Measuring Strategic Performance

Question 1

What is the final step in the strategic planning process?

Answer 1

Evaluating performance

Question 2

Why are evaluation and control important in strategic management?

Answer 2

They ensure alignment with goals, provide feedback, and allow for adjustments.

Question 3

What should effective evaluation systems provide?

Answer 3

• Timely data
• Accurate data
• Relevant data

Question 4

What are critical success factors?

(CSFs)

Answer 4

Core activities or conditions essential for executing a strategy successfully.

Question 5

What is the purpose of key performance indicators (KPIs)?

Answer 5

To measure performance in critical success factors essential to competitive advantage.

Question 6

What should be aligned with strategic and operational goals to ensure goal congruence?

Answer 6

Performance evaluation and reward systems.

Question 7

What is the relationship among planning, budgeting, and performance evaluation?

Answer 7

They form a feedback loop to set objectives, allocate resources, monitor performance, and make adjustments.

Question 8

What is a flexible budget?

Answer 8

A budget that recalculates projections using actual sales volume.

Question 9

What are the steps in the control loop process?

Answer 9

• Establish the budget or performance standards
• Measure actual performance
• Analyze and compare actual results with budgeted results
• Investigate and report on unexpected variances
• Prepare and submit variance reports
• Devise and implement corrective actions
• Review and revise budget or standards

Question 10

Why is timing critical in evaluation systems?

Answer 10

Delayed information weakens the ability to inform action.

Question 11

What is goal congruence?

Answer 11

Alignment of individual, departmental, and business unit actions with broader strategic objectives.

Question 12

What should be considered in effective strategy evaluation?

Answer 12

• Cost-effectiveness
• Timeliness
• Relevance to core objectives
• Accurate reflection of results

Question 13

What is management by exception?

Answer 13

A technique that focuses managerial attention on significant deviations from expected performance.

This approach helps streamline decision-making by concentrating resources on substantial variances from the budget or standard.

Question 14

What are the risks associated with management by exception?

Answer 14

• Negative trends may be overlooked if the threshold for exception reporting is too high.
• Management can be overwhelmed if too many exceptions are reported at once.
• Important trends may be missed if focus is too narrow.

Question 15

Who introduced the concept of the balanced scorecard?

Answer 15

Drs. Robert Kaplan and David Norton

The concept was introduced in a Harvard Business Review article in 1992 and has since evolved significantly.

Question 16

What are the four perspectives of the balanced scorecard?

Answer 16

• Financial perspective
• Customer perspective
• Internal Process perspective
• Learning and Growth perspective

Each perspective supports the others in a hierarchy that drives long-term financial success.

Question 17

What is the purpose of a strategy map in the balanced scorecard framework?

Answer 17

To visually link the four Balanced Scorecard perspectives, creating a cause-and-effect chain that supports Financial outcomes.

It helps make the logic of the strategic plan transparent to all employees.

Question 18

What does the Financial perspective of the balanced scorecard focus on?

Answer 18

Whether the company’s strategy, implementation, and execution contribute to improved bottom-line results.

Question 19

What are the types of benchmarks?

Answer 19

• Financial benchmarks
• Nonfinancial benchmarks
• Internal benchmarks
• External benchmarks

Question 20

What are the limitations of benchmarking?

Answer 20

• Ethical and legal standards must be followed in gathering information.
• Comparisons must be appropriate and take into account differences in scale or business model.

Question 21

What are the steps in the benchmarking process?

Answer 21

• Select and prioritize benchmarking projects
• Organize benchmarking teams
• Research and identify best-in-class practices
• Analyze critical success factors
• Implement best practices
• Follow up and make adjustments

Question 22

Fill in the blank:

Non-financial indicators in the balanced scorecard are ______ measures.

Answer 22

leading

Question 23

True or False:

The balanced scorecard system should be treated as a top-down monitoring tool.

Answer 23

False

Question 24

What is a key ethical concern when gathering benchmarking information?

Answer 24

Ethical and legal standards must be followed.

Using public sources like websites and industry publications is acceptable, but corporate espionage and unauthorized access to competitor data are unethical and illegal.

Question 25

Why must benchmarking involve **appropriate comparisons**?

Answer 25

To ensure data comparability and avoid poor decision making. ## Footnote Differences in scale, business model, or accounting choices can lead to mismatched data and ineffective benchmarks.

Question 26

What can be a **consequence** of overemphasizing meeting benchmark targets?

Answer 26

It can lead to unintended consequences such as increased employee stress and sacrificing quality. ## Footnote Short-term gains may come at the cost of long-term relationships or brand equity.

Question 27

What is the role of evaluation and control in **strategic management**?

Answer 27

They serve as the feedback loop that ensures strategies are working as intended. ## Footnote Effective evaluation systems must be timely, accurate, and aligned with organizational objectives.

Question 28

Which **tools** help monitor progress and link day-to-day performance to long-term goals?

Answer 28

Balanced scorecards, strategy maps, benchmarking, and budget variance reports. ## Footnote These tools help organizations adapt and sustain strategic alignment over time.

Question 29

What are **common financial measures** used in reporting results?

Answer 29

* Return on investment (ROI) * Residual income * Earnings per share (EPS) * Economic Value Added (EVA®) * Operating cash flow * The DuPont formula

Question 30

What is the **formula** for calculating Return on Investment (ROI)?

Answer 30

ROI = Income of Business Unit / Assets of Business Unit

Question 31

What is the **required rate of return** also known as?

Answer 31

The hurdle rate ## Footnote It is the minimum return a project or business segment must generate to justify investment.

Question 32

What is a **major disadvantage** of using ROI for performance measurement?

Answer 32

It expresses performance as a percentage rather than in absolute monetary terms. ## Footnote This can create an incentive problem when managers are evaluated solely on improving ROI.

Question 33

What does **Residual Income** (RI) measure?

Answer 33

The surplus income a unit earns after covering the cost of the capital invested in it. ## Footnote RI promotes decisions that increase overall company value, even if they reduce divisional ROI.

Question 34

How is **Economic Value Added** (EVA®) calculated?

Answer 34

Operating income after taxes minus (Book Value of Total Assets – Current Liabilities) × WACC

Question 35

What is **Earnings Per Share** (EPS)?

Answer 35

The amount of income the holder of one share of common stock would have received if 100% of the company’s earnings had been distributed as dividends.

Question 36

What is the **difference** between Basic EPS and Diluted EPS?

Answer 36

* **Basic EPS** is for all common shares outstanding * **Diluted EPS** accounts for potentially issuable and dilutive common shares

Question 37

What does **Operating Cash Flow** measure?

Answer 37

How much cash is generated by the company’s normal business operations.

Question 38

What is the **significance** of operating cash flow for a company?

Answer 38

Operating cash flow measures how much cash is generated by a company’s normal business operations. ## Footnote Positive operating cash flows are essential for a company to invest, grow, and achieve long-term strategic goals. Negative cash flows may indicate potential financial difficulties.

Question 39

What does the **DuPont Formula** for Return on Assets (ROA) analyze?

Answer 39

* Efficiency of asset usage (asset turnover ratio) * Efficiency of operations (net profit margin percentage) ## Footnote The DuPont Formula breaks ROA into these components to show how sales revenue and profitability affect asset returns.

Question 40

How is **Return on Equity** (ROE) broken down using the DuPont formula?

Answer 40

* Return on Assets (ROA) * Equity Multiplier (financial leverage) ## Footnote The DuPont analysis reveals how asset efficiency, operational efficiency, and financial leverage together influence ROE.

Question 41

What are **liquidity ratios** used to measure?

Answer 41

The sufficiency of the firm’s cash resources to meet its short-term cash obligations. ## Footnote Common liquidity ratios include the current ratio, quick ratio, and cash ratio.

Question 42

What does the **current ratio** indicate?

Answer 42

The liquidity of a company by relating current assets to the claims of short-term creditors. ## Footnote A standard current ratio is 2:1, with lower ratios indicating potential liquidity problems.

Question 43

What does the **debt to equity ratio** represent?

Answer 43

The comparison of financing from creditors versus owners in the form of equity. ## Footnote This ratio provides insight into a company's capital structure and financial leverage.

Question 44

How is the **interest coverage ratio** calculated?

Answer 44

Earnings Before Interest and Taxes (EBIT) ÷ Interest Expense ## Footnote Also known as the times interest earned ratio, it compares funds available to pay interest to the interest expense.

Question 45

What does the **inventory turnover ratio** measure?

Answer 45

How many times during the year the company sells its average level of inventory and replaces it with new inventory. ## Footnote It indicates the efficiency of inventory management.

Question 46

What does the **price/earnings (P/E) ratio** indicate?

Answer 46

What shareholders are paying for continuing earnings per share. ## Footnote It is viewed as an indication of the firm’s future earning power by investors.

Question 47

Define the **net profit margin percentage**.

Answer 47

Net Income ÷ Sales Revenue ## Footnote This ratio measures the percentage of sales revenue that becomes profit.

Question 48

What **factors** should be considered in product profitability analysis?

Answer 48

* Direct costs of manufacturing or purchasing * Marketing and advertising expenditures * Allocation of overhead expenses ## Footnote Overhead expenses include rent, utilities, and administrative support.

Question 49

Why might a low-performing product **not be discontinued**?

Answer 49

* Role in a bundle * Contribution to customer retention * Potential for future growth ## Footnote Strategic considerations may justify continued investment despite low performance.

Question 50

What **factors** should be considered when evaluating business unit profitability?

Answer 50

* Financial performance * Strategic value to the organization * Interdependencies with other units ## Footnote Consider both quantitative and qualitative factors, including intangible benefits like brand visibility and innovation.

Question 51

What should be included in a **customer profitability analysis**?

Answer 51

* All revenues * All costs associated with serving the customer * Special concessions and service requirements ## Footnote Consider factors like timely payment behavior, returns, and support demands.

Question 52

What are **some challenges** in measuring performance of operations in different countries?

Answer 52

* Economic environments * Political, social, and cultural differences * Currency exchange rates and laws ## Footnote Legal and regulatory requirements and infrastructure differences also impact performance comparisons.

Question 53

How does **transfer pricing** affect multinational corporations?

Answer 53

It impacts global tax obligations by determining how much income is reported in each jurisdiction. ## Footnote Transfer prices between related parties should reflect arm’s-length transactions to ensure fair tax reporting.

Question 54

What is the purpose of **post-completion audits**?

Answer 54

To compare actual outcomes against original expectations and reinforce accountability. ## Footnote They help improve forecasting, planning, and execution in strategic projects.

Question 55

What **practices** promote transparency and strategic alignment in reporting?

Answer 55

* Balanced scorecards * Benchmarking * Profitability analyses ## Footnote These practices also support continuous improvement and informed resource allocation.