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Improving your Advanced

Performance Management
answers – part 2

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This article aims to give clarity on the level of response that is required in an APM answer. It will address a specific past
exam question that caused considerable difficulty in the June 2014 session. The article follows on from the first part (see

'Related links') giving examples of weak answers, and will discuss two possible passing solutions to this question. Then it
will consider a marker’s view of each one.
In reading through these solutions and the marker’s comments, candidates should gain a better understanding of the
breadth and depth of solution that a marker is expecting. Comments are made in [ ] after each paragraph, where
appropriate.

Before reading this article, it is essential to have read the scenario and requirement for Question 1, part (i) of the June
2014 APM exam and it will be helpful to keep these to hand. The requirement is repeated here for clarity.

Requirement:
Write a report to the CEO of Cantor to:

(i) Evaluate the current performance report in Appendix 1. (15 marks)

The first example (numbered 3 to be consistent with the earlier article) is based on several, very good solutions seen. The
spelling and grammar has been slightly tidied up but not perfected so that this solution is understandable but not overly
polished. This solution’s length reflects real exam efforts.

Example solution 3 – an excellent, passing solution

The current performance report has the following merits to it:

It represents the results of the two subsidiaries separately along with total group results, thus enabling for specific
management and measurement of the subsidiaries, which represents different types of business and also allowing for

internal benchmarking.

[Comment: Valuable here are the implicit identification of the different users of the report, different businesses
(though, more accurately, it is their different stage of development) and the appropriate use of the jargon term

‘internal benchmarking’.]

The report also shows comparisons of budgeted and actual results, allowing for analysis and continuous improvement of
planning and budgeting processes.

The report also provides a list of margins on the group level, so allowing for efficiency and profitability analysis and
conclusions.

[Comment: Notice how, in the second and third points, the author has not just identified what the report does,

but has then said why it is helpful (‘allowing for analysis and continuous improvement of planning and budgeting
processes’).]
The report shows industry averages, thus allowing for external benchmarking and preventing company from internal
focus, smugness and putting company’s performance into perspective.

[Comment: The language strays here a little from the professional (‘smugness’) but a marker would allow some
latitude as the general point is well made.]

The report also shows detailisation for food and drink sales within the group and subsidiary, enabling detailed analysis of
product mix and product margins.

[Comment: ‘Detailisation’ is an overly complicated way of saying ‘a breakdown’. Markers prefer simple, clear
language. Also, the breakdown is not at a product level so this comment is not entirely accurate. Better would
have been to mention what detail is given and then to say what detail would be helpful for the boards.]

Operational costs are very detailed allowing for deep evaluation which is in line with the idea of cost control and cost
reduction, which is a vital part of most business management processes.

[Comment: A prime reason why this is a good answer is that most of the points are structured to state what the

report does and then why (and often, how) this is beneficial. Notice that the answer does not just declare that the
point at issue in the report is ‘good’, it explains why this is so.]

However, there are some drawbacks to the report:

The report is obviously overloaded with information. It’s difficult (almost impossible) to understand for non-financial people
and members of the board. This is helpful information for the financial managers but it will prove of little use for the top
level of the company.

[Comment: This point is a little confused. It actually appears to be making two points. First, that there is
information overload and secondly the use of excessive financial jargon. It might also be considered insulting to
the board to imply they cannot read a basic set of accounts. It would be improved by a specific example of how
the report goes wrong – for example, poor rounding choice or how to improve the report – eg which margins
should be highlighted.]

The report consists only of financial information, lacking some non-financial aspects which are very important for the
business of Cantor, such as customers’ satisfaction, brand awareness and brand loyalty, staff turnover (especially in the
light of new staff angle of the mission statement).
[Comment: This may not be perfectly put, but is an excellent point as it is justified by using the mission of the
company.]

Some vital financial information is missing as well. Cantor is a listed company stating maximisation of shareholders’
wealth as its primary objective – but there are no measures of shareholders’ wealth on the report. It could be useful to
include such traditional measures as total shareholders return (TSR), price to earnings (P/E), earnings and dividend
yields, earnings per share (EPS) and such. However, this matter is expected to be addressed after the introduction of

VBM and EVA as its main part.

[Comment: Again, this is well justified by reference to the mission though a logical approach would have put
point 3 ahead of point 2. Also, a marker will like the fact that the solution links the point about VBM to this area
as it shows that the candidate is grasping an overall view of the problems faced by Cantor.]

As we know, Cafes and Juicey are very different types of business, Cafes is a mature business with a saturated market
and low expected growth, whereas Juicey is a young, rapidly developing business. According to the BCG matrix, they can

be classified as cash cow and star respectively, so it would be logical to introduce different measures for them. For
Cafes – cash flows, cost measures (cost margins, cost variances, cost trends) and for Juicey – profitability, market share,
number of new Cafes launched and such.

[Comment: Here is a good illustration of how to use the models that the APM syllabus contains in a suitable
context. It is a common mistake here to realise the BCG matrix may help but then to wander away into a lengthy

(and unnecessary) definition and description of the BCG matrix. The solution has used the jargon correctly in
context and demonstrated this in the specific advice given. A very good approach.]

Properties are very important for restaurant business in general and so for Cafes and Juicey as well. This part of activities

needs special control and attention. Cafes are renting on the open market and use standard lease terms (here we should
control lease payments to ensure they don’t exceed market levels). Juicey is experiencing the monopoly of one supplier

(strong bargaining power according to Porter’s Five Forces model). So the calculation of rentals which is a percentage of
revenue should be controlled.

[Comment: These are useful performance management points but they are in danger of not being relevant to the
question asked. They can be made clearly relevant to the report (and so the question) by explaining what metrics
should be appearing in the report (for example, benchmark of open market fixed and variable rental charges or
alternatively, the market inflation rate of these amounts). It would not be wise, however, to take this advice as
implying that it would be better to add to the report many new metrics since this contradicts point 1 above.
However, given that the solution has justified this specific point as of particular importance to Cantor, it would
seem reasonable to make such a suggestion here. A further improvement might be to suggest what data in the

existing report should be dropped to allow for this inclusion.]

It’s also not recommended that Cantor use one report for the purposes of all three boards. Cantor should customise its
reports, issuing three different reports which would address special strategies and factors of both Cafes and Juicey and
would be more aggregated for Cantor as a parent company.

[Comment: Much more could be said about this; however, the answer has at least shown how this improvement
could be done (‘more aggregated for Cantor’).]

I’d also recommend the rounding up of figures to represent them in thousands (‘000), not in dollars – it adds little but
excessively clogs the report.

[Comment: A marker would be happy to see this minor point towards the end of the list.]

It also would assist managerial decision making and appraisal if previous year’s comparative figures would appear on the
report allowing for year on year comparison.

[Comment: Again note that this solution does not just say include historic comparatives, it states why, although
it might be better put as ‘allowing for historic trends to be shown’.]

Summary
Overall, the answer has a good logical structure – merits then drawbacks which is what is expected when the verb
‘evaluate’ is used. Within the lists of points, there is some effort to prioritise but this could be improved – see third
drawback.

More and different points could be made, but in a time-limited examination this is an excellent effort. It may be worth

noting that this answer contains c.600 words while the poor answer example for the same question (in the earlier article)
had c.800 words and would have scored less than half as many marks! Quality not quantity is what markers and your
future employers seek.

Example solution 4 – the model solution

A detailed commentary on this solution is provided at the end.

Current performance report

The current report has a number of strengths and weaknesses. These will be discussed according to whether the report:
 • addresses the overall aims of the group

• assists the individual subsidiaries

• is well presented

• contains appropriate information for decision-making.

The current mission of the group can be broken down into three parts:

• to maximise shareholder value

• supplying good value food and drink, and

• providing appealing environments for our customers.

The report does not directly measure shareholder value which could be done through considering net present value or

economic value added (EVA™) or share price and dividends. This problem has been recognised and is addressed in a
later section of this report. The current report uses period profits as its main measure of performance. This can suffer from
being short term unlike the shareholder value measures mentioned. The report does compare budget and actual

performance which gives an indication of whether plans are being followed and is helpful in controlling the organisation.

There is an indirect measure of the customer value being offered by the group through the gross profit which, when
compared to the industry average, gives a partial measure of value but without data on the price/quality mix compared to
competitors, it is difficult to be conclusive about this. Revenue growth compared to industry growth would aid in giving an

impression of the attractiveness of our offering to the customer. However, no historic information is given which would
allow trends to be calculated.

Measuring the appeal of the sites to customers will be difficult and involve subjective non-financial measurements.
Customer loyalty and price elasticity of demand will give some indication of the appeal but it will be difficult without directly

surveying customers to untie this from the issues of price/quality mentioned above.

The main board would probably find it easier if less detailed figures were given and a clear statement of the key measures
of subsidiary performance provided.

The report seems to treat the subsidiaries in the same way as the group, using profit and comparison to industry average
margins and budgets as the main assessment tools. As already mentioned, the reporting of performance against budget

is a helpful control tool. However, as the subsidiaries will have more detailed issues than the group, it does not seem
appropriate to be using the same high-level overview as for the group board. For the subsidiaries, it would be expected

that there would be a more detailed breakdown of revenues and gross margins by product line. Marketing, which is a
significant cost, is not attributed to specific sites/products which would help to explain the changes in these categories.
The subsidiary managers would probably benefit from the inclusion of a breakdown of profit by geographical region as
well. It would seem that the measure being used to assess subsidiary performance would be the operating profit, which is
appropriate as it contains the elements of performance controllable by the subsidiaries’ managers. The annual reporting
period would also appear to be too lengthy to allow the detailed control of operations required by the subsidiary boards.

In terms of presentation, the data is clear and in a form which would be easily recognisable to those used to reading
accounts. However, it is common to provide a narrative commentary with such a report in order to highlight the key
features in the report, such as major deviations from the budget or performance well outside industry norms. The report

could be made easier to read by rounding all figures to thousands and thus removing unnecessary detail.

To summarise, additional information which could be supplied in the report also includes:

• historic information to demonstrate trends (especially important at Juicey with its fast growth)

• greater detail by product or site to aid the managers of the subsidiaries

• competitor information relating to their performance in the three areas of Cantor’s mission (shareholder value,
product value, site appeal)

[Overall commentary:
As with all model solutions, this is longer than a marker would expect to see produced in the time limits of the
exam. This model solution has more than 15 marks within it (probably about 20 marks).

However, this is the top of the standard expected in terms of the depth of points made – not beyond that
standard! It would be wise to study how each point is supported by evidence or argument from the scenario or
else is developed. The answer tries to avoid making unsupported judgements. As an example, in the second last
paragraph, the solution does not only say ‘However, a narrative commentary should always be provided in such

a report.’ Instead, it says ‘However, it is common to provide a narrative commentary with such a report in order to
highlight the key features in the report,’ (reason/benefit) ‘such as major deviations from the budget or
performance well outside industry norms’ (specific example). It is the italicised clauses that the marker is looking
for.

Another feature of the model solution is its logical structure. The model solution begins with the most important
point of view: the group board’s perspective. It lays out the group strategy and then assesses whether the report

is measuring the achievement of the strategy. Then, it goes deeper by considering the needs of the subsidiaries’
boards. Finally, it finishes with probably, the least important points about general presentation and provides a
short summary.

Having read this article, prepare (or if already done)/review your own solution to this question so that you can
see where improvements can be made.]
Written by a member of the Advanced Performance Management examining team

 Related links

• Improving your Advanced Performance Management answers – part 1

• Student Accountant hub

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