Chapter 4

Performance Analysis
This chapter covers the following:
1. Quantitative analysis
2. Financial Analysis
3. Benchmarking
4. Baldrige model
• Quantitative analysis
– choose three or four key ratios
– there is no need to illustrate the formula or the
calculation only one comparator should be needed
– focus on the cause of any changes and what this
might tell us about the organisation's position
• Profitability ratios
– ROCE
– Gross Margin
– Net margin
– ROE
• Efficiency ratios
– Assets turnover
– Receivables days
– Inventory days
– Payable days
– Sales or revenue per person/emloyee
• Liquidity ratios
– Current ratio
– Quick ratio
• Gearing ratio
– Financial gearing
• Investor ratios
– Dividend cover
– Interest cover
– EPS
– PE ratio
Ratio Calculation

Profitability ratios
ROCE Op profit/cap employed x100
Gross margin GP/Net sales x 100
Net margin NP/Net sales x 100
ROE PAT-Pre. Div / Shareholders funds x 100
Efficiency ratio
Asset turnover Sales / Capital employed
ROCE Net margin x asset turnover
Receivables days Cl receivables / Cr sales x 365
Payable days Cl Payables / Cr purchaes x 365
Inventory days Cl inventory / Cost of sales x 365
Liquidity ratios
Current ratio CA/CL
Quick ratio Quick assets/ CL
Gearing ratios
Financial gearing Debt/ Equity or Deb/ Debt+ Equity
Investor ratios
Dividend cover PAT/ Total dividend
Interest cover PBIT/Interest
EPS PAT – Pre. Dividend / No. Of shares
PE ratio Share price / EPS
• Inter-firm comparisons
– While making inter firm comparison keep
limitations of ratios
• Non-financial performance measures
– performance analysis should not focus on profit
alone
– A range of performance indicators should be used
and these should be a mix of financial and non-
financial measures.
CSFs KPIs
Competitiveness sales growth by product or service measures of customer
base relative market share and position
Resource utilisation efficiency measurements of resources planned against
consume  measurements of resources available against those
used
Quality of service productivity measurements  quality measures in every unit
 evaluate suppliers on the basis of quality  number of
customer complaints received
Customer satisfaction number of new accounts lost or gained speed of response to
customer needs  informal listening by calling a certain
number of customers each week
Quality of working life number of factory and non-factory manager visits to
customers  days absence labour turnover overtime measures
of job satisfaction
Innovation proportion of new products and services to old one
 new product or service sales levels
Quality of output returns from customers reject rates reworking costs warranty
costs
• Problems with non-financial performance
indicators
– wide range of performance indicators can be time-
consuming and costly
– complex system that managers may find difficult
to understand
– no clear set of NFPIs that the organisation must
use
– scope for comparison with other organisations is
limited
• Using Key Performance Indicators (KPIs) in
scenarios
– KPIs may be presented in the scenario along with
financial indicators
2. Benchmarking
• Why benchmark?
– Benchmarking is the process of systematic
comparison of a service, practice or process.
– Its use is to provide a target for action in order to
improve competitive position.
• The strategic role of benchmarking
– In strategic analysis it can be used in value chain
analysis to compare one company's values to
another
– In making strategic choices
– In putting strategy into action
– There will be links between benchmarking, critical
success factors (CSFs) and key performance
indicators (KPIs).
• Types of benchmarking
– Internal benchmarking
– Competitive benchmarking
– Generic benchmarking
• Benefits and dangers of benchmarking
– The main benefits include:
• improved understanding of environmental pressures
• improved competitive position
• a creative process of change
• a target to motivate and improve operations
• increased rate of organisational learning
– Dangers of benchmarking
• not always reveal the reasons for good/poor
performance
• benchmarking exercise can appear to threaten staff  
3. Multi variable performance analysis
– Organisations should combine financial and non-
financial performance measures in order to
provide a broader view of the organisation’s
performance and position. There are different
tools one such tool is
• The balanced scorecard
– This suggests that appraise performance from four
perspectives
• a financial perspective
• a customer perspective
• an innovation perspective
• an internal business process perspective
• Baldrige performance excellence
– This was developed by Malcom Baldrige as a way
of measuring and rewarding those organisations
that have performed better than their
contemporaries
– The Baldrige model assesses across seven
categories
• Leadership
• Strategy
• Customers
• Workforce
• Operations
• Results
• Measurement, analysis, and knowledge management
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