The Performance Pyramid: Linking Strategy, Operations and Performance Measures

The managing director of a Nigerian bottling company announces a bold vision: to be the first choice of retailers in the South-West within three years. The sales director asks what that means for her team. The production manager asks what it means for the line. A machine operator on the night shift asks what it means for him.

In most companies nobody can answer clearly, so the vision stays on the wall and the day-to-day numbers, such as output per shift and scrap, drift apart from it. The performance pyramid, proposed by Richard Lynch and Kelvin Cross, is a framework for closing that gap.

It links the corporate vision at the top to the work of departments and work centres at the bottom through measures at each level, using both financial and non-financial indicators.

This topic explains the four levels and what is measured at each, the difference between measures that look outward at customers and those that look inward at efficiency, the benefits and drawbacks of the pyramid, how it compares with the balanced scorecard, and the alternative views of performance management that have grown up as organisations have moved away from annual rating exercises.

It builds on the earlier topic on information needs at each level of management. The next topic covers value-based management.

The performance pyramid

A performance management system should include financial and non-financial indicators. The performance pyramid is a hierarchical framework that turns the corporate vision into measures that people at every level can act on. It integrates objectives from the vision level down through business unit and department levels, and carries performance information back up.

The four levels

1. Level 1: corporate vision, mission and goals. The organisation’s long-term aims, and the strategy for success and competitive advantage. This is the senior management level and answers “what do we want to be?”
2. Level 2: business units. The business units or divisions turn the vision into targets for the market and for finance. Market measures include market share, customer satisfaction indices and market size. Financial measures include short-term targets for cash flow and profitability and long-term financial goals that support growth in value.
3. Level 3: business operating systems. The systems that bridge the gap between the top and the shop floor. They are the enablers of the strategy: customer satisfaction, flexibility in operations and productivity.
4. Level 4: departments and work centres. The operational units and individuals handle the day-to-day work with the specific measures of quality, delivery, cycle time and waste: product and service quality, reliable delivery, the time taken to do the work, and the control of waste. These are the driving forces for the achievement of the higher objectives.

The pyramid is read in two directions. Objectives cascade downwards: the vision sets business unit targets, which set operating system targets, which set department measures. Performance is reported upwards: quality, delivery, cycle time and waste results feed the operating system measures, and those feed the market and financial results.

Between the two sides, the left side shows the external focus of performance, mainly non-financial, as in customer satisfaction and flexibility. The right side shows internal efficiency, mainly financial and operational, as in productivity and the control of waste.

Benefits

• Alignment. Goals at every level are tied to the vision and to each other.
• Communication. Corporate objectives become clear to people who do the work.
• Continuous improvement. Performance is appraised and improved at every level, not only at the top.
• Needs assessment. It shows where training, resources or systems are needed.
• Motivation. Staff can see how their work contributes and can set personal goals.
• Balance. It joins financial and non-financial measures, and external and internal ones.

Drawbacks

• It addresses mainly two stakeholders, the shareholders and the customers, and gives no measures for workers, suppliers, lenders, government or the community.
• It does not say which measures to choose or how to weight them, so judgement is needed.
• Cascading measures can become complex and costly to collect.
• Like any system of targets it can encourage gaming and short-term focus unless it is managed well.

The balanced scorecard is a related framework. It also joins financial and non-financial measures, but it organises them in four perspectives (financial, customer, internal process, learning and growth) and links them as cause and effect. The pyramid stresses the cascade from vision to operations and the two sides of external effectiveness and internal efficiency.

Alternative views of performance management

Many organisations have moved away from rating-based appraisal that happens once or twice a year, and towards approaches that stress continuing communication and development:

• Continuous feedback instead of infrequent, formal reviews, so that adjustments can be made in real time.
• Employee development. The focus is growth and skills, in a culture of continuous learning.
• 360-degree feedback gathers views from peers, supervisors and subordinates for a fuller picture.
• Management by objectives. Specific, measurable, achievable, relevant and time-bound goals, with regular review.
• Key performance indicators track progress towards organisational goals.
• Peer support programmes, adaptive performance management (goals and expectations adjusted as circumstances change) and social performance management (online tools for communication and feedback).

The criticisms of traditional systems are that they assume performance comes from fixing weaknesses; that they spend effort telling people whether they are talented, when it is more useful to explore their talent; that they leave the organisation, not the individual, responsible for development; that grids which place people in boxes of performance and potential need managers who can tell the two apart, and many cannot; and that one or two conversations a year are not enough to build trust.

The alternatives are to look to the future as well as the past, to build on strengths, to test how well a person’s values and ambitions fit what the business needs, to make the individual accountable for learning, and to focus on the quality of the conversation. Performance measurement should still be fair, based on matters the individual controls, and linked to the strategy.

Measures at the lower levels

1. Defect rate (quality). Defective units ÷ units produced × 100.
2. On-time delivery. Orders delivered on time ÷ orders × 100.
3. Cycle time. Actual time compared with target: (actual − target) ÷ target × 100.
4. Waste. Scrap quantity ÷ input quantity × 100; cost of waste = scrap quantity × cost per unit of quantity.
5. Productivity. Output ÷ input hours. The gain in output = input hours × increase in output per hour; its value = extra units × contribution per unit.

Money is in ₦, percentages to one decimal place, and each answer is rounded once, at the end.

Worked examples

1. Defect rate.
   180 ÷ 6,000 = 3.0%.
2. On-time delivery.
   1,140 ÷ 1,200 = 95.0%.
3. Cycle time.
   (36 − 30) ÷ 30 = 20.0% above target.
4. Waste.
   420 ÷ 14,000 = 3.0%
   cost 420 × 1,200 = ₦504,000 = ₦0.50m.
5. Comment. These feed the level 3 measures: cases that are late or faulty lower customer satisfaction, and slow cycle times reduce flexibility. The manager should look first at cycle time, which is furthest from target.

1. Output now.
   40,000 × 8.0 = 320,000 cases.
   After. 40,000 × 8.8 = 352,000.
2. Extra output. 32,000 cases, a 10% gain.
3. Value.
   32,000 × ₦1,500 = ₦48.0m of contribution a year, if the market takes the extra cases.
4. Comment. A level 3 improvement turns into a level 2 financial gain and supports the level 1 aim. The condition is that sales are there, which is why the market measures at level 2 matter.

Expect variants: a different set of measures, a question asking for one measure at each level for a named business, or a comparison with the balanced scorecard.

The four levels by name, and the case against ratings

The levels of the pyramid are also described by the kind of capacity each draws on. Level 1, at the top, is the visionary (spiritual) capacity level: corporate vision, mission and strategy. Level 2 is the mental capacity level: business unit objectives for market and financial performance. Level 3 is the emotional capacity level: the business operating system, with customer satisfaction, flexibility and productivity, which bridges the top and the shop floor.

Level 4 is the physical capacity level: departmental and work-centre measures of quality, delivery, cycle time and waste. The left side of the pyramid is the external, mostly non-financial focus; the right side is the internal, mostly financial efficiency.

The wider debate about alternative views of performance management also questions rating-based appraisal.

Critics argue that twice-yearly conversations are too infrequent to build trust; that sorting staff into a nine-box grid of performance and potential assumes that managers can tell the two apart, when many are too close to the individual and too far from the talent strategy to do so; that talent should be explored rather than labelled; and that ownership of learning and development should move to the individual.

The alternatives stress continuous feedback, a focus on the future and on strengths, and honest conversations about fit with future business needs.

Common mistakes

• Mixing the levels. Defect rate is a level 4 measure, customer satisfaction level 3, market share level 2.
• Listing measures without a link. Show how a lower measure supports the one above.
• Forgetting the two directions. Objectives cascade down, results report up.
• Saying the pyramid covers all stakeholders. It serves mainly shareholders and customers.
• Confusing it with the balanced scorecard. Name the difference.
• Ignoring alternatives to rating. Continuous feedback and development are the usual points.

Quick revision

• Four levels: vision; business units (market, financial); operating systems (customer satisfaction, flexibility, productivity); departments (quality, delivery, cycle time, waste).
• Objectives cascade down; results report up. Left side external effectiveness; right side internal efficiency.
• Benefits: alignment, communication, continuous improvement, needs assessment, motivation. Drawback: mainly shareholders and customers.
• Alternatives to rating: continuous feedback, development, 360-degree feedback, management by objectives, adaptive and social approaches.

How the marks are earned

• Describe the levels: name, content and a measure for each, about one and a half marks per level.
• Apply: one measure per level for the business in the question.
• Evaluate: benefits, drawbacks and a comparison.

Practice questions

These are original questions, written in the style of the Skills examination. Work each one before you open the answer.

Recall check: multiple choice

Section B style: written questions

Model answers

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