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Figure 2. Top-down approach of Kaplan & Norton (Biazzo & Garengo, 2012a)
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- Table 1. Develop steps of a performance measurement system (Wisner Fawcett in Neely et al., 2005)
- 2.5 Performance measurement systems for SMEs
- 2.5.1 Designing and implementing a performance measurement system for SMEs
- 2.5.2 Design and implementation methodologies for SMEs
- Figure 3. A circular approach to the implementation of the BSC (Biazzo Garengo, 2012a)
- 2.5.3 Preconditions for effective developmental process for SMEs
- 2.5.4 Strategic alignment
- Figure 4. Strategic alignment (Bauer, 2004)
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Figure 2. Top-down approach of Kaplan & Norton (Biazzo & Garengo, 2012a)
The process methodology accompanying the implementation of a BSC developed by Kaplan and Norton (1996) (figure 2) is based on two principles: a top-down approach and management involvement in group sessions (Biazzo & Garengo, 2012a). By employing a couple of group sessions Performance measurement in SMEs
07-12-15 Koen Brinkerink 6 the BSC is developed. The process starts with identifying and formalising the organizational mission, vision and strategy. During the first group sessions consensus have to be reached about the mission and future vision the organization strives for, as well as determining accompanying strategic objectives for each BSC-perspective (Biazzo & Garengo, 2012a). Afterwards the objectives per perspective are translated into critical success factors and performance indicators. Lastly, two group sessions are held for discussing the results of each perspective and for the development of an implementation plan (Biazzo & Garengo, 2012a). Periodically, the BSC has to be reviewed as part of the strategic planning process (Kaplan & Norton, 1996).
An alternative ‘typical’ (Wouters & Sportel, 2005; Wouters & Wilderom, 2008) coercive methodology is developed by Wisner & Fawcett in Neely et al. (2005). 1. Clearly define the firm’s mission statement 2. Identify the firm’s strategic objectives using the mission statement as a guide (profitability, market share, quality, cost, flexibility, dependability, and innovation) 3. Develop an understanding of each functional area’s role in achieving the various strategic objectives 4. For each functional area, develop global performance measures capable of defining the firm’s overall competitive position to top-management 5. Communicate strategic objectives and performance goals to lower levels in the organization. Establish more specific performance criteria at each level . 6. Assure consistency with strategic objectives among the performance criteria used at each level 7. Assure the compatibility of performance measures used in all functional areas 8. Use the performance measurement system 9. Periodically re-evaluate the appropriateness of the established performance measurement system in view of the current competitive environment Table 1. Develop steps of a performance measurement system (Wisner & Fawcett in Neely et al., 2005)
At the start the mission and strategic objectives of an organization are defined. Thereafter the role of every functional area in achieving the objectives is clarified (Wouters & Sportel, 2005). By analysing the role of every functional area, performance indicators can be developed. Of utmost importance during the developmental process is accomplishing strategic alignment between strategic objectives and performance perspectives (Wouters & Sportel, 2005).
Groen, van de Belt and Wilderom (2012) outline a process approach for developing an enabling performance measurement system. They took as basis the Balanced scorecard and the strategy map. Together with employees of an organizational department they developed a PMS for said organization. A bottom-up approach (Groen, 2012) was utilised. As part of developing and explicating strategy the strategy map was applied (Groen et al., 2012). This was a necessary step since the organization had no formalized strategy. Therefore, employees were not knowledgeable about the organizational strategy or direction (Groen et al., 2012). An external facilitator guided the project and handed it over to an employee who acted as a project champion from thereon (Groen et al., 2012).
This approach consists broadly of the following steps (Groen et al., 2012): 1. Identify strategy and focus of the organization; 2. Identify the current work processes; 3. Identify currently applied control mechanisms; 4. Identify the organization’s characteristics; 5. Sort out which areas need improvement; 6. Identify operational activities’ priorities; 7. Develop aspects of the strategy map; 8. Develop performance indicators; 9. Share idea’s and futuristic actions; 10. Experiment with the developed method. 2.5 Performance measurement systems for SMEs Differences between large enterprises and small and medium-sized enterprises (SMEs) are evident (Baba, Deros, Yusof, Azhari & Salleh, 2006; Brem et al., 2008) in general organizational
Performance measurement in SMEs
07-12-15 Koen Brinkerink 7 characteristics and in relation to performance measurement systems (e.g. Garengo et al., 2005; Taticchi et al., 2008). Utilisation of performance measurement systems can be problematic for SMEs since models and frameworks are, implicitly (Brem et al., 2008; Chalmeta, Palomero & Matilla, 2012), developed for large, mature manufacturing and service organisations (i.e. Bititci, Garengo, Dörfler & Nudurupati, 2012; Groen et al., 2012; Mettänen, 2005; Pun & White, 2005; Yadav & Sagar, 2013). These models and frameworks don’t take into account the characteristics of SMEs (Brem et al., 2008; Garengo et al., 2005; Taticchi et al., 2008; Taticchi et al., 2010). Implementing such a model or framework is hindered because a SME (Garengo et al., 2005): lacks human resources; has little managerial and financial capacity; adopts a reactive approach to strategic planning; has primarily “tacit knowledge and little attention given to the formalization of processes (…) [and] misconception of performance measurement” (Garengo et al., 2005, p. 30).
Little research has been conducted on performance measurement in SMEs (Brem et al., 2008; Garengo et al., 2005; Taticchi et al., 2008). Models that are explicitly developed for SMEs are not widely supported (Brem et al., 2008). Research that focuses on designing, implementing, and using (Bourne et al., 2000) a PMS for SMEs (Brem et al., 2008) mainly contain guidelines and methods that were developed by said authors and are predominantly based on single case studies (e.g. Biazzo & Garengo, 2012a; Chalmeta et al., 2012; Fernandes et al., 2006). These methods are context specific and whether they can be successfully applied to other SMEs is unclear. Therefore the organizational context and characteristics has to be taken into consideration.
Garengo et al. (2005) recommends that a PMS should be: simple and efficient implementable (Sousa & Aspinwall, 2010); employees involved in the developmental process must remain committed throughout the process (Hudson-Smith & Smith, 2007); strategy and operational activities have to be taken into consideration (Taticchi et al., 2008); existing IT-infrastructure must be utilised (Brem et al., 2008; Taylor & Taylor, 2014); a structured approach for a dynamic system must be used (Hudson et al., 2001; Taticchi et al., 2008). Next to, SMEs are in need of simple (Fernandes et al., 2006) indicators who provide useful and meaningful information (Bititci, Firat & Garengo, 2013). SMEs should focus on a limited number of indicators (Garengo et al., 2005) that encompass the entire organization (Bititci et al., 2013; Taticchi et al., 2008).
Developing a PMS follows the same conceptual phases for SMEs and large enterprises (Bourne et al., 2000). Though, the prescriptive design and implementation methods may not be suitable for SMEs per se (Garengo et al., 2005; Taylor & Taylor, 2014) due to the characteristics of SMEs. This is reflected the recommendations and requirements for a suitable SME PMS developmental process (Chalmeta et al., 2012; Cocca & Alberti, 2010; Hudson et al., 2001; Hudson-Smith & Smith, 2007).
The characteristics of the developmental process for SMEs have to comply with are extensive and context dependent (Brem et al., 2008; Sousa & Aspinwall, 2010; Taylor & Taylor, 2014). Requirements of a effective developmental process according to Hudson et al. (2001) consists out of: “need evaluation/existing PM audit; key user involvement ; strategic objective identification; performance measure development; periodic maintenance structure; top management support; full employee support; clear and explicit objectives; set timescales” (p. 1102). Effectively managing the developmental process is dependent upon top management support; having clearly formulated objectives; full employee-participation; having a project timeframe (Hudson et al., 2001). Cocca and Alberti (2010) complements that the developmental process must aim at “periodically evaluation existing PMS; strategy development; (…) long and short-term planning; information sharing and communication; (…) facilitator; (…); linking performance to compensation process; procedures clearly defined; IT infrastructure support”; systematically developing goals and targets; role assignment and responsibilities sharing” (p. 194); and performance adjusting procedures.
Hudson et al. (2001) concludes that the developmental process must be resource effective, lead to short and long term benefits, be dynamical and flexible in order to adapt to strategic changes, as well as it must be iterative. The system should be easy to use; implementable in a short time period; robust, valid and easy to maintain (Sousa & Aspinwall, 2010).
Performance measurement in SMEs
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Derived from the demands a PMS (Garengo et al., 2005) and the developmental process for SMEs (Chalmeta et al., 2012; Cocca & Alberti, 2010; Hudson et al., 2001; Hudson-Smith & Smith, 2007; Sousa & Aspinwall, 2010) must comply with, several process methodology were developed. These methods seek to be relevant for SMEs. Following the models and process methodologies specific developed for SMEs it can be concluded that most of them are an adoption of the Balanced Scorecard (Chalmeta et al., 2012; Taticchi et al., 2008): Balanced Scorecard in non-profit SMEs; The Balanced Scorecard for SMEs: A Circular Approach (Biazzo & Garengo, 2012a); Adaptation of Balanced Scorecard to SMEs; Application of Balanced Scorecard to Small Companies; Quality Models in an SME Context (cf. Chalmeta et al., 2012; Taticchi et al., 2008). Since no model meets the demands posed by academics (cf. Brem et al., 2008; Chalmeta et al., 2012; Taticchi et al., 2008), it is recommended (Chalmeta et al., 2012; Sousa & Aspinwall, 2010) to use the Balanced Scorecard as basis since: the BSC is easy to understand (Biazzo & Garengo, 2012c; Edberg, 1997; Sousa & Aspinwall, 2010); is recognizable (Sousa & Aspinwall, 2010) and stands synonymous for PMS (Wouters, 2009); is used widely and is perhaps the most applied model (Taticchi et al., 2010); is the most well-known PMS-model (Biazzo & Garengo, 2012c), and there is plenty of evidence of successful implementation in SMEs (Basuony, 2014; Biazzo & Garengo, 2012a; Fernandes et al., 2006; Groen et al., 2012).
Biazzo and Garengo (2012b) developed a method for SMEs who haven’t formalized their strategy, and thus cannot apply a top-down methodology. Biazzo and Garengo (2012b) assume that a SME will develop their strategy both emergently as well as planned. Their methodology is based on the strategy map (Kaplan & Norton, 2004) and Balanced Scorecard (Kaplan & Norton, 1996). Suggested is to base the development of a PMS on executing a gap-analysis for the measures currently under control, to identify the desired future state and strategy of the organization (Biazzo & Garengo, 2012b; Garengo & Biazzo, 2012). The methodology is called the ‘Circular Balanced Scorecard’ and consists out of 4 stages, who altogether represent a cycle: 1. Identify existing performance indicators, 2. Develop implicit strategy map based on identified indicators, 3. Develop desired strategy map based on implicit strategy map; determine discrepancy between strategy and identified critical success factors; and determine comprehensiveness of performance measures in line with critical success factors, 4. Develop Balanced Scorecard based on the desired strategy map; develop key performance measures, targets, goals and initiatives. Their methodology is graphically portrayed below (figure 3).
2.5.2.2 The PMS-IRIS process methodology The PMS-IRIS process methodology (Chalmeta et al., 2012) can be regarded as a ‘typical’ (Lohman et al., 2004; Wouters & Sportel, 2005; Wouters & Wilderom, 2008) process methodology and utilises a top-down approach. The fundaments of their method are the strategy map (Kaplan & Norton, 2004) and the Balanced Scorecard (Kaplan & Norton, 1996). The method is developed for SMEs and takes into consideration: decentralized decision making; limited resources; limited IT-infrastructure; limit knowledge about performance measurement and data-analysis; limited strategic alignment and
Performance measurement in SMEs
07-12-15 Koen Brinkerink 9 little organizational formalisation; poor communication; and low commitment to a PMS development project (Chalmeta et al., 2012).
An alternative developmental method is defined by Groen et al. (2012). This method can be found in Enabling developmental method .
The circular Balanced Scorecard methodology (Biazzo & Garengo, 2012a) and the PMS-IRIS methodology (Chalmeta et al., 2012) uses a top-down logic. A project team, mainly consisting out of managers, is appointed to execute the project and develop the PMS. However, in the enabling methodology end-users execute the project, thus develop the PMS (Groen, 2012; Groen et al., 2012). It has been empirically found that the enabling approach leads to employee empowerment, employee commitment to performance improvement, organisational learning and higher department performances (Gravesteijn et al., 2011; Groen, 2012; Groen et al., 2015). 2.5.3 Preconditions for effective developmental process for SMEs SMEs are recommended (Taticchi et al., 2012; Taticchi et al., 2008) to examine their ‘readiness’ (Brem et al., 2008) a priori designing, implementing and using the PMS (Bourne et al., 2000). Examining readiness is crucial due to inherent resource limitations of SMEs (Garengo et al., 2005; Hudson et al., 2001; Hudson-Smith & Smith, 2007). As a result, the development of a PMS must be effective (Garengo et al., 2005). Effective implementation of a PMS is dependent on: strategy implementation process; strategy formulation process; leadership; supporting IT-infrastructure; quality management culture; organizational learning orientation (Taylor & Taylor, 2014); existence of a cost accounting system; Enterprise Resource Planning (ERP) system; formal process structure; and execution of customer focused market research (Brem et al., 2008).
A SMEs has to undertake actions when it does not comply with preconditions, i.e. by means of gaining knowledge, developing expertise or developing procedures (Taylor & Taylor, 2014). The existence of preconditions is, among other things, dependent on the organizational maturity (Chalmeta et al., 2012; Sousa & Aspinwall, 2010; Taylor & Taylor, 2014).
A PMS is part of the management process (Kaplan & Norton, 2004). Where defining the mission, vision, core values, and strategy precedes the development of a PMS (de Waal & Kourtit, 2013; Doeleman et al., 2013; Kaplan & Norton, 2004). The PMS must be aligned with the organizational mission, vision, and strategy (e.g. Franco-Santos et al., 2007; Kaplan & Norton, 2004, 2008; McAdam, 2000; Taylor & Taylor, 2014) in order to link the system to organisational objectives (Garengo et al., 2005). By means of achieving strategic alignment managers, employees and, external stakeholders will be able to understand the direction of the organization (Doeleman et al., 2013). The cascading of strategic alignment is portrayed below in figure 4.
Vision
Strategy Objectives Critical Success Factors Key Action Initiatives What do we want to be in the future? How do we intend to accomplish our vision? What must we complete to move forward? to achieve our vision? What are our metric indicators of success? What action programs will achieve our performance goals? { {
{ { { Strategic V ision and Objectives Performance measurement in SMEs
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2.5.4.1 Mission The mission is the raison d’être of the organisation. It is “a concise, internally focused statement of the reason for the organization’s existence, the basic purpose towards which its activities are directed and the values that guide employees’ activities” (Kaplan & Norton, 2004, p. 34).
The vision is the desired future state of the organization (Johnson, Scholes & Whittington, 2008). It is “a concise statement that defines the mid- to long-term (three- to ten-years) goals of the organization. The vision should be external and market-oriented and should express (…) how the organization wants to be perceived by the world” (Kaplan & Norton, 2004, pp. 34-35).
Strategy is the direction and long-term organizational goal of an organization (Johnson et al., 2008). It operationalizes the organizational mission and vision. Strategy “is about selecting the set of activities in which an organization will excel to create a sustainable difference in the market place” (Kaplan & Norton, 2004, p. 35). The strategy must be adapted in need of the external environment and the organizational competences (Kaplan & Norton, 2004).
Organizational goals are targets by which the mission and strategy of an organization must be achieved (Caralli et al., 2004). Goals are said to be specific, measurable, acceptable, realistic, and timely (S.M.A.R.T.) defined (Caralli et al., 2004; de Waal & Kourtit, 2013). They should be quantitative in order to be able to measure goal achievement (Caralli et al., 2004).
Critical success factors are those factors that determine the success of an organization (Bullen & Rockart, 1981; Caralli et al., 2004; Rockart, 1978). They must be monitored at all time and the link between the mission, vision, and strategy of an organization and the critical performance indicators (e.g. Biazzo & Garengo, 2012c; Kaplan & Norton, 1996, 2004; Mettänen, 2005).
A performance-indicator “can be defined as a metric used to quantify the efficiency and/or effectiveness of an action” (Neely et al., 2005, p. 1229). Key performance indicators are financial and non-financial metrics that can be applied at all organizational levels. They are used for measuring the organizational ability of achieving goals, strategies, and plans (Ferreira & Otley, 2009). Key performance indicators provide insight into those factors that determine organizational success (Parmenter, 2007).
Linked to (key) performance indicators are tactical and operational targets. They must be S.M.A.R.T defined (de Waal & Kourtit, 2013; Shahin & Mahbod, 2007) and provide guidance for activities and actions an organization must execute in order to fulfil the targets (Kaplan & Norton, 1996). Targets must be challenging but feasible (Ferreira & Otley, 2009).
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