1 STRATEGY – VIRGIN AUS

Strategy

Low cost (cost leadership) Product differentiation

Single plan type Multiple plan range
Economy only Business class added
Popular routes On-board food, drink
Common KPI across airline industry:

Financial Non-financial
Revenue per available sear kilomter Available sear kilometer: indicates capacity

Revenue from corporate and government Revenue factor load: 80% of the seats are
sector filled. 20% empty, not used capacity cannot be
recovered

Cash flows from operating activities Passengers carreied: stay the same

EBIT Market share of business class

Financial leverage, net debt Number of members in loyalty program

Risk framework

Strategic risk Operational risk Financial risk Compliance risk

Disruptive The “rogue trader” Credit risk - Ford Emission regulation -
technology - NOKIA problem – Barings Volkswagen
Bank
Galaxy Note 7 – Breach of anti-
Samsung money-laundering
law - CBA
Cowmilka
- Change in customer - Drought and - Cost of foreign - Health and safety
tastes seasonal factors acquisition - Foreign investment
- Substitue products - Quality of milk - Cost of integration rules (NZ)
- Increase in price - Management - Foreign exchange
results in lower transition at Fintona - Cost of inputs
affordability Cheese
- Monitor the market - Diversify sources of - Due diligence - Ensure staff are
- Build brand loyalty supplis - Hedge advisors familiar with
- Launch new - R&D - Hedging regulations
products - Inspections/quality - Use advisors
cont. - Internal compliance
- Standard operating audits
procedures
Virgin Airlines
- new entrants - aircraft reliability - CASA rules and - foreign exchange
- substitue - safety-related issues monitoring
products/services - capacity
- price wards - IT-related issues - airport curfews
- consumer - crew fatigue
- government policies
confidence
- privacy breaches
around loyalty and
frequent flyer
programs
- regular and - aircraft - regular and - hedging policies
systematic maintenance systematic
monitoring of market protocols met inspections and
dynamics audits to monitor
- regular analysis of - IT prevenetative compliance
pricing, costs and maintenance
activity levels undertaken - promote workplace
- strengthen systematically culture focused on
customer loyalty competence and
- food quality audits
programs ethical behavior

Walker Books
- disruptive - financial difficulties
technology: ebook, - cash reserves drain
audio book - lose suppliers,
- large acquisition printing companies
- competitive and - no access to
dynamic market additional capital
(Amazon, Barnes &
Noble)
- focus resources and - consolidate the - reduce number of
expertise in business titles published
differentiation - maintain highly - reduce overhead
- publish better skilled and expenses
quality titles competent editors
- improve
relationships with
authors

2 STRUCTURE - ECOTRIPP

functional divisional matrix

- Encourages specialisation: good for
developing expertise, depth of
knowledge and economies of scale and
scope
- Clear accountability and chain of
command: CEO has good visibility of
organisational functions; all functions
co-ordinated at one point – the CEO
- Should allow Kranworth to be
customer responsive. The two divisions
created essentially relate to the two key
markets Kranworth operates in; namely
the Retail (relatively standard higher
volume lower margin products) and
Custom (more specialised products with
higher margins) Divisions
- Identify more (less) profitable products
and customers
- Promote decentralised decision
making. Decisions relating to the core
activities of each of the work of the
divisions can now be made managers
closed to the respective markets. (might
not be a benefit because managers’
mindset is not open and want control)

- - How well senior management is able to

“give-up” the decision making authority
to the divisional and responsibility
 centre managers. Kevin is struggling
with this. It is clearly the case.
- Whether the right people have been
given the senior positions within
divisions and responsibility centres. For
example, Kevin had expresesd concern
about Joe Yarmouth who would be
appointed the general manager of Retail
Division.
- Less goal congruence as managers
focus only on their unit and key
responsiblities: although the
management control system tries to help
here with CRs measure and the 75:25.
- Difficulties associated with cost
allocations to the divisions. For example,
there is some unrest relating to the R&D
cost allocations and support. This is
causing significant.

functional divisional matrix

- Encourages specialisation
- Clear accountability and chain of
command
- All functions co-ordinated at one point:
the CEO
- direct attention to marketplace results - market responsive but keep
rather than process results economies of scale
- responsive to demands of specific
producst/regional demands/markets/clients - dual hierarchy
encourages learning, collaboration
- hold divisional managers accountable for across segments and utilise
end-to-end results, specialist skills

- encourage them to be autonomous - empowerment of cross-units,

consultation, consensus. Not
individual accountability, autonomy
- Horizontal information flow tends to - decentralised functions may be duplicated; - creat unsolved tensions between
be problematic lose economies of scale unit managers

- Top management is overloaded with
opeartional decision
- Work unit managers tend to focus
exclusively on their unit’s efficiencies
- Measuring performance is difficult.
Estimating the value added at each
function (R&D, design,
sales&marketing)
- horizontal information flow tends to be
problematic: competition not collaboration
- less goal congruence as managers focus only
on their unit and key responsiblities
- dual hierarchy may be confusing
and excessively bureaucratic, one
team with two superior
- matrix subunits become frustrated
with conflicting directives
- power struggles emerge and
political maneuvering drains the
organisation’s resources

- Managers see a homogeneous market.

Centralised Decentralised
Approach Top down. Senior managers make all More input from employee. How to treat
decisions: strategy, product, a dissatisfied customer, launch a new
implementation project
Timely decision - Info complete, quick Timely decision, responsive
- Info incomplete, knowledge from sub-
units is requried, slow decision-making
process
Economic condition Stable operations Dynamic/volatile
Employee’s morale - more monitoring of employee efforts - autonomy encourages optimal efforts
at sub-unit level
- lack of coordination among sub-unit,
not goal congruence
Managment less monitoring of decisions upper management has more time to
 focus on org. strategies

Type of structure (informal, Degree of Extent of work Span of

functional, divisional, matrix) centralisation specialisation control

Round 0 Informal
Round 1 Functional: Finances, sales, - strategic: top Employees are 2
marketing, HR, product, operations management expected to enhance
- product: supervisors their knowledge and
- implementation: formally trained. (No
individual contributors cross train, no project
Top down management team)
Round 2 Divisional: Split product, marketing, A little decentralised Formally trained but 8
(horizontal and sales departments into Americas - existing products and also cross-trained
and Divisions, Europa Division, Asia services is shared.
geographic) Division - rest is top-down

Round 3 Matrix: Keep Europe Division, Asia Even more Cross-trained and feel 8
Division, Americas Division, and add decentralised free to change team
Hotel, Flight, and Activities - existing products and
departments services is shared among
State the 2 dimensions (region x bottom three
product, function, customer type) - new products and
services is shared among
the botttom 2 (excluding
the lowest)
- rest is top-down

3 ROI, RI - KRANWORTH
ROI = controllable profits/assets employed
RI = controllable profits – required rate of return*assets employed
What is controllable profits? EBIT, earnings before interest and taxes, income from operations.
Not: income from continuing/discontinued operations (since they are after taxed).
What is assets empoyed? Total assets on balance sheet.

Short-term orientation:
Cut R&D, training
Reduce employees
Defer asset replacement
Forego desirable long-term investments

Solutions to negative behavioural influences:

- Use of ROI over a longer time period: Long range strategic planning. (because
shorter period  short term focus, not good). Change time period from annual to 3-5
year averages
- Management service histories: length of tenure
- Goal congruent environment. Senior management develop close links with
divisional managers
 - Use of multiple performance measures: a balanced set of long-term/short-term;
financial/non-financial
BUT NOT: use of ROI on a relative (comparative) performance basis

4 INTERNAL TRANSFER PRICING – BIRCH PAPERS,

GOLIATH
Eccles’ organisational characteristic
Five characteristics of the organisation that influence internal transfer pricing policy: (1 –
method; 2 – sourcing autonomy)

- The nature of corporate strategy and the strategic planning process [org. strategy]
- The primary means of control by top management [decision making process:
decentralised, centralised]
- The criteria for performance measurement, evaluation, and reward
- The definition of fairness in the company [Distributive bargaining process = win-lose or
integrative bargaining process = win-win]
- The nature of the managerial processes [strategic planning process: top down, bottom
up]
Which method to use?

- Organisational strategy
- Availability of market price
- Idle capacity
- Organisational structure
Problems:

- Frequency: recurrent or one-off

- Magnitude: overall business volume
- Level of sourcing autonomy

Goliath – Take-aways
1. In many cases, the same information, but different internal transfer pricing (ITP)
methods may facilitate different decisions
2. In some settings, ITP methods are more likely to facilitate goal congrugence (in the case
of Goliath the negotiated and market-based policies facilitated the most desirable
outcomes for the firm)
3. In some settings, dual-pricing seems to facilitate an internal transaction, even when it
does not benefit the firm (in the case of Goliath the buyer and seller were generously
subsidised)
4. It is important to consider any issues of idle capacity or capacity constraints when
deciding upon an appropriate ITP method
 5. The degree to which sourcing autonomy is allowed is also antoher important policy
consideration and will most likely influence decision making (in the case of Goliath all
divisional maangers had full sourcing autonomy)
Student follow-up activity:
Write a short summary (half a page or so) in your own words describing why having a suitable
Transfer Pricing Policy is an important control mechanism (using Goliath to demonstrate) for
particular organisations (e.g. for competitive or cooperative types per the Eccles article).
Competitive organisation:

- Corporate strategy is the sum of business unit strategies

- Decision making: decentralise to the business unit level
- Strategic planning process is bottom-up
- Distributive bargaining process: win-lose
- Use market price less discount (no selling costs, credit risk) or cost-plus-profit markup if
no market price
- Cannot use dual pricing because neither division has the incentive to monitor the
performance of the other, which is a central characteristic of the competitive
organisation. (exception: dual pricing enables a division selling betteries as a
replacement part to price more competitively and regain lost market share)
Cooperative organisation:

- Corporate strategy is established for the company as a whole

- Decisions rest at the top of the organisation
- Strategic planning process is top-down
- Inegrative bargaining process: win-win
Use full cost. The purpose of transfer prices is to accumulate total costs as if the end products
were manufactured completely within a signle business uni

Characteristic Competitive Cooperative Collaborative

Strategy Aggregate of division’s Total company strategy Mutually defined total
strategies company business
perspectitves
Structure Multidivisional Functional Matrix
Systems Profits, ROI compared with Costs compared with budgets Combination of costs,
budget, internally and and history profit, and ROI compared
externally with budget
Processes Bottom-up; distributive Top-down; integrative Iterative; mixed-mode
bargaining bargaining bargaining
Method of Impartial spectator Shared fate Rational trust
managers’
fairness
evaluation
Top Through systems on Through structure on actions Through processes
management outcomes balancing structure and
control systems
Transfer pricing Dual pricing, market price, use full cost. The purpose of market price less discount
method constraint sourcing, Use transfer prices is to (no selling costs, credit
market price less discount accumulate total costs as if risk) or cost-plus-profit
 (no selling costs, credit risk) the end products were markup if no market price
or cost-plus-profit markup if manufactured completely
no market price within a signle business unit.

5 BALANCED SCORECARD, STRATEGY MAP

5.1 QUESTION 1
Explore four common mistakes with respect to non-financial measures.

Mistakes Describe mistakes Solutions

Not linking measures Treat BSC as off-the-shelf
to strategy checklist or procedure that is
universally applicable and
completely comprehensive
Not validating the links Does accelerating product-
Not investigate development time lead to
whether there is a increase market share (not if
plausible relationship our new products are only
between actions and minutely different from our
outcomes, earlier models or we have
merely reverse-engineered
those of our competitors).
Not setting the right Outstanding nonfinancial
performance targets performance is not always
beneficial. It often produces
diminishing or negative
eocnomic returns. 100%
customer satisfaction.
Choose metrics based on causal
models, value driver maps, lay out
the plausible cause-and-effect
relationships that may exist
between the chosen drivers of
strategic success and outcome
Based weightings purely on their
assumptions about measures’
strategic importance
Need to understand when the pay-
off comes for an improvement in a
non-financial performance
measure …. Sometimes seeking
further improvement in a measure
is counter-productive.

Measuring incorrectly Validity (a metric suceeds in

capturing what is supposed to
capture); Reliability (free of
measurement error)

Apply to Chemico case.

Causal link
Measures for Chemico Definition for Chemico

Financial Perspective
Net profit after tax divided by Profitability
1. Return on Investment total assets.
Percentage increase in sales Revenue growth
2. Revenue Growth revenue

3. Net Profit Margin Net income/net sales

4. Reduction in Production
Costs
Customer perspective
1. Customer retention
2. Price per kg
3. Customer satisfaction
rating
4. Market Share
Internal process
perspective
1. Quality measure
2. Number of improvements
implemented
3. Employee productivity
(output per employee hour;
kg/hr)
4. Capacity utilization
percentage
Learning and growth
perspective
1. Employee satisfaction
survey
2. Employee suggestions
3. Employee turnover
(engineers)
4. Hours of employee
training (hrs)
Environmental
perspective
1. Toxicity of air emissions
(ppm)
Percentage reduction in Lower production costs
production costs
Percentage of customers
making repeat purchases
Not setting the right
performance targets.
Could lead to negative
economic returns. RED
Sales price FLAG
Based on a survey of existing
customers, score is out of 100
Sales revenue as a percentage Capture market share
of total industry sales in the
country
The product's score on an
aggregate measure of quality
Not validate the link
between improvements
Number of employee implemented and
suggestions chosen to be process management
implemented skills
Total output of completed
product divided by total
operating employee hours
Actual production level as a
percentage of ideal operating
capacity.
Outstanding nonfinancial
performance is not
always beneficial. It
often produces
diminishing or negative
Score (out of 100) on an eocnomic returns. 100%
employee satisfaction survey customer satisfaction.
Number of employee
suggestions chosen submitted
through the formal employee Suggestions not reflect
suggestion scheme. enginners’ innovations.
Percentage of engineers that
cease employment.
Hours of training per employee
Parts per million of toxic
substances in the air
emissions.
2. Toxicity of water
emissions (ppm)
3. Coal Usage (tons of coal
per 10,000kg of output)
4. Accidental release of
untreated waste (litres)
Parts per million of toxic
substances in the wastewater
Quantity of coal used for each
10,000 kg of completed
product
Quantity of waste released
intot he environment.

Description of strategy map

 Produce an innovative type of plastic that is replacing steel in production of care.

 Continually reducing production costs and effective utilisation of its expensive plant and
equipment.
 Capture market share by providing the cheapest product on the market.
 Highly toxic waste associated with the production process must be managed carefully.
 Highly trained and experienced engineers ensure efficient process and continual
improvement.
 Objective: invest in training and workplace conditions  improve engineers’ innovation
and process management skills.  more efficient operations, lower production costs.
 Low prices but maintian a high gross margin  market share increases
5.2 QUESTION 4

ROI and a customer satisfaction index

ROI: controllable regional profit/controllable regional assets
Customer satisfaction index: based on a likert scale rating across four key factors
Strategic direction: develop its competitive advantages.

Whether there are any critical performance metrics relevant to the division and the three
regions that are not captured in the current BSC. If so, what can be done about it?
Environmental impact. Add to the internal perspective, instead of employee productivity
implemented. It could be carbon emissions (ppm)
To make a successful BSC project, throughout the company,
some metrics are better to be applied at organisation level, not divisional/unit level. Share price.
Economic value added (EVA).
Take into account the unique characteristics of each division. Selecting useful metrics at varying
levels within the organisation
Causal links in the strategy map must be scrutinised to ensure that strategic objectives do indeed
lead to the intended competitive advantage. Selecting metrics that reflect the strategic objectives
Avoiding too many metrics
Part a

Which measure is The new measure How it will be Why it should be part
being replaced calculated of BSC for Wine div.
Reduction in Asset turnover Sales revenue/ Net profit margin
production costs Employed assets and reduction in
production costs may
tell the same story.
Asset turnover
implies how well the
management utilises
its resources.
Customer retention Market share Net revenue Customer retention
generated by Wine and customer
division compared to satisfaction rating
top 10 wine might tell the same
companies story. Also, SW
division strategy is to
lead the market.
Market share metrics
 will be more
informative about
SW’s ability to
expand customer
base and increase
sales volume.
Employee Sustainability: water based on 9 litre We need to consider
productivity (output efficiency equivalent per case the environmental
per employee hour; impacts.
kg/hr)
Long-term incident Training employees Number of hours The incident rate is a
free rate attended by metrics that we are
empoyees interested in.
However, it should
not be in the
balanced scorecard
because it doesn’t
link to the strategic
objectives. Employee
engagement index
and employee
satisfaction survey
are conflicting at all
three plants.

Key challenges associated with developing a bonus system based on BSC

 Use balanced scorecard as a bonus system = interactive use

 Lipe and Salterio (2000) Common measure bias problem in BSC
 Assume a scorecard similar to Chemico but with some scope for each plant to have a few
measures specific to each of their circumstances (unique measures).
 Have some common and unique metrics to that plant.
 When asked to evaluate performance of the three plants, it appears more likely that
managers will focus on the common measures (those that are the same across the three
plants).
 This of course has consequences for the USE of scorecards in performance evaluation
and distribution of rewards.
Bonus plan
The score is the percentage by which the target is exceeded. If the target is not exceeded, then
the score is zero. The agreegate score is the weighted sum of all the scores. Weights are allocated
by senior managers.
The bonus pool may be allocated pro-rata relative to the aggregate score.
Performance Metrics Plant A Plant B Plant C Plant A Plant B Plant C
target actual actual actual weight score score score
Financial Perspective
1. Return on Investment 12.0% 10.0% 15.2% 13.0% 25% 0.0 26.7 8.3
3. Net Profit Margin 8.0% 6.5% 10.0% 9.5% 15% 0.0 25.0 18.8
4. Reduction in Production Costs 10.0% 11.5% 8.0% 11.0% 15% 15.0 0.0 10.0
Customer perspective
1. Customer retention 85% 86% 79% 88% 5% 1.2 0.0 3.5
2. Product quality index 79% 79% 72% 78% 10% 0.0 0.0 0.0
3. Customer satisfaction rating 90.0% 94.5% 83.0% 89.0% 5% 5.0 0.0 0.0
Internal process perspective
2. Number of improvements implemented 10 12 8 11 5% 20.0 0.0 10.0
3. Employee productivity (output per employee hour; kg/hr) 50 53 65 63 5% 6.0 30.0 26.0
4. Capacity utilization percentage 80% 77% 90% 83% 10% 0.0 12.5 3.7
Learning and growth perspective
1. Employee satisfaction survey 80.0 95.5 66.0 82.0 0% 19.4 0.0 2.5
2. Employee suggestions 25 24 26 26 5% 0.0 4.0 4.0
3. Long-term incident-free rate 70.0 79.5 55.0 66.0 0% 13.6 0.0 0.0

100%
Weighted Sum: 3.9 13.4 8.9

Total score: 3.9 + 13.4 + 8.9 = 26.2

$100,000 /26.2 = $3817 per one score
Plant A = $3817 * 3.9 = $14,884
Plant B = $3817 * 13.4 = $51,145
Plant C = $3817 * 8.9 = $3,971

5.3 QUESTION 5
Identify and briefly explain TWO key factors influencing the suitability of non-financial
measures in a balanced scorecard.
Validity:
Capture what is intended. Inappropriate measures can be chosen. It might not reflect the
objective at all.
Reliability
Free of measurement error. Non-financial measures are “soft” and subjective in nature. For
example, customer satisfaction might contain error due to Kilgors can’t be 100% sure the
customers are telling the truth about how they feel. Non-financial measures must be
quantifiable otherwise different methodology to calculate these metrics will give conflicting
results.
5.4 QUESTION 13
Evaluation
Gorss margin % per wine case & Total cost of goods sold per case. These two metrics could tell
the same stories. We might only need one.

6 STRUCTURING REWARD SYSTEM – CHEMICO

Look at question 4.

7 USING R – AFL

7.1 QUESTION 8
Part a

 It is misleading to only compare a player’s running distance for a game to his own
historical performance on this measure. It is wrong to punish a player who performs
poorly because we don’t know why his performance deteriorates. This could due to a
COMMON RANDOM SHOCK THAT AFFECTS ALL PLAYERS.
 It is misleading to make static comparisons across players. It is wrong because at any
point in time, a player’s performance is subject to a great deal of luck, not to skill. Only
across time can we assess improvement in actual performance, which will regress to the
mean.
 Making relative performance comparisons over time help addres these issues.
o Relative performance means that a player will not be penalised for a common
factor that affects all players. This makes it fairer.
o Across time means that true performance will be revealed, whether the player is
improving or performing poorly over time.
Part b
A good benchmark or peer group is players in the same position, for example: midfield.
Take the average of the runing distance by all players in the peer group.
Part c
It is not necessarily an issue if there are large differences over time in the level of a
player’s performance relative to the benchmark or peer performer.
If there is a consistent difference between the level, it sometimes does not matter during
comparison across players. This is because of their position in the team doesn’t require them to
run much. Another reason could be due to the strategy of the team. Defensive style and
Attacking style will have a consistent difference in running distance.
Part d
The best benchmark fo rplayer 2’s performance is player 1. This is becaue they have similar
trends in performance over times. This could indicate that their position in the team is similar.
Player 3’s performance is not suitable because it is constant over time. This could imply that
player 3 plays a diferent position. Player 1 consistently ran longer distance than player 2.

Economy wide factors Interest rate, demand/supply, covid-19,

political policy, tax
Common random shocks for sport players Weather, injuries

8 STRATEGIC CAPITAL INVESTMENT – KILGORS

8.1 QUESTION 11
Part a (6 marks)

Financial/non- Calculation Weightings

financial factors
NPV Ranking all the 40%
projects from highest
to lowest NPV. The
highest will receive 10
points. All negative
projects will receive 0
points.
Payback period Ranking all projects 10%
from shortest to
longest payback
period. The shortest
will receive 10 points.
Alignment with Using Likert scale, 0 20%
organisational if the project does not
strategy align with
organisational
strategy and 10 if
perfectly align
Risk and Using Likert scale, 0 20%
opportunities if the project is highly
assessment risky and 10 if the
project is risk-free
Social impact If the project has 10%
positive impact on
society, it receives 1
point. If not, it is
deducted 1 point.
 No. Financial/non- Calculation Comment Final score Weightings
financial
factors
1 NPV Profitabiliy index = Negative NPV. -0.034*40*100= 40%
NPV/COST = However, -1.36*100 = -136
-210,000/6.2millio (210,000) is
n = -0.034 small, relative
to 6.2million
2 Payback period Number of years 5 years and 6 -0.5*10 = -50 10%
away from 5 years months out of
benchmark 8 years life
3 Alignment Likert scale 10. perfect 200 20%
with (0-10) alignment.
organisational 10 – perfectly Diversifed
strategy aligned. product
0 – not align portfolio.
Reduce
reliance on
carbonated
drinks, in-line
with
company’s
growth
strategy and
opens up
opportunities
for future
expensation
4 Risk and Likert scale Highly 8*20 = 160 20%
opportunities (0-10) competitive,
assessment significant
barriers to
entry
5 Social impact (-1; 0; +1) +1. Generate +1*10 = 10 10%
more than 500
new jobs.
Healthy
drinks.

Classification of investment projects

Reasons why conventional techniques do not work for strategic investment.
Factors to consider: market forces, internal capabilities, risk of (not) investing
Build a weighted index model
Build a combined quanlitative and quantitative model

Part b
Demonstrate how SIEM could facilitate better investment decision
If NPV is used, the orange juice project is definitely rejected because of negative NPV. However
this model is much more comprehensive.
Key benefits of this SIEM model:
- A weighted index is perfect for comparison. This weighted index is a fully quantitative
model and is applicable across the organisation, capable of capturing the specifics of
different kinds of capital investments.
- Multiple factors, financial and non-financial are given weigthings based on importance.
NPV continues to play a major role. However, other non-financial factors should be
considered as well.
o It is always in the best interests of the shareholders if the project is in-line with
the organisational strategy. The orange juice project is diversifying the product
portfolio because its current carbonated drink market is shrinking. In addition,
the orange juice project links Bulle with healthier, natural beverages, and develop
positive reputation with fruit suppliers. Also, this paves the way for many similar
investments in the long-term.
o Positive social impacts of orange juice such as reducing unemployment rate by
creating extra 500 jobs and producing healthier drinks, be offsetting some of the
negative financial impacts.
- Project proposer is forced to investigate across all of the factors. Risk and opportunies
relating to the investment such as strategic, operational, regulatory, financial are
reviewed. For example, Bulle faces the strategic risk of highly competition and significant
barriers to entry. However, there are operational opportunies such as an amply supply of
oranges in Queensland and a chamption who in the past year have performed better than
expected. There is not much regulatory risks because orange juice is often seen as
healthy drinks unless the sugar level is alarmingly high. Financial risk is that this is a
negative NPV project.

Market factors - Alignment with distinctive capabilities and intended strategy

- Strength of competitive advantage arising from the investment
- Impact on reputation
- Corporate Social Responsibility (environmental, social, ethical)
Internal - Alignment with existing core competencies and capabilities
capabilities - Alignment of proposal with existing strategy
- Track record and ability of people involved (champion). A champion, a
person who believes that this asset is an important source of competitive
advantage for the business, willing to argue forcefully for the merits of
acquiring it.
- Too optimistic? Does the champion have a good track record of
achieving what they set out to do? Sufficient resources to utilise the asset
effectively.
- Impact on the structural cost drivers (scale, scope, complexity,
experience and learning
- Subjectively judge.

Risk of not - Impact of deciding not to acquire the asset (moving-baseline concept)
investing - Another competitor take the opportunity, first movers can create
 advantages that are difficult to replicate.

Risk of investing - Ability to manage the risks relating to the investment (strategic,
operational, regulatory, financial)
- opportunity cost? Excess cash return to shareholder? Reaction of
competitors? Different organsation structure?
- Feasibility and cost of reversing decision. Can we reverse it, how much
does it cost?
Quality of - Market analysis, economic forecast, estimation of cash flow, rate of
information return.
supporting - right variable? Any contigencies relating to market dynamics? Include
proposal brand value? Economies of scope?

8.2 QUESTION 12
Comment:

 First impression could impact the evaluation.

 Jack is dropped off because his project is operational. Is it really if it has technology
aspect? And not just pure maintenance
 Are the financials “credible enough”? The number must undergo sensitivity analysis,
discussion with accounting department, a robust analysis. Challenge the numbers.
 Our model is full quantitative model.
 Judgement are highly subjective. Simplicity hides some of the complexity requried when
making decision. Even the NPV is subjective.
 Three most critical non-financial factors that drive your evaluation of the project you
ranked number one.
o Alignment with intended strategy
o Alignment with core competencies and capabilities
o Risk factor
 Each person on pannel did their own evaluation. Better to disagree than everyone agrees.
 If you alter the weighting of factors, the outcome will be different.
Benefits and drawbacks

 Two key benefits of Kilgors SIM model: a weighted index is perfect for comparison;
multiple factors weighted based on importance; project proposer is forced to investigate
across all of the factors.
 Downsides: highly subjective; some items are hidden, only look at the final score.; too
simple, the simplicity might hide the complexity of issues concerned with the projects.
Revise
Create a benchmark index as a hurdle
Separate qualitative assessment, pull it out of the model and not put on number.
Create phase I and phase II and probably phase III.
Potential alternate model: combines a qualitative assessment with a quantitative model.
Three key factors to be treated as part of a qualitative assessment of strategic capital
investments.

 Impact on reputation
 Link to strategic intent
 Risk assessment

9 MARKET VARIANCE ANALYSIS – SOLARTRONICS,

CAMPUS GELATO

9.1 QUESTION 2
How the market variance analysis could be used to inform the subsequent profit planning
process.
In the next profit planning prorcess, experiment with changing the product mix to further
increase this favourable. Most importantly, increase the selling price.
The overall profit variance of $8,207 (between actual and planned) doesn’t look like a significant
figure. However, underpinning that, there could be large UNFAVOURABLE sales price variance
and FAVOURABLE VOLUME VARIANCE offsetting each other.
The volume variance (is in total contribution margin variance) is 76,943 FAVOURABLE despite
a unfavourable market size, $1,800 smaller than expected.
We almost double our sales volume (planned: 24,208 vs actual: 43,249), capturing $64,092
more than expected of revenue from market share.
The product mix variance is favourable because the planned average CM at actual mix reflects a
shift in volume towards higher CM products.
Reasoning: Much of the new sales from restaurants drive the volume. Restaurants are
purchasing gelato, which is a higher CM product, better product mix.
Although sales volumed doubled, net operating profit has not doubled (planned: 84,993 vs
actual: 93,188) due to unfavourable selling price variance and cost variance.
Actual selling price is lower, $100,920 unfavourable, offsetting all the positive effects from
volume effect. We charge factory price + 15% however, we even have to pay 10% if shortfall in
other stores so not much margin.

Cost variance: unfavourable direct materials, packing to restaurant sales ? not much
information, favourable direct labour, less people standing and selling to customers. The direct
materials and direct labour variance is driven by GELATO.

Ultimately, if we can fix the selling price, more profits can come through.
 Separate store sales from restaurant sales.
 Separate market data for gelato, ice cream, industry data. Analyse by product is better.
 Standard cost review. Cost control policy
9.2 QUESTION 9
Planned Actual
Volume Flexible Volume
litres ('000s) $ ('000s) Variance budget Variance $ ('000s) litres ('000s)
French Vanilla 2,020.00 28,076 1,168 29,244 39 29,283 2,104.00
Macadamia Twirl 336.00 8,570 357 8,927 (17) 8,910 350.00
Total sales 2,356.00 36,646 1,525 38,171 22 38,193 2,454.00

Cost of goods sold

French vanilla
Dairy ingredients (litres) 1,919.00 (16,106) (670) (16,776) 92 (16,684) 1,934.00
Other ingredients (100g) 1,313.00 (6,213) (258) (6,471) 104 (6,367) 1,335.00
Labour (hrs) 34.01 (988) (41) (1,029) (52) (1,081) 37.10
Macadamia Twirl
Dairy ingredients (litres) 320.00 (2,726) (114) (2,840) 165 (2,675) 318.00
Other ingredients (100g) 241.00 (1,680) (70) (1,750) 51 (1,699) 244.00
Labour (hrs) 30.00 (869) (36) (905) 66- (839) 28.79
Contribution margin 8,064 336 8,400 448 8,848
Non-variable costs (3,000) - (3,000) (500) (3,500)
Net profit 5,064 336 5,400 (52) 5,348

Budgeted market size ('000 litres) 19,633.00

Budgeted market share 12%
Planned CM at planned mix 3.42

Actual market size ('000 litres) 20,811.00

Actual market share 11.79%
Planned CM at actual mix 3.42

Market size difference 1,178.00

Market share difference -0.21%
Product mix difference 0.000

Market size variance 483.85

Market share variance -148.42
Product mix variance 0.18
Reconciliation
Budgeted net profit 5,064
Volume effect
Market size difference 483.85
Market share difference (148.42)
Product mix difference 0.18 336
Price effect
Selling price variance 22
Variable costs variance
Large panel 144
Small panel 282 426
Non-variable costs variance (500)
Actual profit 5,348

Conduct a variance analysis. Create a flexible budget. Break down the volume effect.
Reconcile the actual net profit to the budgeted net profit.
Brief comment:
Overall, there is a positive volume effect of $336 favourable. We should have earned an
additional $483.85 profit due to the larger market size. Although market size is expanding,
actual market share was lower than what is planned, $148.42 of the potential additional profit
was not possible. Therefore, the analysis highlights that attention should be focused on the
market size and market share in order to understand how to improve future profitability.

10PROFIT PLANNING – WALKER BOOKS

10.1 QUESTION 10
These two diagrams illustrate seven stages of planning cycle. The first 4 steps are called profit
variance analysis (PVA), which provides an input for the next 3 steps, also known as profit
planning phase.
PVA is used to reconcile actual results with budget to tell a story about its current profitability.
This acts as a reflection on what worked and not work so that the management could learn how
to improve profitability in the future.
The feedback of PVA and feeds into the profit planning phase, where alternate courses of actions
are explored. The management could delete some products, introduce new products, spending
more on marketing expenses. These options are assessed and the most optimum profit plan will
be adopted to be used in the next period. This is where the number in the master budget comes
from.
This is how they were connected to each other.

10.2 QUESTION 3
Seven stages of planning cycle (variance analysis and profit planning)

Step
1. Monitor actual results compared
to budget
2. Investigate differences between
actual and budget
3. Evaluate and reward
performance
4. Reassess vision and core
competencies
5. Reconsider long term strategies
6. Develop and reiterate profit plans
7. Translate strategies and profit
plans into master budget
Action
 Reconcile actual resutls with budget
 Calculate specific variances
 Tell a story about its existing profitability
 Provide feedback to evaluate and reward
performance
 Reflect on what worked and not
 How to improve profitability in the future.
 Identify risks and opportunities
 Review and adjust strategies for subsequent
planning cycles
 Formulate and consider alternate courses of
action
 Perform quantitative and qualitative analyse to
test underlying assumptions
 Identify the most optimum profit plan
 Translate into master budget, which form the
targets for the next reporting period

How step 5,6,7 fit into budgeting and planning cycle for Walker Books.
= How management could make use of results of profit variance analysis as part of the profit
planning process.

What is profit variance analysis (PVA)?

A form of management report that considers the firm’s profitability in the market relative to
planned performance.
By using profit variance analysis, Walkers Book can:
 Reconsider long-term strategies
 o Identify risks such as large unfavourable market share and opportunities such as
favourable market size. Increase spending on direct marketing to capture larger
market share
 Develop and reiterate profit plans
o Formulate and consider alternate courses of action
o Decrease the number of new titles, number of segments.
o Focus on Children’s Book
o Spend more on marketing
o Investing in e-book
 Translate strategies and profit plans into master budget.
o Choose option 1 or 2  identify the most optimum profit plan
o Construct the master budget

Walker Books : Children's Books Segment Home

Variance Analysis for 2019 plan
Reconciliation of planned net profit and actual net profit
$ $
planned net profit 114,300
market size variance 11,097
market share variance (60,379)
product mix variance (16,639)
volume variance (65,920)
price variance (32,324)
variable cost variance (4,589)
variance due to other expenses 2,914
variance due to other income and expenses (34,000)
actual net profit 14,380
Children's books sold by Walker Books
actual sales volume 333,247 units

planned sales volume 346,250 units

difference (13,003) units

Size of global children's book market

actual market size 322,000,000 units
market size used in plan 319,300,000 units
difference 2,700,000 units

Walker Books' share of the USA Children's Book market by volume

actual market share 0.103%
planned market share 0.108%
difference -0.005%

Planned unit contribution margin (weighted average)

planned unit CM's at actual product mix 3.74011 $/unit
planned unit CM's at planned product mix 3.79004 $/unit

difference (0.04993) $/unit

Although market size is better than expected, which is a good news, both market share and
product mix variance is unfavourable.
The market share is $60,376 unfavourable. We should spend more on advertising to capture
more of the market share.
Planned Unit Contribution Margin

weighted average at weighted average at

Category planned unit CM ($) planned mix planned mix actual mix actual mix

Picture 3.864 19.61% 0.758 14.80% 0.572

Photo 4.201 10.22% 0.430 7.50% 0.315
Black & White 4.565 6.06% 0.277 4.65% 0.212
Nonfiction 3.706 10.61% 0.393 6.74% 0.250
Fiction 4.006 3.52% 0.141 3.26% 0.131
Backlist 3.585 49.96% 1.791 63.06% 2.261
aggregate 100.00% 3.790 100.00% 3.740

The product mix is unfavourable because we sell 63.06% on backlist compared to 49.96% on
backlist as planned. Backlist has the lowest CM. By selling more of the lowest CM product, the
product mix is unfavourable.

Increase the selling price of backlist.

 Product performance: which products seem to be performing best? - Fiction

  What does the market size variance and market share trends inform us about potential
actions?

Construct a strategy map that demonstrates key strategic objectives including cause-and-effect
connections.

Develop two measures for each perspective.