Business Paper

What is a Performance Management (PM) System?

Simply put, a performance management (PM) system encompasses everything organizations do to recruit, select, place, orient, train, develop, evaluate, and retain their employees (i.e., manage human resources).You are not expected to provide detailed explanations of all these processes in your report. Given the target audience for this report, you will likely just want to include a sentence explaining what performance management is and should be, and an additional sentence or two summarizing whether and how the organization currently handles these processes.

What is a Performance Appraisal (PA) System and what is its relationship to performance management?

Performance appraisal/evaluation is best viewed as one component of an organization’s performance management system. Performance appraisal systems vary in design, purpose, and implementation. Some are quite formal and well-institutionalized and some are very informal. In start-up enterprises or small businesses, for example, the system may simply be discussions between a boss and employee about whether work is being completed as expected. In contrast, in some organizations you might find a performance appraisal system that includes all employees and incorporates feedback from multiple stakeholders (for example, a 360 degree system). Given that employees will be evaluated and receive feedback on their performance (or this should be the case) and that most supervisors and managers will need to evaluate and provide this feedback, addressing the questions below in this section of your report is important. As with the earlier sections, however, your description must be succinct.

Financial Resources

An organization's financial situation and the system used to manage its financial resources will vary depending on the type of organization. Organizations need to acquire and manage the financial resource it needs to support its mission, vision, goals, and objectives and implement its strategy. When examining a business's financial resources, it may be possible to draw conclusions about how well those resources and supporting systems and processes are being managed.

New managers entering an organization would need to know where and how to find information about an organization's current and past financial situation and key information about budgets and budgeting.

Financial Resources

An organization's financial situation and the system used to managage its financial resources will vary depending on the type of organization. Organizations need to acquire and manage the financial resource it needs to support its mission, vision, goals, and objectives and implement its strategy. When examining a business's financial resources, it may be possible to draw conclusions about how well those resources and supporting systems and processes are being managed.

New managers entering an organization would need to know where and how to find information about an organization's current and past financial situation and key information about budgets and budgeting.

Technology Resources

Acquisition, use, and effective management of advanced information and computing technologies have the potential to serve as strategic differentiators in an increasingly competitive global marketplace. This principle applies across sectors, industries, organizational sizes, and markets. A report of an organization's technology resources would endeavor to answer the following questions:

· How would you describe your organization’s capacity to manage and leverage information, computing, and other technologies to achieve its mission, vision, goals, and objectives and its strategy?

· To what extent does your organization leverage the Internet as a source of competitive advantage? This includes use for marketing, customer relations, and services.

· Does your organization use an Intranet and, if so, what evidence is there that it contributes to improved internal communications, collaboration, and performance? Are there related issues that merit special attention?

· Does your organization have a strategic technology plan? If so, what was the process used to develop it, what positions were involved, and what evidence is there that it is being used to guide decision making? Is there evidence the technology plan aligns with and supports the organization’s strategic plan and objectives?

· What evidence is there of sound technology governance and security practices within your organization?

· Is your organization behind the curve, bleeding edge/leading edge, or somewhere in between where technology use is concerned?

Physical Resources

When performing resource-based analysis of an organization, resources are typically differentiated into several groups: physical, human, technological, financial, and, increasingly, information. Each category can be evaluated, quantified, and managed to effectively enhance organizational performance.

The term physical resources refers to the physical property of the organization—its property, buildings and improvements, and capital equipment used in the process of producing and selling its product or service, as well as the on-hand inventory of inputs and outputs. In other words, physical resources comprise all of the nonhuman, tangible, physical property the organization owns or has at its disposal.

Consider the following resources for a fictitious pizza chain, and how they would be categorized according to resource allocation theory:

Different resources contribute differently to the organization’s performance, depending on the type of goods being produced, or the service being provided. For example, what is Amazon's most crucial asset? The physical inventory in its warehouses? No—it could be argued that it has two incredibly important assets—its cash holdings and its prime customer database. The future value of its sales to customers who happen to be Prime members far exceeds the actual value of its inventory and physical plants at any given time. Strategically, its cash holdings allow the company to do nearly anything it wants to do at any given time.

On the other hand, consider Intel and its chip plants. While the plant building the i7 processor chip cost around $4 billion to build, the knowledge of its team of research and development scientists and engineers far exceeds the value of any plant. Its human resources, in other words, are its most important resource. You’ll find that individuals who work in research and development at Intel earn outstanding salaries. Intel has assessed the value of these resources to the organization—and pays its employees accordingly.

Contribution Margin

A contribution margin framework can be useful to quanitfy the amount of each resource necessary to complete a single unit of output, the cost assigned for each unit, and therefore, the return each unit contributes to operating results.

Consider the following example, in which an organization has calculated the number of units required to sell a single unit of a particular good that brings in $500 of revenue.

Notice in this calculation that, when each contribution margin is calculated, the other resources are ignored. It gives you a quick analysis of which resource is contributing the most, relative to its price and the amount needed in production. (Assume for ease of example that revenue is the right unit of analysis; other approaches may calculate using per-unit profit instead of revenue.)

As you can see, physical resources had the greatest contribution. It would be natural for this organization to try to replace its most costly resources—human resource—with capital, to take advantage of this greater contribution.

Depreciation of Physical Resources

Physical resources are subject to depreciation and replacement, as their value to organizations tend in general to decline over time with greater usage. For instance, a delivery truck used in the pizza restaurant described above wears down more every time it is used, and therefore must be replaced over time.

Human and financial resources are often managed so that their value to the organization increases over time. Little can be done to increase the value of physical resources except replacement or spending on enhancement. Property, which generally increases in value over time, may be the exception, but its value is a function of market conditions and not necessarily anything the organization does to the property.

The contribution margins calculated above do not account for depreciation or replacement. A more accurate contribution margin would take the total cost into account, including depreciation and replacement costs.

Management Control Systems

Merchant and Van der Stede (2012) define management as "the processes of organizing resources and directing activities for the purpose of achieving organizational objectives" (p. 6), which the authors explain may be broken down to smaller elements, described in the following table.

Elements of Management

Adapted from Merchant & Van der Stede (2012)

Management Control Systems

Within the management framework, management control systems (MCSs) gather and use information to evaluate how well organizational resources and functions are performing within the context of an organization’s objectives and strategies (Anthony & Govindarajan, 2007). Management controls focus on an "organization’s critical success factors, such as developing new products, keeping costs down, or growing market share, rather than aiming more generally at improving profitability in otherwise largely unspecified ways" (Merchant & Van der Stede, 2012, p. 8). They should be proactive, not reactive. They differ from strategic management, which focuses on the appropriateness of organizational goals within the context of the overall business environment. MCSs are internally focused to ensure the behavior of employees aligns with an organization’s strategic direction and its best interests.

According to Merchant and Van der Stede (2012), sources of management control problems often stem from one or more of these factors:

· lack of direction—based on a lack of understanding of the company’s objectives, strategies, and vision

· motivation problems—where individuals are driven by self-interest and have no connection to the larger organization and its goals

· personal limitations—in that specific employees underperform because they lack the knowledge or skills for the job, lack training or experience, or have reduced stamina to complete work

There are three broad categories of control:

· Results controls define expected performance goals in terms of performance targets or key actions and results (this can be at various levels within the organization). Performance is measured against targets (key performance indicators) and a system of rewards or punishments may serve to reinforce target levels. To be effective, targets must be clearly defined and communicated, and employees need to understand the consequences of not meeting targets. Results controls work best when organizations can identify and measure the results, and the employees involved know what results are desired and can influence the decision making and processes that contribute to end results. For example, common results controls include pay-for-performance plans that reward employees when company objectives are achieved. These may include merit pay plans, stock option plans, profits sharing, individual plans or bonuses, and team awards.

· Action controls involve making employee actions the focus of control (Merchant & Van der Stede, 2012). They take the form of behavioral constraints, pre-action reviews, action accountability, and redundancy. Behavioral constraints divide into physical (limiting access to physical assets) and administrative (limiting authority to perform functions, separating duties, etc.). Pre-action reviews involve requirements that employees’ action plans be reviewed and approved in advance by their managers. Action accountability controls hold employees responsible for their actions by rewarding or punishing based on the performance results in comparison to the defined objectives. Merchant and Van der Stede (2012) explain that redundancy controls involve "assigning more employees (or equipment) to a task than is strictly necessary" and that "at least having backup employees (or equipment) available also can be considered an action control because it increases the probability that a task will be satisfactorily completed" (p. 84).

· People controls involve the means employed to form an organizational culture that supports the objectives. Merchant and Van der Stede (2012) write, "Personnel/cultural controls can have distinctive advantages over results and action controls. They are usable to some extent in almost every setting; their cost is often lower than more obtrusive forms of controls; and they might produce fewer harmful side effects" (p. 95). Such control is shaped by selection and placement, training, job design, resource allocation, and the "tone at the top." They can be supported through the use of codes of conduct, group rewards, interorganizational transfers and promotions, physical arrangements, and the environment.

There are no perfect control systems. Merchant and Van der Stede (2012) write, "Optimal control can be said to have been achieved if the control losses are expected to be smaller than the cost of implementing more controls. Because of control costs, perfect control is rarely the optimal outcome; what is optimal is control that is good enough at a reasonable cost. The benchmark therefore is adequate control rather than perfect control" (p. 13).

While placing a combination of management controls into place often provides the desired results, another method of exercising management control is avoidance, or eliminating the chance that a control problem will occur. Avoidance strategies include elimination, automation, centralization of decision making, and risk sharing. The first three are self-evident. The fourth, risk sharing, involves engaging with outside third parties to reduce or share risk. Examples include purchasing insurance or entering into joint ventures with other partners.

What goes into designing management control systems? Specifically, you need choose your controls, determine your level of tightness (loose or tight), employ a behavioral focus, provide for changes, and maintain control through effective monitoring.

Conclusion

As with many aspects of management, management control systems are influenced by the type of organization, its structure, culture, level of employment motivation, and risk environment. Managers are responsible for understanding the different types of controls and being able to implement those that are appropriate to the situation.

Leadership Style and Effectiveness

Those who have studied the history of modern management have helped us identify and understand some key elements for managerial success. This resource, which presents a brief summary of management thought (see Management Thought [2009] in the Resources section), describes how perceptions of the roles and responsibilities of managers and what constitutes best managerial practices have evolved over time. An analysis of leadership styles should answer the following questions:

· Is there evidence of a dominant or common managerial style (see Management Styles [2009] in the Resources section) in your organization? If so, consider the possible causes and likely consequences for achievement of missions, goals, values, and objectives and for optimal employee performance and commitment.

· What support does your organization provide to help its managers develop the knowledge, skills, and abilities needed for effective performance?

· Are there concerns related to managerial effectiveness? If so, are there specific ideas for improvement (gleaned from research) that the organization's leadership should consider?

· What are the likely costs and benefits associated with the ideas you might wish to recommend, and what are the likely costs of deciding not to act? 

Leadership

Leadership—and factors impacting the effectiveness of leadership—are arguably among the most researched subjects students of business and management examine. The thirst to discover the secrets to success and best practices seems endless. The sheer volume of ideas you will discover in the literature on leadership, both scholarly and popular, can prove overwhelming.

Because of the sensitive nature of this particular area of inquiry, you should consult your professor before conducting any interviews or using any other method to collect information about leadership effectiveness. Unless specifically agreed upon between you and your professor, you should not share the results of your review and analysis with anyone in the organization you are examining.

This section of a report intended for new employees and new board members would be restricted to a simple profile of the organization’s leadership, with an emphasis on particular strengths and competencies that are or might be a source of strategic advantage. Its focus may be on the CEO, or may extend a summary to the senior leadership team.

The following points serve as a guide to completing the leadership section of a situation audit report:

· leader’s professional and educational background and current role and responsibilities

· leader’s recognized competencies

· ways in which the leader’s behaviors, decisions, and actions contribute positively to the organization’s MGVOs and to its reputation

You may need wish to conduct additional journal research to help you understand how to best describe your leader’s approaches and explain your conclusions about his or her effectiveness. If so, consult with your faculty on useful sources to help you with this task.

Governance

To be effective, organizations need some means of establishing who has authority and responsibility for key decisions and associated actions. In some organizations, this is clarified in formal statements or documents. Others may not have such structured documentation. Mechanisms for oversight and review that are independent of the organization’s leadership and management are also important, especially when legal or ethical accountability to external stakeholders (including stockholders) is involved. Such organizations need a corporate governance system and structure. The article Corporate Governance, located in the Resources section, provides an overview of this topic.

The following questions serve as guides to analyzing an organization's governance:

· How would you describe the current approach to governance and the structure within the organization?

· Is the governance structure formally documented? Does it offer assurance of independent and expert oversight and review of major organizational policies and decisions?

· If the organization does not have a formal governance structure, is there appropriate protection against arbitrary, capricious, or unethical behavior on the part of leaders and managers?

· Consider any recent changes in the management, leadership, and governance within your organization. Have these changes had a positive, measurable effect on the organization? If there have been no changes, are the current management, leadership, and governance effective?

· Is governance handled in such a way that it supports the organization's mission, vision, goals, objectives, and strategy?

· Is it possible to conclude that the organization's approach to governance is a potential or actual source of competitive advantage?