Value measurement is the process by which management decides on operational performance measures that will enable them to secure the shareholders return on investment. Value measurement should be multidimensional in that it must indicate
- Financial measures like Profit Before Tax (PBT)
- Customer focused measures like customer satisfaction or market share
- Process measures like the throughput rate of material and inventory levels
- People focused measures like training objectives etc.
Measures covers lead factors and lag factors. Lead factors are measures that are early indicators of performance that helps management make adjustments in the value positioning as a strategy is being implemented. Lag factors are fait accompli but it gives a more accurate view of business performance. Employee satisfaction can for example be a lead factor for profitability. If employee’s are dissatisfied and have a low morale then we can expect the bottom line profit to be impacted through absence of work increases etc.
The value measurement sets key performance measures and spell out how the measures will be measured, reported and interpreted. There should be no uncertainty with shareholders, customers, management, employees and even supply chain partners what performance levels are being targeted in terms of the customer. Performance measures highlight to shareholders if the management is delivering on the plan for wealth creation that was set during the value positioning step. The value measurement process determines the behaviour of the business and aligns the behaviour with the value expectations of all stakeholders.
No transformation process can be successfully completed without an in depth understanding of which performance measures will drive the business change. The business performance indicators must measure whether the business strategy is being effectively executed.