APM Short Notes

BBMC3014 Advanced Performance Management (APM) BPP Chapter 1
Additional notes (supplementing the BPP Workbook 2nd edition 2020) Week 2 Lecture (3RPA Jan – Apr 2021)
Strategic performance management
→ improve performance to achieve goals and objectives

→ increase shareholders’ wealth (long-term value creation)
Strategic management accounting
→ information that aids decision-making (at 3 levels – strategic, tactical & operational), also known as management information system
Linked to strategic Forward looking Mix of financial & External

level goals → → Forecast cash non-financial environment →
Goal congruence flows information SWOT, Porter’s 5
forces, PESTEL
Strategic management accounting
→ traditional management accounting was focused on financial and internal information:

(1) not achieving goal congruence because strategic goals contain non-financial critical success factors e.g. innovation, quality, service
(2) short-term focus because internally-generated financial information is based on the annual financial statements (one year)
(3) is focused on profitability, therefore, not focused on maximising long-term cash flows to create shareholders’ wealth
(4) causes dysfunctional behaviour of managers and employees:
a. “What gets measured, gets done” problem – their performance is measured based on financial targets (KPIs) only, therefore,
they will neglect the other critical success factors that are non-financial
b. manipulation of financial performance in order to achieve the financial targets (KPIs)
Dysfunctional behaviour – behaviour that is not

beneficial to the company
→ strategic control means to change the plans in order to achieve the strategic goals
- by closing the gaps (important areas that are currently neglected), such as:
(1) Improved efficiency (reducing costs or increasing output)
(2) Growth (e.g. Ansoff’s growth vector matrix – market penetration, market development, product development, diversification)
Revenue growth
Benchmarking
→ is a way to improve performance by identifying best practices from other external organizations or internal business divisions
→ however, it is merely ‘catching-up’ (no innovation)
Root cause analysis – means to understand deeply about the fundamental
Problems: cause of a problem/good performance e.g. In Six Sigma, root cause analysis
(1) Not easy to collect external data, especially from competitors requires asking the question “Why” for five times (probing deep)
(2) Data may be inaccurate or not detailed enough to enable deeper understanding of the root causes of good performance
(3) No one best way of doing business and not all businesses are alike
(4) May focus on the wrong areas that are not the critical success factors, hence, not achieving goal congruence
Harvest means preserving the quality of this business division → so as to fetch
Invest is also
a high disposal value in future e.g. maintaining a good brand reputation
called as “build”
BCG Matrix
→ is useful at strategic level decision-making – resource allocation on whether to invest, divest, hold or harvest
Four categories of products/business division:

(1) Star – strong market share & operating in a high-growth market → Invest (or “build) strategy
(2) Question Mark – low market share (currently not competitive) but operating in a high-growth market → Invest, or divest
(3) Cash Cow – strong market share but operating in a mature market (low or no growth) → hold or harvest
(4) Dog – low market share (weak competitor) & operating in a mature market → divest (or “dispose”)
→ also useful at tactical level decision-making – which products/services to offer and which competitive strategy to adopt
→ also useful in analysing the lifecycle of the products/services (1) Low cost strategy e.g. Air Asia
(1) Question Mark – “Introduction” phase of lifecycle (2) Differentiation strategy e.g. Apple
(2) Star – “Growth” phase of lifecycle
(3) Cash Cow – “Mature” phase of lifecycle KPIs are also called as
(4) Dog – “Decline” phase of lifecycle “performance metrics”
→ somewhat useful in setting appropriate performance measures (KPIs)

(1) Star – relevant KPIs “percentage of revenue growth”, “percentage of profit growth”, “percentage of new customers”
(2) Cash Cow – relevant KPIs “percentage of cost reduction”, “profit margin is maintained”
Changing role of the management accountant (Burns & Scapens)
• Role of the hybrid accountant:

- Has both the accounting knowledge & in depth understanding of operational processes
- Is part of the finance function as well as integrated into the operations (e.g. based in
operating departments)
- Is a user of the information system along with other users
- Spend majority of their time as internal consultants or business analysts (i.e. analysing
& interpreting information)
- More actively involved in decision-making
- A valuable partner with operational management, by providing a much broader
understanding of business (due to links to centralised accounting function & knowledge
of interactions with other parts of the business)
• The main forces for change in the role:

(1) Technology
- Sophisticated management information systems (e.g. ERPS) allow all users to input data and run reports that were traditionally provided by management
accountants
- Management accountants are now a user of the system
(2) Management structure
- Shift in responsibility for budgeting from the centre to operational management, who have knowledge of budgeting & cost control, are accountable & responsible
for their KPIs, produce forecasts & report/monitor their own performance
- Management accountants are another reporter to senior management that links the financial outcomes with strategy
(3) Competition
- The need to respond to competition and deploy a more strategic focus forces the management accountant to move from financial accounting to a more
commercial orientation
- A commercial orientation recognises that the future earning capacity of the business is important (i.e. long-term view) & not just the profit in the current period
(i.e. short-term view)
(4) Corporate trends & organisational structure
- The creation of business networks, alliances and relationships require information sharing, cooperation & flexibility that the management accountant must adapt
- Traditional focus on internal processes & performance now also includes performance of external outsource partners
Performance hierarchy
(1) Strategic level information is required to achieve the overall mission and strategic objectives
→ information required is over longer periods (e.g. 3 to 10 years) and focused on the external environment and the future
→ information is used mainly for planning
(2) Tactical or managerial level information is required to achieve the more detailed objectives of business units
→ information required is over a shorter term (possibly over a quarter or a year) and are focused on the unit manager’s deployment of the
resources and activities
→ information is used for short-term planning and to assist the managers in controlling their respective business units
(3) Operational level information is required to achieve specific tasks of each individual employee or team
→ information required is detailed and task-specific and prepared on a regular basis (often daily or weekly)
→ information is used mainly for controlling day-to-day tasks and activities; there is very little planning activity
Cascade down – top-down approach in setting lower-level objectives, so the entire organization will achieve goal congruence
Every employee → focused on the mission of the company

E.g. Air Asia’s mission “Everyone Can Fly” → competitive strategy is low cost (efficient) Every employee is focused on improving efficiency
Critical success factors (CSFs) – are those areas of business performance where the company must succeed, otherwise, it will fail to compete
Create value to the customers that competitors are unable to do → value means something that the customer needs
E.g. Dutch Lady Milk – source fresh milk locally in order to meet customers’ needs for fresh milk and good quality milk
→ CSFs is to: (1) regularly inspect the local cow farms; and (2) train the local cow farms to product good quality milk
Key performance indicators (KPIs) – individual (manager or employee or team) targets to ensure their behaviour are aligned with the goal
Every individual should have several KPIs → ensure a balanced emphasis But too many KPIs will be confusing and
on a few areas of performance (a mix of financial and non-financial KPIs) causes information overload
Participation – empowering lower-level employees to participate in making decisions and setting targets:
(1) Employees are motivated because they feel empowered, therefore, will work towards achieving KPIs
(2) Decisions and targets become more realistic because the employees know the operations better
Bottom-up = participation of lower-level employees (i.e. decentralised decision-making)
Budgeting models
Incremental budget – budget is based on an increment (or growth) from previous year’s actual results
→ traditional budgeting model → prepared by head office (i.e. top-down approach)
→ fixed for the whole year (i.e. inflexible) → unrealistic/outdated when the external environment is dynamic
→ encourages slack (i.e. inefficiency) by over-budgeting expenses and under-budgeting revenue (in order to be easier to achieve the budget)
→ encourages dysfunctional behaviour by over-spending (i.e. to go on a spending spree) in order to use up the budgeted expenses so as to
justify the same the level of expenses budget for next year
Zero-based budget (ZBB) – every item in the budget starts from zero and the amount budgeted must be justified
→ avoids past inefficiencies → responsive to the anticipated changes in the external environment
→ requires a lot of time and effort and training → most suitable for non-profit organizations and public agencies
→ in profit-seeking organizations, ZBB may be implemented every few years and supplemented with other budgeting methods in between the
years when ZBB is not used
Rolling budget – periodically revised/updated throughout the year to reflect the changing external environment and continuously adding new
periods as the year progresses, so there is always a one-year budget in the horizon
→ adapting to the external environment that is dynamic → more realistic (therefore, motivating for managers)
Flexible budget – flexing the annual budget according to the actual external conditions in order to be more realistic
Activity-based budget (ABB) – amounts budgeted are based on the activities that drive costs (i.e. cost drivers)
→ based on the principle of activity-based costing (ABC) where it’s the activities that consume costs, therefore, focusing on these activities (i.e.
cost drivers) provides a clearer understanding of how much to be budgeted
→ need to justify the activities (i.e. cost drivers), therefore, emphasising on improving efficiency by removing or eliminating the non-value
adding activities (i.e. wasteful activities)
→ more accurate costing of activities, therefore, more accurate budgets
→ suitable for fixed costs → requires training because it is difficult to identify cost drivers correctly
Bottom-up budgeting – participation of lower-level managers/employees in setting their own budgets

Activity-based costing (ABC)

→ based on the principle that products create the demand for activities that consume resources and these resources incur costs
E.g. people, machine, tools, equipment, inspection, electricity, insurance, etc.
Additional Workers’ uniforms Engineers and

Workers’ salaries Workers’ incentives materials quality inspectors’
& tools
(fixed basic salaries) (per unit output) salaries
Raw materials Depreciation of

machinery & equipment
Production manager and Insurance premium

supervisors’ salaries
Electricity & utilities bills
Repairs of machinery
Rework on defective output
& equipment
Disposal of
Consumable hazardous wastes
materials
Finished output
What is the total cost of

each unit of finished output?
What selling price should we

charge our customers?
ABC is the modern costing approach (versus traditional absorption costing approach) in allocating overheads to the final product costs
Each overhead item is allocated based on

Standard costing (traditional) Activity-based costing (modern)
the respective activity (or cost driver)
e.g.
Direct materials X Direct materials X
• Production planning overheads –
Direct labour X Direct labour X
allocated based on the number of
Add: Overheads Add: Overheads
production orders
Total overheads Production planning X
• Production supervision overheads –
(allocated based on an Production supervision X
allocated based on the number of
arbitrary absorption rate Machining X
supervisors’ hours spent
e.g. total overheads/quantity Quality control X
• Machining overheads – allocated
e.g. total overheads/labour hours) X Packing and delivery X
based on the number of machine
Total product costs X Total product costs X
maintenance jobs
Benefits of ABC:
• More accurate and fair → because it is based on the consumption of cost drivers that incur the overheads
• Identify the reasons (or the root causes) for incurring overheads → therefore, improving upon the value-adding activities and
eliminating the non-value adding (or wasteful) activities
• Encourages a long-term focus → because removing the unnecessary or wasteful activities will bring higher long-term profits
• More aware of how the products/jobs will consume activities → therefore, able to identify the cause-and-effect relationship between
activities and costs
• Removes the problem of cross-subsidisation between departments/divisions → one department/division that consumes higher level of
activities are being “subsidised” by other more efficient departments/divisions due to the traditional costing using an arbitrary rate
• Enables the design of more relevant performance measures (or KPIs) that are tied directly to the consumption of activities → hence,
these KPIs are more objective, fair and motivating, as well as achieving goal congruence
Challenges of implementing ABC:

• Difficult to identify the activities (or cost drivers) accurately → training is required for all the managers to acquire the skills
• Substantial amount of time and efforts are required → hence, causing managers to neglect their operational activities
• Costly investment in a sophisticated information technology (IT) system → to facilitate collation and analysis of information
• Resistance to the change from managers and employees → strong commitment and a change of culture is required
(1) Leadership role model

(2) Transparent communication throughout the organization
(3) Participation of lower-level employees in designing & implementing the change
(4) Rewards that are tied to achievement of KPIs
Business structures External companies are within

Traditional department the internal value chain process
(1) Functional: structure
• Centralised & rigid (3) Network:
• Each function is specialised & isolated from other functions, even though actual • Decentralised, loose & organic,
business processes are passed from one function to other functions team-based work
• Vertical communication: • Innovative response to
- Downward – communicates strategic plans & decisions Even though it is very short- changing circumstances
- Upward – reports actual performance term & narrow focus, it may be • Interdependent & cooperative
• Data is aggregated by functions; not identified by products suitable for mature businesses with suppliers & customers
• Focused on functional efficiency & budget variances that make low profit margins (e.g. outsourcing, virtual
teams)
(2) Divisional: Bottom-up • Communication is lateral rather
• Autonomy given to lower-level managers, who are usually responsible as profit than vertical
centres • Trust, information sharing &
• Headquarters set policies, such as transfer pricing transparency with partners
• 2-way communication regarding performance standards/expectations & reports of • Service level agreements
actual performance (SLAs) to specify expectations
• Clear about the organisation’s strategy & objectives to ensure that divisional Cascade-down • Information to monitor
managers perform accordingly outsource partners’
• Information must be available for divisional managers to monitor & control their own performance
performance
Performance management in service businesses – face extra challenges/difficulties due to the four characteristics:
(1) Simultaneity – services are created at the same time as they are consumed
(2) Heterogeneity – services created may not be precisely the consistent standard
(3) Intangibility – services created lack physical substance
(4) Perishability – services created are innately perishable
Solutions to the challenges/difficulties above:

(1) Use a broader range of performance measures to cover more aspects in order to avoid a narrow focus or misleading indicators
(2) Use qualitative performance measures (e.g. customer satisfaction, employee morale) to capture the outcome of performance
(3) Use activity-based costing to understand cost drivers and drive long-term efficiency (i.e. reduce fixed costs) that add value to the
customers
Business integration
→ Business integration means the people, strategy, technology & operations are aligned efficiently & effectively to create value
(1) Porter’s value chain model

• A key idea is that it is activities which create value and incur costs. The activities are split into two groups:
- Primary ones which the customer interacts with directly and can ‘see’ the value being created, i.e. inbound logistics,
operations, outbound logistics, marketing & sales, after sales service
- Secondary ones which are necessary to support the primary activities, i.e. procurement, technology, human resource
management, firm infrastructure
• Another feature of the value chain is the idea of a chain. This is the thought that value is built by linking activities and so there must
be a flow of information between the different activities and across departmental boundaries.
• Value created is measured by the amount customers are willing to pay above the cost of carrying out value activities
(2) McKinsey’s 7S’s model

• An organisation is a set of interconnected & interdependent subsystems (i.e. the 7S’s – structure, strategy, systems, shared
values, skills, style, staff)
• Strategies or changes adopted in any one area will impact upon other parts of the organisation
• All elements, both hard and soft, must pull in the same direction for the organisation to be effective. E.g. an organisation is not
effective even with the most modern IT system if managers want the same old reports because they don’t understand/trust the
new IT system
New performance measures → non-financial KPIs
Business process re-engineering (BPR)
→ Process re-engineering involves strategic re-thinking of large scale to achieve sustained competitive advantage e.g. JIT, ABC, TQM
• Focuses on internal processes to achieve radical & dramatic improvements to meet the needs of customers (i.e. cost, quality, service,
speed), i.e. adding value and eliminating waste, resulting in less steps in the operating processes
• Aims to avoid the coordination problems caused by reciprocal interdependence
• Change of culture to a ‘bottom-up’ employee participation in decision making
• Higher motivation for employees who are empowered with more responsibility, multi-skilled, team-based
• Flat structure, where a process becomes the work of a whole team and managers have less to do
• New performance measures (that concentrate on results rather than activities) need to be developed around processes/teams
• Less reliance on internal controls to check and review and segregation of duties. Instead, more robust monitoring systems, such as
exception reports, variance analysis that are usually automated
• More investments in an integrated IT system to automate processes and enable user input of data and self-generated reports
Example of Mendelow’s matrix analysis: Employees have:
Stakeholders – there are 2 extreme approaches to stakeholder theory:
(1) High level of interest; but (2) Low power level
(1) Strong view – stakeholders have a legitimate claim on management attention; management’s job is to balance stakeholder demands
→ this is an extreme view that stakeholders are strong
(2) Weak view – satisfying stakeholders is a good thing but only because it enables the business to satisfy its primary purpose, i.e.
increase long-term shareholders’ wealth → this is an extreme view that stakeholders are weak
Stakeholder mapping using Mendelow’s matrix Stakeholders’ influence on performance
Weak
view
The Ethical Stance – is the extent to which it will exceed its minimum obligations to stakeholders; there are four possible stances:
(1) Short-term shareholder interest – minimalist approach (i.e. merely complying with the law) because it is the duty of the government
alone to impose ethical constraints
(2) Long-term shareholder interest – enlightened self-interest stance (i.e. voluntary ethical responsibilities) because it will benefit the
business and its corporate image
Strong
(3) Multiple stakeholder obligations – accept the legitimacy of stakeholders, otherwise it would not be able to function
view
(4) Shaper of society – benefits to society are more important than financial and other stakeholder interests
Environmental Management Accounting (EMA)
Types of environmental costs:

(1) Environmental protection costs (e.g. designing a system of drilling oil that will not leak)
(2) Environmental detection costs (e.g. installing sensors to detect early oil leakage within the pipe chambers)
(3) Environmental internal failure costs (e.g. installing filters to capture any oil that is leaking out)
(4) Environmental external failure costs (e.g. cleaning up oil spill)
Usefulness of EMA:
(1) Visibility of environmental costs – leads to better understanding that enables root-cause analysis; traditional management accounting
techniques are inadequate because it underestimated the cost/benefit of environmental issues & unable to apportion environmental
costs appropriately but simply classed as general overheads (i.e. ‘hidden’ as other costs in traditional accounting)
(2) Highlights management attention – taking actions to improve performance because poor environmental behaviour can have a direct
impact on company’s financial performance (e.g. fines, damage to reputation/brand value, loss of sales, inability to secure finance,
contingent liabilities, etc.)
(3) Supports strategic performance and reporting – as environmental issues are attracting a lot of public attention, organisations aspire to
improve their public reputation by incorporating it in their strategic goals and vision/mission, therefore, EMA will help directors towards
achieving goal congruence & improved reputation (because EMA communicates these environmental issues transparently)
EMA techniques:
(1) Input/output analysis – input must be fully accounted as output & waste (e.g. 100kg of input that produces finished output of 80kg must
be fully accounted as 20kg of wastes such as CO2, hazardous discharge & scraps)
(2) Flow cost accounting – similar to input/output, measured as:

• Materials
• System (e.g. overheads such machinery that consume electricity or fuel will also contribute to environmental costs)
• Delivery/disposal (e.g. transportation involved in purchasing as well as delivery to customers will also incur environmental costs)
(3) Environmental activity-based costing – cost drivers are identified for (e.g. volume of emission/waste, toxicity of emission/waste):
• Environment-related costs – specific environment costs such as incinerators, sewage plant
• Environment-driven costs – indirect overheads e.g. higher depreciation due to shortened equipment working life, higher staff cost
(4) Lifecycle costing – the complete costs, including the environmental consequences are captured e.g. whether to invest in a project
Sensitivity Analysis
→ measures the degree of changes to key variables when the profit is zero
Profit
Sensitivity of a variable =
Value of the variable
Example:
Sensitivity of selling price – measures the percentage of decrease in selling price before profit becomes zero
→ Higher percentage value means: Selling price will need to decrease by a larger degree before profit becomes zero → less sensitive
→ Lower percentage value means: Selling price decreases by a small degree and profit quickly becomes zero → more sensitive
Usefulness:
• To determine how the outcomes can be affected from a change in the component/input variable
Limitation:
• Only one component/input variable can be examined at any one time
• It does not examine the probabilities of the occurrence of these changes
Usually, shareholders prefer to take higher risk (to earn higher returns) but
managers/directors are risk averse in order to preserve their job security
4 methods of decision rules under risk and uncertainty
(1) Maximax
• Decision is to select the highest profit under the best possible outcome
• Reflects a risk taker attitude that is interested in the highest possible outcome, i.e. highly optimistic
(2) Maximin
• Decision is to select the highest profit under the worst possible outcome (i.e. “best of the worst”)
• Reflects a risk averse attitude that is interested to minimise the worst possible outcome, i.e. pessimistic
(3) Expected value

• Decision is to select the highest expected value
• Reflects a risk neutral attitude that is interested in the most probable outcome
• But this decision does not indicate the actual outcome because expected value is the weighted average of all probable outcomes
First variable: Decision to be undertaken

Second variable: (controllable factor) → columns on the right
Uncontrollable
exogenous Probable outcomes Decision #1 Decision #2 Decision #3
factor → rows Scenario 1 Profit x probability Profit x probability Profit x probability
on the left Scenario 2 Profit x probability Profit x probability Profit x probability
Scenario 3 Profit x probability Profit x probability Profit x probability
Total expected value Total expected value Total expected value
Risk neutral is not taking any risk position (or not making a stand whether taking a high or low risk) → leaving the decision to be
based on the highest probable amount (i.e. highest expected value) → therefore, it is wrong to assume it is medium risk attitude
(4) Minimax regret

• Decision is to select the lowest maximum regret
• Reflects a pessimistic attitude that minimises the regret from making a wrong decision (i.e. risk averse attitude)
First variable: Decision to be undertaken

Second variable: (controllable factor) → columns on the right
Uncontrollable
exogenous Probable outcomes Decision #1 Decision #2 Decision #3
factor → rows Scenario 1 Step 1: Under each scenario, the best decision = zero regret
on the left Scenario 2 Step 2: All other decisions’ regret = Profit of the best decision less profit of each decision
Scenario 3 Step 3: Under each decision, determine the highest amount of regret = maximum regret
Maximum regret
Information systems e.g. SAP, Oracle

(1) Enterprise Resource Planning Systems (ERPS)
• Automates business processes across the organization to improve upon value adding activities and eliminate non-value adding
activities, hence improving the cost efficiency of operations
• Integrated into one system of unified (or centralised) database that enables accurate data to be available on a real-time basis to
measure and control performance, in order to meet customers’ demands and to reduce wastages
• Enables planning of resources across the organisation in all activities, therefore, more coordination is required between the
activities in order to plan resources more efficiently and to avoid the ‘silo mentality’ problem
• Strong built-in internal controls enable automated controls on the performance of managers and employees to ensure that they are
aligned with organizational strategy, hence achieving goal congruence
• User input of data enables more efficient operations where users are directly involved in the business operations are capturing
transaction data and updated on a real-time basis
• User-generated reports enables customised reports to be generated by the users quickly in order to be flexible and adapt to the
operational needs of the business
• Interactive reports (i.e. dashboards) are customisable and user-created screens, showing high-level indicators or charts which can
be drilled down for more details
• Ability to collect and store financial and non-financial data that supports the measurement of performance targets to achieve the
critical success factors of the organization
• Analyses for strategic and operational planning due to the availability of a vast amount of accurate data that are updated on a real-
time basis enables more robust and sophisticated analyses that assist in strategic and operational planning
(2) Lean information and information systems Lean is under the TQM family of management models
Lean principles:
• Getting the right things to the right place at the right time, the first time (by collaborating with customers & suppliers)
• Root cause analysis to add value (achieving goals more effectively) & eliminate waste (improved efficiency)
• Flexible & empowering employees
• 5 ‘S’s – Seiri (or structure), Seiton (or systemize), Seiso (or sanitise), Seiketsu (or standardize) and Shitsuke (or self-discipline)
Lean management information system:

• Focused on eliminating waste (by reducing effort or difficulty in retrieving, correcting inaccurate information)
• Aims to add value to the information (by providing only relevant information, useful for decision making, increasing
quality/productivity of operations)
(3) Recording and processing data

• Connectivity & interoperability with other systems – seamless processing of data and transactions between different organisations
(e.g. e-commerce, electronic data interchange)
→ Electronic data interchange (EDI) is the computer to computer exchange of documents, in a standardised electronic format,
between business partners
• Networked connectivity for geographically dispersed units – fast updating of data from all the separate parts of the organisation
• Unified corporate database that integrates data from subsystems, allowing users to access the same information throughout the
organization – everyone has the same version and more accurate information
• Powerful PCs, spreadsheet, database, software & data capture technology (e.g. ePOS, CTI, RFID) enable high volumes of data to
be accessed & analysed real-time, with speed, ease of use, accurately, cheaply & directly by users
→ ePOS (electronic point of sales) system uses barcode scanners to speed up & avoid errors in customer transactions &
update/manage inventories
→ CTI (Computer Telephony Integration) gathers information about callers (e.g. age, income, interests) and sent to the screen of
the staff dealing with the call
→ RFID (Radio frequency identification) are small radio receivers tagged to assets to allow tracking and real-time transactions
processing (e.g. inventory updates)
• Cloud computing enables on-demand network access to a shared pool of resources (e.g. networks, servers, storage, applications
and services) that are operated by third party cloud-based service providers – provides an organization with improved access to
data that is accessible from anywhere around the world where there is internet connectivity
→ increased collaboration between teams working in different locations
• Process automation
- Reduces human intervention and enables smooth steps in the sequential tasks → employees can focus on more value adding
activities
- Increases speed, reduces costs and minimises errors → improved efficiency
- Many repetitive business processes can be automated such as employee recruitment, bookkeeping → boring tasks are
automated, therefore, motivating for employees
• Internet of things
- Any objects/devices containing sensors that are connected to and share data over the internet e.g. computer printers enable
printer manufacturers to monitor the ink used by the customers → ability to track and upload data of these objects/devices in
order to better understand their own needs and customers’ needs
• Customer relationship management (CRM) systems – analysing customers’ interactions with an organization throughout the
customer life cycle
→ aims to improve the customer relationship and retention (or loyalty), driving sales growth and increased customer profitability
• Big Data analytics – ability to analyse and reveal insights in data (which had previously been too difficult or costly to analyse) is an
important strategic resource that confers competitive advantage for an organization
The 3 Vs of Big Data:
- High volume – the bigger amount of data provides more potential for insights in identifying trends/patterns for getting a deeper
understanding of customer needs
- High velocity – the increasing speed with which data flows into an organisation, and with which it is processed within the
organisation
- High variety – diversity of source data (unstructured)
• Data warehousing (internal & external data available for analysis & decision making) – contains data from a range of internal and
external sources to be used across the organisation for analysis and decision making
• Data mining (data analytics to look for hidden patterns & relationships) – data analytics software that looks for hidden patterns and
relationships in large pools of data (or Big Data); discovering previously unknown relationships and predicting future behaviour
• Data visualization
- Presentation of data in a pictorial or graphical format which is easier for recipients to process than detailed written data
- Can also be an interactive experience where recipients can create their customised dashboard of data, with the ability to drill
down into areas of particular interest to them
• Artificial intelligence (AI) and machine learning

- Systems that are capable to sense, comprehend, act and learn e.g. robotic arms that learn and adapt while working in the
production assembly line → analysing Big Data to solve problems for themselves
- However, the systems may operate in ways that is not predicted (e.g. use of inappropriate language) → therefore, some
controls over AI behaviour (e.g. content filters) may be required
- The learning may be less effective if they use data generated from within a business → Big Data should be sourced from a
wide variety of media
- Customers and staff may react adversely and feel threatened → opportunities for collaboration between machines and humans
should be explored
(4) Performance reports (output reports)

- Meeting the objectives of the report?
- Meeting the needs of the readers? (timely, accurate, tailored to suit the users)
- Best practice in presentation? (e.g. dashboards, charts, graphs)
(i) Measuring achievement of strategic goals (incl. CSFs)
(ii) Problem of information overload, hence important areas overlooked
(iii) User-friendly presentation of figures (e.g. rounding, pie charts, tables)
(iv) Trend analysis to show progress of performance over several periods
(v) Analytical information (e.g. percentage of change, financial ratios)
(vi) Narrative explanations to provide reasons for the changes
(vii) Benchmarking to improve performance (e.g. against ‘best-in-class’)
(viii) Benefits outweigh the costs of preparing the reports
(5) Integrated reporting (IR) (communicates how an organisation creates sustainable value)
- Use forward-looking and historical information
- Consider long-term and short-term performance
- Financial and non-financial performance indicators
Private sector performance

→ profit-seeking organisations
Why is performance focused on maximizing the shareholders’ long-term wealth (even though there are other stakeholders)?
→ Legal owners & bearers of risk by investing capital
→ Decisions for the long-term also benefit all other stakeholders
→ Facilitates goal congruence EPS is a poor financial KPI:
(1) Short-term focus (financial statements
Financial performance measures (or KPIs) – to maximise shareholders’ long-term wealth: are prepared yearly or quarterly)
(2) Causes dysfunctional behaviour (of
managers/employees):
(1) Total Shareholder Return (TSR)
(a) “What gets measured, gets done”
Dividends paid this year + (Share price today − Share price last year)
TSR = (b) Manipulation of financial results
Share price last year
However, Earnings per share (EPS) is more popular because it is easily found from published financial statements.
Profit after tax
EPS =
Number of ordinary shares
(2) Economic value added (EVA)

EVA = NOPAT − (Adjusted Capital Employed × WACC)
However, Return on Capital Employed (ROCE) or Return on Investment (ROI) is more popular because it is easy to understand.
Profit before interest and tax
ROCE or ROI =
Average capital employed
Note: Residual Income (RI) is another financial measure that is very similar to EVA but without making the adjustments to reflect
the ‘economic reality’. RI carries all the same problems as ROCE.
(3) Profit margins
(4) Cash generated e.g. EBITDA (profit before interest, tax, depreciation and amortization)
(5) Net present value (NPV) and Modified Internal Rate of Return (MIRR) – but these are more appropriate for capital investment
decisions, not very suitable for measuring performance.
Economic value added (EVATM)

→ requires adjustments to the figures from published financial statements
→ in order to reflect the ‘economic reality’ of performance
→ because the financial statements are based on accounting policies and accounting treatments that distort the ‘economic reality’
→ the ‘economic reality’ is a closer reflection of cash flows, rather than profits
EVA = NOPAT − (Adjusted Capital Employed × WACC)
NOPAT (Net operating profit after tax):

• Must add back all value-building expenditure (e.g. marketing expenditure, research & development expenditure) because they bring
long-term benefits
• Must adjust depreciation to reflect economic depreciation because accounting depreciation is not an accurate reflection of economic
usage of the assets
• Must add back all non-cash items (e.g. provisions, amortisation)
• Must add back debt interest to avoid double-counting as debt interest is already included in the WACC (but the tax relief must be
removed)
Adjusted Capital Employed:

• Must use the figure at the beginning of the financial year to reflect fairly the assets employed by the manager in generating NOPAT
• Must use replacement value (if given) to reflect the ‘economic reality’, i.e. the market value of the assets employed
• Must add last year’s value-building expenditure, in order to capitalize the expenditure as assets
• Must adjust last year’s accumulated depreciation to reflect accumulated economic depreciation
• Must add last year’s non-cash expenses or last year’s accumulated provisions e.g. provision for doubtful debts
• No need to add last year’s debt interest because it was a relevant cost of capital charge
EVA vs ROCE
Benefits of EVA:
• EVA encourages managers to spend/invest for the long-term benefit of the company, therefore, achieving goal congruence
• EVA shows the absolute amount of wealth created by the business over and above the weighted average cost of capital, therefore, it
is a clear measure that can be easily understood.
• EVA reflects the ‘economic reality’, therefore, is a more relevant measure.
Limitations of EVA:
• Requires a lot of complicated adjustments that are time-consuming and not easily understood by managers.
• Calculated based on historical profits which may not be an accurate indicator of future performance.
• Not appropriate when comparing performance of businesses of different sizes because the absolute amount of wealth generated
depends on the amount of capital employed.
Problems with ROCE:

• Discourages managers from spending/investing because the higher expenditure/depreciation charge reduces the ROCE
• Causes dysfunctional behaviour, where managers delay expenditure/investments in order to manipulate the financial results, in order
to achieve a higher short-term ROCE.
• The profit figure is distorted by accounting policies, estimates, non-recurring and non-cash items.
Illustrative calculation of EVA

based on BPP’s Chapter 8 Activity 3: Economic value added (page 181)
Additional information regarding depreciation (not given in BPP, but I have added it here for illustration purposes)
• B Division’s operating profit has charged depreciation of $12,000 for the year ended 31 Dec 20X5
• B Division’s accumulated depreciation brought forward as at 1 Jan 20X5 was $45,000
• It is estimated that B Division’s economic depreciation for the year should be $15,000 and the accumulated
economic depreciation brought forward as at 1 Jan 20X5 was $54,000
$’000 $’000
Profit after tax 89.6 Opening capital employed as at 1 Jan 20X5 470
Add: Debt interest x (1 – tax) [15 x (1 – 0.3)] 10.5 Add: Last year’s non-cash expenses 8
Non-cash expenses 8 Last year’s brought forward goodwill 40
Amortisation of goodwill (non-cash item) 5 Last year’s Accum. Accounting depn. 45
Accounting depreciation 12 Less: Last year’s Accum. Economic depn. (54)
Less: Economic depreciation (15) Adjusted Capital Employed 509
Net operating profit after tax (NOPAT) 110.1
Assume: Non-cash expenses were the same last year.
Accounting depn $12,000 Economic depreciation $15,000 should Last year’s Accumulated Accounting depreciation
was already deducted from be deducted from PAT because it is the of $45,000 was already deducted from the
PAT → add back to PAT ‘economic reality’ → deducted from PAT Opening capital employed → add back
Last year’s Accumulated Economic depreciation

of $54,000 should be deducted from the Opening
capital employed → deducted
WACC = [Proportion of equity x cost of equity] + [Proportion of debt x cost of debt after-tax] = [0.75 x 0.15] + [0.25 x 0.1 x (1 – 0.3)] = 13%
EVA = NOPAT – (Adjusted CE x WACC) = $110,100 – ($509,000 x 0.13) = $43,930
Comment: The division is generating value for the shareholders, therefore, it is performing well in achieving the long-term objective of
increasing shareholders’ wealth.
Responsibility accounting
→ Decentralised decision-making to the lower levels of managers:

(1) Cost centre – departmental managers
(2) Revenue centre – sales managers
(3) Profit centre – divisional managers
(4) Investment centre – divisional managers
→ Being accountable for the manager’s area of responsibility
→ Managerial performance measures only those items that are controllable, therefore, it is a fair measure of performance
Managerial performance determines the amount of rewards (or bonus), therefore, motivating because the manager is able to control actions
towards achieving the targets (or KPIs)
→ Economic performance measures overall divisional performance including non-controllable expenses (e.g. allocated head office expenses)
Economic performance gives the big-picture view to enable strategic level decision-making on resource allocation on whether to invest,
divest, hold or harvest
Transfer pricing
→ In organisations with divisional structure (i.e. decentralised responsibilities to the divisional managers), trading of goods and services
among these divisions require a transfer price
Transfer price is the selling price between divisions in a group
Will the two

subsidiaries make Is there tax
decisions that planning to
maximize profit to minimize tax
the whole group? liability for the
Holding company (head office) whole group?
Subsidiary A (i.e. profit centre) Subsidiary B (i.e. profit centre)

Should I buy
from the external
suppliers or buy
Should I sell to the internally from
external customers or Subsidiary A?
transfer internally to Internal transfer (inter-
Subsidiary B? company transaction)
Manager A (divisional head) Manager B (divisional head)
If I transfer to Subsidiary B, If I buy from Subsidiary A,

what transfer price should I what transfer price should I
charge? Will I achieve my pay? Will I achieve my profit
profit target KPI and earn target KPI and earn my
my rewards? rewards?
Models of transfer pricing:

(1) Market price – external market price (i.e. there is a valid and equivalent
product available externally) that is priced competitively
(2) Adjusted market price – a discount is adjusted to the external market
price due to the savings enjoyed from internal transfer e.g. savings in
bad debts, selling and administration costs, transport/delivery costs
(3) Full cost – total costs (i.e. variable costs plus fixed overheads)
(4) Full cost plus – total costs plus a mark-up profit
(5) Marginal cost – variable costs only
Note: The cost based models could be either actual or standard costs.
Aims of transfer pricing (i.e. the criteria for an ideal transfer pricing policy):
(1) Autonomy in each division’s decision-making that maximises their respective profits (i.e. without interference from Head Office)
(2) Fair performance measurement of each division as a profit centre (i.e. doing work for another profit centre only when fairly paid for it)
(3) Goal congruence is achieved while maximising its own divisional profit (i.e. maximising profit for the overall group)
→ Market based models are the most ideal in meeting all the 3 aims of transfer pricing because:
(1) External market price enables the divisions to have the freedom to make buying or supplying decisions in a competitive market
(2) Fair pricing to both the buying and supplying divisions, hence no arguments or resentment for being required to transfer internally
(3) Market competition may encourage better quality service, greater flexibility, dependability of supply and cheaper costs, and that will
also maximise the profit for the overall group
→ In cost based models, standard costs are more appropriate than actual costs because:
• Standard costs are the targeted/budgeted costs (such as direct materials, labour and fixed overheads) that are revised/updated
periodically to encourage short-term efficiencies (however, standard costs include a permissible level of inefficiency such as the
allowance for wastages, and it should be eliminated for the long-term benefit of the company)
• Actual costs are compared against standard costs to calculate the variances (either favourable or adverse variances)
(1) Standard costs are decided by the centralised authority, so there is no divisional autonomy
(2) Standard costs are fair to the buying division because the supplying division has to take responsibility for the variances
(3) The supplying division is encouraged to control costs within the standard costs, and that will maximise the profit for the overall group
However, it is sometimes impossible to achieve all the aims of transfer pricing because:
• There is no valid or equivalent product available externally (e.g. specialised components that are designed/produced internally)
→ Cost based models will be appropriate:
(1) Transfer price has to be imposed by the central authority, so there is no divisional autonomy
(2) If no profit is made by the supplying division, it is unfair in measuring performance. Even if there is a profit mark-up, the buying
division will feel unfair because the mark-up is arbitrary
(3) Supplying division is not encouraged to improve its cost efficiency because all its costs are absorbed in the transfer price (i.e. the
full cost and full cost plus), and that will not maximise the profit for the overall group
• There is spare capacity available in the supplying division (i.e. not enough external customer demand to utilise the capacity in full)
→ Marginal cost is appropriate to encourage buying internally at a cheaper transfer price, since fixed costs are sunk costs
(1) Transfer price has to be imposed by the central authority, so there is no divisional autonomy
(2) No profit is made by the supplying division, it is unfair in measuring performance
(3) Buying division is encouraged to buy internally because it is cheaper than the external market price, thereby, utilising the supplying
division’s spare capacity and maximising the profit for the overall group
• There are savings enjoyed from internal transfer e.g. savings in bad debts, selling and administration costs, transport/delivery costs
→ Adjusted market price is appropriate to encourage buying internally at a cheaper transfer price
(1) Both divisions should negotiate on the amount of savings to be shared between them, which should be possible with minimum
intervention from the central authority (i.e. autonomy)
(2) Depending on the negotiating skills of both parties, one party may feel unfair or disadvantaged
(3) Buying division is encouraged to buy internally because it is cheaper than the external market price, thereby, leading to profit
maximisation for the overall group (due to the higher cost of selling externally)
Calculating the “ideal” transfer price

→ reflects the opportunity cost of sale to the supplying division and the opportunity cost to the buying division
Supplying division Buying division

Minimum transfer price Ideal transfer price Maximum transfer price
= Marginal cost + Lost contribution = External buying price
• Lost contribution is the opportunity cost (to supplying division) of giving up sales to external customers = Market price – Variable costs
• External buying price is the opportunity cost (to buying division) of the competitive purchase price from an external market
Not-for-profit (NFP) organisations
Challenges/problems in measuring performance in NFP organisations:
(1) Difficult to define objectives because NFPOs usually have many roles to play and it is difficult to be specific what they are
supposed to achieve
→ therefore, the lack of clearly defined objectives makes it difficult to determine the performance measures (or KPIs)
(2) Multiple objectives that conflict because of many stakeholders with different needs and difficult to decide who to prioritise and what
are the trade-offs
→ therefore, the multiple objectives cause difficulty in determining which performance measures are to be prioritized
(3) Difficult to measure performance because NFPOs pursue non-financial objectives which are subjective and judgemental
→ therefore, qualitative factors are subjective and difficult to judge and also difficult to collect the data
Solutions to overcome the challenges/problems above:
(1) Measure the inputs, instead of the outputs in order to measure performance more objectively and controllable e.g. instead of
measuring whether the streets are clean (output), measuring the number of times the streets are cleaned (input) is more
objective and controllable
→ therefore, fair and motivating and easier to collect data
(2) Develop a range/mix of performance measures (or KPIs)

→ therefore, a more balanced focus on a wider range of performance factors
(3) Independent experts to judge performance

→ therefore, their expertise and objectivity may provide a credible and fair assessment of performance
(4) Quantify the qualitative aspects of performance e.g. a scoring system to assess the performance such as citizen confidence
score, league tables (e.g. universities ranking table)
→ therefore, making it measurable and easier to collect data
Trade-offs – means we have to give up some objectives because of limited resources or the conflicts with other more important objectives (a
simple example in a private sector: the objective of investing for long-term profit may need to accept short-term losses, i.e. short-term trade-off)
Value for money
(1) Economy – the ability of the organisation to optimise its use of its productive resources; achieving the appropriate quantity and
quality of inputs at the lowest cost possible
→ maximizing the amount of input for every dollar spent; or
→ minimizing the amount of dollar spent for every unit of input
(2) Efficiency – the relationship between inputs and outputs; the ‘output’ per unit of resource consumed
→ maximizing the output for every unit of input
(3) Effectiveness – the relationship between an organisation’s outputs and its objectives; the extent to which the organisation
achieves its objectives
→ output is achieving the objective
Money Economy Input Efficiency Output Effectiveness Objective
Money – the amount that is being spent, e.g. the government agency is given the budget of RM50 mil for the year
Input – the resources being purchased e.g. the government agency needs employees, equipment and contractors to fulfill its objectives
Output – the outcome from the work done e.g. the government agency has served 500,000 citizens for the year
Objective – the purpose or the mission e.g. the government agency is set up for the purpose of retraining workers who have been
retrenched to acquire new skills
Example: Beeshire Local Authority (BLA) (extracted from ACCA Dec 2014 exam)
One of BLA’s task: ensure that waste is collected from the homes and businesses in Beeshire
BLA’s goal: (1) ‘to maintain Beeshire as a safe, clean and environmentally friendly place where people and businesses want to both stay
in and return to’
(2) ‘to promote the recycling of waste and has set a target of 40% of all waste to be recycled by 2015’
Economy KPIs: Staff cost per staff; Total cost per staff; Maintenance cost per truck.
Efficiency KPIs: Tonnes of wasted collected per staff; Cost per tonne of waste collected; Tonnes of waste collected per truck.
Effectiveness KPIs: Frequency of waste collection; No. of complaints per household; Waste recycled as a percentage of total waste
Non-financial performance indicators (NFPIs)
Reasons why NFPIs are important in performance management:
(1) NFPIs are better indicators of performance because most critical success factors are non-financial such as quality, customer and
employee satisfaction, innovation.
(2) NFPIs are leading indicators (i.e. early indicators) of performance, that means, information can be provided quickly such as
number of customer enquiries and complaints. Therefore, they direct management’s attention so that early corrective actions can
be undertaken.
(3) More relevant to the lower level operational managers and employees because they can relate directly their own performance
efforts to the non-financial measures e.g. number of hours rectifying a technical defect, number of new innovations, customer
feedback/complaints.
(4) NFPIs help the organization to achieve financial success in the long term by focusing strong performance in the areas that help to
achieve competitive success.
(5) Easy to collect, calculate and understand, hence, more effective in measuring performance.
(6) Anything can be compared, if it is meaningful.
Problems with NFPIs:
(1) NFPIs are open to the risk of manipulation because NFPIs are subjective such as customer feedback and satisfaction.
(2) NFPIs may encourage “what gets measured, gets done” if it only a narrow aspect of performance is measured.
(3) Combined with financial indicators, they may be too many performance indicators (i.e. information overload).
Brand strength can play an important role in creating customer loyalty, especially in a competitive strategy of differentiation – performance
measures that measure brand strength are:
(1) Brand awareness test or brand recall test – how widely people are aware and recall the brand
(2) Repeat customers – how loyal are customers to the brand (e.g. percentage of repeat customers, customer retention rate)
Quality management models Cell manufacturing – means different machines & workers are grouped into
cells (so workers can multi-task when operating the different machines)
Keeping records is a non-

value adding activity
Value-adding activities that will

increase customer satisfaction
Employees participate in solving
quality problems (i.e. empowered)
Very popular topic in both internal and

external exams → calculate and assess
Benefits of preparing the costs of quality report:
(1) Expressing each cost category as a percentage of sales revenue enables comparison:
• Benchmarking with other divisions or other companies
• Trend analysis with previous periods
(2) Enables better visibility of what kinds of costs of quality are being incurred, i.e. highlighting the attention of the senior management.
Currently, the costs of quality are hidden under other categories of operating expenses.
→ Therefore, it will enable better analysis of the quality problems and will help in identifying the root causes of these quality problems
(3) Indicates how total quality costs could be reduced between the 4 categories e.g. increase in prevention costs will lead to reduction in
total costs
→ As a result, better decisions can be undertaken to overcome/solve the quality problems
(4) Highlighting the costs of quality will ensure that operational managers are aware of the direct impact of their poor quality outcomes.
→ Therefore, accountability can be established to link these costs of quality to their performance report and rewards
(5) Inclusion of opportunity costs of poor quality, such as the loss of customer goodwill, loss of repeat customer sales
→ therefore, giving a more complete information about the total costs of the quality
Limitations of the costs of quality report:
(1) Measurement of the costs of quality may not be accurate or some data are difficult to collect
(2) Costly information systems may need to be developed to collect these data e.g. Big Data
(3) Ignores the non-financial costs of poor quality, such as poor reputation and employee morale
Six Sigma
→ Is a quality management system that seeks to reduce defects to an insignificant level, i.e. almost zero
→ It involves a systematic approach using DMAIC steps to implement process improvements, i.e. marginal (or small) improvements to the
internal processes
Features/characteristics of Six Sigma:

• An increased focus on the customers, where process improvements are implemented to create value to the customers
• Management decision-making is based on well-substantiated data and facts through rigorous data collection, not opinions
• Focuses on improving the business processes as the key to success, where processes that are non-value adding are eliminated or
redesigned
• Requires the commitment and proactive involvement of the senior management as champions of the Six Sigma project
• Increased profile of quality in the entire organisation through the use of experts, such as master black belts, black belts and green
belts, to create energy and awareness to improve quality
• Involves the empowerment and participation of employees in solving the quality problems (they are the source of the solutions)
• Collaboration across functional and divisional boundaries, hence the focus of the entire organisation to the quality issues
Six Sigma DMAIC implementation steps:

• Define the quality problem in order to understand why the quality problem is not meeting the customers' requirements
• Measure the existing performance through rigorous data collection of external and internal data, as well as financial and non-financial
data
• Analyse the existing processes to determine whether value adding or non-value adding and identify the root causes of the quality
problem
• Improve the processes through employee participation and creative thought, and implementing the process improvement changes
carefully
• Control the new process by collecting external and internal data (including the costs of quality) to monitor the actual performance
results (compared against desired targets) after the improvements were implemented
The human resource management (HRM) model
→ Even though feedback is necessary in the participative style of

management, the judgemental aspect of appraisal has the potential
to demotivate, i.e. the negative problem in appraisal.
Solution to the negative problem in appraisal:
360 degree appraisal – is a multisource feedback from

subordinates, peers, superiors, customers, suppliers and external
consultants
(1) It is seen to be more objective because feedback is obtained
from multiple parties, internally as well as externally
(2) Empowering for staff to be able to give feedback on their
managers
Wrong to assume that base pay must

be higher than the industry/market
There are 3 reward options:
(1) Base pay – in order to be competitive, it should be similar as
the industry/market
(2) Performance-related pay – incentives/bonuses that are linked
to KPIs that support team working and commitment to goals
(i.e. team-based and individual feedback from appraisal)
(3) Share option schemes – are devices to ensure goal
congruence (i.e. aligning directors & senior managers’ personal
interests with the shareholders)
E.g. Employee participation is an intrinsic reward

because it empowers the employee (motivating)
Performance management models:
(1) Balanced Scorecard Key performance indicators (examples):

KPIs are identified according to the
1) Financial nature of the business (read the
• TSR (total shareholder return)
• EVA (economic value added)
question scenario carefully)
• Profit margin
• Percentage of cost reduction or percentage of revenue growth
• Cash generated from operations
2) Customer
• Customer satisfaction score
• Brand awareness rating/score
• Market share (i.e. revenue as a percentage of total market)
• Market position ranking
3) Internal process
• Time taken to produce finished output
• Set-up time for each new production batch
• Percentage of reduction in wastage (i.e. cost reduction)
• Number of non-value adding activities eliminated
• Focuses on a whole range of financial and non-financial • Time taken to respond to customers’ requirements (i.e. flexibility)
aspects • Time taken from new ideas until product launch (i.e. time to market)
• Looks internally & externally, short- & long-term objectives 4) Innovation and learning
• Communicates mission and strategy, therefore, influencing • Number of new products launched
• Number of new ideas per employee
behaviour and organisational change • Number of new production technologies implemented
• Number of training hours
Strategy maps are developed to implement the Balanced • Number of new skills acquired
Scorecard more successfully, outlining a sequence of steps that • Employee retention rate or turnover rate (i.e. satisfied with the learning & growth opportunities)
suggests:
• Financial perspective is the highest-level hierarchy (i.e. the

financial strategies are to deliver the overall goals)
• All other perspectives should help the organisation achieve its
financial goals
(2) Performance Pyramid (Lynch & Cross)
Key performance indicators (examples): Key performance indicators (examples): Key performance indicators (examples):
2) Market Mission: To become the top market leader by providing 1) Financial

• Market share (i.e. revenue as a percentage of total market) innovative and high-quality products • TSR (total shareholder return)
• Market position ranking • EVA (economic value added)
• Profit margin
3) Customer satisfaction
• Customer satisfaction score 4) Flexibility (2nd half)
• Percentage of repeat customers • Number of new production technologies
• Number of employees’ new skills acquired
4) Flexibility (1st half)
• Number of new products launched 5) Productivity
• Number of new ideas per employee • Percentage of cost reduction
• Number of non-value adding activities eliminated
8) Delivery
• Percentage on-time customer delivery 6) Waste
• Customer feedback on responsiveness of innovation for • Percentage of reduction in wastage
customers’ needs • Percentage reduction in stock obsolescence
• Time taken from new ideas until product launch (i.e. time to
market) 7) Cycle time
• Time taken to produce finished output
9) Quality • Set-up time for changing production lines
• Percentage of customer rejects • Time taken to implement new production technologies
• Customer feedback on quality • Time taken by employees to acquire new skills
Coherent means consistently • Focuses on the development of a

throughout the organization coherent set of objectives from the
(i.e. goal congruence) corporate vision, therefore, clearly linking
strategic to operational measures
• A range of objectives (from the highest to
the lowest level) that are linked through
the theme of:
- External effectiveness (success in the marketplace)
- Internal efficiency (success in the internal process)
• Objectives reflect the entire business
systems that cross functional boundaries
(3) Building block model (Fitzgerald & Moon)

• Aims to improve the performance measurement systems of service
businesses
• Performance system should be based on three concepts of
dimensions, standards and rewards
• Dimensions fall into two categories:
- Downstream results (competitive and financial performance)
- Upstream determinants (quality of service, flexibility, resource utilisation and innovation) of
those results
• Standards are the specific performance measures that are developed
for each of the dimensions (or KPIs):
- Employees must take ownership so they need to participate, accept and be motivated by
the targets
- Standards must be set high enough (stretch targets) that aim beyond the easily
achievable, yet achievable and fair
• Rewards are motivators that encourage employees to work towards
the standards set:
- Clarity of the rewards (understood by employees)
- Motivating (that is of value to employees)
- Based on factors that are controllable
(4) Activity-based management (ABM)
• ABM views the business as a set of linked activities that ultimately

add value to the customer
• This encourages managers to eliminate unnecessary activities (and
thereby reduce costs) and improve the performance of value-adding
activities and processes
• The goal of ABM is to enable customer needs to be satisfied while
making fewer demands on organisation resources:
- Operational ABM is about ‘doing things right’. Those activities which add value to products
can be identified and improved. Activities that do not add value should be reduced in order
to cut costs without reducing product value.
- Strategic ABM is about ‘doing the right things’ using the ABC information to decide which
products to develop and which activities to use. It can focus on profitability analysis,
identifying which products/ customers are the most profitable and for which sales volume
should be developed.
(5) Value-based management (VBM)
• VBM begins from the view that the value of a company is measured
by its discounted future cash flows
• The idea being that value is only created when companies generate
returns which beat their cost of capital
• VBM then focuses the management of the company on those areas
which create value:
- Identification of critical value drivers to achieve its strategy
- Translated into short-term and long-term performance targets (financial and non-financial)
- Measurement of financial performance is most likely using EVA
- Performance metrics and incentives to monitor value drivers at all levels
• All decision makers (strategic, tactical and operational levels)
concentrate on these value drivers in order to increase the value of
the firm
Complex business structures

→ networks of business relationships with external parties within the internal value chain process
Forms of complex business structures:
(1) Strategic alliances – two or more businesses share their resources and activities to pursue a particular strategy
(2) Joint ventures – two or more firms combine resources, each having a share in the equity and management of the joint venture
(3) Virtual organisations – use the capabilities of other organisations to create and distribute products/services, without being
physically linked
(4) Supply chain management (SCM) describes the ‘win-win’ collaborative relationship between suppliers and customers, each
concentrating on their own core competencies, to deliver a value chain process that adds the most value to the final customers
SCM is often misunderstood as sourcing for the
Challenges/problems in measuring performance: Customers are willing to pay a
cheapest manufacturing location (not correct)
higher price
(1) Different objectives/goals, culture and processes of the partners
→ therefore, conflicts may arise that lead to delays in decision-making and even result in failure/collapse
(2) Unclear accountability as to who is accountable for what outcomes

→ therefore, confusion in the operations
(3) Different risk appetites where one party may be a risk taker while the other is risk averse
→ therefore, conflicts in decision-making
(4) Reliability of the data used in measuring performance is in question because external parties have their self-interests when
generating the data
→ therefore, the data may have been manipulated
(5) Incompatible IT systems

→ therefore, making it difficult to share information and collect data
Solutions to overcome the challenges/problems above:
(1) Contract that clearly specifies:

- the roles and responsibilities of the parties
- the objectives/goals of the venture
- the processes that need to be complied to make operational decisions quickly and well-coordinated
- the accountability for specific outcomes
- the rules for making decisions regarding risks
(2) Develop SLAs (service level agreements) as the key performance indicators for external parties (included in the contract)
(3) Share information to enable the external parties to make appropriate decisions that are “win-win” for all parties
(4) Include the right to audit the external parties, i.e. internal auditors can undertake regular reviews to ensure processes, quality and
ethical values are aligned
(5) Incentives and penalties to motivate higher performance (included in the contract)
(6) Allow partial access to some portion of the IT system to enable seamless and real-time data transfer and analysis
(7) Collaboration with the external parties (i.e. participation) as early as possible in the internal value chain process e.g. during the
design stage, in order to iron out any potential issues
(8) Team bonding and team building activities will increase the human interaction that fosters trust and closer relationships
(9) Automating the data capture and reducing human input may reduce the likelihood of data manipulation for measuring
performance
(10) Design SLAs that rely more on data generated by the company, in order to reduce the reliance on data given by the external
parties, hence, reducing the problem of reliability of data
(11) Conduct background checks of the external parties before entering into the relationship to determine whether trustworthy or not
Predicting and preventing corporate failure
(1) External analysis

- PESTEL – external factors that pose as opportunities and threats to an organisation
- Porter’s 5 forces – industry structure that affects the competitive strength of an organisation
- Product lifecycle – issues at the different stages of the lifecycle affect the long-term survival of the business
- BCG matrix – the relative market strength and market attractiveness at different stages of a business affect the strategy
(2) Quantitative model:

- Single factor model – financial ratios analysis (e.g. profitability to assets, equity returns, liquidity, gearing, cash to total debt)
- Multivariate model – Altman Z-score combines multiple financial factors into a single score that predicts survival or failure:
Advantages:
- Extensive research behind the development of Z-score
- Simple to interpret from a single score, even though it measures multiple factors
Disadvantages:
- Focuses only on internal factors, therefore, ignoring external factors that pose opportunities or threats to the firm
- Ignores non-financial factors (i.e. the leading indicators of failure) e.g. management complacency, competitors’ actions
- Businesses are too complex to be summarised into a single quantitative score (i.e. over-simplistic)
- Use of historical information to measure, i.e. is a backward-looking model
- The Z-score was originally developed in the late 1960s based on data from US companies in the manufacturing sector. The
world economy has changed significantly since then and the relevant factors may have changed/evolved.
(3) Qualitative model – Argenti’s A score combines financial and non-financial factors into a single score, i.e. to quantify the root causes
and symptoms associated with failure, in order to predict a healthy firm or a firm at risk of failure
There are three connected areas that indicate likely failure:
Defects and
a. Defects (i.e. things that are lacking)
- Management defects (e.g. autocratic leadership, weak corporate governance & poor management in depth) mistakes – to
- Accounting defects (e.g. lack of controls, poor response to change, poor management information system) identify the
b. Mistakes (i.e. decisions made that went wrong) root causes
- High leverage/gearing, overtrading and a big project that has gone wrong of failure
c. Symptoms (i.e. the outcome/results)
- Financial indicators or ratios that reflect poor performance
- Creative accounting to cover up the poor results
- Non-financial signs e.g. high employee turnover, poor morale, customer complaints, regulators’ warnings and sanctions

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BBMC3014 Advanced Performance Management (APM) BPP Chapter 1

Strategic performance management

→ improve performance to achieve goals and objectives

Strategic management accounting

Linked to strategic Forward looking Mix of financial & External

Strategic management accounting

→ traditional management accounting was focused on financial and internal information:

Dysfunctional behaviour – behaviour that is not

Four categories of products/business division:

→ somewhat useful in setting appropriate performance measures (KPIs)

Changing role of the management accountant (Burns & Scapens)

• Role of the hybrid accountant:

• The main forces for change in the role:

Every employee → focused on the mission of the company

Bottom-up budgeting – participation of lower-level managers/employees in setting their own budgets

Activity-based costing (ABC)

E.g. people, machine, tools, equipment, inspection, electricity, insurance, etc.

Additional Workers’ uniforms Engineers and

Raw materials Depreciation of

Production manager and Insurance premium

What is the total cost of

What selling price should we

Each overhead item is allocated based on

Challenges of implementing ABC:

(1) Leadership role model

Business structures External companies are within

Solutions to the challenges/difficulties above:

(1) Porter’s value chain model

(2) McKinsey’s 7S’s model

Stakeholder mapping using Mendelow’s matrix Stakeholders’ influence on performance

Environmental Management Accounting (EMA)

Types of environmental costs:

(2) Flow cost accounting – similar to input/output, measured as:

(3) Expected value

First variable: Decision to be undertaken

(4) Minimax regret

First variable: Decision to be undertaken

Information systems e.g. SAP, Oracle

Lean management information system:

(3) Recording and processing data

• Artificial intelligence (AI) and machine learning

(4) Performance reports (output reports)

Private sector performance

(2) Economic value added (EVA)

(3) Profit margins

Economic value added (EVATM)

EVA = NOPAT − (Adjusted Capital Employed × WACC)

NOPAT (Net operating profit after tax):

Adjusted Capital Employed:

Problems with ROCE:

Illustrative calculation of EVA

Last year’s Accumulated Economic depreciation

→ Decentralised decision-making to the lower levels of managers:

→ Being accountable for the manager’s area of responsibility

Will the two

Subsidiary A (i.e. profit centre) Subsidiary B (i.e. profit centre)

Manager A (divisional head) Manager B (divisional head)

If I transfer to Subsidiary B, If I buy from Subsidiary A,