Integrated measuring system
| Integrated measuring system |
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The use of financial measures in strategic management is subject to numerous limitations.
Therefore, many managers now returns to the need for a broader look at the issue of application of indicators to assess the enterprise (not only of the financial situation, but also the efficiency and effectiveness of all processes).
Integrated measurement systems are a tool for extending the scope of strategic analysis beyond the narrowly understood area of financial analysis.
Advantages of integrated measuring systems
Integrated measurement systems have several advantages, including:
- They provide a more comprehensive view of a company's performance, as they take into account a wide range of factors beyond just financial indicators.
- They allow managers to identify areas of improvement and make more informed decisions.
- They can help align the goals and strategies of different departments and divisions within a company.
- They can improve communication and collaboration between different levels of management and across different departments.
- They can provide a more accurate and balanced view of the company's performance, which can be useful in communicating with external stakeholders, such as investors and regulators.
- They can be used to evaluate the company's performance in the context of its industry and competitors.
- They can help managers identify key performance indicators and track progress over time.
Examples of integrated measurement systems
The most famous and popular are:
- Balanced scorecard
- EFQM model
- Managerial dashboard.
They take into account a broad set of measures and indicators that go beyond the narrow - financial - look at the company. They allow to make broad and objective assessment and analysis of the company.
Limitations of Integrated measuring system
One of the main limitations of using financial measures in strategic management is the fact that they do not provide an integrated measuring system. This can lead to a variety of potential issues, such as:
- Complexity of determining the right measures to be used. Financial measures often do not take into account the wider context of a business’s operations, and so it can be hard to develop meaningful metrics for strategic management.
- Difficulty in predicting future performance. Financial metrics often fail to provide an accurate picture of a business’s future performance, as they are only looking at past performance.
- Potential for bias. As financial measures are often subject to the interpretations of those who are gathering the data, there is a potential risk of bias, which can lead to incorrect conclusions being drawn.
- Dependence on external factors. Financial measures may be impacted by external factors such as market conditions, economic trends, and legislative changes, which can make it hard to accurately measure performance.
- Lack of flexibility. Financial measures may be too rigid to effectively monitor changing market conditions, as they may not be able to respond quickly enough.
One-sentence introduction: Financial measures are not the only approach to strategic management; there are many other methods of measuring performance.
- Balanced Scorecard: The Balanced Scorecard is a performance measurement system that combines both financial and non-financial indicators. It is used to measure performance in areas such as customer satisfaction, employee engagement, process efficiency and innovation.
- Activity Based Costing (ABC): Activity Based Costing is a method of allocating costs in a more accurate and efficient manner. It is used to identify the costs associated with a particular activity or process and then assign those costs to the products that are created through that activity or process.
- Strategic Investment Analysis: Strategic Investment Analysis is used to evaluate projects and investments from a financial perspective. It is used to assess the risk and return associated with a particular project or investment in order to make an informed decision.
- Performance Dashboard: Performance Dashboards are used to provide managers with an overview of key performance indicators that are relevant to their business objectives. They provide a more comprehensive view of performance across multiple areas, allowing managers to assess progress in relation to their goals.
- Return on Investment (ROI): Return on Investment is used to measure the performance of a particular project or investment. It is calculated by taking the total return from an investment and dividing it by the total amount invested.
Summary: Financial measures are an important part of the strategic management process, but they are not the only approach. Other approaches such as the Balanced Scorecard, Activity Based Costing, Strategic Investment Analysis, Performance Dashboards and Return on Investment can be used to measure performance in a more comprehensive manner.
References
- Tierney, B., Crowley, B., Gunter, D., Lee, J., & Thompson, M. (2001). A monitoring sensor management system for grid environments. Cluster Computing, 4(1), 19-28.
