Qualitative approach of value creation measurement in realisation of organizational effectiveness.

Vrdoljak Raguz, Ivona ; Jelenc, Lara

1. INTRODUCTION

There is a growing importance of variety of performance measurement both the quantitative and qualitative measurements in enterprises in today's economy. The financial measures grow in complexity and are very specific in nature due to the characteristics of the industry, processes and goals. A broader conceptualization of the performance rather than just financial measures will offer more objective point of view of the level of performance in the enterprises. The dominance of financial measures is accompanied with the new approaches, non-financial measures that are becoming more important to top management, investors and stakeholders. They offer the view on the performance as the signals of bad or poor performance before it will be reflected in the financial measures in the enterprises. Addition to that, they offer the qualitative approach to value creation that cannot be measured with numbers and represent the indicators of a stable and healthy core of the enterprises, no matter what the financial measures report.

Demand for changes in corporate reporting are also likely to force organizations to adopt a more balanced approach to performance measurement.

As a consequence organisation are forced to search beyond traditional financial measures and place greater emphasis on performance metrics related to softer issues emended in people and processes, whose strengths or weaknesses do not show up on a balance sheet (Bromwich & Bhimani, 1994.). Organizational theorists argue that overall organizational effectiveness is assessed only when it is viewed from multiple consistencies (Connoly, Conlon, Deutsch, 1980 cited in Karri, 2001, p.38; Boyd, 1991; Chakravarthy, 1986; Venkatraman & Ramanujam, 1986).

The aim of this paper is put more elaborated attention to the review of the literature about the possibility of qualitative measurement approaches of value creation apart from the financial ones. This article is directed toward the researchers as the theoretical background for the hypothesis generating and empirical research performed.

The paper consists of the general overview of; Balanced Scorecard, Total Quality Management, EFQM and Key Performance Indicators. This models, methodologies and frameworks are created in order to improve the quality of work, processes and indirectly indicators of performances.

2. QUALITATIVE APPROACH TO VALUE CREATION MEASUREMENT--LITERATURE REVIEW

Balanced Scorecard (BSC) is a synthesis of traditional financial measures and the development of elements of the competitive advantage. The BSC considers financial and non-financial measures such customer voice, internal business processes, learning and growth and financial perspective (Kaplan & Norton, 1993).

In 2001 Kaplan and Norton (Kaplan & Norton, 2001) introduced the five principles to keep strategy the focus of organizational management processes: translate the strategy into operational terms, align the organization to the strategy, make strategy everyone's everyday job, make strategy a continual process, and mobilize change through executive leadership.

The BSC is developed along the four well known perspectives of Financial, Customer, Internal Business Process, and Learning and Growth Performance. These perspectives measure the current status and future potential of organisations. Balanced Scorecard represents the main indicator of controlling and has a central role in the control process in companies that exists in the companies where the planning is the central function of managing system (this especially refers to the large companies).

Another very popular approach is Total Quality Management. Total Quality Management (TQM) emerged as a philosophy in the UK in the late 1970s and early 1980s. It was born out of a much earlier quest for quality, which can be traced, back to the pioneering work of Juran, Deming and others with Japanese industry in the 1950s. The primary focus of TQM is not so much on quality as it is on the customer who defines what quality really is. Implementation of TQM necessitates adherence, discipline and constant employee effort. TQM includes everything, and is dependent on everyone. It is a system of enhancing and improving flexibility, effective and efficient business performance. Today more than ever TQM is being accepted and becoming a way of thinking and a way of life.

In the effective terms of extremely strong competitiveness and more demanding customers, product and service quality become one of the most significant competitive method and one of the fundamental key to business achievement.

The real benefits can be realized only when the companies that apply them truly understand both their capabilities and their limits (Gotzamani, K. D. & Tsiotras, G. D., 2001.). ISO 9000 certification is the main key to obtaining customer satisfaction. There are eights steps to this certification (Swalens, G. J., 1992.). The term Business Excellence has grown up from the TQM. In the world, enterprises have turned to the national and regional award policy rewarding the most successful enterprises whose main goal is the promotion of excellent quality systems and business excellence (Deming prize, The Malcolm Baldrige National Quality Award, ISO, European Quality Award etc.). The Business Excellence (http://en.wikipedia.org/wiki/Business_Excellence) is based on these principles: orientation on the results, consumers satisfaction, leading the purpose, process management based on facts, employee development, team work, permanent education, innovation, partnership development and corporate social responsibility. A few models have been developed from these principles and they are giving the base for the development of Business Excellence.

In this paper the most famous European model of Business Excellence will be presented--European Foundation for Quality Management (EFQM). The EFQM has been founded as a non profit organisation in 1988 and represents an example of regional quality and business excellence award whose mission is to promote quality and business excellence in the European enterprises and which has given the preposition of the model for reaching the business excellence (http://www.efqm.org/). In January 2001 EFQM have had more than 800 members from almost each of the European countries and is the owner of EFQM model which is made of nine aspects. Five of them have the role to help enterprises to reach business excellence and remarkable business results, and the four of them are some kind of control system that show reached results.

For every of these nine aspects a set of questions has been developed that considers exact answers for reaching the model and its potentials in the implementation process. The EFQM model predicts the five levels of excellence which helps enterprises continuous and objective process for reaching the business excellence and also the best solution and concept for an enterprise.

There is one more concept from the quantification aspect that is interesting and possible for the implementation. It reflects to the critical factors for the realisation of the organizational effectiveness, it is called Key Performance Indicators (http://en.wikipedia.org/wiki/Key_performance_indicator).

These indicators are different in every organization, primarily for the different organisation types that are characterised with different organisation units on which measurement depends. It is useful to know the organisation goals that depend on the enterprises vision and mission but also on the stakeholders, before the implementation process. Their aim is to be critic to the success of the same enterprise.

This concept is best to use in a project management and in all fields of project management such as information technology, risk management, supply chain management, financial management, quality, production, sales etc. These indicators are best understood when they are presented as a different charts that are understandable to all employees and at all organisation levels. The most important in this concept, as in others, is the fact that all employees have to understand these concepts so that they can reach them.

3. INSTEAD OF CONCLUSION

The dominance of financial measures is accompanied with the new approaches as it can be seen from this paper. It is obvious that non-financial measures are becoming more important to top management, investors and stakeholders that is forced with the new business condition in the business environment. They all have their principles but also have the same goal and that is organizational effectiveness and the best business result possible.

The further research should be focused on the several aspects of this issue. First of all the brief literature review could be the theoretical background for the empirical research about financial and non-financial measurements. Hypothesis could be organized as such:

Hypothesis 1. The relation between traditional/primary/ financial measurements and contemporary/secondary/nonfinancial measurements could be presented in a correlation.

Hypothesis 1.1. The correlation between financial and nonfinancial measurements could reveal the contradiction of the subject they measure.

Hypothesis 1.2. The correlation between financial and nonfinancial measurements could reveal the interplay of the subject they measure, actually measuring the same subject from a different perspective.

Hypothesis 2. The introduction of the non-financial measurements in the enterprise is the signal of certain stage of growth in financial measurements. It is possible to point the stage of the enterprise that should welcome and introduce the non-financial measurements.

Researchers have suggested, regardless of the basis for assessment, the most important issue in performance is an preparedness of the enterprise for future action (Keats, Hitt, 1988; Thompson, 1967 cited in Harrington, 2001).

4. REFERENCES

Boyd, B.K. (1991). Strategic Planning and financial performance: A meta-analytic review, Journal of Management Studies, 28(4), 353-374, 1467-6486 Bromwich, M., Bhimani, A., (1994). Management Accounting-Pathways to Progress, CIMA Research, first edition, 1874784272, London

Chakravarthy, B.S. (1986). Measuring strategic performance, Strategic Management Journal, 7, 5, 437-458,01432095

Gotzamani, K. D., Tsiotras, G. D. (2001). An empirical study of the ISO 9000 standards' contribution towards total quality management, International Journal of Operations & Production Management, 21, 10, 1326-1342, 0144-3577

Harrington, Robert, J. (2001). Dimensions in the strategy making process, Washington State University, PhD thesis

Kaplan, Norton (1993) Putting the Balanced Scorecard to Work, Harvard Business Review, 71,5, 134-147, Harvard Business School Press, 0017-8012, Cambridge

Kaplan, R.S., Norton D.P. (2001). The Strategy-Focused Organization: how Balanced Scorecard Companies Thrive in the New Business Environment, Harvard Business School Press, 1578512506, Cambridge

Karri, Ranjan V.N. (2001). Strategic Flexibility and Firm Performance, Washington State University, PhD thesis

Swalens, G. J. (1992), ISO 9000 quality standards in 24 questions, ISO 9000 News, International Organization for Standardisation, Compuserve, 100112

Venkatraman, N., Ramanujam, V. (1986). Measurement of business performance in strategy research; A comparison of approaches, Academy of Management Review, 11, 4, 801-814, 0363-7425

http://en.wikipedia.org/wiki/Business_Excellence, Accessed: 2008-07-01

http://www.efqm.org/ Accessed: 2008-07-01

http://en.wikipedia.org/wiki/Key_performance_indicator Accessed: 2008-07-01