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Introduction

Learning objectivesTick off

•  Show, in a given scenario, how a business chooses from competing strategies in order to

maximise the achievement of its key objectives, including those relating to corporate

responsibility and sustainability

•  Choose, for a given scenario, a strategy or combination of strategies which will achieve thebusiness's objectives and takes account of known constraints, including stakeholder riskpreferences

•  Identify the implications for stakeholders, including shareholder value, of choice betweenstrategies

•  Assess a business's current position and performance from both a financial and a non-financialperspective, using a variety of information sources and data analysis

•  Analyse financial and other data in order to provide information for strategic decision making

•  Explain and demonstrate how financial and non financial data can be analysed in order to

implement and manage a business’s strategy and monitor the performance of its projects,divisions and other strategic units

Specific syllabus references for this chapter are: 1g,2b,2c, 2e, 2g, 3g.

Examination context

This chapter looks at two key areas, evaluation of strategies and performance measurement.

An important skill when evaluating strategies in the exam is the ability to assess them in the light of the

organisation's current position, mission and stakeholder objectives and examples of this can be found in

questions 1 and 2 of the sample paper.

Questions are regularly set on performance measurement.

Chapter 11

Evaluation of strategies and

performance measurement

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1 Evaluation of strategic options

1.1 Evaluation criteria

 Johnson, Scholes and Whittington (Exploring Corporate Strategy ) provide a checklist for assessing options:

1.2 Suitability

Suitability relates to the strategic logic and strategic fit of the strategy.

1.3 Acceptability (to stakeholders)

The acceptability of a strategy relates to people's expectations of it and its expected performance

outcomes.

1.4 Feasibility criteria

Feasibility asks whether the strategy can in fact be implemented. Does the firm have the resources and

competences required to carry the strategy out? Are the assumptions of the strategy realistic?

2 Critical success factors

2.1 Identifying CSFs

Critical success factors are a small number of key goals vital to the success of an organisation ie ‘things that

must go right’.

Five areas in which CSFs should be identified:

1 The structure of the particular industry

2 Competitive strategy and position of the firm3 Environmental factors

4 Temporary factors

5 Functional management issues

2.2 Using CSFs for control

CSFs focus management attention on what is important.

The advantages are:

  The process of identifying CSFs will help alert management to the things that need controlling (and

show up the things that are less important).

  The CSFs can be turned into Key Performance Indicators (KPIs) for periodic reporting.

  The CSFs can guide the development of information systems.

  They can be used for benchmarking organisational performance internally and against rivals.

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11

3 Strategic control

3.1 Strategic control systems

Control at a strategic level means asking the question: 'is the organisation on target to meet its overall

objectives and is control action needed to turn it around?'

3.2 Strategic performance measures

Desirable features of strategic performance measures.

Role of measures Comment

Focus attention on what matters in the long term. For many organisations this might be shareholder

wealth. 

Identify and communicate drivers of success. Focus on how the organisation generates

shareholder value over the long term. 

Support organisational learning. Enable the organisation to improve its

performance. 

Provide a basis for reward. Rewards should be based on strategic issues not

 just performance in any one-year. 

Characteristics of strategic performance measures.

  Measurable

  Consistently measured

  Meaningful

  Re-evaluated regularly

  Defined by the strategy and relevant to it

  Acceptable

4 Assessing a firm’s performance – data analysis

4.1 Profitability

A company should be profitable, and there are obvious checks on profitability.

(a) Whether the company has made a profit or a loss on its ordinary activities

(b) By how much this year's profit or loss is bigger or smaller than last year's profit or loss

It is probably better to consider separately the profits or losses on exceptional items if there are any. Such

gains or losses should not be expected to occur again, unlike profits or losses on normal trading.

4.2 Sales margin

Definition

Sales margin: Sales turnover less cost of sales. Sometimes expresses as a percentage of sales turnover to

indicate the proportion of sales proceeds retained as gross profit.

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4.3 Divisional performance measurement

Return on capital employed (ROCE)

ROCE is also called Return on Investment (ROI) or Return on Net Assets (RONA). This divisional

performance target is calculated as:

periodduring theemployedcapitalAverage

100%xperiodfor theProfit

This measure is popular because:

  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.

  It is quick and cheap to calculate given that the financial reporting system will be calculating profits and

asset values already.

Residual Income (RI)

This measure was developed to avoid a dysfunctional consequence of ROCE/ROI.Managers are evaluated and rewarded against ROCE improvements may choose to forego investments

which are in the investor’s interest.

Divisional Profit – (Net Assets of division x required rate) 

Problems of both ROCE/ROI and RI in the evaluation and control of business divisions are:

  Encourage short-termism

  Discourage investment in assets

  Lack of strategic control

5 Balanced scorecard (Kaplan and Norton)5.1 Financial measures of performance

The principal limitations of management reliance solely on financial performance measures:

  Encourages short-termist behaviour

  Ignores strategic goals

  Cannot control persons without budget responsibility

  Historic measures

  Financial measures can be distorted by creative accounting

5.2 The balanced scorecardPerspective Question Explanation

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. 

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Perspective Question Explanation

Innovation and

learning 

Can we continue to

improve and create

future value?

Considers the business's capacity to maintain its

competitive position through the acquisition of

new skills and the development of new products. 

Financial  How do we create

value for ourshareholders?

Covers traditional measures such as growth,

profitability and shareholder value but set throughtalking to the shareholder or shareholders direct. 

Performance targets are set once the key areas for improvement have been identified, and the balanced

scorecard is the main monthly report.

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. 

5.3 Developing a balanced scorecard

Kaplan ( Advanced Management Accounting ) offers the following ‘core outcome measures’:

Perspective Core outcome measure

Financial Return on Investment

Profitability

Revenue growth/revenue mix

Cost reduction

Cash flow 

Customer Market share

Customer acquisition retention

Customer profitability

Customer satisfaction 

Innovation and learning  Employee satisfaction

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 

5.4 Problems

As with all techniques, problems can arise when it is applied.

  The balanced scorecard only measures performance. It does not indicate that the strategy is the right

one.

  Some measures in the scorecard may naturally conflict, it is difficult to determine the balance which

will achieve the best results.

  Appropriate measures have to be devised.

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  The number of measures used must be agreed.

  Managers must have the expertise to initiate appropriate action.

5.5 Using the balanced scorecard

  The scorecard should be used flexibly. 

  The process of deciding what to measure forces a business to clarify its strategy.

  The balanced scorecard can influence behaviour among managers, it can be used as a wide-ranging

driver of organisational change.

  The scorecard emphasises processes rather than departments.

The scorecard can be used both by profit and not-for-profit organisations because it acknowledges the fact

that both financial and non-financial performance indicators are important in achieving strategic objectives.

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Chapter summary

Evaluation criteria

Suitability

 – Strategic logic – Strategic fit

Acceptability

 – Financialrisk/return

 – Customers

 – Investors

 – Government

Feasibility

 – Finance – Competitor

response

 – Technology

 – Time

Critical

success

factor 

Monitored

and

controlled by

MIT approach

 – Industry structure

 – Competitive strategy

 – Environmental factors

 – Temporary factors

 – Functional managerial position

Keyperformance

indicators

Strategic

control

Data analysis of firm’s

performance

 – Profitability

 – Sales margin

Balanced scorecard

 – Customer

 – Financial – Internal business

 – Innovation and learning 

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