Performance indicators are relevant to the following models and theories:
Mission statements: these define the important aspects of performance that sum up the purpose of the organisation. See the article ‘Reports for performance management’ (see 'Related links').
Stakeholder analysis: recognises that different stakeholders have different views on what constitutes good performance. Sometimes what stakeholders want is different to what the mission statement suggests as the purpose of the organisation. This can be a particular problem when the stakeholders are key-players.
Generic strategies: the main generic strategies to achieve competitive advantage are cost leadership and differentiation. If a company’s success depends on being a cost leader (a CSF) then it must carefully monitor all its costs to achieve the leadership position. The company will therefore make use of performance indicators relating to cost and efficiency. If a company that has chosen differentiation as its path to success then it must ensure that it is offering enhanced products and services and must establish measures of these.
Value chain: a value chain sets out an organisation’s activities and enquires as to how the organisation can make profits: where is value added? For example, value might be added by promising fantastic quality. If so, that would be a CSF and a key performance indicator would the rate occurrence of bad units.
Boston consulting group grid: this model uses relative market share and market growth to suggest what should be done with products or subsidiaries. In P3 if a company identifies a product as a ‘problem child’ BCG says that the appropriate action for the company is either to divest itself of that product or to invest to grow the product towards a ‘star’ position on the grid. This requires money to be spent on promotion, product enhancement, especially attractive pricing and perhaps investment in new, efficient equipment. In P5 the model would be used to establish how to manage the performance of the products and what measures should be used depending on their position in the grid. For example, good performance for a star would be measured by market share growth rather than profits. Return on investment could be low until full use is made of the new equipment. Once a product reaches its ‘cash cow’ stage performance measures will focus on revenues, costs and profits.
PESTEL and Porter’s five forces: both the macro-environment and competitive environment change continuously. Organisations have to keep these under review and react to the changes so that performance is sustained or improved. For example, if laws were introduced which stated that suppliers should be paid within a maximum of 60 days, then a performance measure will be needed to encourage and monitor the attainment of this target.
Product life cycle: different performance measures are required at different stages of the life cycle. In the early days of a product’s life, it is important to reach a successful growth trajectory and to stay ahead of would-be copycats. At the maturity stage, where there is great competition and the market is no longer growing, performance will depend on low costs per unit and maintaining market share to enjoy economies of scale.
Company structure: different structures inevitably affect both performance and its management. For example as businesses become larger many choose a divisionalised structure to allow specialisation in different parts of the business: manufacturing/selling, European market/Asian market/North American market, product type A/product type B. Divisional performance measures, such as return on investment and residual income, then become relevant
Information technology (IT): new technologies will influence performance and could help to more effectively measure performance. However, remember that sophisticated new technology does not guarantee better performance as costs can easily outweigh benefits. If IT is vital to a business then downtime and query response time become relevant as might a measure of system usability.
Human resource management: what type of people should be recruited, and how are they to be motivated, appraised and rewarded to maximise the chance of good organisational performance? Performance measures are needed, for example, to monitor the effectiveness of training, job performance, job satisfaction, recruitment and retention. In addition, considerable effort has to be given to considering how employees’ remuneration should be linked to performance.
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