2018
Summary “Performance
Measurement and
Control Systems for
Implementing Strategy”
(Robert Simons)
FIRST EDITION 2014, ISBN 978-1-292-02093-8
MAASTRICHT UNIVERSITY – DANNY LUCIANA
,Summary “Performance Measurement and Control Systems for Implementing Strategy (Simons)”
Table of Contents
1. Organizational tensions to be managed _________________________________ 4
Systems for Performance measurement and control _________________________________ 4
Profit planning systems ________________________________________________________ 4
Performance measurement system _______________________________________________ 4
Balancing organizational tensions ________________________________________________ 5
2. Basics for successful strategy ________________________________________ 6
Corporate strategy and Business strategy _________________________________________ 6
Competitive market dynamics ___________________________________________________ 6
Resources and capabilities of a business___________________________________________ 7
Balance Sheet Assets _________________________________________________________ 7
Intangible Resources __________________________________________________________ 7
The 4 Ps of strategy (Mintzberg) _________________________________________________ 8
3. Organizing for Performance __________________________________________ 9
Purpose of structure __________________________________________________________ 9
Design of work units __________________________________________________________ 9
Basic design choices __________________________________________________________ 9
A hierachy of accountability ____________________________________________________ 9
Specialization and market responsiveness _________________________________________ 9
Accountability and span of control ______________________________________________ 10
4. Using information for Performance measurement and control ______________ 11
Organizational process model __________________________________________________ 11
The choice of what to control __________________________________________________ 12
Uses of information __________________________________________________________ 12
Conflicts in the use of management information____________________________________ 12
5. Building a Profit plan ______________________________________________ 14
Three wheels of profit planning _________________________________________________ 14
The Profit wheel ____________________________________________________________ 15
The Cash wheel _____________________________________________________________ 16
The ROE wheel _____________________________________________________________ 16
Key financial measures _______________________________________________________ 18
6. Evaluating Strategic profit performance _______________________________ 19
Strategic profitability _________________________________________________________ 19
Computing profit plan variances in absolute and relative terms ________________________ 19
Competitive effectiveness: Market share variances _________________________________ 20
Computing Market share variances ______________________________________________ 20
Competitive effectiveness: Revenue variances _____________________________________ 20
Computing Revenue variances _________________________________________________ 20
EMFC RC-program Maastricht University Page 1 of 72
,Summary “Performance Measurement and Control Systems for Implementing Strategy (Simons)”
Volume-adjusted profit plan ___________________________________________________ 21
Operating efficiencies: Variable costs ____________________________________________ 21
Calculating production efficiency and cost variances (if applicable) _____________________ 21
Operating efficiencies: Nonvariable costs _________________________________________ 22
Searching for explanations and initiating action plans _______________________________ 22
Using Strategic profitability analysis _____________________________________________ 22
7. Designing Asset allocation systems ___________________________________ 24
Asset allocation systems ______________________________________________________ 24
Limits on Asset Allocations ____________________________________________________ 24
Policies and procedures _______________________________________________________ 24
Sorting assets by category ____________________________________________________ 25
Evaluating asset acquisition proposals ___________________________________________ 25
Putting it all together ________________________________________________________ 27
8. Linking Performance to Markets ______________________________________ 28
Transfer prices: managing markets inside the firm__________________________________ 28
Transfer price alternatives ____________________________________________________ 28
Transfer pricing effects and trade-offs ___________________________________________ 31
Linking profit performance to external markets ____________________________________ 32
Corporate performance from the perspective of customer markets _____________________ 32
Corporate performance from the perspective of factor markets ________________________ 32
Corporate performance from the perspective of financial markets ______________________ 32
Economic value added________________________________________________________ 33
Linking external markets and internal operations: back to the profit plan ________________ 35
9. Building a Balanced Scorecard _______________________________________ 36
The balanced scorecard_______________________________________________________ 36
Testing the linkage of multiple scorecard measures to a single strategy _________________ 39
Four perspectives: are these sufficient? __________________________________________ 39
10. Using Diagnostic and Interactive Control Systems _______________________ 40
Diagnostic control systems ____________________________________________________ 40
Why use control systems diagnostically __________________________________________ 41
Using diagnostic control systems effectively _______________________________________ 41
Risks in using diagnostic control systems _________________________________________ 42
Interactive control systems ____________________________________________________ 42
Design features of interactive control systems _____________________________________ 43
Choosing which system to use interactively _______________________________________ 44
Choosing how many control systems to use interactively _____________________________ 44
Interactive control systems and formal incentives __________________________________ 44
Contingencies ______________________________________________________________ 45
EMFC RC-program Maastricht University Page 2 of 72
, Summary “Performance Measurement and Control Systems for Implementing Strategy (Simons)”
Return on management ______________________________________________________ 45
Building block summary ______________________________________________________ 46
11. Identifying Strategic Risk ___________________________________________ 47
Sources of strategic risk ______________________________________________________ 47
Operations risk _____________________________________________________________ 47
Asset impairment risk ________________________________________________________ 47
Competitive risk ____________________________________________________________ 48
Franchise risk ______________________________________________________________ 49
Assessing internal risk pressures _______________________________________________ 49
Misrepresentation and fraud ___________________________________________________ 50
Learning what risks to avoid ___________________________________________________ 50
12. Managing Strategic Risk ____________________________________________ 51
Beliefs and boundaries _______________________________________________________ 51
Business conduct boundaries __________________________________________________ 52
Internal controls ____________________________________________________________ 52
Strategic boundaries _________________________________________________________ 53
Building block summary ______________________________________________________ 55
13. Levers of Control for Implementing Strategy ____________________________ 57
Levers of control ____________________________________________________________ 57
Levers of control and human behavior ___________________________________________ 59
Applying the levers of control __________________________________________________ 60
Taking charge of a business ___________________________________________________ 61
Achieving profit goals and strategies ____________________________________________ 61
14. Aligning Performance Goals and Incentives _____________________________ 63
The nature of performance goals _______________________________________________ 63
Critical performance variables __________________________________________________ 63
Selecting performance measures _______________________________________________ 63
Setting the performance bar ___________________________________________________ 64
Multiple purposes of performance goals __________________________________________ 64
Aligning incentives __________________________________________________________ 64
Notes 65
Index 69
EMFC RC-program Maastricht University Page 3 of 72
Summary “Performance
Measurement and
Control Systems for
Implementing Strategy”
(Robert Simons)
FIRST EDITION 2014, ISBN 978-1-292-02093-8
MAASTRICHT UNIVERSITY – DANNY LUCIANA
,Summary “Performance Measurement and Control Systems for Implementing Strategy (Simons)”
Table of Contents
1. Organizational tensions to be managed _________________________________ 4
Systems for Performance measurement and control _________________________________ 4
Profit planning systems ________________________________________________________ 4
Performance measurement system _______________________________________________ 4
Balancing organizational tensions ________________________________________________ 5
2. Basics for successful strategy ________________________________________ 6
Corporate strategy and Business strategy _________________________________________ 6
Competitive market dynamics ___________________________________________________ 6
Resources and capabilities of a business___________________________________________ 7
Balance Sheet Assets _________________________________________________________ 7
Intangible Resources __________________________________________________________ 7
The 4 Ps of strategy (Mintzberg) _________________________________________________ 8
3. Organizing for Performance __________________________________________ 9
Purpose of structure __________________________________________________________ 9
Design of work units __________________________________________________________ 9
Basic design choices __________________________________________________________ 9
A hierachy of accountability ____________________________________________________ 9
Specialization and market responsiveness _________________________________________ 9
Accountability and span of control ______________________________________________ 10
4. Using information for Performance measurement and control ______________ 11
Organizational process model __________________________________________________ 11
The choice of what to control __________________________________________________ 12
Uses of information __________________________________________________________ 12
Conflicts in the use of management information____________________________________ 12
5. Building a Profit plan ______________________________________________ 14
Three wheels of profit planning _________________________________________________ 14
The Profit wheel ____________________________________________________________ 15
The Cash wheel _____________________________________________________________ 16
The ROE wheel _____________________________________________________________ 16
Key financial measures _______________________________________________________ 18
6. Evaluating Strategic profit performance _______________________________ 19
Strategic profitability _________________________________________________________ 19
Computing profit plan variances in absolute and relative terms ________________________ 19
Competitive effectiveness: Market share variances _________________________________ 20
Computing Market share variances ______________________________________________ 20
Competitive effectiveness: Revenue variances _____________________________________ 20
Computing Revenue variances _________________________________________________ 20
EMFC RC-program Maastricht University Page 1 of 72
,Summary “Performance Measurement and Control Systems for Implementing Strategy (Simons)”
Volume-adjusted profit plan ___________________________________________________ 21
Operating efficiencies: Variable costs ____________________________________________ 21
Calculating production efficiency and cost variances (if applicable) _____________________ 21
Operating efficiencies: Nonvariable costs _________________________________________ 22
Searching for explanations and initiating action plans _______________________________ 22
Using Strategic profitability analysis _____________________________________________ 22
7. Designing Asset allocation systems ___________________________________ 24
Asset allocation systems ______________________________________________________ 24
Limits on Asset Allocations ____________________________________________________ 24
Policies and procedures _______________________________________________________ 24
Sorting assets by category ____________________________________________________ 25
Evaluating asset acquisition proposals ___________________________________________ 25
Putting it all together ________________________________________________________ 27
8. Linking Performance to Markets ______________________________________ 28
Transfer prices: managing markets inside the firm__________________________________ 28
Transfer price alternatives ____________________________________________________ 28
Transfer pricing effects and trade-offs ___________________________________________ 31
Linking profit performance to external markets ____________________________________ 32
Corporate performance from the perspective of customer markets _____________________ 32
Corporate performance from the perspective of factor markets ________________________ 32
Corporate performance from the perspective of financial markets ______________________ 32
Economic value added________________________________________________________ 33
Linking external markets and internal operations: back to the profit plan ________________ 35
9. Building a Balanced Scorecard _______________________________________ 36
The balanced scorecard_______________________________________________________ 36
Testing the linkage of multiple scorecard measures to a single strategy _________________ 39
Four perspectives: are these sufficient? __________________________________________ 39
10. Using Diagnostic and Interactive Control Systems _______________________ 40
Diagnostic control systems ____________________________________________________ 40
Why use control systems diagnostically __________________________________________ 41
Using diagnostic control systems effectively _______________________________________ 41
Risks in using diagnostic control systems _________________________________________ 42
Interactive control systems ____________________________________________________ 42
Design features of interactive control systems _____________________________________ 43
Choosing which system to use interactively _______________________________________ 44
Choosing how many control systems to use interactively _____________________________ 44
Interactive control systems and formal incentives __________________________________ 44
Contingencies ______________________________________________________________ 45
EMFC RC-program Maastricht University Page 2 of 72
, Summary “Performance Measurement and Control Systems for Implementing Strategy (Simons)”
Return on management ______________________________________________________ 45
Building block summary ______________________________________________________ 46
11. Identifying Strategic Risk ___________________________________________ 47
Sources of strategic risk ______________________________________________________ 47
Operations risk _____________________________________________________________ 47
Asset impairment risk ________________________________________________________ 47
Competitive risk ____________________________________________________________ 48
Franchise risk ______________________________________________________________ 49
Assessing internal risk pressures _______________________________________________ 49
Misrepresentation and fraud ___________________________________________________ 50
Learning what risks to avoid ___________________________________________________ 50
12. Managing Strategic Risk ____________________________________________ 51
Beliefs and boundaries _______________________________________________________ 51
Business conduct boundaries __________________________________________________ 52
Internal controls ____________________________________________________________ 52
Strategic boundaries _________________________________________________________ 53
Building block summary ______________________________________________________ 55
13. Levers of Control for Implementing Strategy ____________________________ 57
Levers of control ____________________________________________________________ 57
Levers of control and human behavior ___________________________________________ 59
Applying the levers of control __________________________________________________ 60
Taking charge of a business ___________________________________________________ 61
Achieving profit goals and strategies ____________________________________________ 61
14. Aligning Performance Goals and Incentives _____________________________ 63
The nature of performance goals _______________________________________________ 63
Critical performance variables __________________________________________________ 63
Selecting performance measures _______________________________________________ 63
Setting the performance bar ___________________________________________________ 64
Multiple purposes of performance goals __________________________________________ 64
Aligning incentives __________________________________________________________ 64
Notes 65
Index 69
EMFC RC-program Maastricht University Page 3 of 72
