Chapter 13. Performance Measures and Managerial Control

Global Performance Measures

As we have seen in previous chapters, local performance measures may distort the decision‐making process and lead to suboptimization. A measure such as cost per unit may result in the production of large batches, which leads to excess inventory and due‐date delays. A measure such as the number of speeding tickets issued by the police does not reduce the number of traffic accidents or smooth traffic flow. A cellular services provider will not increase its value to its shareholders if the main measure of performance of salespeople is the number of subscribers. We need global performance measures that yield the following benefits:

  • Clearly communicated management policy regarding organizational goals. People behave according to how they are measured (i.e., Tell me how you behave and I'll tell you how you are measured.). Clear and simple measures broadcast management policy in an unambiguous way. Using the right measures should improve the value of the firm in a business environment and advance organizational goals in a not‐for‐profit environment.

  • Decision‐making aids. It is easier for top management to consider different alternatives versus the organizational goals, so that the chosen alternative enhances the value of the firm for its shareholders. However, middle management may find it difficult to see the link between actions in the field and enhancement of the value of the firm directly. Thus, we need ...

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