Archive for April, 2010

smartKPIs.com Performance Architect update 17/2010

Performance Management case study: Ford Pinto – business ethics and performance measurement


Company

Ford Motor Company

Setting

In late 1960s, Ford was facing increasing competition from domestic carmakers and Japanese imports.

Mandate

In June 1967 Ford started planning a new model that would outdo the competition. Lee Iaccoca, Vice-President and head of production at the time championed the project that was meant to deliver what was nicknamed “Lee’s car”. lee formulated a set of performance indicators with specific targets to define the parameters of the new product: “The Pinto was not to weigh an ounce over 2,000 pounds and not cost a cent over $2,000″ (Dowie, 1977).

Approval process

  • December1968 – Project “Phoenix” obtained the approval of Ford’s Product Planning Committee for Pinto’s basic design concept (Schwartz, 1991)
  • January 1969 – Ford’s Board of Directors, chaired by Henry Ford II gave his approval for Ford’s first domestic sub-compact: Ford Pinto. (Schwartz, 1991, Consumer Guide Auto, 2010a)

Performance indicators

The product objectives were listed in Pinto’s “Green book”, “a manual in green covers containing a step-by-step production plan for the model, detailing the metallurgy, weight, strength and quality of every part in the car” (Dowie, 1977).

1. True subcompact

• Size

• Weight

2. Low cost of ownership

• Initial price

• Fuel consumption

• Reliability

• Serviceability

3. Clear product superiority

• Appearance

• Comfort

• Features

• Ride and Handling

• Performance

Targets

The main targets were (Dowie, 1977):

# Weight of the car – Target: under 2000 lb (907kg)

$ Cost – Target: under $2,000.

# Time from conception to production – Target: 25 months (At almost half of the average of 43 months, this was estimated at the time to be the shortest production planning period in modern automotive history).

Results

The achievement of the main targets was as follows (Consumer Guide Auto, 2010):

# Weight – Actual: 1,949 lb (884kg)

$ Cost – Actual: $1,919

# Time from conception to production – Actual: less than 20, as it was launched on 11 September 1970 and the first delivery took place on 13 September 1970

Major design problem

At rear-end collisions of over 30 miles/hour (48km/hour), the rear-end of the car would buckle and the fuel-tank would break and burst into flames. Ford did 11 rear-end crash tests, averaging a 31-mph impact speed, before Pintos went on sale. Some records reveal that rear-end collision tests on the Pinto in took place in December 1970, months after it was already in production (Consumer Guide Auto, 2010). Regardless of the date, out of the 11 tests at 31 miles/hour, only three cars passed the test with unbroken fuel tanks.

Explored solutions

Option 1

Replace the fuel tank with the one used in Ford Capri. It would have been located over the rear axle and differential housing, with much better protection from rear-end impacts.

Decision: Option disregarded due to the impact on trunk space.

During the analysis process a Ford engineer stated: “But you miss the point entirely. You see, safety isn’t the issue, trunk space is. You have no idea how stiff the competition is over trunk space. Do you realize that if we put a Capri-type tank in the Pinto you could only get one set of golf clubs in the trunk?” (Dowie, 1977).

Options 2-4

Three alternative solutions analyzed pre and post production (Consumer Guide Auto, 2010)

• A plastic insulator fitted on the differential that would keep the bolts from ever making contact with the fuel tank. Cost of this item was less than $1.

• The use of a rubber bladder/liner produced by the Goodyear Tire and Rubber Company, at a unit cost of $5.08 per car.

• An extra steel plate attached to the rear of the car just behind the bumper, at a unit cost of up to $11 per car to install.

Decision: Options disregarded due to the impact on costs.

A cost-benefit analysis was conducted to determine the costs associated with implementing such solutions versus the benefits generated by avoiding possible lawsuits resulting from accidents where the gas tank position played a role in injuries or fatalities.

The Pinto went on sale without the gas tank issue being addressed and however meeting all the targets outlined in the green book.

Financial and market outcomes for Ford

* The first domestically produced Ford passenger car with a four-cylinder engine since 1934.
* The segment market share of imports was reduced from 15.2 % in 1971 to 14.8% in 1972
* Made an important impact on Ford’s profits during the 1974 OPEC oil embargo. As the most fuel efficient model Ford produced at the time more Pintos were built (544,209) than the sales for full-sized models taken altogether (461,000) (Consumer Guide Auto, 2010)
* 2,924,773 Pintos built between 1971-1980 (Consumer Guide Auto, 2010)

Reputation and ethical outcomes

* 500 burn fatalities of people who would not have been seriously injured if the car had not burst into flames (Dowie, 1977). National Highway Safety Administration records place this figure at 27 fatalities (Schwartz, 1991).
* In September 1978, Ford issued a recall for 1.5 million 1971-76 Pinto sedans and Runabouts, making it the largest recall in the industry up to that time.
* Millions of dollars in lawsuits were filed and won against the automaker, including the largest personal injury judgment ever.
* In the 1979 landmark case State of Indiana v. Ford Motor Co., Ford notoriously became the first American corporation ever indicted or prosecuted on criminal homicide charges. Ford was found not guilty in March 1980 (Schwartz, 1991).

Other outcomes

1970 - Lee Iacocca, the “father” of the Pinto became President of Ford Motor Company

1977 - “Pinto Madness”, an article revealing the story behind the Pinto to the public was published by the Mother Jones magazine. It went on to win a Pulitzer Prize.

1978 – Lee Iacocca was fired by Ford Motor Company. His relationship with Henry Ford II, chairman of the board and chief executive officer (CEO), became tensed as a result of the Pinto scandal.

1979 - Chrysler Corporation recruited Lee Iacocca as their President and CEO, where he served until his retirement in 1992.

1991 “The myth of the Ford Pinto’s case”, an article revealing some of the inaccuracies in the Pinto scandal was published by the Rutgers Law Review. It concludes with: “ If the Ford Pinto case did not exist, law professors would need to invent it: for the case raises essential issues about both the form and the substance of modern products liability doctrine” (Schwartz, 1991).

From a Performance Management point of view the set targets were met and the desired financial outcomes were realized. However this case raises questions regarding both ethics, risk management and the purpose of using objectives and targets.

Stay smart! Enjoy smartKPIs.com!

Aurel Brudan

Performance Architect,
www.smartKPIs.com


References

Dowie, M 1977, Pinto Madness, Mother Jones, September / October issue

Schwartz, G 1991, The myth of the Ford Pinto case, Rutgers Law Review, Vol. 43, Issue No. 1013

Consumer Guide Auto, 2010, 1971-1980 Ford Pinto Available at: http://auto.howstuffworks.com/1971-1980-ford-pinto.htm, accessed on 3 May 2010.

smartKPIs.com Performance Architect update 16/2010

The importance of learning from practice

DuPont, Toyota, Xerox, Analog Devices, Motorola…

What do they have in common?

Abstract reasoning and introspection enabled humans to advance scientific knowledge at an ever accelerating rate over the last 2500 years. As opposed to other natural sciences such as physics and chemistry, human organization or administration is more loosely defined, some considering it a science and others an art. However, both proponents of management as a science and as an art agree on its ultimate function – the one of getting things done or accomplishing desired goals.

While administrative science is one of the oldest fields of human inquiry, it is still behind in terms of maturity and impact, especially when compared to other fields. Scientific management is less than 100 years old and reporting the level of advancement in this field to others, one might consider it as being in its embryonic stage. It is ironic, as it is perhaps one of the most important aspects of human life – how as people on Earth we organize ourselves to live harmoniously and keep a balance between so many conflicting forces and priorities at so many levels.

So what can be done to accelerate the progress of administrative science, better known in practice as management, at both theoretical and practical level?

While there are many avenues to be explored, one of them is simple and with a considerable impact on both short and long term: Learning from practice.

Over time, administrative science has been driven by 3 main categories of contributors:

  • Academics – researchers employing rigorous academic research methods.
  • Consultants – commercial entities providing expert advice to challenges faced by practitioners.
  • Practitioners - business professionals that apply in practice principles of management to achieve desired results.

A key ingredient for speedy progress in management is cross-polenisation of ideas. That is exchanging opinions, learning and trying new approaches and sharing results, to contribute collaboratively to the body of knowledge. However, each of the three categories of contributors has certain limitations in terms of their contribution to this process:

  • Academics – sound academic research is slow and faces many challenges in terms of data availability and quality.
  • Consultants – as profit oriented businesses, generally the main purpose is profit generation by deploying services. The emphasis on Research and Development in management consulting organizations is inconsistent. Even when it is actively pursued, results are often influenced by marketing and revenue imperatives.
  • Practitioners – due to the ever-increasing demands of today’s fast-paced business environments, many of them have difficulties keeping up to date with professional development. Allocating time to activities such as research, documenting and sharing findings or even sharing opinions is mostly an exception rather than a rule.

For things to change, each of contributors from each of these categories needs to put more efforts both individually and collectively. Ultimately the most important category is the one formed by practitioners.

They spend most of their time in organizations that can be considered virtual laboratories for the administrative science.

They offer opportunities to change, experiment and innovate at a scale unmatched by both academics and consultant altogether.

This is one of the reasons why practitioners are key to the progress of administrative science. They are close to the data, can make decisions and have an unbiased position towards results as they are impacted by them anyway.

Both academics and practitioner have a key supporting role in this process. They can offer guidance and facilitate the cross-polenisation of ideas. The voice of practitioners needs to be heard more often: at conferences, on discussion forums, in academic and business publications and in businesses.

Successes from the past illustrate that, the contribution of practitioners to administrative science is the key driver of innovation in this field.

DuPont Analysis, Toyota Production System, Benchmarking, Balanced Scorecard and Six Sigma…

What do they have in common?

These concepts emerged from practice, championed in the companies nominated in the first question of this post. They were not concocted by consultants or academics in research laboratories.

Indeed, furthering the knowledge and application of such concepts in practice can’t be achieved without the support of the management consulting industry and academic institutions. They have done a rather good job so far.

However, listening to the voice of practitioners and learning from practice is something that we haven’t yet improved considerably. This is a condition that has to be met before the administrative science process of maturing is to accelerate dramatically.

Stay smart! Enjoy smartKPIs.com!

Aurel Brudan

Performance Architect,
www.smartKPIs.com


Relevant links

http://www2.dupont.com/Heritage/en_US/related_topics/donaldson_brown.html

http://www2.toyota.co.jp/en/vision/production_system/

http://hbr.org/1987/01/how-to-measure-yourself-against-the-best/ar/1

http://www.managerialaccounting.org/Balanced%20Scorecard.htm

http://www.motorola.com/Business/US-EN/Motorola+University/About

smartKPIs.com Performance Architect update 15/2010

Performance Measurement taxonomy – linking Performance Measurement and Management

In my previous update, I discussed the concept of taxonomy and outlined the structure of a Performance Management taxonomy. A subset of Performance Management is Performance Measurement and thus a separate taxonomy is required to illustrate its key elements.

The Performance Measurement taxonomy outlined below starts with a list of Performance Measurement instruments that provide the link with the Performance Management taxonomy. The other elements illustrate the various descriptors of performance measures. The taxonomy is listed in a linear format, as it is still work in progress. A more complex map of the taxonomy can be structured once it matures:

Performance Measurement

Instruments

  • Goals / Objectives
  • Measures
  • Performance indicators / metrics
  • Key Performance Indicators
  • smartKPIs
  • Scorecards
  • Dashboards

Stakeholders

  • Measure owner
  • Data custodian

Dimensions

  • Cost
  • Time
  • Quality
  • Maturity

Measure unit type

  • $ Value
  • # Number
  • % Percentage

Formula type

  • Average
  • Volume
  • Rate
  • Ratio
  • Index
  • Composition

Measurement type

  • Quantitative
  • Qualitative

Measurement focus

  • Risk
  • Satisfaction
  • Money
  • Quality
  • Duration
  • Volume

Measure relevance level

  • Strategic
  • Operational

Positive trend for measurement results

  • When increasing
  • When decreasing
  • When within an interval of values

Indicator focus

  • Leading
  • Lagging
  • Diagnostic

Measure impact stage

  • Input
  • Process
  • Output
  • Outcome

Data capture period

  • Spot
  • Day
  • Week
  • Month
  • Quarter
  • Year
  • Year to date
  • Rolling average

Listing and grouping such elements is a good first step. Exploring the relationships between them and linking them in a map structure will provide a much richer picture.

Stay smart! Enjoy smartKPIs.com!

Aurel Brudan

Performance Architect,
www.smartKPIs.com

Experiential learning lesson by Mali - the elephant outside the room thinking outside the box

Step 1: Plan

1-think-mali-the-elephant-outside-of-the-room1

Step 2: Practice

2-practice-mali-of-melbourne

Step 3: Position yourself

3-take-the-journey-mali-of-melbourne

Step 4: Test

4-test-mali-the-tree-eating-elephant

Step 5: Go for it, experience

5-go-for-it-mali-the-tree-eating-elephant

Step 6: Reflect

6-analyse-mali-back-to-thinking-out-of-the-box

smartKPIs.com Performance Architect update 14/2010

Performance Management taxonomy - linking Performance Measurement and Management

Taxonomy is a knowledge management tool used to provide structure to unstructured information. It is about categorizing individual elements into groups, categories or hierarchies based on common elements. The purpose of developing taxonomies is to enable findability and facilitate the identification of patterns. An example of taxonomy is the grouping of organisms in an ordered hierarchy that indicates natural relationships.

In business, taxonomies are used to group and categorize products and services in catalogs, to structure website contents and for structuring data in the document management system, among other uses. Taxonomies can also facilitate the understanding of concepts, by mapping the main topics relevant to in multiple, independent categories.

A taxonomy for performance management as a discipline is particularly useful, as the concept of performance management is generally perceived vastly differently in both practice and academic research. As a discipline, it is still in formation and there is no unified body of knowledge outlining its structure and boundaries. Below is an initial draft of the taxonomy for performance management. It is listed in a linear format, as it is still work in progress. A more complex map of the taxonomy can be structured once it matures:

Performance management

Levels of use

  • Organizational(Strategic)
  • Functional (Operational)
  • Individual (Employees)

Functions

  • Establishment of desired outcomes
  • Measurement of outcome achievement
  • Monitoring of how plans are implemented
  • Facilitation of learning by performance results analysis
  • Alignment of organizational systems to a central performance management system
  • Communication of plans and progress towards meeting them to all staff
  • Communication of key performance data to external stakeholders
  • Motivation of staff towards goal achievement

Key processes

  • Performance management system design – architecture
  • Performance management system implementation - building
  • Performance management system maintenance - use

Tools

  • Performance management business systems
  • Performance management software systems
  • Performance management processes
  • Performance management subject matter experts

Systems or frameworks

  • Tableau de bord
  • Performance Prism
  • Balanced Scorecard

Subsystems

  • Performance measurement
  • Performance analysis and modeling
  • Performance management review

Direction instruments

  • Vision
  • Mission
  • Values
  • Destination statement
  • Critical success factors / value drivers / key results indicators
  • Strategy map

Performance measurement instruments

  • Goals / Objectives
  • Measures
  • Performance indicators / metrics
  • Key Performance Indicators
  • smartKPIs
  • Scorecards
  • Dashboards

Performance management review instruments

  • Performance reports
  • Performance evaluations
  • Initiatives

Listing and grouping such elements is a good first step. Exploring the relationships between them and linking them in a map structure will provide a much richer picture.

Stay smart! Enjoy smartKPIs.com!

Aurel Brudan
Performance Architect,
www.smartKPIs.com

smartKPIs.com Performance Architect update 13/2010

An introduction to theory in Performance Management: Agency theory and its link to pay for performance arrangements

Agency theory has its origins in the research conducted by economists in the 1960s and 1970s, exploring risk sharing among individuals and groups, such as the relationship between insurers and customers. Gradually the scope of investigation expanded from risk to cooperation and division of labour between parties with different goals (Eisenhardt, 1989). As a result of this process, agency theory or the principal-agent problem addresses the relationship of agency, one of the oldest forms of social interaction. It was described eloquently in one of the first academic articles on the subject: “…an agency relationship has arisen between two (or more) parties when one, designated as the agent, acts for, on behalf of, or as representative for the other, designated as principal…” (Ross, 1973). The relationship between employer and employee, doctor and patient or between government and the governed are representative examples.

The theory was discussed in great detail by Eisenhardt in a series of articles published in mid to late 1980s, providing more clarity regarding the application of this theory in organizations. In an organizational context the agency theory explains how to best organize relationships in which one party (the principal) determines the work, which another party (the agent) undertakes. (Eisenhardt, 1985). The implications for performance management as a discipline are considerable, as in organizational context, the objectives of individuals, teams and the entity as a whole can be in conflict. Goal conflict can motivate incompatible actions and this has the potential to impact performance. Thus, alignment between individual and group objectives is important for maximising performance.

The challenge is balancing and harmonising the interests of the principal (employer) and the agent (employee). The settings in which the agency theory is defined in an organizational context are:

* Organizations are composed of a complex network of relationships between individuals and entities with conflicting objectives.
* Both the principal (i.e. employer) and the agent (i.e. employee) are wealth seeking “economic men” who pursue their own self interest (Tiessen and Waterhouse, 1983)

Eisenhardt (1985) presents the theory in two cases. The first one is characterised by complete information, when the behaviour of the agent is observed and the actions and motivations are transparent. The solution to this scenario is a behaviour based contract purchasing of services. However, such a scenario if less frequent due to the information asymmetry problem.

The second case is characterised by incomplete information. In this case, a fixed wage might create an incentive for the agent to avoid efforts and responsibilities since his compensation will be the same regardless of the quality of his work or his effort level (Eisenhardt, 1985). The principal has limited information regarding the level of effort and the behaviour of the agent. This generates a number of issues:

1. The utility function of the agent is in contradiction to the one of the principal. In a company, the employer is interested in maximizing productivity and profit. Employees however may have their own agendas, sometimes being maximizing the benefits from the association with the organization (revenues, training, and status) with minimum effort.
2. There is an information asymmetry between the principal and agent. The underlying behaviour motivations of both employer and employee are not clearly expressed and balanced. What makes this problem more challenging is that such motivations change continuously.
3. Moral hazard, as the principal can’t determine the effort level employed by the agent and cannot be sure if the agent has put forth maximal effort (Eisenhardt, 1989).
4. Adverse selection, as agents may claim their skills and experience level is higher than the actual one. The principal cannot ascertain if the agent accurately represents his ability to do the work for which he is being paid (Eisenhardt, 1989).
5. The difference between principal and agent in terms of attitude towards risk. Often the principal is assumed to be risk neutral while the agent risk adverse (Tiessen and Waterhouse, 1983).

Possible solutions for such are scenario are:

1. Increasing the quality and quantity of information related to the behaviour of the agent. This can be done through increasing the level of management, physical surveillance and establishment of control mechanisms such as budgeting systems (Eisenhardt, 1985). However it is costly and most often impractical to address the information asymmetry problem. Options such as surveillance may raise privacy and ethical issues and are not always suitable and most of the time not welcomed by the agent. The problems of adverse selection and moral hazard mean that fixed remuneration contracts are not always the ideal solutions to organize relationships between principals and agents (Jensen and Meckling, 1976).
2. A second option is rewarding the agent based on outcomes by using arrangements such as: commissions, profit sharing, bond posting by the agent and leveraging the fear of firing. . The provision of ownership rights reduces the incentive for agents’ adverse selection and moral hazard since it makes their compensation dependent on their performance, which includes risk sharing (Fama and Jensen, 1983). The disadvantage of such an approach is that the agent may be penalised or rewarded for results that were influenced by non-controllable, external factors: good outcomes may be produced despite poor efforts and poor outcomes may occur despite good efforts from the agent, to whom some of the risks of the firm are transferred (Eisenhardt, 1985).

Overall, the principal-agent relationships should reflect efficient organization of information and risk-bearing costs. The human assumptions to be considered are self interest, bounded rationality and risk aversion, while at organizational level the assumptions to be analyzed are the goal conflict among participants and the information asymmetry.

While analysis of the theory can be done at macro level, the solution of the problem is specific to each organization. It is influenced by the environment in which it operates and the internal characteristics, such as resources available and structure of organizational systems.

Performance management systems are generally employed to help address the problem. However, this should be noted as one of the contributions such systems bring to organizations. Using such systems to address the agency problem limits their potential and if not configured properly may cause additional issues. This should be a good enough incentive to explore the theory that informs performance management as a discipline before using systems and tools without a clear purpose.

Stay smart! Enjoy smartKPIs.com!

Aurel Brudan
Performance Architect,
www.smartKPIs.com

References

Eisenhardt, M, K. (1989), “Agency theory: An assessment and review”, Academy of Management Review, Vol. 14, No. 1, pp. 57-74.

Eisenhardt, K. M. (1985). “Control: Organizational and economic approaches”, Management Science, Vol. 31, Nr. 2, pp. 134-149

Fama E. F. and Jensen M. C., “Agency Problems and Residual Claims”, Journal of Law and Economics, Vol. 26, No. 2, pp. 327-349

Jensen, M.C., and W.H. Meckling (1976), “Theory of the firm: managerial behavior, agency costs and ownership structure”, Journal of Financial Economics, Vol 3., No. 4, pp. 305−360.

Ross, Steven, (1973). “The economic theory of agency: The principal’s problem”, American Economic Review, Vol. 63, No.2, pp. 134-139.

Tiessen, P., J.H. Waterhouse (1983), “Towards a descriptive theory of management accounting”, Accounting, Organizations and Society, Vol. 8 pp.251 - 267