Evaluation of strategies and performance measurement

Question 1

Strategy evaluation

Answer 1

In order to make the appropriate choices the business needs to evaluate the strategic
options available to it. A common exam instruction is for you to be given a proposed
strategy or series of strategies, which you are then required to evaluate.
An evaluation of a proposed strategy could be performed in a number of ways:
 Consider the benefits and risks that the strategy brings;
 Consider the strategic, operational and financial implications of the strategy;
 Discuss the quantitative and non-quantitative issues associated with the
strategy: and
 Consider the viewpoints held by differing stakeholder groups in relation to the
proposed strategy.
However you conduct your evaluation, you should always end with a conclusion –
do you believe the strategy should be adopted or not, and why? If there is more than
1 proposal, which do you believe to be the better, and why?

Question 1

Data analysis

Answer 1

At least one question in the Business Strategy and Technology exam
will require you to perform data analysis based on quantitative
information provided.

Question 2

Data analysis questions will typically require an assessment of:

Answer 2

 Performance – to what extent has the business achieved its objectives?
 Position – this may be competitive position or product position

Question 3

Data analysis questions
You may be asked to evaluate this from:

Answer 3

 Financial perspective
 Non-financial perspective
You may also be asked to use a spreadsheet pre-populated with data using
spreadsheet functions to provide greater analysis. This could be financial or nonfinancial data (or both).
In addition to the quantitative information supplied you will also be asked to consider
relevant other information provided in the scenario.

Question 4

Data analysis questions
To provide a full analysis your answer should contain:

Answer 4

 A selection of relevant calculations
 Written analysis providing a description of:
– reasons that explain the numerical results achieved
– the potential implications of the results.

Question 5

Financial performance indicators

Answer 5

Financial ratios should be chosen based on their relevance to the scenario and the
analysis required.

Question 6

Financial performance indicators
Measuring performance

Answer 6

Common calculations used for measuring performance are as follows:
 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)

Question 7

Financial performance indicators
Measuring position

Answer 7

Common calculations used for measuring competitive position are as follows:
 Market share
 Average selling price per unit
 Average cost per unit
 Average profit per unit
 Revenue growth vs market or competitor.

Question 8

Other standard financial ratios

Answer 8

Gross profit
margin
Operating margin
Return on capital
employed

Question 9

Gross profit
margin

Answer 9

Gross profit/Revenue

Assess profitability before
taking overheads into
accoun

Question 10

Operating margin

Answer 10

Operating profit/Revenue

Assess profitability after
taking overheads into
accoun

Question 11

Return on capital
employed

Answer 11

Operating profit/(Equity + debt)

Measure of how
effectively resources are
used to generate profit

Question 12

Current ratio

Answer 12

Current assets/Current liabilities

Assess ability to pay
current liabilities from
current assets

Question 13

Quick ratio

Answer 13

Current assets excluding inventory/Current liabilities

Assess ability to pay
current liabilities from
reasonably liquid assets

Question 14

Gearing ratio

Answer 14

(debt/Equity)

Or

Debt/(Debt+Equity)

Assess reliance on
external finance

Question 15

Interest cover

Answer 15

Profit before interest payable/Interest payable

Assess ability to pay
interest charges

Question 16

Trade receivables
collection period

Answer 16

Trade receivables/Revenue

Assess the average time
taken to collect cash from
credit customers

Question 17

Inventory holding
period

Answer 17

Inventory/Cost of sales

Assess the average length
of time inventory is held

Question 18

Trade payables
payment period

Answer 18

Trade payables
/Purchases

Assess the average time
taken to pay suppliers

Question 19

Limitations of financial performance indicators

Answer 19

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 20

Balanced scorecard

Answer 20

The balanced scorecard approach ensures that a mixture of financial
and non-financial perspectives are considered when selecting
performance indicators.
Kaplan and Norton suggested that performance indicators should
consider four perspectives

Financial perspective
Internal business perspective
Customer perspective
Innovation and learning perspective

Question 21

ESG Reporting

Answer 21

Increasingly, stakeholders want to understand more about an organisation’s ESG
performance. This means that organisations are under pressure to adopt, and report
on, measures of performance in respect of ESG matters.

Question 22

Examples of ESG measures that might be adopted by organisations include:

Answer 22

Environmental: taking actions to protect the environment e.g. energy consumption,
water consumption, waste generated;

Social: building and maintaining relationships with stakeholders e.g. employee diversity, working conditions, fair pay, supply chain sustainability issues; and

Governance: ensuring leaders are transparent and accountable e.g. diversity of the Board by age or gender, number of risks effectively identified and mitigated,
incidences of bribery and corruption.
Such measures can form part of a wider Balanced Scorecard assessment.

Question 23

Key performance indicators

Answer 23

Key performance indicators (KPIs) are performance measures which are selected to
monitor an organisation’s ability to achieve its critical success factors

Question 24

Role of KPIs

Answer 24

Critical success factors
Product features valued by customers

Core competences
Must be developed to achieve CSFs

Key performance indicators
Measure CSFs or core competences

Benchmarking
Provide a basis of comparison for KPIs

Question 25

Benchmarking

Answer 25

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

Question 26

The four main categories of benchmarking are as follows:

Answer 26

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.