Developments Of The Subsequent Performance Measurement Models Accounting Essay


According to Johnson and Kaplan, the traditional management accounting system (MAS) has lost it is relevance as the organisations able to "manage the numbers" by focusing on the financial indicators only. (Johnson and Kaplan 1991) However, this is not applicable in the current complex organisations. Besides, the failure occurred because the emphasis on the short termism to evaluate the performances while compromising the long termism. (Johnson and Kaplan 1991)

Examples of the short term performance measurement systems (PMS) are being used are EPS, Return on Investment (ROI), and Residual Income (RI). ROI is invented by Du Pont to measure the return of investment in every division. The composition of ROI consists of the operating ratio and stockturn (sales to assets). Every division is accountable for the cost of capital investment and the profitability of it is owns divisional. This is to decentralise the organisation so that the central manager able to evaluate the divisions performance. (Johnson and Kaplan 1991)

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However, problem arises when managers try to increase the ROI by increasing sales and reducing costs which contributed in the short term effect only. Besides that, comparisons of divisional results unable to attain any outcome because different division has its own problems and aiming for different results. Thus, it is hard to evaluate the performance. Furthermore, ROI is not very applicable to use because the MAS has changed throughout the years. (Johnson and Kaplan 1991) Thus, due to the changes of complexity in MAS more PMS must be developed.

RI is derived from ROI. RI is the net income after deducting the "capital charge of the investment." RI model has been rejected because ROI has more financial data to report to the shareholders. Consequently, ROI are being use more. However, in today's MAS these measurements are not applicable anymore as the organisation failed to measure the non financial indicators such as the changes of technologies, innovations and others. (Johnson and Kaplan 1991)


Below are the subsequent developments explained starting from financial indicators to non financial indicators.

2.1 Economic Added Value (EVA) 315

EVA is developed in 1990s and patented by Stern Stewart. The development occurred because ROI and RI unable to reflect on the true value of the firm and the performances. EVA able to overcome the short termism results in ROI and RI by focusing on long termism. This is one of the remedies suggested by Johnson and Kaplan. The function of EVA is use to "measure the economic profit" of the company and the shareholders value. (Griffth 2004)

Stewart claims that EVA value is highly correlated with the stock value. (Lehn and Makhija 1997) which means the shareholder's value reflects on the share price. Due to the high correlation EVA value uses to forecast the stock performance. (Machuga, Pfeiffer and Verma 2002) However, a research argued that there are no clear indications that EVA has strong correlations with the stock performance because investors will significant lose money in forecasting the stock performance using EVA.

Another studies claimed that earnings outperform EVA in measuring the stock value.(Biddle, Bowen and Wallace 1998) This is due to the errors in estimating the capital charge and the accounting adjustments. (Biddle, Bowen and Wallace 1998) In addition, EVA only adds marginal information to the evaluation of performances compare to accounting profit. (Anastassis and Kyriazis 2007) Thus, EVA may not be a good tool to measure the company values solely.

As mentioned above, EVA able to overcome the short termism by having incentive system to align the shareholders and managers objectives. (Biddle 1998) Their rewards such as cash and stock performance are based on the share price. One of the concerns is that managers will focus on short termism by reducing the value creation and then increase the share price in order to get higher compensation.(Abdeen and Haight 2002) Otley (1999) added that the compensation system can be done if the performance is no on short term basis but in three years long. Managers will get paid if the performances are achieved in three years. Therefore, this will eliminate the short termism to long termism.

2.2 The Balanced Scorecard (BSC)

The BSC is developed by Kaplan and Norton in 1990s to overcome the traditional MAS which are integrated by financial and non financial measurements to develop a strategic management process in an organisation. This is one of the Johnson and Kaplan suggested remedies to improve the PMS in the future. (Johnson and Kaplan 1991) Both indicators are use for strategic planning purposes to focus on long term objectives. (Chavan 2009)

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BSC consists of four perspectives namely customers, financial, internal business and learning and growth perspective. (Bible, Kerr and Zanini 2006) These perspectives can be integrated to form objectives and manage the daily operations. The integration can be a medium of communication from all levels because BSC focus on the top down process and communicated through the scorecard. (Hepworth 1998) However, the "one-size-fits-all" application is not applicable. (Johanson et al 2006) A study showed that BSC unable to integrate all the perceptive together as only a few are integrated in one time. (Speckbacher citied in Johanson et al 2006) Another study argued that "one-size-fits-all" model problem can be solved by adjusting the problems arise then the company can achieve the targeted objectives. (Aidemark citied in Johanson et al 2006)

Furthermore, the time lag between the planning and the outcome occurred during the implementation of BSC. Norreklit (2000) argues that the causal and effect relationship give invalid estimations. This is because the organisation measure different activities at the same time. However, a research shows that the time lagging can be solved by adjusting the process and measurements to reduce the time phasing. (Mackay 2004) 229 words

2.3 Performance Prism

Figure2: Performance Prism

By focusing on the four perceptive in BSC is not enough, a wider perceptive must be considered such as the stakeholders perceptive. One of the PMS that measures the stakeholders' view namely investors, customers, employees and suppliers which is the Performance Prism. The BSC and Prism measure the internal and external views of the organisation. But the dissimilarity of the models which are BSC emphasis on the implementation strategy maps to achieve the goals whereas Prism focus on the stakeholders needs and the company needs from the stakeholders to developed strategies. (Adams and Neely 2000)

These strategies then link to the business processes and lastly to the capabilities to strengthen the stakeholders contributions. (Burne, Franco, Wilkes 2003) Prism able to achieve widespread perceptive and integrate the stakeholder views and the operational process which BSC failed to measure it. (Burne, Franco, Wilkes 2003; Adams and Neely 2000) But, study shows that there is only a little guidance given in implementing this PMS despite that numerous articles had published. (Tangen, 2004)

The setback of Prism is lacking of innovation and learning measure in BSC model. (Moullin 2004) These drivers are important as the company able to improve on the operations through learning. Generally, Prism is a good framework as it focuses on the stakeholder view and the processes are linkable however, it can be improve by incorporate BSC model along to improve the PMS. (Neely et al. 2000) 212 word

2.4 Six Sigma

Besides, improving the strategic management, the quality of operations must be emphasised on. One of the development models is Six Sigma. It is developed by Motorola during 1987 (Hagen M. 2010) despite that is developed long ago but it is widely use by companies like General Electric. It emphasises on the quality of management and continuous improvement in customer satisfactions (Dasgusta citied Jones et al. 2010) and "error free in the business environment". (Pyzdek citied in Moosa and Sajid 2010)

The key feature of Six Sigma is the complex problems are solved through the rigorous data collection and statistical models. (Moosa and Sajid 2010) This will able to improve the efficiency of the production. However, company need to neglect the current culture. (Caulcutt 2001) Another author argued that, the challenge is to improve the new culture. (Kwak and Anbari 2006) The cultural change must be done to accommodate the changes in quality improvement because the resistant to change in the culture and other supports will make the plan failed. (Kwak and Anbari 2006)

Another feature which is training on the black belts will help to improve the company's quality using statistical models and the problem solving process DMAIC (Define, Measure, Analyse, Improve and Control) in solving the company's problem. (Moosa and Sajid 2010) Another authors stated that training is not enough the members need to keep abreast with the latest trend, tools and techniques in order to succeed. (Kwak and Anbari 2006) While, Caulcutt (2001) argued that the model will succeed if the objectives must be clear and cascaded from top to down of the management. If the employees are unclear with their objectives then the implementation will be failed. Overall, Six Sigma has its own uniqueness compare to others however, companies have to fully understand the model in order to implement the model effectively. 270words

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European Foundation for Quality Management Business Excellence Model (BEM)

Figure 2 : Business Excellence Model

BEM focuses on the quality of the management. It is developed in 1980s and derived from the principal of Total Quality Management. BEM is being use to conduct self-assessment in the Europe organisations to improve the leadership qualities. (McAdam and Welsh 2000) Another authors supported that it will improve the decision making and leadership capabilities. (Wongrassamee, Gardiner and Simmons 2003)

EFQM focuses on self-assessment of the outcome whereas six sigma focus on minimizing errors and customers satisfaction. Besides, Six Sigma focuses on the efficiency of the operations through statistical methods and black belts projects whereas EFQM focus the two areas which are enablers (leadership, people, policy and strategy and partnership and resources) and results (people, customers, society and key performance results) to improve the company. Both enablers and results are correlated. (Bou-Llusar et al. 2003) Moreover, another authors supported that the outcome of the "excellence in enablers will lead to superior results." (Moeller et al, 2000; Prabhu et al 2000 citied in Bou-Llusar et al. 2003) This is because BEM emphasises on the achievement on the results through the employees in continuous improvement.(McAdam and Welsh 2000)

One of the weaknesses is BEM does not provide any guidance on the implementation. (Wongrassamee, Gardiner and Simmons 2003) No instructions are given on the model either it can be communicated for the top down management or bottom-up management. (McAdam and Welsh 2000) The implementation is left to the manager's responsibility to implement the actions and outcome. (McAdam and Welsh 2000). Thus, it is very hard to operationalise. (Neely A. et al. 2000) (211 words)


Despite there are disadvantages on the frameworks, companies still adopts the framework. However, the implementation of performances indicators may somehow bring impacts to the companies or consultants.

3.1 Economic Added Value (EVA) 135

The implementation of EVA in Harsco Corporation able to improve the allocation cost efficiently and reduced the average capital employed. This is because EVA Drivers are implemented and these drivers consists of ways to increase grow sales, control costs and manage assets. These strategies are used by the managers to make decision making to improved on the allocation cost and capital employed.

Besides, the shareholder return of Harsco have been increasing this is because of the change of culture in Harsco. EVA Central is developed in the company for train the employees on the fundamental of EVA and all information on EVA are able to attain in the intranet-based site. This is to give a clear view to the managers on their tasks and the responsibility for in aligning the objectives with the shareholder's objective. (Singer and Millar 2003)

3.2 Balanced Scorecard 136

This case study is done by CIMA on the implementation of BSC in BAE Systems, British Aerospace. The implementation of BSC was able to change the culture of BAE. The changes have brought success on the operations as the information from the scorecards is extractable from BAE's SAP R/3 system. BSC become the organisation control system and integrated with the traffic light model to show the status of projects. Besides, monthly reports are able to visualise in online and shared to all employees to view the data so that employees are inform on the work and the contribution of their work to the business units and the whole business. However, from the researcher's view the scorecards has time lag between the variables when it comes to identifying the scorecard's values during the cause and effect relationship. (Murby and Gould 2005)

3.3 Performance Prism 105

The performance prism has been used by DHL International (DHL UK). The management are frustrated in reviewing the monthly report as there no solution from the problem arises and persisted. The model was applied with a success map that consists of the needs of the company and stakeholders' and ways to achieve the goals. The success map outlines the problems on the cost, revenue volume and customers value that interrelated. Problems are solved by solving the challenges and the issues occurred in the business instead focussing on the detailed report monthly. Consequently, issues are solved in teamwork instead of focussing on the individual function responsibilities. (Neely, Adams and Crowe 2001)

3.4 Six Sigma 102

Implementation of Six Sigma in Bharti Infotel, India has improved the customer satisfactions. Secondly, employees able to think critically while relating to the statistical tools, complex issues and the business benefits to minimize the defects. Besides, employees focuses more on fact rather that the experience in resolving problems. Another changes occurred where the cross-functional teams where by employees work as a team to improve projects. The major shift can be seen when improvement of quality is one of the business strategy instead of the quality department's responsibility. Besides, selections of project are emphasized on business priorities not based on employee wish list. (Shukla and Srinivasan 2007)

3.5 EFQM Business Excellence Model (BEM) 82

In Royal Mail, UK changed in the communication channel after the implementation of model. The employees gave feedback to the Communication Managers instead of individual manager regarding the quality of communication in the organization. Furthermore, customers are given feedback on the service that is provided so that the improvement can be done on the service. Furthermore, training are provided based on the criteria and course from the Communication Process to the front line managers after receiving feedback from the employee survey opinion. (Varey and Hamblett 1997)

3.5 Overall view for consultants 95

In KPMG, a UK management consultancy gave their opinion on the current performance model system. They expressed their concerned that the information received for the clients are insufficient to measure the performance against their strategy and objective. Furthermore, they could not assist the client in strategic decision making due to the amount of data are given either too little or much and the time limitation. (Neely, Gregory and Platts, 2005)

Moreover, companies emphasizes on the performance indicators based on internal financial standards and forgoing the external comparisons and non financial targets. Thus, the consultants faced difficulties in assisting the company. (Neely, Gregory and Platts, 2005)


In nutshell, the traditional MAS have limitations but the developments of the models have improved the deficiencies. EVA which is the financial indicator developed after ROI and RI focuses on increasing shareholders values. EVA able to use to measuring the value creation but cannot rely fully as EVA need another supporting model to measure the performance.

BSC focuses on the financial and non financial indicators to form a strategic management using the causes-effect relationship. This model is very helpful as it can produce as scorecard that able to fit all the information and communicate to the organisation.

Performance prism focuses on the stakeholders' perspectives and the strategic planning are link to the operational business. This model is developed to overcome BSC despite that BSC are improving from the setbacks. But it can be integrated with BSC to enhance the performance measure.

EFQM and Six Sigma focuses on quality management which one emphasises on self assessment and another model focuses on minimising defects. These models are developed to improve the operational system.

The criticism of Johnson and Kaplan has somehow overcome, as the developments on PMS able to evaluate the financial and non financial indicators and improved on quality and strategic management instead of using the financial indicators. A deviation on the short-termism to the long-termism on the subsequent developments has helped the organisation to increase efficiency and effectiveness of the business environment such as BSC and EVA. However, the development models able to help the organisations to evaluate the management performances to a certain extent. This is because every models has in own boons and banes and it is not applicable for all. Moreover, each of the company has it owned requirements in accessing the performances. Therefore, different PMS may have different impact on the company.