W1: Lecture 1

Question 1

“Customer Satisfaction” is important for businesses, because…

Answer 1

1. Customer satisfaction is INFORMATIVE about future non-financial performance.
2. CAUSALLY related to future financial performance.

More satisfied customers are/bring:
*less price-sensitive
*more loyal
*low advertising costs (word-of-mouth)
*reduces transaction costs
*enhances firm reputation

!!! Customer satisfaction is one of the measures, but different companies assign varying importance to it and other measures.

Question 2

Managerial perspective of financial and non-financial drivers

Answer 2

Profits—>
Performance feedback & rewards—>
Managerial actions—>
<Innovation, R&D, Production, Customer, Sales>

Issue:
Financial performance is backward-looking, but managers’ actions affect future performance.
—> Kaplan & Norton “Balanced Scorecard”

Question 3

Kaplan & Norton “Balanced Scorecard”

Answer 3

Situation:
Companies care about financial performance, –> these metrics are used and tracked, –> managerial bonuses
Issue:
Financial performance is backward-looking, but managers’ actions affect future performance.
Solution:
4 dimensions capture backwards & forward looking performance metrics, derived from strategy

4 Dimensions:
1. Financials
How do we look to shareholders?
2. Customer
How do customers see us?
3. Learning & Growth
Can we continue to improve and create value?
4. Internal Business Processes
What must we excel at?

all interact with vision and strategy formulated before

Question 4

Well designed BSC answers these questions

Answer 4

• Objective–>
  How does our organisation intend to compete successfully?
• Metrics & Targets—>
  How will we know if we are competing successfully?
• Initiatives–>
  What actions do we take to meet our target future profits?

BSC operationalizes the strategy—it helps align day-to-day operations with long-term strategic goals.

Question 5

The Strategy Map

Answer 5

*Intermediatary step of BSC
* Same 4 dimensions
*Filled with strategic objectives (not initiatives)
Each objective should be linked to at least one at a higher level.
*Derived from strategy–> focus on particular strategy
“ How do we create customer value and our success?”
*Start at the top: increase economic value added
“How can we achieve higher-level goals?”
*For each arrow that you draw, understand what kind of correlation you expect to see in the data.

Question 6

What is the main focus of the financial market perspective in performance analysis?

Answer 6

The financial market perspective focuses on how a company’s performance is evaluated by investors and analysts, emphasizing stock price, risk, return, and market expectations.

Question 7

Why are nonfinancial performance indicators relevant to the financial market perspective?

Answer 7

Because nonfinancial indicators (e.g., customer satisfaction, innovation, operational efficiency) can provide early signals about future financial performance and influence investor expectations.
*customer satisfaction
*employee satisfaction

Question 8

Financial Markets Perspective: 10 elements of AICIPA Business Reporting?

Answer 8

*Financial & Nonfinancial Data
1. Financial Statements and Related Disclosures
2. High-level operating data and performance measurements that management uses to manage business (Profitability, Growth, Risk)

*Management analysis of financial and nonfinancial data
3. Reasons for changes in financial, operating, and performance-related data. Identity of past effects and trends.

*Forward-looking information
4. Opportunities and risks from key trends
5. Management plans (with critical success factors)
6. Comparison of actual performance to previously disclosed plans.

*Information about management and shareholders
7. Directors, management, compensation, major shareholders, relationships, and transactions between relevant parties.

*Background about the company
8. Broad objectives and strategies
9. Scope and description of business and properties
10. Impact of industry on the company.