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Improvement of the Performance Prism and Combination with Performance Evaluation

Master's Thesis 2013 83 Pages

Business economics - Business Management, Corporate Governance

Excerpt

Table of Contents

i. List of Abbreviations

ii. List of Figures

1 Introduction
1.1 Outcome- vs. Behavior-Based Performance Control
1.2 Combined Systems
1.3 Purpose of the Thesis
1.4 Methodology of the Work

2 The Principal-Agent Approach as Explanation for Performance Evaluation
2.1 The Company as the Principle
2.2 The Salesman as the Agent
2.3 Summary of the Chapter

3 Incentive Systems as a Potential Solution to the Control Problem
3.1 Definitions
3.2 Outcome-Based versus Behavior-Based Control Systems
3.3 Evaluation of the Control Approaches
3.4 Criteria Catalogue
3.5 Summary of the Chapter

4 The Balanced Scorecard as First Approach
4.1 Perspectives of the Balanced Scorecard
4.2 Evaluation of the Balanced Scorecard
4.3 Suboptimal Points in the Balanced Scorecard
4.4 Summary of the Chapter

5 Neely’s Performance Prism
5.1 Perspectives of the Performance Prism
5.2 Tools and Elements of the Performance Prism
5.3 Evaluation of the Performance Prism
5.4 Suboptimal Points of the Performance Prism
5.5 Summary of the Chapter

6 Improvement of the Performance Prism
6.1 Combination of the Strategy View between the Balanced Scorecard and the Performance Prism
6.2 Design of an Department Prism Scorecard Approach
6.3 Summary of the Chapter

7 Theoretical Implementation of the Stakeholder Level Design Phase of the Performance Prism
7.1 Need for an Integrated Derivation Approach for the Performance Prism
7.2 Development of an Integrated and Detailed Development Method for the Stakeholder Level Design Phase
7.3 Summary of the Chapter

8 Improvement of the Simple Performance Evaluation Tool
8.1 Approaches for Performance Evaluation
8.2 Summary of the Chapter

9 Synthesis of the Multidimensional Approach with the Performance Prism
9.1 Steps of the Combination of Performance Evaluation with the Performance Prism
9.2 Summary of the Chapter

10 Summary

11 Critical Review of the Thesis

11.1 Value Add of the Previous Work

11.2 Issues Not Answered Yet

Sources I

Appendix A

i. List of Abbreviations

illustration not visible in this excerpt

ii. List of Figures

Figure 1:Performace Ranges

Figure 2: Double-Bound Range

Figure 3: Low-Bound Range

Figure 4: Up-Bound Range

Figure 5: Variations of Double-Bound Cases

Figure 6:Variations of Low-Bound Cases

Figure 7:Variations of Up-Bound Cases

Figure 8: Filled Upper Part of the Success Map

Figure 9: Remuneration Components

Figure 10: Performance Prism Elements

Figure 11: Combining the Performance Prism with the Performance Evaluation Table

Figure 12: Calculation of the Percentage Weights

Figure 13: Adding the Criteria with Metrics

Figure 14: Adding the Target Ranges

Figure 15: The Performance Appraisal Table

Figure 16: The Performance Measure Record Sheet A

Figure 17: Strategy Lead Off A

Figure 18: Neely's Performance Prism B

Figure 19: Linkage between Strategy Orientation and Stakeholder Approach B

Figure 20: Stakeholder Identification Process C

Figure 21: The Basic Stakeholder Web C

Figure 22: A Filled, more Detailed Stakeholder Web D

Figure 23: A Stakeholder Web for the Sales Department D

Figure 24: The Stakeholder Matrix E

Figure 25: Filled Stakeholder Matrix with Importance Tradeoff E

Figure 26: Importance Tradeoff Performance Unit F

Figure 27: Stakeholder Matrix with Stakeholder Prioritization, Needs and Interrelations F

Figure 28: The Basic Performance Evaluation Table G

Figure 29: Performance Appraisal Table (adapted from Bolsinger 2007) H

Figure 30: Adjusted Performance Appraisal Table I

Figure 31: Dimension Weighted Performance Appraisal Table J

Figure 32: Combined Performance Evaluation Approach K

Figure 33: Multi-Dimensional Approach L

1 Introduction

In the post-war times, where goods were scarce, the industry mainly was push-driven. Companies created ideas of products, developed them and sold them to the customers, who were quite undemanding. It was comfort enough to get the goods. However, just about a half century later, at the end of the 20th century, the time was driven by more demanding customers, global competition and slow-growth economies and industries. To fulfill the rising expectations of the customers and to keep the competitive edge in the industry, quality management became popular in the 70’s and 80’s which led to an improvement of both, product and process quality. These efforts brought important performance improvements (Garvin, 1983; cited in Woodruff, 1997).

At that time, the systems were most internally focused. The perspective laid on what “the company” thinks what can be improved and what is requested from the customer. First with the “Customer Satisfaction Measurement” (in short: CSM), the voice of the customer was brought into quality management. However, the CSM wave did not held what it promised for several reasons. First, many companies set up customer satisfaction agendas, but they did not measure the results (planning without measuring). Second, the companies which measured their customers’ satisfaction did not respond to the results (measuring without managing) (Dutka, 1994). Third, while applying CSM, companies discovered problems, because customer satisfaction did not always correlate with the performance (Jones and Sasser, 1995).

1.1 Outcome- vs. Behavior-Based Performance Control

Total quality management itself became “standard” with the years and did no longer provide a basis for a competitive edge (Butz and Goodstein, 1996). So with the time, new fields had to be explored for gaining competitive advantage. In 1997, Woodruff advocated the “customer value” as future competitive advantage. Maybe based on Porter’s researches in differentiation (Porter, 1980), Woodruff conceptualized a framework, which tries to deliver customer- / buyer value to gain and hold competitive advantage (Woodruff, 1997). Synergizing the definitions of various authors, Woodruff defined customer value as:

“A customer’s perceived preference for and evaluation of those attributes, attribute performances and consequences arising from use that facilitate (or block) achieving the customer’s goals and purposes in use situations” (Woodruff, 1997)

In his implications for future research he referred to Garver and Gardial (1996) who found out that at that time not much was known about the role of salespeople in delivering value to customers. Woodruff mainly mentioned two approaches of performance evaluation of the sales people: outcome- and behavior-based control (Woodruff, 1997). Based on the analysis of the characteristics of the sales force, he tried to derive the adequate system for performance evaluation. He found out that both have advantages and disadvantages for the sales department.

1.2 Combined Systems

One year earlier, in 1996, another approach of performance measurement was born too. Kaplan & Norton’s Balanced Scorecard (in short: BSC) combined the output-based and behavior-based approach with an open framework, in which both KPI-categories could be included. Furthermore they criticized, that many companies just concentrated on the financial dimension and captured by that Woodruff’s approach of customer value via their customer dimension. Furthermore they designed an integrated approach, which not just measured more result based key figures like the customer perspective and the financial perspective but also behavior-based key figures. With the Balanced Scorecard they gave an opportunity to derive the necessary processes (with the process dimension) and the necessary potentials (with the potential perspective). The Balanced Scorecard became one of the most known systems at that time (Wödl, 2008).

In 2002 Neely, Adams, & Kennerley used the dimensional approach of Kaplan & Norton and expanded it by further stakeholders. They critizized, that the Balanced Scorecard considered just two stakeholders, namely the shareholder and the customer. In Neely and his colleague’s point of view, this would not reflect the reality, because much more stakeholders (e.g. the supplier, the employees and the public) must be considered as well. Furthermore they propagated, that (in contrary to the Balanced Scorecard) the strategy should be derived from the stakeholder at not vice versa.

1.3 Purpose of the Thesis

Against the Performance Prism the Balanced Scorecard reached a certain degree of fame with the time, so many books exist about its implementation, even regarding the topic performance evaluation (see for example Chai, 2009). In contrary to the Balanced Scorecard, Neely et al. (2002) wrote nothing about the combination of their performance measurement appraoch with performance evaluation.

So the actual work tries to add value to the existing literature by combining these two systems. Although the concept, explained in this work, is designed as open approach, which can be applied to every department, the application shall be exercised at the sales department due to Garver and Gardial’s (1996) findings, that actually not much is known about the role of the sales department in the customer value generation. Hereby the real value-add of the actual work starts beginning from chapter 7 with:

- the development of a model for “departmental” prisms / scorecards
- the development of a process for the identification of the stakeholders of an department and the assessment of their needs
- the improvement of a simple performance evaluation tool up to a multidimensional evaluation tool, which is needed for connection to the Performance Prism
- a practical exercise for the combination between the Performance Prism and performance evaluation

1.4 Methodology of the Work

Beginning the thesis, chapter 3 explores the question, why performance evaluation is necessary at all. Here the principal-agent approach is used for verification. Generally it bases on the assumption, that the company (as the principal) has the main goal of (a) surviving in the business environment and under the presumption of surviving (b) the maximizing of its profit.

The employee (in the actual thesis the salesman) has the main goal of assuring his working place and maximizing his own profit / remuneration. But also every other employee (e.g. purchase, controlling etc.) is expected to have the same goal. So the employee will behave in any way, which serves these two goals. A useful tool, which directly touches at this point, is the performance evaluation which uses assessment bases (in form of KPIs) which are connected to a reward system.

Chapter 4 handles the question, which assessment bases should be used to guide the employee in the right direction. It starts with a short explanation of the basics about incentive systems. Here it especially underlines the assessment bases, which are connected to the reward. In the second part of this chapter it introduces the outcome- and behavior / input-based control system and analyzes the fit of each system to the characteristics of the sales department. This chapter ends up in a criteria catalogue, which shall be fulfilled by a control system to guide the employee in the right direction. In the end a mix of both systems is suggested (which consolidates the advantages of both systems), because pure input or output control do not meet the requirements of the criteria catalogue completely.

Chapter 5 and 6 introduce the Balanced Scorecard (Kaplan & Norton, 1996) and the Performance Prism (Neely, Adams and Kennerley, 2002) as potential solutions and analyze the better fitting system, because both systems have advantages and disadvantages. In the end the Performance Prism is used for the rest of this thesis.

Up from this chapter the actual work tries to add value to the existing literature. Like mentioned in the introduction, the Performance Prism shall be applied to the “department” level and used for performance evaluation of the employees. To be able to do that, the Performance Prism needs to be broken down to departments. Furthermore a performance evaluation tool needs to be improved to multidimensional perspectives, to be able to be connected to the Performance Prism. Therefore in chapter 7, the Performance Prism is taken as basic system and improved by a derivation procedure to departments and the linkage to a corporate strategy.

Subsequently chapter 8 explains the identification process for the stakeholders of the department and the assessment process of their needs. Later these needs are connected in form of criteria to a performance evaluation tool.

To be able to do that, chapter 9 improves a simple performance evaluation tool up to a multidimensional approach, which is needed for the connection to the Performance Prism.

After these two chapters the reader should be able to basically understand the framework of the Performance Prism, the derivation to the department level (including the identification of the stakeholders and the assessment of their needs) and based on that, the connection points to the performance evaluation sheet.

To end the actual work, in chapter 10 all the tools developed above, are applied in a simple example case of a sales department. Here an imagined existing success map is taken, translated to criteria and connected to performance evaluation.

2 The Principal-Agent Approach as Explanation for Performance Evaluation

As the first main chapter of the thesis, the actual chapter shall clarify the question, why performance evaluation is necessary at all. Here, like mentioned above, the actual work is applied to the sales department according to Garver and Gardial‘s (1996) finding that not much is known about the role of the sales department in the customer value generation. Therefore the examples for key performance indices, which are used later in the following chapters, mainly concentrate on the input and output of sales persons. However, the approach explained in the thesis below, also can be applied to any other department.

The relation between the salesman (respectively any other employee) and the company is formally described by Eisenhardt (1985) with the agency theory as a normative microeconomic / accounting approach. In this system two parties exist: the principal who delegates decision making responsibilities and the agent who fulfills the responsibilities. A presumption is that the principal and the agent have different goals. The theory is concerned with the design of control systems that realign the incentives of both parties that they desire the same outcome.

The sales department is one of the main drivers in the corporate success, because the profit stands and falls with the work of the representatives with their customers (assuming a business where representatives are needed). The representative is the main communicator of the company to the customer and achieves by “selling” the billable success of the company (Schmitt, 2008).

But the salesperson is also just an employee of the company and gives his work capacity in return for a salary. As an employee he is expected to have the goal of assuring his working place and maximizing his remuneration.

2.1 The Company as the Principle

In the upper approach the company represents the principle of the relation.

The main goal of the company is hereby:

(a) the survival in the business environment and next to the survival
(b) the maximization of the profit in the long run.

For that the company must ensure that:

(a) The products are sold with “gross margin” means not under the production costs (variable costs) of the product.

By this at least the costs for the manufacturing departments and the raw material is refinanced. This is essential to ensure the survival of the company in the short run. As long as the price is over the production costs, additional orders lead to gross margin respectively refinancing of the administrative and selling departments.

(b) The products are sold with profit margin means in the long run at a price which covers all costs of the company.

This assures that the company not just refinances the production costs, but also the administration and selling costs. When the products are sold over the total costs, the company makes profit.

(c) Developing and retaining the customer base (to ensure the survival of the company in the long run).

No company can survive without customers who buy its products. If a company wants to survive, it needs at least to retain the existing customer base, even when not expanding it, to ensure a sustainable growth.

(d) Satisfying the customer needs

That the customers continue buying, the company has to meet their requirements. This has to happen first by the product features, which lead to interest of the customer in the product, but also the respectful dealing with the customer.

(e) Satisfying the needs of other stakeholder groups in and out of the company

Next to the customers, the company also has other stakeholder groups, which wants to be served. For example suppliers want long-term and profitable relationships with the company and the employees want fair working conditions and a regular salary.

The upper list reflects just a few criteria, which a company aims to achieve. Sure, there may be much more things a company has to consider, but they shall not be mentioned here.

For the selling process and the retention of the customer base, the company as the principle employs the salesman as an agent, which shall perform the upper criteria within the meaning of the company.

2.2 The Salesman as the Agent

The representative as an employee is expected to have the goals of assuring his working place and maximizing his remuneration. This assumption can be explained with Maslow’s “pyramid of needs” (Maslow, 2011). The first two layers (the basic needs like food, water and sleep in the first layer and security and shelter in the second layer) are served by a secured job, which grants the basics (by money) for a home and food. The third layer (friends, family and community) is more entertainment based and varies with the additional money given by the employer. Because the employee also wants to maximize this layer (higher entertainment – higher social status) he tries to maximize his profit.

Hereby he may perform in any way, which serves these goals. The possible way to influence the salesman to act according to the meaning of the company is to connect his remuneration to assessment bases, which shall direct the salesman as an employee in the right direction.

2.3 Summary of the Chapter

Like seen in the upper chapter, the relation of the salesman as well as any other employee with the company can be described with the principal-agent approach, which presumes that the company and the employees can have different goals. Whereas the company wants to survive in the business environment and maximize its profit, the employee wants to assure his working place and maximize his own (and not necessarily the companies) profit. To guide the employee in the right direction a possible method may be an incentive system, which rewards the employee upon certain assessment bases which reflect the goals of the company.

3 Incentive Systems as a Potential Solution to the Control Problem

Like explained in the upper chapter, a method used to guide the employee into a direction which is whished by the company, is the application of an incentive system.

The idea of incentive systems is not quite new, and already a broad body of knowledge exists in the literature. In the following chapter the knowledge about incentive systems of various authors shall shortly be explained to give the reader a broad overview about that topic, which is needed to understand the rest of the thesis. Here the thesis mainly describes the basics of incentive systems followed by a more detailed look on assessment bases with the question, which assessment bases should be taken to guide the employee in the “right” direction.

3.1 Definitions

An incentive system basically consists of incentives, which are connected to the assessment bases in form of a reward function (Bolsinger, 2007).

Incentive system

The literature defines incentive systems as the: “sum of all intentionally designed and aligned stimuli (working conditions), which enforce certain behaviors (by positive stimuli / reward) and reduce the possibility of occurrence of unwished behaviors (by negative sanctions)” (Becker, 1995; cited in Bolsinger, 2007).

The stimuli are so called “motivators” which shall enforce job related behavior and guide its form, direction, strength and length (Weinert, 2002; cited in Bolsinger, 2007). Incentive systems are characterized by the granting of the incentives upon well-defined assessment bases (Kossbiel, 1994; cited in Bolsinger, 2007).

Incentives

Friedl (2003; cited in Bolsinger, 2007) defines incentives as rewards, which are granted as a result of a realized decision and satisfy the motive or motives of the decision maker.

Assessment bases

The assessment bases are defined as indicators which reflect either the desired behavior itself (input) or the result of the desired behavior (output) (Weißenberger, 2003; cited in Bolsinger, 2007).

Rewards Function

The rewards function shows the relation between assessment basis level and incentive level. The relation can be linear, progressive, regressive or S-shaped (Fischer & Rödel, 2007; cited in Bolsinger, 2007). Furthermore the relation can show leaps, which can be used for granting a reward just then, when a certain level of performance is reached (floor) and capping it on a certain level (Bolsinger, 2007).

3.2 Outcome-Based versus Behavior-Based Control Systems

However, just stating that an incentive system is needed is more simply done than implementing it. The upper part just considers the process of connecting incentives to measures, to make the employee acting according to a wished direction.

The question, which is more important, is “what kind” of measures shall be taken to setup the control system. Generally in the literature two basic kinds of control approaches exist. The first category consists of input (behavior) assessment bases and the second category consists of output (result) based assessment bases. Here it must be carefully considered which approach is adequate, because with the use of wrong assessment bases various problems can occur.

3.2.1 Outcome-Based Control Systems

Outcome based sales control systems use various objective measures, such as sales and profit achieved by the sales personal to evaluate whether the salespeople are performing to their expectations (Anderson and Oliver, 1987).

This system is often used in sales departments with various and complex sales transactions, where the clear identification of sales processes is not possible. If (in such a complex environment) the sales manager would try to analyze efficient sales methods by observation and analysis of the methods used, the management cost would increase significantly (Takashima, 2004).

Therefore, according to Anderson and Oliver (1987), this system is characterized by relatively little (behavior) monitoring by the management. Sales force is expected to act on their own way using their own strategies and methods. They are only held accountable for the result but not the way they reach the result. So management also shows little direction and guidance regarding the sales methods used. The guidance can be seen as extrinsic – by the market – rewarding the behavior the sales force use by buying their products.

But the system is also seen to shift the risk to the salesperson. It can occur that sales are low for reasons behind the influence of the salesperson e.g. economic crises, deflation and so on. These facts are in case of outcome-based control not beard by the company but by the representative.

This system is often applied by companies (Churchill, Ford, Hartley and Walker, 1985). The reason is seen in the simplicity of getting the measures of sales volume and turnover. Peck (1982) also finds evidence that these measures are widely used in practice. Other measures which are widely used are profit or net margins – which in contrary measure the profitability of the business (Behrmann and Perreault, 1982).

3.2.2 Behavior-Based Control Systems

Behavior-based control represents the contrary approach of the upper system. Management staff highly monitors the behavior and guides the sales staff. Managers often have a well-defined idea what leads the company to success and therefore wants sales staff to behave in that way. Because results are expected to come in the long run, the risk is beard by the company (Anderson and Oliver, 1987). The evaluation and remuneration are based on a broader set of different performance measures – most taken from input factors like calls done, customers visited, and days worked (Jackson, Keith and Schlacter, 1983). The focus lies on the methods and procedures instead of the results of an action.

3.3 Evaluation of the Control Approaches

The upper two systems are two extreme poles of control. In the following subchapter the characteristics of the sales department are mentioned to analyze the appropriateness of these systems for the sales department with the question which system shall be applied to the sales department.

3.3.1 Distance between Salesman and Manager

The sales occupation is inherently a very independent occupation. Sales persons spend much of their time on the road. This makes it difficult to monitor them. Especially it’s hard to figure out what makes a sales person more efficient than another (Weitz, 1981).

So the data necessary for the control should be gathered with adequate time effort. The output based control system has the advantage that result figures are much more easily gathered, because they can be prepared by the accounting department, controlling or already exist in the erp-system. Pure behavior based control often needs special procedures to gather the data and that often needs the direct involvement of the sales manager, which also leads to the problem of a biased view on how reality works. So upon this characteristic the output-based control would be more appropriate.

3.3.2 Biased View of the Manager and Various Factors for Sales Success

The major disadvantage of behavior based control lies in the complexity of the performance measurement and the related subjectivity of the evaluation. Like mentioned before, managers often have their own “view” what drives success and evaluate the sales staff according to that view, not knowing whether reality really works in that way or not. The view of the manager can be shifted by bias, ignorance, halo effects and lack of credibility into the evaluation system (Behrmann and Perreault, 1982).

Also according to the sales situation itself, a method, what could work in one situation, may fail in another. There is no “universal transformation process” (Ouchi and McGuire, 1975) which transfers sales force input to output. This makes managers letting sales persons use their own methods. Outcome based controls for example give hereby the sales staff the necessary flexibility in using their own resources and just get evaluated for the result.

Upon the upper information it is also useful, that a control system uses outcome measures to grand enough flexibility for rewarding the sales specific procedures and knowledge, which cannot exactly be measured with behavior based measures. By the upper criteria, the outcome based control would be more appropriate. But a pure outcome-based control also can launch some difficulties.

3.3.3 Short Term Performance Driven

When using a pure outcome based control system, the sales staff may start to concentrate on short-term performance and reaching turnover goals while neglecting customer needs and future selling potential (Anderson and Oliver, 1987). Sales staff could neglect effort in selling new product lines, concentrating on the cash-cow products, which are already in the market, due to the higher pay off by the measures (Moynahan, 1983). So the control system definitely should use some behavior based measures to bring the sales staff onto the “right direction”. The motto should be:

“As much flexibility as possible to ensure the use of sales specific knowledge, but as much control as needed to ensure the walk on the “right path”.

3.3.4 Better Linkage to Corporate Strategy

Generally an advantage of behavior based control lies in the linkage to the corporate strategy, which is not necessarily short-term oriented, by using measures for compliance with the corporate strategy (Anderson and Oliver, 1987). Pure outcome based control can be a “black box” regarding the strategy, because no control exists regarding “how” the sales staff achieves the results. Behavior based control gives control over the way the results are achieved.

3.3.5 Exclusion of External Factors

Behavior based control also leads to more equated evaluation of the sales staff, because external market factors are eliminated. So this System is more intrinsically driven. Turnover can be influenced by external factors beyond the control of the sales staff. By behavior based control this fact is considered (Churchill, Ford, Hartley and Walker, 1985).

3.4 Criteria Catalogue

As seen above, each of the polarized systems has advantages and disadvantages. To conclude, a system should be implementable with low or medium effort and leave enough space for unique sales knowledge and behavior which is not known by management but also leads to sales success. But also measures are needed, which guide the sales staff in the strategy wished direction and assures a long-term (not only short-term) success. Furthermore a right mix between internal and external factors should be measured to exclude negative external effects on the sales success, which lie beyond the responsibility of the sales person.

Upon the upper characteristics it can be recognized that a polarized approach is not appropriate for the sales department. The solution could be a mixed approach between behavior and results based measures. Upon these characteristics in the following part a criteria catalogue shall be developed.

1. Manager Independent Control System

Ideally the system should be independent from the sales management in two terms. Like mentioned above the sales occupation is very independent, because the representatives spent much of their time on the road. So the manager should not have the hassle to observe and control the employee permanently in the matter of time. The system should be automated, that the manager just gets the key figures at the end of the month and evaluate and direct by that the employee into the right direction. Second it should be a standardized system which is set up independent from the manager in meaning of criteria selection. Like mentioned above, the manager has his personal view of how reality works but this view may not always be in line with the reality or the goals of the company itself. These personal biases could lead to a misevaluation and by that misdirection of the employee.

2. Not too Deep Measurement of Sales Activities

Like mentioned above various and different behaviors can drive sales success. And not always there is one ultimate sales solution, which transforms input into output. So the control system should just use measures on a higher level, which lead the employee in a certain (wished) direction, but gives him enough free space to act in his own way.

3. Right Mix between Short Term and Long Term Goals

While pure output based control mainly concentrates on results, which stem from the past and does not use input figures which lead to future results, it can occur that a salesperson just concentrates on maximization of the short term success, because this leads directly to his “next” remuneration. So the system should use a mix between short term oriented goals and long term oriented goals, which also ensure the success of the company in the future.

4. Linkage to Corporate Strategy

The sales department is not a “lone wolf”. It also has to follow the corporate strategy. So the measures should be derived from and be in line with the corporate strategy.

5. Right Mix between External and Internal Key Figures

The measures of the control system should include a right mix between internal and external key figures. Like mentioned above a pure concentration on external key figures, could make the employee responsible for situations which are beyond his control. But in contrary a pure internal key figure control could neglect “unknown” success-driving influences, which are just known by the employee but not by the management. Furthermore it would take the flexibility to act differently in different sales situations. So the tonus should be to give as much space as possible by external key figures, to give space to the employee to act freely and as much needed internal control as necessary to guide the employee into the right (and from the corporate strategy) whished direction.

3.5 Summary of the Chapter

Like mentioned at the end of chapter 3, an incentive system is a possible method to guide the employee in the right direction. So in the first part of this chapter the incentive system as a performance evaluation system was introduced. The basic components like the incentives, the assessment bases and the reward function were shortly explained. Regarding the assessment bases the second part of the upper chapter explored the behavior based and the output based control systems as contrary extreme poles of assessment bases with the question, which of these systems better fits the requirements of the sales department. Here, it was found out, that no “pure” solution (neither pure behavior-based nor pure outcome-based) is adequate due to the characteristics of the sales department. Merely a combination of both systems is necessary. So in the last part of the chapter a criteria catalogue was developed, which took the advantages of both approaches and tried to delete the weaknesses. This catalogue shall be taken as match criteria, which a potential control system for performance evaluation should fulfill.

4 The Balanced Scorecard as First Approach

Like mentioned above, upon the upper criteria it can be discovered that a mix between external and internal criteria for guiding and evaluation the sales staff is needed. A pure behavior- or outcome based control like explained in the work of Anderson and Oliver (1987) may be inadequate. Already Woodruff (like mentioned in the introduction) found out, that each pure system has advantages and disadvantages. So a system has to be taken which combines both approaches.

The first well known performance management system, which fulfilled this requirement, was developed by Kaplan and Norton in 1996 – the Balanced Scorecard. The development was driven by the fact that in the 80’s most American companies used financial key figures (in most cases outcome based) for evaluation of performance (Kaplan and Norton, 1996).

Kaplan and Norton shared the idea, that a control and guidance of a company cannot be made solely on a single financial perspective. But also a single customer based concentration of performance management, like it is the case in Woodruff’s (1997) customer value management framework could lead to a suboptimal solution. A “balanced” solution of several dimensions of a company would mirror the reality of the company. So the Balanced Scorecard considered both, the customer and the financial perspective as external stakeholders.

4.1 Perspectives of the Balanced Scorecard

Characterizing for the Balanced Scorecard is that all goals, measures and actions are allocated to a certain perspective. Here Kaplan and Norton define four main perspectives (Kaplan & Norton, 1996).

4.1.1 The Financial Perspective

The core question is “which goals can be derived from the financial requirements of the shareholders”. Here the perspective mirrors whether the main goal of business – the long term financial success – was reached. Kaplan and Norton see in the financial perspective the result of all other perspectives and make it by that to the main perspective. The customer, process and potential perspectives are seen as “driver” perspectives (Horváth and Partners, 2001).

4.1.2 The Customer Perspective

The core question in this perspective is “which goals have to be set regarding the customers to reach the financial result”. In this perspective the measures should reflect the creation of a concrete customer value as also proposed by Woodruff (1997). Contents of this perspective can be originality, functionality, quality and price of the product as well as the creation of the image and reputation of the company.

In later versions of the Balanced Scorecard Kaplan and Norton replaced the input oriented key figures of this perspective by output oriented key figures, which reflect the result of the interaction with the customer like market share, customer satisfaction, customer loyalty and customer profitability (Horváth and Partners, 2001). But the system is still open to connect both categories of KPIs.

4.1.3 The Process Perspective

This dimension defines “which goals have to be set in the process level to fulfill the requirements of the customers and the financial perspective”. According to Kaplan and Norton a customer value just can be created when the processes are mastered. Therefore key figures should be set to these processes to measure their effectiveness and efficiency. Contents could be core competencies and key factors like cycle time, the employee skills, the quality or the productivity (Kaplan & Norton, 1996).

4.1.4 The Potential Perspective

The last perspective defines “which goals have to be set regarding the potentials to handle actual and future challenges”. Key content is the strategic infrastructure. It mainly contains the employees, the knowledge, innovation and creativity and technology and information systems. Important for this perspective is, that it not just reflects the actual strategic requirements, but should be the background for future change- and adaptability-abilities.

Kaplan and Norton (1996) believed that the customer and process perspective underlie a continuous change. Just those companies survive who are able to adapt to the always changing situations.

4.2 Evaluation of the Balanced Scorecard

Now the balanced scorecard shall be analyzed for the use in the sales department upon the criteria established in chapter 4.4.

4.2.1 Check for Independence from Management

One of the requests in the upper criteria catalogue was that the control system is independent from the sales management, means that the manager has no opportunity to bias the evaluation of the controls. The Balanced Scorecard measures are derived from the financial perspective down to customer, processes and potentials. Often (as a corporate approach) the Balanced Scorecard is designed by the top-level management in cooperation with the corporate controlling, means above the responsibility of the single sales managers. The key figures themselves are standardized and in most cases calculated by computerized systems upon well-defined criteria. By that a personal biasing by the sales manager is reduced even if not completely impossible.

But also from the distance aspect the balanced scorecard can fulfill the criteria. Surely it depends on the goals setup in the perspectives, but as soon as measures are created, it is assumed that the raw data is registered. So the manager is freed of the task to observe and control the representative actively.

4.2.2 Check for Mid-Depth Insight in Sales Activities

Another request was that the control system measures at a level, which grants enough space for the sales agents to act freely but deep enough to direct the agents in the of the company supposed direction.

Like mentioned in the customer perspective Kaplan and Norton started with an input based approach, but switched later to outcome-based measures. But these two approaches can be combined. So the customer perspective, as relatively free space for implementation, can be set up with a combination between input-based measures and output-based measures. Furthermore the other perspectives also can be applied to the sales agent. Kaplan & Norton also advocated the derivation of a corporate balanced scorecard to departmental and individual scorecards, including all four perspectives. So a financial perspective, which is mainly results based, can be used to measure sales related outcome measures like turnover and profit. The process dimension can be used to measure input, like calls done, visits and the amount of offers and orders. To summarize the balanced scorecard is able to freely define the degree of depth in measuring sales activities.

[...]

Details

Pages
83
Year
2013
ISBN (eBook)
9783656402350
ISBN (Book)
9783656403906
File size
1.7 MB
Language
English
Catalog Number
v212600
Institution / College
University of Applied Sciences Aalen – France Business School Clermont-Ferrand / HTW Aalen
Grade
1.0
Tags
Performance Prism Performance Measurement Performance Evaluation Performance Management Controlling Management Accounting Performance Appraisal

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Title: Improvement of the Performance Prism and Combination with Performance Evaluation