AGENDA
Management systems and Strategy Driven Performance
Management
• Methods to manage performance - management system
• Different types of Balanced Scorecards
• Deriving performance measures and targets from
strategy - Strategy Maps
Accounting for Management
Control 2016 / T.Malmi
WHAT IS LEADERSHIP AND / OR
MANAGEMENT?
”Leadership / management means that those things you
want to get done gets done with the aid of the others”
Jorma Eloranta, CEO, Metso Corporation
(Talouselämä 15/2009)
The core question of this course:
How do we get others to do what we want them to do?
Accounting for Management
Control 2016 / T.Malmi
DECISION MAKING AND CONTROL
To manage performance, a manager (and an organization)
needs:
• Information to make good decisions
–
–
–
–
How to organize logistics?
Should we introduce a new product or discontinue existing one?
Where to establish the next plant?
Etc.
• A system of controls to ensure managers and employees at all
levels do their best for the company
– Accountability
– Incentives
– Etc.
Accounting for Management
Control 2016 / T.Malmi
ORGANIZATIONAL CONTROL
• Ensuring that the organization is on track towards
achieving its objectives
– Specify objectives (plan)
– Communicate objectives to organization members
(communicate and implement)
– Monitor performance relating to objectives (measure)
– Act on discrepancies between actual and target performance
(revise)
Accounting for Management
Control 2016 / T.Malmi
”CONTROL” AND / OR MANAGEMENT
SYSTEMS
• Control refers to set of procedures, tools, performance
measures, and systems that organizations use to guide
and motivate all employees to achieve organizational
objectives
• Hence, control is much more than accounting or
management by objectives / management by exception!
Accounting for Management
Control 2016 / T.Malmi
NEED FOR MANAGEMENT CONTROL
SYSTEMS
• If we recruit smart people, why don’t they necessarily do
what you want them to do, or do not do their best for the
organization?
• In other words, what are the causes of control
problems?
Accounting for Management
Control 2016 / T.Malmi
Source: Kaplan & Norton, The Execution Premium, 2008
Accounting for Management Control 2016 / T.Malmi
BASIC LEVERS OF CONTROL
BELIEF
SYSTEMS
D
E
C
I
S
I
O
N
BOUNDARY
SYSTEMS
CORE
VALUES
RISKS TO BE
AVOIDED
+
BUSINESSSTRATEGY
CRITICAL
PERFORMANCE
VARIABLES
STRATEGIC
UNCERTAINTIES
INTERACTIVE
SYSTEMS
Accounting for Management
Control 2016 / T.Malmi
DIAGNOSTIC
SYSTEMS
Source: Simons, 1995
S
U
P
P
O
R
T
S
Y
S
T
E
M
S
PARTS OF MANAGEMENT CONTROL
SYSTEM
• Organizational arrangements
– Organizational structure, decision rights and responsibilities
– Internal governance (e.g. executive/management boards)
– Task Controls / Action Controls – Ensuring compliance with standard
operating procedures
•
•
•
•
•
Verification
Monitoring
Pre-action reviews
ISO quality standards
Etc.
Accounting for Management
Control 2016 / T.Malmi
PARTS OF MANAGEMENT CONTROL
SYSTEM
• Results Control – Motivating people to be creative in meeting
objectives
– Inform about objectives and motivate to achieve results
– Budgeting, Balanced Scorecards, Quality award points
– Reward systems essential part of results control
• Planning
– Strategic and action planning
– Often linked to results controls
Accounting for Management
Control 2016 / T.Malmi
PARTS OF MANAGEMENT CONTROL
SYSTEM
• Social, personnel and cultural controls
– Social controls involve selecting “right” employees
– Personnel controls build on employees natural tendencies to control
themselves (emphasis on job design and training in addition to selection)
– Cultural controls represent set of values, social norms and beliefs that are
shared by organizations members (and affect their actions)
• In addition to above, various decision support systems can be regarded
as part of management (control) systems, or they can be thought of as
conceptually fulfilling different need
Accounting for Management
Control 2016 / T.Malmi
Values
Long Range
Planning
Strategy
Culture
Organisation
Outcomes
Meeting
Objectives
OGSM
Objectives
Activities
Action
Planning
Dashboard
Budget
Organisation
Outcomes
Short Term
Financial
Performance
Financial
Measures
Scorecard
C.A.
Organisational
Structure
Accounting for Management
Control 2016 / T.Malmi
Governance
Policies &
Procedures
Values
Long Range
Planning
Strategy
Culture
OGSM
Organisation
Outcomes
Meeting
Objectives
Objectives
Activities
Action
Planning
Accounting for Management
Control 2016 / T.Malmi
Budget
Organisation
Outcomes
Short Term
Financial
Performance
CONTROL PACKAGE (Malmi & Brown 2008)
Cultural Controls
Clans
Values
Planning
Long range
planning
Action planning
Symbols
Cybernetic Controls
Bud
gets
Financial Measurement Systems
Non Financial Measurement Systems
Hybr
id
Mea
sure
ment
Syst
ems
Reward and
Compensation
Administrative Controls
Governance Structure
Organisation Structure
- What are the altrnative ways to use these controls?
Accounting for Management
Control 2016 / T.Malmi
Policies and
Procedures
The pros and cons of various types of
controls?
•
•
•
•
•
Hierachy?
Matrix organizations?
Exploration / exploitation?
Crises?
Etc.
Accounting for Management
Control 2016 / T.Malmi
SUMMARY
• Terminology and concepts far from being clear -> make
sure you understand each other within your organization
• Understand the difference between systems that are
used to support decision-making and systems that are
used to guide peoples behavior = > you will always need
both and accounting and finance can support both of
these needs
• Typically different functions / managers are responsible
for different parts of the control system => who
coordinates / make sure they form an effective and well
functioning system?
Accounting for Management
Control 2016 / T.Malmi
AGENDA
Management systems and Strategy Driven Performance
Management
• Methods to manage performance - management system
• Different types of Balanced Scorecards
• Deriving performance measures and targets from
strategy - Strategy Maps
Accounting for Management
Control 2016 / T.Malmi
INTEGRATED PERFORMANCE
MANAGEMENT FRAMEWORKS
•
•
•
•
Balanced Scorecard
Performance Pyramid
Tableau du Bord
Etc.
• The idea of is to build a performance management
system based on vision and strategy in order to translate
strategy into action
Accounting for Management
Control 2016 / T.Malmi
FEW WORDS ABOUT STRATEGY
•
•
•
•
What is strategy?
Corporate, business and functional strategies
Strategy definitions in accounting research
How do we create a good business strategy / where do
good business strategies come from?
• Content of a good strategy statement:
– Objective
– Scope
– Advantage
• Value proposition
• Internal organization
Prof. Teemu Malmi 2016
MISSION
Why we exist
VALUES
What’s important to us
VISION
What we wan’t to be
STRATEGY
Our game plan
STRATEGY MAP
Translate the strategy
BALANCED SCORECARD
Measure and focus
TARGETS AND INITIATIVES
What We Need to Do
PERSONAL OBJECTIVES
What I Need to Do
STRATEGIC OUTCOMES
Satisfied
Shareholders
Efficient
Delighted
Accounting for Managementand Effective
Customers
Control 2016 / T.Malmi
Processes
Motivated
and Prepared
Workforce
BSC DEVELOPMENT PATH
• First BSC: Analog Micro Devices 1988
• In1990 development project involving 12 major US based
corporations
• First Harvard Business Review article in 1992
• In1996, BSC was introduced as a strategic management
system
• In 2000 strategy maps to clarify strategy and to support
measurement selection
• Path from measurement tool to a part of management
system; from measurement problems to the problem of
implementing strategy, and to the clarification of strategy
Accounting for Management
Control 2016 / T.Malmi
Financial Perspective
How do we look to shareholders?
• return on investment
• market share
• cash flow
Learning and Growth
Perspective
Customer
Perspective
Vision
&
Strategy
To achieve our vision, how
should we appear to our
customers?
• customer lead time
• incidence of defects
• reliability of lead times
• price
To achieve our vision, how will
we sustain our ability to change
and improve?
• number of initiatives
• employee retention
• capabilities vs. needs
Internal-BusinessProcess Perspective
To satisfy our shareholders and
customers, what business processes
must we excel at?
• cycle times
Accounting
for Management
• yields
Control
2016
T.Malmi
• percentage/of
sales from new products
Source: Kaplan & Norton, 1996.
THREE TYPES OF SCORECARDS
• Scorecards have been used for different purposes!
• Key Performance Indicator (KPI) Scorecards
– Management must have a multitude of measures to evaluate
current performance => If measures alert, corrective actions can
be taken
• Strategy Scorecards
– The aim is to guide organization to achieve (strategic) objectives
and goals =>Is based on the logic: what you measure is what
you get
• Stakeholder Scorecards
Accounting for Management
Control 2016 / T.Malmi
WOULD THE CONTENT OF A SCORECARD
BE THE SAME INDEPENDENT OF THE
SELECTED APPROACH TO
MEASUREMENT?
• Number of measures?
• Nature of measures?
Accounting for Management
Control 2016 / T.Malmi
AGENDA
Management systems and Strategy Driven Performance
Management
• Methods to manage performance - management system
• Different types of Balanced Scorecards
• Deriving performance measures and targets from
strategy - Strategy Maps
Accounting for Management
Control 2016 / T.Malmi
STRATEGY MAPS
• Strategy Maps were originally created to derive BSC
measures
• There are many definitions and versions of strategy
maps around
• Concepts of leading and lagging indicators
• It is a simplification, providing focus
• Similar logic can be applied in every level in an
organization
Accounting for Management
Control 2016 / T.Malmi
Generic Strategy Map
Accounting for Management Control 2016 / T.Malmi
HOW TO COME UP WITH A STRATEGY
MAP
• Vision or strategic objectives provide starting point
• Strategic choices, emphasis, themes, value propositions
and/or projects aimed for achieving strategic objectives
provide next layer
• Business strategy, not all sub-strategies
• Use cause-and-effect logic, top-down
• Not by drawing arrows between measures ex post
Accounting for Management
Control 2016 / T.Malmi
CAUSE-AND-EFFECT RELATIONSHIPS
“A Strategy is a set of hypothesis about the cause and effect”
Kaplan & Norton, 1996
Accounting for Management
Control 2016 / T.Malmi
ROCE
FINANCIAL
CUSTOMER
LOYALTY
CUSTOMER
ON-TIME
DELIVERY
INTERNAL/
BUSINESS PROCESS
LEARNING AND
GROWTH
PROCESS
QUALITY
Accounting for Management
Control 2016 / T.Malmi
PROCESS
CYCLE TIME
EMPLOYEE
SKILLS
STRATEGIC THEME: SOLUTIONS IN EVOLVING SURROUNDINGS
ROE = 12%
=> combined ratio = 106
FINANCIAL
INSURANCE PREMIUM
AND
INCOME FROM SERVICES
CUSTOMER
CRM
EFFICIENCY AND
PRODUCTIVITY
INSURANCE, LOSS PREVENTION
AND CLAIMS SERVICES
DEVELOPMENT OF
PRODUCTS
AND SERVICES
IT-SYSTEMS
INNOVATION
AND
RENEWAL
PERSONNEL
AND
LEARNING
PRODUCT AND MARKETING
SKILLS TRAINING
IDENTIFICATION OF
CUSTOMER NEEDS
PRODUCT AND SEVICES
TRAINING
Accounting for Management
RISK SEMINARS
Control 2016 / T.Malmi
ORGANISATIONAL STRUCTURE,
RESOURCES AND
PARTNERSHIP
E&M-TECHNOLOGY
PERSONNEL
GUIDELINES
Accounting for Management
Control 2016 / T.Malmi
HOW TO COME UP WITH A STRATEGY
MAP
• Cause and effects need not to be verified facts – they
are rather believes of management about how to
compete successfully
• Strategy map is always a simplification of true cause
and effect relationships
• Still necessary as it aids in determining focus!
Accounting for Management
Control 2016 / T.Malmi
MEASUREMENT
• Define measures for each box in a strategy map
• Strategy Scorecard should not contain everything which
is important for you, it should contain issues that are
crucial for you to achieve competitive advantage
• Strategy Scorecard doesn’t prevent monitoring and
measuring other important issues
Accounting for Management
Control 2016 / T.Malmi
EXCERCISE
• You are concerned about your well-being in terms of
physical health
• Set yourself a vision and corresponding outcome
measures / lagging indicators!
• What shall you do to achieve your vision? In other
words, what is your startegy? How could you measure
that? Define some leading indicators for yourself!
Accounting for Management
Control 2016 / T.Malmi
STRATEGY DRIVEN TARGET SETTING
• Establish targets for 3-5 years
• Establish targets that, if achieved, company and its
operating processes have been changed
• Part of this gets done when vision is determined
• Break long-term objectives into short-term milestones 
connection to yearly planning and budgeting
• This means target setting is done during strategy
process, not during yearly planning process!
Accounting for Management
Control 2016 / T.Malmi
DESIGNING MANAGEMENT (CONTROL)
SYSTEMS TO TRANSLATE STRATEGY INTO
ACTION
• Management systems consist of many different
components – management by objectives only part of
the picture
• Requires measurement of both outcomes (lagging
indicators) and means to outcomes, i.e. strategies
(leading indicators)
• Strategy needs to be translated to measures in all levels
of an organization – linking crucial
• Right set of measures is not enough – targets should be
set, people should be held accountable for achieving the
targets
Accounting for Management
Control 2016 / T.Malmi