Corporate Performance Management

Strategy and Performance Management

Andy Weeger

Neu-Ulm University of Applied Sciences

August 8, 2025

Learning Objectives

After this unit, you should have a solid understanding of

  • the relationships between key financial statements and their role in performance measurement;
  • financial ratio analysis and time value of money concepts for investment evaluation;
  • theoretical foundations explaining why performance management works and fails;
  • agency theory, motivation theory, and political perspectives on performance measurement;
  • the management control framework linking strategy formulation to task execution;
  • different types of responsibility centers and their appropriate performance measures;
  • planning and budgeting processes that translate strategy into operational targets;
  • variance analysis methodology for systematic performance diagnosis;
  • and common performance management frameworks.

Introduction

Prologue

What gets measured gets managed — even when it’s pointless to measure and manage it, and even if it harms the purpose of the organisation to do so. Simon Caulkin, management editor of the Guardian summarizing Ridgway (1956)

Concepts

Corporate performance management (CPM) is an organization-wide approach to steering results across both financial and non-financial dimensions.

It integrates goals, measures, feedback, and learning at individual, team, and enterprise levels to ensure strategy is executed effectively (Presti 2021).

Management control is the subset of CPM concerned with processes by which managers influence other members of the organization to implement the organization’s strategies (Robert N. Anthony and Govindarajan 2007).

Theoretical foundations

Performance management bridges the strategy–implementation gap by providing systematic measurement, behavioral incentives, and feedback mechanisms that ensure strategic objectives are achieved.

But these levers do not operate in isolation — their design must be grounded in an understanding of how people, systems, and incentives interact in real organizations.

Agency theory

Agency theory explains how goal conflicts between principals and agents can be managed through performance measurement and incentive design to align self-interested behaviors with organizational objectives (Eisenhardt 1989).

  • Problem: Information asymmetry and moral hazard create misaligned interests.
  • Solutions: Outcome-based contracts (pay for results) vs. behavior-based contracts (monitor actions) and risk sharing based on measurability & agent risk tolerance
  • Limits: Overemphasis on extrinsic incentives; ignores intrinsic motivation.

Motivation theory

Performance management effectiveness depends on expectancy (effort-performance link), instrumentality (performance-reward link), and valence (reward value) relationships (Porter and Lawler 1968).

Motivation varies across individuals and cultures. Some respond strongly to monetary incentives, others to recognition or development opportunities. Performance management systems should thus allow customization within a consistent overall framework.

Political and power perspectives

Performance measurement systems are not neutral — they can reinforce or challenge power structures by legitimizing authority, influencing resource allocation, and framing organizational discourse (Burchell et al. 1980; Hopwood 1976).

Performance measurement dysfunctions

Common dysfunctions that can undermine performance management effectiveness:

  • Tunnel vision: Overemphasis on measured areas at expense of unmeasured aspects
  • Gaming: Manipulating measures rather than improving underlying performance
  • Short-termism: Focus on immediate results at expense of long-term value creation
  • Suboptimization: Local optimization that undermines overall organizational performance
  • Rigidity: Inability to adapt measures as circumstances change

Financial reports

Overview

Companies report performance through three primary financial statements: Profit & Loss Statement, Balance Sheet, and Cash Flow Statement.

Understanding these reports is essential for performance measurement as they provide the raw data for most financial performance indicators used in management control systems.

Profit & Loss (P&L) Statement

Simple structure by expense type

Item
Revenue
- Material costs
- Salaries & wages
- Rent
- Other expenses
= EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization)
- Depreciation & Amortization
= EBIT (Earnings Before Interest and Taxes)
- Interest
= EBT (Earnings Before Taxes)
- Taxes
= Net income

Multi-step income statement

Item
Revenue
- Cost of Goods Sold (COGS)
= Gross Profit
Other operating expenses
- Selling, General & Administration (SG&A)
- Research & Development
- Others
= Operating Income or Loss
+ Total other income from continuing operations1
= EBIT from continuing operations
+ Financial income
- Financial expenses
= Income before taxes from continuing operations
- Taxes
= Net Income from continuing operations
+ Income or loss from discontinued operations
= Net income

Balance Sheet

Assets

Category Description
Non-current (fixed) Assets Long-term assets, e.g., real estate, machines, patents/licences, and property, plant & equipment
Inventories Finished goods, raw materials
Accounts receivable Invoices to customers not yet paid
Cash & cash equivalents Cash, balances of current bank accounts, sovereign bonds

Current assets include inventories, accounts receivable, and cash & cash equivalents.

Liabilities & Equity

Category Description
Equity Money paid in by shareholders plus retained profits minus accumulated losses
Non-current liabilities Long-term obligations, e.g., bonds, long-term bank loans
Current liabilities Short-term obligations, e.g., open invoices from suppliers, bank overdraft

Equity is the delta between the sum of all assets and the sum of all debt.
Debt includes both non-current and current liabilities.

Cash Flow Statement

Components of a Cash Flow Statement

Cash from operating activities

Mainly revenues and cash flows due to expenditures (OPEX):

  • Cash inflow from revenues
    Shows in P&L as revenue (timing may differ)
  • Cash outflow for salaries, materials, rent, etc.
    Shows in P&L as expenses (timing may differ)

Cash from investing activities

Mainly capital expenditures (CAPEX):

  • Cash outflow for investments in non-current assets
    Not in P&L; affects Balance Sheet
  • Cash inflow when non-current assets are sold
    Non-current assets hit P&L only via depreciation

Cash from financing activities

Any cash flow due to financing:

  • Cash outflow for interest
    Expense in P&L
  • Cash outflow for loan repayment
    Not in P&L; Balance Sheet only
  • Cash inflow from new loans
    Balance Sheet only
  • Cash inflow from financial investments
    Can be in P&L (non-operating income)

Cash flows either show up in the P&L (as revenues or expenses, possibly in different periods)
or appear as changes in the Balance Sheet.

Key financial ratios

Categories

Financial performance analysis relies on systematic ratio analysis:

  • Profitability — how much value do we create?
  • Liquidity — can we meet near-term obligations?
  • Efficiency — how well do we use assets?
  • Leverage — how risky is our capital structure?

Overview

Category Ratio Description Formula Usage
Profitability Gross Margin % of revenue left after COGS (Revenue − COGS) / Revenue Assess core production profitability
EBITDA Margin % after operating costs excl. D&A EBITDA / Revenue Compare core operating profitability
Operating Margin % after operating expenses EBIT / Revenue Evaluate efficiency before financing/tax
Net Margin % after all expenses Net Income / Revenue Measure overall profitability
ROA Return on assets Net Income / Total Assets Asset efficiency in generating profit
ROE Return on equity Net Income / Equity Returns to shareholders
ROCE Return on capital employed EBIT / (Total Assets − Current Liabilities) Return on long-term capital
Liquidity Current Ratio Ability to meet short-term liabilities Current Assets / Current Liabilities Short-term solvency
Quick Ratio Liquidity excluding inventory (CA − Inventory) / CL Liquidity in urgent cash need
Operating Cash Flow Ratio Cash flow coverage of CL Operating Cash Flow / CL Cash-based liquidity measure
Efficiency Asset Turnover Revenue per € of assets Revenue / Total Assets Asset utilization
Inventory Turnover Times inventory sold COGS / Avg Inventory Stock level optimization
Receivables Turnover Times receivables collected Net Credit Sales / Avg A/R Collection efficiency
Payables Turnover Times payables settled COGS / Avg A/P Payment speed
Leverage Debt-to-Equity Debt proportion to equity Total Debt / Total Equity Financial leverage
Equity Ratio Assets financed by equity Equity / Total Assets Capital structure health
Interest Coverage EBIT coverage of interest EBIT / Interest Expense Debt service capacity
DSCR Cash available for debt service Operating CF / Debt Service Lender risk assessment
Table 1: Overview of key financial ratios

Days-based efficiency ratios

Ratio Description Formula Usage
Days Sales Outstanding (DSO) Avg. days to collect receivables (Avg A/R / Net Credit Sales) × 365 Credit policy effectiveness
Days Inventory Outstanding (DIO) Avg. days inventory is held (Avg Inventory / COGS) × 365 Stock management efficiency
Days Payable Outstanding (DPO) Avg. days to pay suppliers (Avg A/P / COGS) × 365 Supplier payment terms optimization
Cash Conversion Cycle (CCC) Net days cash tied up in operations DIO + DSO − DPO Overall working capital efficiency
Table 2: Overview of days-based efficiency ratios

Turnover vs day-based ratios

Turnover ratios (Table 1) express frequency (times per period).
Days-based ratios (Table 2) express duration (average days).

Both describe the same reality from different angles:

  • High turnover ↔︎ low days outstanding (good)
  • Low turnover ↔︎ high days outstanding (needs improvement)

Time value of money

Overview

Money has different values at different points in time due to its earning potential — a euro today is worth more than a euro tomorrow because of:

  • Opportunity cost: money can be invested and earn a return.
  • Risk: future cash flows may be uncertain.
  • Inflation: purchasing power decreases over time.
  • Preference: people prefer current consumption to future consumption.

Key idea: to compare cash flows at different times, we convert them to a common basis — either all future values or all present values.

Future value (FV)

The formula for calculating the future value (FV) from the present value (PV) is as follows:

\(FV = PV \times (1 + i)^n\)

  • \(PV\) = present value
  • \(i\) = interest rate per period
  • \(n\) = number of periods

Example:

FV of 1,000 € in 3 years given a 5% annual interest rate:
\(FV = 1000 \times (1 + .05)^3 = 1,157.63\)

Present value (PV)

Formula to discount the present value (PV) from a future value (FV) is as follows:

\(PV = \frac{FV}{(1 + i)^n}\)

  • \(PV\) = present value
  • \(i\) = interest rate per period
  • \(n\) = number of periods

Example:

PV of 1,000 received in 3 years given a 5% annual interest rate:
\(PV = \frac{1000}{(1.05)^3} = 863.84\)

Interest rates

There are two differnt interest rates being used:

  • Nominal interest rate: stated annual rate, not accounting for compounding frequency.
  • Effective annual rate (EAR): accounts for intra-year compounding.

\(EAR = \left( 1 + \frac{i_{nom}}{m} \right)^m - 1\)

  • \(i_{nom}\) = nominal annual interest rate
  • \(m\) = number of compounding periods per year

Example:
Nominal rate 12%, monthly compounding (\(m = 12\)):
\(EAR = (1 + 0.12/12)^{12} - 1 \approx 12.68\%\)

Annuities

An annuity is a series of equal payments or receipts occurring at regular intervals.

Future value of an annuity:
What is the future value of a constant annual cash flow have at the end of the period? \(FV_{OA} = PMT \times \frac{(1 + i)^n - 1}{i}\)

Present value of an annuity:
What is the present value today of a future annual cash flow for multiple years? \(PV_{OA} = PMT \times \frac{1 - (1 + i)^{-n}}{i}\)

\(PMT\) = payment per period

Net Present Value (NPV)

Net present value (NPV) is a financial metric used to evaluate the profitability of an investment or project.

Steps:

  1. Estimate cash inflows and outflows over time.
  2. Chose a discount rate2 and discount each cash flow to present value.
  3. Sum present values — if positive, project adds value.

\(NPV = \sum_{t=0}^n \frac{CF_t}{(1 + r)^t}\)

  • \(CF_t\) = cash flow in period \(t\)
  • \(r\) = discount rate

NPV example

What is the NPV of an investment with cash flows shown below if the Weigthed Average Cost of Capital (WACC) is 10%?

Year Cash Flow (€) Discount Factor (10%) Present Value (€)
0 -10,000 1.0000 -10,000.00
1 3,000 0.9091 2,727.27
2 4,000 0.8264 3,305.79
3 5,000 0.7513 3,756.57
NPV -210.37
Table 3: The economic value added by the investment calculated for the time \(t_0\) as compared to an investment which returns exactly the WACC every year and has the same investment volume

Decision: Since NPV < 0, the project would not be accepted at a 10% WACC.

Cost types

Understanding different cost types is essential for designing budgets, conducting variance analysis, and making informed resource allocation decisions within performance management systems.

  • Direct vs. indirect costs: Traceable to specific products/services (direct) versus allocated overhead (indirect)
  • Fixed vs. variable costs: Remain constant (fixed) versus change with activity levels (variable)
  • Standard costing: Predetermined benchmarks for materials, labor, and overhead
  • Activity-based costing (ABC): allocates overhead using cost drivers rather than volume

Management controls

Management control x strategy

R. N. Anthony and Govindarajan (2014)’s perspective on management control

 

Management control framework

Formal management control system (R. N. Anthony and Govindarajan 2014, 105)

 

 

 

Planning and budgeting process

The planning and budgeting cycle translates strategic objectives into operational plans through resource allocation and performance targets that guide organizational action (Robert N. Anthony and Govindarajan 2007).

Responsibility center design

Organizations structure accountability through different responsibility center types:

Cost centers focus on expense control, revenue centers on sales generation, profit centers on bottom-line results, and investment centers on return on invested capital (Robert N. Anthony and Govindarajan 2007).

The choice of center type determines KPI sets and bonus formulas; e.g., ROI/EVA for investment centers versus margin or contribution for profit centers.

Variance analysis

Variance analysis compares actual results to planned targets to understand the causes of performance deviations and guide corrective action (Robert N. Anthony and Govindarajan 2007).

Variance analysis disaggregration

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flowchart TD
    A[Total Variance Profit]
    A --> B[Other costs]
    A --> C[Manufacturing costs]
    A --> D[Revenue]

    B --> B1[Administration]
    B --> B2[Marketing & Sales]
    B --> B3[R&D]

    C --> C1[Variable costs]
    C --> C2[Fixed costs]

    C1 --> C1a[Material]
    C1 --> C1b[Direct labor]
    C1 --> C1c[Variable overhead]

    D --> D1[Selling price]
    D --> D2[Volume / Mix]

    D2 --> D2a[Market share]
    D2 --> D2b[Market size]

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    classDef default fill:#ffffff,stroke:#000,stroke-width:1px,color:#000;
    %% Bold root + first level
    classDef bold font-weight:bold,stroke-width:2px;
    class A,B,C,D bold;

Financial performance frameworks

Overview

Du Pont Pyramid, Tableau du Bord, Balanced Scorecard, Performance Pyramid, and Performance Prism.

Group work

Form small groups of 3 to 4 students, do a research on one of the frameworks and to prepare a short presentation (5 minutes) that summarizes the key-tenets of the framework.

Prepare yourself to present your insights.

Framework evolution

As organizations mature, control systems evolve from financial-only to integrated, adaptive systems.

Stages:

  1. Financial control focus (DuPont)
  2. Balanced approaches (BSC)
  3. Value-based management (EVA)
  4. Stakeholder integration (Performance Prism, Integrated Reporting)
  5. Dynamic, AI-enabled, real-time controls

Choose frameworks appropriate to current maturity and adaptability needs.

Key takeaways

  • Financial statement literacy underpins all performance measurement
  • Ratios answer four questions: value, liquidity, efficiency, risk
  • TVM & investment appraisal connect performance to value creation
  • Theory explains why measures work (or fail)
  • Dysfunction prevention & politics-awareness make systems robust
  • Control frameworks connect strategy to operations
  • Responsibility centers, budgeting, and variance are core CPM tools

Review and consolidation

The following questions are designed to review and consolidate what you have learned and are a good starting point for preparing for the exam.

  • Analyze how agency theory explains the need for performance measurement systems. Describe how motivation theory informs performance system design.
  • Identify and explain two major performance measurement dysfunctions. Propose prevention strategies for each dysfunction.
  • Explain how performance measurement systems create power dynamics in organizations. Analyze both positive and negative political uses of measurement.
  • Explain how the three primary financial statements interrelate and support performance measurement. Calculate and interpret key financial ratios for a given company.
  • Apply NPV to evaluate investment proposals. Explain the components of WACC and their impact on investment decisions.
  • Differentiate between direct/indirect and fixed/variable costs. Explain how cost behavior affects responsibility center performance measurement.
  • Differentiate between strategy formulation, management control, and task control. Explain how management control bridges strategy and operations.
  • Design appropriate responsibility centers for different organizational contexts. Explain the controllability principle and its implications.
  • Describe the planning and budgeting process and its role in strategy implementation. Compare annual versus rolling budget approaches.
  • Conduct comprehensive variance analysis for a business unit, decomposing total variance into price, volume, mix, and cost components.
  • Compare and contrast DuPont analysis, EVA, and Balanced Scorecard for different organizational scenarios. Recommend which framework(s) would be most appropriate and why.
  • Analyze how performance measurement systems should evolve as organizations mature and environments change. Provide specific examples of adaptive changes.

Homework

Come prepared to the case study.

  • Review all case study tasks.
  • Research and collect the relevant public data from the provided sources.
  • Organise your findings in a personal data pack that facilitates group analysis (financial figures, extracted KPIs, relevant excepts)

Estimated time: 60–90 minutes total
Tip: Use the links in the lecture notes to speed up your search.

Q&A

Literature

Anthony, R. N., and V. Govindarajan. 2014. Management Control Systems. McGraw-Hill Education.
Anthony, Robert N., and Vijay Govindarajan. 2007. Management Control Systems. 12th ed. Boston: McGraw-Hill.
Burchell, Stuart, Colin Clubb, Anthony G. Hopwood, John Hughes, and Jan Nahapiet. 1980. “The Roles of Accounting in Organizations and Society.” Accounting, Organizations and Society 5 (1): 5–27. https://doi.org/10.1016/0361-3682(80)90017-3.
Deci, Edward L., and Richard M. Ryan. 1985. Intrinsic Motivation and Self-Determination in Human Behavior. New York, NY: Springer Science+Business Media. https://doi.org/10.1007/978-1-4899-2271-7.
Eisenhardt, Kathleen M. 1989. “Agency Theory: An Assessment and Review.” Academy of Management Review 14 (1): 57–74. https://doi.org/10.5465/amr.1989.4279003.
Hopwood, Anthony G. 1976. “Accounting and Human Behaviour.” In Accounting and Human Behaviour. London: Haymarket Publishing.
Locke, Edwin A., and Gary P. Latham. 1990. A Theory of Goal Setting and Task Performance. Englewood Cliffs, NJ: Prentice Hall.
Porter, Lyman W., and Edward E. Lawler. 1968. Managerial Attitudes and Performance. Irwin-Dorsey Series in Behavioral Science. Homewood, Illinois: R. D. Irwin.
Presti, Claudia. 2021. “Performance Management as a Part of the Management Control System.” In Integrating Performance and Risk in a Management Control System, 43–63. SIDREA Series in Accounting and Business Administration. Cham: Springer. https://doi.org/10.1007/978-3-030-87082-9_3.
Ridgway, Valentine F. 1956. “Dysfunctional Consequences of Performance Measurements.” Administrative Science Quarterly 1 (2): 240–47.
Vroom, Victor H. 1964. Work and Motivation. New York, NY: Wiley.

Footnotes

  1. Earnings that are not part of the company’s main operating activities, but still come from business lines the company is keeping (e.g., rental income)

  2. The discount rate is the rate of return you could earn on an alternative investment with a similar level of risk. It’s used to “discount” future cash flows back to their present-day value. A common discount rate is a company’s weighted average cost of capital (WACC).