In the past, the company performance was measured by asking ‘how much money the company makes?’ To a certain extent, they are right because gross revenue, profitability, return on capital, etc. are the results that companies must bring to survive. Unfortunately, in today business if the management focuses only on the financial health of the company, numerous unwanted consequences may arise.
With the dramatic changes of business environment, the traditional measure that focuses on minimising production costs is no longer well-matched (Hall, 1980). As a result, contemporary performance measurement which adopts both financial and non-financial has been developed in prior to ...view middle of the document...
ROI analysis is appropriate to measure financial benefits of investment. However, this tool was found to be difficult to measure other benefits and costs arise from future plan. Such issues happened in practice, for instance, in evaluating health promotion and diseases prevention program (Cavallo, B.A., M.P.H, 2006). Some benefits and costs that cannot be measured are absenteeism, as well as employee productivity.
The application of traditional methods is also in the contrary to the just-in-time principle. A study emphasised in the importance of five traditional performance measures has shown negative relationship to the JIT practices (Ahmad, Mehra, & Pletcher, 2002). The five measurements are indirect labour productivity, direct labour productivity, variances, labour efficiency, and machine efficiency. Performance measures based on traditional cost accounting are inappropriate for today’s JIT implication because it is likely to provide irrelevant or out-dated feedback for the managers that they may develop a deviance strategy to improve the performance. The study resulted in the recognition of the needs of non-financial operating measures.
However, not all traditional financial measures should be eliminated in respect to the requirement on providing the certain information. Some strategies that are required by the company to face the competition make the application of traditional measurement still being suitable. For example, some of the useful methods are cost minimization, variance reporting, overhead absorption, and capacity utilization measures (S.L, 2013). Nonetheless, when using this non-financial measurement, it need to prevent dysfunctional behaviours, which is likely to happen as an effort of creating the favourable result on financial performance measurement. After all, traditional performance measures should not create conflict with the strategy of the management, or it may refrain the improvement.
3 Contemporary Performance Measurement
As a result of observed deficiencies in the traditional performance measure against the rapidly changing environment and continuously changing areas of performing business, it has led to the increased advocacy of both financial and non-financial performance measures systems, such as Balanced Scorecard (BSC), performance pyramid, performance prism, intangible asset scorecard (Landfield-Smith, 2012). This report focuses on two such systems: BSC and performance prism.
3.1 Balanced Scorecard
In contrast to traditional measure that rely only on short-term financial measures, the BSC provides managers with four perspective measurements which are financial, customer, internal business processes, learning and growth that enable to align the business activities to the vision and strategy of the company. It improves both internal and external communications while simultaneously monitoring company performance against strategic goals for future growth (Kaplan & Norton, 1993).
Furthermore, BSC promotes a...