BEYOND PERFORMANCE

MANAGEMENT

WHY, WHEN, AND HOW TO USE 40 TOOLS AND BEST

PRACTICES FOR SUPERIOR BUSINESS PERFORMANCE

BY JEREMY HOPE AND STEVE PLAYER

Contents

Figure 2-1 3

Figure 2-2 4

Figure 4-1 5

Figure 5-1 6

Figure 6-1 7

Figure 10-1 8

Figure 12-1 9

Figure 12-2 10

Figure 12-3 11

Table 13-1 12

Table 13-2 13

Table 14-1 14

Table 16-1 15

Figure 16-1 16

Figure 24-1 17

Table 25-1 18

Table 25-2 19

Figure 28-1 20

Figure 28-2 21

Table 29-1 22

Figure 33-1 23

Figure 34-1 24

Figure 35-1 25

Figure 35-2 26

Table 38-1 27

Strategy

Alignment

Execution

Decisions

Variancecontrols

Reports andforecastsFixed performance

contracts

Mission, objectives,strategic guidelines

Incentives

Budgets

Targets

Resource allocations

The traditional planning and budgeting model

FIGURE 2-1

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3

Value center Customer

Value center Customer

Value center Customer

Value center Customer

Value center Customer

Value center Customer

Value center Customer

Value center Customer

Value center Customer

Value center Customer

Value center Customer

Value center Customer

Value center Customer

Value center Customer

Regions, brands/product groups,customer segments, each withprofit-and-loss account

Role of valuecenter team isto continuouslylearn, adapt, andimprove relativeto peers,markets, andbest practices

Executiveteam

Role of strategy,finance, HR,marketing, etc. is tosupport value centersas business partners

The value zone

Role is to set corporategoals and strategicdirection, then challengeand support valuecenters to aim forambitious but realisticgoals and plans

Supportservicesteams

FIGURE 2-2

The adaptive planning model

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4

Objectives

• Flight is on time• Lowest prices• Attract and

retain morecustomers

Medium-term goalMeasurement

FinancialProfitability

Fewerplanes

Morecustomers

Flightis on time

Ground crewalignment

Learning

Initiative

• FAA on-timearrival rating

• Customer ranking• Number of

repeat customers• Number of

customers

• Number 1• Number 1• 70%• 12% increase

• Qualityimprovement

• Customerloyaltyprogram

Lowestprices

Customer

Internal

Fast groundturnaround

FIGURE 4-1

A simple strategy map for a low-cost airline

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5

Value center Customer

Value center Customer

Value center Customer

Value center Customer

Value center Customer

Value center Customer

Value center Customer

Value center Customer

Value center Customer

Value center Customer

Executiveteam

Supportservicesteams

• Support services costs areregularly benchmarked withbest practices

• Support services teams actas suppliers to value centercustomers

• All resources are either drawn downby value centers or allocated to them

• Value center teams can make opexand capex decisions within a threshold

• Value center teams have an incentiveto continuously reduce resources

• As many valuecenters aspossible arecreated based onmarket niches

• All capital isallocated basedon value center performance

• Whatever thelatest plan says,teams respond to prevailing demand

Executive team actsas a venture capitalprovider, alwaysprioritizingresources to bestopportunities

Portfoliomanagement

FIGURE 5-1

A portfolio management view of resources

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6

$ Millions

100

80

60

40

20

0

Sev

erit

y

Remote Low High

Frequency

Minimal or no risk transfer

Partial risk transfer

Risk transfer

FIGURE 6-1

Using a management matrix to communicate risk

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7

Marketcapital

• Brand values

• Loyal customers

• IT networksand databases

• Lean customer- oriented processes

• Intellectualproperty rights

• Innovationcapabilities

• Self-managedteams

• Capable andcommitted people

Innovationcapital

Financialcapital

Marketvalue

50%–90%

10%–50%

Intangiblecapital

Humancapital

Structuralcapital

+

+ =

+

FIGURE 10-1

Component parts of intangible capital

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8

Value of firm = +Present value of free

cash flows fromexisting assets

Present value of freecash flows from

growth opportunities

FIGURE 12-1

The value of a firm

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9

Level 0Generic

Level 1Business unit

specific

Level 2Operational(front line)

• Sales growth• Customer satisfaction• Cross selling

• Process cycle times• Load factors

• Accounts receivable• Accounts payable• Stock turnover

• Plant life• Maintenance

• LeverageDiscountrate

Examples Examples

• Market share• Time-to-market

• Productivity• Capacity

management

• Tax-efficientstructures

• Working capitaldays

• Asset utilization• Brand management

• Cost of equity• Cost of debt

Shareholdervalue

Free cashflows

Cashprofit

Investedcapital

Revenue

Operatingmargins

Cashtaxes

Workingcapital

Fixedcapital

Cost ofcapital

FIGURE 12-2

Levels of value drivers

10

Value

Grossmargin

Deliverycosts

Warehousecosts

Gross marginper transaction

Number oftransactions

Stores perwarehouse

Cost perwarehouse

Cost per trip

Number oftransactions

FIGURE 12-3

Value drivers for a distributor

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11

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12

TABLE 13-2

Car dealer’s invoice

Dealer list price $100.00

Order size discount 1.50

Competitive discount 1.00

Invoice price $97.50

Payment terms discount 5.00

Annual volume bonus 6.00

Cooperative advertising 3.50

Special promotions 8.00

Net price $75.00

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13

TABLE 14-1

Three classic customer value propositions

Components of valueproposition

Product leadership

Operational excellence Customer intimacy

Price Meet industry standard Combination ofprice, quality, andease of purchase

Meet industry standard

Quality Meet industry standard Meet industry standard

Time State-of-the-art products and services

Meet industry standard

Meet industry standard

Functionality Meet industry standard

Meet industrystandard

Service Meet industry standard Meet industry standard

Customizedproducts andpersonal service

Customization Meet industry standard Meet industry standard

Image Feel-good brand Smart shopper Trusted partner

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14

TABLE 16-1

Customer profitability evaluation guide

Annual revenues from customer or customer group

$xx

Less: Direct costs (e.g., discounts, rebates, etc.)

($x)

Less: Cost of goods sold ($x)

Direct profit from customer (or customer group)

$xx

Slow pay High Medium Low N/A

Unusual fixed capital costs High Medium Low N/A

Complexity of order entry High Medium Low N/A

Billing complexity High Medium Low N/A

Distribution complexity High Medium Low N/A

Customer service complexity High Medium Low N/A

Senior management time required High Medium Low N/A

Other costs High Medium Low N/A

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15

FIGURE 16-1

Which customers are worthwhile?

Strategic?

Yes

Significant? Profitable? Customertype

Percentsales

Percentprofits

Yes Yes A 20% +150%These are the customers you need to keep at allcosts. Pour resources into them.

Yes Yes No B 20% -20%Work on the profitability problem through a mixof pricing, service, delivery, etc.

Yes No Yes C 10% +20%Consider other channels to reduce costs. If businessis low but potential is high, work hard to increase.

Yes No No D 5% -5%Being strategic is not enough. Try other ways to improvescale and profits. Otherwise, exit leaving a way back in.

No Yes Yes E 10% +10%If customer does not fit your value proposition, don’tprovide any special attention. If the customer demandsspecial offers, then exit.

No Yes No F 20% -40%This is the real test. Size is not enough. Exit fast beforeyour profits are drained even further.

No No Yes G 5% +5%Your long-term profits lie with strategic and significantcustomers. Spin off to a distributor.

No No No H 10% -20% These are easy. Just say goodbye.

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16

Traditional costing Target costing

Market research

Product ideas

Product design

Engineering

Supplier pricing

Cost (if too highreturn to design stage)

Manufacturing

Standard cost control

Market research

Product ideas

Planned selling priceless desired profit

TARGET COST

Design Engineering Supplierpricing

Target costs force designers, engineers, andsuppliers to agree on costs within the allowable figure

Manufacturing

Continuous costreduction

FIGURE 24-1

Contrasting traditional and target costing

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TABLE 25-1

A typical weekly box report

Productionweekly Box Report Week 1 Week 2 Week 3 Week 4 Week 5 Week 6 Goal

Units perperson 15.18 15.63 14.70 15.91 15.30 16.99 20.00

On-timeshipment 82.0% 83.0% 78.0% 79.0% 84.0% 85.0% 95.0%

Dock-to-dockdays 5.80 5.90 6.00 6.20 6.20 6.00 5.00

First timethrough 65.0% 68.0% 67.0% 70.0% 67.0% 70.0% 90.0%

Averageproduct cost £7.5 £7.3 £7.1 £7.4 £7.6 £7.5 £6.0

AR days 65 62 64 68 62 68 35

Productivecapacity* 26% 25% 26% 25% 24% 24% 50%

Waste 54% 52% 53% 55% 56% 56% 30%

Availablecapacity 20% 23% 21% 20% 20% 20% 20%

Revenue 60,000 59,000 56,000 57,500 58,250 59,500 70,000

Material cost 6,000 5,900 5,600 5,750 5,825 5,950 5,600

Conversioncost 33,000 32,450 30,800 31,625 32,038 32,725 33,600

Other costs 4,800 4,838 4,368 4,543 4,777 4,939 5,600

Value streamGP 16,200 15,812 15,232 15,582 15,610 15,886 25,200

RoS 27.0% 26.8% 27.2% 27.1% 26.8% 26.7% 36.0%

*% of total capacity used for value-added work (defined as total cycle time � units shipped).

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Wiremold before and after lean

1990 2000

Assess value $30 million $770 million

Gross profit 38% 51%

Sales per employee $90,000 $240,000

Throughput time 4–6 weeks 2 hours–2 days

Product development time 2–3 years 3–6 months

Number of suppliers 320 43

Inventory turns 3.4 17.0

Working capital as percentof sales 21.8% 6.7%

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TABLE 25-2

19

Pro

bab

ility

of

failu

re

Internal rate of return

A

B

FIGURE 28-1

Risk and value

Source: The discussion of options theory and related illustrations are from the authors’ discussions with SteveMorlidge. For more information, see Steve Morlidge and Steve Player, Future Ready: How to Master BusinessForecasting (Chichester, UK: John Wiley & Sons, 2010), 151–178.

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Pro

bab

ility

of

failu

re

Internal rate of return

A B

FIGURE 28-2

Project B: The real risk profile

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TABLE 29-1

Examples of cost drivers

Reduce number of: Eliminate number of:

Purchase orders Production defects

Sales orders and order lines Warranty returns

Machine setups Stockouts

SKUs Supplier late deliveries

Schedule changes Supplier defects

Inspections Accounts payable errors

Credit inquiries Order entry errors

Invoices processed Customer claims

Customer inquiries Refunds

Checks processed Customer returns

Cost center postings Customer complaints

Measures, reports, and spreadsheets Repeat telephone calls

Reconciliations and journals Late payments

Management tools and IT systems Unnecessary e-mails and meetings

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FIGURE 33-1

A five-quarter rolling forecast

Year 1 Year 2

J F M A

Q1 Forecast

Q1 Forecast

Q2

Q2

Q3

M J J J F M A M J J A S

Fiscal year-end

A S O N D

Traditionalforecast

Five-quarterrolling

forecast

23

FIGURE 34-1

Using analytics to monitor performance

Call center team 1 index

Call centerteam 1

QualityWeight 50%

Call handlingWeight 50%

PeoplemanagementWeight 20%

CustomerexperienceWeight 30%

FinancialperformanceWeight 20%

Process qualityWeight 30%

Call centerteam 2

Call centerteam 3

Call centerteam 4

Call centerteam 5

KPI KPI KPI KPI KPI KPI

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FIGURE 35-1

Examples of analytics-based reports

Executive team

FinancialperformanceWeight 30%

Profitabilityindex

Costmanagementindex

Capitalmanagementindex

•

•

•

Employeesatisfactionindex

Health andsafety index

Diversityindex

•

•

•

New businessindex

Loyalty index

Customerprofitabilityindex

•

•

•

Quality index

Supply chainindex

Productivityindex

•

•

•

Risk index

Reputationindex

Ethics index

•

•

•

Growth index

Innovationindex

•

•

CustomerrelationshipsWeight 20%

Operationalexcellence

Weight 15%

Innovation andgrowth

Weight 15%

PeoplemanagementWeight 10%

RiskmanagementWeight 10%

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FIGURE 35-2

Report on a page

Trend (What will future outcomes be?)Level (What is going on today?)

Action (What action, if any, should we take?)Analysis (Why is trend moving up/down?)

Failure calls this week

# Calls % Failure

AgentAgentAgentAgentAgentAgentAgent

Average

Despite previous actions, failure calls continueto run at unacceptable levels. We need tourgently rethink how we tackle these problemsas our costs remain at far higher levels thanbest-practice competitors.

Goal: To reduce failure calls by 80% over 2 years.

Action: To engage a lean consultant to investigatethe problem and recommend improvements.

270220280300240190310

259

60%45%62%40%30%70%35%

49%

1234567 0

25

50

75

90

Weeks

% Failure calls

Movingaverage

Best Practice Context

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TABLE 38-1

Value center team evaluation scorecard

Weighting

Score (out of 100)

Weighted average

score

Performance criteria a b a × b

How well are we doing relative to peers? 30% 60 18.0

How well are we managing our strategic investment port-folio?

10% 50 5.0

How well are we innovating? 20% 60 12.0

How well are we managing our resources? 10% 60 6.0

How well are we satisfying our customers? 30% 80 24.0

Total 100% 65%

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27