Performance Measurement PDF

Performance management Assignment grade: simple average of 2 assignments (25%) Final exam (written): 75% The final exam (written) will consist of essay questions, relating to class theory sessions, and cases, similar to those we analyse in class. It will last 90 minutes and will be organised in exe...

Performance management Assignment grade: simple average of 2 assignments (25%) Final exam (written): 75% The final exam (written) will consist of essay questions, relating to class theory sessions, and cases, similar to those we analyse in class. It will last 90 minutes and will be organised in exercises and open questions. PMS (performance measurement systems): 1.​ Convey financial information 2.​ Are formal 3.​ Used by managers (influence decision-making and managerial action) 4.​ Influence patterns in organisational activities Business Strategies refers to how a company creates value for customers and differentiates itself from competitors in the marketplace. It defines the business model and the organization that managers use for competing. Business goals are the measurable aspirations that managers set for business: economic and financial goals market share goals capabilities to generate learning and innovation in organization. How to design and use PMS to support strategy? 1.​ Balancing profit, growth and control 2.​ Balancing short-term results against long-term capabilities and growth opportunities 3.​ Balancing performance expectations of certain stakeholders 4.​ Balancing opportunities and attention 5.​ Balancing the motives of human behaviour Growth in sales->growth in assets Eg sales 12000 DSO (days of sales outstanding) 90 days Receivables 3000 Sales 18000 (1500 x 12) DSO (days of sales outstanding) 90 days Receivables 4500 (+50%) Current assets: cash, inventory and receivables Fixed: tangible (equipment, machinery, building), intangible (patents, rights), financial Liabilities vs equity Balancing profit, growth and control Performance management PMS can assist managers by serving the following objectives: communicating to the organisation the strategic goals identifying resources available for long term goals specifying the cause and effect relationship between business goals and profit providing key performance indicators of growth establishing and monitoring short term profit goals Netflix case library-intangible asset that is the most relevant asset in the entertainment industry library=ownership or rights The value of a company is evaluated by the library Netflix starts producing its own content instead of borrowing Consequences: 1. negative cash flow increases the debt and equity Huge investment is necessary to create your own library The product becomes obsolete in approximately 6 months You buy shares to create a barrier against a hostile takeover Balancing performance expectations of certain stakeholders Performance management Example: ferrari Balancing opportunities and attention PMS can assist managers by focused only on critical measurement: so they can focalize their time and attention in opportunity as new products, new services new markets striking alliances branching into other industries Balancing the motives of human behaviour A need that has been satisfied is not motivating anymore ! think of Maslow hierarchy of needs people->organisational block They want to contribute, they like to innovate, they want to do complex work usually opportunities outnumber the res Performance management It is important to align people on the core values before entering strategy part Corporate vs business strategy How to analyse the attractiveness of an industry: ​ Market size ​ Expected market growth rate ​ Number of significant competitors ​ Concentration of competitors ​ Profitability of the sector in its entirety ​ Barriers to entry into the sector Performance management ​ Barriers to exit ​ Bargaining power of suppliers and customers ​ Availability of management talent ​ Purchasing power of customers ​ Legal security ​ Current market share and trend ​ Relative profitability, quality and price ​ Customer concentration ​ Innovation rate ​ Talent ​ Efficient access to raw materials and inputs asset is defined as a resource, owned or controlled by the entity, that will yield future economic benefits (must have future value to the firm resource is more broadly defined as a strength of the business embodied in the tangible or intangible assets that are tied semipermanently to the firm. Resources: technical, financial, managerial Intangible resources: hard to measure through monetary value, rarely appear on balance sheet analyse different kinds throughout ACME 1.​ Distinctive internal capabilities: special resources that give competitive advantage Functional skills, market skills, embedded resources 2.​ Market franchises: the ability to attract customers Performance management 3.​ Relationship and network: long-term relationships with relevant suppliers and customers Business Model Canvas 4 Ps of Strategy BORGOLUCE CASE STUDY Borgoluce is a family-owned multifunctional farm in Italy's Treviso province. It recently expanded its vineyard to produce Prosecco grapes, aiming to leverage market growth and its favorable location in the Conegliano-Valdobbiadene DOCG area. The family is evaluating strategic options to manage this expansion. Key Strategic Options: Performance management 1.​ Option A: Focus on Agricultural Production (No Investment) ○​ Sell grapes to Prosecco DOC Consortium at €95/100 kg. ○​ No additional marketing or branding effort. ○​ Minimal operational changes; negligible costs. 2.​ Option B: Outsource Wine Production and Build Borgoluce Brand ○​ Investment: €40,000 for branding. ○​ Outsource production to a local plant; sell 700,000 bottles annually through modern trade at €3/bottle. ○​ Costs: €1.5/bottle; no need for specialized competences. 3.​ Option C: Build a Limited Capacity Wine Processing Plant ○​ Investment: €1.5M for a prefabricated plant and €40,000 for branding. ○​ Produce 200,000 bottles of Prosecco DOCG in-house and outsource the rest. ○​ Revenue streams: ​ 500,000 bottles in modern trade (€3/bottle). ​ 200,000 bottles in specialty shops (€7/bottle). ○​ Requires specialized employees for the plant. 4.​ Option D: High-End Winery with Tourism and Events ○​ Investment: €4M for an architectural wine plant with advanced technologies and tourist facilities. ○​ Fully insourced production of 700,000 bottles of DOCG (€7/bottle). ○​ Emphasis on wine tourism and B2C sales for higher margins. ○​ Requires significant resources and specialized staff for operations and marketing Performance Measurement Considerations: 1.​ Financial Metrics: ○​ Return on Assets (ROA), Return on Equity (ROE), and profitability vary across options. ○​ Example: Option D has the highest revenue potential (€4.9M) but involves substantial investment (€4M) and risk. 2.​ Balanced Scorecard Perspectives: ○​ Financial Perspective: Investment and revenue generation capacity differ significantly among options. ○​ Customer Perspective: Options C and D target specialty markets, enhancing brand perception and customer engagement. ○​ Internal Process Perspective: Integration of winemaking (Options C and D) ensures better process control and reduces dependency on external suppliers. ○​ Learning and Growth Perspective: Options with insourced production require skill development and employee training. 3.​ Make-or-Buy Analysis: Performance management ○​ Key decision factors include cost efficiency, control over quality, brand building, and reliance on external suppliers. ○​ Option C balances risk and investment by integrating partial production, while Option D maximizes strategic potential at higher financial risk. 4.​ Strategic Alignment: ○​ Option D aligns with Borgoluce's long-term goal of multifunctionality, enhancing its appeal in wine tourism and premium markets. ○​ Option A represents a low-risk, low-reward approach, suitable for maintaining status quo. Potential Exam Questions: 1.​ Evaluate the financial implications of each strategic option using key performance indicators (e.g., ROA, ROI). 2.​ Discuss how Borgoluce could use the Balanced Scorecard to assess the viability of Options C and D. 3.​ Apply the make-or-buy framework to the case and justify a recommendation based on strategic alignment. 4.​ Identify challenges Borgoluce might face in implementing Option D and propose performance measurement tools to address them. Lecture 4 Financial Statements: contents and structures PMS are the formal, information-based routines and procedures managers use to maintain or alter patterns in org activities strategy->actions->measures measures->actions->strategy Financial statements are the institutional reports used by companies to communicate to “external readers” officially and periodically the company’s economic and financial results Groups who use financial statements: 1.​ Investors-prime concerns and risks, when to buy/sell 2.​ Lenders-to determine whether their loans will be repaid when due 3.​ Employees-stability and profitability 4.​ Government agencies-determine tax policies, basis for national income 5.​ Suppliers, trade creditors and customers 6.​ Public-contribution towards the local economy Performance management Income Statement Revenues and Costs Balance Sheet Assets and Liabilities Cash Flow Statement Inflows and Outflows The typical tools used to analyze financial statements are: ​ Balance Sheet and Income Statement formats ​ Ratio and Cash Flow analysis Is based mainly on comparison: Either the same entity during time or different entities (key competitors, industry average) Income Statement Revenues (sales or turnover) are the value given by the market to the products and services sold by the company in a certain period Costs (expenses) are the value given by the market to the productive factors used (consumed) by the company in a certain period profit=revenues-costs profit=income, earning, economic result, margin Input: labour, energy, raw materials, technology, money, facilities Output: products, services Stakeholders: suppliers, banks, workers, public authorities, customers Performance management Single step income statement=when the revenues are considered separately from expenses Gain on disposal-the value we got from the market is higher then anticipated as a result of depreciation (same with loss on disposal but the other way around) Eg equipment depreciated till 68 but we seel it for 70 (creating gain) The Income Statement items can be organized on the base of different business determinants, so we can produce a different income statement that better shows the main determinants of net income (or net loss). Operating activities are those activities that are part of the day-by-day business functioning of an entity: Manufacturing/trading SG&A Non-recurring activities are those unusual and exceptional activities that should be disclosed separately if material, Write-downs of inventories or of PP&E Reversals of write-downs​ Restructuring costs​ Disposals of PP&E or Investments Litigation settlements Performance management Financial activities are those activities related to the various funding sources used by the company and, on the other, operations linked to investing financial resources ​ issuance of shares and bonds, borrowing a loan, servicing debt, buying back shares Taxes Net operating sales-(Cost of goods sold)*=Gross profit Other operating revenues-(SG&A-Selling, General and Administrative expenses) =Operating income Non-recurring revenues-(Non-recurring expenses)=EBITDA EBITDA - amortization & depreciation = EBIT Interest and financial income-(Interest expense and financial charges)=EBT EBT-(Taxes)=Net Income from continuing operations The Income Statement items can be also spitted between Continuing operations-the company’s regular business activities and Discontinued operations-product/business line that has been divested or shut down COGS – Cost of Goods Sold or Cost of Sales is the total value of goods/products/merchandise sold in a year. Eg units produced=1000 units sold=800 for a manufacturing company, COGS is: Production costs (typically listed in detail) +/- Δ inventory for a trading company, COGS is:​ Purchases (i.e. cost of merchandise purchased) +/- Δ inventory (Beginning Inventory of Raw Materials) -100 (Purchases of Raw Materials) -900=-1000​ Ending Inventory of Raw Materials 200 Performance management (Consumption of Raw Materials) -800 (Salaries)​ (Power)​ (Indirect materials)​ (Manufacturing Depreciation)​ (Manufacturing rents)​ (Other indirect manufacturing costs or overhead) (Beginning Inventory of WIP Work in Progress) Ending Inventory of WIP Work in Progress (Cost of products produced in the period) (Beginning Inventory of Finished Products) Ending Inventory of Finished Products (Cost of Goods Sold) Outflow of money=total operating costs-depreciation Financial markets prefer to talk about EBITDA as it is a reasonable estimation of the cash flow calculated within the income statement Selling expenses typically include: ​ Sales salaries, commissions and bonuses and related costs (including social security and pension costs); ​ Advertising And Promotion Costs; ​ Warehousing costs; ​ Transportation costs; ​ Costs related to fixed assets used in the selling activity (including depreciation, maintenance costs, rents, etc.); … General and Administrative expenses typically include: ​ Administrative staff salaries, bonuses etc. and related costs (including social security and pensions costs); ​ Directors Executive Salaries And Related Costs; ​ Stationery,telephone,legal and tax services; ​ Costs related to fixed assets used for the G&A activity (e.g. depreciation, maintenance of buildings, rents, etc.); ​ Research Costs; ​ Professional fees; BALANCE SHEET Performance management Assets vs liabilities and equity TOTAL ASSETS = TOTAL LIABILITIES + TOTAL EQUITY Liabilities: debt in front of third parties Equity: book value/money from shareholders Through the Balance Sheet we describe the company’s properties (“the richness”) under two different perspectives: sources perspective.the investment perspective and the funding sources perspective. The Income Statement is a movie because inside it we find all the economic effects of each transaction made with the external counterparts during the year (value created or destroyed during the period just ended) VS. The Balance Sheet is a picture because it describes the composition of the company’s properties and debts at a certain date (difference between the book value of properties and total debts) Performance management Reserves is the sum of past profit undistributed and kept within the company Relationship between income statement and balance sheet Income statement=movie explaining what you did last year Balance sheet=an instant snapshot of the company’s value that could vary within moments RATIO ANALYSIS PROFITABILITY Pertains to the company’s ability to earn profit with an efficient use of the resources available - ability to generate an adequate remuneration of Invested Capital Equilibrium between revenues, costs and investments SOLVENCY (financial strength) Pertains to the company’s ability to bear internal or external events (particularly) negative Equilibrium between investments and financing; the ability of a company to resist challenging financial moments LIQUIDITY Refers to the company’s ability to meet its current obligations Equilibrium between current assets and current liabilities Performance management GROWTH Refers to the company’s ability to increase its size without compromising its existence and autonomy Equilibrium among increases in Financial Statements' items, without compromising the overall pattern Two main analysis types: 1.​ Vertical-relationship (in percentage) of each category of items to a specified base, which is the 100% figure (eg 100%-total sales revenue) 2.​ Horizontal-% changes in comparative financial statements of the same company (eg increase in the total asset value in % compared to those previous accounting periods) Profitability Ratios ROE-Return on Equity=Net Income/Stockholder Equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested. It’s necessary to compare it with the average of the industry. ROA-Return On Assets=EBIT (or Operating Income)/Total Assets the capability of the company to remunerate its investments, regardless how they have been financed ROI-Return On Investment ROS-Return on Sales=EBIT/Sales expresses how much Operating Profit (including non-recurring items) is produced in percentage over money of Sales. expresses the operating marginality and the level of operating efficiency. Use industry benchmarks and take into consideration the riskiness. AT-Asset Turnover=Sales/Total Assets Sales-a flow of richness you are attracting into your business. In order to attract it, you need to invest ROA=ROS x Turnover EBIT/Total Sales= (EBIT/Sales) x (Sales/Total Assets) Performance management The adoption of a "Volume Strategy" is aimed at maximizing the volumes sold against reduced unit margins. The adoption of a "Value Strategy" is aimed at maximizing profitability by achieving high unit margins. The link between ROA and ROE: the financial leverage EBT 1000 - taxes 200 =net earnings 800 +discontinued +400 net income=1200 Performance management Example 1: no debts NI/E = EBIT/TA x f (tax burden) x discontinued Example 2: NI/e = (EBIT/TA + (EBIT/TA - i) x D/E) x f x discontinued ROA = 7% = 35 EBIT 70 Assets = 1000 Equity = 500 *0.07=35 Debts = 500*0.03=15 35+15=50 (7% + (7%-4%) x (1000/1000)= 10% SOLVENCY RATIOS Gearing Ratio (Debt to Equity) = Debt / Equity provides an indication of the company's ability to receive new loans in the short term The higher the index, the riskier the company Debts-to-EBITDA = Debts / EBITDA Fixed assets Coverage = Equity / Fixed Assets LIQUIDITY RATIOS Quick ratio (acid test) = (Current Assets - Inventories) / ST liabilities Performance management measures a company’s ability to meet its short‐term obligations with its most liquid assets. If its value is below 1 the coverage is insufficient, and the company is more at risk of insolvency Current ratio = Short-term Assets / ST Liabilities DSO (Days Sales Outstanding) = Accounts receivable / (sales / 365) expresses the number of days the Company takes in average to collect its credits. Accounts receivable-uncollected sales Growth= ability to preserve competitiveness and to motivate talent It is necessary, desirable, unavoidable Growth analysis is simply applied by comparing each item, of at least two Financial Statements, measuring their change (growth) between values of different years Sustainable growth The ability of an organization to growth, in preserving its competitiveness and without compromising its autonomy (without altering profitability, solvency and liquidity) g (S) = Sales Growth Rate​ It expresses Growth. It can be necessary to preserve company competitiveness DEFICIT g(S) > self-financing... meaning that: D/E increases unless shareholders pay in some more share capital SURPLUS g(S) < self-financing... meaning that: D/E decreases unless corporate dividends are distributed to shareholders g (TA) = Total Assets (investments) Growth Rate It is related to sales growth and efficiency in asset management r = profit Retention rate​ It’s the % of net income retained in the company (not distributed as dividends). Performance management ROA = Operating Profitability​ It expresses the operating activities’ return (i.e. the Profitability). It reflects the Core Business Profitability. i = Interest Rate​ It is the average cost of debt D/E = Debt-to-Equity ratio It is the gearing ratio t = Tax Burden​ where (1-t) is equal to (f) of financial leverage PARAMOUNT GLOBAL CASE STUDY 1.​ Identify the trend within the ratios 2.​ Understand reasons for those trends analysing, checking the role of the numerator and denominator 3.​ Analyse the components of the numerator and denominator 4.​ Make hypothesis ​ See the Excel file! San Francisco Opera Association Case Context: The San Francisco Opera Association (SFO) is a nonprofit arts organization focused on opera production, education, and artist training. The organization relies on diverse revenue streams, including ticket sales, contributed income, grants, and endowment investments. The 2008 financial crisis significantly impacted its financial performance, with a reduction in contributions and investment losses. Key Strategic Focus Areas: 1.​ Revenue Streams: ○​ Earned Revenue: Ticket sales, subscriptions, and rentals. ○​ Contributed Income: Donations from individuals, corporations, and foundations. ○​ Investment Returns: Endowment funds and other long-term investments. 2.​ Expenses: ○​ Production and artistic activities dominate expenses (e.g., performances, media, and artist training). ○​ Marketing, administration, and fundraising activities also constitute a significant portion. Performance management 3.​ Financial Challenges: ○​ Significant operating losses, exacerbated by reduced investment income and the financial crisis. ○​ High reliance on restricted contributions and endowment funds to cover operational deficits. ○​ Long-term liabilities, including deferred compensation and notes payable. 4.​ Endowment Management: ○​ Endowment assets are managed to balance risk and provide a predictable funding stream. ○​ Spending policy limits annual distributions to 5% of the fair value of long-term investments. 5.​ Cost Management Initiatives: ○​ Reduced artistic expenses (e.g., production costs) while maintaining revenue growth. ○​ Focus on efficient use of resources, including better allocation of deferred production costs. Performance Measurement Considerations: 1.​ Balanced Scorecard Perspectives: ○​ Financial Perspective: Focus on managing operating losses, maximizing investment returns, and diversifying income sources. ○​ Customer Perspective: Ensure high audience engagement through ticket sales, subscriptions, and innovative programs like OperaVision and simulcasts. ○​ Internal Process Perspective: Optimize cost structures in production and marketing while leveraging endowment spending policies. ○​ Learning and Growth Perspective: Invest in staff training, especially for fundraising and endowment management. 2.​ Key Performance Indicators (KPIs): ○​ Revenue Metrics: Ticket sales growth, contribution income trends, and endowment return rates. ○​ Cost Efficiency Metrics: Artistic and marketing expense ratios relative to total income. ○​ Liquidity Metrics: Cash flow and compliance with financial covenants (e.g., liquidity thresholds). ○​ Engagement Metrics: Subscription renewal rates and audience attendance. 3.​ Risk Management: ○​ Addressing the volatility of investment returns through a diversified portfolio. Performance management ○​ Mitigating donor concentration risk, as a significant portion of contributions comes from a few major donors. 4.​ Strategic Use of Resources: ○​ Aligning donor restrictions with operational needs. ○​ Efficiently utilizing restricted contributions for long-term sustainability. Potential Exam Questions: 1.​ How can the San Francisco Opera use the Balanced Scorecard to address its operating losses and reliance on restricted contributions? 2.​ Discuss the implications of the financial crisis on SFO's endowment management and long-term financial sustainability. 3.​ Evaluate the cost reduction strategies implemented by SFO and their impact on artistic quality and audience engagement. 4.​ Apply a performance measurement framework to analyze the effectiveness of SFO's marketing and fundraising efforts. Cash Flow Statement is a document demonstrating how companies produce cash The cash shown last year in the financial statement and how it is converted into final (ending) cash value (the result of cash management); Investment generates cash through interest Revenues create cash; costs absorb cash (cash out) = operating activities (buy, transform, produce, sell) - day-to-day activities (first section of the statement) Investing activities = investing, de-investing - the choice to acquire or dispose of long-term productive assets that are expected to provide services for more than one year Financing activities = receiving funds; giving back to repay debts (absorb) - transactions that obtain resources from debt and equity transactions ​ Issuance of additional stock(source)​ Borrowing Money From The Bank(source) ​ Repaying Previous Loans(use) Revenues - COGS = Gross Margin Increase in accounts receivable = cash absorption (since we haven’t actually been paid) Decrease in accounts payable = absorb cash (and vice versa) Increase in raw material = absorb cash Performance management The purpose of cash flow is to detail the changes in the cash account on the balance sheet, report cash receipts and cash payments, classify the cash flows Cash equivalents are highly liquid short-term investments that a company can easily and quickly convert into cash (an investment that has a short maturity - three months or less from the date of acquisition) Example: Listed treasury/corporate bonds very close to the reimbursement date Cash flow statement helps to: ​ Predict future cash flows ​ Evaluate how management generates and uses cash ​ Determines a company’s ability to pay interest, dividends ​ Identifies increases and decreases in a firm’s productive assets (investments) operating: collecting cash vs cash payments 2 approaches to present cash flow from operating activities: investing: selling vs purchasing financing: issuing vs reayment/repurchase Direct method: trace each transaction and subtract disbursements from collections  Performance management Indirect: adjust accrued-based net income from the income statement to reflect only cash receipts and disbursements (used by most companies) Start from net income (profit made during the year) 1)​ +- Adjust for non-monetary revenues and expenses (not requiring cash), add back depreciation and other adjustments 2)​ +- Adjust for changes in classifications that are not related to the operating activities 3)​ Adjust for changes in non-cash assets and liabilities related to operating activities (deduct increase in assets, add increase in liabilities) = cash flow from operating activities assets (in reverse) assets (in reverse) assets (in reverse) libilities liabilities Performance management CHAPTER 9 - BUILDING A BALANCED SCORECARD NFI - non- financial indicators Internal perspective- the way we run our processes; measures evaluating each one to understand the way we are performing Learning growth perspective- is there anything we need to improve? Where are our weaknesses? Where did we fail? Performance management Kaplan and Norton believe that it is important​ to observe the actual and future performance of a company not only by — the “traditional” economic-financial perspective but also by — The customer perspective​ — The processes perspective​ — The learning and growth perspective And it is also important to determine, for each perspective, the variables that are — expressive or — coherent with the strategic goals and the mission The fundamental idea of the Balanced Scorecard is to determine a series of variables and objective parameters (KPI - Financial and No Financial) in the four balanced perspectives which can: — Translate strategy into action​ — Capture the intangible dimensions of daily operations​ — Consent a wide range of control in company performance Where in every perspective it is necessary to ask: Intangible assets are the building blocks for the learning and innovation what are the economic variables on which the results depend? what are the variables on which client satisfaction and loyalty depend? what are the processes in the company on which client satisfaction depends? what is learned from this expereince? Performance management FInancial perspective objectives and measures Performance management ESG and materiality map are useful to identify material sustainability issues across different industries While ESG information alone will not answer these questions, it can be meaningfully accretive to fundamental financial and investment analysis. How a company manages the environmental (E) and social (S) aspects of its business – those that are relevant to performance and value creation – is a signal of how well the company is run and its long-term financial sustainability. Corporate governance (G) – including board composition and its role in shaping and overseeing strategy – is another signal of the quality of leadership and management. definitions that go around the concept of sustainable investing (SI): — responsible investing. It develops an ethical perspective on the basis of the UN six principles on responsible investing. ESG framework plays a pivotal role in investment decision Performance management — impact investing. It wishes to generate a positive impact on the society, accepting a higher risk or a lower return from the investment (sub-optimal risk-return combination). project phases and the realization: 1. Defining and review of the company mission 2. Defining objectives and strategic intent 3. To determine through the “STRATEGIC MAP” the variables and critical process 4. To choose parameters (indicators) for each variable/process with reference to the time chosen 5. To fix targets 6. To define actions to obtain fixed targets The Balanced Scorecard is an instrument of the Management System which presents some of the following characteristics ​ The BSC model proposes a system of measuring companies divided into four interrelated perspectives (financial, customer / market, internal processes, learning and growth); ​ it is a multidimensional system of measurement, which presents monetary, non monetary (KPI), and combined measurement systems; ​ it is a system of integrated measurement and balanced in a way that explains the relationships of cause and effect between the diverse strategic variables, which are the object of planning and control ​ it is an instrument that facilitates the alignment of employees towards strategic goals and the mission of the company Performance management ​ it is an instrument that focalizes the attention of management on strategic variables necessary for the success of the company in business ​ It is an instrument that focalizes the attention of management also on the intangible resources and on aspects of intellectual capital fundamental in the value creation in the fashion industry. The link between the balanced scorecard and the master budget BOSTON LYRIC OPERA (BLO) case study The mission statement communicates 3 major goals: 1.​ Produce high quality professional opera productions 2.​ Developing future opera talent 3.​ Promoting opera appreciation through educational and community outreach Individual support remained the largest source of funding for the arts in the US Measures for the customer objectives Performance management Challenges (1993-2000): ​ Financial pressures due to rising operating costs and reduced unrestricted corporate donations. ​ Transitioned to the larger Shubert Theater in 1998, increasing capacity and improving amenities but intensifying the need for sustainable funding. ​ Ticket sales covered less than 40% of operating expenses, necessitating a focus on converting subscribers to donors and attracting more significant funding. Strategic Response: 1.​ 1993 Mission Statement Goals: ○​ Produce high-quality opera productions. ○​ Develop future opera talent. ○​ Promote opera appreciation through education and outreach. 2.​ 1999 Mission Update: ○​ Build a knowledgeable, supportive opera community. ○​ Develop future professionals, audiences, and leaders. 3.​ Adoption of the Balanced Scorecard (BSC): ○​ Introduced in 2000 to align strategy, set objectives, and measure performance. ○​ Focus on three strategic themes and eight customer objectives, including donor loyalty, artistic reputation, and community engagement. Benefits of the BSC: ​ Enhanced transparency of goals and better management of trade-offs. ​ Clear focus on resource allocation and alignment with strategic themes. ​ Empowered staff and departments by clarifying how they contribute to organizational success. Performance management Challenges in Implementing the BSC: ​ Resource-intensive, requiring focus groups, surveys, and significant time investment. ​ Resistance from board members who felt arts organizations should not be managed "by the numbers." ​ Need for active communication and leadership to explain and implement the system effectively. The nature of control and different uses of information Strategy -> Organization -> Measures To implement the strategy, companies are organized in a certain way The logical path for choosing measures: 1)​ Classification of measures 2)​ Selection of measures 3)​ The use of measures The coherence of the measures with the system of responsibilities The object of measurement = the PROCESS Input -> transformation -> output (IPO model) The resources used by the process (info, material, energy) - input Performance management How to convert the resources used into valuable outputs - transformation The result deriving from the processing activity, legible in terms of products and services (internal or external) - output What do I measure? Adequacy, efficiency, effectiveness A “benchmark” against which to compare the performance actually achieved (standard) A “feedback” mechanism through which variances can be communicated and a learning circuit activated (1)​Technical feasibility of monitoring and measurement THEORETICAL DETECTABILITY OF THE MEASUREMENT (E.G. OBSERVABILITY OF THE TRANSFORMATION PROCESS AND ITS REPEATABILITY), AVAILABILITY OF THE UNDERLYING DATA OR, ALTERNATIVELY, POSSIBILITY OF COLLECTING THE SAME DATA (2)​Understanding of cause and effect ABILITY TO CLEARLY IDENTIFY THE RELATIONSHIP BETWEEN RESULT DETERMINANTS (INPUT AND TRANSFORMATION) AND FINAL RESULTS (OUTPUT) (3)​Costs (and benefit) THE EXISTENCE OF A POSITIVE RELATIONSHIP BETWEEN THE COSTS NECESSARY TO OBTAIN A MEASURE AND THE 'OPPORTUNITY COST' ASSOCIATED WITH THE ABSENCE OF THAT MEASURE (LOSS OF BENEFITS OR RISK OF HARM) (4)​Desired level of innovation THE WILLINGNESS/NEED TO LEAVE "FREEDOM OF ACTION" WITHOUT LOSING CONTROL OF THE PROCESS (MONITORING OF RESULTS VERSUS MONITORING OF BEHAVIORS) (5)​External communication Use of measures as a form of dialogue with the various company stakeholders (expectation management) Performance management Control inputs when: ​ It is impossible to monitor process or output ​ Cost of input is high relative to the value of output (eg precious metals in computer chips) ​ Quality and/or safety are important Control processes when: ​ Cost of measuring is low ​ Standardization is critical for safety and quality ​ Cause and effect relationship is understood ​ Proprietary process enhancement can result in strategic advancement Control outputs when: ​ Outputs can be observed and measured ​ Cost of measuring is low ​ Cause and effect relationship is understood ​ Freedom to innovate is desired Consistency with the strategy: effectiveness, efficiency, innovation Consistency with the organization: span of responsibility We need instruments to evaluate the contribution of each manager Management information can be used for a variety of purposes: 1.​ Decision-making - Info for planning and coordinating Performance management 2.​ Control - to ensure that inputs, processes, and outputs are aligned with organizational goals 3.​ Signaling - a "signal" sent within the organization regarding values, preferences, expectations 4.​ Education and learning - as a mechanism for understanding business outcomes and the underlying business model 5.​ External communication - to providers and potential providers of capital, goods and services, potential customers Managers must pay attention to conflicting uses of information Culture is the tacit social order of an organization: it shapes attitudes and behaviors in wide- ranging and durable ways. Cultural norms define what is encouraged, discouraged, accepted, or rejected within a group. When properly aligned with personal values, drivers, and needs, culture can unleash tremendous amounts of energy toward a shared purpose and foster an organization’s capacity to thrive. The four accepted attributes of corporate culture: ​ Shared - culture is a group phenomenon ​ Pervasive - some aspects of culture are unseen, such as mindsets, motivation, unspoken assumptions ​ Enduring - culture can direct thoughts and actions in a group ​ Implicit - people are effectively hardwired to recognise and respond to culture instinctively Performance management ​ — When aligned with strategy and leadership, a strong culture drives positive organizational outcomes ​ — Selecting or developing leaders for the future requires a forward-looking strategy and culture ​ — In a merger, designing a new culture based on complementary strengths can speed up integration and create more value over time ​ — In a dynamic, uncertain environment, in which organizations must be more agile, learning gains importance LAVAMATIC CASE Company Strategy and Operations ​ Strategy: Cost leadership with low innovation rates, narrow product portfolio, and manufacturing efficiency. Key focus on offering competitive pricing. ​ Product Lines: Standard, Plus, Lux washing machines, and Washer-driers. ​ Sales Channels: Sold through independent multi-brand retailers. Performance Metrics and Insights ​ Overall Financial Performance: ○​ Revenue: €14,395k (3% below budget). Performance management ○​ Gross Margin: 41.7% (close to the budgeted 42.1%). ○​ Operating Income: €1,427k (26% below budgeted €1,920k). ​ Cost Issues: ○​ Increased selling and administrative costs (e.g., fixed costs up by 47%, uncollectible accounts up by 57%). ○​ Lower advertising expenditure (-38%) impacts sales visibility. ​ Product Performance: ○​ Units sold fell short of targets for the Plus and Lux models. ○​ Washer-driers exceeded budget in sales and maintained competitive gross margins. Area Performance and Managerial Issues ​ Geographical Divisions: ○​ South-Islands (S-I): Best operating income margin (13.9%) with low input resources but high efficiency. ○​ Center: Weakest results (6.7% margin) despite higher resource input, attributed to higher competition and less effective resource allocation. ○​ North-East and North-West: Middle-performing regions, resource allocation slightly misaligned with contribution to overall results. ​ Sales and Area Managers: ○​ The sales department overall did not meet efficiency expectations. ○​ Geographic variations in resource use and outcomes suggest inefficiencies in resource allocation and potential training gaps. Recommendations for Resource Allocation and Target Setting ​ Input Measures for Resource Allocation: ○​ Align resource allocation with market potential and historical efficiency data (e.g., visits/orders, customers per salesman). ​ Output Measures for Target Setting: ○​ Use historical revenue and margin performance as baselines for area-specific targets. ○​ Focus on ROI for advertising and other controllable expenditures. Learning and Process Measures ​ Efficiency: ○​ Visits per salesman and orders per visit metrics indicate variability in efficiency across areas. ​ Effectiveness: ○​ Target measures should include sales conversion rates and customer retention metrics. Performance management CASE SOLUTION 1. Performance Evaluation ​ Sales Manager: While total revenues were close to the target, the inability to meet the profit margin was attributed to inefficiencies in cost management rather than sales volume issues. Improvements in advertising and better control of selling costs are recommended. ​ Area Managers: Variability in performance across regions highlighted issues with both resource allocation and competitive pressures. Each area should be evaluated based on input, process, and output measures to ensure fairness and effectiveness. 2. Resource Allocation ​ Input Measures: ○​ Allocate resources based on the market potential and historical performance of each area. ○​ Regions like the Center should receive support to address their unique challenges, such as higher competition. ○​ The South-Islands (S-I), performing well with fewer resources, could benefit from additional investment to maximize returns further. ​ Adjustments: ○​ Reduce resources in underperforming areas only after addressing potential inefficiencies. ○​ Increase training or improve processes in the Center to handle competitive pressures better. 3. Target Setting ​ Output Measures: ○​ Set targets based on historical performance and market-specific potential. ○​ Include both financial (e.g., revenue, operating margin) and non-financial metrics (e.g., sales visits, customer conversion rates). ○​ Tailor targets to reflect regional challenges and opportunities. ​ Center Division: ○​ Recognize higher competition in this area and set more realistic targets for profit margins and resource efficiency. ○​ Evaluate potential to enhance effectiveness (e.g., visits leading to higher conversion rates). Performance management 4. Learning and Continuous Improvement ​ Process Measures: ○​ Track efficiency (e.g., visits per order, orders per salesman) and effectiveness (e.g., revenue per order). ○​ Invest in training programs for sales staff to address inefficiencies identified in underperforming regions. ​ Knowledge Sharing: ○​ Share successful strategies from high-performing regions (like S-I) with other areas. ○​ Use cross-functional collaboration to optimize resource use and address systemic inefficiencies. 5. Broader Structural Changes ​ Consider revising the allocation of indirect costs, as area managers argued that some allocations were unfair and did not reflect controllable factors. ​ Explore realigning administrative functions (e.g., credit and orders management) to better support the sales department. Summary of Proposed Actions ​ Short Term: Adjust resource allocation and targets using a mix of input, output, and process measures. Prioritize quick wins in high-potential areas like S-I while improving efficiency in underperforming areas like the Center. ​ Long Term: Implement structural and training improvements, re-evaluate cost allocation methods, and develop tailored competitive strategies for each region. Sessions 16-17 The link between PMS and Org Design - chapter 4 Work unit - org unit that groups individuals who utilize the firm’s resources and are accountable for the performance (basic building block) Accountability - the outputs that an org is expected to produce, the performance standards Performance management Org chart is a picture, a diagram of accountability can be of 2 types: 1.​ Groups of people and resources engaged in work(functions) 2.​ Groups focused on a specific market (divisions and business units) Units clustered by product, by customer (market needs of each segment) and by geography (regional business) Any firm when taken as a whole is a market focused entity Vs. at the lowest org level all activity is grouped by function to allow specialization For intermediate level, when do managers choose to group people and resources based on work process or market focus Work process: benefit of specialization, economies of scale and scope eg cluster units by function Market focus: benefit from increased responsiveness to customers and competitors (promptness in understanding the market shift, demand, opportunities and threats) eg we cluster units by market focus Span of Control - how many and which subordinates and functions report to each manager. It outlines the reporting relationships eg who is accountable to whom but does not tell us what they are accountable for Span of accountability - describes the range of PM used to evaluate a manager’s achievements. The most common ones are cost center, profit center and investment center accountability Performance management ​ Some managers may be held accountable for revenues only, costs only, EBIT or ROA Cost Center Accountability: managers are accountable only for their unit’s level of spending. Profit Center Accountability: managers are accountable for revenues, costs, income (EBIT, EBT, Net Income), return on investment (R.O.C.E., R.O.N.A, …) Span of Attention - the domain of activities that are within a manager’s field of view and defines what an individual will attempt to gather info on and influence Business Units / Legal Entities Books + Staff Newspapers + Staff Magazines + Staff Partworks / Collectibles + Staff Direct Marketing + Subscriptions + Staff Advertising + Staff Film (box office) + Staff Home entertainment + Staff (Operations) Corporate Staff ​ Finance ​ Corporate HR ​ Corporate ICT ​ Marketing ​ Operations Centralized Org = designed so that managers have a narrow span of attention; units are typically grouped by function specialty; unit managers are accountable for narrow subsets of income statement (generally cost center); fiscal optimization Decentralized Org = designed so that managers have wide span of attention; essential when business strategy demands quick and agile responsiveness to customers and markets; units are market-based Deadpool vs Wolverine - Marvel case study Box office = 1.3 billion -> 47% from North America (domestic) US + Canada 53% WW: UK, France, Australia, Mexico, China, Brazil, Germany, Spain Producer -> Distributor -> Theater Income statement: Performance management The focus is solely on money Employees were demotivated and unhappy: 275 employees were fired 1996 Marvel filed for bankruptcy -> post bankruptcy strategy (1997-2004) The ERRC grid: Session 17 The Profit Plan is a principal managerial tool ​ Price the business and operating plans ​ Make trade-off between different courses of action ​ Set performance and accountability goals Performance management ​ Evaluate the extent to which business performance is likely to meet the expectations of different constituencies Profit plan and budget are often interchangeable! But the profit plan is reserved for units that generate profits (eg stand alone units that generate and are held responsible for both revenues and expenses) Profitability = set of assumptions about the future Feasibility = economic resources available and needed, cause-and-effect relationships and trade offs Accountability = definition of targets for performance evaluation of managers in accordance with the firm’s objectives + coordination In 95% of cases your business plan will fail because your revenues will not be aligned with revenue expectations Is your strategy optimal to obtain a business objective? — Has it been clearly outlined and defined in terms of words and/or practice? — Does it fully capitalize on the company’s available environmental opportunities? — Is it consistent in terms of current and projected company resources and skills? — Is it consistent with the company’s major internal requirements and policies? — Does it align with the personal aspirations and values of senior management? — Is it appropriately contributing to society at the company’s desired standards? — Does it clearly serve as an impetus for organizational commitment and efforts? — Can any early indications of responsiveness by market and segments be noted? Functions: 1.​ Internal ​ To improve strategic management processes ​ Learning ​ Risk reduction ​ Org integration 2.​ External ​ Ask for resources ​ Law compliance ​ Start-up or restructuring approvals (surveillance authority, analysts consequences) Performance management The design of the Business Plan helps strategic management in: — Encouraging a deep reflection about the future — Giving the interfunctionality, improves the quality of competitive strategies — Facilitating the development of partnership and joint ventures — Involving the top management in strategic analysis and decisions (approvals, participation, resource planning, strategic control) The need to prepare a strategic plan is very intense in some phases of the company life-cycle: — Business Start-up — Diversification of Internationalization processes (entering in new industries, markets, geographic areas, etc.) — Gathering financial resources, both loans and equity increase — Extraordinary Company financial deals (mergers & acquisitions, business division split, etc.) — Company crisis — Strategic or organizational turnoround — Development of a new Business Area The arrangement of a business plan requires a pool of cross-functional and miscellaneous competences. In particular it is relevant the role of: — Strategy (analysis, diagnosis and strategic vision) — Marketing — Operations — Organization and HR management — Management Control Systems — Corporate Finance — Communication — Legal and taxation 1.​ Executive Summary ​ Strategic Project Proposal ​ The action plan ​ Expected results ​ The management team 2.​ The Strategy ​ Competitive Strategy ​ Group performances ​ Competitive Strategy ​ Business Unit performances Performance management 3.​ Reasons and opportunities for a new Strategy ​ Internal reasons for pitfalls of the actual strategy ​ External reasons environmental threats and opportunities 4.​ The strategic project proposal ​ Mission ​ Portfolio strategy ​ Competitive strategy per Business Unit ​ Expected Results ​ Financial resources needed for the project 5.​ The Action Plan ​ Strategic structure projects ​ Productivity improvement projects ​ Sales development projects ​ Project milestones: a synthesis 6.​ Financial plan ​ Link between strategy and economic results ​ Main financial assumptions ​ Business plan results forecast ​ Financial appraisal and finance feasibility ​ Sensitivity analysis ​ Risk analysis Three wheels of profit planning: Profit wheel = the amount of expected sales over a period + (2) the amount of operating expenses + (3) investment in assets = (4) expected level of profits Performance management Cash Wheel = (5) accounts receivable + inventories (6) + operating cash flow (7) Business plan Budget Change management tool Continuity management tool Objective : optimization Objective : rationalization Comparative approach Incremental approach Perspective : medium term Perspective : short term Strategic business units Single org unit Competitiveness Controlability Effectiveness in resource dimensioning Efficiency in resource usage Does the org strategy create economic value? 1.​ Estimate the level of sales 2.​ Forecast operating expenses 3.​ Calculate expected profit 4.​ Price the investment in new assets 5.​ Close the profit wheel and test key assumptions Does the org have enough cash to fund the strategy and remain solvent? 1.​ Estimate net cash flows from operations 2.​ Estimate cash needed to fund growth in operating assets 3.​ Price the acquisition and divestiture of long term assets 4.​ Estimate financing needs and interest payments Does the organization create enough value to attract the financial resources it needs to fund long-term investments? Step 1: Calculate overall Return on Equity Step 2: Estimate Asset Utilization Step 3: Compare Projected ROE with Industry Benchmark and investor expectations Luxury Hotel Podgoritsa The ACME case focuses on reconstructing the oldest hotel in Podgorica, Montenegro, into a five-star luxury hotel under a franchising contract with a globally recognized hotel chain. The project represents a significant investment aimed at leveraging Montenegro's growing tourism industry and Podgorica's development into a metropolis. Competitive Analysis: ​ Main competitors: Hotel Ziya, Hotel Hemera, and Best Western Podgorica. ​ Differentiation: Affiliation with a luxury brand, superior service quality, and facilities. Performance management Performance Measurement Considerations: 1.​ Balanced Scorecard Perspectives: ○​ Financial: Focus on IRR, NPV, and revenue diversification to ensure long-term profitability. ○​ Customer: Deliver exceptional service and leverage the luxury brand to attract high-value clientele. ○​ Internal Processes: Efficient project management to avoid cost overruns and delays. ○​ Learning and Growth: Training programs to maintain service standards aligned with luxury brand expectations. 2.​ Key Performance Indicators (KPIs): ○​ Occupancy rates and Average Daily Rate (ADR). ○​ Revenue per Available Room (RevPAR). ○​ Return on Investment (ROI) and payback period. ○​ Customer satisfaction and brand loyalty metrics. 3.​ Risk Management: ○​ Monitor economic and political conditions in Montenegro. ○​ Manage debt repayment obligations and maintain financial flexibility. ○​ Address seasonality in tourism demand with diversified revenue streams (e.g., spa, events). Accomodation revenue expected = 4, 321 F&B = 2,160 Spa = 324 Other = 297 Renting = 880 Casino = 312 COGS rooms = 777 (18%) COGS F&B = 1253 (58%) COGS casino = 160 Spa COGS = 200 Other COGS = 148 Renting COGS = 100 (maintenance reason) Gross Margin = $5655029 Franchising Program = 4% accom revenues (4321600*0.04) = 172864 Franchising Royalties = 2.5% of the overall GM = 141376 Energy Cost = 3% of total revenues = 248871 Insurance = 1% total revenue = 82957 G&A expenses = 7% total revenues = 580698 Marketing cost = 4% of total revenues = 331828 Performance management Maintenance = ( you pay more at the end of the life cycle; refurbishments every 8-10 years) = 0.25% of the total investment of 32000000 = starting from year 5 increases by 1% per year = 80000 Depreciation = varies, usually 32-33 years, 3% per year of total investment = 960000 Negative Interest = 2% on the bank loan = 400000 (year 1) Taxes = 9% * EBT = 239079 EBIT + Depreciation - Taxes = FCF Beginning Invest =32000000 - (accumulated depreciation ) 9600000 = 22400000 Net Book Value = 22400000 WACC = 8% NPV = 9489892 IRR = 12.6% The occupancy rate would influence the revenues the most, therefore influencing COGS (could be a theory question in the exam) ! OREGON film commission CASE - how to prepare a budget for a movie? ATL - above the line Costs: Creative aspects like producer/director fees and cast salaries. ​ Initial budget: $14,011. ​ Adjusted budget: $12,716 (fees waived until production recoups costs). BTL - below the line - Pre-production, production, post-production BTL Production: Principal photography costs, including crew salaries, equipment rentals, and locations. ​ Initial budget: $135,394. ​ Adjusted budget: $125,477 (shortened shooting schedule). BTL Post Production: Editing, sound, music, and distribution readiness. Performance management ​ Initial allocation: $88,000. ​ Adjusted budget: ~$59,806. BTL Other: Insurance and general expenses (e.g., legal fees). ​ Fixed at $19,000. Total Budget: Initial: $217,900 Vs Revised: $218,000 (after adjustments for compliance with i-OPIF rules). Context: ​ Project: Larry Wildman, founder of Oregon Trail Productions, plans to produce his first feature film, Fear on Mount Hood, a thriller with a micro-budget of $218,000. ​ Incentive Program: The project aims to qualify for the Indigenous Oregon Production Investment Fund (i-OPIF), which offers: ○​ 20% rebate on goods and services. ○​ 10% rebate on labor-related expenses. ​ Challenge: The initial budget does not comply with i-OPIF rules, particularly for labor wages, overtime, taxes, and insurance coverage. Larry must revise the budget to qualify for incentives while ensuring the film’s completion and distribution readiness. Key Challenges: 1.​ Labor Costs: ○​ Minimum wage: $8.40/hour. ○​ Overtime: 1.5x minimum wage for 2 hours/day. ○​ Additional taxes: 18% for social security and 0.5% payroll taxes. 2.​ Insurance Requirements: ○​ $12,000 for production insurance, mandatory for i-OPIF eligibility. 3.​ Postproduction Deficit: ○​ Original allocation ($88,000) reduced due to labor and compliance costs. ○​ Revised allocation: ~$76,000 (including i-OPIF incentives). ○​ Remaining shortfall: $12,000. Solutions: 1.​ Compliance with i-OPIF Rules: ○​ Reallocate resources to meet labor, tax, and insurance requirements. ○​ Prioritize mandatory costs (e.g., insurance) to secure rebates. 2.​ Optimize Shooting Schedule: ○​ Hire additional crew (e.g., a second assistant director) to shorten the principal photography phase from 20 to 18 days. Performance management ○​ Reduces labor and equipment rental costs, freeing up funds for postproduction. 3.​ Leverage Incentives: ○​ Total rebates: $25,689.2 ($5,549.2 for labor and $20,140 for goods/services). ○​ Reinvest rebates into postproduction, marketing, and festival participation. 4.​ Postproduction Focus: ○​ Prioritize essential activities: editing, sound design, and digital intermediate. ○​ Allocate funds for publicity (e.g., social media campaigns) and festival participation to attract distributors. TIGER AIRWAYS CASE Overview of Tiger Airways ​ Tiger Airways, a Singapore-based low-cost carrier, faced multiple crises between 2010 and 2012, including financial losses, safety issues, and reputational damage. ​ Notable setbacks included pilot strikes, the grounding of Tiger Airways Australia by regulators, and a significant downturn in profitability. ​ By 2012, Tiger Airways was transitioning from an IPO-driven growth phase to a turnaround phase under the leadership of CEO Koay P.Y. Performance Challenges and Strategic Priorities 1.​ Immediate Business Priorities: ○​ Improve safety and risk management systems to restore customer and regulatory confidence. ○​ Address financial challenges, including high fixed costs and excess capacity. ○​ Stabilize operations and rebuild the brand's reputation. 2.​ Long-Term Strategic Goals: ○​ Develop a sustainable business model that balances short-term crisis management with long-term growth. ○​ Align employee incentives with corporate objectives to foster accountability and performance Key Performance Indicators (KPIs) ​ Financial Metrics: ○​ Revenue growth and profitability turnaround (e.g., reversing the US$80M loss in 2012). Performance management ○​ Cost control: Managing fixed and variable expenses, especially in light of overcapacity in Singapore operations. ​ Operational Metrics: ○​ Safety compliance: Regain regulatory approval for grounded operations in Australia. ○​ Fleet utilization and cost efficiency to address overcapacity. ​ Employee Performance Metrics: ○​ Employee engagement and retention: Attract and retain skilled, adaptable talent capable of thriving in a turnaround environment. ○​ Management accountability: KPIs linked to safety, customer satisfaction, and financial performance. Compensation as a Performance Tool 1.​ Challenges: ○​ Post-IPO executive departures left leadership gaps and impacted morale. ○​ Existing compensation schemes, designed for IPO success, were misaligned with the ongoing operational needs. ○​ Negative publicity from regulatory issues hindered talent acquisition. 2.​ Compensation Scheme Elements: ○​ Fixed Pay (Base Salary): Benchmarked to market rates to attract talent. ○​ Short-Term Incentives: ​ Linked to immediate crisis management goals, such as improving safety and restoring customer confidence. ○​ Long-Term Incentives: ​ Designed to align executives with turnaround objectives, such as achieving profitability and sustainable growth. ○​ Benefits: Adjusted based on employee level, with long-term incentives prioritized for senior leadership. Turnaround and Performance Alignment ​ Compensation was structured to incentivize behaviors critical for recovery: ○​ Crisis resolution for immediate challenges (e.g., safety compliance, financial stability). ○​ Strategic planning for long-term growth, emphasizing customer trust and regulatory confidence. ​ Leadership KPIs were tied to safety, operational efficiency, and profitability to ensure alignment with company goals Lessons for Performance Management Performance management 1.​ Adaptation to Business Stage: ○​ Pre-IPO focus on growth and market entry shifted to post-IPO emphasis on operational stability and risk management. 2.​ Role of Incentives: ○​ Align compensation with key performance metrics to motivate employees at all levels. ○​ Balance short-term and long-term goals to address both immediate and future challenges. 3.​ Building Organizational Resilience: ○​ Foster a culture of accountability through governance reforms and aligned incentives. ○​ Hire and retain agile, adaptable talent capable of navigating crises. ZAGO MILANO GUEST SPEAKER Asia has the largest Beauty & Personal Care market in 2023, with a revenue of US$ 245.3 billion The United States has the largest Beauty & Personal Care market in 2023 with a revenue of 97.8 billion On average 20% of responders engage with Beauty & Personal Care online For most customers, quality is the most crucial factor when choosing skincare products Market trends 1.​ Wellness 2.​ Gen z influence 3.​ Fresh approach to omnichannel (personalization meets adv technologies) Founded in Milan in 2017 by Gianluca Ottolina and Andrea Zorloni, Zago Milano is the first indie brand entirely Italian and made in Italy that in addition to proposing a skincare line divided by type of skin, offers a whole line of undermakeup products dedicated to stem the gap between make-up and skin-care. Our mission is to make a difference in the world of skincare with undermakeup and be the perfect partner to face every situation with confidence. KPIs: Monthly sales and variations CRM -> lead & review Coorte -> Time life value Acquisition cost Performance management Growth awareness THE DEFINITION OF A NEW MBO SYSTEM TO SUPPORT A PROFITABILITY MODEL FOR ELECTA PUBLISHING HOUSE Case Study Founded in Florence (Italy) in 1945 Is part of the Mondadori Group's Book Area 41.7 million revenues in 2019 (before Covid-19 data) Is the largest Italian Publishing House in the field of figurative culture thanks to its innovative publishing models, extent of catalog, variety of series, quality of publications and activities related to the museum sector Is a multibusiness and multichannel reality in continuous expansion in the fields of: fashion, art, photography and design publishing - acquisition of "Rizzoli Italia illustrati" and "Rizzoli International Publications" in 2016 Italian art history and literature- acquisition of “Abscondita” in 2020 MAIN AREAS OF ACTIVITY Publishing: more than 1,500 illustrated titles and more than 500,000 images in the iconographic archive Exhibitions: more than 20 years of exhibitions production, in collaboration with leading Italian and international cultural institutions Bookshops and merchandising: management of bookshops and production of merchandising in the country's main exhibition venues and archaeological areas Communications: development of marketing campaigns for exhibition projects, museum, publishing and events Sponsorships, events and special projects: services to companies, private institutions and individuals such as communication projects, organization of events, exclusive visits to exhibitions or permanent collections, etc. Content and challenges INTERNAL CHALLENGES Performance management Complex organizational structure Expansions into new businesses and activities: Quadrifolio projects, festivals, educational activities, cultural events, conferences Archaeology Office in Rome always dedicated to activities for the Colosseum Lack of communication and collaboration between Offices New Business Leaders with different visions RELATIONAL AND REGULATORY CHANGES The complexity of the concession relationships that Electa was managing, including the end of the 20-year concession with the Colosseo in Rome ENVIRONMENTAL CHANGES The Covid-19 pandemic that broke out in March 2020 that caused the closure of museums and related activities The acceleration of many market trends such as sustainability and digital innovation, which pushed companies to align and redefine their offerings External Challenges: ​ Impact of the COVID-19 pandemic, leading to museum closures and reduced demand. ​ Acceleration of market trends such as digitalization and sustainability. Goals of Organizational Analysis ​ Profitability: ○​ Enhance value creation and improve financial performance. ○​ Align individual and team incentives with strategic priorities. ​ Collaboration and Culture: ○​ Foster a culture of flexibility, trust, and communication across departments. ○​ Create synergies within a matrix model that integrates product and service offerings across core business areas. Proposed "To Be" Incentive System 1.​ Structure and Alignment: ○​ Variable compensation linked to both individual and organizational performance. ○​ Core offices such as Publishing, Bookshops, and Exhibitions have distinct KPIs tied to Electa’s strategic objectives. 2.​ Key Features: ○​ Minimum 30% of total compensation is variable, with an annual and long-term component. ○​ Bonuses are tied to company-wide access gates (e.g., EBITDA and ordinary cash flow thresholds). ​ 85% target met: 40% bonus paid. Performance management ​ 100% target met: 100% bonus paid. ​ 110% target exceeded: 120% bonus paid. 3.​ KPI Categories: ○​ Company-Level KPIs: ​ EBITDA (50%), revenues (20%), and cash flow (30%). ○​ Department-Level KPIs (e.g., Exhibitions Office): ​ EBITDA (15%), matrix revenues (25%), matrix EBITDA (30%), and specific metrics like visitor numbers or sustainability-related projects. Performance Measurement Improvements 1.​ Matrix KPIs: ○​ Encourage cross-departmental collaboration by linking revenue contributions to multiple business units. ○​ Example: The Farnese Exhibition matrix KPI distributed revenues across publishing, bookshops, and exhibitions to align goals. 2.​ Role Clarity: ○​ Clearly defined targets for leaders in core areas to improve accountability and focus on profitability. ○​ Strategic development office responsible for fostering innovation and partnerships. 3.​ Support in Change Management: ○​ Incentives designed to guide employees through organizational changes, focusing on motivation and adaptability. ○​ Operational guidance and training for new activities to ensure smooth transitions. Key Takeaways for Performance Measurement 1.​ Integrated Incentives: ○​ Aligning personal and team performance metrics with overarching business goals ensures organizational alignment. 2.​ Matrix Model Efficiency: ○​ Utilizing cross-functional KPIs promotes collaboration and maximizes resource utilization. 3.​ Sustainability and Digital Priorities: ○​ KPIs include contributions to sustainability, diversity, and digital innovation, reflecting modern business imperatives. Performance management PM in the Media Industry - session 23 The TV ®Evolution Content is king but channel is the castle Overview of Fox Channels Italy ​ Launched as part of the global Fox International Channels (FIC) portfolio, Fox Italy aimed to become a leader in the Pay-TV segment by offering premium entertainment content. ​ Initial distribution agreement with SKY Italia for 4 channels, with goals to expand into additional channels and multimedia platforms. ​ Business model focused on: ○​ Licensing/producing high-quality content. ○​ Building channel branding to resonate with viewers. ○​ Expanding revenue streams through advertising and subscriber fees. Performance Measurement Aspects 1.​ Key Performance Indicators (KPIs): ○​ Financial KPIs: EBITDA and EBITDA margin: Profitability was a critical measure, with Year 7 targets of >35% margin. Year-on-Year (YoY) growth in revenues and profitability. Cash flow conversion: EBITDA as a percentage of cash flow. ○​ Revenue KPIs: ARPU (Average Revenue Per User) from subscriber fees. Advertising revenue as a percentage of total revenue. Share of platform audience and grid. ○​ Cost KPIs: Cost per fresh programming hour. Marketing expenses as a percentage of total costs. Operational efficiency in programming and channel maintenance. 2.​ Operational Measurement: Performance management ○​ Monthly "flash" reporting for profit and loss (P&L) tracking. ○​ Quarterly board reviews of key financial and operational data. ○​ Yearly evaluations for rolling 3-year budgets and forecasting. 3.​ Benchmarking Against Competitors: ○​ Share of audience and advertising revenue compared with SKY Italia and other Pay-TV channels. ○​ Performance of programming (e.g., fresh content hours, cost per hour). Evolution of Pay-TV and OTT KPIs ​ Traditional Pay-TV KPIs: ○​ Subscriber count (#Subs). ○​ Audience share as a percentage of total viewership. ○​ Average Revenue Per User (ARPU). ○​ Customer churn rate: Key metric for retention. ​ OTT Transition: ○​ Shift to measuring on-demand engagement. ○​ Focus on subscription revenue and retention (e.g., Disney+, Netflix). ○​ Enhanced focus on branded content and targeted digital marketing. Lessons for Performance Management ​ Channel Branding and Marketing: ○​ Branding KPIs (e.g., share of grid, audience loyalty) are crucial for establishing competitive positioning. ○​ Effective promotional strategies contribute to both revenue growth and audience retention. ​ Strategic Planning: ○​ Long-term planning (5–7 years) ensures alignment of programming investment with market trends. ○​ Quarterly reforecasting provides agility in adapting to changing market conditions. Key Takeaways 1.​ Performance measurement must integrate financial, operational, and strategic metrics to balance profitability with audience engagement. 2.​ A strong focus on content quality and marketing ensures differentiation in a competitive media landscape. Performance management 3.​ Metrics such as EBITDA margin, ARPU, and churn (recovered or re-engaged customers) are central to evaluating the success of Pay-TV and OTT strategies. EXAM 6 questions or exercises (for attending students question 6 A) Exam covers content, slides, cases, guest speakers Example question: which is the most relevant variable to take into consideration according to a specific case Chapter 11 - Session 04/12 A goal is a formal aspiration that defines purpose or expected levels of achievement. -> the ends that managers wish to achieve and the means by which to achieve them. OBJECTIVES and TARGETS Are more specific. They incorporate measurement standards and time frames against which to gauge progress and success. ​ Goals signal the preferences of top managers, i.e. they indicate a set of strategic priorities ​ When goal achievement is linked to bonuses and promotions, they provide managers with motivational tools ​ Performance goals can be shared with stockholders and analysts to communicate the prospects of the business Two steps for determining critical performance variables for any business: 1.​ Identify potentially important performance drivers, i.e. variables that either influence the probability of strategy success (effectiveness criterion) and/ or provide the largest potential for marginal gain over time (efficiency criterion) 2.​ Identify the critical performance variables (any performance variable that could cause the strategy to fail) from among this list of performance drivers TEST 1 Alignment with strategy A measure is a good one, if the person accountable for it can infer the goals that managers want him to focus on and, ultimately, the intended business strategy TEST 2 Their nature Ideally, measures should be: objective: can be derived from clear formulas and independently verified. complete: capture all the relevant attributes of the achievement. Performance management responsive: reflect actions that a manages can directly influence. TEST 3 The link to value Output measures (i.e. lagging indicators) give the highest confidence that economic value is being created. Input and process measures (i.e. leading indicators) are valid only if managers are confident that they understand the cause-and-effect Performance goals are useful for communicating strategy and motivation, but also for other purposes: ➔​ For planning and coordination, performance goals should be set at levels that represent management’s best judgment, most likely levels of output ➔​ For early warning of potential problems, as performance goals compared to actual results help identify pitfalls and problems ➔​ For ex post evaluation, as managers are judged on the extent to which they met, exceeded, or fell short their goals. The link between the behavior of executives and company performance: - Use multiple metrics – include a purely revenue-based target in the basket because that’s harder to fudge than a profit target. - Increase payouts at a constant rate, adjusting for risk - Reward performance relative to competitors – relative targets makes gaming far harder because the performance of competitors isn’t known until they release results - Include non financial targets – they provide leading indications about the long-term viability of an organization’s strategy The term “incentive” implies that individuals are paid more when performance exceeds some base or threshold. This means that higher performance generates higher pay, lower performance, lower pay. There are three major design decisions that must be made in designing contingent incentives: 1. The bonus pool 2. The allocation formula Performance management 3. The type and mix of incentives The bonus pool could be applied at the corporate level (gate (EBITDA or FCF) - minimum level of certain performance that needs to be reached to open the pool) or business unit level Allocation formula = performance % + behaviors % eg (60-40 or 70-30) The allocation formula The allocation is based on three categories of performances: - Individual performance (for example 10%) - Business performance (20%) - Corporate performance (50%) Decisions must be taken on the % weights of each category of performance. Range of options concerning the incentive types (all extrinsic in this case) What benefits would increase your loyalty? Performance management Intrinsic motivation factors: Interesting Work: At least part of your work should be of great interest. Involvement: enhances commitment and eases implementation of changes. Information: Employees crave knowledge about how they are doing Increased Visibility: For some workers, getting company visibility is highly rewarding. Independence: Provide assignments in a way that tells what needs to be done without dictating exactly how to do it. Case: Sustainability trends in luxury (Chanel Case) ​ Influence and visibility ​ Governance and compliance ​ Long-term brand value ​ Environmental impact generated ​ Heritage and craftsmanship What does Chanel's mission (1.5) mean for its future? 1.​ Chanel must monitor, measure and analyze its brand value 2.​ It is embarking on a plan of action and decarbonisation journey across the business and value chain 3.​ Sustainability is the only way to source, manufacture and transform 4.​ Chanel needs to integrate financial and non-financial performance 5.​ Chanel should operationalize and communicate its long-term corporate framework (5): climate, environment and biodiversity, human rights in the supply chain, circular economy and research and innovation Chanel’s impact on people and planet: Social Impact: ​ Migrant Workers ​ Gender Inequality (80% employees are women 18-35) ​ Textile production affects workers through hazardous substances ​ Local growers or replacing the weave with artificial materials and fabrics Environmental footprint: ​ Time-sensitive nature of fashion (eg fast fashion) ​ Overproduction ​ Creating a timeless product that is long-lasting ​ Materials used (avoid plastic, microfiber etc) ​ Natural resources (carbon, energy consumption) Performance management Strategy and implementation: Key sustainability initiatives: (2010-2021) 1.​ Sustainability-linked bond 2.​ Fragrance and beauty division engaged in a CSR program - top ranked in global luxury 3.​ Chinese boutique became the first to be certified as a green building 4.​ Supporting supplier base during the pandemic confirming longer orders and shorter payment plans 5.​ 50 mil spent on innovation and development funds Operational enablers of chanel’s sustainability effort: 1. Finance enablers: 2. Organizational enablers 3. Operational enablers SIMONS BOOK NOTES Chapter 1 Summary: Organizational Tensions to be Managed Introduction to Performance Measurement and Control Systems ​ Performance measurement and control systems are essential for guiding strategy and ensuring organizational goals are met, especially as businesses grow and become geographically dispersed. ​ These systems help managers address key tensions in organizational management, including balancing innovation with control, profitability with growth, and aligning goals across different stakeholders. Core Tensions in Organizations 1.​ Balancing Profit, Growth, and Control: ○​ Successful managers innovate to drive profitable growth but must also maintain control to avoid risky behaviors that could jeopardize the organization. ○​ An overemphasis on profit or growth without sufficient control can lead to operational vulnerabilities, as seen in historical business failures. Performance management 2.​ Balancing Short-Term Results with Long-Term Capabilities and Growth Opportunities: ○​ Managers must meet immediate financial targets while also investing in long-term capabilities, such as new markets, R&D, and infrastructure. ○​ Performance measurement systems support this by setting both short-term goals (e.g., annual profits) and long-term objectives (e.g., innovation and adaptability). 3.​ Balancing Performance Expectations of Different Constituencies: ○​ Organizations have various stakeholders, including shareholders, employees, customers, suppliers, and government agencies, each with different interests. ○​ Effective control systems help align these expectations to support business success without compromising stakeholder satisfaction. 4.​ Balancing Opportunities with Management Attention: ○​ With numerous opportunities (e.g., new markets or products), managers must allocate limited time and attention effectively. ○​ Performance measurement systems can help prioritize these opportunities, ensuring focus on areas that drive the highest Return on Management (ROM). 5.​ Balancing the Motives of Human Behavior: ○​ Managers use performance measurement systems to influence employee behaviors in alignment with organizational goals. ○​ Effective systems consider both intrinsic and extrinsic motivations, supporting employees’ desire to innovate, achieve, and contribute to a purposeful organization. Profit Planning and Performance Measurement Systems ​ Profit Planning Systems: Focus on predicting financial inflows and outflows to plan for resource allocation, assess revenue and costs, and set performance goals. ​ Performance Measurement Systems: These systems monitor strategic goals by comparing actual performance against targets, providing feedback to adjust strategy and optimize both short- and long-term outcomes. Conclusion ​ Performance measurement and control systems help balance organizational tensions, facilitating sustainable growth, effective resource management, and the achievement of strategic goals. By addressing these tensions, managers can unlock the full potential of their organizations and employees. Performance management Chapter 2 Summary: Basics for Successful Strategy Introduction to Strategy in Performance Measurement ​ Performance measurement and control systems are central to implementing strategy by formalizing business goals and monitoring progress. ​ Strategy operates at two levels: ○​ Corporate Strategy: Focuses on maximizing the value of resources and deciding in which markets to compete. ○​ Business Strategy: Focuses on competing within specific product markets by differentiating offerings. SWOT and Five Forces Analysis 1.​ SWOT Analysis: Helps identify a firm’s internal strengths and weaknesses relative to external opportunities and threats. This alignment enables effective strategic planning. 2.​ Five Forces Analysis: Aids in understanding market dynamics through five forces: ○​ Customers: Determines demand, price sensitivity, and potential for increased sales. ○​ Suppliers: Analyzes the critical suppliers and the importance of supply factors (e.g., quality, cost). ○​ Substitute Products: Assesses the threat of alternatives that could replace the company’s offerings. ○​ New Entrants: Considers barriers to entry and potential competitors. ○​ Competitive Rivalry: Evaluates industry growth, overcapacity, and customer switching costs. Firm Resources and Capabilities 1.​ Tangible Assets: Includes cash, productive assets, and inventory, which are typically recorded on the balance sheet. Performance management 2.​ Intangible Resources: Often unrecorded but crucial, like: ○​ Distinctive Capabilities: Core skills that provide a competitive advantage. ○​ Market Franchises: Brand reputation and customer loyalty. ○​ Relationships and Networks: Partnerships with suppliers and distributors that can affect competitive success. The 4 Ps of Strategy 1.​ Perspective: The organization’s mission, which sets the foundation for decision-making and establishes a sense of purpose beyond profit. 2.​ Position: Decisions on creating customer value and differentiating offerings in the marketplace. 3.​ Plan: Detailed goals and timelines that guide organizational activities, communicate strategy, and enable resource coordination. 4.​ Patterns of Action: Recognizing that some strategies emerge from on-the-ground experimentation and learning rather than formal planning. Implementing Strategy ​ Mission: Drives the strategic perspective by aligning organizational activities with overarching values and ideals. ​ Position and Differentiation: Determines how the business competes (e.g., on cost or by offering unique products) and aligns internal resources with this positioning. ​ Setting Goals and Measuring Success: Uses specific, actionable goals to monitor progress and adjust strategies. ​ Emergent Strategy: Recognizes that strategies can develop from innovative ideas at lower organizational levels. Effective performance measurement systems encourage this innovation and feedback to refine strategies. Conclusion ​ Effective strategy formulation and implementation require a blend of planned and emergent strategies, underpinned by a clear mission, focused goals, and responsive adaptation to new opportunities. Performance management Linking strategy with action Performance management Chapter 3 Summary: Organizing for Performance Introduction to Organizational Structure for Strategy Execution ​ Organizational structure is essential for aligning people and resources to a company's strategy. Effective structures facilitate work flows and focus attention on key areas. ​ Structuring allows managers to design both physical processes and cognitive focus within the organization, impacting work processes and individual attention. Purpose and Types of Organizational Structure 1.​ Purpose of Structure: ○​ Enables efficient flow of materials and information. ○​ Channels attention and effort toward strategic goals. 2.​ Basic Types of Work Units: ○​ Process-Based Units (Functions): Group individuals performing similar tasks, such as marketing or production, to create economies of scale and focus. ○​ Market-Based Units (Divisions): Cluster people and resources around specific markets, such as products, customers, or geographies. Design Choices for Work Units 1.​ Units Clustered by Work-Process (Function-Based): ○​ Functional units support specialization, improving productivity and economies of scale. ○​ Organizations such as hospitals and universities often group by specialized knowledge, e.g., departments based on medical specialties or academic fields. 2.​ Units Clustered by Market Focus: ○​ Product-Based Clusters: Useful for firms with multiple products, as they allow focused expertise on product-specific competitive strategies. ○​ Customer-Based Clusters: Aligns resources around customer types, beneficial when customer needs vary significantly across segments. ○​ Geography-Based Clusters: Supports regional market needs and adapts to local legal, cultural, and consumer differences, essential in international operations. Performance management Accountability Structures 1.​ Hierarchy of Accountability: ○​ Structures can be layered, combining functional units and market-focused units at different levels of the organization. Large corporations may use a mix of product, geographic, and functional divisions to meet both local and corporate goals. 2.​ Types of Accountability: ○​ Cost Centers: Managers are accountable for controlling costs in specialized functions. ○​ Profit Centers: Managers oversee entire income statements and must balance revenue and costs, often managing assets for their unit. Specialization vs. Market Responsiveness ​ Specialization: Clustering by function enhances efficiency, cost savings, and quality but may reduce customer responsiveness. ​ Market Responsiveness: Clustering by market focus increases the organization’s ability to react quickly to market shifts but can reduce efficiency due to the duplication of specialized functions. Span of Control, Accountability, and Attention 1.​ Span of Control: Number of subordinates reporting to a manager, affecting the manager’s focus. 2.​ Span of Accountability: Range of financial and non-financial metrics a manager is responsible for, influencing their decision-making and priorities. 3.​ Span of Attention: Influenced by unit design, span of control, and accountability, it determines what managers prioritize, impacting organizational alignment with strategy. Performance management Centralization vs. Decentralization ​ Centralized Organizations: Use narrow spans of control and accountability, focusing on efficiency and control by concentrating decision-making at higher levels. ​ Decentralized Organizations: Rely on wide spans of control and accountability, promoting responsiveness to customer needs and faster decision-making at lower levels. Conclusion ​ Organizational structure is a strategic tool that helps shape how managers and employees focus on tasks, make decisions, and prioritize goals. Effective structuring enables alignment with strategic objectives, supporting shared goals and enhanced performance through efficient information flows and clear accountability. Chapter 3: Using Information for Performance Measurement and Control 1. The Role of Information in Organizations: ​ Importance: Information is crucial for efficient decision-making and operational effectiveness. Organizations with ample, quality information can set goals, make data-driven decisions, and adapt quickly to changing conditions. ​ Purpose of Performance Measurement: Shift management from intuition to a data-driven approach, using hard data to validate decisions and track performance against set goals. 2. Types of Information Flow: ​ Internal Information: Flows within the organization to help managers assess operations, track variances, and monitor productivity. This includes performance metrics on both expected goals and emerging issues, supporting ongoing SWOT (Strengths, Weaknesses, Opportunities, Threats) analyses. Performance management ​ External Information: Managers communicate strategies and performance goals to external stakeholders like investors, suppliers, and board members, who rely on this data for decision-making. 3. Key Components of the Performance Control Model: ​ Inputs-Process-Outputs (IPO) Model: This model breaks down organizational processes into: 1.​ Inputs: Resources such as labor, materials, and data required for production. 2.​ Transformation Process: Activities that convert inputs into outputs. 3.​ Outputs: The final products or services delivered. ​ Feedback and Standards: Essential elements that compare actual performance against expectations, enabling adjustments to optimize future results. The cybernetic feedback model illustrates how managers use variances between actual and standard outputs to control and adjust inputs or processes. 4. Decision-Making in Performance Control – What to Monitor? ​ Focus Areas: Managers must choose to monitor inputs, the transformation process, or outputs based on: ○​ Technical Feasibility: Whether a process or its outputs can be accurately observed and measured. ○​ Cause and Effect: Understanding the link between actions taken and the outcomes achieved. ○​ Cost: Balancing the cost of information collection against the risks and potential losses from not having it. ○​ Innovation Needs: Whether output-based or process-based control is more appropriate. Output monitoring allows for greater innovation, Performance management while process monitoring may be preferred for quality, efficiency, and safety. 5. Applications of Information in Management: ​ Decision Making: Information supports both planning (setting performance targets) and coordination (aligning resources and functions). ​ Control: Feedback is used to motivate and evaluate employee performance, aligning efforts with organizational goals. ​ Signaling: Information cues organizational focus; employees often prioritize what their managers prioritize. ​ Learning and Development: Performance data educates managers on operational economics, fostering a deeper understanding of revenue, costs, and performance drivers. ​ External Communication: Performance data is used to communicate with stakeholders, projecting a company’s stability and aligning expectations. 6. Conflicts in Using Management Information: ​ Potential Biases: Different purposes for information (e.g., motivation