Most of the business management systems have been developed during the industrial revolution, when manufacturers understood that business and production processes needed to be controlled, evaluated and improved. With the development of industry and the growth of business in general, the business management systems have evolved into business philosophies that have their supporters, as well as their critics.
This article reviews major business management systems that employ such processes as setting goals (strategic, operational and others), evaluation, control, introduction of response actions, etc. We intend to analyze the most popular systems of Performance Management (PM).
Why Performance Management matters?
It is worth saying that Performance Management facilitates delivery of both operational and strategic goals. In general, performance management ensures that company goals are effectively and efficiently achieved. This is done through evaluation of performance, which can be the performance of the entire company, department, process, project, all team employees and individual employees. Benefits of performance management are evident:
- Growth of sales,
- Reduction of costs,
- Alignment of organization behind top management goals,
- Transparency in achieving goals, etc.
Different performance management systems are operating on different levels, and thus are suing different goals, as well as serving different purposes. It would be wrong to say that one system is better than another. So, let’s review commonly accepted and recognized performance management systems.
Six Sigma – Focusing on Processes and Separate Projects
The concept of Six Sigma was first formulated in 1986 by Bill Smith at the Motorola Company. This system used some of the concepts from preceding methodologies like total quality management, quality control and others.
What are the principles and major advantages of Six Sigma theory?
- Genuine interest to the client. Six Sigma is customer oriented.
- Management based on facts and data
- Process orientation, process management and improvement
- Proactive management (forecasting the situation)
- Total cooperation inside the company
- Striving for perfection
Well, it should be noted that Six Sigma and Balanced Scorecard look pretty much alike. At the same time there is a difference in the scope. Six Sigma focuses on processes and separate projects, while Balanced Scorecard covers strategic goals (it tends to cover everything that happens to the company, but not only internal processes). A company may run a dozen or even more projects and processes. Thus, Six Sigma can be used in implementation of separate projects. As a result, only the third Six Sigma principle (Process orientation) cannot be attributed to Balanced Scorecard.
It is interesting that implementation process is almost identical to that of Balanced Scorecard:
- Improve and control.
These stages may have different names in the two systems, but they certainly have similar concepts.
Process-oriented KPIs of Six Sigma
Six Sigma uses the concept of KPI evaluation, although these KPIs are related to all business processes and projects, while Balanced Scorecard KPIs aim to align operational management with the company strategy, so its KPIs need to be something that establishes and maintains such a connection.
- In short, Six Sigma is fact based and data driven, process oriented, linked to a strategy and is thinking about customer requirements.
- One of the drawbacks of Six Sigma is the fact that processes may be improved separately, while the Balanced Scorecard requires that all processes in the company should aim at reaching strategic goals.
Lean Manufacturing – Avoiding Unnecessary Costs
Lean manufacturing mostly refers to production processes. It was created and then tested in Toyota Company. The goal of lean management is to avoid expenses that the final customers do not need. For example, a customer doesn’t want to pay for storage of the car at the factory, although storage costs are added to the final cost of the car. In other words, the goal of lean manufacturing is avoiding waste.
Lean manufacturing implies the following stages:
- Identify value,
- Identify value stream,
- Pull and
Value in this case is expressed in how the product meets the customer’s needs at a certain price and at a certain time. In other words, the main advantage of lean manufacturing is a focus on avoiding unnecessary costs and operations.
In context of Balanced Scorecard, lean manufacturing also uses metrics, since it is necessary to establish, for example:
- Cost per 1 day of storage, or
- Cost for one produced detail.
Total Quality Management (TQM) – Addressing Quality Internally
This system is often compared to Six Sigma and lean manufacturing as they have many common, as well as different features. So, let’s try to define what TQM is about.
Unlike Six Sigma, TQM’s advantage is that it is often implemented within departments, and total quality measures are seldom based on customer critical criteria. It may have no time urgency and focuses mainly on manufacturing, leaving such areas as marketing and service to other management systems of a higher level.
Total quality management may often disregard company strategy and senior managers may not be involved in TQM. While lean production and Six Sigma focus on certain individual processes and projects, TQM may aim at improving everything. Quality requirements in TQM are internally set, while Six Sigma uses a constant value.
Six Sigma and lean manufacturing as a rule require top experts to implement these systems, while TQM accepts non-dedicated managers. All initiatives in Six Sigma are often based on predicted figures and values, while in TQM it might not have a complete knowledge of what the final financial results might be. TQM is often criticized by its inability to bring quality to another, higher level, while improvement in Six Sigma is a continuous process.
At the same time, it would be wrong to say that TQM is an ineffective management system since it has been successfully implemented in numerous companies. But still, TQM is a “local” tool, since measures and response actions are often developed by technical specialists at the departments, but not top managers and CEOs.
Using performance management tools together
As you can see all the three systems use own metrics, have different goals and serve different purposes. Before implementing any of the above mentioned systems, including Balanced Scorecard, one should be 100% aware of expected outcome. If your ultimate goal is positioning your company in the market or gaining a particular market share, this is a strategic goal and Balanced Scorecard is so far the most effective tool to help you reach such a goal.
But at the same time, other business management systems can be used in combination with Balanced Scorecard. For example, a production enterprise would certainly appreciate using the lean management system to decrease product value and optimize production process, while Six Sigma may be used in larger companies to implement various projects which may not be related to each other. Unlike Six Sigma, TQM and lean manufacturing, Balanced Scorecard works on a larger scale, which at the same time does not exclude the possibility to use the “lower level” tools.
Balanced Scorecard (BSC) – Strategy Execution
As to Balanced Scorecard System, the following principles and stages are to be mentioned. Implementation of balanced scorecard begins with setting of strategic goals.
It is imperative to correctly understand the meaning of the word strategic. Earning, for instance two million dollars, is not a strategic goal, but getting that 25% market share is a good example of strategic goal. This is one of the most common mistakes at the first stages of BSC implementation.
Once the goals are set, a serious of operational tasks is created. In other words company management should answer the question “What needs to be done to reach strategic goals?” Ideally, BSC aims at informing every employee on his/her contribution to the overall success. So, every employee should be aware of strategic goals and what he/she is personally doing to reach them.
Key performance indicators are created based on operational tasks. Key performance indicators or KPIs make it possible to evaluate performance and analyze, and if necessary review, operational tasks or introduce response actions.
The choice of key performance indicators is a very important stage. The wrong indicators will show wrong values and figures, and thus will lead to wrong conclusions. Key performance indicators should be understood for both company top management and employees at the operational level.
Key performance indicators should be measurable. It is imperative to have the right number of KPIs. For example, the top manager does not need more than 20 KPIs, although the total number of key performance indicators in the company will be greater.