Performance Measurement Issues

Performance Measurement Issues in Company X

1.0 Introduction

Performance measurement is essential in order to make an evaluation of an organization. It is imperative to identify company’s vision and translate it into a set of performance indicators. Moreover, identifying both internal and external factors are also important to know any factors that drive or hinder the strategies of company.

The performance measurement of Company X will use balance scorecard, which will measure several perspective, such as: financial, customer, internal business process, and learning and growth perspective. SWOT analysis is also used to analyze the internal and external forces that influence the performance of Company X.
This report will evaluate the performance of Company X, comprising the goals, measures, targets and analysis of every perspective of the balance scorecard in order to have better performance planning and management process, as well as any strategies for possible improvements in the future to makes the company closer to its vision by setting the right and reliable strategies.

2.0 Methodology

One sales outlet as an authorized H car dealer will be analyzed in term of its performance measurement and management process. In addition, data has been collected from primary data source, hence, the name of company and its brand has kept unrevealed to avoid any harm occur.

3.0 Company Profile
3.1 Background Information of Company X

Company X is an organization that has been established since 1970 which operating in automotive industry. In 1994, Company X has become authorized dealership for H car in Indonesia covering the area of Manado City, North Celebes as well as providing the service for H car. This company is based on family-business and still shows the growing market in its coverage market area with total employees of approximately 30 persons.

Company X has several specialized departments to handle unit sales and services for customers in addition to its marketing and management support. Those are called H1 for sales unit, H2 for technical services, H3 for spare parts and HC3 for customer care center.

As a dealer, Company X has its sole agent, assembler and components of H automobiles which located in Jakarta but it is functioning only as to supply car to the dealers as well as set the sales target.

3.2 Organization Structure

Company X is managed under the Board of Directors which has been positioned by all of the members of the family. The board is responsible for the company’s accountable that are being able to maintain company’s activities, strategy and performance. Below Board of Directors, there is general manager which has a function to assist the directors to control all the activity in the company. All of the managers in every department must be responsible to the General Manager. This figure below shows the structure of the organization in details.

3.3 Vision and Mission

The vision of Company X is to make H car to be a number one brand in North Celebes region, starting from its capital city, Manado. While the missions of this company are strengthen the H brand, increase market share, strengthen and expand the network and provide the best service to achieve customer satisfaction.

4.0 SWOT Analysis of the Company X Regarding of H Brand
4.1 Strengths

Company X has several strengths regarding of carrying H brand, such as:

- H is a popular brand due to its quality and consistency in the production

- Great reputation for producing high quality products

- H has won many awards for initial quality and customer satisfaction

- Reliable and fuel efficient, especially with the fluctuation oil price causing by financial crisis

- Very competitive in creating an innovative products in which the developing products are based on customers need

- H is a pioneer in engineering low emissions internal combustion and hybrid technology

- H has been oriented on green technology, safety technology and improved leisure

- H has consistency in its production

Moreover, Company X itself has long existed in automotive industry and H brand is widely known because of its quality and accepted by all segments of consumers. Also, Company X has been experienced in dealing with vehicle registration, which can be done in approximately 1 month. In addition, Company X has good teamwork, administration and marketing. Other strengths of Company X are the owner of Company X has been involved in the business, has a principle based on Plan, Organize, Lead and Control, decentralized decision making, has its own warehouse, has a good and stable financial and Company X is the only one authorized H car dealer in its area, hence they just compete with the other brands. Those strengths are used by Company X to maximize the profits as well as to maximize shareholder’s wealth and to achieve the objectives.

4.2 Weaknesses

Despite of all its strengths, H also has the weaknesses, such as:

- H products are fairly bland and inoffensive in terms of styling

- Higher prices for non-luxury vehicles than comparable modes by other manufactures

- H products do not have a strong offering in a truck line, and their vehicles also have reputation for being underpowered

In term of Company X itself, there are also several weaknesses, which are the arrangement of price list has been taken too much profit which could lead to delay in selling out and the service rate of current dealer is not maximum in term of H Genuine Parts and accessories availability. Those weaknesses lead to unsatisfied customer which is always complaining.

4.3 Opportunities

In addition to its internal analysis, H also has its opportunities and weaknesses. The opportunities of H are:

- An offering in a pickup type truck would be profitable, even if priced under competitors

- Continue progressing low emission vehicles and alternative power sources

Moreover, the opportunities of Company X are: addition of H authorized workshops to facilitate the consumers in term of service and repair of vehicles, still a lot of coverage areas that still have not reached to market this product and opportunity to work with local government are still wide open in term of market area procurement due to the expansion area that has been going on in almost all regencies and cities in North Celebes, as well as the launch of new type of H car is expected to boost sales of H in general.

4.4 Threats

However, there are also threats

- H’s success has not gone unnoticed by its competitors

- The presence of several new types of car from competitors which is more satisfying the customer needs, for instance, in term of style, thus it could interfere the market segmentation of H brand

- Unsatisfied customers due to lack of service and parts availability could lead to changing preferences of customers

Those threats and weaknesses of company could lower the trust level of customers of this brand which can lead to customer’s changing buying decision. Thus, Company X must try to reduce it while improving its strength and opportunities.

5.0 Performance Measurement
5.1Financial Perspective

FINANCIAL PERSPECTIVE

GOALS

MEASURES

TARGET

INITIATIVES (STRATEGIES)

ANALYSIS

Increase sales

Sales growth

Profit in 5 years

10 % annually growth (Based on annually sales growth from 2005-2009)

Reduce price
Hiring trainers
Advertising
Consumer referrals
Freelance salesman
Focus on new product

Must be reviewed periodically every quarter

Increase profit

Income statement

Profit margin

15% margin growth (Based on profit margin in 2008 and 2009)

Eliminate or reduce any unnecessary spending

Must be reviewed periodically every year

Table 4 Financial Perspective Measurement of Company X

Company X has business unit situations that are expected to maintain current market share and strive to increase the sales gradually by 10% every year. Measurements that will be used by Company X are by controlling the profit in 5 years and sales growth. Supporting initiatives or strategies that are considered useful is by having advertising campaign to the market coverage area, consumer referrals, hiring freelance salesman and trainers who can provide advice to the salesman about how to increase the sales. Another initiative is by reducing the price of car per unit; hence, it is predicted that if price is reduced then more customers will buy the car which leads to increasing in sales. In addition, the launching of new product is also expected to increase sales in general. Those kinds of measurements to meet the target must be review periodically every quarter, to maintain and evaluate the sales growth of Company X.

From the table below, it can be seen that the sales growth from 2005 until 2007 and 2009 is decreasing, while in 2008, the sales growth was increasing by 43%.

UNIT

GROWTH

UNIT

GROWTH

UNIT

GROWTH

UNIT

GROWTH

2005

2006

UNIT

%

2006

2007

UNIT

%

2007

2008

UNIT

%

2008

2009

UNIT

%

159

145

-14

-10%

145

133

-12

-9%

133

234

101

43%

234

168

-66

-39%

Table 1 Market growth of H Car in Manado City from 2005-2009

Financial goals related to profitability will be set by Company X to meet the expectation or target, which is increasing in annual profit for every year by 15% margin growth, which is based on the last performance on 2008 (9.5%) and 2009 (11%). Such goals can be expressed by using measurement that is related to accounting profit, such as income statement and profit margin. Managers also are asked to maximize the income generated from capital investment. By eliminating or reducing any unnecessary spending can be considered as a supporting strategy of this goal.

Other measurements for this business unit in Company X are used to align the accounting profits generated by the level of capital invested. Returns on investment, return-on-capital-employed and economic value-added are also other examples of the measurement that can be used to evaluate the performance of business unit in Company X. In this report, profit margin operation of Company X will be used as a financial measure. Based on the sales in 2008 and 2009, thus the profit of Company X can be calculated as follow:

Year 1 (2008) (USD)

Year 2 (2009) (USD)

REVENUE

Sales

Cost of Goods Sold

9,190,000
7,248,618

6,880,000

5,204,136

GROSS PROFIT

1,941,382

1,675,864

EXPENSES

Total Salary

Sales Incentive (USD 50/unit)

Interest 13% from Initial Capital

Expenses for Vehicle Registration

Advertising & Promotion
Distribution Expenses

Electricity & Water

Others (Maintenance, Gasoline,

Security)

TOTAL EXPENSES

500,000

234,000

21,999

234,000

10,600

46,800

4,000

10,000

1,061,399

500,000

168,000

21,999

168,000

9,600

33,600

4,000

10,000

915,199

NET PROFIT BEFORE TAX

879,983

760,665

NET PROFIT AFTER TAX (15%)

747,985

646,565

Table 3 Income Statement of Company X from 2008-2009

Based on the profit from the income statement of Company X, thus the profit growth and profit margin can be calculated as follow:

PROFIT (USD)

GROWTH

2008

2009

%

747,985

646,565

-15%

Table 4 Profit Growth of Company X from 2008-2009

PROFIT MARGIN

2008

2009

879,983 : 9,190,000 = 9.5%

760,665 : 6,880,000 = 11%

Table 5 Profit Margin of Company X from 2008-2009

Changing in market, technology, regulations, etc. will be affect sales. Thus, this kind of transformation will change the overall financial objectives of the relevant business units. In 2008, 9.5% profit margin has been achieved, means that Company X has a net income of USD 0.095 for each dollar of sales. In 2009, 11% profit margin means that Company X has a net income of USD 0.11 for each dollar of sales. Thus, even though the profit in 2009 is smaller than in 2008, however the profit margin in 2009 is higher than in 2008. This higher profit margin in 2009 indicates a more profitable in which Company X has better control over its costs compare than before. In addition, financial objectives should be review periodically, at least once a year to reassert or change any strategies of financial business unit.

5.2 Customer Perspective

CUSTOMER PERSPECTIVE

GOALS

MEASURES

TARGET

INITIATIVES (STRATEGIES)

ANALYSIS

Increase customer satisfaction

Decrease in customer complaints

80% decrease in customer complaints

Open several service center outlet (H2 and H3)
Form a mobile technician team
Customer service surveys

Review periodically (every quarter) by the dealer’s management

Customer retention

Number of customer is not decreasing (constant)

100% customer retention

Constant customer contact
Reminder for service time

Must be done and review periodically (every month) by HC3

Maintain image and reputation
Customer loyalty

Products quality

Better Service

40% increase in new customer

Advertising
Customer gathering
Formation of H Car Clubs
Automotive events

Review periodically every quarter

Table Customer Perspective Measurement of Company X

Customer perspective scorecard translates mission and strategy of Company X into the company's specific objectives which are matched with the customer’s need and also this needs to be communicated throughout the organization.

In order to increase customer satisfaction, Company X strives to understand the needs of customers in order to avoid any competitors’ attack through their products and services offering that are better fit with customer preferences. The measurement for this goal indicates by decreasing in customer complaints about poor availability of H Genuine Parts (H3) and service center (H2) (workshop) in the market area of Company X. The target of this goal is by decreasing 80% in customer complaints. Thus, in order to actualize it, Company X is planning to open several authorized service center (workshop) together with its parts (H2 and H3) in its market coverage area and form a mobile technician team. Those kinds of strategies must be review periodically every quarter by the dealer’s (Company X) management, for instance by using customer survey feedback form.

Constant number of customers is a measure of maintaining the existing customer. Company X has set the target to achieve 100% customer retention by having constant customer contact and reminding the service time by H Customer Care Center (HC3) Department. In result, those kinds of strategies can build strong relationship between Company X and its customers which leads to attract new customers and long-term financial profit. In addition, these activities must be review periodically every month by H Customer Care Center (HC3) Department.

Image and reputation dimension describe the intangible factors that makes customer interested in Company X as well as enable Company X to proactively explain themselves to the customer. Customer loyalty can be achieved through advertising to remind the customers how great these products are, as well as emphasizing on products quality and better services provided as measurements. These intangible aspects are producing image and reputation which is far exceeding from various aspects of tangible factors. Others strategies to achieve the goal is by having an event of customer gathering for every year, accommodate and sponsor the formation of H Car Clubs and develop and implement various kinds of automotive events. In addition, this goal must be review periodically every quarter to evaluate any increasing in new customers as well as attracting potential customers.

5.3 Internal Business Process Perspective

INTERNAL BUSINESS PROCESS PERSPECTIVE

GOALS

MEASURES

TARGET

INITIATIVES (STRATEGIES)

ANALYSIS

Increase Marketing

Sales revenue

Sales growth

Profit in 5 years

3% additional revenue from new product
10% increase in sales

Develop a new incentive scheme

Exhibition at mall or business center

Review periodically every month

Improve Management System

Decision making

Strategic planning

Improve time in decision making
Improve strategic planning

Total Quality Management

Planning, Organizing, Leading and Controlling

Management audit

Review periodically every six months

Table Internal Business Process Perspective Measurement of Company X

Note that Company X is only a dealer not a manufacturer, thus the style of the product and any other product innovation are done by the manufacturing itself not by Company X. Thus, the goals of Company X is only in term of its business management process, sales and marketing, as well as to improve both financial and non-financial performance.

Sales revenue, sales growth and profit in 5 years are the performance key indicators of increasing in marketing. Company X sets several strategies to meet 3% additional revenue from its new product (H Freed) and 10% increase in sales (in general), which are developing a new incentive scheme for the salesman as well as for the marketing and finance managers. Other strategies are by having freelance salesman and launching exhibition at various mall and business center. This goal needs to be reviewed periodically every month to maintain the current organizational behavior to keep its goal on track.

In order to improve internal management system of Company X, Total Quality Management system can be implemented. TQM is mainly concerned with continuous improvement in all work, from high level strategic planning and decision-making. In addition, this system has a benefit in which mistakes can be avoided and defects can be prevented especially in making a decision and planning a strategy. This will leads to continuously improving results, in all aspects of work, as a result of continuously improving capabilities, people and process. Planning, Organizing, Leading and Controlling is also needed to support this system as well as management audit to keep Company X’s internal business process to be improved. In addition, all of these strategies must be reviewed periodically for every six months.

5.4 Innovation and Learning Perspective

INNOVATION AND LEARNING PERSPECTIVE

GOALS

MEASURES

TARGET

INITIATIVES (STRATEGIES)

ANALYSIS

Organizational Learning

Increase of technician’s competences

Increase employee’s competences

Skill development of technician in service center

Develop strategic skill

Training and education

Cross-train

Review periodically every quarter

Workforce optimization

Employee turnover

Decrease the number of employee turnover

New benefit implementation

Performance appraisal

Review periodically every quarter

Employee productivity

Employee’s performance

20% increase in employee productivity/performance

Training

Good working atmosphere

Performance evaluation

Review periodically every quarter

Develop a long term vision

Employee competences

Increase in employee competences

Training

Review periodically every six months

Table Innovation and Learning Perspective Measurement of Company X

The purpose of the innovation and learning perspective is to provide the infrastructure of company that enables ambitious goals in the other three perspectives to be achieved. Company X also invests in infrastructure, employees, systems and procedures to achieve long-term financial goals. Firstly, by organizational learning, the measurement of this goal is increasing of technician’s skill and all employees’ competences in general. The target of this goal is having a competent employee and to develop any strategic skill in general as well as for technician in service center. Training, education and cross-training can be used to implement this goal and must be review periodically every quarter.

Secondly, workforce optimization, the measurement of this goal is employee turnover rate in which Company X wants to decrease the number of employee turnover as high turnover can be harmful to Company X’s productivity, especially if skilled workers are often leaving and other worker population contains a high percentage of novice workers. New benefit implementation for the employee in Company X is considered to be a thoughtful strategy, as it can retain the existing employees especially the potential employees. Benefits that can be implemented are group insurance (health, dental, life, etc.), disability income protection, retirement benefits, daycare, tuition reimbursement, sick leave, vacation (paid and non-paid) and social security. Another strategy that can be implemented is by having performance appraisal to ensure employee career development. These strategies can be review periodically every quarter.

Thirdly, employee productivity, the measurement of this goal is employee’s performance. 20% increase in number of employee’s performance and productivity is a target of this goal and can be achieved by training, providing good working atmosphere and performance evaluation from the supervisor and manager. In addition, these strategies it must be reviewed periodically every quarter.

Lastly, developing a long-term vision is needed to increase overall performance of Company X and can be measured by both financial and non-financial performance, especially by employee competences. Training can be used to translate this goal into the actual or action and must be reviewed periodically for every six months to make sure that the performance is always synchronizing with Company X’s vision which is to be the number one brand in its market coverage area while keep maintain customer satisfaction.

6.0 Conclusion

In conclusion, Company X’s overall performance can be considered running well because of an excellent internal management process based on the analysis of previous and current performance using balance scorecard.

Moreover, balance scorecard also provides a guideline for Company X to monitors its current performance as well as to maintain or increase its performance in the future. SWOT analysis is needed to guide Company X in create its balance scorecard in order to achieve target by using strategies that are synchronize with company’s vision while maintain long-term financial growth, customer satisfaction and employee competences.

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