Internal Performance Measures Research Articles

Return on equity: A popular, but flawed measure of corporate financial performance

This article is aimed at analysing the impact of popular financial performance measures on shareholders’ wealth. It tests the strength of the linear relationships between these performance measures and shareholders’ returns, which consist of dividends and changes in the share price. The return on equity (ROE) is weighed up against the present favourite, economic value added (EVA) and the merits and flaws of each approach are discussed. Other approaches, such as a combination of performance measures and the expectations theory are also discussed briefly.The statistical tests performed found Spreads (a standardised EVA) to be slightly superior to ROE in explaining changes in shareholders’ returns. However, the use of same year data resulted in very weak linear relationships between all the performance measures tested, relative to shareholders’ returns.When 5-year medians were used in the analysis, significant correlations were obtained between current shareholders’ returns and the future results for the internal performance measures. This engenders some support for the expectations theory with its contention that the most effective positive impact on shareholders’ returns can be accomplished by managing expectations about future financial results, rather than maximising these results now. It is clear that the debate about the effectiveness of traditional accounting performance measures, as well as the search for the real drivers of shareholder value, will continue and increase in intensity.

EVA versus zisk a korelace s akciovým výnosem akcií

Nespokojenost s tradičními způsoby měření výkonnosti firem pomocí ukazatelů odvozených pouze z účetních výkazů vyústila ve snahu vyvinout alternativy měření výkonnosti podniků, na nichž by bylo možné stavět ukazatele zainteresovanosti manažerů. V souvislosti s teorií zastoupení (agency theory) vzniká problém vztahu "principal - agent" vymezený kontraktem (contract), kdy principál najímá agenta, aby pro něho uskutečňoval určitou službu. Manažeři však nemusí vždy usilovat o co největší přínos pro akcionáře, o maximalizaci akcionářské hodnoty (shareholder value) a o maximalizaci tržní hodnoty (market value) podniku. S tím souvisí otázka, jak sjednotit zájmy obou stran, aby byly minimalizovány náklady zastoupení, a jak stanovit, které měřítko výkonnosti nejlépe vyjadřuje přínos manažerů k hodnotě firmy. Na základě empirického výzkumu autoři zjišťovali a odvozovali "přidanou hodnotu" od ukazatele EVA v konkrétních odvětvích a podnicích v USA. Výsledky jejich zkoumání byly pozitivní a významné v předvídání u firem, které zavedly EVA jako vnitřní výkonnostní měřítko. To vede k závěru, že ukazatel EVA je vhodný jako "bonus base" pro odměňování manažerů. Odměňování manažerů na základě ukazatelů kapitálového trhu, zejména cen akcií, jak požaduje druhá skupina - zastánci tohoto kritéria se nejeví vhodné, protože v ceně akcií se odráží i faktory, které manažeři podniku nemohou ovlivnit (např. inflace, aj.).

Achieving Growth and Responsiveness: Process Management and Market Orientation in Small Firms

Achieving a consistent market orientation is a challenge for entrepreneurial manufacturers. This research seeks improved understanding of how internal process management assists and hinders small growing manufacturers in achieving the responsiveness component of a market orientation. Under process management, firms implement internal systems, procedures, and performance measures to improve performance and responsiveness to changing markets. Benefits include improved market sensing, two‐way communication, and coordinated responses to market demands. Despite the potential benefits, researchers question whether the internal structure and control of process management will improve responsiveness in entrepreneurial firms. Process management may conflict with the organizational cultures, agility, and responsiveness of entrepreneurial companies. Research results identify how process management assists and hinders the responsiveness component of market orientation in small manufacturers. Management implications and strategies for coping with growth challenges are presented.

The internal performance measures of bank lending: a value‐added approach

PurposeTo solve problems of overdue loans and bad debts, the research establishes the internal performance measures to monitor and enhance the operational qualities of the employees in the lending department.Design/methodology/approachThe research utilizes the value‐added approach to analyze the lending production process and derive the internal performance measures to add value to lending activities.FindingsCompared with final measures (data envelopment analysis, benchmark, and productivity measures), the internal performance measures proposed in this research would be more effective for evaluating the job performance of employees in lending activities. A comprehensive analytical framework that will improve the accuracy of analyzing a borrower's capacity and condition has also been constructed in this research.Research limitations/implicationsThe conclusions in this research have been derived from deductive method. Some empirical study in confirmation of the conclusions in this research could be the direction for future research.Practical implicationsThe practical implication of using internal measure to monitor the output quality of the employees in lending department is a reduction in the likelihood of employee's moral hazard behavior.Originality/valueThe past researches in measuring the performance of bank lending have focused on the final measures that are incapable of solving the problems of overdue loans and bad debts. The value of the internal performance measure approach would ease the lending operational risk that is one of the main purpose of Basel II.

Institutional Investment Flows and the Determinants of Top Fund Manager Turnover

This study examines how the termination of superannuation investment mandates contributes to the departure of top fund managers in companies delegated the portfolio management role. Terminations of superannuation plan mandates increase the probability of a fund company changing the responsible fund manager. Objective-adjusted returns are also significant managerial turnover considerations. These results illustrate that significant losses of superannuation fund clients act as an external control mechanism in the investment management industry that complements internal managerial performance measures.

Performance measurement system simplicity

Leading researchers, consultants and practitioners advocate that internal operations performance measurement (PM) systems need to be 'simple' in order to be most effective. The notion of PM system simplicity has often been expressed as the characteristic of having few versus many measures. This paper proposes a new simplicity scale based on the importance rankings of performance measures found in a large-scale survey of manufacturing firms. The PM system simplicity scale is developed and applied in the context of traditional manufacturing strategy constructs such as cost, quality, delivery and flexibility and with respect to environmental dynamism. Analysis of empirical data on 100 manufacturing firms shows that superior market performance is associated with firms that have both complex and simple PM systems, but that moderately simple systems perform less well.

Contemporaneous relationship between EVA and shareholder value

This paper investigates the assertions that EVA is more highly associated with shareholder wealth and firm values than are traditional performance measures. Two commonly used value-based performance metrics – namely, Total Shareholder Return (TSR) and Tobin's Q – were also considered to highlight the value-relevance of EVA vis-a-vis these measures in predicting shareholder wealth. Using a panel sample of about 1000 American firms over the period 1990–2002, the study found compelling evidence consistent with the notion that EVA outperforms other traditional performance measures in explaining shareholder wealth. Value-relevance tests reveal EVA to be more highly associated with shareholder wealth than TSR and Tobin's Q. The incremental value-relevance tests have also suggested that EVA possesses the largest explanatory power over TSR and Tobin's Q. These results conclusively support the claims made by EVA proponents and further support the potential usefulness of EVA metric for internal and external performance measurement.

Internal supply chain performance measurement

The purpose of this article is to present one example of how the strategies of total quality management (TQM) and continuous improvement are being used by US health care providers to meet the challenges of the future. This article presents an application utilizing the strategies of TQM and continual and rapid improvement in the area of assessing internal customer satisfaction in the health care arena. Satisfaction information concerning internal processes is critically important to the health care provider, and this article presents the development and application of an instrument designed to provide timely and relevant internal customer satisfaction information to individual health care providers. This provides information on problem identification and improvement opportunities for a world-class continuous improvement program. The article finds that customer satisfaction is increasingly being recognized as an appropriate measure for determining how well a particular organization is accomplishing its mission and, while customer satisfaction surveys provide valuable information and may be used to improve the entire operation, they provide limited insight into the details of the inner workings of each cost center. Each of the measures discussed in this article is potentially equally insightful and may provide more directly usable information when applied to internal customers. This article provides useful information on providing customer satisfaction in the health care arena.

Applying the strategy‐structure‐performance paradigm to the supply chain environment

PurposeThe paper extends a central paradigm of the strategy literature to the supply chain environment to foster a better understanding of the elements characterizing strategic decisions that lead to supply chain structural development and performance.Design/methodology/approachStrategic literature is reviewed to provide a fuller explanation of the strategy‐structure‐performance (SSP) research stream. SSP foundational principles are linked to supply chain management concepts, and synthesized into an explanatory framework. Propositions for future research are presented based upon the framework.FindingsAn iterative relationship among internal firm strategy, structure, and performance measurement systems is indicated, implying that firm supply chain strategy should be complementary with that of supply chain partners.Research limitations/implicationsThe paper presents a content analysis of existing research and a conceptual framework emerging from it. No data were collected nor were research propositions tested.Practical implicationsThe primary implication is “know your supply chain partners”. Do their strategies mesh – either as consistent or complementary – to your own firm's supply chain strategy? Strategic alignment is a necessary precursor to deployment of an effective supply chain structure.Originality/valueThe paper shows that SSP theory can be extended beyond the firm to the complex supply chain environment.

Rastreando os direcionadores da performance organizacional: uma proposta metodológica

Este artigo tem por objetivo propor uma metodologia para rastrear a seqüência de causalidade entre direcionadores e indicadores de performance dentro de um sistema de avaliação da performance organizacional. A metodologia propõe o levantamento das principais variáveis relacionadas ao desempenho da organização, a simplificação dos dados mediante técnicas de análise fatorial e a aplicação de análises de regressão e de modelagem de equações estruturais para testar modelos causais de maior poder explicativo. A título de ilustração, a metodologia é aplicada a uma empresa composta de unidades de negócio e gerenciada a partir de um modelo de mensuração de performance. No estudo, constatou-se que algumas variáveis supostamente causadoras da performance, como a competência dos funcionários, aparentemente não causavam nenhum efeito. Outras, como a satisfação dos empregados, mostraram-se relacionadas à performance, com efeito direto sobre algumas dimensões (como performance operacional) e indireto sobre outras (como satisfação de clientes e desempenho financeiro).

Measuring the Effectiveness of Disaster Management Organizations

This study proposes introducing the ‘client-stakeholder’ as a partner in measuring public sector disaster management effectiveness. Combining multiple constituency and goal attainment theories, an analysis was made of Israel's Home Front Command. Combining responses of key managers in this disaster agency along with those of a representative national sample of Israel's urban population, effectiveness was measured by matching stated organizational goals against the perception of their provision by client-stakeholders. Goal perceptions were found to substantially differ from and focus on only a small number of officially stated goals. The results suggest that a disaster organization's stated goals, upon which most measures of organizational effectiveness are based, are not necessarily those perceived or even used by its client-stakeholders to gauge effectiveness. In addition, factors contributing to these perceptions are not necessarily related to the organization or the services it provides. This stands in sharp contrast to traditional measures of organizational effectiveness based on internal performance measures and highlights the need to reevaluate the role of the client-stakeholder in measuring disaster management organizational effectiveness.

Constraint‐based accounting and its impact on organizational performance: a simulation of four common business strategies

Since its inception, cost accounting has provided data to managers for the development of internal organizational performance measures. In the mid 1980s, Dr Eli Goldratt introduced a new management philosophy called the theory of constraints (TOC). This philosophy contained a new set of performance measures which linked together the strategic objectives and operational capabilities of the organization. This linkage allows for the maximization of profits. Since its introduction, there has been a growing amount of evidence documenting TOC’s ability to more tightly link local decisions to organizational performance than those of traditional cost accounting. This research used a simple Gedunken experiment to evaluate the difference between strategy driven product‐mix decisions based on TOC accounting and traditional cost accounting. In all cases, the constraint‐based approach to costing outperformed the traditional approach based on cost accounting.

Economic Value‐Added: A Review of the Theoretical and Empirical Literature

With increasing pressure on firms to deliver shareholder value, there has been a renewed emphasis on devising measures of corporate financial performance and incentive compensation plans that encourage managers to increase shareholder wealth. One professedly recent innovation in the field of internal and external performance measurement is a trade‐marked variant of residual income known as economic value‐added (EVA). This paper attempts to provide a synoptic survey of EVA's conceptual underpinnings and the comparatively few empirical analyses of value‐added performance measures. Special attention is given to the GAAP‐related accounting adjustments involved in EVA‐type calculations.

Supply Chain Metrics

Most discussions and articles about supply chain metrics are, in actuality, about internal logistics performance measures. The lack of a widely accepted definition for supply chain management and the complexity associated with overlapping supply chains make the development of supply chain metrics difficult. Despite these problems, managers continue to pursue supply chain metrics as a means to increase their “line of sight” over areas they do not directly control, but have a direct impact on their company's performance. We provide a framework for developing supply chain metrics that translates performance into shareholder value. The framework focuses on managing the interfacing customer relationship management and supplier relationship management processes at each link in the supply chain. The translation of process improvements into supplier and customer profitability provides a method for developing metrics that identify opportunities for improved profitability and align objectives across all of the firms in the supply chain.

EVA versus Earnings: Does It Matter Which Is More Highly Correlated with Stock Returns?

Dissatisfaction with traditional accounting-based performance measures has spawned a number of alternatives, of which Economic Value Added (EVA) is currently the most prominent. How can we tell which performance measures best capture managerial contributions to value? There is currently a heated debate among practitioners about whether the new performance measures have a higher correlation with stock values and their returns than do traditional accounting earnings. Academic researchers have relied instead on the variance of performance measures to gauge their relative accuracy. To formally address the above debate, we use a relatively standard principal-agent model in which contracts can be based on any two accounting-based performance measures plus the stock price. Rather than model detailed differences between EVA and traditional measures such as earnings, we focus on the problem that while the variability of each measure is observable, its exact information (signal) content is not. The model provides a formal method for researchers to ascertain the relative value of alternative accounting-based measures based on two distinct uses of the stock price. First, as is well known, prices provide a noisy measure of managerial value-added. In our model, stock prices also can reveal the signal content of alternative accounting-based performance measures. We then show how to combine stock prices, earnings, and EVA to produce an optimally weighted compensation scheme. We find that the simple correlation between EVA or earnings and stock returns is a reasonably reliable guide to its value as an incentive contracting tool. That is, a firm could reasonably gauge the merits of adding a measure like EVA by examining its correlation with the firm's stock price. This is not because stock returns are themselves an ideal performance measure, rather it is because correlation places appropriate weights on both the signal and noise components of alternative measures. We then calibrate the theoretical improvement in incentive contracts from optimally using EVA in addition to accounting earnings. Specifically, we empirically estimate the value-added of EVA by firm and industry. These estimates are positive and significant in predicting which firms have actually adopted EVA as an internal performance measure.

The competitive analysis model

The economic contribution that small firms make is being increasingly recognised. Consequently robust strategic benchmarks for small firms must be extremely valuable not just for the firms themselves but also for the wider economic community. The Competitive Analysis Model (CAM) is a new approach to the strategic benchmarking of small firms. Currently this model comprises 893 firms on which are held 320 separate data items. These data items are used to provide individual firm reports so that participating firms can benchmark their performance in terms of measures such as: growth rates, internal performance measures, external performance measures and strategic priorities. The benchmarks are provided in two major manners: sectoral comparisons so that a firm can benchmark its performance with others of a similar size in the same industry sub‐sector and cross‐sectional comparisons so that a firm can benchmark its performance with others of similar size irrespective of the industry in which they operate. This article describes the operation of CAM and illustrates its operations through a typical CAM report.

R&D Metrics: Evaluating R&D Performance Using the Cost Savings Metric

OVERVIEW:In today's hotly competitive business environment, most companies have Total Quality Programs operating, and are pursuing research projects to remove costs and become even more efficient in order to enhance or maintain their profit margins. The R&D “Cost Savings Ratio” (CSR) is the metric used to measure the impact of R&D on these cost savings efforts. CSR measures the reduction in cost of goods or cost of operations that are realized from technology changes. The actual calculation of CSR depends on its use—whether for internal performance measurement or external benchmarking.

The Relationship Between the Market Value of a Company and Internal Performance Measurements

It is widely accepted that the primary objective or goal of a firm is to maximise the shareholders' equity. While there may be legitimate differences of opinion as to whether this is the sole motivation of a firm's management, it should without a doubt be a dominant variable in management's decisions. In management's attempts and decision-making to increase shareholder value as measured by the market value of a company, they continuously influence, directly of indirectly, those variables that affect shareholder wealth. It is thus of the utmost importance that those variables that influence shareholder value are stimulated in the most positive way in order to increase shareholder value to the utmost. In the literature part of this study, the emphasis fell not only on drawing a distinction between accounting-based models of determining shareholder value, but also on the fact that Economic value added (EVA) in particular, have distinct advantages in determining value created (or destroyed) by the management of a company. EVA can also be adjusted for inflation purposes or standardized in order to be an even more complete internal performance measure. However, other ratios or yardsticks which might have an influence on the market value of a company are also identified and placed alongside EVA as variables that can correlate with the market value of a company. Whilst EVA and other variables or ratios are internal measures of shareholder value creation, Market value added (MVA) is the external method of determining shareholder's wealth. The goal of this study is to determine which internal performance measures of a company correlate the best with its external performance measure as represented by the MVA of the corporation. In order to achieve the aforementioned goal, an empirical analysis was conducted. The research methodology, including the statistical techniques as well as the boundaries of the sample used, were set out. The results of the empirical analyses were reported and compared with the theoretical principles. The highest consistent positive correlation coefficient obtained was between MVA and EVA with inflation adjustments to the data. The very same pattern was obtained with discounted EVA. Slightly lower positive correlations were found between MVA and ROA, ROE, EPS and DPS. These correlation coefficients were higher when data with inflation adjustments were utilized.

Policing with the Ottawa shift system: a British experience

This paper takes an international perspective and reports the results of a trial of the Canadian (Ottawa) shift system within a UK police force. Primary data were collected via group interviews followed by a questionnaire survey. Secondary data were available from internal reports and performance measures. Officer welfare and morale were investigated and found to be greatly improved. Performance indicators, including arrest rates, also improved although it was not possible to establish a direct causal link with the introduction of Ottawa. A number of operational problems associated with the Ottawa system in the UK are identified and reviewed.

Lead time selection and the behaviour of work flow in job shops

Few studies in job shop scheduling consider dynamic shop load and work flow issues. However, these issues are of importance to management responsible for shop floor control. This research investigates relevant internal performance measures and their relationship to external measures. As well, a new dispatching mechanism that seeks to even out the distribution of jobs in queue is investigated. Results show that a shop load balance index, which takes both shop load levels and load variability into account, has a very strong relationship to the lead times required to maintain a desired level of delivery performance. It appears that good performance based on internal measures is consistent with good performance based on external measures.