12. Evaluating and analysing performance and strategies

Question 1

In what ways can strategies be evaluated?

Answer 1

• Considering benefits and risks that the strategy brings
• Considering the strategic and financial considerations associated with the strategy
• Discussing the quantitative and non-quantitative issues associated with the strategy
• Considering the viewpoints held by different stakeholder groups in relation to a proposed strategy
• Using a framework such as Johnson, Scholes and Whittington’s SFA criteria

Question 2

Describe the SFA approach.

Answer 2

Suitability: Is this option appropriate considering the organisation’s strategic position and outlook?

Feasibility: does the organisation have the resources and competences required to carry the strategy out? Are the assumptions of the strategy realistic?

Acceptability: ll this option gain the support of the stakeholders essential for the success of the strategy and the organisation as a whole? Will the option antagonise significant powerful stakeholders that could thwart its success or that of management as a whole?

Question 3

Describe suitability in the SFA approach.

Answer 3

Suitability relates to the strategic logic and strategic fit of the strategy. The strategy must fit the organisation’s operational circumstances and strategic position.

Does the strategy:

• Exploit company strengths and distinctive competences?
• Rectify company weaknesses?
• Neutralise or deflect environmental threats?
• Help the firm to seize opportunities?
• Satisfy the goals of the organisation?
• Fill the gap identified by gap analysis?
• Generate/maintain competitive advantage?

Question 4

Describe feasibility in the SFA approach.

Answer 4

Feasibility asks whether the strategy can in fact be implemented:

• Is there enough money?
• Is there the ability to deliver the goods/services specified in the strategy?
• Can we deal with the likely responses that competitors will make?
• Do we have access to technology, materials and resources?
• Do we have enough time to implement the strategy?
• Will the strategy deliver results within an appropriate timeframe?

Strategies which do not make use of the existing competences, and which therefore call for new competences to be acquired, might not be feasible.

• Gaining competences via organic growth takes time.
• Acquiring new competences can be costly.

Question 5

Describe acceptability in the SFA approach.

Answer 5

The acceptability of a strategy relates to people’s expectations of it and its expected performance outcomes. This includes consideration of:

• returns – the likely benefits that stakeholders will receive; and
• risk – the likelihood of failure and its associated consequences.

• Financial considerations: strategies will be evaluated by considering how far they contribute to meeting the dominant objective of increasing shareholder wealth, using measures such as:

– Return on investment
– Profits
– Growth
– EPS
– Cash flow
– Price/Earnings
– Market capitalisation

• Customers may object to a strategy if it means reducing service, but on the other hand they may have no choice.

• Banks are interested in the implications for cash resources, debt levels etc.

• Government: a strategy involving a takeover may be prohibited under monopolies and mergers legislation. Similarly, the environmental impact may cause key stakeholders to withhold consent. Considerations of ethics and corporate responsibility are included here.

Question 6

Define the business partner model.

Answer 6

Has resulted in finance professionals adopting a more commercially-focused, action-orientated approach. Increasingly, finance professionals are being embedded within operational departments and business units so that they can provide financial insights in a more integrated manner than if they were based in the finance department alone.

Question 7

What are the steps in setting up formal systems of strategic control?

Answer 7

Step 1 Strategy review: review the progress of strategy.

Step 2 Identify milestones of performance (strategic objectives), both quantitative (eg, market share) and qualitative (eg, quality, innovation, customer satisfaction):

Step 3 Set target achievement levels. These need not be exclusively quantitative

Step 4 Formal monitoring of the strategic process.

Step 5: Reward

Question 8

What is a budget?

Answer 8

A budget is a plan expressed in financial terms.
A budget is a plan not a forecast.

Question 9

How does a budget fit in the strategic planning process?

Answer 9

• The mission sets the overall direction.
• The strategic objectives illustrate how the mission will be achieved.
• The strategic plans show how the objectives will be pursued.
• The budgets represent the short-term plans and targets necessary to fulfil the strategic objectives.

Question 10

What are the five main benefits of budgets?

Answer 10

(a) Promotes forward thinking

(b) Helps to co-ordinate the various aspects of the organisation.

(c) Motivates performance.

(d) Provides a basis for a system of control.

(e) Provides a system of authorisation.

Question 11

What are the possible limitations of budgets?

Answer 11

(a) Employees may be demotivated if they believe the budget to be unattainable.
(b) Slack may be built in by managers to make the budget more achievable.
(c) Focuses on the short-term results rather than the underlying causes.
(d) Unrealistic budgets may cause managers to make decisions that are detrimental to the company.

Question 12

What are the main features of successful budgetary control systems?

Answer 12

• Senior management take the system seriously.
• Accountability.
• Targets are challenging but achievable.
• Established data collection, analysis and reporting routines
• Targeted reporting.
• Short reporting periods
• Timely reporting.
• Provokes action.

Question 13

What are the behavioural aspects of budgets?

Answer 13

• Improve performance.
• Be most effective when they are demanding, yet achievable.
• Are most effective when the managers have participated in the setting of their own targets.

Question 14

What are the guidelines for a strategic control system?

Answer 14

1. Linkages - If there are linkages between businesses in a group, the formality of the process should be low, to avoid co-operation being undermined.
2. Diversity - If there is a great deal of diversity, it is doubtful whether any overall strategic control system is appropriate
3. Criticality
4. Change - Fashion-goods manufacturers must respond to relatively high levels of environmental turbulence, and have to react quickly.
5. Competitive advantage

Question 15

What are the advantages of building a control system based around Critical Success Factors (CSFs)?

Answer 15

• The process of identifying CSFs will help alert management to the things that need controlling
• The CSFs can be turned into Key Performance Indicators (KPIs) for periodic reporting
• The CSFs can guide the development of information systems by ensuring that managers receive regular information about the factors that are critical to their business.
• They can be used for benchmarking organisational performance internally and against rivals

Question 16

In what ways can performance be measured?

Answer 16

• Financial performance can be measured in terms of growth, profitability, liquidity and gearing.

• Resource use can be measured in terms of effectiveness, economy and efficiency.

• Competitive advantage can be measured by identifying critical success factors (CSFs) and then measuring achievement via appropriate key performance indicators (KPIs).

Question 17

In what ways can an organisation’s growth be measured?

Answer 17

• Sales revenue (a growth in the number of markets served)
• Market share
• Profitability
• Number of goods/services sold
• Number of outlets/sites
• Number of employees
• Number of countries in which the business operates (sales and/or production)

Question 18

What are the 3 Es used to determine whether resources are being used optimally?

Answer 18

(a) Economy – is a measure of the actual resources used (inputs) eg, cost of labour per employee or
the rent per square metre.

(b) Efficiency – is a measure of productivity. It considers the relationship between the goods or services produced (outputs) and the resources used to produce them (inputs) eg, output per person or per £ of labour, sales per square metre.

(c) Effectiveness – is a measure of the impact achieved and considers outputs in relation to objectives. It looks at the extent to which the processes used by the business deliver the right results, eg, percentage of products delivered without faults, market share.

Question 19

What are some appropriate KPIs for various activities?

Answer 19

Marketing:

• Sales volume
• Market share
• Gross margins

Production:

• Capacity utilisation
• Quality standards

Logistics:

• Capacity utilisation
• Level of service

New product development:

• Proportion of revenue from new products (or services)
• Patents registered

Sales programmes:

• Contribution by region, salesperson
• Controllable margin as percentage of sales
• Number of new accounts
• Travel costs

Advertising programmes:

• Awareness levels
• Attribute ratings
• Cost levels

Pricing programmes:

• Price relative to industry average
• Price elasticity of demand

Management information:

• Timeliness of reports
• Accuracy of information

Question 20

What are the desirable effects of strategic performance measures?

Answer 20

• Focus attention on what matters in the long term

• Identify and communicate drivers of success

• Support organisational learning

• Provide a basis for reward

Question 21

What are the characteristics of strategic performance measures?

Answer 21

• Measurable
• Meaningful
• Defined by the strategy and relevant to it
• Consistently measured
• Re-evaluated regularly
• Acceptable

Question 22

How is ROCE calculated?

Answer 22

Profit for the period / Average capital employed during the period x 100

Question 23

Why has ROCE achieved popularity?

Answer 23

• It can lead to a desired group ROCE

• It enables comparisons to be made between divisions of different sizes

• It is readily understood by management due to its similarity to an interest rate or other yield on assets.

• It is cheap to calculate given that the financial reporting system will be calculating profits and asset values already.

Question 24

What is Residual Income?

Answer 24

Is a divisional performance measure. It is calculated as:

Divisional profit – (Net assets of division * required rate)

Question 25

What are the problems of using ROCE/RI?

Answer 25

• Short-termist
• Discourage investment in assets
• Lack of strategic control

Question 26

When assessing divisional performance, what other issues must be considered?

Answer 26

• The division manager should only be held accountable for factors within their control.

• Where there is inter-divisional trade, careful consideration should be given to any transfer pricing mechanism in place, which may under or over-state the profits of a particular division.

• Divisions operating in different marketplaces and facing differing levels of competition cannot be expected to produce similar returns.

• Wider strategic issues need to be taken into account such as any interdependence between divisions

• In assessing the future strategic direction of the business it is not just the historic performance of the division but also its future potential that is relevant.

• Focus on a narrow set of financial measures is unlikely to give a true picture of performance

Question 27

What is the Balanced Scorecard?

Answer 27

An approach that tries to integrate the different measures of performance is the balanced scorecard, where key linkages between operating and financial performance are brought to light. This offers four perspectives:

• Financial
• Customer
• Innovation and learning
• Internal business processes

Kaplan and Norton claimed that the scorecard is balanced in the sense that managers are required to think in terms of all four perspectives, to prevent improvements being made in one area at the expense of another.

Question 28

What are the limitations when management rely solely on financial performance measures?

Answer 28

• Encourages short-termist behaviour
• Ignores strategic goals
• Cannot control persons without budget responsibility
• Historic measures
• Distorted

Question 29

Explain the four different perspectives of the balanced scorecard.

Answer 29

Customer:

• What do existing and new customers value from us?
• Gives rise to targets that matter to customers: cost, quality, delivery, inspection, handling and so on.

Internal Business:

• What processes must we excel at to achieve our financial and customer objectives?
• Aims to improve internal processes and decision making.

Innovation and learning:

• Can we continue to improve and create future value?
• Considers the business’s capacity to maintain its competitive position

Financial:

• How do we create value for our shareholders?
• Covers traditional measures

Question 30

What are the core outcome measures regarding the four perspectives of the Balanced Scorecard?

Answer 30

Financial:

• Return on Investment
• Profitability
• Revenue growth/revenue mix
• Cost reduction
• Cash flow

Customer:

• Market share
• Customer acquisition
• Customer retention
• Customer profitability
• Customer satisfaction
• On-time delivery

Innovation and Learning:

• Employee satisfaction
• Employee retention
• Employee productivity
• Revenue per employee
• % of revenue from new services
• Time taken to develop new products

Internal Business:

• Quality and rework rates
• Cycle time/production rate
• Capacity utilisation

Question 31

What is the process for setting up the BSC?

Answer 31

(a) Senior executives decide strategy.
(b) Budgets and information systems are linked to the measures in the BSC.
(c) Personal scorecards are developed and, through performance management become the basis for staff development and incentive payments.
(d) Collaborative working occurs as many targets require team work to achieve.
(e) Therefore strategy is ‘operationalised’ through being turned into day-to-day operations.

Question 32

What are some potential problems when applying the BSC?

Answer 32

• Conflicting measures
• Selecting measures
• Expertise
• Interpretation