Performance pyramid
The Performance Pyramid is a hierarchically oriented performance measurement system for performance measurement and corporate management. The concept was introduced to the general public in 1991 by Richard L. Lynch and Kelvin F. Cross.
introduction
background
In the recent past, the efficiency of companies has become more important. The reasons for this are the increasing globalization of the economy, the associated intensification of competition, shorter product life cycles , greater product complexity and many other influencing factors. Existence in such an environment requires that the performance of a company is continuously monitored at all performance levels so that, in the event of a discrepancy between the degree of target achievement and the target setting, optimal steering and control measures can be initiated at an early stage.
Performance measurement system
The objective measurement of performance results has always been a difficult problem in business administration . Traditional performance measurement is very much characterized by financial target variables such as sales , profit and return on investment . Although these can mostly be measured, due to the one-sided approach, the performance actually provided is displayed incorrectly, which is why there is a risk of incorrect control. The idea of performance measurement systems arose in the 1990s as a result of the increasing awareness that the performance of a company must be assessed from different perspectives. The integration of non-monetary influencing factors such as quality or customer satisfaction complements the traditional performance assessment of companies based on purely financial indicators . Characteristic for performance measurement and as a distinction to conventional performance measurement is the multi-dimensional (monetary and non-monetary values), future-oriented, simultaneous (costs, time, quality, output) consideration of both operational and strategic aspects for measuring and managing the company's success. The aim is to make the performance planning and control more effective and generally to strive for an improvement in performance.
Science and practice have spawned a variety of performance measurement concepts. The best known include the Balanced Scorecard , the EFQM model , the Tableau de Bord , the Quantum Performance Measurement System and the Performance Pyramid .
Performance pyramid
Origin of the model
Along with the Balanced Scorecard, the concept of the Performance Pyramid was published around the same time. Presumably the two concepts influenced each other. The Lynch / Cross Performance Pyramid Model was first introduced to the general public in 1991. Essential features of the concept of the Performance Pyramid are the hierarchical structure of goals and the associated indicators and measured values as well as the equal inclusion of the two stakeholder groups, customers and investors .
Building the pyramid
Figure 1 shows the hierarchical structure of the corporate goals in corporate vision , business unit , main business processes , department / workplace and finally individuals . Each of these levels is assigned at least one type of measurement and target variable in the respective different areas. Starting from the highest hierarchical level, the corporate vision, the indicators at the level of the business unit take into account both the market and the financial perspective. Possible indicators would be, for example, market share and return on investment. On the following level of the main business processes, operational indicators with regard to customer satisfaction , flexibility and productivity are formed. Here one could imagine the number of customer complaints, throughput times and the input / output ratio as indicators. At the department / workplace level, there is ultimately a breakdown into the indicator types quality, delivery, lead time and scrap. In this context, the following parameters should be mentioned as examples: Proportion of problem-free installations, proportion of punctual deliveries, time for order processing and costs for scrap material. The indicators and metrics can be further differentiated according to the types of stakeholders. The external effectiveness represents the degree of target achievement in the external relationship with the customer (market-related indicators) while the internal efficiency is attributable to the shareholders (process-oriented indicators). Since the objectives of a hierarchical level can be derived from the higher-level objectives, all objectives follow the corporate vision directly or indirectly. The top-down approach is intended to ensure that the corporate strategy and the individual objectives at the operational level are consistent. In contrast, the indicators are aggregated in a bottom-up direction.
Key performance indicators
When generating goals and deriving indicators, it is important to ensure that there are causal relationships between the hierarchical levels of goals and measured variables. In the Performance Pyramid, this is taken into account by so-called “Building Blocks of Success” . Figure 2 shows some of such causal relationships as an example. In the third example from above, the profit margin depends on the overall operational productivity and this in turn depends on the scrap rate: A reduction in the production-related scrap rates at the department / workplace level increases productivity at the main process level Ultimately, at the business unit level, the profit margin increases.
The division of the pyramid into a customer (market) oriented and an owner (capital) oriented side reflects the equal importance of these two stakeholder groups. The interests of the employees are not explicitly taken into account, but they are included through the hierarchical structure of the goals and indicators. Theoretically, an expansion of the concept to include additional stakeholders would be conceivable. However, the clear representation of the pyramid shape would have to be expanded to include additional dimensions, which creates problems.
Performance loops
Lynch and Cross go into the details of the model in that the performance pyramid can be adapted to changing environmental conditions using four control loops.
The first control loop can be formed on the lowest level. The aim of this is to increase quality, for example. Only non-financial measures are used as indicators.
The second control loop connects the department level with the business area level by converting the non-financial performance indicators into financial indicators for internal accounting. The increase in quality from the example for control loop 1 would result in a corresponding change in the cost structure.
The third control loop creates a link to the strategic level. The aim of this control loop at the level of the business units is to review the strategic effect of the measures and results located at the lower hierarchical level. For example, the cost structure changed by the second control loop can have a bad result on finances in the short term, but have a positive effect on market share in the long term.
The fourth control loop is the only performance control loop that does not interact with the department level. He compares the corporate vision with the implementation of the corporate strategy.
The more or higher hierarchical levels of the Performance Pyramid are involved in a control loop, the more the frequency of the control loop decreases. If a daily run can be suitable for the first control loop, control loop 2 is carried out monthly. An annual or time-based pass can only make sense for the third and fourth control loops.
The individual control loops enable the company to link its strategy with the processes on the individual hierarchical levels and to carry out the various planning cycles of the business level.
Critical appraisal
The concept of the Performance Pyramid is hierarchically oriented and represents a causal connection between strategic and operational performance indicators, which appears innovative. The most important indicators relevant to long-term corporate success are taken into account. The narrow focus on the two main stakeholder groups, customers and shareholders, has the advantage that the system remains simple and straightforward. On the other hand, this is accompanied by a major disadvantage, since essential aspects are not taken into account. The performance of a company can therefore only be mapped to a limited extent, also in view of the lack of expandability of the approach. In terms of a globalized and dynamic environment, this would be desirable. An interesting and innovative approach is the concept of control and regulation through the integration of performance loops, which makes a contribution to the further development of controlling. In practice, the Performance Pyramid was unable to prevail over the popular balanced scorecard.
bibliography
- Klingebiel, Norbert (1999): Performance Measurement. Gabler: Wiesbaden.
- Gleich, Roland (2001): The System of Performance Measurement. Vahlen: Munich.
- Baum, Heinz-Georg / Coenenberg, Adolf G. / Günther, Thomas (2007): Strategic Controlling. Poeschel: Stuttgart.
- Cross, Kelvin F. / Lynch, Richard L. (1998): Measure Up! How to Measure Corporate Performance. Cambridge MA.
- Wettstein, Thomas (2002): Holistic Performance Measurement - Procedure Model and Information Technology Design. Dissertation. Freiburg (CH).
- Grüning, Michael (2001): Performance Measurement Systems. Dissertation. German university publisher: Wiesbaden.
Individual evidence
- ↑ Grüning, Michael (2001): Performance Measurement Systems. Dissertation. German university publisher: Wiesbaden. P. 35.
- ↑ Grüning, Michael (2001): Performance Measurement Systems. Dissertation. German university publisher: Wiesbaden. P. 36.
- ↑ Grüning, Michael (2001): Performance Measurement Systems. Dissertation. German university publisher: Wiesbaden. P. 41.