People (the employees), Customers and Shareholders (EFQM, 2012). The EFQM Excellence Model is based on a set of three integrated components: the Fundamental Concepts of Excellence, the Model Criteria, and the Radar Logic. A. Fundamental Concepts of Excellence First of all, excellence needs to be defined. Excellent organizations achieve and sustain outstanding levels of performance that meet or exceed the expectations of all their stakeholders (EFQM, 2012). In the EFQM Excellence Model, excellence is outlined by eight fundamental concepts. Each of the concepts is important, but maximum benefit is achieved when an organization can integrate them all into its culture. The Fundamental Concepts of Excellence form the basis for the criteria of the EFQM Excellence Model. They are (1) adding value for customers, (2) creating a sustainable future, (3) developing organizational capability, (4) harnessing creativity and innovation, (5) leading with vision, inspiration and integrity, (6) managing with agility, (7) succeeding through the talent of people, and (8) sustaining outstanding results (EFQM, 2012).

35 35 B. The Model Criteria Figure 5 - The Model criteria (EFQM, 2012) To achieve excellence, the EFQM Excellence Model relies on nine criteria. Five of these are enablers and four are results. The enabler criteria cover what an organization does and how it does it. They are the things an organization needs to do to develop and implement its strategy and are pictured on the left-hand side of the model. The 5 enablers are: (1) leadership, (2) strategy, (3) people, (4) partnerships & resources and (5) processes, products & services (EFQM, 2012). On the other hand, the results criteria represent what a company achieves. These are the results an organization achieves, in line with its strategic goals. They are shown on the righthand side of the model. The four results are: (1) customer results, (2) people results, (3) society results and (4) business results. These results should provide an organization with the relevant measures for analyzing their performance. These measures enable the organization to evaluate the successful deployment of their strategy. The results can be segmented to evaluate the performance of specific areas of the organization (EFQM, 2012). Because of the ever-changing global market and customer needs, the companies that achieve excellence today will not necessarily be the companies that achieve excellence in the future. The EFQM Excellence model has implemented a continual feedback loop to handle this challenge. This feedback loop allows companies to learn out of their results and thereby improving their 5 enablers. In the long term, this should lead to constant innovation and customer satisfaction (EFQM, 2012).

36 36 C. The Radar Logic Figure 6 - The RADAR Logic (EFQM, 2012) The RADAR methodology is the core of the EFQM Excellence model. It is a dynamic assessment tool that allows the management to examine the performance of the organization in a structured way. It states that an organization must take the following into consideration (EFQM, 2012): Determine the Results it is aiming to achieve as part of its strategy; Plan and develop an integrated set of sound Approaches to attain the required results; Deploy the approaches in a systematic way to ensure implementation; Assess and Refine the approaches by monitoring and analyzing the results achieved. 4.6 The Integrated Dynamic Performance Measurement System The Integrated Dynamic Performance Measurement System (IDPMS) was created by Ghalayini et al. (1997). This PMS was specifically built for manufacturing environments. The IDPMS provides (i) performance measurement at several levels of the organization, (ii) integration of general areas of success with associated performance measures, and (iii) integration of relevant financial measures with operational performance measures (Ghalayini et al., 1997). The IDPMS is based on the integration of three primary functional areas, which will be discussed below: management, process improvement teams (PITs) and the factory shop floor.

37 37 The management is responsible for both the general and specific areas of success that will be used in IDPMS. General areas of success are the important areas for the company s longterm success. They are based on the organization s strategy and the use of the PMQ. The specific areas of success are the essential areas for competing in a specific product market. These are usually determined by the marketing department according to sales and market share reports and customer satisfaction reports. The PITs are composed of people from both management and the factory shop floor. The focus is on improving the operational and cost performance of the manufacturing systems. These teams select the performance indicators, determine an appropriate time horizon and report to management about the performance measures. The factory shop floor includes departments directly related to manufacturing a product. They collect and analyze data on daily operations with respect to the performance measures of both general and specific areas of success. They may use a chain of performance indicators to govern and improve the relationships among the different departments. Three different tools help the functional areas measure and improve performance in an integrated manner: the performance questionnaire (PMQ), the half-life concept and a modified value-focused cycle time (MVFCT) diagram. The starting point of the IDPMS is to apply the PMQ. Afterwards the results of the PMQ are used to develop the organization s strategies, supporting areas of success, and associated performance measures. A second tool is the half-life concept. The underlying premise of the concept is that any defect level that is subject to legitimate process improvement efforts will decrease at a predictable rate (Ghalayini et al., 1997, p. 213). The PITs use the half-life concept to determine a reasonable planning horizon and expected improvements to be achieved in the horizon. The last tool that is being used in the IDPMS, are the MVFCT diagrams. These are developed to model the manufacturing processes simply and accurately. It allows employee-based teams to improve process performance from an overall systems perspective. These diagrams indicate all the value adding and non-value adding components of a certain process. Teams can use these diagrams to improve the overall process. A schematic overview of the IDPMS is presented in figure 7.

38 38 Figure 7 - Integrated dynamic performance measurement system (Ghalayini et al., 1997) IDPMS implementation follows four steps: 1. Evaluate the PMQ results to determine areas of success and associated performance measures; 2. Identify the interrelationships between the various areas of success and performance measures; 3. Set up specific performance measures and indicators throughout the company; 4. Initiate system improvement activities. For each general area of success, a list of specific areas of success can be generated. These are then further analyzed to determine a set of performance indicators. After identifying the areas of success and the associated performance indicators, the management has to identify the interrelationships among the different areas and measures. This enables the organization to prioritize improvement efforts in order to maximize the return of activities (Ghalayini et al., 1997). However, Susilawati et al. (2013) state that within the IDPMS, it is unclear to measure in a logical order and manage the relationships between measures. 4.7 The Integrated Performance Measurement Framework The Integrated Performance Measurement Framework (IPMF) was designed by Medori (1998) as a PMS for manufacturing organizations. Medori & Steeple (2000) state that most PMSs give little guidance for the selection and implementation of the measures that form the

39 39 PMS. Therefore, the IPMF not only serves as a PMS for an organization, it can also be used to evaluate the relevance of the different measures that are already being used within the PMS of a firm. The IPMF consists of 6 steps that have to be followed (Medori & Steeple, 2000). 1. Determining the company s success factors The selected success factors have to be strongly related to the organization s strategy, mission and vision. 2. Forming the Performance Measurement Grid (PMG) The selected success factors must now be linked to the six competitive priorities of any organization in the manufacturing business. These are (i) quality, (ii) cost, (iii) flexibility, (iv) time, (v) delivery and (vi) future growth. 3. Selection of measures For every competitive priority, the measures that are most relevant in accordance with the success factor(s) that correspond(s) with the competitive priority are selected. For one competitive priority, different measures can be selected. Below, a schematic representation is given of the first three steps of the IPMF. Competitive priorities (step 2) Company success factors (step 1) Measures (step 3) Success factor 1 Measure 1 1 Quality Measure 2 Success factor 2 Measure 3 Measure 4 2 Cost Success factor 3 Measure 5 3 Flexibility 4 Time 5 Delivery 6 Future Growth Table 5 - The selection of performance measures in the IPMF (Medori, 1998) 4. Auditing of the existing PMS If the company is not using a PMS at the moment, this step can be ignored. However, if a PMS is already in practice, the IPMF allows an organization to asses it by comparing the currently used measures with the new measures that were selected

40 40 using the IPMF. When there is a gap or difference between both sets of measures, adjustments have to be made. 5. Implementation of the measures The IPMF provides organizations with an eight step plan to implement their selected measures. The 8 steps are (i) title, (ii) objective, (iii) benchmark, (iv) equation, (v) frequency, (vi) data source, (vii) responsibility and (viii) improvement. These steps will not be discussed into detail. 6. Periodic maintenance The measures that are most relevant today, could become irrelevant in the future, and vice versa. Therefore continual reviewing is imperative. 4.8 The Performance Prism The Performance Prism was created by Neely & Adams (2001). It is one of the younger PMSs. Although Neely and Adams recognize the importance of the BSC, they argue that priorities are constantly changing and that there is a need for second generation of PM frameworks. Figure 8 - The Performance Prism (Neely et al., 2001)

41 41 The Performance Prism consists of five interrelated facets: A. Stakeholder Satisfaction: Who are the important stakeholders in your organization and what do they want and need? This facet is broader than the BSC view of stakeholders, which only encompasses shareholders and customers. In the Performance Prism, the impact of employees, suppliers, the local community, etc. on performance plays a more prominent role. B. Stakeholder Contribution: What do we want from our stakeholders? This facet recognizes the fact that organizations not only have to deliver value to their stakeholders, they also enter into a long-term relationship with their stakeholders. This relationship should involve the stakeholders contributing to the organization. C. Strategies: What are the strategies we require to ensure the wants and needs of our stakeholders are satisfied? The starting point when selecting measures was: Who are the stakeholders and what do they want and need?. Only when these questions have been answered is it possible to start to explore the issue of what strategies should be put in place to ensure the wants and needs of the stakeholders are satisfied. In other words, strategy means how the goal will be achieved. It is not the goal itself. D. Processes: What are the processes we have to put in place in order to allow our strategies to be delivered? Many organizations classify four business processes: (1) develop products and services, (2) generate demand, (3) fulfill demand, (4) plan and manage the enterprises. These processes can be sub-divided into more detailed processes. Management will have to identify which are the most important processes, and focus attention on these, rather than simply measuring the functioning of all processes. E. Capabilities: What are the capabilities we require to operate our processes? Capabilities are the combination of people, practices, technology and infrastructure that together enable execution of the organization s business processes. They are the fundamental building blocks of the organization s ability to compete.

42 42 The Performance Prism builds on the strengths of existing measurement systems on shareholder value and brings innovation based on free premises. The strength of this framework is that it first questions the company s existing strategy before the process of selecting measures is started (Najmi et al., 2012). However, the framework does not offer any information about how these performance measures are going to be implemented (Striteska & Spickova, 2012). 4.9 The Dynamic Multi-dimensional Performance Framework The most recent PMS that will be discussed is the Dynamic Multi-dimensional Performance Framework (DMPF), designed by Maltz et al. (2003). This framework was created as a reaction on some older frameworks, like the BSC. Three points of criticism were mentioned, the authors state the older frameworks (i) fail to focus on the long term and are too focused on the short term (Maltz et al., 2003), (ii) put insufficient emphasis on the environment (Atkinson et al., 1997) and (iii) put insufficient emphasis on employees (Atkinson et al., 1997). The DMPF includes five major dimensions: Financial, Market/Customers, Process, People Development and Preparing for the Future. The first three dimensions are more related to short term performance, while People Development and Preparing for the Future are aimed at the long term. For every dimension, an organization has to select the most relevant measures. This means that measures can and should differ between organizations. What measures an organization will select, depends on its size, strategy, environment, industry, etc. The authors empirically determined that there are 12 measures that are relevant in most organizations, regardless the characteristics of the company. We call these measures the potential baseline measures. They are presented in table 6 below.

43 43 Dimensions Potential baseline measures 1 Sales 1 Financial 2 Profit margin 3 Revenue growth 4 Customer Satisfaction Index 2 Market / Customer 5 Customer retention rate 6 Service quality 7 Time to market with new products/services 3 Process 8 Quality of New Product Development and Performance Measurement processes 4 People Development 9 Retention of top employees 10 Quality of leadership development 5 Preparing for the Future 11 Depth and quality of strategic planning 12 Anticipating/preparing for unexpected changes in external environment Table 6 The twelve potential baseline measures of the DMPF (Maltz et al., 2003) The importance of the different dimensions will vary strongly between different types of companies. A car manufacturer for example, will put more emphasis on the Process dimension, whereas a service organization will focus more on Preparing for the Future (Waltz et al., 2003).

44 44 5. Case Study In the previous chapter, a review of nine different PMSs was performed. In the following chapter, these PMSs will now be put to practice, by using a case study. The nine frameworks will all be applied on the same case. This case was written by Prasad & George (2009) and reviews the historical and current strategy of an international manufacturer, Rolls-Royce. Since only a part of the entire case will be relevant for this research, a brief summary of the relevant information will be presented below. 5.1 The case: Rolls-Royce Rolls Royce was founded by Henry Royce and Charles Rolls in 1904 and quickly became one of the most successful car manufacturers. In 1914, at the start of the First World War, the company designed its first aero engine. Since then, the sale of aero engines has become the core business of the company. They continued to manufacture cars, but only for an exclusive and wealthy clientele. In 1973, the automotive division of the company (Rolls-Royce Motors) was separated from the aero engine division (Rolls-Royce plc). This case only focuses on the aero engine division of the company. In 1987, the company was privatized by the British Government. The company was listed in the London Stock Exchange and its shares were subscribed by almost two million shareholders. Currently, the Rolls-Royce Holding has a market capitalization of more than 20 billion and is one of the largest companies with a primary listing on the London Stock Exchange. The company has become the second largest aero engine manufacturer in the world. Markets The company has 4 business areas: civil aerospace, defense aviation, energy generation and marine propulsion. For the civil aerospace market, the customers are (i) aircraft manufacturers (e.g. Boeing, Airbus), (ii) airline operators (e.g. American airlines, Singapore Airlines) and (iii) private buyers and corporations. This last group purchases business jets and helicopters. Rolls-Royce has become the global market leader in the business jet segment. The main competitors for the company are General Electric Aviation and Pratt & Whitney, the other main aero engine manufacturing firms in the world.

45 45 Strategy Since the late 1990s, Rolls-Royce has embraced the concept of servitization. They changed their strategy by going from a manufacturer and seller of engines to a company that gains most of its revenues from the after-sales service. When a customer purchases an engine, Rolls-Royce offers him a maintenance contract. The customer has to pay a maintenance fee per aircraft flight hour (i.o.w. only for the time the engines are actually running). This policy is called Power by the Hour. In return, Rolls-Royce maintains the engines and replaces them when needed. Even though the engines are sold at low margins or even at cost, the after-sales service provides the company with revenues over the lifetime of the engine. Therefore, it could be stated that Rolls-Royce has a highly customer-centric business model. Joint venture In 1999, Rolls-Royce created a joint venture called Data Systems & Solutions with the Science Applications International Corporation (SAIC). The goal was to integrate Rolls- Royce engine maintenance expertise with the IT-systems knowledge of SAIC. This led to the creation of Engine Health Management (EHM). EHM allows Rolls-Royce to record engine data during a flight. This way, they can predict and plan engine repairs or renewals, monitor performance, detect anomalies and provide solutions online. Other products / services As mentioned above, Rolls-Royce has a very customer-centric business model. Obviously, the sales and maintenance of their engines is their most important business. However, they also provide lots of other services for their customers. Rolls-Royce has created a global repair & overhaul network, provides engine support equipment, provides asset management and logistics & engineering support for their customers and undertakes the repair of accessory units. Challenges The biggest challenge in the future will be to stay innovative and maintain a technological lead over its rivals. Also it will remain very important to maintain the current customers, since there are few opportunities to attract new customers. Finally, investors tend to avoid the aerospace industry. Some analysts believe that it will become difficult for Rolls-Royce to raise further money from the stock market or through debt.

46 Applying the case to the different PMSs The next step is to apply the nine different PMSs on the case. The goal is to put the PMSs to practice and to get a better understanding of (i) its processes, (ii) on what level(s) of the business architecture it can be situated, (iii) whether it can serve as a tool for reinforcing topdown strategic alignment within an organization and (iv) its strengths and weaknesses. As these are the central objectives within this master thesis, the models will not be as complete as it would be in real life. The number of performance measures used in the different PMSs is limited. Also, the application of the PMSs was based on the information that was available from the chosen case, which was limited. To construct a comprehensive PMS, more inside information of the organization will be needed. Four steps will be used to evaluate the nine PMSs. Step 1: Applying the PMS to the case. To get a better understanding of the processes that one has to go through when implementing a certain PMS, the PMS will be applied to the Rolls-Royce case. The performance measures that will be selected are based on the background information from the case. Therefore, they are fictional, although there might be a chance that some of them are actually being used by Rolls-Royce. Most measures will be used in more than one PMS. Step 2: On what level(s) of business architecture can this PMS be situated? The business architecture of an organization can be presented as a layered structure, consisting of three different levels (Andersson et al., 2009; Pijpers et al., 2012): 1) The WHY-dimension: The first level is called the strategic level. Here, the different strategies are defined, using goal models. 2) The WHAT-dimension: The second level, the value level, describes how a company wants to implement the defined strategies. Business models can be used to give a clear presentation of how the organization wants to create value for both the enterprise and its stakeholders (Roelens & Poels, 2013). 3) The WHO- and HOW-dimension: The last level is called the operational level. It describes the operational details within an organization. Process models are used to give a detailed overview of the different steps that have to be performed for any process, along with the different actors that have to perform them.

47 47 Figure 9 - Three dimensions of business architecture In order to be considered active on any of three levels, a PMS will have to meet certain criteria. A framework can focus on one level or on different levels of the business architecture. Below, the requirements to be considered active on a certain level of the business architecture are discussed. A. Strategic level The main question here is: Does the PMS evaluate the quality of the chosen strategy? A first important criterion will be whether the PMS evaluates the current results. Both the financial (e.g. revenue growth) and non-financial results (e.g. market share growth) should be considered. Secondly, a PMS that is active on the strategic level should have an external view. This means that it does not solely focus on the results of the company, but also on the results of the competitors in its market. Having an external focus also means that all the different stakeholders have to be taken into consideration. Finally, a PMS that focuses on the strategic value should enable a company to question its current strategy and reinforce the formulation of a new strategy. B. Value level To be considered active on the value level of the business architecture, a PMS should evaluate the implementation of the strategy and the creation of value for all the different stakeholders. Value creation can be achieved in many ways, depending on the stakeholder. A framework that is active on this level should evaluate the flexibility of the organization, the employee satisfaction, the employee competence, the customer satisfaction, the internal processes, etc. In other words, the goal is twofold: measuring to what degree the company delivers value for all stakeholders and measuring to what degree the architecture and processes help to deliver this value (now and in the future).

48 48 C. Operational level The evaluation of the performance on an operational level will depend on the type of organization. Indeed, what happens on this operational level will be completely different if we would compare a manufacturer with a service organization. For a manufacturing company like Rolls-Royce, a PMS that focuses on the operational level should evaluate the resource utilization, the cycle time, the cost, the productivity, the product quality, etc. Step 3: Can this PMS serve as a tool for top-down strategic alignment within an organization? Doumi et al. (2011, p. 345) define strategic alignment as a perfect coherence of all the actions and decisions with the strategic objectives of the enterprise. In other words, strategic alignment is all about linking the company s structure, procedures, decisions and behaviors with the chosen strategy and business goals. It is important for companies to align goal models, business models and process models, as this alignment determines whether a company can successfully implement its chosen strategy (Roelens & Poels, 2013). In some organizations however, there is little or no strategic alignment between these three dimensions. This makes it hard for the management to estimate what actions they should and should not do. To claim that a PMS can reinforce strategic alignment within an organization, these criteria will have to be met: 1) The PMS has to integrate corporate objectives and strategy with operational performance indicators. 2) The PMS has to consist of performance measures from the three levels of business architecture (strategic, value and operational). 3) The PMS must have a top-down approach. 4) There must be a clear linkage between the different measures within a PMS. This fourth criterion has a more subjective character and is perhaps of less importance than the other three criteria. Step 4: What are the strengths or weaknesses of this PMS? Besides reinforcing strategic alignment, a framework can consist of other strengths or weaknesses. Possible strengths could be:

49 49 - Comprehensiveness: Does the PMS take into account all the stakeholders and their needs? - High applicability: Is the PMS applicable over different organization types? - Does the PMS take into account continuous improvement? - Does the PMS have a long-term focus? - High flexibility: Can the PMS easily be adjusted to a specific organization? - User-friendly: Does the PMS consist of clearly described processes and can it easily be implemented by a non-expert? The Performance Measurement Questionnaire (PMQ) 1. The application of this PMS to the case will be the most difficult one, since the choice of performance measures cannot be directly derived from the chosen strategy. They are based on an evaluation that was done by the management of the firm. This could eventually lead to conflicts with the other stakeholders of the organization. However, to get a better view on the model, it is necessary to apply it to the chosen case. The first step is to analyze all the potential improvement areas. In reality, this could be a very extensive list. Here, we will only select a few. How much improvement is required in the long term? None >>> Great IMPROVEMENT AREAS Do current measures support improvement? Inhibit >>> Support Labour efficiency/ productivity Overhead cost reduction Manufacturing cost reduction Flexibility of after-sales service department Employee competence Infrastructure Equipment Motivation Table 7 - The PMQ put to practice part 1 When management has selected the most important improvement areas and analyzed whether the current measures support improvement in these areas, the next step is to perform an analysis of the different Performance Improvement Factors of the organization.

50 50 Let us assume that the most important improvement areas were (i) Labour efficiency/ productivity, (ii) Employee competence and (iii) Flexibility of after-sales service department. Possible performance improvement factors could be: Of how much importance is this performance factor? PERFORMANCE IMPROVEMENT FACTORS How much emphasis is currently placed on measuring this performance factor? Inhibit >>> Support None >>> Great # Hours of machine downtime Waste levels Effectiveness of production schedule Education budgets # Hours of training Introduction of new staff Extension of overhaul network Range of products # Fixed first visits Table 8 - The PMQ put to practice part 2 The measures that an organization will eventually use for the evaluation of its performance over a certain period, will derive from this analysis. 2. When applying this model to an organization, it is difficult to say on what level of business architecture it focuses the most. Needless to say, this will depend on the judgment of the management. If the management believes that the current strategy is inefficient, the most important improvement areas should be focusing around this problem. In that case, the PMQ could be situated on the strategic level. If management however feels that the employee competence or the flexibility of the company are the most important improvement areas, the PMQ will be situated on the value level. However, Dixon et al. (1990) originally stated that all improvement areas could be classified under three different categories: Quality, Labour efficiency and Machine efficiency. This should not come as a surprise, since the model was designed for manufacturing environments. These are situated on the operational level of business architecture. Therefore, when used as originally was intended by the authors, the PMQ is a PMS that will focus on the operational level of business architecture.

51 51 3. The PMQ cannot be directly derived from the chosen strategy. Therefore, it does not align strategy with actions. Also, there seems to be no linkage between the different measures and it does not have a top-down approach. We might conclude that the PMQ cannot serve as a tool for enhancing the strategic alignment within a firm. 4. As we already stated above (see supra p. 25) the PMQ distinguishes itself in the fact that it cannot be considered as a comprehensive PMS. It can be an interesting tool to evaluate the management s priorities, but as a PMS it falls short. First of all, the PMQ does not take into account the other stakeholders of the organization. Also, since it was designed for manufacturing environments, which maybe makes it less applicable for other organizations The Results-Determinants Framework (RDF) 1. The second framework that will be put to practice is the Results-Determinants Framework by Fitzgerald et al. (1991). It is constructed on the premise that there are two basic types of performance measures, those that relate to Results (Competitiveness and Financial Performance) and those that relate to the Determinants that lead to these results (Quality, Flexibility, Resource Utilization and Innovation) (Neely et al., 2000). The table below gives a possible outcome when applying this framework on the Rolls-Royce case.

52 52 Results Determinants Categories Competitiveness Financial Performance Quality Flexibility Resource Utilization Innovation Table 9 - The RDF put to practice Performance measures 1. Market share in civil aerospace sector 2. Market share in defense aviation sector 3. Market share energy generation sector 4. Market share in marine propulsion sector 5. Return on Investments 6. Operating Margin 7. Revenue Growth 8. Customer perceived value of products 9. Customer satisfaction with service 10. # hours engine downtime / year (aero engines) 11. Extension of overhaul network 12. Flexibility of service systems to meet particular customer needs 13. Range of products 14. # hours machine downtime / year (factory) 15. Inventory levels 16. Waste levels 17. Time to market 18. # new products to market 19. Perceived added value of new products by customers 2. The first two categories, Competitiveness and Financial Performance can be used to evaluate the chosen strategy. This means the RDF is active at the strategic level of business architecture. The categories Innovation and Flexibility can be situated on the value level, since they will play an important role in the process of value creation for the customer. The category Resource Utilization can be situated on the operational level. The category Quality could be placed either on the operational or value level depending on whether it is process- or customer-oriented. Indeed, the third measure (number of hours of engine downtime per year for each engine sold) can be seen as an indicator of how well the company is performing on an operational level. The measure customer satisfaction with service however, is more related to value creation for the customer. We conclude that it is hard to pin the RDF to one level. Although not all criteria are met for each level, the RDF is active on all levels of the business architecture. 3. Although the RDF focuses on the three levels of business architecture, the model does not reinforce strategic alignment within a company. There seems to be little linkage between the measures, the measures are not directly derived from a strategy or vision and the model does not use a top-down approach.

53 53 4. The RDF is a simple, easy to use model with a clear development process. It can be used in all kinds of organizations. It does however lack an external view, since the competitors are not taken into account. Even the employees are not considered, unless you would consider them as a part of the resources. Also, the model is not very flexible, since it is based on six fixed categories The SMART Performance Pyramid 1. The SMART Performance Pyramid consists of four different levels of objectives. The model starts with the corporate vision at the top of the pyramid and then cascades down into more operational objectives. For every category, the organization has to select the most relevant measures. An example of how the framework might look like when applied to the Rolls-Royce case, is shown below. Corporate level Category Performance measures Business units Market 1. Market share in civil aerospace sector 2. Market share in defense aviation sector 3. Market share energy generation sector 4. Market share in marine propulsion sector Business operating systems Departments and workcenters Financial Customer Satisfaction Flexibility Productivity Quality Delivery Cycle time 5. Return on Investments 6. Operating Margin 7. Revenue Growth 8. Customer perceived value of products 9. Customer satisfaction with service 10. Extension of overhaul network 11. Flexibility of service systems to meet particular customer needs 12. Effectiveness of production schedule 13. Employee retention rate 14. # hours engine downtime / year (aero engines) 15. Delivery reliability 16. Manufacturing cycle time Waste 17. Waste levels Table 10 - The SMART Performance Pyramid put to practice 2. When putting the SMART Performance Pyramid to practice, it immediately becomes clear that the basis of this model is the same as the model of business architecture. The three corporate levels correspond with the three levels of business architecture. This makes the SMART Performance Pyramid a comprehensive framework that focuses on all levels of the

54 54 organization. One could argue that the category Quality could also be placed on the value level and that the category Productivity has more of an operational nature. 3. The aim of this framework is to connect the strategy with operations, translating objectives from the top down. Therefore, this framework can be seen as a very useful tool in the search for strategic alignment within an organization. Also, the model is constructed in such a way that there is a strong linkage between the categories. This should also lead to a strong linkage between the different measures. 4. THE SMART Performance Pyramid is a model that can easily be used by a non-expert. It clarifies the objectives of the organization and could lead to better understanding of the different processes within an organization. However, this framework also has some disadvantages. Again, the model puts insufficient focus on the different stakeholders. It takes into account the needs of the customer, but ignores the needs and influences of suppliers, employees, SAIC and the government. Also, this framework has a quite rigid character, which might make it redundant for many organizations. Categories such as Waste and Cycle time are more difficult to apply for organizations that are not manufacturers (e.g. service organizations). In other words, the model lacks flexibility to make it applicable to all companies. Finally, it could be stated that this model has a short term focus. Indeed, innovation and training of staff, two important elements for future results, are not added to the model The Balanced Scorecard (BSC) 1. When using the BSC, measures are selected for four different perspectives: Customer, Internal Business, Innovation & Learning and Financial. This should lead to a balanced set of measures that drive performance in the future. When we apply the BSC on the Rolls-Royce case, a possible scorecard could look like this:

55 55 Financial 1. Return on Investments 2. Operating Margin 3. Revenue growth Customer 4. Product complaints 5. Customer satisfaction with service 6. Delivery reliability Vision & Strategy = Turn service into a growth engine! Internal Business Processes 7. Product development cycle time 8. Effectiveness of production schedule 9. Extension of overhaul network (# of service centers, workshops and teams of technicians around the world Innovation & Learning 10. # hours training / employee 11. # new products to market 12. Employee retention rate Table 11 - The BSC put to practice As we can see, the BSC puts strategy and vision (rather than control) at the center of the scorecard. The measures are therefore selected to pull people towards this overall vision of the company. The goal is to keep companies looking forward instead of backwards (Kaplan & Norton, 1992). 2. When we link this framework with the three levels of business architecture, the BSC clearly focuses on the first level, the strategic level. It aims to implement and manage the vision and strategy which were selected at the top, throughout the entire organization. However, the other two levels are also present in this scorecard. The categories Innovation & Learning and Customer will evaluate the company s ability to create value, now and in the future. The last category, Internal Business Processes could be placed on the operational level, since good internal business processes will increase the productivity. However, optimizing internal business processes can also be seen as a requirement for strategy implementation. Thus, this category could be placed on both the value or operational level, depending on how one interprets Internal Business Processes. In conclusion, we might state that the operational level of business architecture will be less important for the BSC.

56 56 3. The BSC could be a very useful tool for obtaining strategic alignment within an organization, since it strives for integration of vision with actions (Susilawati et al., 2013). In a certain way, the goal of this entire PMS is strategic alignment. 4. Some disadvantages have become apparent when putting the BSC into practice. First of all, it puts sufficient focus on the customer and shareholders, but other stakeholders (e.g. suppliers, government, employees) seem to have been forgotten. Secondly, the BSC does not take into account what the competitors are doing. One of the biggest challenges for Rolls- Royce is to maintain a technological lead over its two main rivals. This will certainly be a part of Rolls Royce s strategy, but the four perspectives used in the BSC seem to have a very internal focus The EFQM Excellence Model 1. The EFQM Excellence Model is somewhat different from the other frameworks that are discussed within this research. The model was not designed as a PMS per se, but more as a framework to guide organizations in the quest for excellence. It displays the ideal organization or construction of competitive businesses. Therefore, the model could be seen as a business model, since it demonstrates how a company can gain results and create value (EFQM, 2012). However, the EFQM Excellence Model can be a practical tool to help organizations be successful by measuring where they are on the path of excellence. It determines the current levels of excellence and exposes opportunities for improvement. To do this, measures will have to be selected for the nine different criteria that form the framework. An example of how the EFQM could be applied on the Rolls-Royce case is displayed below.

57 57 Enablers Criteria Leadership People Strategy Partnerships & Resources Processes, Products & Services Performance measures 1. Employee evaluation of management 2. # hours of training / employee 3. Growth of after-sales services 4. Share of after-sales revenues in total revenues 5. Buyer-supplier partnership levels 6. Inventory levels 7. Waste levels 8. # new products to market 9. Range of products 10. Effectiveness of production schedule People results Customer results Society results Results Business results Table 12 - The EFQM Excellence Model put to practice 11. Employee satisfaction 12. Retention rate 13. Customer satisfaction with service 14. Customer perceived value of products 15. # layoffs 16. CO 2 emission 17. Return on Investments 18. Operating Margin 19. Revenue Growth 20. Market share in civil aerospace sector 21. Market share in defense aviation sector 22. Market share energy generation sector 23. Market share in marine propulsion sector The EFQM Excellence Model has a similar structure to the RDF by Fitzgerald et al. (1990). Both frameworks start with two main categories, which are then further subdivided into different criteria. The logic behind the framework is the same: the performance on the five Enablers criteria will drive the performance on the four Results criteria. The EFQM Excellence Model contains a lot of measures that are not used in the other frameworks which were applied so far. For example, the model takes into account the needs of society. Since the organization was privatized by the government, this will be an important stakeholder. Possible goals or needs of society could be maintaining high levels of employment and constraining the company s pollution. Other criteria that are not found in the other frameworks so far are Leadership and Strategy. Since the strategy of Rolls-Royce is to gain revenues through after-sales services,

58 58 the chosen measures have to represent how well the organization is doing in this particular aspect. A possible measure could be Growth of after-sales services or Share of after-sales revenues in total revenues. To evaluate leadership, management could perform a survey between the employees to assess their performance. 2. Since the EFQM Excellence Model could be seen as a business model, it will put much emphasis on the second level of business architecture. The ultimate goal of the model is to achieve excellence for the different stakeholders, this is basically the same as creating value for the different stakeholders. The model is also active on the strategic level, since both leadership and strategy are assessed. Since there is a clear feedback loop from the results towards the enablers, the EFQM Excellence Model can serve as a tool for questioning and renewing the current strategy. The last level of business architecture, the operational level, is less important in this model. 3. The most important concept of this model is not strategic alignment, but continuous improvement. As stated above, the EFQM Excellence Model does not have a top-down approach like most of the other frameworks. The strategy certainly plays an important role, but it is not at the start of the model. Therefore, this model is perhaps not ideal for enhancing strategic alignment within an organization. 4. Just because the EFQM Excellence Model varies from the other PMSs, that does not necessarily make it worse. For example, the EFQM Excellence Model could be seen as a comprehensive framework since it evaluates the results of the different stakeholders (business, employees, society and customer). Also, there is a strong focus on continuous improvement. Remember that we stated in part 1 of this thesis that the ultimate goal of performance measurement is not quantification, but stimulating change (Neely et al., 2005) The Integrated Dynamic Performance Measurement System (IDPMS) 1. The IDPMS is a model that was built for manufacturing environments. Although Rolls- Royce has made a priority of their after-sales services, the manufacturing and selling of aero engines is still a very important part of their business. Therefore, the IDPMS can certainly be applied on this case. Remember that the IDPMS starts with the application of a PMQ. The results of the PMQ are then used to select the areas of success and the associated performance measures. Below is an example of how the application of the IDPMS on the Rolls-Royce case could look like. Let us

59 59 assume that the two general areas of success for Rolls-Royce are (i) their after-sales services and (ii) the manufacturing and selling of their aero engines. General areas of success After-Sales services Manufacturing and selling aero engines Table 13 - The IDPMS put to practice Specific areas of success Financial Flexibility Customer satisfaction Employee competence Productivity Innovation Quality Financial Performance indicators 1. Growth of after-sales revenues 2. Profit margin 3. Flexibility of service systems to meet particular customer needs 4. Extension of overhaul network 5. Customer satisfaction with service 6. # fixed first visits 7. # hours training / employee 8. Employee retention rate 9. Waste levels 10. Product manufacturing cycle time 11. # hours of machine downtime 12. # new products to market 13. Perceived added value of new products by customers 14. Customer perceived value of products 15. # product complaints 16. Profit margin 17. Total aero engine sales revenue 2. As stated before, the IDPMS makes a distinction between 3 functional areas within a company: the management, the PITs and the factory shop floor. We can easily link these three functional areas to the three levels of business architecture. The management is working on the strategic level. They are responsible for selecting both the general and specific areas of success, which are based on the firm s strategy. The factory shop floor includes departments directly related to manufacturing the product. They analyze the selected measures on a daily basis. They represent the operational level. In between the management and the factory shop floor, we find the PITs. They are working on the value level. They focus on improving the operational and cost performance of the manufacturing systems. 3. The IDPMS can also be used for strategic alignment within an organization. As stated above, the model starts with the selection of areas of success. These are derived directly from the company s strategy. These areas of success are then further subdivided into performance indicators. On an operational level, the factory shop floor only focuses on these performance

60 60 indicators. The IDPMS thus has a clear top-down approach that allows actions being linked with strategy. It should however be noted that the way the IDPMS was applied here, probably does not correspond with the way Ghalayini et al. (1996) intended it to be employed, when they created the model. The IDPMS was created for complex manufacturing environments, where much more performance indicators are used on the operational level. In their model, management would not be interested in the performance of all these different measures, they just want to focus on the overall performance in the areas of success. 4. When implementing the IDPMS, it becomes clear that it is a well-structured, easy to use framework. The model clearly indicates how performance indicators should be selected. The model also embraces the concept of continuous improvement, since the three functional areas are constantly linked with each other through feedback loops. A possible disadvantage of the IDPMS is its internal focus. The model searches for a company s own areas of success, but has no attention for the goals or needs of other stakeholders. The biggest difference of the IDPMS and the other frameworks that were seen so far is that this model does not provide predetermined categories from which the performance measures should be selected. The model starts with selecting the company-specific areas of success. This makes the IDPMS a very flexible model which can be applied in a wide variety of businesses, although it was originally designed for manufacturing environments The Integrated Performance Measurement Framework (IPMF) 1. Just like the IDPMS, the IPMF was designed for manufacturing environments. The IPMF consists of six steps that have to be followed when implementing the model. For the selection of the performance measures, the company must form a Performance Measurement Grid (PMG) based on the company s success factors and six competitive priorities.

61 61 For the Rolls-Royce company, the PMG might look like this: Competitive priorities Company s success factors Performance measures After-sales service 1. Customer satisfaction with service Quality Cost Flexibility Time Delivery Future growth Table 14 - The IPMF put to practice Engine manufacturing Engine manufacturing Worldwide overhaul network Employee competency Engine manufacturing After-sales service After-sales service Sales of equipment Innovation Market share 2. Customer perceived value of products 3. # complaints 4. # hours engine downtime / year 5. Inventory levels 6. Waste levels 7. Operating margin 8. Extension of overhaul network 9. Employee Retention rate 10. # hours training / employee 11. Manufacturing cycle time 12. Effectiveness of production schedule 13. Mean time to repair engine problem 14. # Fixed first visits 15. Range of products 16. # new products to market 17. Perceived added value of new products by customers 18. Market share in civil aerospace sector 19. Market share in defense aviation sector 20. Market share energy generation sector 21. Market share in marine propulsion sector 2. The model very much focuses on the operational level of business architecture. This is probably because the model was created for manufacturing organizations. The competitive priorities Quality, Cost, Time and Delivery could all be situated within the operational level. The extent to which a company can adjust to the customer needs could be seen as an important component of value creation within a service organization. Therefore, the competitive priority Flexibility could be placed at the value level. The last competitive priority, Future growth, has a more strategic value and is placed at the first level of the business architecture. 3. Like many other models, the starting point of the IPMF is the chosen strategy. This strategy is then subdivided into different success factors for the company. This model thus has a topdown approach. In the Rolls-Royce case, the most important success factors will be growth of

62 62 the after-sales services and maintaining an innovative lead. These success factors are then further subdivided into performance measures. However, the model has a strong focus on the operational level of business architecture. Therefore, this model might have a beneficial effect on strategic alignment within a company, but it is probably less appropriate when comparing it with some of the other models discussed in this thesis. 4. Just like some of the models that were previously discussed, the IPMF too has a very internal focus. Most of the stakeholders are simply ignored. Also, the focus is very much on the operational performance of an organization and it could therefore be questioned whether the IPMF is comprehensive enough. Although it could be adopted by all types of organizations, this model will be more relevant for manufacturing companies The Performance Prism 1. In contrast to the two previous models, the Performance Prism was designed for use in commercial or non-profit organizations, big and small (Ryan, 2012). The prism consists of five different facets, which should illustrate the true complexity of performance measurement and management (Neely & al., 2001). The different facets of the model should be interlinked and should support each other. It may even occur that the same measure is applied in different facets. When applied to the Rolls-Royce case, the Performance Prism might look like this: FACET 1: STAKEHOLDER SATISFACTION Who are the important stakeholders in the organization and what do they want and need? Stakeholders Performance measures Investors 1. Return on investments 2. Operating margin 3. Revenue growth Customers Employees Government / Society Suppliers / Partners Customers Employees 4. Customer satisfaction with service 5. Customer perceived value of products 6. # product complaints 7. # fixed first visits 8. Employee satisfaction 9. # layoffs 10. CO 2 - emission 11. Buyer-Supplier partnership levels FACET 2: STAKEHOLDER CONTRIBUTION What does the organization want from the stakeholders? 12. Customer retention rate 13. Employee retention rate

63 63 FACET 3: STRATEGIES What are the strategies the company requires to ensure the wants and needs of the stakeholders are satisfied? After-sales services 14. Growth of after-sales services 15. Share of after-sales revenues in total revenues Aero engine sales 16. Growth of market share in civil aerospace sector 17. Growth of market share in defense aviation sector 18. Growth of market share energy generation sector 19. Growth of market share in marine propulsion sector FACET 4: PROCESSES What are the processes the organization has to put in place in order to allow their strategies to be delivered? Engine manufacturing 20. Manufacturing cycle time 21. Waste levels 22. Inventory levels 23. Effectiveness of production schedule Innovation Generate demand 24. # new products to market 25. Perceived added value of new products to market 26. Effectiveness of promotional activities FACET 5: CAPABILITIES What are the capabilities the organization requires to operate the processes? Technology 27. Budget spent on technological innovations 28. Improvement of EHM Employee competency Infrastructure 29. # hours training / employee 30. Employee retention rate 31. Extension of overhaul network Equipment 32. # hours machine downtime Table 15 - The Performance Prism put to practice 2. The Performance Prism distinguishes from other frameworks in the fact that it does not start from the strategy. In the first facet, the Performance Prism aims to measure to what degree the company is currently delivering value for all of it stakeholders. The Performance Prism therefore starts at the value level. The strength of the Performance Prism is that the strategy will be derived from the results on the first two facets. In other words, if the company is not delivering sufficient value to the different stakeholders, the strategy could be wrong. The evaluation of the current strategy is performed in the third facet. Therefore, the Performance Prism is also active on the first level of the business architecture. The fourth facet could either be placed on the value level or the operational level. Take for example

64 64 Innovation. This process will have a direct link with delivering value in the future, whereas the process of engine manufacturing is a process that should be placed on the operational level. The last facet evaluates the capabilities that are needed to operate the processes that lead to value-creation. This fifth facet could be linked to the operational level of business architecture. 3. Strategic alignment is not achieved in the same way as the other frameworks so far. As we just stated, the Performance Prism does not begin with the company s strategy. The first step is to analyze the needs and goals of all stakeholders. Strategies are then put in place to satisfy these needs. The model thus starts with questioning the company s existing strategy before the process of selecting measures is started (Najmi et al., 2012). Since the Performance Prism focusses on the three levels of business architecture and there is a clear linkage between the selected measures, we might conclude that once implemented, the Performance Prism can play an important role in strategic alignment within an organization. 4. The most important difference between the Performance Prism and other models is that it tries to focus on all different stakeholders and even identifies what the stakeholders can do for the organization in return. Therefore, this model perhaps has the most external organizational focus of all PMSs evaluated in this research. It might be a disadvantage that the framework offers little information about how the performance measures should be selected and implemented The Dynamic Multi-dimensional Performance Framework (DMPF) 1. The last framework that will be applied to the Rolls-Royce case is the DMPF. It differs from other systems in the fact that it already contains 12 performance measures that are considered relevant for any type of organization. These measures were empirically selected. Organization-specific measures should be added to complete the framework. These measures should be derived from the strategy, environment, industry, of the organization. Applied to the Roll-Royce case, the DMPF could look like this. (The twelve potential baseline measures are shown in italic.)

65 65 Dimensions Financial Market / Customer Process People Development Performance measures 1. Sales 2. Profit margin 3. Revenue growth 4. Return on Investment 5. Customer Satisfaction Index 6. Customer retention rate 7. Service quality 8. Customer perceived product quality 9. Market share in different markets 10. Time to market with new products / services 11. Quality of New Product Development and Performance 12. Flexibility of service systems to meet particular customer needs 13. Effectiveness of production schedule 14. Retention of top employees 15. Quality of leadership development 16. # hours training / employee 17. Employee satisfaction 18. Depth and quality of strategic planning 19. Anticipating / preparing for unexpected changes in external Preparing for the Future environment 20. Extension of overhaul network 21. Growth of after-sales services Table 16 - The DMPF put to practice 2. The model focuses mainly on the strategic and value level of business architecture. The current financial and customer results are evaluated, as well as the processes that allow the organization to achieve these results. Measures concerning the manufacturing process (e.g. waste, inventory levels, machine downtime, ) are less important in this model, since it puts less attention on short term performance. Therefore, this model is less appropriate for measuring performance on the operational level. 3. In contrast to some other PMSs, the framework is not built entirely around the chosen strategy. The framework consists of five fixed dimensions. For every dimension there are even some performance measures that are always included in the framework. The other measures however, are derived from the strategy. Since the model has no top-down approach, it does not contain measures from the three levels of business architecture and there seems to be little linkage between the chosen measures, it might be concluded that the DMPF is not the ideal tool for enhancing strategic alignment within an organization.

66 66 4. The DMPF is a framework that tries to put more emphasis on the role of the environment and on human capital. Also, the model consists of performance measures to evaluate the performance on short term ( Financial, Market/customer and Process ) and performance measures to evaluate the opportunities for organization in the long term ( People Development and Preparing for the Future ). These two factors combined, make the DMPF one of the most comprehensive PMSs.

67 67 6. Conclusion Research has shown that organizations with a high degree of strategic alignment among its components are relatively more effective (Prieto & Mateiro de Carvalho, 2011). Although it has a great influence on the performance of the organization, there are however still few leaders who really consider this concept (Doumi et al., 2011). The use of a PMS can enhance the strategic alignment within an organization. A framework can transform the strategic objectives into operational measures. Therefore, a company that tends to optimize all its efforts, will certainly benefit from employing a PMS. However, not all PMSs are equally adequate. In paragraph 5.3 (p.47), four criteria were presented that a PMS has to meet in order to be considered a helpful tool for reinforcing strategic alignment within an organization. Below, a schematic summary is presented of how the different PMS that were evaluated score on these four criteria. As already stated earlier in this thesis, it is not always easy to decide whether a PMS meets a certain criterion. Especially the fourth criterion has a rather subjective nature. Criteria PMQ A RDF B SMART C BSC D EFQM E IDPMS F IPMF G PP H DMPF I 1. Align strategy with measures 2. Contain measures of three business levels 3. Top-down approach 4. Linkage between measures A. The Performance Measurement Questionnaire (Dixon et al., 1990) B. The Results-Determinants Framework (Fitzgerald et al., 1991) C. The SMART Performance Pyramid (Cross & Lynch, 1991) D. The Balanced Scorecard (Kaplan & Norton, 1992) E.The EFQM Excellence Model (EFQM, 2012) F. The Integrated Dynamic Performance Measurement System (Ghalayini et al., 1997) G. The Integrated Performance Measurement Framework (Medori, (1998) H. The Performance Prism (Neely & Adams, 2001) I. The Dynamic Multi-dimensional Performance Framework (Maltz et al., 2003) The first two frameworks that were discussed, the Performance Measurement Questionnaire and the Results-Determinants Framework, will barely or not at all reinforce strategic alignment within a company. Both models do not have the company s strategy as their starting point. The PMQ is based on the perception of the management team, whereas the RDF contains a fixed set of six different categories that are the same for every organization. The measures that are selected for every category could be derived from the chosen strategy. However, the model itself does not enhance strategic alignment. The same

68 68 goes for the last model that was discussed, the Dynamic Multi-dimensional Performance Framework. This model consists of 12 measures (potential baseline measures) that are considered relevant for every organization. This makes the model less flexible and specific than the other models. However, organization-specific measures should be added, which should be derived from the company s strategy. A last model that is not built around the chosen strategy is the EFQM Excellence Model. Strategy is one of the nine criteria within the model, but does not play the same crucial role as in most other frameworks. However, there is a strong interlinkage between the different measures within the EFQM Excellence Model and since the model aims for continuous improvement, there is a constant feedback loop. These are two factors that can enhance the strategic alignment within the organization. We might conclude that these four models will certainly consider the company s strategy when setting up their framework. However, the strategy is not at the heart of the framework, which perhaps makes them less appropriate for enhancing strategic alignment within a company. The Integrated Performance Measurement Framework starts with the selection of the company s success factors. Performance measures are then selected for each of them. Since these success factors are derived from the chosen strategy, we might state that the IPMF aligns strategy with measures and has a top-down approach. However, the PMS focuses too much on the operational level of business architecture to be considered a good tool for enhancing strategic alignment. The other four frameworks can be of great importance for the strategic alignment of a company. The SMART Performance Pyramid for example is built with the strategy and vision of the company at the top of the framework. The goal is to translate this through the different levels of the company. The same goes for the Integrated Dynamic Performance Measurement System. This model is more flexible than the SMART Performance Pyramid, since the different categories from which the measures have to be chosen are not predefined. This model consists of clear communication and feedback arrows, which reinforce the strategic alignment even more. The Balanced Scorecard has the strategy and vision at the center of as well. Since the main goal of this model is to align strategy with actions, this framework can be a great tool for enhancing strategic alignment. The last model that was also discussed, the Performance Prism, does not start with the current strategy of the company. The first step is to question the current strategy by analyzing all the different stakeholders needs. The strategy should then be composed based on these results. When the strategy has

69 69 been selected, the processes and capabilities are derived from it. Again, this framework can certainly be an important tool for strategic alignment when implemented correctly within an organization. When we linked each of the PMSs to the three levels of business architecture, it became apparent that four models (RDF, SMART, IDPMS, Performance Prism) measure performance on all of the levels. However, some models tend to put more focus on one particular level. The Balanced Scorecard is a PMS that could mainly be situated on the strategic level. Measures to evaluate whether a company is achieving its strategic objectives could be financial measures or measures that represent the market share growth. However, the BSC s not limited to this one level and should measure the performance on the value and operational level. For the next level, the value level, the EFQM Excellence Model could be selected as the most appropriate framework to measure performance. As already stated above, this model aims for excellence for the different stakeholders. Therefore, value-creation will be very important in this model. Possible measures for the value level of business architecture will mainly focus on flexibility, quality, human capital, processes & procedures, innovation, customer satisfaction, etc. Thirdly, there are two frameworks that focus on the operational level. The reason behind this is the fact that both frameworks were designed for manufacturing organizations. They are the Performance Measurement Questionnaire and the Integrated Performance Measurement Framework. These models focus on the production process. The performance measures will focus on cost, productivity, time, waste, etc. Finally, the Dynamic Multi-dimensional Performance Framework is active at the strategic and value level, but is less appropriate for performance measurement on the operational level. The research that was conducted in this master thesis has two important limitations. First of all, the research was limited to nine different PMSs. This means that not all existing PMSs were evaluated in this research. First of all, frameworks that were developed before 1990 were excluded. Secondly, frameworks that were not applicable for the entire organization were not taken into consideration. It is also possible that recently, new frameworks were constructed, which have not yet been reviewed in the literature. Finally, frameworks on which sufficient literature could not be found were excluded.

70 70 Secondly, the application of the PMSs to the case were of course fictional. To get a better view on the strengths and weaknesses of the different PMSs and how they can enhance strategic alignment between the different levels of the business architecture, the frameworks should be put to practice in a real life. Such an evaluation would perhaps give more profound results. Indeed, just because management has implemented one of the PMS mentioned above, does not necessarily mean this implementation will be successful. This PMS will have to be supported by many different - possibly all employees, which will not always be evident. This research cannot provide an analysis of the interactive processes of the different PMSs. This could be an interesting guideline for future research in the domain of performance measurement.

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