Business Administration and Management
BENEFITS OF KPIS FOR INDUSTRY SECTOR
EVALUATION: THE CASE STUDY
FROM THE CZECH REPUBLIC
Martina Hedvičáková, Martin Král
Introduction In Q2 and Q3 2017 is already a noticeable
Industrialization, a major force in structural decline in dynamism. The industrial production
change, shifts resources from labour-intensive index was in the EU28 2.9% and in the Czech
activities to more capital technology-intensive Republic 5.9% (January to September 2017)
activities. It will remain crucial to the future (Statistika&My, 2018). Value added in the
growth of developing countries. Manufacturing’s industry in the first quarter of 2018 after the first
share of GDP has remained stable over the last five years fell slightly year-on-year by 2.3%.
40 years. Technology and capital equipment The pace has slowed down and in the second
are the main drivers of both manufacturing and third quarters of 2018, it has stabilized on
growth and aggregate growth in developed and a more moderate but sustainable growth. In the
developing countries, although in developing second and third quarters of 2018, the growth
countries energy and natural resources use in value added stabilized around two to three
affects growth in the medium- and low-tech percent. In the 1st to the 3rd quarter of 2018, the
industries (Unido, 2018). value added increased year-on-year by 0.9% at
Currently, the industrial value creation current prices. The major weight in the industry
is shaped by the development towards the continues to be maintained by large enterprises
fourth stage of industrialization, so-called with 250 or more employees. Business entities
Industry 4.0. Industry 4.0, referred to as the of this size category accounted for 67.2% of
“Fourth Industrial Revolution”, also known as total revenues in the 1st to 3rd quarters of 2018,
“smart manufacturing”, “industrial internet” 69.7% of total industrial outputs; the share of
or “integrated industry”, is currently a much- value added was 60.9% (Statistika&My, 2019).
discussed topic. It is assumed that Industry 4.0
supposedly has the potential to affect entire 1. Theoretical Basis
industries by transforming the way goods are Currently, there is a dynamic and progressive
designed, manufactured, delivered, and paid growth of substitution labour by capital. The
for (Stock & Seliger, 2016; Hofmann & Rüsch, introduction of new technologies, digitization,
2017; Marešová, et al., 2018; Hedvicakova, and automation of production is referred to
2018; Hedvicakova & Kral, 2018). Substitution as the fourth industrial revolution or Industry
of capital for labour leads to the onset of a new 4.0. The initiative Industry 4.0 also causes
concept of Industry 4.0, which is already being changes in the labour market. Industry 4.0
promoted in most European Union countries. should increase production efficiency, increase
Industry creates long-term less than a third work productivity, reduce costs, customize
of gross value added of the whole of the Czech solutions, and increase business flexibility. The
national economy. Relatively stable share in the higher efficiency of production and automation
last 20 years. Industry accounts for about 30% will enable the implementation of sustainable
of total employment in the Czech Republic. For development. These market changes bring
this reason, we focused on the analysis of the with them the need to measure the efficiency
industry in the Czech Republic. and performance of production and industry.
Czech industry is at the beginning of Current performance indicators are insufficiently
2017 was characterized by high dynamics, reflected in dynamically changing market
significantly exceeding the previous year’s pace conditions. For this reason, more and more
and follow rather a very successful year 2015. companies, as well as governments around
DOI: 10.15240/tul/001/2019-2-007 2, XXII, 2019 97
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the world, are starting to use performance performance indicators (KPIs) in an aluminium
indicators and efficiency for example KPI. extrusion process. The proposed methodology
KPIs are objective-oriented quantitative consists of the following main components:
assessment indicators, which are regarded 1 identification of key performance indicators
as a classification of key ingredients in the 2) classification of manufacturing processes
operations of the enterprise. In recent years, on the basis of KPIs 3) evaluation of key
the business environment has become more performance indicators.
competitive and volatile. Therefore, enterprises Kaganski et al. (2017) point out that the
need to focus on technological abilities, the amount of different available metrics provides
soft abilities, and management of manpower. difficulties to make the right decisions. Ammara
The knowledge technology of an enterprise et al. (2016) developed new key performance
can lead to competitive advantage and in indicators (KPIs) based on an in-depth
surmounting the competition. Thus, the concept characterization and dimensional analysis of the
of core competence becomes an important Kraft process equipment using the Buckingham
management tool (Lahti, 1999; Hong et al., Pi Theorem.
2015). An alternative to benchmarking is to
A Performance Indicator or Key identify the process signals that are strongest
Performance Indicator (KPI) is a term used correlated with the KPI and then change these
by industry or professionals for assessing or process signals in the direction that improves
type of performance measurement. KPIs are the KPI (Lindberg et al., 2015).
generally used by an organization in terms to Key Performance Indicators (KPIs) are
evaluate their success and also the success crucial for measuring and improving the
of a particular effort which an individual or they performance of the manufacturing process.
are doing. Although success is sometimes An especially critical aspect of developing
defined in terms of making progress toward the balanced process performance improvement
expected goals or an event that accomplishes strategies across all critical objectives is the
its intended purpose but often, success is need to discover the inherent relationships
simply the repeated achievement of some level between all KPIs assigned to a targeted
of operational goal and workers it becomes all manufacturing process (Brundage et al., 2017;
the more important to set strategic goals, so Kang et al., 2016).
choosing the correct KPIs is directly dependent Amrina and Yusof (2011) propose a set of
on gaining an understanding of what is important initial key performance indicators (KPIs) for
to the organization (Srivastava & Maitra, 2016). sustainable manufacturing evaluation believed
Currently, dashboards are the preferred to be appropriate to automotive companies,
tool across organizations to monitor business consisting of three factors divided into nine
performance. Dashboards are often composed dimensions and a total of 41 sub-dimensions.
of different data visualization techniques, Four of the most commonly cited indicators
amongst which are Key Performance Indicators to evaluate manufacturing performance are
(KPIs) which play a crucial role in quickly quality, cost, delivery, and flexibility (Hudson
providing accurate information by comparing et al., 2001). Finally, the initial KPIs consist of
current performance against a target required three factors of environmental, economic, and
to fulfil business objectives. However, KPIs social performance and further divided into nine
are not always well known and sometimes it is dimensions.
difficult to find an appropriate KPI to associate
with each business objective (Peral et al., 2. Methodology and Goals of Article
2017). Secondary data monitored in a detailed
Manufacturing industries today are breakdown since 2008 from the Ministry of
focusing on controlling negative environmental Industry and Trade of the Czech Republic are
impacts, reducing cost, conserving energy used in this paper. These data contain basic
and natural resources while producing new characteristics of individual types of industry
products through various methods and tools of (i.e. everything related to the mechanical,
Sustainable manufacturing assessment. Singh physical or chemical transformation of materials
and Sultan (2018) propose science-based or components into new products). This
guidelines for modelling and evaluation of key includes, in particular, the added value, costs,
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turnover, profits, the number of companies lowest correlation coefficients are selected to
operating in the industry, the number of their allow the most comprehensive way to evaluate
employees and the investment. performance. According to these key indicators,
The aim of the paper is to critically assess the performance of the industrial sectors of the
the performance evaluation of individual Czech Republic is subsequently assessed,
industries based on the absolute monitored notably with the emphasis on the volatility of
indicators compared to the performance the development of KPIs for individual industrial
indicators (PIs) and key performance indicators sectors since 2008. On the basis of the
(KPIs). The paper contains a proposal for significance of changes in growth indexes (year
a KPIs system that would allow performance / (year -1)) for KPIs for each year, it is concluded
assessments of industry sectors, including a what type of industrial sectors are threatened
correlation analysis of these indicators, to allow by a potential economic recession that may
for long-term relations. Therefore, it is possible occur in the Czech Republic in the future, and,
to evaluate the performance of individual on the contrary, which sectors are stable and
industry sectors by means of their aid. even in the event of a future recession or crisis
Performance Indicators (PIs) are set and are perspective for the Czech economy.
used for the analysis. These performance
indicators are based on absolute indicators 3. Current Economic Situation
that are monitored by the Ministry of Industry in the European Union
and Trade (2018a; 2018b) and the Czech
Statistical Office (2019) for the evaluation
and in the Czech Republic
The beginning of the Fourth Industrial
of the development of the manufacturing
Revolution, information and communication
industry. They draw on experience in setting
technologies, become crucial in both the
performance indicators, for example in the area
processing industry and the services (Půžová
of the private sector and public administration,
& Marešová, 2014). Their impact on GDP
in monitoring the economic (financial and cost)
growth and regional development is evidenced
effectiveness of different areas. The absolute
by several studies (Gatautis, 2008; Volejníková
values of the monitored indicators are therefore
related to other absolute values of the indicators & Lelek, 2012; Doucek, Maryška, & Novotný,
(e.g. number of employees, total costs, total 2013; Kraftová, Doudová, & Miláček, 2018).
investments, etc.), thus generating the ratios Structure of economic sectors and
commonly used in various financial analyses industries, or disciplines have long been
(Balachandran & Williams, 2018). an important element in the performance
These are index ratios that allow more assessment of national economies (Fisher,
appropriate managerial comparison of the 1939; Marais, 1981; Saboniene, 2010). Zdražil
performance and efficiency of individual industry and Applová (2016) identify even across the
sectors. These are relative ratios that take into EU σ-convergence in terms of gross domestic
account individual absolute characteristics and, product (GDP) growth, productivity and
in addition, cost-efficiency or the promotion of employment, although it does not confirm this
industry 4.0 through investment replacement at the national level for the V4 countries as part
labour by capital. At the same time, a correlation of the so-called eastern integration expansion
analysis of these PIs is performed in the most (Kraftová, Doudová, & Miláček, 2018).
important industrial sectors and an analysis of
the contrast between the simple evaluation of the 3.1 The Situation in the European
performance of these sectors according to the Union
raw data and the set PIs. The correlation analysis At the NACE division level, the manufacturing
is performed in IBM SPSS Statistics, using the sector is composed of 24 different subsectors.
Pearson correlation coefficient. The analysis The largest EU-28 subsectors in 2015 in
complements the graphical representation of the terms of value added and employment were
performance of major industries in the Czech the manufacture of machinery and equipment
Republic, the statistics standardized by standard (Division 28), manufacture of motor vehicles,
deviation are used in the figures. trailers and semi-trailers (Division 29) and
On the basis of correlation relationships, manufacture of food products (Division 10)
three key performance indicators with the (Eurostat, 2018a).
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Manufacturing subsectors are very diverse, per employee in the Netherlands, Luxembourg,
combining activities with relatively low apparent Austria, Germany, France, Ireland, Denmark
labour productivity and average personnel and Finland. On the other hand, average
costs, such as the manufacture of wearing personnel costs were below EUR 10.0
apparel, leather products, furniture, wood and thousand per employee in Latvia, Romania and
of products of wood and cork and textiles, Bulgaria where the lowest levels were recorded
with other activities that have considerably (EUR 5.7 thousand per employee). Combining
higher values for the same indicators, such these two indicators gives the wage-adjusted
as manufacture of coke and refined petroleum labour productivity ratio, which is a measure of
products, tobacco manufacturing, the labour productivity that takes into account the
manufacture of basic pharmaceutical products very different levels of pay and social charges
and pharmaceutical preparations and the between the Member States and activities.
manufacture of chemicals (Eurostat, 2018a). The highest such ratios were recorded in
In 2015, apparent labour productivity Ireland (840.9%), Hungary (223.8%), Bulgaria
within the EU-28’s manufacturing subsectors (200.9%), the United Kingdom (193.3%) and
ranged from EUR 20.0 thousand per person Poland (192.1%). The lowest wage-adjusted
employed or more for the manufacture of labour productivity ratios in manufacturing
wearing apparel, furniture, leather and related were registered in France (130.2%), Germany
products, and wood and products of wood to (133.6%), Luxembourg (135.4%) and Italy
EUR 204.0 thousand per person employed for (138.8%) (Eurostat, 2018a).
the manufacture of coke and refined petroleum
products (Eurostat, 2018a). 3.2 The Situation in the Czech Republic
Among the five largest EU Member States, The Czech economy growth has been
Germany stood out as its manufacturing sector accelerating since 2013, and it has been
contributed more than one quarter (30.4%) of supported mainly by the domestic demand.
the EU-28’s value added in 2014, well above The gross domestic product (GDP) adjusted for
its 23.3% share of value added in the EU-28’s price effects and seasonally adjusted in 2017
non-financial business economy as a whole. (Q4) was by 0.5% higher than in the previous
Italy also recorded a larger share (11.9%) of quarter and compared to the corresponding
the value added generated in the EU-28’s quarter of 2016 it was 5.2% up. The GDP
manufacturing sector than it did for the non- growth for the entire year 2017 was 4.5%.
financial business economy as a whole (9.8%), The gross value added (GVA) increased
while the reverse was true for France and the by 0.6%, quarter-on-quarter (q-o-q), and by
United Kingdom (Eurostat, 2018). 5.4%, year-on-year (y-o-y). Manufacturing
Among the EU Member States, the highest industry was successful; it was mainly owing
apparent labour productivity in manufacturing to the manufacture of motor vehicles, electrical
in 2015 was recorded in Ireland, where this equipment, metal structure, and chemical
measure reached EUR 445.9 thousand per products. Performance of manufacturing
person employed. This was quite ahead of increased by 0.9%, q-o-q, and by 7.4%, y-o-y.
the next highest level of apparent labour The GVA in most economic activities of services
productivity, namely EUR 103.5 thousand was also slightly growing compared to the Q3
per person employed recorded in Belgium. In (see Tab. 1) (Czech Statistical Office, 2018).
Norway and Switzerland, the apparent labour The position of industry in the structure of
productivity in manufacturing was above the the Czech economy can be documented by the
EU-28 average, and in the case of Norway, the share of this sector of total gross value added
average personnel costs (EUR 68.1 thousand (at current prices).
per head) were higher than the figures for the On the resource side, gross value
EU Member States. Belgium recorded the added increased at constant prices year-
second highest level of average personnel on-year by 4.7%, i.e. as well as the gross
costs within the manufacturing sector in 2015, domestic product. She was still doing well the
EUR 63.6 thousand per employee, just above manufacturing industry, which added 7.9% y/y
the value of EUR 63.1 thousand per employee and almost secured half of the total gross value
in Sweden. Average personnel costs were also added. All services, including trade, transport,
greater than or equal to EUR 50.0 thousand accommodation and hospitality, which turned
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Tab. 1: GVA Development (%)
Q1 Q2 Q3 Q4 2017
Compared to the previous quarter 1.6 2.2 0.8 0.6
4.5
Compared to the corresponding quarter of 2016 3.0 4.6 5.2 5.4
Source: Czech Statistical Office, 2018, own processing
the trend after three quarterly declines. Growth since 2010 (see Fig. 1). On the other hand,
has also returned to construction, with a drop in however, the overall added value of the Czech
gross value added over the entire year. industry – from CZK 728 billion in 2010 to CZK
In the sectoral structure, gross value added 1,020 billion in 2016, an absolute increase
(in nominal terms) slightly has weakened almost of nearly 40%. Still, the development of the
a third of the industry, despite its gross added manufacturing industry in the Czech Republic
value grew by 6.6% in the second quarter, was marked by the global financial crisis almost
well above the gross value added across the ten years ago, in the past few years the EBIT
economy. The decrease in the share (to 32%) reached a record CZK 330 billion and is rather
was caused by the decrease in prices in the stagnant. The same is true for investments that
industry by 1.3%, while the average price level are directed to the industry. While in 2010 they
on the supply side of the economy increased were only CZK 140 billion, in the years 2015
by 0.9%. In in the manufacturing industry, and 2016 they grew to a total of CZK 220 billion.
prices fell even by 2.4%, so even a dynamic However, it is necessary to add that the ratio of
one its performance did not prevent a slight investments to total costs still does not reach
deterioration in this relative indicator (down to the level of the global financial crisis and still
26.9%). By contrast, above-average growth oscillates around 5%. In 2008, this ratio was
in prices in the trade and transport sector 6.5%, two years later (when the absolute level
(by 2.5%) improved the position of this industry of investment reached the ten-year low) was
(to 18.9%), although its gross added value grew only 4.5% and in 2016 only 5.3% more than
more slowly (4.1%) than in the whole economy 5.3% (Ministry of Industry and Trade, 2018b).
(Ministry of Industry and Trade, 2018a).
Approximately 1.1 million employees work 4. Results
in the manufacturing industry in the Czech In the Czech Republic, for the longest time, most
Republic, but this number has not changed people are employed by companies operating
significantly – it has only increased by 8% in the motor vehicle manufacturing industry,
Fig. 1: Basic characteristics of the industry in the Czech Republic
Source: own processing
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Fig. 2: Main industry sectors in the Czech Republic
Source: own processing
the production of metal structures and metal high investments, and the total added value.
products and the production of metal machinery These implications are also demonstrated by
and equipment. In these three sectors, more the correlation analysis of individual monitored
than 40% of people working in the industry indicators, basically very strong and statistically
are employed (see Fig. 2). On the other hand, significant (level of significance alpha = 0.01)
only 3% of people work in papermaking or correlation of approximately 0.9 are between
clothing production, due in particular to low-cost these indicators. These relationships can
competition and imports from Asian countries. be observed in the graphical representation
High contrast can also be found from the (for comparability of individual statistical
point of view of the total turnover of companies characteristics the data were standardized, the
operating in the industry. The first three individual axes represent normalized variables)
industries are relatively stable, accounting for (see Fig. 3).
almost 46% of the industry’s total revenue, However, without any more detailed analysis,
while for example, the already mentioned paper there is not possible to determine any larger
industry and the clothing industry account industry as efficient, because even a company
for only 2.5%. Similarly, we can continue to that employs a low number of employees can
compare the investments where the ratio is create a high added value, even though the
from 46.6% to 2.4% or the added value, where cost is lower compared to other businesses.
the ratio is from 44.6% to 2.6%. Evaluating the performance of each sector and
From this basic analysis, there is a correlation estimating its economic benefits is therefore
between the size of individual industries and not possible by using regression analyses for
their contribution to GDP: the high number of example because that would only prove the
employees indicates the high costs, high sales, above-mentioned dependency.
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Fig. 3: Basic characteristics of the chosen industry sectors
Source: own processing
For this reason, it is necessary to evaluate leaving the sectors that are not efficient.
the performance in a different way – using the By using all the main indicators followed
so-called Performance Indicators (PIs) and by the Ministry of Industry and Trade and the
Key Performance Indicators (KPIs) that are Czech Statistical Office, we have subsequently
used, for example, by Governments of different set the following performance indicators (ratios)
countries for a number of different areas (e.g. to assess the area of industry:
Great Britain to assess the efficiency of using Value added per employee, which reflects
office buildings (Government Property Agency, technological progress (in the context
2018), in the Czech Republic for evaluating the of industry 4.0 replacement of labour by
effectiveness of elections (Král & Hájek, 2018) capital), over time should be in a positive
etc.). These are benchmarks that together correlation with the performance of the
create a performance rating system that is industry;
more usable than a managerial perspective not Value added in relation to cost, which
only for individual companies but also for entire expresses cost-effectiveness, similar to
sectors – it can serve to support industries that the previous indicator, there should be a
are successful in maintaining a comparative positive correlation between this indicator
or absolute advantage, and on the contrary, and the performance of the industry;
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The turnover per employee, which reflects whether investments in the industry share
the work efficiency of employees, there the same economic benefits and lead to
should again be a positive relationship added value;
between this indicator and the performance EBIT in relation to investments, which
of the industry; complements the previous indicator as it
Earnings before taxes and interest (EBIT) also takes into account total costs.
per employee, which complements the
previous indicator, takes into account the These performance indicators can be
level of costs; referred to as so-called ratio indicators.
Investment per employee, which reflects Ratio indicators are used for performance
the degree of innovation in the context of evaluation in many areas of private and public
industry 4.0, as investments are the source administration (Ministry of Interior, 2016). In
of future revenue and performance gains; summary, these indicators can be used in
A share of investments of the total costs, a relatively simple way to perform complex
which is similar to the previous indicator performance assessments (Balachandran &
(the rate of innovation); Williams, 2018). These indicators together
Value added in relation to investments, create a system of indicators that can be
which expresses the effectiveness of the used to assess the performance of individual
investment, thus enables it to determine industries as a whole, while making decision-
Fig. 4: KPIs of the chosen industry sectors
Source: own processing
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making at the level of individual companies, investment per employee. According to these
both in benchmarking and government policy indicators, it is possible to say that the profit
support for the relevant sectors. of a successful industrial sector is satisfactory
The following graph (Fig. 4) shows a even in terms of the number of employees, but
significant difference in performance between it does not reach its potential because of its
industries compared to the above (the same low level of automation. Activities that could be
industries are shown, and the normalized provided by modern technology are in this case
values of the relevant PIs are used). people whose employment is generally more
While the automotive industry has the expensive.
highest revenue, it is rated very poorly in terms On the other hand, for example, food
of value added per employee, which is due production, which ranks among the smaller
to the very high number of employees that industries, has a completely different position
make the resulting benefit diminish. Similarly, in the KPIs. It turns out that in terms of
this is the case for turnover per employee or employees it has a high added value, turnover
Tab. 2: KPIs Correlation Matrix
Add. val. / costs
Invest. / costs
investments
investments
employees
Turnover /
Add. val. /
employee
employee
employee
Add. val./
Invest. /
EBIT /
EBIT /
Added value / Correl. 1 -.058 .490 .647 -.021 -.053 .874 .427
employee ** ** ** **
Signif. .072 .000 .000 .524 .099 .000 .000
Added value / Correl. -.058 1 -.568 -.248 .483 .301 .077 .248
costs ** ** ** ** * **
Signif. .072 .000 .000 .000 .000 .018 .000
Turnover / Correl. .490 -.568 .426 -.310 -.065 .340 .143
1
employee ** ** ** ** * ** **
Signif. .000 .000 .000 .000 .046 .000 .000
Investments / Correl. .647 -.248 .426 .359 -.560 .476 -.069
1
employee ** ** ** ** ** ** *
Signif. .000 .000 .000 .000 .000 .000 .034
Investments / Correl. -.021 .483 -.310 .359 -.449 .009 -.165
1
costs ** ** ** ** **
Signif. .524 .000 .000 .000 .000 .773 .000
Added value / Correl. -.053 .301 -.065 -.560 -.449 1 .049 .417
investments ** * ** ** **
Signif. .099 .000 .046 .000 .000 .132 .000
EBIT / Correl. .874 .077 .340 .476 .009 .049 1 .640
employees ** * ** ** **
Signif. .000 .018 .000 .000 .773 .132 .000
EBIT / Correl. .427 .248 .143 -.069 -.165 .417 .640 1
investments ** ** ** * ** ** **
Signif. .000 .000 .000 .034 .000 .000 .000
Source: own processing
Note: ** Correlation is significant at the 0.01 level (2-tailed). * Correlation is significant at the 0.05 level (2-tailed).
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and investments. Unfortunately, however, added in relation to the total costs. In the long
investments represent only a small proportion run, profits will be reduced by increased costs
of total costs, and along with low food prices, due to increasing investments, but there will
this sector also has a low profit. be a reduction in the number of employees
In order to find connections between partial in the long run (lower wage costs), and the
PIs and find key performance indicator (KPIs), company will become more competitive and
a correlation matrix was created, using the less dependent on fluctuations in the labour
Pearson correlation coefficient: market (see Tab. 2).
Relative strong relationships between KPIs Based on the results of the correlation
that use the number of employees as a weight, analysis, it is also possible to find key
such as added value and investment (the performance indicators – performance indicators
higher the investment, the higher the added that will not be in a statistically significant
value), are obvious. However, it is essential relationship. Based on these indicators, it will
to draw attention to the opposite relationship be possible to benchmark the performance
between investment per employee and value- of individual industries, other indicators, and
added relation to investments – the lower the absolute data values can then serve to identify
investments per employee, the higher the value the specific cause of different performance. The
added per investments. first key performance indicator, which provides
This confirms the positive effects of a basic picture of industry performance and
modernization and the introduction of smart economic benefits, is the value added in
technologies into production (replacing labour relation to cost. The growth of this KPI implies
by capital). This is also evidenced by the strong growth in the performance of the industry. The
relationship between the share of investments second key performance indicator is the EBIT
in total costs and the added value in relation in relation to one employee. If the value of this
to the total costs – the higher the share of indicator increases, it means that the efficiency
the investment indicates the higher the value of the employees and thus the performance of
Fig. 5: KPI 1 – Value added in relation to costs
Source: own processing
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the entire industry is increasing. The third and of individual industries differs significantly (see
final key performance indicator is the share of Fig. 6). In recent years, the highest earnings
investments, which complements the previous per employee generated beverage production
indicators and broadens the performance (CZK 681 thousand), as well as manufacture
perspective for the future as investments of chemicals and preparations (CZK 525
are one of the key factors that can increase thousand), manufacture of motor vehicles (CZK
production efficiency in subsequent periods. 492 thousand) and manufacture of rubber and
The value of the first performance indicator plastic products (CZK 422 thousand) (figures
(value added in relation to cost) is interesting for are presented for 2016). However, despite
each industry sector (see Fig. 5). Nevertheless, the high added value in terms of cost, the
the leather industry is rather marginal in the production of clothes is at least profit-earning,
Czech Republic but creating the highest added with a profit of CZK 130 thousand per employee
value in terms of cost – almost 47%. Similarly, is caused by cheap products imported from
the wearing apparel production sector (44%), eastern countries.
the printing and reproduction of recorded The third key performance indicator extends
media sector (43%) or the metalworking and the previous two KPIs into the future sight as it
metalworking sector, excluding machinery evaluates the ratio of investment to total costs –
and equipment (42%), also generate a similar in the case of efficient investments, performance
value added in relation to costs. By contrast, increases may be expected in subsequent
the manufacture of motor vehicles (excluding periods. On the basis of the indicator’s values, it
motorcycles), trailers and semi-trailers produces cannot be unequivocally stated that an industry
relatively low added value (18%) in relation to sector differs significantly from another industry
costs, which can be attributed in particular to sector because investments in almost all
high production costs (wages). sectors amount to for around 8% of total costs
According to the second key performance (see Fig. 7). In the long-term (since 2008), the
indicator (EBIT per employee), the performance largest share of investments is in the printing
Fig. 6: KPI 2 – Earnings before Interest and Taxes (EBIT) per employee
Source: own processing
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Fig. 7: KPI 3 – Share of investments of the total costs
Source: own processing
and reproduction of recorded media (9.9%), is evident from the development of the second
other manufacturing industries (9.3%) and performance indicator (earnings per employee)
fabricated metal products, except machinery of the industry sector, which essentially had a
and equipment (7.7%). Investments in the motor similar development to the GDP of the Czech
vehicle sector (except for motorcycles), trailers Republic in the course of the last 10 years.
and semi-trailers amounted to an average of On the other hand, some industry sectors
5.1% of total costs in 2008-2016. in the Czech Republic are marginal from the
The key performance indicators show point of view of absolute numbers, but they
that all industries cannot be considered are very effective and efficient in terms of
effective and efficient only on the basis of key performance indicators – for example,
absolute values such as turnover, profits or production of basic pharmaceutical products
share of GDP. While automobile production and pharmaceutical preparations or the
contributes significantly to GDP in the Czech production of alcoholic and non-alcoholic
Republic, which in terms of absolute indicators beverages. While these two sectors do not
outperforms other industry sectors in turnover, generate the greatest added value in terms
profit, a number of employees and added of cost, they are very profitable, and they are
value in terms of key performance indicators not undervalued in terms of investment. One
are among the less powerful. In terms of value employee in the beverage industry brings the
added in relation to total production costs, it is owners a profit of almost CZK 700 thousand per
only less than 18%. This can be seen as a high year, and one employee in the pharmaceutical
threat. Wages (cost of production) increasing in industry brings CZK 524 thousand per year.
the automotive industry may in the event of a In addition, the beverage production sector is
decline in demand for cars and reducing their not influenced by major problems caused by
prices cause serious problems of the whole the economic recession and its profitability is
sector, and thus of Czech economy at all. This relatively stable.
108 2019, XXII, 2
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5. Discussion economy value added. Equally remarkable
Nowadays, to be able to stay in the competitive was the Greek specialisation rate for the
environment, organizations have come to the manufacture of food products which contributed
understanding, that monitoring of enterprise to 5.7% of non-financial business economy
processes is one of the ways to achieve value added. Other high specialisation ratios
better efficiency, performance, and overview were recorded in Hungary for the manufacture
(Kaganski et al., 2017). Key Performance of machinery and equipment n.e.c. (Division 28)
Indicators (KPIs) are important for monitoring and in Slovenia for the manufacture of fabricated
the performance in the industry. They can be metal products (Division 25) (Eurostat, 2018a).
used to identify poor performance and the The question in the discussion is how
improvement potential. KPIs can be defined the current economic situation is reflected in
for individual equipment, sub-processes, and measuring the efficiency and effectiveness of
whole plants. Different types of performances businesses and industries. At present, there is
can be measured by KPIs, for example, energy, a very low unemployment rate that is below the
raw-material, control & operation, maintenance, natural rate of unemployment. Companies do
etc. Lindberg et al. (2015). not have enough workforce, demand for work
With the development of initiatives Industry exceeds supply, and due to economic growth,
4.0, it is important to measure the performance there are plenty of jobs that companies do not
of individual activities, industry and the whole have enough labour. The economic situation
economy. For this reason, companies are allows a faster onset of initiatives Industry 4.0.
looking for new indicators to measure this One of the solutions to measure Industry 4.0’s
effectiveness. Worldwide, KPI is one of the benefits are KPI indicators.
most appropriate indicators. For example, the Our proposed performance measurement
National Economic Council of the Government of the manufacturing industry could be used to
(NERV) has proposed a KPI for qualified measure the performance and efficiency of the
assessment of public administration activities manufacturing industry or other industries. At
and the provision of a basis to government the same time, it can serve individual companies
and government officials for its effective to evaluate the effectiveness of manufacturing
management. To a large extent, KPI indicators processes or governments for assessing the
are used in public administration e.g. in the economic performance of the sector.
UK, Canada or New Zealand (Vláda České
republiky, 2013). The industry has a dominant Conclusion
role in the Czech Republic. Regarding With the onset of the fourth industrial
technological readiness, the Czech Republic is revolution, known as Industry 4.0, labour is
doing better than the other Visegrad countries being substitution by capital. This brings about
(Svobodová et al., 2017). significant changes in the production processes,
Due to the importance of the manufacturing but also the need for new indicators to measure
industry and the speed of Industry 4.0’s performance and efficiency.
implementation of this industry, the analysis Many companies use absolute indicators
was focused on it. The manufacturing sector (such as sales, profits, ...) or financial indicators
employed 29.9 million people in the EU in (such as asset turnover, return on assets, ...)
2015. 2.1 million enterprises were classified to evaluate their performance and efficiency.
to manufacturing in the EU in 2015. In value A part of the scientific community uses this
added terms, Germany was the largest EU shortfall for extensive statistical analyses to
Member State in 19 of the 24 manufacturing identify weaknesses of the evaluation. However,
subsectors in 2015; Italy was largest in three these analyses are very complex for business
(the textiles, wearing apparel, and leather and managers or government and they do not
related products manufacturing subsectors); usually understand them. The aim of this article
France was the largest for the manufacture was to point out that evaluating the performance
of beverages and the manufacture of other of individual industries is not possible on
transport equipment. The Slovak specialisation the basis of absolute values (it is generally
rate for the manufacture of motor vehicles, mistaken for the more efficient enterprise to
trailers and semi-trailers was very high and be the bigger one) only. Therefore, a system of
amounted to 8.5% of non-financial business key performance indicators has been proposed
2, XXII, 2019 109
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Business Administration and Management
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at first glance the hidden relations between Management, University of Hradec Kralove,
the absolute indicators that businesses Czech Republic.
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Abstract
BENEFITS OF KPIS FOR INDUSTRY SECTOR EVALUATION: THE CASE STUDY
FROM THE CZECH REPUBLIC
Martina Hedvičáková, Martin Král
Currently, there is a fourth Industrial Revolution known as Industry 4.0. This industrialization is
characterized by structural changes in the substitution of labour by new technologies and capital.
The paper focuses on the industrial sector, which is dominant in the Czech Republic and has a
significant contribution to GDP and value added. It describes the current economic situation in
Czech Republic and in European Union.
Many companies use absolute indicators (such as sales, profits, ...) or financial indicators (such
as asset turnover, return on assets, ...) to evaluate their performance and efficiency. A Performance
Indicator or Key Performance Indicator (KPI) is a term used by industry or professionals for assessing
or type of performance measurement. The aim of the paper is to critically assess the performance
evaluation of individual industries based on the absolute monitored indicators compared to the key
performance indicators (KPIs). The paper contains a proposal for a KPIs system that would allow
performance assessments of industry sectors, including a correlation analysis of these indicators,
to allow for long-term relations. Therefore, it is possible to evaluate the performance of individual
industry sectors by means of their aid.
At the same time, KPI provides sufficient information on whether to invest more in individual
industrial sectors and replace human work by modern technologies or, on the contrary, whether
these investments bring no added value and that it is therefore appropriate to stop them and leave
this sector to other (more competitive) countries. KPI indicators gain in importance in Industry 4.0.
Primary and secondary sources were used in the processing of the article.
Key Words: Industry, added value, EBIT, key performance indicators, GDP, correlation analysis.
JEL Classification: L16, E24, O33.
DOI: 10.15240/tul/001/2019-2-007
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