Performance Measurement and Management in Business

Executive Summary

Change is pervasive not only in people’s individual lives but also in business organizations – for profit or not. Change is inevitable; it is also one of the constants in this world. It doesn’t matter if an organization is doing something about the impact of change – technological, societal and market – on how they do business. These changes will still impact on them and those who react fastest and most constructively will survive. Management theories emerged as a result of change. From the scientific management to centralized organization from a decentralized management to empowered workforce; and from a knowledge management to learning organization. In order to protect its current status, Toyota Motors Corporation, as they say, must run faster to stay in place. First and foremost, it must embrace change whole heartedly – this means the entire organization as a whole rather than its parts individually.

The above changes unfortunately results to a more cutthroat competition not only in the automobile industry but in all industries affected by these changes. Sustaining status quo or surviving in a highly competitive environment is expensive. Companies, to maintain their standing in the market, have to spend more and more in advertising and other activities to sustain the market’s interest in their products and services. This practice is fatal in the long run. Certainly a company can not indefinitely spend its scarce financial resources in activities which can only sustain what is. To survive the company must not only please existing customers, but make new ones too.

The Balanced scorecardStrategy as proposed by P. Chan Kim and Renee Mauborgne might be the answer for Toyota. As Balanced scorecardstrategy forces the company to think outside it comforts zones all the time to create uncontested market and hence, make competition irrelevant. As mentioned surviving in a highly competitive environment is very expensive and such expense is an expense that Toyota Motors Corporation can not afford. Rather it can spend such amount more productively in to its capital investments and research and development programs the budget of which for 2009 decline for the first time in 6 years.

Introduction

Doing business today is much more different than decades ago and some of these differences are startling. Companies competing in their industries have become more global in reach and depth. Factors such as environmental, organisational, and technological are creating a very competitive business environment wherein the customer is still and always king. As technology becomes more of a necessity, the business environment also faces more forceful pressures from the market, society, and technology itself.

In this dynamic environment, an organisation finds change and performance improvement more as matters of business survival rather than as matters of competitiveness. Product differentiation and cost leadership are two strategies a company can adopt to stay ahead of competition. Continuous process improvement including total quality management, six sigma, and knowledge management is one of several programs a company can integrate into its operations to improve productivity and quality. Integrating different strategies such as the balanced scorecard strategy into the company’s organisational strategies to improve competitiveness and protect competitive advantages is not a fad, but rather a necessity if an organisation wants to be in the long haul. Standards in the manufacture and production of goods and execution of services must be met for the customer to be able to optimize value for money.

Moreover, as emphasized in the discussions of the balanced scorecard strategy an organization needs to develop a continuous learning atmosphere. Unless an organisation learns to adopt change, it will not survive the competition. A learning organisation it must be.

This paper aims to look at the history of Toyota Motors Corporation – its development as one of the most premiere organisations in the automobile industry and in the world. Also, discussion and analysis on how Toyota can enhance its standing will also be the main focus of the paper with emphasis on the role of the Balanced scorecard strategy pioneered by W. Chan Kim and Renee Mauborgne.

In the end, this paper aims to add to the general understanding and body of knowledge on organisational performance improvements. With this in mind, the student set out to intensively and extensively study available resources on Toyota Motors Corporation and on organisational performance.

Toyota Motors Corporation in Perspective

From its beginning in the late 19^th century and of producing Japan’s first power loom, Toyota Motors Corporation or TMC is now one of the most successful multinational companies not only in the automotive industry, but in the whole world (Toyota Motors Corporation 2008). As a manifestation of its success, Fortune Magazine included Toyota Motors Corporation as one of the top ten Fortune Global 500 companies.

Toyota’s history of success didn’t come easy. It was the result of dreams, hard work, innovation and passion not only of its founder, Sakichi Toyoda, and his son’s, Kiichiro, but of its more than 300,000 employees around the world as well. From these dreams, hard work, innovation and passion, Toyota Motors Corporation is now one of the most admired car makers of all times.

TMC pioneered technologies in automobile production and manufacturing system. Its Web site states that “Toyota’s approach to automobile production and its inherent quality controls revolutionized the industry. Its “just-in-time” supply-chain concept has become a model for manufacturers around the world, and not just for automakers” (Toyota Motors Corporation 2008) which is popularly known as the Toyota Production System or TPS. The TPS is one of the proofs of Toyota’s dedication to its craft and industry. However, Toyota Motors Corporation can not simply sit back and just rely on its past successes. More than ever it needs to run faster to remain in the same place, so to speak. It must continually innovate and change to defend its status in the market place. The following sections of this paper present several analyses and management theories on how TMC can do just that.

As of the end of its 2008 fiscal year, March 31, 2008, Toyota Motors Corporation reported an operating income of 2,500 billion yen from net revenue of 26,289 billion yen (Toyota Motors Corporation 2008). This operating income is 8.6 per cent of the company’s net revenues for the fiscal year. This percentage, however, is the lowest that Toyota displayed in over five years. This decline in net operating income relative to net revenues also resulted to a decline in return on equity for the year which was computed at 14.5 per cent. This decline is in spite of the increase in net income of 1,717 billion yen from 2007’s 1,644 billion yet. The company’s return on assets also declined for the year from 5.4 per cent to 5.3 per cent (Toyota Motors Corporation 2008). This indicates that TMC’s capability and ability to utilize its assets fully.

Moreover, the planned 2009 capital investment, which excludes investments in vehicles and equipment on operating leases, and research and development expenses reflect a decline in Toyota’s. This decline is the first for the company which has been steadily increasing its capital investment and R&D expenses from 2004 to 2008.

These indicators may or may not show that the internal effectiveness and efficiency of the company is declining. The conclusion is not yet firm because other indicators such as Toyota Motors Corporation’s vehicle production and vehicle sales increased during the year. Or these indicators might support the conclusion that such effectiveness and efficiency are really in the decline. From this, the researcher concludes that there is urgency for TMC to adopt all or some of the strategies as outlined in this paper.

In the company’s presentation of 2008 fiscal year’s financial results, in spite of the worsening financial indicators as shown above, stressed that the profit structure of the company is “geographically well balanced” (Toyota Motors Corporation 2008, p. 7). Although a geographically well balanced profit structure is very important for the long term survival of TMC, the question is whether the company can sustain that balance or not. According to some of the company’s financial indicators, Toyota Motors Corporation might have difficulty sustaining a geographically well balanced profit structure.

The decline in the company’s return on equity was attributed by TMC to the “decelerating economy of developed countries [its main markets], led by the United States; continued soaring raw material costs and drastic currency fluctuation; and implementation of more challenging environmental regulations worldwide” (Toyota Motors Corporation 2008, p. 12).

Despite all this, the clamor for the development of more environmental friendly automobiles has been becoming louder. In this field, Toyota has shown exponential growth in its hybrid vehicle sales from just 180,000 in 2003 to 1,410,000 in 2008.

Performance measurement is vital in all organizations because the organizations need to verify the validity of the selection methods; they also need to do performance measurement in order to improve productivity of the organization.

As much as this may seem an important and key aspect of management, still it has a lot more difficulties associated with it. Some of the main factors that may make performance measurement to be more challenging are the measurement problems that make it impossible the supervisors (those in charge of the performance measurement) to tell the juniors or subordinates that they are below the average standards.

In order for organizations to do performance measurement well, then they should carefully study the job, systematically and scientifically, in order to determine the nature and characteristics of the job, knowledge, skills and experience required for the successful performance of the job. They should collect all the vital information related to the job. They should then look at the specific individual tasks that comprise the job and qualifications necessary to do the job. This is called job analysis that involves determining the content of the job in terms of what the worker is expected to do, methods and techniques used, and lastly, the conditions and skills required for the job.

Performance measurements can be defined as the activity of measuring and accessing various aspects of a process from operations within an organization. Performance measurement involves measuring quality, speed, dependability, flexibility and cost. (Slack – et – al 2007). Balanced score card model.

Balanced score card

This is a tool which is used by businesses for measuring and improving performance in businesses. The tool is used in measuring financial success of a firm by highlighting the required financial ratio to be calculated. The score card is developed through considering a number of factors or score cards such as;- financial aspects of the company, innovation and collaboration process and customer. A strategy and vision is laid down and the following perspectives in business emerges, this include;-

• Financial perspective; – this involves coming up with ratios and other performance indictors which are common in the industry in order to be used for performance measures in terms of finance. The company in question uses the ratios and standards that are a requirement and an agreement of the industry. In the same time the measures that are used include: – health ratios, profitability ratios, activity ratios, and liquidity ratios. The goals to be attained are also set so that there is a means of performance measure within the organization for it to be used.
• Innovative: – this is concerned with training and development of human resources, sharing of information within the organization and recruitment and selection. It also involves product differentiation through research and development; at the same time it includes collaboration which increases the shareholders wealth. Innovation goes together with collaboration for success of business in the world today. This ensures there are regular changes in creation of value and the use of resources efficiently and effectively.
• Process: – another critical point in vision and strategy is the process at which things are done is also redesigned, the process is used in modifying the product that is being sold and it ensures there is quality and timely production. Efficiency is improved leading to cost reduction. The internal systems of the organization are improved using these formulae. This is at times called designing process. A number of steps are used in designing the score card.
• People Customer:- the score card also is used in setting goals on how the marketing department will reach the required market share, the value they will offer to the customer and how they will satisfy the customers. This considers people as the most important in the chain of capabilities. There is a strife to satisfy the customers in the production, in this case one will be able to keep the customers leaving the competitors to keep the information, this can be expressed in a simple diagram such as:-

Benchmarking

IN any organization, for any organization performance measurement adds value for its success and it must have a benchmark that will help them grow. Bench mark is th process of the organization running from other organizations (Slack et – al 2007). Benchmarking involves analyzing internal, external, competition, non competition performance and practice (Slack – et al 2007). The aim of benchmarking is to ensure that the company becomes the best competitor in the market. And it involves product processes, people and finances. Benchmarking helps the organization to grow.

Critical analysis

In today’s business environment, only companies who “are truly revolutionaries” can “create new wealth” (Ng 2007, p. 94). This phenomenon is our pervasive reality which is affecting how organizations do business and how Toyota is doing business. A point in fact is “seven of the [ten] companies that have seen the biggest growth in share value over the past five years did not exist a couple of decades ago” (Wooldridge 2007, p. 12), a point that Toyota Motors Corporation must learn and relearn. The success of these companies and the failure of others lies in how these firms acknowledge or disregard conventional boundaries on doing business and specially, on how organizations think of and respond to changes in their operating environment. Ng emphasized the urgency of transforming an organization into an innovative one to be not “a victim of unplanned obsolescence” (2004, p. 93).

An innovative organization is “one in which members are systematically (integrated, seamless and coherent) and systematically (with order and method) renewing the organization through innovation as part of their everyday existence” (Ng 2004, p. 94) whereas a learning organization was defined as “one in which all members are individually and collectively willing in heart and in mind to go deeper and broader in their learning process” (Ng 2004, p. 95).

Drucker connected these two types of organization when he said that “innovation requires knowledge, ingenuity, and, above all else, focus” (2002, p. 102). Ng adequately made this connection and argued successfully that the innovative organization can be developed from the foundations of the learning organization. Ng said and the student agrees that an organization to be truly innovative must “[develop] innovation as a deep capability” and in order to do this “[it] has to learn and learn deeply” (2004, p. 98) which is the basis of a learning organization.

After analyzing Toyota framework of performance evaluation and measurements the company has implemented DMB model where they have ensured that the organization processes are well taken care of. This model uses weighted method in ensuring there is a balanced measurement. It is important to note that the organization, in order for them to improve their production they should continue looking for new techniques which will help them grow to the level that is competitive in the market.

Key areas for improvements

Toyota motor vehicles have already implemented many performance measurement models but there are areas that need improvement. Such areas include human resource, and production. More than ever, the human resource strategies, objective, systems and processes of the organization must be integrated and synchronized with the overall Toyota Motors Corporation’s strategies, objective, systems and processes and the rest of the organization. Human resource as one of the key success factors in implementing the balanced scorecard strategy must be able to support and not detract the company from it. Hence, the personnel selection, training and development, and performance appraisal processes should be seamlessly integrated into the whole organizational structure ad systems to ensure that all these systems are working towards the same goal: creating uncontested market space and making the competition irrelevant.

Mondy & Noe defined recruitment as the “process of attracting individuals on a timely basis, in sufficient numbers, and with appropriate qualifications, and encouraging them to apply for jobs with an [organization]” (2005, p. 199). The objective of the selection process for any type of [organization] is selecting the best “individual suited for a particular position and the organization” (Mondy & Noe, 2005, p. 162). Hence, for TMC the goal of the organization’s selection process should be selecting the best individual suited for the vacant position and have the necessary capability to help the company in its quest in making the competition irrelevant.

On the other hand, the performance appraisal system is a “formal system of review and evaluation of individual or team task performance” (Mondy & Noe, 2005, p. 252) “to determine who should be promoted, demoted, transferred, or terminated (Anthony, Kacmar & Perrewe, 2002, p. 354). Several of the factors that affect the effectiveness of an appraisal system are job-related criteria, performance expectations, standardization, trained appraisers, continuous open communication, performance reviews, and due process (Mondy & Noe, 2005, pp. 270-272). Managing employee performance is one of the more difficult and complex activities within an organization. Unlike the other resources of a business, the human resource is not very easy to control: people think and act accordingly.

Anthony, Kacmar & Perrewe wrote that an effective performance appraisal system are “not only tools for evaluating the work of employees but also for developing and motivating employees” (2002, p. 351). These benefits are central to why the performance appraisal system was developed in organizations: employees need to be motivated and developed in order to perform their jobs effectively and efficiently. Furthermore, the appraisal system of a company can also be used to “determine who needs formal training and development opportunities” (Anthony, Kacmar & Perrewe, 2002, p. 354). In the end, all of these will result to a better equipped human resource. Hence, for Toyota Motors Corporation its performance appraisal system must be redesigned to fit the balanced scorecard strategy of the company. As a vital component in motivating its employees, the human resource performance appraisal system of TMC should not operate in a vacuum, rather it must support the goal of developing organizational competencies to make the competition irrelevant.

What had Toyota Motors Corporation done for its worldwide human resource management is admirable – it developed HRM practices to sustain the Toyota Production System (Winfield 1994, p. 41). However, today it is no longer enough. It is time that Toyota models its human resource management practices to sustain the balanced scorecard strategy. The researcher believes that TPS is a component of balanced scorecard strategy; hence it should not be the end goal in designing the company’s human resource management system and its other systems. The four goals as promoted by the company’s existing human resource management practices are “employee commitment, workforce flexibility and adaptability, quality” (Winfield 1994, p. 50) in the balanced scorecard strategy perspective are only several of the factors needed in creating an uncontestable market as opposed to the current practice.

Conclusion

As competition become more and more intense, companies such as Toyota Motors Corporation which are leaders in their industries can not afford to become complacent. Rather they must again pioneer developments in their fields. These companies have to integrate all their resources, use these resources efficiently and effectively to attain organisational goals.

As the workforce becomes varied and as competition within industries becomes more intense, the need to effectively and efficiently manage human resources to gain, develop and sustain competitive advantages is becoming more important. In integrating the balanced scorecard strategy to its overall strategy, Toyota Motors Corporation must not forget that the most important factor in order for such strategy to succeed is its human resource.

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