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CHAPTER 12
Measurement and Knowledge Management
For Performance Excellence
Teaching Notes
This chapter develops concepts of measurement and knowledge management from an
organizational perspective (in contrast to quality control measurement discussed in Chapter 8).
Much of this chapter is based on the Measurement, Analysis, and Knowledge Management and
Results categories of the Baldrige Criteria. These concepts may be somewhat difficult for
students to grasp at first, particularly if there are accounting or finance majors in the class, or
practicing accountants in a seminar. Some of the measurement concepts presented in this chapter
may disagree with the conventional views of traditional accountants and many economists.
Key objectives are:
• To understand the role of measurement in quantifying the performance dimensions of
products, services, processes, and other business activities and the use of measures and
indicators — the numerical information that results from measurement. Data and
information support control, diagnosis, and planning. Benefits include better knowledge
• To develop an appreciation for the balanced scorecard concept that includes the four
perspectives of: financial, internal, customer, and innovation and learning, and typically
contains leading and lagging measures that are linked through logical cause-and-effect
relationships.
• To explain the Baldrige criteria in terms of the balanced scorecard, focusing on five
Performance Measurement and Strategic Information Management 2
• To learn that many organizations make two fundamental mistakes: (1) not measuring key
characteristics critical to company performance or customer behavior, and (2) taking
irrelevant or inappropriate measurements. Leading organizations select appropriate
measures and indicators using well-defined criteria.
• To understand the concept of comparative data, which refer to industry averages,
competitor performance, world-class benchmarks, or performance measures of other
organizations with similar product offerings. Comparative data are needed because an
organization needs to know where it stands relative to competitors and to best practices;
comparative information and information obtained from benchmarking often provide the
impetus for significant (“breakthrough”) improvement or change; and comparing
performance information frequently leads to a better understanding of processes and their
performance.
Performance Measurement and Strategic Information Management 3
o Rapid knowledge transfer (RKT), which involves the discovery, learning, creation
and reuse of knowledge that eventually becomes intellectual capital—knowledge that
can be converted into value and profits.
ANSWERS TO QUALITY IN PRACTICE FEATURES
Using the Balanced Scorecard at the United States Postal Service
1. Explain how the Voice of the Employee supports improved internal processes (Voice of
the Business), and how the Voice of the Business supports customer satisfaction (Voice of
the Customer).
The Voice of the Employee supports improved internal processes (Voice of the Business), and
the Voice of the Business, in turn, supports customer satisfaction (Voice of the Customer). One
of the first areas of emphasis was the “Voice of the Employee,” which focused on providing a
safe and secure workplace in response to instances of violence and poor employee relations. A
second major initiative, the “Voice of the Business,” focused on the “Breakthrough Productivity
2. While Figure 12.12 shows only representative measures associated with the balanced
scorecard, suggest some other measures that might be included, using your knowledge of
postal operations.
Despite significant strides in improving performance, most customers would agree that there is
additional room for improvement in customer service by the USPS. This could start with efforts
Knowledge Management at Conoco-Phillips
1. Explain how is the knowledge-sharing approach shown in the Figure 12.13 Knowledge
Architecture Model is aligned with Conoco-Phillips’ strategic motivation for knowledge
management.
Performance Measurement and Strategic Information Management 4
Conoco-Phillips’ strategic motivation for introduction of knowledge sharing in 2004 was to
promote functional excellence, better leverage knowledge across the organization, and ensure
that the next generation of technicians and engineers had access to the critical knowledge they
2. How does Conoco Phillips provide support for its KM system in the form of personnel
and budget?
Conoco Phillips provides support for its KM system in the form of personnel and budget. They
structured KM using a three-tiered support model:
1. The knowledge sharing team is responsible for enterprise KM process, tools, and
templates,
2. IT partners provide infrastructure support and some SharePoint site maintenance
3. External consultants maintain SharePoint sites and provide customization and KM
expertise.
The knowledge sharing team is responsible for overseeing networks of excellence. The team is
comprised of seven full-time equivalent (FTE) employees led by a director of knowledge
sharing. The director reports to the senior vice president of planning and strategy, who is a
3. Explain the unique approach that Conoco-Phillips took to assess the financial impact of
KM.
Conoco-Phillips assesses and tracks impact and return on investment of KM in a unique way. In
the first four years, employees were encouraged to submit success stories based on their
Performance Measurement and Strategic Information Management 5
experiences using the networks of excellence. As part of the submission process, they were asked
to provide details on measurable gains, such as cost savings, reduced cycle times, safety and
environmental improvements, and other tangible business benefits. Each success story included a
ANSWERS TO REVIEW QUESTIONS
1. Summarize the measurement and knowledge management practices for performance
excellence.
Table 12.1 summarizes nine measurement and knowledge management practices for
2. Explain the importance of performance measurement in organizations.
Considerable value lies in using performance measurement based on objective data to support
strategic planning and daily operating decisions in organizations. Organizations need
performance measures for three reasons:
• To lead the entire organization in a particular direction; that is, to drive strategies and
organizational change
3. Explain the role of analytics and big data in quality management and performance
excellence.
Analytics is defined as the use of data, information technology, statistical analysis, quantitative
methods, and mathematical or computer-based models to help managers gain improved insight
Performance Measurement and Strategic Information Management 6
future by examining historical data, detecting patterns or relationships in these data, and then
extrapolating these relationships forward in time; and prescriptive analytics – using optimization
to identify best alternatives. The disciplines underlying analytics – statistics, business
intelligence, and operations research/management science – have been around for well over a
half-century. The integration of these disciplines has been supported by various tools such as
A study by the American Productivity and Quality Center and ASQ found that less than
two-thirds of organizations in manufacturing, services, and health care use quality measures for
trending and/or predictive analytics. In quality management, many opportunities for using
analytics exist. Various elements of the Baldrige Criteria explicitly address the potential use of
analytics, such as:
• Strategy Considerations. How do you collect and analyze relevant data and develop
information for your strategic planning process?
• Performance Projections. For these key performance measures or indicators, what are
your performance projections for your short– and longer-term planning horizons? How
does your projected performance on these measures or indicators compare with your
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4. What is the balanced scorecard? Describe its four components.
Robert Kaplan and David Norton of the Harvard Business School in response to the limitations
of traditional accounting measures coined the term “balanced scorecard.” Its purpose is “to
translate strategy into measures that uniquely communicate your vision to the organization.”
Their version of the balanced scorecard consists of four perspectives:
• Financial Perspective: Measures the ultimate results that the business provides to its
shareholders. This includes profitability, revenue growth, return on investment, economic
value added (EVA), and shareholder value.
5. Explain the difference between leading and lagging measures. How are they used within
a balanced scorecard?
A good balanced scorecard contains both leading and lagging measures and indicators. Lagging
measures (outcomes) tell what has happened; leading measures (performance drivers) predict
what will happen. For example, customer survey results about recent transactions might be a
6. What are the five groups of results measures in the Malcolm Baldrige Criteria? Provide
examples of measurements and indicators in each group.
The key categories of results measures for the Malcolm Baldrige Criteria are divided into five
groups:
• Product and process measures
• Customer-focused measures
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Product Measures. Measures and indicators of product and service performance that have strong
correlation with customer satisfaction and decisions relative to future purchases and relationships
are important for organizations to track. They might include internal quality measurements, field
performance of products, defect levels, service errors, response times, data collected from
customers or third parties on ease of use or other attributes, and customer surveys on product and
service performance.
Customer Measures. Relevant measures and indicators of an organization’s performance as
viewed by customers include direct measures of customer satisfaction and dissatisfaction,
customer retention, gains and losses of customers and customer accounts, customer complaints
and warranty claims. Other indicators of customer satisfaction include measures of perceived
Leadership and governance measures. With an increased focus on issues of governance, ethics,
and leadership accountability, it is important for organizations to practice and demonstrate high
standards of overall conduct. Relevant performance measures can help organizations monitor
these issues. They might include measures of regulatory/legal compliance, results of oversight
audits, and financial and ethics review results. Leadership measures also include measures of
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Financial and market measures. Financial measures are generally tracked by senior leadership
to gauge overall company performance and are often used to determine incentive compensation
for senior executives. Measures of financial performance might include revenue, return on
7. Describe the issues that organizations must consider in selecting measures and
indicators.
The issues that organizations must consider in selecting measures and indicators are that 1) an
organization must align its measurement system to its vision and strategy; and, 2) it must select
meaningful measurements.
8. What two fundamental mistakes do organizations frequently make about measurement?
Many organizations make two fundamental mistakes: (1) not measuring key characteristics
critical to company performance or customer satisfaction, and (2) taking irrelevant or
9. How should performance measures be linked to strategy?
It is important to link performance measures to strategy. A balanced scorecard approach can help
to identify the right measures by aligning them with the organization’s vision and strategy. This
provides a means of setting targets and allocating resources for short-term planning,
1. the nature of a company’s products and services
2. major markets
3. principal customers and their key quality and performance requirements
4. organizational culture; its purpose, mission, and vision
5. capabilities and core competencies, such as facilities and technologies
6. supplier and partnering relationships
7. regulatory environment
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10. What is the role of enterprise resource planning (ERP) in performance measurement?
Enterprise Resource Planning (ERP)—systems are software packages that integrate
organizational information systems and provide an infrastructure for managing information
across the enterprise. The role of ERP in performance measurement is to integrate key aspects of
a business—accounting, customer relationship management, supply chain management,
11. Why is it important to conduct periodic audits of a measurement system? What are
some key questions to consider?
As the business environment changes, old measures can become obsolete and new measures
might be needed. An outdated measurement system wastes resources, hinders strategic
deployment and often rewards the wrong behaviors. Thus, a periodic audit of an organization’s
measurement system is important. Such an audit should examine and answer such questions as:
12. Describe ways by which data can be analyzed to generate useful managerial
information.
Analysis refers to an examination of facts and data to provide a basis for effective decisions.
Examples of possible analyses to yield useful managerial information include the following:
• Examining trends and changes in measures and indicators using charts and graphs
• Calculating a variety of statistical measures such as means, proportions, and standard
deviations
13. What is interlinking? Provide an example.
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14. What is the role of comparative data in a performance measurement system?
Comparative data refer to industry averages, competitor performance, world-class benchmarks,
or performance measures of other organizations with similar product offerings. The use of
comparative data is important to all organizations. Comparative data are needed because an
organization needs to know where it stands relative to competitors and to best practices;
15. Why should managers review performance results?
Managers should review performance results for several reasons:
• To assess organizational success and performance relative to competitors
• To understand how well progress on strategic objectives and action plans is being made
16. Describe some important issues related to managing information resources.
Some important issues related to managing information resources are that organizations must
ensure that both data and information and the hardware and software systems that process them
17. Why is knowledge management important in modern organizations?
Knowledge management is important in modern organizations because process improvement
18. What are knowledge assets? Explain the difference
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between explicit knowledge and tacit knowledge.
Knowledge assets refer to the accumulated intellectual resources that an organization possesses,
including information, ideas, learning, understanding, memory, insights, cognitive and technical
skills, and capabilities. Knowledge assets consist of two types: explicit knowledge and tacit
knowledge. Explicit knowledge includes information stored in documents or other forms of
media such as databases, policies and procedures, and technical drawings. Explicit knowledge is
19. What are some ways of transferring knowledge within organizations?
High-performance organizations use many different mechanisms to share and transfer knowledge
within the organization. For example, these include use of a team-oriented approach to transfer
knowledge, which is accomplished using various tools, technologies, and processes to fill needs
or gaps identified through proactive research.
Other organizations identify and transfer best practices within the organization using
internal benchmarking. However, executives have long felt frustrated by their inability to
identify or transfer outstanding practices from one location or function to another. They know
Cultural issues include how to motivate and reward people for sharing best practices and
establishing a supportive culture. As with any TQ effort, senior leadership must take an active
role by tying initiatives to the organization’s vision and strategy, communicating success stories
at executive meetings, removing implementation barriers, reinforcing and rewarding positive
behaviors, leading by example, and communicating the importance of best-practice sharing with
all employees.
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ANSWERS TO DISCUSSION QUESTIONS
1. What types of measurements, either formal or informal, do you use to manage your
personal life? How might your personal measurement system be improved using the
principles discussed in this chapter?
The answers to this question could provoke a lively debate in a class. If the philosophy is held
that “quality is everybody’s job,” then the individual student may consider him/her-self a process
owner. He/she must analyze, make improvements, and follow up on both process improvements
2. Under which perspective of the balanced scorecard would you classify each of the
following measurements?
a. On-time delivery to customers — Customer perspective and/or internal
b. Time to develop the next generation of products —Innovation and learning perspective
c. Manufacturing yield — Internal perspective
d. Engineering efficiency — Internal perspective
e. Quarterly sales growth — Financial perspective
f. Percent of products that equal 70 percent of sales — Financial perspective/innovation
and learning
g. Cash flow — Financial perspective
3. How might a SWOT (strengths, weaknesses, opportunities, and threats) analysis be of
use for identifying measures in a balanced scorecard? What types of questions might you
ask?
SWOT (strengths, weaknesses, opportunities, and threats) analysis might be used to identify
measures in a balanced scorecard by concentrating on the strategic issues that the company faces
and how can those be measured and improved. For example, if surveys show that customers
perceive that the company’s products are not well-designed and are of inferior quality compared
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4. Many “course and instructor evaluation” systems consist of inappropriate or ineffective
measurements. Discuss how the principles in this chapter can be used to develop an
effective measurement system for instructor performance.
Without going into all of the problems of what is wrong with course and instructor evaluations, it
can be said that at least four major flaws are common in most systems, as well-intended as they
may be: a) they typically lack customer (student) input and customer focus; b) they are too
general and fail to take into account the mission or objectives of the course, department, college
5. How can measurement be used to control and improve the daily operations of your
college or university? You might conduct some research to understand what measures your
school uses.
A number of measures might be discussed in answer to this question. For example, “Time to
market” is a metric that many businesses have concerns about. It generally takes a long time to
6. What types of performance measurements might be used by a fraternity or student
organization?
Answers will vary, depending on the experience and interests of the students in fraternities or
student organizations. However, some obvious categories of financial measures, recruiting and
retention measures, service to members and community, and academic and competitive
excellence come to mind. Financial measures might include standards for non-profit
7. In making cheese, companies test milk for somatic cell count to prevent diseases. They
also test for bacteria to determine how clean the milk is, and perform a freezing-point test
to see whether the milk was diluted with water (milk with water in it freezes at a lower
temperature, which increases production costs because all the excess water must be
Performance Measurement and Strategic Information Management 15
extracted). Final cheese products are subjected to tests for weight, presence of foreign
elements or chemicals, and for taste and smell. What customer-related measures
might interlink with these internal measures?
In the cheese-making process, customer requirements of full weight, wholesomeness (lack of
8. What information would you need to fully answer the questions that IBM Rochester
uses for selecting measures and indicators:
• Does the measurement support our mission?
• Will the measurement be used to manage change?
• Is it important to our customers?
• Is it effective in measuring performance?
• Is it effective in forecasting results?
• Is it easy to understand/simple?
• Are the data easy/cost-efficient to collect?
• Does the measurement have validity, integrity,
and timeliness?
• Does the measure have an owner?
Where would you get this information?
This information would be difficult to obtain from one source. However, the measurement
(process) owner would be a key source from which to begin the process of obtaining the
information needed to select the measure.
Will the measurement be used to manage change? Determine who will use the measure (i.e.,
Is it important to our customers? Determine the voice of the customer, for instance, from
surveys and other intelligence, and whether the measure ties to an important customer need.
Is it effective in forecasting results? This won’t be known until it is actually used, but can be
Is it easy to understand/simple? Obtain feedback from workforce and other key stakeholders.
Performance Measurement and Strategic Information Management 16
Are the data easy/cost-efficient to collect? Determine how the data is collected and the
accessibility of the data; conduct a pilot project.
Does the measurement have validity, integrity, and timeliness? Engage users, analytics
professionals and IT staff as appropriate.
Does the measure have an owner? Who will be responsible for managing the results and
Here is a more detail answer from one of my students:
• Does the measurement support our mission?
The first bit of information one would need to know to answer this question is what the
mission statement of the organization is. From there you can determine if the measure
supports it. For instance, if the mission talks of satisfying customers in the organizations
• Will the measurement be used to manage change?
If change is being measured, then one would expect an improvement. Therefore, to fully
answer the question, one would need the Jump of Point (JOP) of the item being
measured. For instance, at my company, we are looking to improve our scrap, rework
and warranty for 2018 versus 2017. To measure change we know we ended the year at
• Is it important to our customers?
This question can be answered internally by asking the question from the perspective of
the customer. One would need to ask, “Why would the customer care if……..?” This
must be taken on a metric by metric basis. For instance, we originally had a metric that
was stated, “Increase inventory turns from 3.0 to 4.0 by 12/31/2018” This was internal to
Performance Measurement and Strategic Information Management 17
• Is it effective in measuring performance?
The information one would need to fully answer this question is the linkage to the
strategy for which the metric is tied and then the results of said strategy. I’ll continue to
use examples to get my point across. We had a strategy to grow sales of our Food
Service products in Europe. Our metric was to measure the number of new distributors
• Is it effective in forecasting results?
The question to answer to understand is the metric effective at forecasting results is if it is
a leading or lagging metric. If it is a leading metric it has a chance to be good at
forecasting results. Next one would need for this measure is the delta between the Jump
of Point and the Final Measure. The metric, linked to the action plan to drive, would
have to forecast the result. If the metric measured a decrease of a waste, one would
• Is it easy to understand/simple?
The information one would need to know if the metric is easy to understand/simple is the
opinions of those distant from the metric. Can an independent party read the measure and
easily communicate what the metric means and its impact, or do they start to ask question
• Are the data easy/cost-efficient to collect?
Answering this question starts with knowing if the calculation is automatically generated
from a report out of the organizations enterprise system or does it require manual
calculations. Manual calculations take time and are subject to error and not easy and
Performance Measurement and Strategic Information Management 18
• Does the measurement have validity, integrity, and timeliness?
The information needed for validity is correlation between the data received and the
measure. Verification that the calculations are being done correctly. Does the data
represent what is reality. Knowledge that the data is moving in the direction expected.
For Integrity, knowledge that the data is being collected the same way each time, from
the same sources, good input data, software and hardware are up to date and backed up
appropriately. Best if it is from an enterprise system and not manual. Information on
• Does the measure have an owner?
Knowledge of the name of the individual who is responsible for the data and the name of
who is responsible for reporting on the measure is important to know to establish
9. An internal auditor has proposed the following metrics:
a. number of audits performed each year
b. number of audit findings by audit category.
c. number of audit findings that are classified as minor or major
What problems might these metrics have in driving good decisions?
a. The number of audits does not provide any information of the quality of the audit or how
effective it is. There would be little actionable information.