Session5: Value creation: definition and measure

Question 1

Measuring Performance

Answer 1

• Performance
  –> end result of activity
  –> One of the obstacles to effective control is the difficulty in developing appropriate measures of important activities and outputs.

Question 2

Evaluation and Control Process

Answer 2

determine what to measure->establish predetermined standards->measure performance->does performance match standards?
–>Yes: stop
–>No: take corrective action->measure perf.

Question 3

Appropriate Measures

Answer 3

• Steering controls –> measure variables that influence future profitability
• Cost per available seat mile (airlines)
• Inventory turnover ratio (retail)
• Customer satisfaction

Question 4

Types of Controls

Answer 4

• Output controls
  –> specify what is to be accomplished by focusing on the end result through the use of objectives
• Behavior controls
  –> specify how something is done through policies, rules, standard operating procedures and orders from supervisors
• Input controls
  –> emphasize resources

Question 5

Activity-based costing

Answer 5

• allocates indirect and direct costs to individual product lines based on value-added activities going into that product
• Allows accountants to charge costs more accurately since it allocates overhead more precisely.

Question 6

Traditional Financial Measures

Answer 6

• Return on investment (R O I)
  –> result of dividing net income before taxes by the total amount invested in the company (typically measured by total assets)
• EPS
• ROE –> dividing net income by total equity
• Operating cash flow
  –> the amount of money generated by a company before the cost of financing and taxes
• Free cash flow
  –> the amount of money a new owner can take out of the firm without harming the business

Question 7

Shareholder value

Answer 7

• Shareholder value
  –> the present value of the anticipated future streams of cash flows from the business plus the value of the company if liquidated
• Economic value-added (EVA)
  –> measures the difference between the pre-strategy and post-strategy values for the business.
  –> after-tax operating income minus the total annual cost of capital
• Market value-added (MVA)
  –> Measures difference between market value of a corporation and capital contributed by shareholders and lenders
  –> Measures the stock market’s estimate of the net present value (NPV) of a firm’s past and expected capital investment projects.

Question 8

Business Strength/Competitive
Position

Answer 8

Star–> High bss strength/ High industry attractiveness
QuestionMark–>Low BS / High Ind. Att.
CashCow–> High BS / Low Ind Att
Dog–> Low BS / Low Ind Att

Question 9

Balanced Scorecard

Answer 9

• Combines financial measures that tell results of actions already taken with operational measures on customer satisfaction, internal processes, and corporation’s innovation and improvement activities—the drivers of future financial performance
• Key performance measures
• In the balanced scorecard, management develops goals or objectives in each of four areas:
  1. Financial: How do we appear to shareholders?
  2. Customer: How do customers view us?
  3. Internal business perspective: What must we excel at?
  4. Innovation and learning: Can we continue to improve and create value?

Question 10

Key Performance Indicators (KPI)

Answer 10

inputs->process->outputs->outcomes

Question 11

Using Benchmarking To Evaluate Performance

Answer 11

• Benchmarking
  –> the continual process of measuring products, services and practices against the toughest competitors or those companies recognized as industry leaders.
  1. Identify area or process to be examined
  2. Find behavioral and output measures
  3. Select accessible set of competitors of best practices
  4. Calculate differences among company’s performance measurements
  and competitors; determine why differences exist
  5. Develop tactical programs for closing performance gaps
  6. Implement the programs and compare the results

Question 12

Problems in Measuring Performance

Answer 12

• Lack of quantifiable objectives or performance standards
• Inability to use information systems to provide timely and valid information
• Long-term evaluations may not be conducted because executives:
  –> Don’t realize their importance.
  –> Believe that short-term considerations are more important than long-term considerations.
  –> Aren’t personally evaluated on a long-term basis.
  –> Don’t have the time to make a long-term analysis.