Topic: Strategy evaluation and control

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  • 5 Marks

CSEG – Nov 2015 – L2 – Q4b – Strategy evaluation and control

Identify and explain five elements of the Ms Model used in resource audits for strategy evaluation and control.

Strategy evaluation is as important as strategy formulation. One of the tools used in resource audit as part of strategy evaluation and control is the Ms Model. Identify and explain any FIVE (5) elements in the Ms Model. [5marks]

Elements in the Ms Model

Resource audits identify human, financial and material resources and how they are deployed. A resource audit is a review of all aspects of the resources the organisation uses. The Ms Model categories the factors as follows:

Resource Example Machinery Age. Condition. Utilization rate. Value. Replacement cost. Make-up Culture and structure. Patents. Goodwill. Brands Management Size. Skills. Loyalty. Career progression. Structure. Management information Ability to generate and disseminate ideas. Innovation. Information systems. Markets Products and customers. Specialized or general, national, international. Materials Source. Suppliers and partnering. Waste. New materials. Cost. Availability. Future provision. Men and women Number. Skills. Efficiency. Industrial relations. Adaptability. Innovatory capacity. Wage costs. Labour turnover. Methods How are activities carried out? Outsourcing, quality. Money Credit and turnover periods. Cash surpluses/deficits. Short-term and long-term finance. Gearing levels. Debts.

  • 20 Marks

CSEG – Nov 2018 – L2 – Q4 – Strategy evaluation and control

Discuss how the Balanced Scorecard can assist in delivering the company’s vision and strategy and explain its limitations.

An insurance company has developed a new mission statement following a detailed analysis of the company’s operations and marketplace. The mission statement states: “We want to continually grow through our commitment to quality and delivering quality to customers.”

The management developed the following set of vision statements to complement the mission statement:

  • Provide superior returns to our shareholders
  • Continually improve our business processes
  • Delight our customers
  • Learn from our mistakes and work smarter in the future

Required:

a) Advise on how the Balanced Scorecard can assist the insurance company in delivering its vision and strategy. (12 marks)

b) Explain FOUR (4) limitations of the Balanced Scorecard. (8 marks)

a) How the Balanced Scorecard Can Assist in Delivering Vision and Strategy (12 marks):

  1. Better Strategic Planning:
    • The Balanced Scorecard provides a powerful framework for building and communicating strategy. The business model is visualized in a Strategy Map, which forces managers to think about cause-and-effect relationships. The process of creating a Strategy Map ensures that consensus is reached over a set of interrelated strategic objectives, helping to align business processes with the company’s vision and mission.
  2. Improved Strategy Communication & Execution:
    • The Balanced Scorecard enables companies to communicate strategy internally and externally in a more effective way. A visual representation of the strategy, such as a Strategy Map, helps employees and stakeholders understand the strategy and their role in executing it. This facilitates better engagement and alignment across the organization.
  3. Better Management Information:
    • By identifying key performance indicators (KPIs) for various strategic objectives, the Balanced Scorecard ensures that companies measure what truly matters. This leads to higher quality management information, which supports better decision-making and performance management.
  4. Improved Performance Reporting:
    • Companies using the Balanced Scorecard tend to produce better performance reports. These reports provide a comprehensive view of performance, linking financial and non-financial measures to strategic objectives, and ensuring transparency for both internal and external stakeholders.
  5. Better Strategic Alignment:
    • The Balanced Scorecard helps in aligning the organization’s strategic objectives across different business units and departments. This alignment ensures that all parts of the organization are working towards the same strategic goals, enhancing overall efficiency and effectiveness.
  6. Better Alignment of Projects and Initiatives:
    • By mapping projects and initiatives to specific strategic objectives, the Balanced Scorecard ensures that resources are allocated to activities that are most critical to achieving the company’s vision. This focus on strategic priorities improves the likelihood of successful strategy implementation.

b) Limitations of the Balanced Scorecard (8 marks):

  1. No Single Overall Measure:
    • The Balanced Scorecard does not provide a single overall measure of performance, such as Return on Capital Employed (ROCE). This can make it difficult for stakeholders to quickly assess the overall health of the organization.
  2. Potential Conflicting Measures:
    • The Balanced Scorecard includes multiple measures, which can sometimes give conflicting signals. For example, improving customer satisfaction may require additional investments, which could negatively impact short-term financial performance. Managing these trade-offs can be challenging.
  3. Cultural Shift Requirement:
    • Implementing the Balanced Scorecard often requires a substantial shift in corporate culture. This can be difficult to achieve, especially in organizations with deeply ingrained practices and mindsets. Without strong leadership and commitment, the Balanced Scorecard may fail to be effectively adopted.
  4. Complexity and Cost:
    • Developing and implementing a Balanced Scorecard can be complex and costly. It requires significant resources to design, monitor, and maintain the system, which may be prohibitive for smaller organizations or those with limited resources.
  • 14 Marks

CSEG – May 2016 – L2 – Q2a – Strategy evaluation and control

Describe the four perspectives of a balanced scorecard and explain three problems associated with its use in strategic management.

 

The Balanced Scorecard approach has been embraced as an effective model for generating information to assist management in formulating and achieving strategic policies. It emphasizes the need to provide management of an organisation with a set of information which addresses all relevant areas of performance in an objective and unbiased fashion.

You are the Management Accountant of McGinate Incorporated, a local printing and publishing house located in the regional capital of Ashanti. Your CEO has asked you to brief him further on the balanced scorecard approach.

Required: In a memo to the CEO: i) Describe FOUR perspectives of a balanced scorecard. (8 marks) ii) Explain THREE problems usually associated with the use of this approach for strategic management. (6 marks)

MEMO

To: The Chief Executive Officer From: Management Accountant Date: Subject: Balanced Scorecard

Introduction This memo is to describe the four perspectives of the balanced scorecard and the major problems inherent in its application to corporate strategic management.

i. Description of the four perspectives of the balanced scorecard

  • Financial perspective – The financial perspective of the balance scorecard answers the question, ‘how do we as an organisation look to shareholders?’ Thus, it addresses the question on how the organisation should create value for its shareholders in order to succeed financially. It covers traditional measures such as growth, profitability and shareholder value, with measures set through talking directly to the shareholders. Financial performance measures indicate whether the company’s strategy, implementation, and execution are contributing to bottom-line improvement.
  • Customer perspective – The customer perspective of the balance scorecard is a means by which management translates its overall mission statement on customer service into specific measures that reflect the factors that really matter to customers. It answers the question of how the organisation should appear to its customers in order to achieve its vision. It helps management to pay attention to customers’ concerns such as cost, time, quality, performance, reliability and service.
  • Internal business process perspective – This perspective addresses internal business processes for which the organisation must excel at in order to meet or exceed customer expectations and achieve financial objectives. Internal measures for the balanced scorecard should stem from the business processes that have the greatest impact on customer satisfaction – factors that affect quality, employee skills, and productivity. It also attempts to identify and measure the organisation’s core competencies and critical technologies needed to ensure continued market leadership.
  • Innovation and learning perspective – This perspective is a means of recognising that the targets for success keep changing due to intense global competition and other environmental factors. Thus, it is an attempt to measure the continual improvement of the organisation with regards to existing products and processes. Thus, measures may include the ability of the company to introduce entirely new products with expanded capabilities as well as innovative processes that delivers better value to customers. It brief, it answers the question of how the organisation can continue to create value and maintain its competitive position through improvement and change.

ii. Major problems associated with the application of the balanced scorecard

  • Conflicting measures – The balanced scorecard sometimes presents conflicting measures. A typical example is research funding and cost reduction. While research is a means of ensuring innovation and learning it leads to cost accumulation which may reflect in high prices for customers. Thus, it is often difficult to determine the balance which achieves the best results.
  • Selecting measures – Not only do appropriate measures have to be devised but the number of measures used must be agreed. Care must be taken that the impact of the results is not lost in a sea of information. The innovative
  • Expertise – Measurement is only useful if it initiates appropriate action. Non-financial managers may have difficulty with the usual profit measures. With more measures to consider, this problem will be compounded. Measures need to be developed by someone who understands the business processes concerned.
  • Interpretation – Even a financially-trained manager may have difficulty in putting the figures into an overall perspective.
  • Management commitment – The scorecard can only be effective if senior managers commit to it. If they revert to focusing solely on the financial measures they are used to, then the value of introducing additional measures will be reduced. In this context, do not overlook the cost of BSC. There will be costs involved in data-gathering and in measuring the performance of additional processes.
  • Lack of aggregate performance measure – The balance scorecard doesn’t provide a single aggregate summary performance measure; for example, part of the popularity of ROI or ROCE comes from the fact that they provide a convenient summary of how well a business is performing.
  • No direct link with shareholder value – In comparison to other measures used in value-based management (such as economic value added or EVA) there is no direct link between the scorecard and shareholder value.
  • Culture – Introducing the scorecard may require a shift in corporate culture; for example, in understanding an organisation as a set of processes rather than as departments.
  • Imbalance between short-term and long-term perspective – Implementing the scorecard will require an organisation to move away from looking solely at short-term financing measures, and focus on longer-term strategic measures instead. This usually leads to an imbalance between the long and short-term perspectives by management.

Signed

  • 16 Marks

CSEG – May 2017 – L2 – Q6a – Strategy evaluation and control

Discuss strategic issues for Adama Group and explain how the Balanced Scorecard can be used to monitor performance.

The chairman of Adama Group, which is large and diversified, has expressed concern about the inadequacies of the present voluminous monthly reports submitted to the Board. He acknowledges that it compares budget and actual results for all operations, and that it contains extensive reporting of non-financial indicators such as customer satisfaction and factory performance towards Total Quality Management (TQM). However, he regards much of this as operational detail, and considers that the report should place more emphasis on strategic issues.

A strategy consultant is currently assisting the Group to implement a Balanced Scorecard to effectively monitor the performance of managers.

Required:

i) Explain THREE strategic issues that should engage the attention of the Board of Directors of Adama Group. (6 marks)

ii) Explain how Balanced Scorecard can be used to monitor and measure performance in Adama Group. (10 marks)

i) Strategic Issues for the Board of Adama Group:

  1. Long-term Growth and Expansion: The Board should focus on the strategic issue of long-term growth and expansion. This involves setting objectives related to market expansion, diversification, and new product development. The Board must ensure that the company’s growth strategies are sustainable and aligned with its overall vision.
  2. Risk Management: Effective risk management is another strategic issue that should engage the Board’s attention. The Board must assess the potential risks associated with the company’s operations, such as financial risks, market risks, and operational risks. They should ensure that appropriate risk mitigation strategies are in place to protect the company from unforeseen challenges.
  3. Sustainability and Corporate Social Responsibility (CSR): The Board should also consider the strategic importance of sustainability and CSR initiatives. This includes integrating environmental, social, and governance (ESG) factors into the company’s business strategy to enhance long-term value creation and fulfill the company’s responsibilities to stakeholders.

(Total: 6 marks)

ii) Balanced Scorecard for Performance Monitoring and Measurement:

The Balanced Scorecard (BSC) is a strategic management tool that provides a framework for monitoring and measuring organizational performance from multiple perspectives. For Adama Group, the BSC can be used as follows:

  1. Financial Perspective: The BSC will allow Adama Group to monitor financial performance beyond traditional measures such as profit and revenue. Key performance indicators (KPIs) may include return on investment (ROI), economic value added (EVA), and cash flow. This perspective helps the Board assess whether the company is achieving its financial objectives and delivering value to shareholders.
  2. Customer Perspective: The BSC can measure customer satisfaction, retention rates, and market share. This perspective ensures that the company remains competitive and responsive to customer needs, which is critical for sustaining revenue and profitability.
  3. Internal Business Processes Perspective: This perspective focuses on the efficiency and effectiveness of internal operations. KPIs might include cycle time, quality control measures, and process improvement initiatives. By monitoring these metrics, the Board can ensure that the company’s internal processes are aligned with its strategic goals and contribute to overall performance.
  4. Learning and Growth Perspective: The BSC can also be used to track employee development, innovation, and organizational culture. KPIs may include employee satisfaction, training hours, and the number of new products or services launched. This perspective helps the Board assess the company’s ability to innovate, improve, and sustain its competitive advantage over time.

(Total: 10 marks)

  • 10 Marks

CSEG – Nov 2017 – L2 – Q6a – Strategy evaluation and control

Explain the concept of benchmarking and identify the advantages that companies gain from benchmarking.

In the business world, companies use benchmarking as a point of reference. Benchmarking occurs across all types of companies and industries. Many companies have positions or offices that are in charge of benchmarking.

Required:

i) Explain the term benchmarking. (2 marks)

ii) Explain FOUR advantages companies gain from benchmarking. (8 marks)

i) Explanation of Benchmarking:

Benchmarking is the process of gathering data about targets and comparators that permit current levels of performance to be identified and evaluated against best practices. It involves comparing an organization’s processes, practices, and performance metrics to those of industry leaders or competitors to identify areas for improvement. The goal of benchmarking is to adopt the best practices identified through the comparison to enhance the organization’s overall performance.
(2 marks)

ii) Advantages of Benchmarking:

  1. Position Audit: Benchmarking allows companies to assess their existing position by comparing it to industry standards or best practices. This helps identify gaps in performance and areas where improvements are needed.
  2. Focus on Improvement: Benchmarking provides a clear focus on the improvement of key areas. By identifying best practices, companies can set challenging but achievable targets, driving continuous performance enhancement.
  3. Encourages Innovation: The process of benchmarking often involves sharing information and learning from other organizations, which can be a spur to innovation. Companies can adopt new ideas and strategies that have been successful elsewhere.
  4. Improved Performance: By adopting best practices identified through benchmarking, companies can improve their performance, particularly in cost control, quality, customer satisfaction, and operational efficiency. This can lead to a competitive advantage in the marketplace.
  • 15 Marks

CSEG – Nov 2017 – L2 – Q5a – Strategy evaluation and control

Explain the limitations of financial measures for evaluating performance and describe financial and non-financial measures that can be used.

During the past year, the management of Doncat Limited faced many challenges, including several customer complaints, loss of some key customers, and a high level of employee turnover. At a meeting of the Board of Directors, the Chief Executive Officer presented a report on the financial performance of the company during the period and, in his closing remarks, he said, “Overall, we have done very well, notwithstanding the challenges we faced.” Some members of the Board were not happy with these remarks and accused him of doing a “partial evaluation” of the company.

Required:

i) Explain FOUR limitations of the use of financial measures for evaluating the performance of the company. (6 marks)

ii) Describe THREE financial measures and THREE non-financial measures that Doncat Limited may use to evaluate its performance. (9 marks)

i) Limitations of Financial Measures:

  1. Historical Nature: Financial measures often reflect past performance and do not provide real-time insights into what is currently happening within the company. This limitation makes it challenging to use financial measures as a sole indicator of future performance or current operational effectiveness.
  2. Subjective Judgments: Financial analysis can involve subjective judgments, where values or ratios might mean different things across different industries or even different companies within the same industry. The interpretation of these measures may vary, leading to potential bias or misinterpretation.
  3. Narrow Focus: Financial measures typically focus only on the financial health of the organization and do not consider other critical aspects such as customer satisfaction, employee engagement, or innovation. This narrow focus may result in overlooking important factors that contribute to the overall success of the company.
  4. Short-term Orientation: Financial measures can sometimes encourage short-term thinking, where management might focus on improving financial metrics at the expense of long-term strategic goals. This short-term orientation can be detrimental to the sustainable growth of the company.

(Total: 6 marks)

ii) Financial and Non-Financial Measures:

Financial Measures:

  1. Return on Capital Employed (ROCE): ROCE measures the efficiency with which a company is using its capital to generate profits. It is calculated as a percentage of profit earned over the capital employed, providing insights into how well the company is utilizing its resources.
  2. Net Present Value (NPV): NPV calculates the present value of cash flows generated by a project, considering the time value of money. A positive NPV indicates that the project is expected to generate more value than the cost of capital, making it a useful tool for investment decisions.
  3. Profit Margins: Profit margins measure the amount of profit generated from sales, indicating the company’s ability to manage costs and generate revenue. Key ratios include gross profit margin, operating profit margin, and net profit margin.

Non-Financial Measures:

  1. Customer Satisfaction: Measuring customer satisfaction can provide insights into the quality of products or services offered by the company. High levels of customer satisfaction can lead to repeat business, customer loyalty, and positive word-of-mouth, all of which contribute to long-term success.
  2. Employee Turnover Rate: The employee turnover rate measures the rate at which employees leave the company. A high turnover rate may indicate underlying issues such as poor work conditions, low morale, or inadequate compensation, which can negatively impact the company’s performance.
  3. Market Share: Market share measures the percentage of the total market that the company controls. A growing market share indicates that the company is performing well relative to its competitors and is successfully attracting and retaining customers

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