Performance Measurement Making sure your controls are appropriate by David Allen

by Heather Dandridge  yesterday at 12:25

Performance Measurement: Making sure your controls are appropriate by David Allen

An important feature of any financial control system is its compatibility with the enterprise’s orientation, of which we might consider two very different ones.

Probably the most written about, in the management literature, is a customer orientation. This means that the enterprise is defined in terms of the markets it chooses to supply, and is prepared to tap into various resources in order to do so. Supermarkets provide good examples.

However, resource orientation is surprisingly resilient, and remains common. This means that the enterprise defines itself in terms of the resources it chooses to employ, and is prepared to convert those resources in to products (be they goods or services) for sale to various markets. The oil majors provide good examples.

The choice depends on the competitive environment, e.g. in the late forties and fifties, so many materials and skills were in short supply, that it was natural to be resource oriented. Given that demand outstripped supply, those companies with the property, plant and supplies of raw materials would be in the best position to achieve good sales and profits, and be able to grow.

On the other hand, when supply exceeds demand, as it does in many industries today, it pays to be customer oriented. Those businesses that are most successful in identifying and satisfying customer needs will be in the best position to achieve good sales and profits and grow.

Intriguingly, the key financial performance measures appropriate to these two orientations exist at the opposite ends of the spectrum. A resource oriented business needs to pay particular attention to the profitability of market sectors, and even individual customers, so that it can invest in the more attractive areas, and withdraw from the less attractive.

A customer oriented business, on the other hand, needs to pay particular attention to product profitability, expressed as a multiple of the key resource (e.g. contribution per tonne of scarce material).

Make sure that your controls are appropriate!

David Allen is the author of our new course, Performance measurement: the reality.
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