Chapter 12 Evaluation of strategies and performance measurement

Question 1

1.1 Strategy evaluation

Answer 1

Johnson, Scholes and Whittington suggested that three tests need to be applied to strategic options before a strategy is chosen. Suitability (is strategy consistent both externally and internally), acceptability (risk and return perspectives of key stakeholders) and feasibility (is strategy within the resources and capability of organisation).

Question 2

2.1 Performance management

Answer 2

Data analysis questions require an assessment of performance (what extent has the business achieved its objectives) and position (can be competitive position or product position). In addition to quantitative information supplied, you should also consider other information provided. Answer should contain a selection of relevant calculations and written analysis providing a description of reasons that explain the numerical results achieved and the potential implications of the results.

Question 3

3.1 Financial performance indicators

Answer 3

Measuring performance can be calculated using revenue growth, profit margins, increase in profit, increase in costs, revenue per store/employee and divisional performance measures (ROI and RI).
Common calculations for measuring competitive position are market share, average selling price per unit, average cost per unit, average profit per unit and revenue growth vs market or competitor.

Question 4

3.2 Other standard financial ratios

Answer 4

These include:
- Gross profit margin: gross profit / revenue x 100
- Operating margin: operating profit / revenue x 100
- Return on capital employed: (measured how effectively resources are used to generate profit) operating profit / equity + debt x 100
- Current ratio: current assets / current liabilities
- Quick ratio: current assets excluding inventory / current liabilities
- Gearing ratio: (assess reliance on external finance) debt / equity or debt / debt + equity
- Interest cover: profit before interest payable /interest payable
- Trade receivables collection period: trade receivables / revenue x 365
- Inventory holding period: inventory / cost of sales x 365
- Trade payables payment period: trade payables / purchases x 365

Question 5

4.1 Limitations of financial performance indicators

Answer 5

These limitations include historical information does not necessarily predict the future, financial information report internal performance and does not consider external factors, can encourage short-term decision making at expense of long-term objectives, can be manipulated with use of accounting profits and it does not consider the whole picture.

Question 6

4.2 Balanced scorecard

Answer 6

This approach ensures that a mixture of financial and non-financial perspectives are considered when selecting KPIs. The four perspectives which need to be considered are financial, innovation and learning, internal business and customer.

Question 7

5.1 Data analysis using spreadsheets

Answer 7

The following functions will be used in the exam:
- Average: (calculates the mean) =AVERAGE(cell range)
- Correlation: (calculates correlation between data sets) =CORREL(cell range, cell range)
- COUNTIF (calculates number of cells in a range that contain specific content): =COUNTIF(range, criteria)
- COUNTIFS (does the same function of above, but with 1 more criteria)
- IF (makes logical comparison between two values and returns one of two results based on the outcome of the comparison) = IF(logical test, value if true, value if false)
- RANK (function provides the rank of a series of a number from within a series of numbers): =RANK(number, ref, order)
- STDEV (calculates standard deviation based on a series of values which are the same from the population): =STEV(number range)
- TREND (uses regression analysis to calculate predictive values for Y for a given range of X values): =TREND(known y values, known x values, new x values)

Question 8

6.1 Evaluating strategic performance and benchmarking

Answer 8

KPIs are performance measures which are selected to monitor an organisation’s ability to achieve its critical success factors. Benchmarking compares results internally or against other organisations to identify where improvements can be made. The four main categories of benchmarking are:
- Internal benchmarking (against last year or between branches)
- Competitive benchmarking (against competitors, sectors or industry)
- Activity benchmarking (comparisons made with best practice in whatever industry can be found)
- Generic benchmarking (against conceptually similar, but not identical process