Performance Measurement

Summary

This lecture introduces the concept of performance measurement, emphasizing its importance in both organizational and personal success. It highlights the pros and cons of various performance measurement systems, such as the Balanced Scorecard and Management by Objectives. The lecture warns against focusing solely on easily measurable metrics, as it may lead to unintended consequences like internal competition or complacency. The concept of Hoshin Kanri, Toyota’s approach to aligning strategy with measurable goals, is also explored. The key takeaway is that while performance measurement is crucial, it must be handled carefully to avoid negative effects.

Takeaways

• 😀 Measurement drives action: 'What gets measured gets done,' but be mindful that measuring the wrong things can lead to undesired outcomes.
• 😀 Grades are a proxy, not a perfect measure: While grades can indicate performance, they don't fully reflect learning, passion, or development in the field.
• 😀 Performance management is crucial: It's a core component of any professional business, helping to track financial results and communicate strategic goals.
• 😀 Measurement fosters alignment: It ensures employees' performance is aligned with company goals and provides clarity for individual success criteria.
• 😀 Performance measures increase motivation: Clear measures can boost motivation, self-esteem, and drive for improvement among employees.
• 😀 A balanced approach to measurement is necessary: Focusing only on financial metrics can lead to an unbalanced view, so a holistic approach is vital.
• 😀 The Balanced Scorecard is key: It incorporates four perspectives (Financial, Customer, Internal Business, Innovation & Learning) to offer a more rounded view of performance.
• 😀 Operational metrics matter: Focusing on the underlying operational factors (e.g., process quality, efficiency) is critical for achieving long-term success, just like an athlete's training metrics.
• 😀 Management by Objectives (MBO) has limits: While useful, it can lead to pitfalls like focusing too narrowly on measurable outcomes, which may not align with true goals.
• 😀 Be cautious of KPI-driven cultures: A heavy emphasis on KPIs can lead to internal competition, reduced collaboration, and unhealthy stress among employees.
• 😀 Toyota's Hoshin Kanri system: This process helps align the whole organization by breaking down strategic goals into tangible objectives at every level through a 'catchball' communication method.

Q & A

What is the significance of the phrase 'What gets measured gets done' in performance measurement?

The phrase emphasizes that people often focus on what is measured because they know it will be tracked. For example, students tend to study more for exams, as grades are measured, but this doesn’t necessarily mean the most important aspects are being measured or addressed.

Why should we not become overly focused on measurement in performance management?

While measurement is essential, it can be problematic if overemphasized. Many things that are important can't be easily measured, and focusing too much on metrics can lead to unintended consequences, such as a lack of attention to other critical aspects.

What is the role of performance measurement for companies?

For companies, performance measurement helps communicate strategic goals, align teams towards common objectives, provide insights into current performance, enable corrective actions, and create a fair reward system for employees.

How does performance measurement benefit employees?

For employees, having clear performance metrics clarifies success criteria, motivates them to perform, and boosts self-esteem when they meet goals. It also provides a benchmark for ongoing improvement.

What is the Balanced Scorecard and what does it include?

The Balanced Scorecard is a performance measurement framework that includes four perspectives: Financial, Customer, Internal Business, and Innovation & Learning. This approach ensures a balanced focus on various key areas, rather than just financial performance.

What are the four perspectives in the Balanced Scorecard?

The four perspectives are: 1) Financial, focusing on revenue, costs, and profitability; 2) Customer, focusing on satisfaction and market share; 3) Internal Business, focusing on operational performance like quality and efficiency; and 4) Innovation & Learning, focusing on long-term improvement and skill development.

Why does financial performance need to be complemented by other measures?

Financial performance is an outcome, but it doesn’t explain how a company gets there. Operational metrics, such as process quality or employee skills, are crucial to achieving sustainable financial success.

What was Peter Drucker’s contribution to performance measurement, and why was it later debunked?

Peter Drucker proposed 'Management by Objectives,' which focused on aligning individual and organizational goals. However, this approach was later criticized because it can lead to narrow focus, gaming of the system, and neglect of more qualitative or long-term goals.

What are the potential drawbacks of performance measurement systems?

Some drawbacks include: 1) You might get exactly what you measure, not necessarily what you want; 2) Easy-to-measure metrics may not be the most important; 3) Over-reliance on metrics can hurt intrinsic motivation; 4) It may foster a KPI-driven culture that doesn’t prioritize customer needs.

How can performance measurement systems harm organizational culture?

Performance measurement can create internal competition, leading to a lack of cooperation between teams. It can also cause stress, low self-esteem, or complacency, depending on whether targets are consistently met or missed.

How does Toyota’s Hoshin Kanri process help with performance measurement?

Toyota’s Hoshin Kanri process is an annual policy deployment approach where goals and performance measures are set at all levels of the organization. It ensures alignment and communication through a ‘catchball’ process, ensuring that each level creates goals that contribute to achieving overall strategy.

What is the key takeaway about performance measurement from this lecture?

The key takeaway is that while performance measurement is essential for organizational success, it must be used wisely. Companies should avoid over-relying on simple metrics, be mindful of their limitations, and aim for a balanced approach to achieve long-term success.