1-1. Financial and Non-Financial Measures of Performance

Question 1

What are 2 reasons that customer expectation re: quality increased?

Answer 1

1. Automated manufacturing techniques

2. Adoption of international quality standards

Question 2

Quality management: what is the basic concept behind?

Answer 2

Customer satisfaction.

Question 3

Quality management: what are most commonly used measures of customer satisfaction?

Answer 3

Sales returns, warranty costs, customer complaints.

Question 4

Quality management: Define quality of design.

Answer 4

Meeting or exceeding the needs and wants of customers.

Question 5

Quality management: Define quality of conformance.

Answer 5

Conforming to the design specification.

Question 6

Quality management: what are voluntary costs of quality?

Answer 6

• Prevention costs: costs incurred to prevent the production of defective products (e.g. cost to improve process etc.)
• Appraisal costs: costs incurred to identify defective products during the manufacturing process = inspection, tests of functionality

Question 7

Quality management: what are involuntary costs of quality?

Answer 7

• Internal failure costs: costs of defective components and final products identified prior to delivery to the customer (e.g. scrap, rework, spoilage, etc)
• External failure costs: costs caused by failure of products in the hands of the consumer (e.g. cost of field service, warranty repairs, liability, etc)

Question 8

Quality management: what are 2 types of quality?

Answer 8

Quality of design.

Quality of conformance.

Question 9

Quality management: what is the type of cost of quality that incur when the overall quality of conformation is low?

Answer 9

Cost of failure = cost of external failure.

Question 10

Quality management: what is the result when increasing the cost of prevention and appraisal?

Answer 10

Decrease in the cost of failure and increase in the quality of conformance.

Question 11

Quality management: what is the most effective method of reducing the overall cost of failure?

Answer 11

Increase efforts to prevent failures.

Question 12

Quality management: describe cost comparison between efforts toward prevention, cost of appraisal, and cost of failure.

Answer 12

Prevention costs < cost of appraisal, cost of failure.

Question 13

Quality management: what is Six-Sigma?

Answer 13

A statistical measure expressing how close a product comes to its quality goal.

Question 14

Quality management: what does one sigma mean? Three? Six?

Answer 14

1 = 68% of products are acceptable
3 = 99.7%
6 = 99.999997% = 3.4 defects per million parts

Question 15

Quality management: Six-Sigma: what is the method?

Answer 15

DMAIC = Define, Measure, Analyze, Improve, Control.

Question 16

Quality management: Six-Sigma: what is the term for continuous improvement? List the terms from other methods that mean the same.

Answer 16

Kaizen.

• Cause-and-effect analysis
• Fishbone diagram
• Ishikawa diagram

Question 17

Quality management: what is Pareto charts? Also called?

Answer 17

Ranks causes of process variations by the degree of impact on quality (how frequent)
*80/20 rule, low hanging fruit

Question 18

What is balanced scorecard?

Answer 18

A performance management tool that helps an organization identify and evaluate critical success factors within the context of overall strategy.

Question 19

Balanced scorecard: what measure does it use?

Answer 19

Both financial and non financial measures to provide a comprehensive view of overall performance.

Question 20

Balanced scorecard: what are 4 categories?

Answer 20

• Financial: ROI
• Customer: critical to customer perspective
• Internal business processes
• Learning, innovation, and growth: employee satisfaction, retention etc

Question 21

Balanced scorecard: What does organizations identify within each of 4 categories?

Answer 21

• Strategic goals
• Critical success factors
• Tactics
• Performance measures

Question 22

Balanced scorecard: what are 4 steps to create?

Answer 22

1. Identify strategic objectives
2. Do SWOT analysis
3. Develop operational tactics
4. Develop performance measures for each tactic

Question 23

Balanced scorecard: what are 4 features of a good balanced scorecard?

Answer 23

• Articulates a company’s strategy by trying to map a sequence of cause-and-effect relationships through metrics
• Assists in communicating the strategy to all members of the organization
• Limits the number of measures used by identifying only the most critical ones
• Highlighting suboptimal trade-offs made by managers

Question 24

Balanced scorecard: what are 5 things to avoid?

Answer 24

• Assuming the cause-and-effect linkage are precise
• Seeking improvements across all measures all the time
• Using only objective measures on the scorecard
• Failing to consider both costs and benefits of initiatives
• Ignoring non financial metrics when evaluating employees

Question 25

Benchmarking: Define.

Answer 25

A process in which organizations compare their own processes and performance with the processes and performances of business leaders within or across competing industries.

Question 26

What are best practices? How can best practices be identified?

Answer 26

The most efficient and effective means of accomplishing a task.
To identify: observes the practice of leading companies.

Question 27

Why is it beneficial to recognize best practices?

Answer 27

To identify potential for improvement.

Question 28

In order for benchmarking to support continuous learning and improvement, what must change?

Answer 28

Best practices change overtime and therefore, benchmarking should be an ongoing process.

Question 29

Competitive analysis: What does it include?

Answer 29

• Conventional profitability/return analysis
• Value based management
• Target pricing markups
• Price elasticity

Question 30

Competitive analysis: Conventional financial performance: What is ROI?

Answer 30

Return on Investment = Net Income / Total assets

Question 31

Competitive analysis: Conventional financial performance: what is DuPont approach to ROI?

Answer 31

ROI = Return on Sales (ROS) x Asset Turnover
ROS = Net Income / Sales
Asset turnover (also called capital turnover) = Sales / Total assets

Question 32

Competitive analysis: Conventional financial performance: What is focus of ROI?

Answer 32

Evaluation of broad performance.

Question 33

Competitive analysis: Conventional financial performance: what are weaknesses of ROI?

Answer 33

For internal purposes;

• Suffers from accrual distortions
• Suffers from the diluted hurdle rate problem

Question 34

Competitive analysis: Conventional financial performance: ROI weakness: why for accrual distortions?

Answer 34

Because;

• Accrual accounting is often arbitrary
• Accounting conventions are concerned with compliance, not with economic performance

Question 35

Competitive analysis: Conventional financial performance: Explain diluted hurdle rate using an example.

Answer 35

Assume:
*Manager has current average return of 28%
*Prospective investment promise 25%
*Company requires (hurdle rate) at least 20%
Conclusion:
Manager will be unwilling to invest in an asset promising less than 28%, since it would penalize the managers personal incentive.

Question 36

Competitive analysis: Conventional financial performance: what is the metric designed to eliminate diluted hurdle rate problem?

Answer 36

Residual Income (RI) = Operating income - (required rate of return x invested capital).

• A general form of economic profit
• Recognizes the cost of capital and expresses answer in dollars (rather than a rate)

Question 37

Value Based Management: what are 2 most popular metrics? What are they often used for?

Answer 37

EVA = Economic Value Added = Specific form of RI that is often used for incentive compensation and investor relations (high likelihood tested).
CFROI = Cash Flow Return on Investment = a cash based metrics used for incentive compensation, valuation and capital budgeting (not likely tested).

Question 38

Value Based Management: How is EVA computed?

Answer 38

EVA = NOPAT - WACC x (Total Assets - Current Liabilities)
or
= NOPAT - WACC x Invested capital (Net assets)
NOPAT = net operating profit after tax
WACC = weighted average cost of capital

Question 39

Value Based Management: define WACC.

Answer 39

Summarizes the overall cost of capital based on the weighted proportion of debt versus equity after reducing the cost of debt by the marginal tax rate.

Question 40

Value Based Management: how is CFROI computed?

Answer 40

CFROI = (CFO - ED) / Cash invested.
CFO = cash flow from operation
ED = economic depreciation = the annual cash investment required to replace fixed assets

Question 41

Value Based Management: what are themes and concepts?

Answer 41

• Accrual-based metrics are discredited
• Cost of capital is increasingly emphasized
• Shareholder value as the primary element of interest is common
• Relating VBM to strategy and linking to driver of success is common

Question 42

Price elasticity: how is price elasticity of demand computed?

Answer 42

% change in qty demanded / % change in price.
Elastic = the price elasticity of demand > 1
Inelastic = the elasticity of demand < 1

Question 43

Price elasticity: Describe the impact of price increase on demand if products A and B are substitute.

Answer 43

An increase in the price of A = an increase in the demand for B.

Question 44

Price elasticity: Describe the impact of price increase on demand if products A and B are complements.

Answer 44

An increase in the price of A = a decrease in the demand for B.

Question 45

Elasticity of pricing: Describe the impact of increase in price on volume: if prices are relatively elastic? Inelastic?

Answer 45

• Elastic (price elasticity >1): Increase in price will tend to decrease volume
• Inelastic: Increase in price will tend to increase revenue as volume remains unaffected

Question 46

Markups: what is the key to properly analyze?

Answer 46

To understand what the markup is based on - should focus on specific language that communicates the basis for the markup.

Question 47

Markups: Ex:
A sales target = 1,000 units, direct cost = $50 per unit, total cost = $80,000. What is the target price necessary to achieve a 25% profit margin on direct costs? 20% profit margin on sales?

Answer 47

The desired profit = 25% x (1,000 units x $50) = $12,500.
1,000 x ? - 80,000 = 12,500
?1,000 = 92,500
? = $92.50

1,000 x ? - 80,000 = 20% x ? x 1,000
? = $100

Question 48

WACC EX:
A company with a combined federal and state tax rate of 30% has the following capital structure;
Weight instruments: 40% bonds, 50% Com stock, 10% pref stock. Cost of capital: 10% bond, 10% com stock, 20% pref stock.
What is the weighted-average after tax cost of capital for this company?

Answer 48

Bond:
40% x 10% x (1-30%) = 0.028
Com stock:
50% x 10% = 0.05
Pref stock:
10% x 20% = 0.02

0.028 + 0.05 + 0.02 = 9.8%

Question 49

Competitive analysis: Conventional financial performance: what could asset equal to? Required rate of return equal to?

Answer 49

Investment.

Imputed interest rate.

Question 50

What is the definition of strategic objective?

Answer 50

A statement of what the strategy must achieve and what is critical to its success.

Question 51

What is the definition of strategic initiatives?

Answer 51

Key action programs required to achieve strategic objectives.

Question 52

What is the definition of strategic map?

Answer 52

Diagrams of the cause-and-effect relationships between strategic objectives.