USING KEY PERFORMANCE INDICATORS TO FACILITATE
THE STRATEGY IMPLEMENTATION AND BUSINESS
PROCESS IMPROVEMENT IN SME’S
Miguel Merino Gil and David Neila Sousa
Department Enterprise Organization, University of Vigo, Campus Lagoas-Marcosende, Vigo, Spain
Keywords: KPI’s Performance Metrics, Strategy Monitoring, SME’s Performance Control, Industrial Benchmarking.
Abstract: The use of metrics for a wide range of issues in business management is usual in big organizations but don’t
use frequently in business in small size enterprises. Business Intelligence (BI) is seen largely as the domain
of large organizations, yet any size business can benefit greatly from BI tools. To date, the cost of BI
technology has been too high for small businesses and limited scope of market operations and financial
reports. We develop a method for successful BI implementation in the SME'S on the basis of its
performance indicators based upon business process monitoring and constructing a plan of action (Business
Initiatives) to carry out a defined strategy by targeted objectives.
1 INTRODUCTION
In their book, "The Strategy-Focused Organization:
How Balanced Scorecard Companies Thrive in the
New Business Environment," Robert Kaplan and
David Norton estimate that fewer than 20% of
businesses execute their business strategies
effectively.(Kaplan, 2001).
This principle would be much more severe if it is
applied to the SME’s for which it is difficult to
know the drivers to transform strategy in action.
Usually in this type of organizations, the corporate
performance monitoring was based upon planning
and financial metrics, that do not have critical issue
for SME managers because they use frequently the
direct monitoring due the small complexity of the
matter. On the contrary the managers spend more
time in operational performance monitoring, close to
the main organizational direct objectives, like
efficiency of products or services, than strategy
control.
Despite decades of investments in business
intelligence, most organizations still struggle to
execute on their business strategies. Strategies are
intended to focus everyone's attention on what to do;
but, in many cases, they are inadequately created,
poorly communicated and badly measured. “The
align-to-action process is aimed at helping
organizations synchronize their strategic and tactical
activities, and better execute their strategies. Most
organizations continue to produce their key financial
reports (such as the three core financial statements
— profit and loss [P&L], balance sheet and cash
flow forecast), as well as a raft of management
reports via manually intensive processes”.
(Chandler, 2009).
“Business managers have often fought long and
hard to achieve organizational efficiencies through a
functional structure, and they don't want to risk
losing these benefits as they explore new ways of
improving organizational effectiveness. The
challenge for managers is to hold on to the
efficiency gains a functional structure provides,
while still exploring the opportunities for
effectiveness a process focus can give”. (Smith,
2007).
The SME’s functional structure is simplest than
the bigger enterprises and many are process
oriented.
“The most successful companies demonstrate
significant market share growth. A well-rounded set
of KPI’s involving financial, customer, process and
organizational measures yields higher performance
in areas such “time to market” and “customer
satisfaction/retention”. Improvements in these and
other key performance areas drive market share
performance and overall growth”. (Hatch, 2009)
This paper is organised in the following
arrangement:
In the first place look at the fundamentals of the
193
Merino Gil M. and Neila Sousa D. (2010).
USING KEY PERFORMANCE INDICATORS TO FACILITATE THE STRATEGY IMPLEMENTATION AND BUSINESS PROCESS IMPROVEMENT IN
SME’S.
In Proceedings of the 12th International Conference on Enterprise Information Systems - Artificial Intelligence and Decision Support Systems, pages
193-197
DOI: 10.5220/0002886501930197
Copyright
c
SciTePress
strategy initiatives developed from the strategic
maps, as the way of turning the strategy in action.
Then we will analyze the use of Benchmarking to
identify the performance indicators (metric) in the
SME'S.
In the point 3 and on the basis of the Gartner
Business Value Model, we specified its application
to the case of an SME belonging to a specific
industrial sector. Define its overall strategy and
objectives and its "strategic map". The business
processes are defined in from the Business Aspects
of the model of Gartner and the performance
indicators to control them. Then be linked these
indicators with the strategic objectives
Finally be derived from these links, business
initiatives that will be the way of setting up the
strategy and that should be consistent with the
strategic objectives raised, with which demonstrate
the feasibility of the method followed.
2 STRATEGY MAPS IN SME’S
The strategy map describes the logic of the strategy,
showing clearly the objectives for the critical
internal process that create value and the intangible
assets required to support them. The Balanced
Scorecard translate the strategy map objectives into
measures and targets. The organization must launch
a set of action programs that will enable the targets
for all measures to be achieved. Kaplan and Norton
“Strategy Maps” refers these action programs as
strategic initiatives. (Kaplan, 2004)
2.1 Strategic Initiatives
The first problem finding is to define what are the
strategic initiatives for a SME. The Kaplan and
Norton “Strategy Maps” are oriented to define
financial metrics trough four perspectives Financial,
Customer, Internal and Learning and Growth,
determining a perfect causal link but easily break
down in SME’s organizations. According to Kaplan
and Norton, only 25% of organizations link
incentive compensation to strategy, only 40% link
budgets to strategy, and only 5% of employees
understand how their position affects the
organization’s strategy. Thereby we find an
alternative model developed Gartner, that establish
a coherent set of objectives that integrate all the
"activities" (structures, systems and processes) to
achieve that statement.
We use the concept, and well know theory of
Business Process Management (BPM) for relate the
business process with strategy, because the last one
are better understanding for middle level managers
in SME’s that are responsibles for conduct and
ensure implementation of strategy initiatives from
senior executives decisions.
Based on “APQC's Process Classification
Framework” (APQC, 2008), is possible to conduct a
business process taxonomy that defines the steps or
activities that make up the major processes and sub-
processes used in the organization, in order to
establish a set of performance metrics.
2.2 Identify SME Case Metrics from
Benchmarking Process
The Benchmarking analysis method is a basic
tool for help to fix quantitatives and qualitatives
objectives and metrics for an industrial sector.
These analysis have a double approach.
From normalized metrics , the companies show
their reports and ratios throughout public entities or
official registry whose information are mainly of
financial nature and oriented to serve information for
stakeholders. The possible benchmarking analysis in
this case is easily from Specialized Data Base
(FINTEL Industry Metrics; Moody’s Financial
Metrics; Deloitte: The Shift Index; ….) and small
cost, but also small effectiveness for SME’s. The
reason is the financial data latency and final oriented
information results not causal effects.
A second approach for benchmarking is
focalized to SME’s competitiveness analysis and
based upon core competencies. This type of
companies is characterized by a great flexibility and
adaptability to markets and environmental factors,
therefore the performance of its activities is a critical
success factor and should be subject to a follow-up
next and most accurate as possible. On the other
hand, if your strategy is based on the growth in
another sector or other types of customer, will need
to take into account the possible development of
skills and competencies, necessary, as well as the
precise indicators to control them. The
benchmarking in these cases is much more difficult
to obtain, because it is of indicators internal process
that are not published and with a rapid evolution to
adapt to changing market conditions. In addition
require specific studies by sectors, industry,
countries, etc. that is costly in time and money, and
that are offered frequently By companies
specialising in this type of studies (Gartner;
Forrester; …).
One way to address the problem is through
industry metrics snapshot from prestige publications
those of APQC that allows a company to easily
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194
benchmark its corporate performance against peers
in the industry. The snapshot illustrates nearly two
dozen metrics spanning six categories of operational
performance including sales, efficiency,
effectiveness, profitability, cash and earnings – all
driving shareholder value.
A company can assess its performance in each
metric against the industry average, determine where
it specifically falls among the lower, median and
upper quartiles, and identify the worst-in-class and
best-in-class performers.
Table 1: Industry metrics snapshot.
Business Aspects Metric
Sales
Performance
-Revenue Growth (%,LTM)
-Revenue Growth (%,5-yr)
Efficiency
Performance
(LTM)
-Revenue P/Employee
-Net Income P/ Employee
- SG&A Expense Rate
- R&D Expense Rate
- Asset Turnover (R/ LTM)
- Inventory Turnover
Effectiveness
Performance
(LTM)
-Return on Assets (%)
-Return on Capital (%)
-Return on Equity (%)
Profitability
Performance
-Gross Profit Margin (%, -LTM)
-Gross Profit Margin Growth (%, 5-yr)
-Operating Income Margin (%, LTM)
-Net Income Margin (%, LTM)
-Net Income Margin Growth (%, 5-yr)
Cash Performance
-Free Operating Cash Flow Margin (%, LTM)
-Days Sales Outstanding (DSO) (Days, LTM)
-Cash Flow Growth (%, 5-yr) -Current Ratio
(Ratio, LFY)
Earnings
performance
-EPS (Excluding Extr. Items) ($/Share, LTM)
-EPS Growth (Excluding Extr. Items) (%, 5-yr)
-P/E Ratio (Excluding Extr. Items) (Ratio, LTM)
Source: QlikTech metrics snapshot, 2007
3 USING BUSINESS METRICS IN
INDUSTRIAL SME’S
The scope of the standard measures contained in the
Gartner Business Value Model covers all the
controllable activities performed within an
organization. These activities center on three broad
categories, referred to as business aspects:
Table 2: Business Value Model High-Level Business
Aspect Definitions (Smith, 2006).
Demand
Management
All the actionable activities involved with
generating demand for the products and
services offered by the organization.
Supply
Management
All the actionable activities directly involved
with supplying the products and services
offered by the organization.
Support
Services
All other actionable activities involved with
supporting the organization. These services
operate within organizations by providing
services to internal clients.
Source: Gartner Value Model. 2006
3.1 Use of Industrial Metrics in SME
Machinery Building Sector
A manufacturer of equipment in the automotive
industry, originates from a normal way, on the basis
of subcontracting by a company manufacturer or
supplier of first level (tier 1) in the sector.
This initial phase requires to orient the business
toward the intensive use in engineering and the
exploitation of skills specific techniques, having less
impact the commercial activity, with low number of
customers.
A later stage is characterized by the growth
based on a standardization of the product, a
optimization of the processes of supply, manufacture
and distribution and expand greatly the number of
customers, which involves a more commercial
activity of marketing, sales and customer service. It
is essentially to increase the value creation through
the processes that constitute the know-how of the
company, and to withstand a strategy given.
- Company name example (We use a fictitious name
to preserve the confidentiality):
Técnicas Industriales Especializadas S.L. (TIE)
- Activity: Engineering and specialized industrial
machinery building
- Business Strategy: Growth through expanding the
range of products and services, highly specialized
and adapted to the customer, with a reasonable
standardization and at a competitive price.
Strategy objectives (defined through interview with
the CEO of the organization):
1. Loyalty to the main customers
2. Design the best offer products and services through
options pre-configured
3. Improve the operational efficiency (supply;
assembly; warehousing; distribution)
4. Increase the work capital available
5. Improve the customer service and
operational margin
6. Create an Image of Mark (Brand)
We search build a set of Business Initiatives that can
create value to satisfy the Business Strategy.
We begin linking performance metrics with
strategy objectives following the strategy map model
in order to establish a cause-and-effect relationships
(in accordance with Kaplan and Norton model).
The metrics of performance must be focusing on
the actionable activities within the enterprise that are
managed at the executive and middle management
levels. The holistic nature of the Business Value
Model should capture the cause-and-effect
relationships between business functions within the
enterprise, to ensure that all the effects of a specific
change are considered.
USING KEY PERFORMANCE INDICATORS TO FACILITATE THE STRATEGY IMPLEMENTATION AND
BUSINESS PROCESS IMPROVEMENT IN SME'S
195
Figure 1: TIE Strategy Map Model.
The prime metrics should be selected based on
general availability of the data required to support
them in automated business transaction systems.
Regrouping according to the 3 Business Aspects
of the Business Value Model (Demand
Management; Supply Management; Support
Services), in addition to a fourth, due to the
relevance is for this company (Engineering), are
selected indicators of process needed to carry out the
strategy, according to the following table:
Table 3: Relationship between Business aspects and
performance indicators.
Business Aspects Performance Indicators
DEMAND MANAGEMENT
(Comercial and Sales)
-Product Portfolio index
-Sales Cycle index
-Sales Close index
-Customer Retention index
-Sales by Customer index
-Chanel Profitability index
-Activity in Company Portal
-Sales by Product Type
-Payoff by Product
-Profitability by Product index
-On-Time Delivery
SUPPLY MANAGEMENT
-Order Fill Rate
-Impacts Assembly index
-Warehousing Cost per unit
-Inventory Turnover
-Supplier On-Time
-Delivery Material
-Quality Supply Service
- Service Accuracy
-Conversion Cost
-Asset Utilization
-Cash-to-Cash Cycle Time
CUSTOMER SERVICE
-Service level effectiveness
-Time to Service index
-Total Cost index
ENGINEERING
-New Products index
-New Ideas Available index
-Configurability index
By having a pre-defined set of metrics that can be
used to translate vision to action. In this example, an
industrial machinery building company has defined
a high-level strategy to grow the business by
delivering customized pre-configured products and
services and at a reasonable price. By having a pre-
defined set of performance metrics, the management
team can more rapidly focus on the specific business
elements necessary to achieve the strategy and
formulate tactical plans to improve them. We will
consider the mainly strategic implications of follow-
up to these indicators.
Performance metrics facilitate strategy execution
creating a set of Business Initiatives or actions
adequate to meet targeted objectives:
-Develop a Web-based order fulfillment process
tied to preconfigured product options
-Creating a new commercialization channel
-Creating a new warehouse for commodities
-Establish relationships with new partners in each
of the areas
-Development of a production system for
standardized products
Table 4: Performance Metrics Facilitate Strategy
Execution.
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4 CONCLUSIONS
The use of BI tools and performance metrics in is
especially suitable in SME strategy growth
processes. The model developed by Gartner must be
very effective in most of the cases to implement the
theories of Kaplan and Norton in regard to the
establishment of strategic maps in the SME'S, and
especially in the industrial environments, where the
financial metrics are less value.
It is a critical success factor growth based on the
development of an offer well suited to the customer
and the creation of a brand image, for which the use
of new technologies based on the Internet is crucial.
Although there have been obtained even results
for the implementation of this method to the SME
analyzed due to the time required for an analysis
conclusively, it has been reached an agreement with
the CEO to implement the system of measures and
initiatives to help carry out the strategy defined, with
which it sense satisfactory results in the medium
term.
Finally the use of performance indicators based
on the activities of business, can provide a critical
path for the development of the strategies, which
Gartner called "Business Initiatives".
This first analysis to develop currently in a
specific industrial sector, will be subject to spread to
other sectors that validated the adequacy of the
model.
REFERENCES
Robert S. Kaplan and David P. Norton, The Strategy
Focused Organization: How Balanced Scorecard
Companies Thrive in the New Business Environment,
Harvard Business School Press, 2001
Robert S. Kaplan and David P. Norton, Strategy Maps,
Harvard Business School Press, 2004
Michael Smith, Audrey L. Apfel, Richard Mitchell, The
Gartner Business Value Model: A Framework for
Measuring Business Performance, Gartner Research,
May 2006
Michael Smith, Bill Gassman, John E. Van Decker, Using
Key Performance Indicators to Facilitate Business
Process Improvement, ID Number: G00146727,
Gartner Research, March 2007
QlikTech, Industry Metrics Snapshot for Industrial
Machinery, QlikTech International AB, 2007
APQC, The Framework for Process Improvement, APQC
Organization, April 2008
David Hatch, Performance Management AXIS, Aberdeen
Group, QI 2009
Neil Chandler, Top Four Corporate Performance Mana-
gement Processes for 2009 to 2014, Gartner Research,
September 2009
USING KEY PERFORMANCE INDICATORS TO FACILITATE THE STRATEGY IMPLEMENTATION AND
BUSINESS PROCESS IMPROVEMENT IN SME'S
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