measuring and improving strategic performance of contractors

Angiang Construction Enterprise ACE is selected as a case study to measure the strategic performance.. The DBSC model was calibrated to a construction enterprise to measure the strategic

Measuring and Improving Strategic

Performance of Contractors

by Luu Truong Van

Interdisciplinary Program of Construction Engineering

and Management The Graduate School Pukyong National University

February 2009

A thesis submitted in partial fulfillment of the requirements

for the degree of

Doctor of Philosophy

in Interdisciplinary Program of Construction Engineering and

Management The Graduate School Pukyong National University

February 2009

Luu Truong Van 의 공학박사 학위논문을

Contractors

A dissertation

by Luu Truong Van

Approved by:

Chairman Young-Dai Lee

Member Young-Jin Kim Member Sung-Woo Moon

February 25, 2009

Luu Truong Van

Interdisciplinary Program of Construction Engineering & Management

The Graduate School Pukyong National University

Abstract

The current business environment in construction is characterized by fast change and severe competition This research reports on the design, implementation and evaluation of a dynamic performance measurement framework, as an attempt to better match the business environment System dynamics (SD) and Balanced Scorecard (BSC) is integrated to meet research objectives The development of a dynamic BSC (DBSC) is a logical extension to the Balanced Scorecard to address above problems

The major objective of this research is to describe how the BSC and Strength-Weakness-Opportunity-Thread (SWOT) matrix can be used to formulate the business strategies and to measure the strategic performance of construction Angiang Construction Enterprise (ACE) is selected as a case study to measure the strategic performance An applicable simulation model

of a construction enterprise was built using system dynamics methodology The DBSC model was calibrated to a construction enterprise to measure the strategic performance and to formulate and evaluate practical policies to improve its performance In order to considerably improve performance, some integrated policies combining the separate policies having the most effects were evaluated

of its strategies and policies prior to implementing them in the real project This also proves that the integration between SD and BSC has enormous potentials in the performance measurement of construction organizations The findings imply that the low training frequency of human resource and high proportion of direct costs and administrative expenses to turnover are generally “Achilles’ heel” of medium-sized construction enterprises in Vietnam and very likely in other developing countries The findings from this case study provide valuable lessons for practitioners in the application of new management frameworks (i.e BSC and SWOT) in managing their strategic performance in other developing countries and region The integration of BSC approach and SWOT analysis can help medium-sized construction enterprises in developing countries identify short-term objectives and long-term strategies, establish the performance measurement

As the Asian saying goes, “to know oneself is true progress” Therefore,

based on the research findings, Korean construction firms can gain insights into Vietnamese construction firms As a result, thorough understanding of competitors in Vietnam is the best way so that Korean construction firms can win construction contracts in Vietnam For that reason, the research findings are very useful for Korean construction industry Since a medium construction firm from a country to the other country may have the same principles to formulate their strategies, the research framework and the model

in this study can be applied to medium construction firms in Korea with minor adjustment For those reasons, this study is useful not only to practitioners, researchers, and clients in Vietnam but also to those in Korea

Through out the course of this study, I wish to thanks from the bottom of

my heart to my advisor, Professor Soo-Yong Kim, whose expertise, patience, constructive comments, enthusiastic guidance, encouragement, and friendly discussion have been of immeasurable value I express my deep gratitude to Professor Soo-Yong Kim for providing the opportunity to undertake my study I am very happy to acknowledge my debt to Professor Soo-Yong Kim for nice treatment and financial support over the past duration of graduate study at Pukyong National University

I also express my deep gratitude to Professor Young-Dai Lee, who served as chairman of the examination committee for his kindness, helpful recommendations and valuable comments

Special thanks also are extended to Professor Sung-Woo Moon, Professor Dae-Young Kim and Professor Young-Jin Kim, committees of this dissertation, for their helpful suggestions and recommendations as well as their valuable comments

I am also grateful to Professor Soo-Yong Kim, Professor Young-Dai Lee,

Dr Jin-Kook Yang, Dr Jung-Man Jung, Dr Hur Yurl and Professor Yong Lee, for what they taught

Soo-Grateful acknowledgement are extended to top managers, line managers and site managers, who made it possible for the survey in Angiang Construction Enterprise (ACE) I also express my gratitude to Mr Cao Huu Loi, a vice director of ACE for nice help Without their hearty participation and corporation, the objectives of this study have not been accomplished

extended to Dr Park Young-Min, who had always supported, and to Mr Lee

Yang-Woo, Mr Park Choong-Soo, Mr Jang Hyo-Won, Mr Lee Sang-Hee,

Mr Jung Poo-Jin, Ms Cho Ha-Ra, Mr Kim Jang-Soo, Mr Kim Hoe-Syeob,

Mr Tulo and Mr Le Hoai Long for their kind support and assistance

I would also like to express deepest gratitude from the bottom of my

heart to my wife - Tran Thi Thu Huong, my son – Luu Truong Thinh and my

daughter – Luu Diem Huong Mai, who always support, love, sacrifice, and

encourage me in every day and forever

Finally, I wish to express my deepest gratitude and I am forever indebted

to my parents, my brothers, my sister for their infinite sacrifice, love and

ABSTRACT i

ACKNOWLEDGEMENT iii

TABLE OF CONTENTS v

LIST OF TABLES xiii

LIST OF FIGURES xv

CHAPTER 1: INTRODUCTION 1.1 Background 1

1.2 Problem statement 2

1.3 Objectives of the study 4

1.4 Scope of work 5

1.5 Expected contribution 6

1.6 Expected contribution to Korea Construction Industry 7

CHAPTER 2: LITERATURE REVIEW 2.1 General 8

2.2 Characteristics of construction industry 8

2.3 Strategic performance measurement of organizations 9

2.3.1 Definition of performance measurement 9

2.3.2 Background to strategic performance measurement 11

2.3.3 The evolution of modern performance measurement 12

2.3.4 Balance Scorecard (BSC) 25

2.4 Previous studies on organizational performance measurement in the construction industry 29

2.5 System thinking and system dynamics 32

2.5.3 Systems dynamics 35

2.5.4 System dynamics models 39

2.6 Applications of system dynamics in management 40

2.6.1 The roles of system dynamics 41

2.6.2 System dynamics in performance measurement 42

2.6.3 System Dynamics in Construction Management 45

CHAPTER 3: RESEARCH METHODOLOGY 3.1 General 48

3.2 Research method framework 48

3.3 Stage 1: Developing the performance measurement system using the BSC approach 50

3.3.1 Corporate strategy formulation 50

3.3.2 KPIs identification 52

3.3.3 KPIs validation 53

3.3.4 The strategic performance measurement and evaluation 53

3.4 Stage 2: Developing a dynamic-BSC (DBSC) model using the SD approach 55

3.4.1 Principles of system dynamics modeling 55

3.4.2 System dynamics modeling process 56

3.4.3 Research methodology for stage 2 58

3.4.4 System dynamics modeling 58

3.4.5 Model testing 65

3.4.6 Policy design and evaluation 65

3.5 Tools for the research 65

4.1 General 67

4.2 Brief overview of the Vietnamese construction market (VCM) 67

4.3 Analyzing internal environment of the enterprise 69

4.3.1 Introduction to An Giang Construction Company (ACC) and AnGiang Construction Enterprise (ACE) 69

4.3.2 Financial performance analysis 76

4.3.3 Human resource analysis 76

4.3.4 Current performance measurement analysis 78

4.3.5 Procurement management analysis 78

4.3.6 Construction site management analysis 79

4.3.7 Tender activity analysis 79

4.3.8 Organizational culture analysis 80

4.3.9 Summary of strengths and weaknesses of ACE 80

4.4 Analyzing external environment of the enterprise 82

4.4.1 Integrating Vietnam economy into the global economy 82

4.4.2 Legislation factor 83

4.4.3 Macroeconomics analysis 85

4.4.4 Impact of foreign direct investment (FDI) to the Vietnamese construction market (VCM) 88

4.4.5 Summary of opportunities and threats of ACE 89

4.5 SWOT matrix of ACE 92

4.6 Determining the ACE’s vision and strategies 97

CHAPTER 5: KPI DEVELOPMENT AND KPI IMPLEMENTATION 5.1 General 99

5.2 Developing KPIs 99

5.2.2 Developing preliminary KPIs corresponding to each perspective

102

5.2.3 KPI validation 103

5.2.4 Developing an enterprise strategic map 108

5.3 Computing KPI weighting 116

5.4 Data collection on the ACE strategic performance 124

5.4.1 Preparing data collection 125

5.4.2 KPI data collection 126

5.5 KPI evaluation 131

5.6 The enterprise performance analysis 138

5.6.1 Performance scale 138

5.6.2 The performance scale computation 138

5.7 Discussion on the enterprise performance 146

5.7.1 Discussion on results of the performance scale computation 147

5.7.2 Discussion on cause-and-effect relationship among KPIs 148

CHAPTER 6 DEVELOPING THE DYNAMIC BSC MODEL TO MEASURE THE STRATEGIC PERFORMANCE 6.1 General 152

6.2 Reference modes 152

6.2.1 Profit margin percentage (PMP) 153

6.2.2 The proportion of interest to profit after tax 153

6.2.3 Turnover 154

6.2.4 Profit after tax 155

6.3 Key feedback structures of the strategic performance of construction enterprises 157

6.3.3 Investment in employee training 159

6.3.4 Quality-customer satisfaction factor-investment in R&D 159

6.3.5 Quality-customer satisfaction factor-investment in machinery 160

6.3.6 Quality-customer satisfaction factor-investment in employee training 161

6.3.7 Competitor-goodwill-investment in R&D 161

6.3.8 Competitor-goodwill-investment in machinery 162

6.3.9 Competitor-goodwill-investment in employee training 163

6.3.10 Quality-customer satisfaction factor-costs-investment in R&D 163 6.3.11 Quality-customer satisfaction factor-costs-investment in machinery 164

6.3.12 Quality-customer satisfaction factor-costs-investment in employee training 165

6.4 Model boundary 165

6.5 Model Structure 169

6.5.1 Causal loop diagram of the DBSC model 169

6.5.2 Stock-and-flow diagram of the DBSC model 171

CHAPTER 7 MODEL TESTING 7.1 General 177

7.2 Model behavior 177

7.2.1 Introduction 177

7.2.2 The construction market in Angiang and market share 178

7.2.3 Profit after tax 179

7.2.4 Turnover 180

7.2.5 Goodwill 181

7.2.8 Profit margin percentage 186

7.2.9 Summary of model behavior 187

7.3 Model testing 188

7.3.1 Boundary adequacy tests 189

7.3.2 Structure assessment tests 189

7.3.3 Dimensional consistency 189

7.3.4 Parameter assessment 190

7.3.5 Extreme condition tests 191

7.3.6 Integration error tests 193

7.3.7 Behavior reproduction tests 194

7.3.8 Sensitivity analysis tests 196

7.3.9 Model testing summary 197

Chapter 8 Policy Analysis 8.1 General 198

8.2 Implications of the base run and the enterprise practice 198

8.2.1 Construction market and market share 198

8.2.2 Growth rate of turnover 199

8.2.3 Proportion of direct costs to turnover 200

8.2.4 Proportion of administrative expenses to turnover 201

8.2.5 Cost reduction rate 202

8.2.6 Investments in R&D, machinery and training 202

8.2.7 Interest rate, loan rate and inflation 202

8.3 Policy Alternatives 203

8.3.1 Adjustments of the construction site performance 204

8.3.2 Adjustments of investments in machinery, R&D and training 206

8.4 Policy evaluation 210

8.4.1 Evaluation of separate policies 210

8.4.2 Evaluation for integrated policies 217

8.5 Scenario analysis 221

8.6 Summary of the chapter 229

CHAPTER 9 CONCLUSIONS AND RECOMMENDATIONS 9.1 Summary of research execution 231

9.2 General conclusions 232

9.3 KPIs for performance measurement system of the construction enterprise 233

9.4 The strategic performance analysis 234

9.5 Major findings and discussion about the DBSC model 235

9.5.1 The reliable level of the DBSC model 235

9.5.2 The dynamics of interaction between improvements in the enterprise operation and turnover 236

9.5.3 Feedback structures in construction enterprises 236

9.5.4 Policies for improvement in performance of the enterprise investigated 237

9.6 Contributions of the study 238

9.6.1 Lessons learned for Vietnam Construction Industry 238

9.6.2 Lessons learned for Korea Construction Industry 240

9.6.3 DBSC model - a promising tool for construction enterprises 241

9.7 Limitations of the study 242

9.7.1 Limitations of the performance measurement system 242

9.7.2 Limitations of the DBSC model 242

REFERENCE 245

APPENDIX Appendix 1 Questionnaire 1: Investigation into factors affecting the strategic performance of medium construction firms 267

Appendix 2 Questionnaire 2: Investigation into degree of importance of KPIs for strategic performance of ACE 272

Appendix 3 Weight result of KPIs 276

Appendix 4 KPIs data collection form 281

Appendix 5 Completed performance evaluation form 288

Appendix 6 The equations of the DBSC model and their parameters 292

CURRICULUM VITAE 303

Table 4.1 Business performance of AnGiang Construction Enterprise

(ACE) 73

Table 4.2 Eleven significant factors influencing the ACE’s success 81

Table 4.3 Total of construction enterprises (2000-2004) 85

Table 4.4 GDP and growth rate of GDP (2000 - 2007) 85

Table 4.5 Gross domestic product (GDP) at current prices by economic sector 86

Table 4.6 Structure of state budget expenditure final accounts 87

Table 4.7 Foreign direct investment (FDI) projects licensed in period 1988 – 2007 89

Table 4.8 Fourteen significant factors influencing the ACE’s success 90

Table 4.9 The SWOT matrix of ACE 95

Table 5.1 Preliminary KPIs under four perspectives of the BSC approach 102

Table 5.2 Summary of KPIs resulted from the validation process 105

Table 5.3 The enterprise goal and objective due to financial perspective 110 Table 5.4 The enterprise goal and objective due to customer perspective 111 Table 5.5 The enterprise goal and objective due to internal process perspective 112

Table 5.6 The enterprise goal and objective due to learning and growth perspective 113

Table 5.7 The formal set of validated KPIs 114

Table 5.8 Summary of KPI weighting 123

Table 5.9 Summary of KPIs by type, source, and formulation 127

Table 5.10 Results of KPI data collection 132

Table 6.1 Model boundary chart 167 Table 7.1 Estimation of some parameters 191 Table 8.1 Policy alternatives 209 Table 8.2 Relevant variables of the DBSC model under the current

scenarios and four alternative scenarios 222

Figure 2.1 Relationship between mission and strategy of an organization

and its management control structure and process 13

Figure 2.2 An example of CSF and its corresponding KPIs 14

Figure 2.3 Diagram of GRAI grids 16

Figure 2.4 The first five parts of the Neely et al (1996a) process 19

Figure 2.5 The process of KPI assessment using Tableau de Bord 22

Figure 2.6 The cycle diagram of MBO 24

Figure 2.7 Translating vision and strategy 26

Figure 2.8 Linear thinking as one-way direction thinking 34

Figure 2.9 Linear thinking 34

Figure 2.10 Stock and flow 37

Figure 2.11 A model of the bank account accruing compound interest 37

Figure 2.12 A model for amortizing a loan 38

Figure 2.13 Connector and converter 38

Figure 2.14 An inventory model with a delay after ordering 39

Figure 2.15 An inventory model with a delay after ordering 40

Figure 3.1 The research method framework: Stage 1 51

Figure 3.2 Iterative cycle of modeling process 57

Figure 3.3 The research methodology: stage 2 59

Figure 3.4 The sixteen-step process involved in the construction of reference mode 60

Figure 3.5 Loop notation 63

Figure 3.6 Example of a loop 63

Figure 3.7 Stock and flow diagramming notation 64

Figure 4.1 Market share by company in Angiang province 73

Figure 4.4 ACE’s vision and strategies 98

Figure 5.1 Translation of the enterprise strategies into 4 perspectives of BSC 101

Figure 5.2 The strategic relationship map of ACE 109

Figure 5.3 The summary of equations for weight development 122

Figure 5.4 The summary of weight of each perspective under the BSC format 125

Figure 5.5 Assigning the raw score for each KPI based on data collected 134

Figure 5.6 Summary of the ACE’s performance scale computation 141

Figure 5.7 Summary of performance levels of each perspective and the overall performance of ACE 146

Figure 6.1 The dynamics of the enterprise performance showing low profit margin percentage 153

Figure 6.2 The dynamics of the enterprise performance showing decreasing proportion of interest to profit after tax 154

Figure 6.3 The dynamics of the enterprise performance showing fluctuation of the annual turnover 155

Figure 6.4 The dynamics of the enterprise performance showing fluctuation of the annual profit after tax 156

Figure 6.5 R&D investment feedback structure 158

Figure 6.6 Machinery investment feedback structure 158

Figure 6.7 Employee training investment feedback structure 159

Figure 6.8 Quality-customer satisfaction factor-investment in R&D feedback structure 160

Figure 6.10 Quality-customer satisfaction factor-investment in employee

training feedback structure 161

Figure 6.11 Competitor-goodwill-investment in employee training feedback structure 162

Figure 6.12 Competitor-goodwill-investment in machinery feedback structure 162

Figure 6.13 Competitor-goodwill-investment in employee training feedback structure 163

Figure 6.14 Quality-customer satisfaction factor-costs-investment in R&D feedback structure 164

Figure 6.15 Quality-customer satisfaction factor-costs-investment in machinery feedback structure 164

Figure 6.16 Quality-customer satisfaction factor-costs-investment in employee training feedback structure 165

Figure 6.17 Causal loop diagram of the DBSC model 170

Figure 6.18 The part of the DBSC model resulting from the strategic map corresponding to the learning and growth perspective 172

Figure 6.19 The part of the DBSC model resulting from the strategic map corresponding to the internal process perspective 173

Figure 6.20 The part of the DBSC model resulting from the strategic map corresponding to the customer perspective 174

Figure 6.21 The part of the DBSC model resulting from the strategic map corresponding to the financial perspective 175

Figure 6.22 The full stock-and-flow diagram of the DBSC model 176

Figure 7.1 Construction market in Angiang province 178

Figure 7.2 Market share of ACE 179

Figure 7.5 Goodwill 181 Figure 7.6 Goodwill increase factor 182 Figure 7.7 Efficiency level of the whole operation 183 Figure 7.8 Efficiency rate of change 183 Figure 7.9 Degree of operation improvement related site management184 Figure 7.10 Overall cost 185 Figure 7.11 Indirect cost 185 Figure 7.12 Direct cost 185 Figure 7.13 Profit margin percentage 186 Figure 7.14 Proportion of loan interest to profit after tax 187 Figure 7.15 Profit margin percentage and profit after tax under the

situation of the principal resulting from the whole turnover192 Figure 7.16 Profit margin percentage and profit after tax under the

situation of no grow of local construction market 193 Figure 7.17 Profit margin percentage – simulated output and historical

data 195 Figure 7.18 Proportion of loan interest to profit after tax – simulated

output and historical data 195 Figure 7.19 Turnover – simulated output and historical data 195 Figure 7.20 Market share – simulated output and historical data 195 Figure 8.1 Degree of operation improvement related site under base run,

policy 1a and policy 1b 211 Figure 8.2 ‘Profit after tax’ behavior under policy 2a and 2b 212 Figure 8.3 ‘Profit margin percentage’ behavior under policy 2a and

policy 2b 213 Figure 8.4 ‘Turnover’ performance under policy 2a and 2b 213

Figure 8.6 ‘Profit after tax’ performance under policy 3a and 3b 214 Figure 8.7 ‘Profit margin percentage ’ performance under policy 3a and

policy 3b 215 Figure 8.8 Overall cost under policy P3a and b 215 Figure 8.9 Turnover under policy P3a and b 216 Figure 8.10 ‘Efficient level of the whole operation’ performance under

policy 3a and policy 3b 217

Figure 8.11 Profit after tax under integrated policies 218 Figure 8.12 Profit margin percentage under integrated policies 219

Figure 8.13 Efficient level of the whole operation under integrated policies

219 Figure 8.14 Cost reduction percent under integrated policies 220 Figure 8.15 The behavior of profit margin percentage under four scenarios

224 Figure 8.16 The behavior of profit after tax under four scenarios 224 Figure 8.17 The behavior of overall cost under four scenarios 225 Figure 8.18 The behavior of turnover under four scenarios 226 Figure 8.19 The behavior of ‘Efficient level of the whole operation’ under

four scenarios 226 Figure 8.20 The behavior of ‘Customer satisfaction factor’ under four

scenarios 227 Figure 8.21 The behavior of ‘Degree of operation improvement related

site’ under four scenarios 228 Figure 8.22 The behavior of ‘Goodwill’ under four scenarios 229

CHAPTER 1

INTRODUCTION

1.1 Background of the study

Construction industry has been considered as one of the most important industries of every economy in the worldwide, especially in developing countries Construction is also a fragmented industry together with various negative factors Construction is usually characterized by high capital investment, dependence on developers, subcontractors and suppliers, an extensive and complex regulatory framework, high interest costs, severe competition, multi-work locations, fluctuating workforce, and large turnover

of workers In addition, companies in the construction industry have faced various risks including availability of funds for repayment of borrowings, availability of skilled labor and fluctuation of material costs and interest rates All impede its developments and performance improvements at both construction industry and construction organizations

The construction environment in developing countries may be risky due

to poor infrastructure, backward management mechanisms, and a bureaucratic local government In this context, construction firms must continually improve their own performance and operation to deal with severe competition in the construction market Performance measurement is the heart of ceaseless improvement (Luu et al., 2008a)

The Balanced Scorecard (BSC) is the famous performance measurement framework The BSC is considered to be one of the most important business tools of the past fifteen years, with predictions that over 50% of Fortune 500 companies currently use some form of it as a measurement framework (Tood, 2000) Similarly with other performance measurement systems, BSC is a static tool

Depending on complexity and uncertainty, different analytic tools incorporated with experience, continuous learning and intuition are performed to ensure high organization performance and participant satisfaction Simultaneously, to cope with managing such uncertainty, organizations should find the balance between planning and learning Planning provides discipline and a concrete set of activities while learning permits adapting to unforeseen or chaotic events (Meyer et al., 2002) The more uncertain will lead to the more learning As such, system dynamics (SD) methodology can facilitate this learning via emphasizing on systems thinking and systems simulation More importantly, system dynamics model helps overcome many limitations of static models (Sterman, 1992 and Sterman, 2000), especially in complex and fast-changing construction environments

Therefore, System Dynamics (SD) methodology and Balance Score-card should be integrated into an analytical tool to complement for the traditional performance measurement methodologies at a strategic level and to overcome disadvantages of BSC as well as other static performance measurement systems

1.2 Problem statement

Performance measurement is one of the essential factors for organization management However, managers seldom see the importance of performance measurement, but more concerned on planning and modifying strategy in organization due to changing business environment (Dacharin, 2001 cited in Chaichan, 2002) Managers recognize the impact that measures have on performance But they rarely perceive that performance measurement is an essential part of their strategy (Kaplan and Norton, 1993) In order to cope with high and rapid change in competitive market, organization should adopt effective tool for measuring and evaluating their performance continuously Therefore, performance measurement is the process of organization determining how successful organizations or individuals have been in achieving their objectives Moreover, it is important to consider how an organization’s performance is measured and how it can be communicated to the wider market (Kagioglou et al., 2001)

Better strategic management requires proactive and appropriate policies

to be identified and implemented properly in coping with ever-increasing complexity and uncertainty in dynamic and ever-changing environment nowadays System dynamics approach may be a good option, which helps managers and organizations possess a holistic overview whereas the traditional approaches are inadequate Additionally, experiments and then learning via systems simulation may be one of the most critical powers of system dynamics Thus, alternative policies can be evaluated to select the bests for managing construction enterprises successfully Finally, system dynamics methodology is employed as an analytical tool to complement for the performance measurement methodologies at a strategic level

Many construction firms have been unsuccessful in their business for the past ten years The construction environment becomes riskier in developing countries (Ezeldin and Sharara, 2006), therefore, construction firms must periodically measure their performance and compare with their past performance in order to find out what should be improved (Gupta, 2004) Many construction companies in Vietnam are lacking an effective method to evaluate their strengths and weaknesses and to measure their performance As

a result, it is very difficult to raise their position in the dynamic marketplace Moreover, the occurrence of a large number of foreign construction firms during the past four years brought out severe competitiveness for domestic contractors (Cao, 2006) For these reasons, the development of effective methods is very necessary to identify the Vietnamese medium-sized contractor’s weaknesses and threats from external environment as well as to measure their strategic management performance

1.3 Objectives of the study

The goal of this study is to develop a new performance measurement system, which is integrated BSC and SD, for performance measurement of construction firms in a developing country, i.e Vietnam

Therefore, the major objectives of the study are:

(1) To implement a SWOT-QFD matrix to formulate the strategies of a typical medium-sized construction enterprise (i.e., Angiang Construction Enterprise - ACE) in Vietnam;

(2) To develop a performance measurement for ACE using BSC;

(3) To develop a dynamic BSC (DBSC) model for improving strategic performance of ACE by integration of SD and BSC; and

(4) To experiment and evaluate the possible effects of ACE’s strategies

in the real word with very low costs as well as risks

1.4 Scope of work

The study focuses on two management techniques called Balanced Scorecard (BSC), which can be used to help managing strategic organization (Kaplan and Norton, 1993), and System Dynamics (SD), which helps managers and organizations possess a holistic overview whereas the traditional approaches are inadequate Therefore, the study focuses on the development and implementation of KPIs towards BSC approach, for small and medium construction firms in developing countries Moreover, in depth,

a case study of a medium construction firm is implemented in a typical developing country, i.e., Vietnam

In Vietnam, a construction company is normally considered small, medium, and large when his average annual revenue is from 50 billion VND ($1.00≈VND18000) to 100 billion VND, 100 billion VND to 200 billion VND and greater than 200 billion VND, respectively (Luu et al 2008b) Moreover, this study assumed that medium-sized construction companies must have at least number of skilled workers, and number of unskilled workers of 200 and 500 persons, respectively

Especially, the study also aims to construct a comprehensively analytical tool in order to improve a strategic performance of a medium-size construction firm As mentioned earlier, this tool should be complementary,

instead of replacement, for traditional techniques and tools such as return on investment (ROI), discounted cash flow (DCF), profit margins and so on

Moreover, the BSC-oriented SWOT analysis can provide a basic framework to identify the meaningful SWOT factors towards the strategic performance measurement

From a practical perspective, the study firstly has proven through the design, implementation and evaluation process that the Dynamic BSC (DBSC) is a valid and viable performance measurement system The DBSC

is able to resolve a number of Balanced Scorecard deficiencies, related to static nature of performance measurement systems in general

Secondly, a SWOT analysis and BSC framework are popular with all companies in developed countries whereas both methods are rarely used in developing countries A possible explanation is that CEOs of construction companies in developing countries recognize no benefits from SWOT and BSC As the severe competitiveness in the construction market increases, top managers of those companies often face somewhat urgent problems related to

the company existence rather than the strategic management In this context, the findings from this dissertation will provide valuable lessons for practitioners in the application of new management frameworks (i.e BSC and SWOT) in managing their strategic performance in other developing countries and regions

1.6 Expected contribution to Korea Construction Industry

Korea has emerged as the first largest foreign investor in Vietnam, pouring over 4.2 billion USD in 403 projects in 2007 (VNA, 2007a) In the past eleven months, Korea businesses registered for additional 732 million USD (VNA, 2007a) Vietnam and the Korea have enjoyed steady growth in trade and investment Two-way trade revenues increased to over 4.7 billion USD in 2006 from 490 million USD in 1992 (VNA, 2007b) Therefore, the KPIs for strategic measuring performance of medium construction firms in Vietnam, strengths and weaknesses of those firms are valuable lessons for Korean construction firms, who would like to win construction bids in Vietnam In the other hand, since a medium construction firm from a country

to the other country may have the same principles to formulate their strategies, the research framework and the model in this study can be applied

to medium construction firms in Korea with minor adjustment For those reasons, this study is useful not only to practitioners, researchers, and clients

in Vietnam but also to those in Korea

of BSC and system dynamics will be outlined to advocate the integration of BSC and system dynamics as a promising approach for performance measurement at strategic level of construction firms

2.2 Characteristic of construction industry

It is widely accepted that the construction industry is usually characterized by its complexities, reluctance to change and resistance to innovations (Oglesby et al., 1989; Palaneeswaran and Kumaraswamy, 2000) Construction is inherently risky; its projects are generally unique and prototype (Wantanakorn et al., 1999; Kale and Arditi, 1999) Oglesby et al (1989) pointed out that construction operates differently from other industries and most construction projects are unique and fast-moving The contractual structure in construction is seldom conductive to cooperation among participants (Oglesby et al 1989)

In addition, Kale and Arditi (1999) summarized several unique characteristics of the construction industry:

• fragmented industry structure,

• fragmented organization of the construction process,

• easy entry to the construction business,

• post-demand production,

• uniqueness of projects,

• high uncertainty and risk involved,

• high capital required for constructed facilities, and

• temporary nature of the relationships between parties

As a result, the construction industry requires more commitment of time, effort, talent and money (Oglesby et al., 1989)

2.3 Strategic performance of organizations

2.3.1 Definition of performance measurement

The meanings of terms and activities used to describe the field of business measurement have remained constant over time Armstrong & Baron (1998) outline the semantics of the terms used within the performance measurement field The term ‘performance appraisal’, was replaced with the term ‘performance management’ afterwards, was the first term that indicated

a need for business to understand performance Over time this term was

replaced with the term ‘performance management’ This term implied that business performance could be controlled and therefore better managed This view of performance evolved further during the 1970s and 80s, with a focus

on performance control being replaced by monitoring and understanding The terms performance management and performance measurement were used interchangeably (Armstrong & Baron, 1998) by many researchers In modern management, performance measurement is defined as “the process of quantifying past action, in which measurement is the process of quantification and past action determines current performance” (Neely, 1998) Therefore, “a performance measure can now be defined as a metric used to quantify the efficiency and/or effectiveness of past action” The above definition of performance measurement is applied in this study

Harper (1984) argued that performance is measured to satisfy shareholders, to encourage investors to provide capital investment and to keep the tax-man happy A less restricted perspective argues that through measurement, improvements in the performance being measured are encouraged Measures and measurement frameworks were developed from a need to control the business

Armstrong & Baron (1998) believed that no one knows exactly when formal methods of measuring and assessing performance were first introduced Records of financial transactions can be traced back for thousands of years, when the Egyptians, Phoenicians and Sumerians used them to facilitate commercial transactions (Kaplan & Norton, 1996) One of the first examples of performance measurement involved the emperors of the Wei Dynasty (AD 221-265) in China (Koontz, 1971) The emperors

appointed an ‘Imperial Rater’ who evaluated the performance of the official family and then he reported back to the emperors to make sure the official family was performing its duties up to the required standard

However, financial measures largely focus on past performance, but with fast change occurring these financial measures become less and less relevant (Johnson & Kaplan, 1987) Moreover, financial measurements tend to be

‘lag’ indicators whereas most non-financial measures are ‘anticipating’ factors, which are known as ‘lead’ indicators (Kaplan & Norton, 1992) However, good lead indicators are difficult to find Performance measures must be adapted to keep pace with these changes in actual work

2.3.2 Background to strategic performance measurement

In order to be successful in the long run, an organization’s mission and strategy must be implemented while simultaneously ensuring that resources are used effectively and efficiently (Anthony et al., 1989) Figure 2.1 shows relationship between mission and strategy of an organization and its

management control structure and process

It is widely accepted that strategy intensively involves the performance to attain goals However, “goals without performance measures do not motivate managers” (Chaichan, 2002) Without strategic performance measurement,

an organization may meet seriously difficulties to manage its strategy because of no actual data for the comparison with organizational objectives The purpose of strategic performance measurement is: (1) to set direction and motivate managers; (2) to help top managers identifying critical processes and critical success factors (CSFs) A critical process is a series of activities that directly affects the achievement of organizational goals (Chaichan,

2002) Identifying CSFs is a next step to drive the organization towards its goals “CSFs are the limited number of areas in which satisfactory results will ensure successful competitive performance for the organization” (Mard

et al., 2004) A set of CSFs depends on the company’s strategy and is usually less than 10 factors in any company (Mard et al., 2004) There are different performance indicators that may affect a CSF However too many factors can lead to unmanageable, thus management has to select appropriate key performance indicators (KPIs) for each CSF “The art of selecting KPIs requires that management understand how the CSFs and their KPIs are significant components of the company’s corporate strategy” (Mard et al., 2004) The main purpose of KPIs is to measure an organizational performance (Chan and Chan, 2004) Figure 2.2 gives an example of a CSF and its KPIs

2.3.3 The evolution of modern performance measurement

Continuous efforts have been undertaken to develop the methods for performance measurement The following paragraphs will outline the development of a salient performance measurement method in the later part

of the 20th century

Figure 2.1 Relationship between mission and strategy of an

organization and its management control structure and process (Source: Petri, R., and Van Der Vossel, G.J.A.M (1994) cited in DeWall_pages, 2002)

Figure 2.2 An example of CSF and its corresponding KPIs (adapted

from DeWall_page, 2002)

Traditionally, most organizations assess their performance based on financial and accounting measures such as return on investment (ROI), discounted cash flow (DCF), profit margins and so on However, financial measures virtually expose the past performance, thus managers have insufficient information to make decisions Three salient limitations of traditional measures are: (1) focusing on the past and unreflecting on current value-added actions (Kaplan & Norton, 1992); (2) defeating to include other critical factors such as customer satisfaction, employee satisfaction, and the quality of products (Parker, 2000); (3) describing only one perspective of an organization’s performance, becoming out of date and focusing only on short term (Stone, 1996)

Since traditional measures provided businesses with inadequate address

of many issues that it should be concerned with (Amaratunga et al., 2001), a

QUALITATIVE

STRATEGIC OBJECTIVE

Increase customer focus

QUALITATIVE

STRATEGIC CSF

Customer satisfaction

QUALITATIVE

distinct need has emerged for the development of other methods for the incorporation of both financial and non-financial measures

Performance measurement (PM) frameworks can be found in different journals and technical reports

(1) Management of the activity;

(2) Planning of the activity; and

(3) Management of the resources used in the activity

Figure 2.3 Diagram of GRAI grids (Bitton, 1990 cited in Mauchand,

2007)

Bourne et al (2003) pointed out 7 key points of ECOGRAI as follows:

• it relies heavily on the underlying model

• the process is designed for application within the manufacturing function of a business

• it deploys the manufacturing objectives down the organization

• it develops a methodology for the design of measures

• a systems analyst is required to conduct most of the detailed analysis

• the management’s role is primarily one of coordinating and validating the work as well as coordination between the three groups

Performance measurement questionnaire (PMQ)

Dixon et al (1990) developed the special questionnaire, namely performance measurement questionnaire (PMQ), for identifying strengths and failings in the current PM system and then proposing the set of performance measures This approach is based on the premise that measures should appraise, reinforce and reward improvements in performance (Bourne

et al., 2003) Two main parts of PQM are:

(1) part 1, which asks respondents to score the importance of specific improvement areas for the business and to score how effectively the current performance measures gauge improvement; and

(2) part 2, which asks respondents to score specific performance measures on the extent to which they believe that achieving excellence on the measure is important for the long term health of the company and the extent to which they believe that the company places emphasis on that measure

The PMQ is used as a step in the process The first stage of the process involves the development of the improvement areas and measures to be addressed by the questionnaire Once this has been done the questionnaire can be administered to a wide range of managers, supervisors and employees The PMQ results are then analyzed to identify alignment, congruence, consensus and confusion