Using KPIs as goals and targets

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Theoretical framework

In this chapter we will present the theoretical concept underlying this thesis. The selected theory deals with; general information about KPIs, goals and targets, operating control with KPIs, motivation and incentives in relation to KPIs. The theory presented will be used when analyzing the empirical data.

Key Performance Indicators

To be able to attain goals a clear control is needed. (BAS Nyckeltal 2006) When you active-ly influence the behaviors in an organization you are talking of operating control where KPIs are of great importance (Nilsson et al, 2010).
When the economic process is being controlled and directed in a desirable direction by a company, then you are talking about what is commonly known as financial control. Finan-cial control is being used to better understand the economic conditions that that company is facing and what is needed to be adjusted in the best way possible to attain its goals in dif-ferent situations. Financial control can further support you with the information of eco-nomic relationship, cause and effect, since numbers are set together in correlation to each other. (BAS Nyckeltal 2006)
These relationships that are being put together are known as KPIs. Since you are the one choosing KPIs in the company you are creating your own truth (Catasús et al. 2008).
KPIs can be both financial and non-financial. Financial KPIs have been broadly used throughout the years by big organizations and tells us something about the financial situa-tion within the firm, a classic example of a financial KPI is financial solidity which tell us how much of the assets that are financed by own equity. (Johansson & Ramberg, 1997). Another type of KPI that is of great use is the non-financial KPIs. Non-financial KPIs also referred to as soft KPIs, tell us something about a relation that is not connected to the fi-nancial situation, customer satisfaction for example, where an index can be created that tell us how satisfied the customers is another example of a soft KPI is how much time is being spent on each product under production. (PWC, 2007)
KPIs are a numerically values concluded to describe correlations in a company. The corre-lations could either be already attained activities and results or it could be future desirable goals that are supposed to clarify work and motivate employees of the organization. (Catasús et al. 2008)
What you call key performance indicators are basically numbers that you are interested in. KPIs have advantages to simplify complexity and correlations and make it easier to con-ceptualize and overview a situation. These indicators are of great help and importance as long as these simplifications are not always the motive for larger decisions. In order for the KPIs to not be too simplified, the fundamental information behind the process of indica-tors is often used to give more information as well as other indicators. (Catasús et al. 2008) and (Kennerey & Neely, 2003)
Even though KPIs can be used in any way a company whishes there is a distinction present between basic indicators and supplementary indicators. The difference are that basic indica-tors are common used and therefore easily compared with other companies and branches whilst the supplementary indicators exists of numerous of figures and are used in more specific situations in explicit branches. (BAS Nyckeltal 2006)

Using KPIs as goals and targets

Strategic decisions are most often based upon the future with long-term goals. Since this is the foundation of decision making a lot of time is being spend upon this matter. Decisions of how to develop goals, how to accomplish them and with what approach are all aspects of the goal setting process. On top of this you need to allocate resources that support your development. A goal can be more or less specified and can include different areas such as, profits, growth, market shares etc. By having well specified targets you can often allocate what is needed in order for this to be attained, rather than if you have not set any goals at all. (Lee at al. 2005)
Goal setting is not always a very straight forward and easy process. Goal setting is only rel-evant if the targets being set are adjusted to external factors. A major effort must lie on having up to date goals, otherwise you risks being irrelevant and large disappointment might be experienced if the targets are not being met. (Lee et al. 2005)
By working with goals you may have different approaches. Having a clear target stated can mean a great deal of freedom for the workers since they only need to accomplish the over-all goal and the way to achieve this is free of choice. This is not an exclusive and the only natural way of preceding your goals. What is known and common believed about goals is the fact that it works as a clear guidance, what is expected throughout the organization and to make sure that the organization are heading in the right direction. (Bergstrand, 2010). But most important of all a goal concretize a company’s mission, vision and business idea. The most common goal within a company is to create value for customers, employees and shareholders. (Bruzelius & Skärvad, 2011)
By having goals and clear targets usually means that you have either financial or non-financial goals. Having customer satisfaction and other non-financial targets are not rare but the most common are still financial goals. To reach these financial goals financial con-trol and key performance indicators are as mentioned above, useful tools. In order to con-trol your company in the desirable directions following financial aspects and key perfor-mance indicators the following considerations can be an example of control:
Planning, follow up goals, see correlations between goals and actual activities & re-sults
Make sure that the decision making person are fully informed
Communicate the desired outcomes throughout the organization
Analyze the goals and correlation
Analyze how the activities in the organization can be improved (Ax et al, 2009)

Operating control with KPIs

Visions, action plans and budgets are all common tools to operate an organization towards its goals. Doing follow ups of budgets and certain projects to use as a benchmark of how well the company is working in order to achieve the strategy and vision is frequently used throughout businesses. Today, more and more companies have seen the benefits of using different types of KPI’s in their operating control to evaluate their business. (Helling, 2001)
The use of KPIs is a way of communicate the organizations goals and strategies. A weak-ness with a budget and other financial KPIs is that they tend to not have a meaning for big parts of the organizations; many see them as just numbers. Employees do not see the link between their actions and the company´s financial goals. By breaking down the budget into relevant and easy understood KPIs you will get everyone within the company to under-stand what actions are necessary to take in order to reach the goal. (Olve, Roy & Wetter, 2004)
Further on Olve et al. (2004) describes that if the organization is properly manned and staff is doing the right thing customers will be satisfied and thereby will be able to maintain and develop the organization´s business.
According to Ax et al (2009) it is important that the following criterions are fulfilled in or-der to be successful when operating with KPIs;
Use motivating goals which are achievable and inspiring
Employees must understand what measures that are relevant for their own work
Measurement parameters must be affectable by employees
Employees must have knowledge of how to be able to affect the KPIs
Monitoring and reporting must be done continuously
It is important for the controller, or the person in charge of the KPIs to understand what measurements the employees find relevant in order to grasp what they are doing and the effect their action has. It will also lead to better relations between people within the organi-zation, due to a competition feeling with for example the HR and IT department. (Nilsson et al. 2010)
According to Nilsson et al. (2010) there are three distinct reasons for using measurements such as KPIs to operate the business. These three are; Worldview, Incentives and Atten-tion. Worldview refers to how a new world is created within the organization and if you do not share the organization´s Worldview you might as well leave the organization. The KPIs should be part of the worldview and highlight what is important. By incentives they mean that there should be some kind of reward connected to the KPIs to send out messages about what is prioritized and important to focus on. The Attention refers to the im-portance of letting KPIs get the attention they need and that the employees are aware of this. If you design a successful system of the three; worldview, incentives and attention you will have a competitive edge within your business area.
By controlling with KPIs there will be less emphasize on financial outcome, governance is done with measurements that everyone can recognize and engage in. The KPIs could be used to have something to strive for by connecting it to certain measurements. (Catasus et al. 2008).

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Negatives of operating control with KPIs

The use of KPIs as part of a control system has been criticized for being short term orient-ed and that they follow the accounting periods. Focus is on historical data and the KPIs might be too roughly estimated to give a fair picture of the reality. Financial KPIs does not usually explain an organization´s interaction with the surrounding world and it gives inade-quate information of what creates future value for the organization. Further on it is quite challenging to break down the strategy into for the employees easily understood KPIs.
(Catasus, 2008).Together with a change in the business environment soft (non-financial) KPIs have gained value within an organization. Disadvantages with soft KPIs are that it is sometimes hard to measure and evaluate the outcome. (Ax et al. 2009)
If pushing people too much in order to reach certain goals and measuring how they per-form can lead to job related stress, stress that has a negative impact on a person’s physical health. When working with setting goals and working with measurements such as KPIs it is important to find the right balance to motivate people and not make them feel too pres-sured to perform both on an individual level and a team level. (Rennesund & Saksvik, 2010)
To work and develop KPIs demands a lot of pedagogy and logic to get the employees ac-ceptance and engagement. Having the right amount of KPIs to focus on is also important, having too many might just lead to information overflow. Finding the most relevant and important KPIs is a big challenge. (Catasus et al 2008)

Communication with KPIs

There is a difference between measuring and reporting KPIs. Measuring is about creating numbers which tell us something about a situation in the organization. Reporting is about letting other people take part of the measurements done. The difference is fundamental be-cause people affect and are affected by the KPIs therefore the numbers needs to be argued for and made in a certain way so they easily can be understood by the people getting the reports. (Catasus et al. 2008)
According to Hedman, Nilsson & Westelius, (2009) and Saunders & Jones (1992) Having a well-integrated enterprise system makes it possible to compile a lot of useful information at one place Having the information integrated in the same system, comparisons and anal-yses in real-time can be made in an easy way. Other strengths with an integrated enterprise system are:
Faster processing
Better control
Increased quality of information
Simplified data management
Reduced operating costs
(Magnusson, Olsson, 2009)
According to Catasus et al (2008) there are two distinct models of reporting; the infor-mation model and the communication model. The Information model is production ori-ented meanwhile the Communication model is consumption oriented.

The information model

The information model is based on three assumptions;
The sender does not need a dialogue to distinguish what information is relevant to report.
The way the information is sent is not relevant what is important is that the same information sent is the same being received.
The receiver needs to be open for new information and willing to integrate with it. The information sent should be seen as possible action alerts.
The purpose of the information model is that the information should come from a person with in-depth knowledge and end up to someone with less knowledge so that the knowledge gap will decrease. These types of reports are first of all supposed to lead to ac-tions from the receiver rather than just reactions. (Catasus et al. 2008)
There is a risk of having an information overflow with this model, due to the numerous amounts of possible KPIs that can be constructed and reported. The receiver is also ex-pected to understand the information sent to him and make rational decisions which can become complicated the more information the receiver gets from the sender even though the thought behind it is that the more information given the better and more rational deci-sions can be made. It is also important that the information has the same meaning for both the sender and the receiver. The receiver does not always have the same knowledge and time to fully understand the figures. (Catasus et al. 2008)

The communication model

The Communication model is based on three assumptions;
The sender seldom knows what he wants to inform even though he got in depth knowledge. Instead it is the dialogue between the sender and receiver which is of importance and makes up what information that will be sent.
When and where something is communicated is crucial depending on whether it will have an impact or not. The media is the message.
The receiver understands the information based on previous knowledge about the question. This could lead to new information being criticized or ignored.
The communication model starts with the users need, competence and willingness to re-ceive new information. To be able to be successful with the communication of KPIs the sender needs to be responsive and alert on how much the receiver can understand and also what message the sender wants to communicate. Both the sender and the receiver needs to be interested what the success factors are and together come up with relevant KPIs and then how these should be reported. (Catasus et al. 2008)

Motivation

Motive is defined as, what stimulates or makes an individual act in a certain way. A motive is often needs or wishes of different kinds. When a motive activates we are talking about motivation. Motivation is a thrust for action in a certain direction and a person is motivated when a need or a wish affect the persons way of acting. (Bruzelius & Skärvad 2011)
The motivation to work is a result of a complex interaction between the organization and the individual and the individual´s way of doing things. What motivates one worker to per-form a good job do not always necessary motivates another worker. What motivates to work is different from person to person and that needs to be taken into consideration. (Schouh, 2009). There are many studies about what motivates people two of the most fa-mous and discussed ones are Maslow’s hierarchy of needs and Herzberg’s motivation-hygiene theory.

Maslow´s hierarchy of needs

Maslow’s (1954) researches about human needs and how these affect individuals’ thoughts and actions have been the foundation of motivational theory for a long time. The theory says that all individuals at any given time have a number of competing needs. One of these needs is always stronger than the other once and that is what pushes the individual to act in a certain way to satisfy that need. When a need is fulfilled the individual move up in the hi-erarchy. He or she now takes actions to fulfill another need. If earlier satisfied needs are threatened, actions are needed and you thereby move down in the hierarchy once again to take care of the more fundamental needs.

Herzberg´s motivation-hygiene theory

Herzberg motivation-hygiene theory is another theory, related to the hierarchy of needs. Herzberg found out that people disliked other things about their work than what they liked about it. He made a distinction between these and categorized them into Hygiene factors and Motivators. Hygiene factors are what can make someone really hate their work mean-while Motivators are what can make someone loving their job. Hygiene factors are the conditions of work that needs to be fulfilled in order to not feel uncomfortable with work such as; salary, safety, relations with co-workers and the work environment etc. Once the Hygiene factors are fulfilled the worker can focus on the Motivators of work, (that is if they exist). The Motivators are what really makes the individual enjoy and feel commitment to work. The Motivators are usually directly related to the actual tasks given, but also possibili-ties to promotion etc. (Herzberg, 1959)
Figure 3.5.2 shows Maslow’s hierarchy of needs and the relationship to Herzberg motiva-tion-hygiene theory. The bottom three are factors for Hygiene, i.e. related to things that you dislike about your job. The top part of the hierarchy is the Motivators. These are what can make people really enjoy their work.

Table of Contents
1 Introduction
1.1 Background
1.2 Problem discussion
1.3 Purpose
2 Method 
2.1 Research approach
2.2 Course of action
2.3 Empirical data collection
2.4 Primary and secondary data
2.5 Credibility
2.6 Source criticism
3 Theoretical framework
3.1 Key Performance Indicators
3.2 Using KPIs as goals and targets
3.3 Operating control with KPIs
3.4 Communication with KPIs
3.5 Motivation
3.6 Incentive KPIs
4 Empirical data
4.1 Key Performance Indicators
4.2 Using KPIs as goals and targets
4.3 Operating control with KPIs
4.5 Motivation
4.6 Incentive KPIs
5 Analysis 
5.1 Key Performance Indicators
5.2 Using KPIs as goals and targets
5.3 Operating control with KPIs
5.4 Communicating with KPIs
5.5 Motivation
5.6 Incentive KPIs
6 Conclusions and recommendations
6.1 Conclusions
6.2 Recommendations
6.3 Suggestions for further research
References
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Key Performance Indicators The key to success? A study of how KPIs are used at Intersport

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