>> Now let's turn to lesson 4-3, which has the following objectives. We're trying to understand the limitations of financial performance measures. We'll talk about the purpose of non-finance measures and how financial and non-financial measures are organized into the organization's strategic measurement system. We'll talk about the balance score card as a primary example of a strategic performance measurement system, as well. So let's talk about some disadvantages of financial performance measures. First off, they're generally incomplete. Their focused on a single dimension of the firm, and activities and other procedures that are difficult to quantify in financial terms are left out of these measures. Second, they're outcome based. They're very backward looking and specific to a given accounting period, and past accounting periods are not always indicative of the organization's future, and finally, financial performance measures potentially indues myopic behavior. Managers and employees focused on financial measures forego all the things that are not included in that, and sometimes, those strategic and qualitative considerations are just as important as financial goals. So we can turn our attention to alternative measures. Specifically, non-financial performance measures flow from the firm's strategy. Really, in essence, two steps here. First, the firm needs to identify a strategy, and second, they need to design objectives and measures to ultimately achieve that strategy. Those objectives and measures inform the type non-financial information that is useful to managers and employees. Some advantages of non-financial measures include that they're more forward looking. They can provide explanations for financial outcomes. They're more predictive, as opposed to reactive, like financial measures are, and they allow for more proactive behavior by managers and employees. These point are very important, in the sense that if a manager incorporates or implements an action and waits for the story to be told via financial measures, sometimes, it's ultimately too late to learn that they implemented something poorly or ineffectively. It's often the case that financial performance is lagged well behind the type of actions that are being implemented, especially at the strategic level. Non-financial measures are more up-to-date; they're more timely. They can show that a manager has incorporated something poorly or ineffectively, and the manager can respond to that in a more timely fashion. There are, of course, disadvantages of non-financial measures, as well. Specifically, this is very burdensome. Not everything is quantified and in the same scale. It's quite varied. Plus, when we open up the door to non-financial measures, there are many options available to managers and employees. They're oftentimes context specific, which allows for less comparability between the different divisions. The non-financial measures that are applicable in one division may not be the same that are applicable to other divisions inside the firm. So comparability and consistency are sometimes an issue, and they're oftentimes very noisy and subjective. Non-financial measures oftentimes involve some sort of judgment or less reliable measurement that finance measures. So this noise can be incorporated and lead to poor decisions if they're based on non-financial measures. And finally, non-financial measures are potentially irrelevant. Not all non-financial performance leads to financial performance. There's not always a link between the two, and so you can collect a lot of non-financial information, but ultimately, it proves to be irrelevant in relation to the firm's overall organizational goals.