Chapter 12: Evaluation of strategies and performance measurement

Question 1

What do Johnson, Scholes and Whittington suggest you must test before a strategy is chosen?

Answer 1

• Suitability: is the strategy consistent, both externally and internally?
• Acceptability: look at risk and return perspectives of key stakeholders
• Feasibility: is the strategy within the resources and capability of the organisation?

Question 2

What questions do Johnson, Scholes and Whittington suggest you must test before a strategy is chosen?

Answer 2

Suitability:
- Does it give the company a better fit with the environment?
- How do new products fit within the existing portfolio?
- Are there synergies with other parts of the business?
- How does the strategy match against strengths and weaknesses?
- Will it meet organisational objectives?

Acceptability:
- Is the strategy acceptable to stakeholders?
- What risks are involved?
- Is the decision ethical?

Feasibility:
- Is the time-scale achievable?
- Does the business have the competences necessary to implement the strategy?
- Are the necessary resources available?

Question 3

What will the data analysis question ask you in the exam?

Answer 3

• Performance: to what extent has the business achieved its objectives?
• Position: this may be competitive position or product position.

Question 4

What are some ways of measuring performance?

Answer 4

• Revenue growth
• Profit margins (e.g. gross profit or operating profit)
• Increase in profit
• Increase in costs
• Revenue per store/employee etc
• Divisional performance measures (ROI and RI)
• Contribution (percentage) (total sales less total variable costs) (contribution per unit = selling price per unit less variable costs per unit
• Sensitivity analysis e.g.:
  Cost of steel per tonne = Cost of steel £7.2m/48,000 tonnes, amount of steel used = £150 per tonne
  Operating profit = £6.32m
  Increase to breakeven is = £6.32m/48,000 = £131.67
  Breakeven price per tonne = £281.67

Question 5

What are some ways of measuring position?

Answer 5

• Market share
• Average selling price per unit
• Average cost per unit
• Average profit per unit
• Revenue growth vs market or competitor

Question 6

How do you calculate the gross profit margin? What does this do?

Answer 6

Gross profit/Revenue x 100%

Assess profitability before taking overheads into account

Question 7

How do you calculate the operating margin? What does this show?

Answer 7

Operating profit/Revenue x 100%

Assess profitability after taking overheads into account

Question 8

How do you calculate return on capital employed? What does this show?

Answer 8

Operating profit/(Equity + Debt) x 100%

Measure of how effectively resources are used to generate profit

Question 9

How do you calculate the current and quick ratio? What does this demonstrate?

Answer 9

Current ratio: Current assets/Current liabilities
Assess ability to pay current liabilities from current assets

Quick ratio: Current assets excluding inventory/Current liabilities
Assess ability to pay current liabilities from reasonably liquid assets

Question 10

How do you calculate the gearing ratio? What does this show?

Answer 10

= Debt/Equity or Debt/(Debt + Equity)

Assess reliance on external finance (Solvency)

Question 11

How do you calculate interest cover? What does this show?

Answer 11

= Profit before interest payable/Interest payable
Assess ability to pay interest charges (Solvency)

Question 12

What are the ratio calculations associated with efficiency?

Answer 12

• Trade receivables collection period: Trade receivables/Revenue x 365 (Assess the average time taken to collect cash from credit customers)
• Inventory holding period: Inventory/Cost of sales x 365 (Assess the average length of time inventory is held)
• Trade payables payment period: Trade payables/Purchases x 365 (Assess the average time taken to pay suppliers)

Question 13

What are the limitations of financial performance indicators?

Answer 13

• Historical information is not necessarily useful when trying to predict future outcomes
• Financial information mostly reports internal performance and does not always consider external factors
• Can encourage short-term decision-making at the expense of long-term objectives
• Can be easily manipulated with the use of accounting policies etc
• Does not consider the whole picture. Financial results are only part of the business’s performance

Question 14

What do Kaplan and Norton suggest that performance indicators should consider?

Answer 14

• Financial perspective (Profit levels, revenue growth)
• Customer perspective
• Internal business perspective (staff attendance rates, training days per annum per staff member)
• Innovation and learning perspective (e.g., investment in facilities)

Question 15

What is benchmarking and what are the four main categories?

Answer 15

Benchmarking compares results internally or against other organisations to identify where improvements can be made.

The four main categories of benchmarking are as follows:
- Internal benchmarking: against last year or between branches, divisions etc
- Competitive benchmarking: against competitors, sectors, industry (nationally or internationally)
- Activity (best in class) benchmarking: comparisons are made with best practice (in the same activity) in whatever industry can be found
- Generic benchmarking: benchmarking against conceptually similar (but not identical) process.