Designing a performance measurement system:

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Designing a performance measurement system

Designing a performance

measurement system:

a case study within Paris2day

Measuring is knowing

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Designing a performance measurement system:

a case study within Paris2day

Master’s Thesis BA Organizational & Management Control

Author: Hindri van der Laan

Student number: 1729551

Specialization: Organizational & Management Control

Date: 04-07-2011

Place: Emmen

First supervisor: drs. C. J. Westra-de Jong Second supervisor: prof. dr. H.J. ter Bogt

Company: Paris2day

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EXECUTIVE SUMMARY

Prior to this research, Paris2day was concerned with the controllability of the organization. Due to the rapid growth of its clothing chain, with seven stores in under thirty months, management unintentionally focused mostly on the short-term. During the first meeting with the CEO it became clear that a Performance Measurement System was required which takes all relevant aspects of the organization into account. Therefore, the objective of this research was:

To provide the management of Paris2day with a design of a new Performance Measurement System and as a result enable the management to monitor and advance the efficiency of the organization.

In order to achieve the above cited objective the research provides a main research question:

What are the Critical Success Factors and what Performance Measurement System, which incorporates these Critical Success Factors, should be designed for Paris2day?

After the finishing the case study, it can be concluded that the Balanced Scorecard is the best framework for Paris2day wherein the six Critical Success Factors in combination with the fifteen Key Performance Indicators shape the Performance Measurement System. The Balanced Scorecard takes all the processes into account and it ensures simplicity and oversight since it utilizes a limited amount of indicators. Consequently, the simplicity ensures that every person within the organization understands the indicators and its relation to other indicators as well as the mission and strategy. It is therefore easy to communicate to all its personnel. The ascertained CSF’s are: profitability, customer relationship, improvement, increase market share, flexibility, product quality and personnel.

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With the Balanced Scorecard in place, Paris2day will make sure that they can face the future, and the rapid growth that comes with it, confidently. The PMS assures the controllability of the organization. In addition, it pressures management to also focus on the long-term. This way Paris2day will stay on top of present results and will guide future performance.

Besides the conclusion, the research provides several recommendations:

 Management should re-evaluate the Key Performance Indicators and the attached norms on a half-yearly basis.

It is advised to re-evaluate the KPI’s on a half-yearly basis in order to guarantee the validity of the system. Management should asses the current KPI’s whereby the focus should be on the representation of all the CSF’s by the KPI’s. “Do the current indicators capture the Critical Success Factors of our organization?”. In addition, the norms should be assessed. Especially during periods of rapid growth, norms tend to be outdated quickly. As a result, the PMS loses its effectiveness. Re-evaluation eliminates potential bottlenecks.

 Management should perform a yearly data-analyses in order to establish the validity of the information sources and the information it provides.

The research established the use of two information sources. It is important to periodically test the effectiveness of the information sources. On the one hand, the two sources should be evaluated. “Do the two sources provide the organization with all the required information? Or do other information sources complement the current information system?” On the other hand, the information each of the sources provide should be looked at. “Are the indicators measured based on correct information?”

 Management should inform its employees in detail about the PMS. This in order to maximize the acceptance of the system and to increase the knowledge of the organizations strategy and objectives.

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PREFACE

With this master’s thesis I conclude my master Organizational & Management Control within the study Business Administration of the University of Groningen. It is a research conducted at Paris2day with the objective to formulate recommendations for the management concerning the design of a Performance Measurement System. The research took place in the preceding six months and consisted out of an internship at the headquarters of Paris2day.

In the first place I would like to thank both my thesis supervisor Coby Westra-de Jong and my supervisor at Paris2day Pieter Dijkstra. They have been a great help to me during this process. Their feedback definitely has had a positive influence on my thesis. Furthermore they made me feel welcome and they where there for me when help was required.

Secondly, I want to thank my family, friends and especially my girlfriend for their support during my thesis as well as my period in Groningen in general. Thanks to them, studying at the University of Groningen has been great.

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TABLE OF CONTENT

EXECUTIVE SUMMARY ... 3 PREFACE ... 5 TABLE OF CONTENT ... 6 1. INTRODUCTION ………... 8 1.1 INTRODUCTION PARIS2DAY ………... 8 1.2 PROBLEM STATEMENT ………... 9 1.3 RESEARCH OBJECTIVE ……… 9 1.4 RESEARCH QUESTIONS ……… 10

1.5 STRUCTURE OF THE THESIS ……….. 11

2. THEORETICAL FRAMEWORK ……….. 12

2.1 MANAGEMENT CONTROL ………..……… 12

2.1.1 DEFINITION MANAGEMENT CONTROL ……… 12

2.1.2 PMS AS A PART OF MANAGEMENT CONTROL ………. 13

2.2 PERFORMANCE MEASUREMENT SYSTEMS .………. 13

2.2.1 DEFINITION PMS ………. 13

2.2.2 IMPORTANCE OF A PMS ……….. 14

2.3 DESIGNING A PERFORMANCE MEASUREMENT SYSTEM ………. 15

2.3.1 PHASES IN PMS IMPLEMENTATION ……….. 15

2.3.2 MISSION STATEMENT ………. 16

2.3.3 STRATEGIC OBJECTIVES ………. 16

2.3.4 CRITICAL SUCCES FACTORS ………. 17

2.3.5 KEY PERFORMANCE INDICATORS ………...… 17

2.4 CONCEPTUAL MODEL ………..……… 18

2.5 BALANCED SCORECARD VS. EFQM EXCELLENCE MODEL ……..………..…………... 21

2.6 SUMMARY ……… 22

3. RESEARCH METHODOLOGY ………. 24

3.1 RESEARCH TYPE ……….. 24

3.2 DATA COLLECTION ……… 24

3.3 RESEARCH CONDITIONS ……… 25

3.4 RELIABILITY, VALIDITY AND GENERALISABILITY ……… 25

4. CASESTUDY PARIS2DAY ………. 27

4.1 CURRENT SITUATION PARIS2DAY ……….. 27

4.1.1 THE ROLE OF MANAGEMENT CONTROL AND PMS WITHIN PARIS2DAY ……. 27

4.1.2 THE GOALS OF PARIS2DAY REGARDING A NEW PMS ……… 28

4.2 DESIGNING THE PMS ……… 29

4.2.1 MISSION STATEMENT ………. 29

4.2.2 STRATEGIC OBJECTIVES ……….. 30

4.2.3 CRITICAL SUCCES FACTORS ……… 31

4.2.4 KEY PERFORMANCE INDICATORS ……….. 32

4.2.5 NORMS OF THE KEY PERFORMANCE INDICATORS ………... 35

4.3 INFORMATION PROVISION..……… 36

4.4 SUMMARY ……… 37

5. CONCLUSIONS AND RECOMMENDATIONS ………. 40

5.1 CONCLUSIONS ……….. 40

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REFERENCES ……… 43

APPENDIX 1: INTERVIEWS . .……… 45

APPENDIX 2: THE BALANCED SCORECARD AND EFQM... 46

APPENDIX 3: DEFINITION KPI’S ... 47

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1. INTRODUCTION

This first chapter will start with the introduction of Paris2day. It will become clear that Paris2day is a relative new company which momentarily experiences fast growth (§1.1). This fast growth is accompanied with control issues. These issues are described in the problem statement (§1.2). Consequently, the objective of the research will be established (§1.3). The subsequent paragraph deals with the research questions (§1.4). Finally, this chapter will conclude with the structure of the thesis (§1.5).

1.1 Introduction Paris2day

Paris2day was founded in the summer of 2008 by three business partners. The brand, specialized in affordable fashion for women exclusively from Paris, started with a single clothing store in Klazienaveen. This first store was such a success that more stores followed. Nowadays it can be described as a beginning clothing chain with establishments in:

 Klazienaveen  Groningen  Zwolle  Emmen  Drachten  Assen  Hardenberg

As is the first clothing store, the subsequent stores are also a success. Momentarily, Paris2day employs over 50 employees which work in the clothing stores as well as its headquarters. Management is constantly seeking new opportunities to open new Paris2day clothing stores. The goal is growth and subsequently, Paris2day aims at national coverage with a clothing store in every major city of the Netherlands.

The organization can be described as a line organizational structure. The decision-making is centralized and the work atmosphere is informal by nature where management interacts directly with the staff and decisions are implemented rapidly. The line organizational structure lacks standardizations of tasks and is a frequently seen structure among fast growing companies such as Paris2day.

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build a new warehouse in the surroundings of Emmen. Thus, changing from JIT to maintaining stocks. This decision resolved the logistical problems they encountered using the JIT principle.

The other problems within Paris2day revolves management control. These problems will be clarified in the upcoming paragraph.

1.2 Problem statement

Barnes et al. (1998) mentions that “Small- and medium-sized enterprises are susceptible to

business failure primarily due to poor risk management associated with inadequately informed decision-making”. The authors state that a comprehensive PMS can provide the management

with crucial information which sustains this decision-making process and therefore ascertaining the continuity of the organization.

Above narrative perfectly captures the problems within Paris2day. For some months, the CEO of Paris2day is concerned with the controllability of the organization. As mentioned in the first paragraph, Paris2day has opened seven stores in just over two years and another store is already being planned. As a result, management primarily focuses on the short-term. Consequently, the long-term is ignored. Due to the rapid growth, management feels that it is losing the overview and therefore the control. During several interviews it became clear that the CEO has some ideas about the Critical Success Factors, especially in the financial area, but he acknowledges that there are more, unknown, factors influencing the continuity of the organization. Without a concrete PMS, the organization might become ineffective and inefficient and the continuity of the organization would be at risk.

1.3 Research objective

According to Blumberg et al. (2003), the research objective addresses the intentions of the research. As stated in the problem statement, management of Paris2day is losing the overview and thus the control of the organization. Designing a PMS would be the first step in tackling this problem and regain control. Therefore the research objective is defined as:

RO: The aim of this research is to provide the management of Paris2day with a design of a new

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Designing a performance measurement system 1.4 Research questions

After illustrating the problem statement and the research objectives a research question can be formulated. Previous sections are summarized in the following research question:

RQ: What are the Critical Success Factors and what Performance Measurement System, which

incorporates these Critical Success Factors, should be designed for Paris2day?

Besides the research question several sub questions are formulated which combined will answer this research question.

Theoretical framework:

1. What is management control?

This sub questions consists out of a discussion of the scientific literature concerning management control. It will provide a definition as well as an explanation of the different forms of management control. Furthermore, it will establish the fact that a performance measurement system is a part of management control.

2. What is a performance measurement system?

After the reader has a better understanding of management control, the literature review will get deeper into performance measurement systems. This sub question will procure a definition. In addition, the objective of a PMS and the effectiveness of such a measurement system will be dealt with.

3. How should a performances measurement system be designed according to the literature?

The aim of this sub question is to ascertain an insight in the design of a PMS. After reviewing the large amount of scientific literature concerning the design of a PMS, a conceptual model will be constructed. The model will be used as a roadmap for the case study at Paris2day.

4. According to the literature, which performance measurement model fits a fast growing company?

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Designing a performance measurement system Case study Paris2day:

5. What is the current situation at Paris2day?

The case study will initiate with introducing the current situation to the reader. It will become clear what the role of performance measurement is within Paris2day. Next to that, interviews with the management made clear what the goals are regarding a new PMS.

6. What are the Critical Success Factors of Paris2day

In assuring the continuity of an organization it is of vital importance to have an understanding of the Critical Success Factors. This sub question will lead to the determination of the CSF’s of Paris2day given that they are an important contingency in the design of a PMS.

7. How can a performance measurement system, based on the literature, be designed for

Paris2day?

At this point, sub question three will be put into practice. This section will produce the actual PMS which is the goal of the research. It consists out of, in the conceptual model shown, four phases of the design process.

1.5 Structure of the thesis

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2. THEORETICAL FRAMEWORK

Preceding the actual case study a theoretical framework has to be established to form an understanding of the theory concerning a PMS. This chapter will start with discussing management control (§ 2.1). Furthermore, the reader will become aware of the definition, the goals and the effectiveness of PMS (§ 2.2). In addition, the process of creating a PMS will come at bid (§ 2.3). It defines three different phases and identifies the essential parts of a PMS. This will be followed by a discussion of a framework in which the key performance indicators should be organized (§2.4). Subsequently, the obtained information will be summarized in a conceptual model (§ 2.5). Due to the abundance of information, the chapter will be concluded with a summary (§ 2.6).

2.1 Management control

2.1.1 Definition management control

Implementing or improving management control generally improves the payoffs of organizations. Control experts even state that this yields higher payoffs than focusing on strategy. This opinion is supported by studies done by Fortune which showed that 70% of the CEO’s who failed where not due to an ineffective strategy but the way it was implemented. But what is management control? It is a challenge for all organizations to channel human input to achieve organizational goals. In his book, Flamholtz (1996) mentions that organizations therefore should control the behaviour of their employees in order to reach these, previously mentioned, organizational goals. Simons (1994) provides the literature with four management control alternatives:

Belief systems:

This system makes sure that every subordinate of the organization adopts the core values like mission and vision. This can also include social standards that are the standard within the organization. Consequently, the subordinates endorse all the organizational goals.

Boundary systems:

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Interactive control systems:

With a rapidly changing environment it is imperative for organizations to be able to change course when needed. Changes in strategy may be needed after reviewing the environment. Interactive control systems empowers communication between top management and subordinates during decision activities. The focus is on forcing a dialogue through all levels of the organization and stimulate learning. Face-to-face meetings and action plans of employees are a good way in accomplishing this.

Diagnostic control systems:

Diagnostic control systems consists out of formal feedback systems. These are used to observe the organizational results. With this system, managers have a tool to correct digression from the, previously established, standards. This system helps management by implementing and controlling the strategy of the organization.

It is stressed that a good mix of the four control systems is needed in order to guarantee the effectiveness of the complete management control system. The systems keep each other in balance where belief systems and interactive systems are positive and inspirational and boundary control systems and diagnostic control systems are based on constraints.

2.1.2 PMS as a part of management control

Performance measurement systems are a part of management control and it can be seen as a diagnostic control system. The PMS enables the management to measure the results obtained and to compare these with the objectives of the organization. This may result in steering the behaviour and activities of the subordinates whereby the general idea is that an organization will be successful when it realizes its objectives.

2.2 Performance measurement systems

2.2.1 Definition PMS

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2.2.2 Importance of a PMS

The importance of a PMS is described by Sinclair and Zairi (1995). The authors mentions seven dimensions which highlight the significance of a measurement system based on identified literature.

Planning, control and evaluation:

This can be seen as the core of a PMS. A good PMS lets the process of planning, control and evaluation run smooth. It is the link between the three phases. After the planning phase has lead to organizational objectives the organization, with the PMS in place, will attempt to achieve those. The evaluation afterwards is known as the process of analyzing obtained results.

Managing change:

PMS supports management initiatives such as the Balanced Scorecard and EFQM. It is stated that organizations which introduce those initiatives measure more and different processes and results. Besides, it is advised to integrate the measures throughout the organization across the levels of management.

Communication:

PMS enhances communication since strategy, ambitions and objectives of the organization can be reduced to simple measures and indicators. Therefore, lower levels also know what is required to reach the organizational objectives. In addition, it “increases constructive problem

solving, monitors progress, gives feedback and reinforces behaviour.” Improvement:

One of the most important reasons can be found in improvement of the organization. Improvement is the result of the evaluations. Therefore, improvement can be seen as the end product of a PMS. Without a PMS, nothing can be measured and therefore there can be no improvement.

Resource allocation:

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Motivation:

The article states that PMS strongly influences the motivation of employees. When employees are given targets, motivation increases. The motivation is optimized if the employees perceives the targets as difficult but realizable.

Long-term focus:

As is the problem within Paris2day, management are often perceived as short-term focused. Appropriate PMS can make sure that management obtains a more long-term perception.

A PMS is based on the strategy of the organization. The measurement system makes sure that the implementation of the strategy is supported and the strategic proposals are monitored. The process of planning, control and evaluation is captured in a model (figure 1) provided by Lohman et al. (2002). Level one represents the operational level where a comparison between input and output and the predefined measures is made. Level two symbolizes the strategic and tactical level. They plan, control, evaluate and improve the organization which is obviously a continuous process. A proper PMS provides level two with the right information in order to evaluate performance and goals.

Figure 1: “Process control loops”. Source: Lohman et al. (2002)

2.3 Designing a performance measurement system

2.3.1 Phases in PMS implementation

The literature defines three phases in the implementation of a PMS. Bourne et al. (2000) depicts:  The design of the PMS

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The design of a PMS is the sole objective of this Master’s Thesis. This will come at bid during the case study. The author mentions that this first phase can be divided into two main categories. The establishing of the key objectives and attaching the right measures to these objectives. The literature, with reference to designing PMS, agrees unanimously that the measures should be obtained looking at the strategy.

The implementation of a PMS is the second phase. There are numerous examples of organizations who implemented a good PMS which did not show the results expected. Several factors can be debit to this failure. The implementation phase institutes the designed PMS to collect and process the desired information needed. This information enables the measures to be made on a regular basis. The article stresses that this might be information already available to the organization or new information due to new initiatives like customer analysis.

The actual use of the system is the last phase presented by Bourne et al. (2000). The goal of this phase is to test the validity of the strategy. The output of the defined measures, measure the success of the strategy. In addition, the success of the implementation process of that strategy is ascertained.

Although the process is not linear and phases may overlap the process described above is a good starting point for the implementation of a PMS. As mentioned before, only the first phase will be the focus of this research.

2.3.2 Mission statement

Firstly, the mission statement of the organization must be clear. Hill et al. (2008), expresses a mission statement as a “formal, short, written statement of the purpose of a company or

organization. The mission statement should guide the actions of the organization, spell out its overall goal, provide a sense of direction, and guide decision-making.” The strategy of the

organization is based on the mission statement. The mission statement of Paris2day will be the first step in the designing process of a PMS.

2.3.3 Strategic objectives

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2.3.4 Critical success factors

In order for organizations to survive in the current competitive environment it is important for them to have a understanding of their fundamental operating activities. The operating activities that must be given special and continuous attention in order to ensure success of the organization. Boynton et al. (1984), defines this as critical success factors (CSF’s). Establishing the CSF’s is the most crucial part in the design of a PMS. Therefore, a extensive analyses of the organization is needed. A PMS may be theoretically correct but if it measures the wrong factors the organization will default. In addition, Leidecker et al. (1984) state that identifying the right CSF’s helps management in assessing the information desires. It tells management which information is needed from which party in order to be able to get a clear sight of the organization. The CSF’s will be the input for the Key Performance Indicators (KPI’s) which are portrayed in the next subparagraph.

2.3.5 Key performance indicators

According to Parmenter (2010), KPI’s are a set of metrics which focus on the CSF’s for the past and future success of the organization. The author states that KPI’s are rarely new to organizations investigating the possibilities of implementing a PMS. They have not been acknowledged by the management or they were not take seriously. A KPI affects one or more CSF’s and are therefore the link between the strategy and the successful execution of this strategy. In addition, it allows an organization to determine the progress as a whole in comparison to the past and its competitors.

Characteristics:

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SMART:

In their book, Buytendijk & Brinkhuis-Slaghuis (2004) state that it is common practice to set up every KPI based on the SMART-principle:

 Specific  Measurable  Achievable  Relevant  Time framed

Every KPI’s should be SMART or it should be revised. Due to the fact the SMART-principle is a well known phrase in the scientific literature of Business Administration, further explanation is not considered necessary.

2.4 Balanced Scorecard vs. EFQM Excellence Model

In order to get a clearly structured view of all the defined CSF’s and KPI’s, Eijnatten et al. (2002) advises to use a model or framework wherein the complete PMS is captured. According to the authors, a framework decreases the uncertainty in the organization, caused by a lack of oversight of all the measures, by making the whole process visual. Consequently, it captures all the measures of the PMS in a well-ordered visual presentation. This section will examine the Balanced Scorecard which was introduced by Kaplan and Norton (1992) and the EFQM Excellence model (1988) developed by the European Foundation for Quality Management. Appendix 2 elucidates the choice for these two models over other performance models.

Balanced Scorecard:

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Figure 2: Balanced Scorecard. Source: Kaplan and Norton (1996)

model, the mission and strategy are the basis for the analyses of the CSF’s. After establishing the CSF’s, the KPI’s are initiated as described earlier. The model divides the measures over the four perspectives. This fulfils the needs of executives since it compresses all the different elements of an organization, seemingly without a casual relation, into a single management report. On top, it prevents “sub optimization” since it forces managers to consider the cause-and-effect relationship between the measures. A manager has to wonder if improvement in one area might be at the expense of other areas. It obliges the person to consider the big picture instead of focusing on one aspect alone. Moreover, the position of the BSC in the organization is an advantage since it is as well evolves the operational level and therefore it knows the objectives and the way they can be reached.

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cause-Designing a performance measurement system

and-effect relationship which is assumed by the developers of the BSC, Norreklit also mentions the lack of interaction between the BSC and all stakeholders. For Paris2day this is not an issue since it has no interactions with stakeholders which are not mentioned already in the BSC. Norreklit also agrees later on that this argument goes for larger firms.

EFQM Excellence model:

The EFQM Excellence model (figure 3) was developed by the European Foundation of Quality Management in 1988 and it is a self-assessment framework which, as does the BSC, measures performance. It identifies the strengths as well as the area’s which need improvement of all activities within a organization. The term “excellence” is in the name of the framework since it has the aim to focus on what an organization could do in order to provide an excellent product to all its customers or stakeholders. The framework is mainly used as a diagnostic tool in order to ensure quality. The figure shows that there are five enablers and four results areas. The enablers indicate what needs to be taken care of in order to be able to perform and the results areas illustrates what was actually performed. Each of these nine criteria are then again subdivided to describe in detail how excellence is achieved in this criteria.

Figure 3: EFQM Excellence Model. Source: European Foundation for Quality Management (1996)

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To start with the final decision, the Balanced Scorecard will be initiated within Paris2day. In contrast to the EFQM framework, it does not only focus on quality but takes all processes into account. The Balanced Scorecard ensures simplicity and oversight since it utilizes a limited amount of indicators. Consequently, the simplicity ensures that every person within an organization understands the indicators and its relation to other indicators as well as the mission and strategy. It is therefore easy to communicate which is considered a disadvantage of the EFQM framework. The balance between the leading and lagging indicators provides a balance where the emphasize for Paris2day will be on lagging indicators.

2.5 Conceptual model

The PMS of Paris2day will be the centre of the organization. Every level has its relation to the PMS and it connects the strategic and tactical level with the operational level. As can be seen in the conceptual model, every level has his own set of tasks. The strategic level is responsible for the long-term and therefore in charge of constructing the mission, strategy and the goals which are attached to the strategy. Consequently, the tactical level formulates the standards used in the PMS. Achieving the standards will result in achieving the overall strategy. In addition, the tactical level is accountable for the planning, control and evaluation of the organization. The operational level is at the other spectrum of the PMS and is the level that is being controlled. This level executes the core business and informs higher levels about the output which is then again the basis for the evaluation by the tactical level.

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Figure 4: conceptual model

2.6 Summary

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3. RESEARCH METHODOLOGY

Chapter three will present the research methodology which can be seen as the foundation. The methodology defines the boundaries of every research. Methodology shapes research and assures an effective, clearly defined and an efficient plan of approach. As a result, it guarantees a certain level of quality (De Leeuw, 2005). Firstly, the research type will be established (§3.1). The subsequent paragraph deals with the data collection (§3.2). Furthermore, the research conditions are being ascertained (§3.3). The chapter ends with the reliability, validity and generalisability of the performed research (§3.4).

3.1 Research type

In his book, De Leeuw (2005) describes five types of research. Based on the characteristics, this research can be described as policy supporting research. This research type attempts to in part satisfy the need for knowledge of the management by providing concrete knowledge which is been specified in the problem statement. Paris2day can use these insights in a specific situation. Therefore, the client in this research is Paris2day. The research should provide the management with concrete knowledge regarding the design of a PMS.

3.2 Data collection

Besides the research types, De Leeuw (2005) states different information sources which can be utilized. For this research the sources that are being applied will be specified:

Desk research:

The researcher will make use of documents. In this research, literature concerning the performance measurement systems will be explored as well as documents with information from the organization itself.

Interviews:

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Participating research:

During the period of the research, the researcher observes the organization closely from within. “Observation qualifies as scientific inquiry when it is conducted specifically to answer a research

question, is systematically planned and executed, uses proper control and provides a reliable and valid account of what happened” (Blumberg et al., 2005) The research will be conducted at the

headquarters of Paris2day.

3.3 Research conditions

The following research conditions are applicable to the research. It defines the limitations of the research.

 The research will be completed at Paris2day.

 Business documents and files will have to be obtained.  The information used will be confidential.

 The CEO and employees of Paris2day will support the researcher and its research.  The Master’s Thesis will be written in an academic way.

3.4 Reliability, Validity and Generalisability

Evaluating the credibility of any research is crucial. Rogers (1961) says that scientific methodology is a way of preventing a researcher of deceiving himself in regard to his creatively formed subjective hunches. Saunders et al. (2009) portrays three criteria for ensuring that the derived outcomes are valid. Reliability, validity and generalisability:

Reliability:

If reliability is realized, the data collection techniques and analyses procedures will yield consistent findings. The research is based on the literature concerning performance measurement systems. This has been studied intensively. The research objective, the research questions and the conceptual model are defined with the use of scientific literature. Next to that, the scientific literature has also been used to structure the interviews. The above mentioned aspects have been described thoroughly in previous sections. This enhances the transparency and makes it highly likely that other researchers show equivalent conclusions as are shown in chapter 5.

Validity:

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this research can expressed as valid. The conclusions presented in chapter 5 captures the intentions of the researcher.

Generalisability:

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4. CASE STUDY PARIS2DAY

Before the performance measurement system will be designed this chapter will start with establishing the role of both management control and performance measurement within Paris2day as well as the goals management has set for a PMS (§ 4.1). Subsequently, following the steps presented in chapter 2 will lead to the new PMS for Paris2day (§ 4.2). The ascertained indicators along with the norms will be captured in the Balanced Scorecard. The interaction among the indicators and the effects on the strategic objectives are therefore established (§ 4.3). The chapter will conclude with a summary where the key information is summarized briefly (§ 4.4).

4.1 Current situation Paris2day

4.1.1 The role of Management Control and PMS within Paris2day

With the organization growing rapidly “Management Control” started to become a larger part of daily business. As a result of the interviews with the CEO it became clear that during the last few months several control systems where implemented. Besides expanding the company with new locations it was acknowledged that maximizing the performance of the existing locations was as essential as their aspiration for expansion. The goal was to let the employees achieve the highest results as possible. The subsequent systems, which were which were instigated during the execution of this research, where realized:

Sales training:

Management arranges sales training twice a year. These are executed by a staff member of Paris2day which has the required experience due to previous employment by a large clothing chain (Jack & Jones). New and current employees are obligated to attend these trainings where sales skills are updated with role-plays and presentations. Management sees a positive influence on the financial results of each of the stores after the first training although they cannot be absolutely sure about the actual cause-and-effect relationship.

Incentives:

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€ 2.000. Revenue growth of 12% compared to previous years is worth €4.000. Subsequently, there was a minimum the store managers had to achieve. These targets where set in a meeting with these store managers.

“Handbook Paris2day 2011”:

An internship has lead to the design of the “handbook Paris2day 2011”. This handbook contains the rules employees must follow. Additionally, it informs about the daily actions that are needed such as the actions required when one closes down the store at the end of the day or if there is a take back of a product. To conclude, it explains the history of the company, where it stands for and which behaviour is expected of the employees. Before they start, new employees are obligated to read this handbook.

Functioning meetings:

Every employee is subjected to functioning meetings. These reflect the past three months and offers room to discuss the functioning of the employee as well as feedback of the employee towards Paris2day regarding the functioning of all the processes. Suggestions and ideas are welcome during this conversation. The functioning meetings of the sales persons are done by the store managers and the functioning meetings of the store managers are executed by the CEO. Lastly, the functioning meetings of the employees at the head quarters are also the responsibility of the CEO.

Above cited systems are the first step in constructing a complete MCS. The CEO made it clear that for them it is a continues process especially since they recently started thinking about these issues. After implementing a new PMS one can already observe a good balance in the MCS. A balance that was advised in chapter two by Simons (2000). PMS complements the current control system by providing the management with crucial information which sustains the decision making process. Management previously measured performance only financially where there are three other areas where performance should be measured. Financial measures only measures present performance and therefore does not help the organization to achieve its long-term strategic objectives.

4.1.2 Goals of Paris2day regarding a new PMS

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Long-term focus:

The main concern of management was the lack of focus on the long-term. Daily tasks where managing the current stores and searching for opportunities to open new stores. With the design of a new PMS this will change since there will be several leading indicators which will shift the focus from only the short-term to both the short and long-term. These leading indicators will be addressed in paragraph 4.2.4.

Communication:

In addition, management found awareness of the mission, strategy and organizational goals throughout the company of importance. He wanted “all noses in the same direction” so that every person was aware of their tasks and the desired behaviour. Next to that, the PMS shows store managers their targets.

Improvement:

Lastly, improvement was considered an issue. Since the fact that it is a relative new organization management is recently looking at the improvement of Paris2day. This includes all facets from the product line, internal processes to performance measurement which is the subject of this research.

4.2 Designing the PMS

4.2.1 Mission statement

During the writing of the business plan back in 2008, management introduced the mission statement of Paris2day. The statement included facts about what it is Paris2day offers, to whom, by what it is characterized and lastly, the ambitions the company had. In January of 2011 it was revised and the updated statement is shown in the box below. Recognizing this statement is the first step in instituting a new PMS.

“Paris2day is a rapidly growing clothing chain which offers high quality but affordable fashion from Paris to the modern woman with a high self-awareness and confidence. The company is characterized by customer orientation, professionalism and innovativeness. Paris2day aims at national coverage with a clothing store in every major city of the Netherlands.” 1

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4.2.2 Strategic objectives:

Based on the mission statement, several strategic objectives have been set up. These objectives are interlaced with the mission statement. They explain in short in what way the mission can be accomplished by focusing on these core points of the organization. Before the start of this research, management never took the effort to put them in writing. As a result, a brain storm session with the CEO and the consultation of the original business plan has lead to the below formed strategic objectives for Paris2day:

1. Paris2day wants to maximize its profitability.

The first objective speaks for itself. It is the core objective of every profit-organization to maximize the profits. Paris2day is no different compared to all these other organizations.

2. “Customer is king” – Paris2day wants to optimize the relationship with its customers by offering an elegant shopping surrounding, helpful sales persons with a high sense of fashion, high quality products and an excellent customer service. During the interview, the CEO clarified that the customer makes or breaks the concept. “Success is assured when it gains the favour of the customer.” Therefore, this is one of the first priorities of Paris2day. It enhances the customers shopping experience by offering an elegant shopping surrounding, good staff, high quality products for an affordable price and an outstanding customer service.

3. Paris2day aims at national coverage with a Paris2day clothing store in all major cities of the Netherlands and therefore increasing its market share.

Paris2day is constantly searching for expansion possibilities. The current seven stores perform good and therefore expansion is desired. In addition, during the current economic situation, the real estate branch endured several blows. A large number of business units are nowadays vacant2_{. Consequently, the average rent has decreased over}

the last two years. This fact enables the management to seek for low-priced retail units and sign long-term contracts whereby Paris2day is guaranteed with low renting costs. As the objective says, Paris2day eventually wants to be in every major city.

4. In order to reach this high level of product quality, Paris2day wants a solid and sustainable relationship with its distributor where there is a constant dialogue concerning the expectations and wishes of both parties.

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Paris2day does not buy their products by a wholesaler but directly from a producer. This makes that dialogue is possible concerning specific production wishes. Every two weeks a new stock of products is bought from this producer in Paris. Paris2day relies on this wholesaler to provide high quality products. If the CEO requests specific desires regarding the products they can implement it. They are more than willing since everything is paid up front. Paris2day does not, and did never, have any debt. This fact strengthens the relationship firmly.

5. Paris2day wants a maximal operational performance regarding flexibility of internal processes. This therefore stimulates improvement of the organization. With this objective, the flexibility of the logistics and employees is mostly meant. With the warehouse being build, management hopes to improve the problems with reference to the stock level. It wants to manage the fluctuating demand in every independent store more flexible. The warehouse makes that more stock is nearby the stores and a new information system, which was implemented in April 2011, sheds better light in the current demands instead of finding it out later. The new system also makes it easier for one store to check the stock at another store. This is necessary when a customer wants a specific product which is sold out at one store but not at the other. One can be reserved and will be transported to that specific store.

6. Lastly, Paris2day wants to provide its employees with a stimulating and daring work environment where the employees get all the freedom to develop their sales and social skills.

The employees are the link between the customer and Paris2day. They represent the organization and therefore must feel welcome and important. It is acknowledged by the management that a stimulating and daring environment increases the contentment of the employees with its employer and enhances the commitment, loyalty and performance. Continuous training and the interaction with the management during the quarterly functioning meetings should enhance this.

4.2.3 Critical Success Factors

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However, the business plan is also a valuable information source since it for example displays the SWOT-analyses and the core activities which were clearly defined. The analysis has lead to the following table (table 1), where the strategic objectives are linked to the instituted CSF’s. Additionally, the CSF’s are then divided among the four BSC-perspectives.

Table 1: Critical Success Factors

The CSF’s cover the previously presented mission and strategic objectives perfectly and clarifies the points of interest of the management for the coming years. Consequently, there is a good balance between the BSC-perspectives and the CSF’s whereby every perspective has one or two CSF’s. On a side note, it has to be acknowledged that not every CSF has the same weight for the management. During the interview the CEO made it clear that for him the “financial and client” perspectives are the most important. Table 2 clearly arranges the information presented in table 1:

Table 2: Critical Success Factors divided among the BSC-perspectives

4.2.4 Key Performance indicators

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To start, appendix 3 provides the reader with the explanation of each of the fifteen KPI’s. Behind the fifteen KPI’s the three characteristics are elaborated. Paragraph 2.3.5 advised creating a balance between the measures concerning the measuring of future or past performance, if subordinates are able to influence them and if they were tangible or not. As can be seen in the table, the first two characteristics are in perfect harmony. This does not apply to the third characteristic where there are eleven tangible and four intangible measures. This can be explained by the fact that the CEO has a preference for “hard” measures. He is aware of the influence of soft measures on an organization but he finds them to be suggestive. They are hard to measure and therefore the use of more “hard” measures was instructed.

After the reader is familiar with the KPI’s subsequent to the examination of appendix 3, it is important to get an understanding of the interaction between each of the measures. Figure 5 demonstrates these connections where the ultimate goal is maximizing the Net Operating Profit after Tax (NOPAT) and therefore maximizing the Return on Capital (ROC). NOPAT is theoretically not influencing the ROC solely (ROC = NOPAT divided by the total liabilities and equity minus cash) but since Paris2day has no debt and the cash is covered in the liquidity measure, management cannot be surprised by the dominator of the fracture. For that reason, the attention primarily goes to the NOPAT.

Figure 5: Connections among the Key Performance indicators

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influence on the amount of quality complaints made by customers. Therefore, the customer satisfaction is highly likely to be positive which in turn has an impact on the “average sales per client”. In addition, if the “revenue” falls back under the minimal desired level the figure shows what might be its cause. The revenues are affected by the “purchase costs index” (a lower purchase price leaves room for a decrease in retail price), “average sale per client” (if the ratio of sales/customers is increased this obviously affects the revenue) “revenue growth” (this is again an obvious connection where the growth in revenues leads to a higher revenue) and “quality complaints (if revenue numbers are disappointing then management could look into the complaints concerning the quality and therefore might come to the conclusion the quality of the distributor lacks).

4.2.5 Norms of the Key Performance Indicators

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4.3 Information provision

After the design of the PMS it is important to realize that the information provision is crucial. For every KPI it is necessary to establish the information requirements. Paris2day will use two information sources for assessing the performance indicators. Firstly, the custom made information system which manages the bookkeeping, the inventory at the warehouse and every store individually and quality complaints. The system has been implemented in June and can be accessed through the internet. The software has been written specially for Paris2day so that every wish of the company is captured in the system. Stock wise it is a closed circuit. Every new stock that comes in gets scanned and receives an unique code. It contains the name of the product, the retail and sales price and the specifications. Therefore, management has real-time information on all his stock. In addition, he can see the order list of all the stores and the sales numbers. Also the complaints are monitored through the information system. Whenever complaints are made at the stores, the employees are required to fill in a form provided by the system. Every week, the complaints are assessed. The correctness of the information is guaranteed by two-weekly sampling test. The system provides the information for all the KPI’s that use numerical input and are based on complaints:

 Liquidity

 Return on capital  Revenue

 Purchase costs index  Revenue growth  Quality complaints  Average sales per client

 Market share (The information is partially provided by the system. The market information is collected through public branch information.)

 Stock level  Lead time

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to assess the performance of the indicators. Besides the retrieving of info, the control of this process stands central.

4.4 Summary

The case study turned the literature study into practice. The steps provided by chapter two where now followed in order to design the new PMS for Paris2day. However, the beginning of the case study was reserved for an analyses of the current role of management control and PMS within the organization and the goals it has regarding a PMS. It showed that Paris2day did not yet focus specifically on a complete PMS. Management previously measured performance only financially where there are three other areas where performance should be measured. On the other hand, Management Control was getting renewed attention. Functioning meetings, incentives, codes of conduct and sales training where recently implemented. With the introduction of a PMS, which takes all perspectives of a company into account, the total MSC will be brought into balance. The aim of Paris2day was an increased long-term vision, better communication of its mission and strategy to its employees and an evolving organization.

The first step in the process of designing the PMS was determining the mission statement of Paris2day. The statement includes facts about what it is Paris2day offers, to whom, by what it is characterized and lastly, the ambitions the company has. The core of the statement involved high quality but affordable fashion from Paris for the modern woman. Secondly, the strategic objectives where established. The following six objectives where ascertained through a brainstorm session:

1. Paris2day wants to maximize its profitability.

2. “Customer is king” – Paris2day wants to optimize the relationship with its customers by offering an elegant shopping surrounding, helpful sales persons with a high sense of fashion, high quality products and an excellent customer service.

3. Paris2day aims at national coverage with a Paris2day clothing store in all major cities of the Netherlands and therefore increasing its market share.

4. In order to reach this high level of product quality, Paris2day wants a solid and sustainable relationship with its distributor where there is a constant dialogue concerning the expectations and wishes of both parties.

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6. Lastly, Paris2day wants to provide its employees with a stimulating and daring work environment where the employee gets all the freedom to develop their sales and social skills.

The six objectives cover the fundamental operating activities of Paris2day. The operating activities that must be given special and continuous attention, in order to ensure success of the organization, are also known as Critical Success Factors which are portrayed below. In total there are seven CSF’s derived from the previously mentioned strategic objectives.

After instituting the CSF’s, the question was how to measure the progress of each factor. Therefore, the Key Performance Indicators were introduced to the reader. A KPI affects one or more CSF’s and are therefore the link between the strategy and the successful execution of this strategy. Below, the Balanced Scorecard with the fifteen KPI’s attached to the CSF’s and the perspectives is presented. As required by the literature, the KPI’s showed a superb balance between the possible characteristics.

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5. CONCLUSIONS AND RECOMMENDATIONS

This last chapter will come with conclusions based on the research performed at Paris2day (§ 5.1) whereby the main research question will be answered. In addition, recommendations concerning the designed Performance Measurement System will be addressed (§ 5.2). With this concluding chapter it will accomplish the previously presented research objective:

RO: The aim of this research is to provide the management of Paris2day with a design of a new

Performance Measurement System and as a result enable the management to monitor and advance the efficiency of the organization.

5.1 Conclusions

After the literature study, the case study and after establishing the interaction of the two elements it is time to answer the research question. The following research question was devised:

RQ: What are the Critical Success Factors and what Performance Measurement System, which

incorporates these Critical Success Factors, should be designed for Paris2day?

Bourne et al. (2000) showed that designing a PMS consists out of four steps. An analyses of the organization covers the first two steps. The research established the mission statement as well as the organizational objectives which can be found in respectively § 4.2.1 and § 4.2.2. Thereafter, it was of key importance to ascertain the right Critical Success Factors out of the objectives. For Paris2day the following CSF where instituted: profitability, customer relationship, improvement, increase market share, flexibility, product quality and personnel. These factors gives the organization an understanding of their fundamental operating activities. Special and continuous attention of these factors will ensure the continuity of Paris2day. Based on the CSF’s, the Key Performance Indicators where created which, according to the literature, is step four.

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well as the mission and strategy. It is therefore easy to communicate to all its personnel. Below the completed BSC is shown:

Lastly, the information provision is of importance. After the design of the PMS it is important to conclude that the information provision is crucial. For every KPI it is necessary to establish the information requirements. Paris2day will use two information sources for assessing the performance indicators. Firstly, the custom made information system which manages the bookkeeping, the inventory at the warehouse and every store individually and quality complaints. Secondly, there are the KPI’s that are not based on numerical information and are not captured by the information system. These are found through surveys, functioning meetings and paper employee files which are updated by the store managers.

With the Balanced Scorecard, Paris2day will make sure that they can face the future, and the rapid growth that comes with it, confidently. The PMS assures the controllability of the organization. In addition, it pressures management to also focus on the long-term. This way Paris2day will stay on top of present results and will guide future performance.

5.2 Recommendations

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 Management should re-evaluate the Key Performance Indicators and the attached norms on a half-yearly basis.

It is advised to re-evaluate the KPI’s on a half-yearly basis in order to guarantee the validity of the system. Management should asses the current KPI’s whereby the focus should be on the representation of all the CSF’s by the KPI’s. “Do the current indicators capture the Critical Success Factors of our organization?”. In addition, the norms should be assessed. Especially during periods of rapid growth, norms tend to be outdated quickly. As a result, the PMS loses its effectiveness. Re-evaluation eliminates potential bottlenecks.

 Management should perform a yearly data-analyses in order to establish the validity of the information sources and the information it provides.

The research established the use of two information sources. It is important to periodically test the effectiveness of the information sources. On the one hand, the two sources should be evaluated. “Do the two sources provide the organization with all the required information? Or do other information sources complement the current information system?” On the other hand, the information each of the sources provide should be looked at. “Are the indicators measured based on correct information?”

 Management should inform its employees in detail about the PMS. This in order to maximize the acceptance of the system and to increase the knowledge of the organizations strategy and objectives.

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REFERENCES

Articles:

Barnes, M., Dickinson, T., Coulton, L., Dransfield, S., Field, J., Fisher, N., Saunders, I. & Shaw, D., (1998) A New Approach to Performance Measurement for Small and Medium Enterprises. University of Cambridge.

Bourne, M., Mills, J., Wilcox, M., Neely, A. and Platts, K. (2000) Designing, implementing and

updating performance measurement systems. International Journal of Operations &

Production Management. 20 (7) 754-771

Boynton, A.C., Zmud, R.W., (1984) An Assessment of Critical Success Factors. Sloan Management Review. 25, 4 pp. 17-27

Kaplan, R. S., Norton, D. P., (1992) The Balanced Scorecard – Measures that drive performance. Harvard Business Review. Jan-Feb. pp. 71-79

Leidecker, J. K., Bruno, A. V., (1984) Identifying and using Critical Success Factors, Long Range Planning. 17 (1) 23-32

Lohman, C., Fortuin, L., Wouters, M. (2002) Designing a performance measurement system: a

case study. European journal of operational research, 156, 267-286

Neely, A., Gregory, M. & Platts, K. (1995) Performance measurement system design: a literature

review and research agenda. International Journal of Operations & Production

Management, 15 (4) 80-116

Nørreklit, H., (2000) The balance on the Balanced Scorecard – a critical analyses of some of its

assumptions. Management Accounting Research. 11 pp. 65-88

Simons, R., (1994) How new top managers use control systems as levers of strategic renewal. Strategic Management Review. Vol. 15, No. 3 pp. 169-189

Sinclair, D., Zairi, M. (1995) Effective process management through performance management, Business Process Re-engineering & Management Journal, Vol. 1 No. 1, pp. 75-88

Books:

Blumberg, B., Cooper, D.R. and Schindler, P.S. (2003) Business Research Methods, New York, McGraw Hill. ISBN: 978-0077117450

Buytendijk & Brinkhuis-Slaghuis (2004) Balanced Scorecard – Van meten naar Managen. Kluwer Amsterdam. ISBN: 90-14-06574-4

Chandler, D., (1962) Strategy and Structure – Chapters in the History of the American Industrial

Enterprise. Beard Books. America. ISBN: 1-58798-198-X

Eijnatten van, F., Poorthuis A-M. and Peters, J. (2002) Inleiding in Chaosdenken; Theorie en

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Flamholtz, E.G., (1996) Effective Management Control – Theory and Practise, Kluwer Academic Publishers, the Netherlands. ISBN: 978-0792396994

Hill, Ch., Jones, G. (2008) Strategic Management. Houghton Mifflin Company: New York. ISBN: 978-0-618-89469-7

Kaplan, R. S., Norton, D. P., (1996) The Balanced Scorecard – Translating strategy into action. Boston, Harvard Business Press. ISBN: 0-87584-651-3

Kerklaan, L. A. F. M., (2006). De Cockpit van de organisatie –Prestatiemanagement met behulp van

scorecards . 4de druk. Deventer: Kluwer. ISBN: 90-13-037453

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Parmenter, D., (2010) Key Performance Indicators – Developing, Implementing and Using

Winning KPI’s. John Wiley & Sons inc. Hoboken, New Jersey. ISBN: 978-0-470-54515-7

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Website:

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APPENDIX 1: INTERVIEWS

The interviews where semi-structured. Therefore, only the topics discussed will be cited below.

Orientation interview: 04-01-2011 – 12.30

Present: Hindri van der Laan

Pieter Dijkstra

 The curriculum vitae of the CEO  The history of Paris2day

 Current progress

 The structure, responsibilities and the owners  Strategy and goals

 The daily business

 The processes within the organization  Control issues and further problems

 Performance measurement within the organization and its role.

Brainstorm session/interview: 31-03-2011 – 16.45

Present: Hindri van der Laan

Pieter Dijkstra

Jacco Lasche

 Mission statement  Strategy and goals

 Critical success factors – The processes which are important  Key Performance Indicators

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APPENDIX 2: THE BALANCED SCORECARD AND EFQM

This appendix elucidates the choice for the BSC and the EFQM model which are used for paragraph 2.5. The following figure (5) shows several performance measurement systems in a graph.

The graph consists out of two criteria. Firstly, the style of leadership which can be stimulating or controlling. Stimulating leadership represents a bottom-up approach, where employees set their own goals and indicators. Whereas controlling leadership is the opposite. Here, leadership is central and top-down where management steers the organization. Secondly, the current issues a organization faces. They can aim at consolidation of their current position or try to innovate and expend their market share by evolving their internal processes or innovativeness concerning their products. When taking Paris2day into consideration it is apperent that the organization is new and therefore aims at increasing their market share. It is a new brand which has to work hard to gain this. In the case of Paris2day this means innovative clothing which cannot be found in the area where the stores are located. Therefore, quadrant one and three are no options. Subsequently, the leadership style withing Paris2day is definetly top-down, where management steers the organization. Nothing happens what management did not authorize.

Figure 5: the choice for the BSC and EFQM model

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APPENDIX 3: DEFINITIONS KPI’S

BSC-PERSPECTIVE: FINANCIAL

Critical Success Factor: Profitability

1. Liquidity: A measure to identify if the organization is able to meet the short-term debt by possessing enough liquid assets. Both the current and quick ratio will be used.

2. Return on Capital: A measure to see how effective the invested capital in Paris2day is. ROC = NOPAT divided by the total liabilities and equity minus cash

3. Revenue: The income Paris2day receives in a certain period from their activities (in euro’s).

4. Purchase costs index: The purchase costs Paris2day has in a certain period (in euro’s).

5. Revenue growth: The growth in revenue compared to a previous period (as a percentage).

BSC-PERSPECTIVE: CLIENT

Critical Success Factor: Customer relations

6. Customer satisfaction: How far the products and customer service provided by Paris2day exceeds the expectation of the customers. 7. Quality complaints: The number of quality complaints received by Paris2day in

a certain period.

8. Average sales per client: Measured by the amount of sales in euro’s divided by the number of clients.

Critical Success Factor: Market share