Assessing: Management

Assessing Management
corporatefinanceinstitute.com
Course Objectives
01. Structured Approach to

Assessing Management 02. Management Attitudes
03. Assessing Strategy & Business

Plan
04. Assessing Track Record
A Structured Approach
to Assessing Management
Course Objectives
01. Why Assess Management

02. Why Use a Scorecard
03. Multi Criteria Analysis 04. How & Where to Find

Quantitative and Qualitative Data
Why Should We Assess Management?
We have a tendency to focus Management competence is

on financial issues rather than a key driver of business results
management issues
Businesses often fail as a result We can’t just judge a business

of management weaknesses, purely from financial management,
compared to any other single the leadership team has to execute
factor the plan
Why Use a Scorecard?
Business performance should be measured

Performance measured from
from the perspective of strategy
perspective of strategy implementation
implementation, in addition to financial results
Financial and non-financial performance
measures and targets
Organizations need a balanced set of

financial and non-financial performance
measures and targets
Management
Financial
Customer
Strategy
A balanced set of performance measures
will ensure that the entire organization
participates in strategy implementation and
should include:
Example Scorecard Measures
Financial
• Sales growth
• Operating margin
• EPS
• ROCE/RONA
Strategy Management
• Detailed roadmap • Planning

• PEST analysis Mission and strategy • Growth
• Performance levels • Risk
• Employee satisfaction • Ownership
Customers
• Reviews
• Net Promoter Score
(NPS)
• News and media articles
Assessing Management Framework
Structured Approach -> Multi-Criteria Analysis
Attitudes / Character Strategy (Look Forward) Track Record (Look Back)

• Planning • Objectives • Budget vs. Actual
• Risk • Strategies • Previous Statements
• Growth • Measures • Financial Trends (Performance)
• Ownership • Targets
Multi-Criteria Scorecard (Criteria)
Decision Rule Score
Pillar Attributes Attractive (+1) Moderate (0) Unattractive (-1) Weight
Planning Good Satisfactory Doubtful 1
Risk Good Satisfactory Doubtful 1

Character/Attitude
Growth Good Satisfactory Doubtful 1
Ownership Good Satisfactory Doubtful 1
Objectives Clear Satisfactory Unclear 1
Strategies Clear Satisfactory Unclear 1

Strategy
Measures/Targets Accurate Satisfactory Inaccurate 1
Targets Likely Attainable Unlikely 1
Budget vs Actual < 7% Variation 7-15% Variation > 15% Variation 2
Track Record Previous Statements Profitable Close to Profitability Unprofitable 3
Financial Trends
Operating Margin > 30% Operating Margin 30% - 25% Operating Margin < 25% 2
(Performance)
Example
Pillar Attributes Rating Score Comment
Planning Good 1 Management showed a good attitude towards planning, presenting a 1,3,5 year plan for the business.
Based on Hax's Delta Model, management’s strategy seems to be riskier than industry consensus and is
Risk Satisfactory 0
not factoring some key risks of the strategy.
Character/Attitude
Growth Doubtful -1 Based on our analysis using the Ansoff Growth Matrix, it is worrying that they want to enter a new market.
Ownership Good 1 Management is open to outside investors and prepared to use all available resources for the company.
Objectives Clear 1 The objectives are clearly stated and their reasoning is sound.
The strategy to achieve certain objectives will require significant resources and might be difficult to
Strategies Satisfactory 0
implement.
Strategy
Measures Inaccurate -1 Management has selected some poor metrics to measure the outcome of their strategies.
Targets Attainable 0 The targets they devised are quantifiable, time-based, and achievable.
Budget vs Actual 8% Variation 0 The budget was slightly conservative when compared to the actual performance.
The company has been profitable since Q2 of last year, which shows that they have extra resources which
Track Record Previous Statements Profitable 1
can be used for expansion.
Financial Trends Management has been quite positive in their forecast and we think that based on their historical
Operating Margin < 20% 1
(Performance) performance they are doing a good job.
Total Points Scored 3
Where to Find Information
Qualitative Quantitative
• Management Interviews • Financial Statements
• Financial Statements • Budgets
• News Releases • Operational Data (examples)
• Proxy Statements (US Public
Companies)
Linking Financial and Non-Financial Performance Measures
You first need to ask:

What are the organization’s long-term strategic
business goals?
Then, for each business perspective, you must ask:
What are the drivers of success?
What measures (key performance indicators) are

appropriate to gauge how well you are doing in
each of the critical areas?
Questioning Skills
Questioning is a necessary tool for gathering more information which leads to better decision making.
Preparation is Key Think From the Use Open Questions Listen Give Yourself Time
Other’s Perspective as Often as Possible to Think
Management Attitudes
Objectives
01. Attitude Framework

02. Asking the Right Questions
03. Using a Scorecard 04. Examples
Planning
Attitudes
Ownership Risk
Growth
Tools for Assessing Management
01. 02.
Reputation – What do the Consistency – Is there a clear and
press, customers, suppliers, consistent business strategy?
and the competition say What is management’s approach
about management? to growth?
03. 04.
Experience/stability – Statements – What are their
Qualifications, business own statements about the
and financial acumen, business like?
time in business, etc.
Assessing Management Character
?
What are we trying to establish about
the management team?
A
The character of the team and its
major players
A
That the team has the ability and
skills that will enable them to repay
Management Attitudes Toward Planning
Skills in planning and acting on

opportunities and threats
Planning
Attitudes
Ownership Risk
Growth
Attitude to Planning
Objective: to assess management skills in planning and acting on

What are your plans for the business

over the next five years?
What opportunities exist for you to

develop the business?
What are the major threats facing

the business?
The plan should show specific goals and

strategies that fully assess risks related to
expanding the business.
Management Attitudes Toward Risk
Planning
Attitudes
Ownership Risk
Assess knowledge of sector,

business risk and track record
Growth in taking action
Attitude to Business Risk
Objective: to assess management knowledge of sector, business

risk and track record in taking action
What is your strategy to counter

the threat of competition?
What strategy would you adopt if you lost

your major customer(s) tomorrow?
Do you have a disaster response plan?

How much insurance do you have?
The answers should show detailed understanding of

how to manage risks in the business, steps taken to
decrease the chances of risks being realized, and a
response plan.
Planning
Attitudes
Ownership Risk
Skills in planning and acting on

Growth
Attitude to Growth
Objective: to assess management attitude towards growth
Do you want to expand the business?
Are there plans to expand into new home

or export markets?
Is innovation encouraged?
Are new products/services being developed?
Are there management resources and experience

available to expand?
Looking at growth, you can determine if management is satisfied with their

current operations or want to expand by offering new products or services.
Internal Barriers to Growth
70
Percentage of respondents citing
60
factor as important
50
40
30
20
10
0
Preference Lack of Reluctance Reluctance Management
to maintain successful to take on to dilute team too
small size innovation new debt ownership small/stretched
Source: Binder Hamlyn - The quest for growth

Attitude towards ownership,

and succession planning
Planning
Attitudes
Ownership Risk
Growth
Attitude to Ownership
Objective: to assess management attitude to ownership and

succession planning
Do you have outside investors in the

business? What kind?
Do you plan to sell to an outside party?
Do you plan to sell to the employees?
When do you plan to retire?
What is the view on succession planning, and how

does ownership impact the strategy?
Ownership Styles
Aim to
grow
Dynast Business-oriented
Size
current size
Remain at
Family-oriented Protectionists
Exit by family Exit by sale of the

succession business or flotation
Exit Method
Opportunities for Competitive Position
Maximize personal Prepared to use all

Minimize
income & investment or available resources
Expand the business or shareholdings outside
protect investment for growth or
maintain current size the family or have
and pass to next reluctant to push
outside investors
generation resources harder
Maximize income and

Maintain Reluctant to push resources
Outside investment
size harder.
Protectionists and sell business.
Maximize income and Prepared to use all available

Expand Outside
investment and sell business. resources.
Business-oriented
Protect investment
Prepared to use all available
Expand Family to pass to next
resources.
Dynast generation.
Protect investment
Maintain Reluctant to push resources
Family to pass to next
size harder.
Family-oriented generation.
Planning
Attitudes
Ownership Risk
Growth
Management seems to be unaware of some of the risks facing their industry, compared to other
Risk Satisfactory 0
companies we’ve interviewed. They do have a reasonable disaster response plan in place.
Character/Attitude
Objectives
Strategies
Strategy
Measures
Targets
Budget vs Actual
Track Record Previous Statements
Financial Trends
(Performance)
Total Points Scored
Management Questions
Assessing Strategy & Business Plans
Objectives
01. Strategic Frameworks

02. Assessment Method
Assessing Management’s Strategy
Objectives Strategies Measures Targets
PESTEL
PESTEL is a useful framework for building expectations about

the external environment:
PE S T E L
Political Economic Social Technological Environmental Legal
Hax’s Delta Model – Customer Centric Strategy
System lock-in
Dominant exchange
Proprietary standard
Exclusive channel
Enabled through
effective use of
technology
Horizontal breadth Low cost
Total customer
Best product
solutions Redefining the member Member Differentiation
relationship integration
corporatefinanceinstitute.com Hax, Arnoldo C., and Dean L. Wilde. "The Delta Model -- Toward a Unified Framework of Strategy." SSRN Electronic Journal, 2002.
doi:10.2139/ssrn.344580.
Hax’s Delta Model – Customer Centric Strategy
System lock-in
“The Delta Model is a new strategy framework
that places the customer at the centre of
management. It examines the primary options Dominant exchange
available to establish customer bonding and it

prescribes how to link strategy with execution Exclusive channel Proprietary standard
through the alignment of adaptive processes. Enabled through
effective use of
The presentation concludes with an attempt to technology
integrate the Porter's Five Forces Model, the Horizontal breadth Low cost
Resource-based View of the firm, and the Delta Total Customer

Model” solutions Best product
Redefining the member Member Differentiation
relationship integration
• Concentrate on the Customer
• Strategic Positioning among the three positions
• Determine the strategic agenda that determines the action
program to implement your desired strategic option.
• Design the proper metrics and rewards to facilitate the
strategy development.
Hax, Arnoldo C., and Dean L. Wilde. "The Delta Model -- Toward a Unified Framework of Strategy." SSRN Electronic Journal, 2002. doi:10.2139/ssrn.344580.
Ansoff Matrix – Assess Attitude to Growth
MARKETS
Existing New
INCREASING RISK
Existing
MARKET MARKET
PENETRATION DEVELOPMENT
PRODUCTS
1* 3*
PRODUCT
New
DIVERSIFICATION
DEVELOPMENT *Relative risk
1 = Low
2* 4*
4 = High
INCREASING RISK
More Strategic Frameworks
Corporate-level (Portfolio)
Portfolio approach to managing multiple
businesses
Business-level
Market positioning strategies to gain
competitive advantages in one or
multiple industries
Functional-level
Activities within and between different
functions aimed at improving efficiency of
the overall business
Strategic Planning Process
External
Current Strategy Internal Environment
Environment
Assess Current
Goals and Future
Strategy and
Performance
Environment
Strategic Alternatives
Evaluation
Recommendations
Objectives

What are you trying How are you going to What are the output Quantifiable Time-based
to achieve? achieve the objectives? measures?
What must you do to What are input
support the strategy? measures?
Strategies

Measure

Targets

Planning
Risk
Character/Attitude
Growth
Ownership
implement.
Strategy
Targets Attainable 0 The targets they devised are both quantifiable, time-based, and achievable.
Budget vs Actual
Track Record Previous Statements
Financial Trends
(Performance)
Total Points Scored
Business Track Record
Objectives
01. How to Assess a Track Record 02. Looking at the Right Data
Analyzing Track Record
Track record
Budget vs Actual Previous Statements Financial Trends

Evaluating what has been Looking at previous statements Looking at forecasts for the
budgeted in the past and actual to assess financial performance business can also indicate
performance is crucial can provide insight into how hopeful management is
management
Budget vs Actual
Variances Original Budget Revised Budget Actual Variances

Sales Volume 100 90 90
Sales Value $1000 $900 $990 90
Variable Costs (500) (450) (495) (45)
Fixed Costs (200) (200) (210) (10)
Profit 300 250 285 35
Variance = 35
Previous Statements
Track record

management
Places to Find Statements
Press Releases Interviews News Articles Social Media
Company website Podcasts, YouTube, etc. Major news publications Twitter, LinkedIn, etc.
Financial Trends
Track record

management
Financial Information – Forecasts
Revenue EBITDA Free Cash Flow

500,000 100,000 70,000
60,000
400,000 80,000
50,000
300,000 60,000 40,000
30,000
200,000 40,000 20,000
10,000
100,000 20,000
0
0 0
2013A2014A2015A2016A2017A 2018E 2019E 2020E 2021E 2022E 2013A2014A2015A2016A2017A 2018E 2019E 2020E 2021E 2022E
Net Income Earnings per Share

45,000 90.00
40,000 80.00
35,000 70.00
60.00
30,000
50.00
25,000 40.00
20,000 30.00
15,000 20.00
10,000 10.00
0.00
5,000
-10.00
0
-5,000 2013A 2014A 2015A 2016A 2017A 2018E 2019E 2020E 2021E 2022E
Planning
Risk
Character/Attitude
Growth
Ownership
Objectives
Strategies
Strategy
Measures
Targets
Total Points Scored
Summary
Course Summary
01. Structured Approach to

Assessing Management 02. Management Attitudes
03. Assessing Strategy & Business

Plan 04. Assessing Track Record
Based on Hax's Delta Model, management’s strategy seems to be riskier than industry consensus and is
Risk Satisfactory 0
not factoring some key risks of the strategy.
Character/Attitude
implement.
Strategy
Targets Attainable 0 The targets they devised are quantifiable, time-based, and achievable.
Total Points Scored 3
Assessing Management Summary
Assessing management Highlight critical elements

ultimately is about assessing to consider when assessing
whether management has the management character.
ability and skills to run the
business such that they will be
able to repay.
Understanding the ambitions The key to assessing

of management will help you management capabilities
assess their ability to repay. is to ask the right questions
and listen to the answers.
Assessing Management Framework
Structured Approach -> Multi-Criteria Analysis
Attitudes / Character Strategy (Look Forward) Track Record (Look Back)

• Planning • Objectives • Budget vs. Actual
• Risk • Strategies • Previous Statements
• Growth • Measures • Financial Trends (Performance)
• Ownership • Targets
Decision Rule Score
Pillar Attributes Attractive (+1) Moderate (0) Unattractive (-1) Weight
Planning Good Satisfactory Doubtful 1
Risk Good Satisfactory Doubtful 1

Character/Attitude
Growth Good Satisfactory Doubtful 1
Ownership Good Satisfactory Doubtful 1
Objectives Clear Satisfactory Unclear 1
Strategies Clear Satisfactory Unclear 1

Strategy
Measures/Targets Accurate Satisfactory Inaccurate 1
Targets Likely Attainable Unlikely 1
Budget vs Actual < 7% Variation 7-15% Variation > 15% Variation 2
Track Record Previous Statements Profitable Close to Profitability Unprofitable 3
Financial Trends
Operating Margin > 30% Operating Margin 30% - 25% Operating Margin < 25% 2
(Performance)

Assessing: Management

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Assessing Management

01. Structured Approach to

03. Assessing Strategy & Business

01. Why Assess Management

03. Multi Criteria Analysis 04. How & Where to Find

We have a tendency to focus Management competence is

Businesses often fail as a result We can’t just judge a business

Business performance should be measured

Organizations need a balanced set of

• Detailed roadmap • Planning

Structured Approach -> Multi-Criteria Analysis

Attitudes / Character Strategy (Look Forward) Track Record (Look Back)

Decision Rule Score

Pillar Attributes Attractive (+1) Moderate (0) Unattractive (-1) Weight

Planning Good Satisfactory Doubtful 1

Risk Good Satisfactory Doubtful 1

Ownership Good Satisfactory Doubtful 1

Objectives Clear Satisfactory Unclear 1

Strategies Clear Satisfactory Unclear 1

Targets Likely Attainable Unlikely 1

Budget vs Actual < 7% Variation 7-15% Variation > 15% Variation 2

Track Record Previous Statements Profitable Close to Profitability Unprofitable 3

Pillar Attributes Rating Score Comment

Total Points Scored 3

You first need to ask:

Then, for each business perspective, you must ask:

What are the drivers of success?

What measures (key performance indicators) are

01. Attitude Framework

03. Using a Scorecard 04. Examples

Skills in planning and acting on

Objective: to assess management skills in planning and acting on

What are your plans for the business

What opportunities exist for you to

What are the major threats facing

The plan should show specific goals and

Assess knowledge of sector,

Objective: to assess management knowledge of sector, business

What is your strategy to counter

What strategy would you adopt if you lost

Do you have a disaster response plan?

The answers should show detailed understanding of

Skills in planning and acting on

Objective: to assess management attitude towards growth

Do you want to expand the business?

Are there plans to expand into new home

Are new products/services being developed?

Are there management resources and experience

Looking at growth, you can determine if management is satisfied with their

Source: Binder Hamlyn - The quest for growth

Attitude towards ownership,

Objective: to assess management attitude to ownership and

Do you have outside investors in the

Do you plan to sell to an outside party?

Do you plan to sell to the employees?

When do you plan to retire?

What is the view on succession planning, and how

Exit by family Exit by sale of the

Maximize personal Prepared to use all

Maximize income and

Maximize income and Prepared to use all available

Pillar Attributes Rating Score Comment