Question 1: Ittner & Larcker – 4 Non-financial performance measurement mistakes

1. Not linking measures to strategy:

- Goal of pm system: direct allocation of resources, assess & communicate progress towards
strategic objectives, evaluate managerial performance
=> Major challenge: which non-financial to track?
- Many companies mistaking BSC to be an off-the-self checklist or a procedure that is
universally applicable and completely comprehensive
=> using such a framework by itself won’t help identify which performance areas and drivers
make the greatest contribution to financial outcomes
=> Develop a casual model (Value driver maps): which lay out the plausible cause-and-effect
relationship that may exist between the chosen drivers’ strategic success and outcome
2. Not validating the links:
- Management rely on its preconceptions about 4 perspectives rather than verifying
whether those assumptions had any basis in fact
- Investigate plausible causal relationship
- Ex: Do experienced employees make fewer errors, and, if so, should we do whatever we
can to reduce turnover? (Not before testing the hypothesis and determining which
employees matter most.)
- Ex: Does accelerating product-development time lead to increased market share? (Not if
our new products are only minutely different from our earlier models, or we have merely
reverse-engineered those of our competitors.)
=> Fast food ex: choose employee turnover as a key performance indicator
=> high employee retention indicated a high level of satisfaction and motivation
=> improve customer service and eventually boost profits
=> failure investigate whose turnover really mattered nearly led to a substantial
waste of resources
3. Not setting the right performance targets:
- Target setting is inherently difficult because it always takes a while for improvements in
the driver of firm performance to produce improvements in the performance it’s meant to
affect
- Sometimes, efforts to improve non-financial performance measures can even damage
short-term returns
- However, if a company can reasonably estimate when the nonfinancial performance
improvements will pay off, and by how much, it can set lower interim financial targets,
which can subsequently be adjusted upwards.
- Unfortunately, many companies don't make the effort, preferring to focus on initiatives
that promise short-term financial results despite other initiatives have higher long-term
payoffs.
4. Measuring incorrectly
- Employ metrics that lack statistical validity (success in capturing what it is supposed to
capture) and reliability (degree to which management techniques reveal actual performance
change and do not introduce errors of their own) => impair company’s ability to discern
superior performance or predict financial results.
- Collecting data before deciding what they want to find out
- Methods for evaluating measure nonfinancial attributes are inconsistent across the
company

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=> Develop a casual model. Put together the date. Turn data into information. Continually
refine the model. Base actions on finding. Assess outcome.
 What characterises a good performance measure? (financial & non-financial)
• Controllability: reflecting the subordinate’s effort
• Reliability: generating consistent results
• Value-relevance: relates to firm’s value

Question 2: Campus Gelato – how market var analysis used to inform profit planning
process

Profit planning is an exercise in testing (competing) options of strategies and considering the
resources required to operationalise those strategies. Hence, it is an essential step to
determine and translate a high-level strategy into execution. Once the actions for strategy is
applied, variance analysis is undertaken to evaluate the strategy and its performance in
order to improve company’s actions or update the plan. Therefore, variance analysis is more
about evaluating performance after implementing the strategy, which evaluates the quality
of the strategy and its financial implications to improve the strategy plan. Therefore, profit
planning and variance analysis constitute a continuous cycle that complements each other.

Specifically, market-related analysis plays an important role in informing the profit planning
process by identifying changes in profit based on market size, market share and product
mix, which to answer whether the company is performing well or not in relation to its
market
1. Market size var measures the profit increase/decrease as a result of diff in planned
& actual total market size form firm’s products
2. Market share var measures the profit increase/decrease due to actual market
share being ≠ from that reflected in the profit plan (i.e. the planned market share)
3 Product mix var measures the impact of profit because we sold more/less of the
higher/lower CM product in our ratio/mix of sales than we anticipated
Campus Gelato’s market-related variance:
1. Market size variance => unfavourable impact of profit / profit being slightly lower
because size of the market was smaller than we forecast (so we sold less)
2. Market share variance => favourable impact of profit / profit being higher because
we captured more of the market than we anticipated
3. Product mix variance => favourable impact of profit / profit being higher because
we sold more of the higher CM product in our ratio/mix of sales than we anticipated

Hence, when doing the profit planning, the results from market variance analysis would help
company determine whether to keep or improve its strategy and operation. The particular
course of actions and resources selected following the chosen strategy will provide an input
into the final profit plan to constitute the expected financial implications e.g. profit, cash
flows, return on equity etc. Profit planning includes:
1. Translate strategies and profit plans into master budget
2. Develop and reiterate profit plans
3. Reconsider long-term strategies

The company needs to do the review of analysis before progressing to the next plan

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The issues related to market that Profit planning for Campus Gelato should focus on may be
to expand more of the market size.

Question 3: One of your classmates has also been evaluating the budgeting and planning
system at Walker Books. In particular, she has spent considerable time in the Children’s
Books division of Walker Books. She has suggested a profit planning process as an important
step prior to the finalization of the annual budget.
Briefly outline how this profit planning process would fit into the planning cycle for Walker
Books.

The profit planning process includes:

1. Translate strategies and profit plans into master budget
2. Develop and reiterate profit plans
3. Reconsider long-term strategies

1. Identification and analysis of risks and opportunities

2. Consider alternate course of action or construct new course of action as a
possibility
3. Then finalise budget for Walker Books across the org or for a particular segment of
org

To implement the profit planning in its planning cycle, after doing the budgeting and
planning for the Children’s books division of Walker Books, the company should choose a
strategy to follow which meet its target of Profit plan objectives to go ahead and to be
viable long-term performance. The company needs to do the review and analysis of any
risks and opportunities for the strategy before progressing to the next plan. Then, particular
courses of actions and resources should be derived following the chosen strategy, which
provide an input into the final profit plan to constitute the expected financial implications
e.g. profit, cash flows, return on equity etc. The company should consider alternate course
of action or construct new course of action as a possibility. Finally, Walker Books can finalise
the across the org or for a particular segment of org before reconsider the long-term
strategies

The company should also have a monthly integrated planning cycle which include the
review of its strategy, business plan and performance:
 The product management review is about a review of innovation and deletions (what do
we want to do that’s new - increase emphasis on ebooks - and what are we going to delete -
certain product categories we’re going to drop out, etc.)
 Demand review - in this case, we’ve been doing update of volume by product - how
many new titles do we want to have? What do we think is going to sell in the market?
 Supply review - changes in cost and availability? changes in supply chain may drive down
COGS for hard copy books for example - Each of these three components make their way to
management through some financial appraisal
 Management business review/meeting: what are we going to do? what decisions are we
going to take? all of option 1, 2, 3? or combine together into something else for our actions
going forward?

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  Monthly so is an ongoing process that accounting is involved in

Question 4: Sretsof Entertainment group – BSC & performance measures

a. Provide FOUR alternate measures (one in each perspective) to those in the existing BSC.
State which measure is being replaced, the new measure, how it will be calculated and why
it should be part of the BSC for the SW Division. A table is provided to guide the formatting
of your response.

Perspective Eliminated Strategic Measures Explanation

strategic objective
objective
Financial ROI Improve Number of outputs per employee
productivity during the year
Customer Customer Improve % of unsatisfied quality products
retention product
quality
Internal Number of Environmental Environmental and sustainability index
business plant and
process improvements sustainability
guarantee in
production
Learning Long-term Focus on Average training hours per employee
and growth incident free- employee Totalnumber of traininghours
rate training Total number of employees undertaking the training

b.
i. Outline the key challenges associated with developing a bonus system based on BSC
performance. Use the BSC of the SW Division of Sretsof to assist with your explanation.

 Motivates employees and retain talent: Current system only rewards partners and
excludes all other accounting professional staff. To include the employees and have a solid
way of doing so via the BSC will motivate employee effort and promote action towards
achieving strategies of the organisation. It also encourages employees to align unit and
individual goals with organisation vision and strategies, promoting loyalty and improving
talent retainment. This is critical as employee turnover has been high despite above target
salary growths. To retain talent will not only maintain quality of service but also reduce
costs related to recruitment and training.

 Use a good mix of financial and non-financial metrics, and not too many of them in total.
- Select metrics based on the causal effect on performance to ensure usefulness
- Make sure it is measurable and not susceptible to manipulation to ensure reliability
- Ensure targets are reasonable and appropriate to the situation

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 -
 Deter dysfunctional behaviour by including compliance-related metric
- Have a small proportion of the BSC be related to meeting compliance
- As long as there is some influence of the factor on the BSC, employees will pay
attention to it
- Consider having negative scores if compliance is not met
ii. Assuming a bonus pool of $100 000 available for the regional managers of the SW
Division of Sretsof, demonstrate a suitable bonus plan.

The bonus pool will be divided among the local managers on the basis of the number of
bonus units awarded.
For each 1% annual ROI above target, a manager will earn one bonus unit
For each 1% customer satisfaction rating above target, a manager will earn one bonus unit
ROI: $50,000: ROI 12%
- Victoria: 10% => 10 bonus units  Bonus distributed =50,000*(10/33.2) =
- SA: 15.20% => 15.2 bonus units  Bonus distributed = 50,000*(15.2/33.2) =
38,095
- Shandong: 13% => 13 bonus units  Bonus distributed = 50,000*(13/33.2) = 11,195

Customer satisfaction index 90%: $50,000

- Victoria: 94.5% => 94.5 bonus units  Bonus distributed = 50,000*(94.5/266.5) =
- SA: 83% => 83 bonus units  Bonus distributed = 50,000*(94.5/266.5) =
- Shandong: 89% => 89 bonus units  Bonus distributed = 50,000*(94.5/266.5) =
***************************
The three plants have performed quite differently although quite similar
- A has done well with customers and employees and moderately well in terms of internal
processes and environment but not so much financially (missed 3 of 4 targets)
- B has performed reasonably well financially and environmentally but not very well with
customers or employees in terms of learning and growth
- C has done quite well financially and in terms of internal processes and well with
employees but not well in terms of environment
Distribution of bonuses is quite difficult (difficult to determine which one has done better)
as performing well in different areas and none of them have performed well across the
board

Rank the regions in order of relative performance

- How would you rate the plants in relative performance?
- How did you decide?
- Which performance areas did you attach most weight to? Why?
 Look at both financials and drivers in strategy map of each region
 Drivers of future performance have to be managed carefully to ensure that any financial
outcomes are sustainable

 Weights all factors equally (1 point for meeting target, deduct 1 point if don’t)
- deducting if below target and adding more if above  rewards managers for going
above and beyond. Rewards them for doing as well as they can rather than just

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 stopping when they’ve achieved the target level specified) = more common/correct
way to do it
 Weighting for ROI and customer satisfaction index can be 5 points each

- Victoria: 7 bonus units => Bonus distributed = 100,000*(3/21) =

- SA: 4 bonus units => Bonus distributed = 100,000*(4/21) =
- Shandong: 10 bonus units => Bonus distributed = 100,000*(10/21) =

iii. What benefit would there be in introducing an element of subjective assessment into
the performance evaluation process at Sretsof? How might this work in conjunction with
your bonus distribution system developed in part ii?
• Pros:
+ The performance evaluation system is changed to include more non-financial pm
+ provide additional information on subordinates’ effort, which is not captured by
pm
• Cons:
+ Personal biases, e.g. halo effect, favouritism
+ Subordinates influence/please their supervisors
 Quantify the non-financial performance measures by a determining a weighted index???
 How to link the pm across different perspective to bonus amount?
1. Determine target for each measure
2. Aggregate multiple pm => a performance rating for each performance perspective
3. Aggregate performance ratings across perspectives => overall performance rating
4. The performance evaluation is done quarterly
5. Only the ‘annual’ overall performance rating is linked to annual bonus amount.
The annual performance evaluation is done by more than Lisa

Question 5: Based on Kilgors, identify and briefly explain TWO key factors influencing the
suitability of non-financial measures in a balanced scorecard.

1. Not validate links

The BSC is the performance measurement system which sets out the objectives and
performance measures for 4 main company perspective: financial, customer, internal
business process and learning and growth. The objectives should reflect critical success
factors relating to the organisation/unit strategy, while the performance measures should
reflect the objectives on a causal link between the perspectives. An issue that arises in
Kilgors’ is BSC that there may be lack of plausible causal relationship between the
performance measures. The links between those measures may not be valid, which is
abstract to answer the question that whether the improvements in non-financial measures
lead to the improvements in financial performance. It is difficult to verify the links and
investigate whether assumption on the links have any basis in fact to ensure the consistency
within the BSC.

In strategy map, the performance measures should reflect the objectives on a causal link
between the perspectives. An issue that may in Pachelli’s is BSC that there may be lack of
plausible causal relationship between the performance measures. The links between those

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measures may not be valid, which is abstract to answer the question that whether the
improvements in non-financial measures lead to the improvements in financial
performance. It is difficult to verify the links and investigate whether assumption on the
links have any basis in fact to ensure the consistency within the BSC.

2. Not link measures to strategy

In Kilgors case, it may arise a problem that some of the performance measures are not
consistent with the company’s strategy, which is evidenced by choice of actions to resolve
the business issues. For instance, the action of producing private label for supermarket can
increase the performance measures on the BSC but is not consistent with Kilgors’ overall
strategy which is about high-quality products and differentiation. This suggests that the
design of BSC may be problematic because an undesirable choice produces good
performance in BSC. We tend to evaluate whether managers are doing well in
implementation strategy by assessing the BSC measures. This case shows that we should be
careful in making that conclusion because it is possible that the BSC measures are ill-
designed. Therefore, managers have the tendency to make decisions to maximize their
performance shown in the BSC measures while not having the causal model and measures
that are linked to the strategy of the company.
Question 6: Review assignment

Question 7: Podcast
a. Career reflection and oppurtunities in management accounting research and teaching
- the importance of strategy in guiding what we measure and how we measure it and why
we measure things for performance measurement
- using performance measurement to guide future actions rather than focusing on the past,
on reviewing the past
- stop looking at just trying to get better performance measures, and we need to get a
better understanding of how you manage performance overall beyond just the way we
measure it
- understanding much more broadly the things that happen in org like monitoring, training
and development, org culture, org values, all those sorts of things that are part of the
context of performance measurement, and understand much more about the interaction
between those things
-> On face value on what looks like an objective set of criteria, the subjectivity is actually
built in to the determination of what is this objective formula, for want of a better word,
rather than the determination of the objective criteria with then an add-on that adjusts for
the subjective evaluation.
- it’s clarity and its credibility of the system and the supervisory application of subjectivity.
So those are the two principles that underpin what we call a relational contract. What we
think is happening in these firms is that they’re actually building very strong relational
contracts with their employees which govern the performance measurement process and

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moving away from the explicit contract, the words that are written in a document when
people are hired about how much they earn and what bonus they can achieve and so forth.

b. Andrew Williams
- 1st: I manage Amcal and Priceline and our business relationship and business performance
within those accounts. 2nd: I manage our overall relationship and performance within the
broader pharmacy wholesale channel. 3rd: I partner our team on what our total pharmacy
strategy looks like
- “shopper mission” is very different, hence your strategy in that outlet is very different as a
result of that.
- Whats really important from a strategy perspective is that you can define success really
clearly, you know, and then what it takes to win really clearly, and then you can build an
action plan off the back of that. But at the end of the day you’re really only an advisor
- In sales, yes it’s still part of my role to formulate what the strategy is, and as the captain of
Priceline, so to speak, I have a really big say in what that strategy is, but it’s also my role to
own the implementation of that. So, I have a number that I’m accountable to, we have a
budget from Priceline, and it’s really my job as the captain of that ship to make sure that I’m
the one who’s responsible for whether we get to that destination or not.
- co-op is a fixed investment in that retailer

Question 8: Using R to work with performance data

a)  Why might it be misleading to only compare a player’s running distance for a game to his
own historical performance on this measure? Why might it also be misleading to make static
comparisons across players? How might making relative performance comparisons over
time help address these issues?
Within-player performance comparisons over time will not filter out game-specific
common shocks (e.g., weather, injuries, etc.) that introduce noise into the measure.
Between-player performance comparisons for a given game do not address fundamental
(or fixed) differences between players that also influence measured performance (e.g.,
playing position, playing role or style, physical attributes).
Pooling these two approaches together and making between-player comparisons over time
address these issues. Game-specific shocks are filtered out if we compare players within
games. Player fixed effects are removed if we repeatedly compare players over time.

b)  When conducting relative performance comparisons, what makes for a ‘good’

benchmark or peer group? How can we use the historical performance data (plotted above)
to select an appropriate benchmark for a relative assessment of our players’ running effort?
A ‘good’ benchmark or peer performer should be subject to the same shocks and sources
of performance noise as the focal player. That is, the benchmark should have historical
performance data that behaves similar over time to the player of interest’s historical
performance data.
This is because in order for relative performance evaluations to filter out period-specific
shocks, differences between players must be ‘stable’ over time (i.e., common trends in
performance).

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We can plot historical performance data across time to evaluate the quality of a
benchmark. Player B will be a good benchmark for Player A if Player B’s historical
performance fluctuates across time in a similar manner to Player A’s historical performance.

c)  When conducting relative performance evaluations, explain why 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.
We don’t care that some players run more or less his teammates per se. What we care
about is if a player runs more or less than his historical level of performance relative to his
peer or benchmark. If performance differences are stable over time, between-player
comparisons ‘difference out’ this variation in the level of performance and isolate abnormal
performance (i.e., the thing we care about).
In making between-player comparisons over time, we are interested in changes in
between-player differences in performance. This ‘difference-in-differences’ isolates
abnormal individual performance that in theory is not driven by game-specific common
shocks nor fixed differences that players cannot influence (i.e., hard work because the
player actually tried harder).

d)  You are interested in evaluating player 2’s running effort. You decide to benchmark his
recent performance against a team mate. Is player 1 or player 3 a better benchmark for
player 2? Explain why.
For relative performance evaluation, player 2 is best benchmarked against player 1. Both
players share similar trends in historical performance. While the players differ in their
absolute level of running distance per game, both players’ output appears to be highly
correlated across games. This suggests players 1 and 2 are likely subject to the same game-
specific shocks over time.
In contrast, while in terms of levels, player 3’s running distance is similar to player 1’s, each
player appears to be subject to different game-to-game fluctuations in output. For this
reason, player 3 is not a good control or benchmark for player 2

Question 9: Eltsen – market variance analysis

- Variance analysis
- Volume variance breakdown analysis
- Reconcile the actual net profit to the budgeted net profit

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1. Competitive effectiveness variances:
- Selling price variance: = 22
- Volume effect variances:
> Planned market size = 19,633
> Actual market size = 20,811
> Planned market share = 12%
> Actual market share = 11.79%
> Planned CM = planned CM/planned volume = 8064/2356 = 3.42275
> Planned CM at actual mix = 8400/2454.6 = 3.42214

> Diff in mk size = 20,811 – 19,633 = 1178 F

> Diff in mk share = 11.79% – 12% = -0.21%U
> Diff in avg CM = 3.422 – 3.423 = -0.0006U
+ Market size variance = Diff in mk size*planned mk share*planned avg CM
= 1178*12%*3.423 = 483.87F
+ Market share variance = Actual mk size*diff in mk share* planned avg CM
= 20,811*-0.21%*3.423 = -149.59U
+ Product mix variance = Actual mk size*actual mk share*diff in avg CM
= 20,811*11.79%*-0.0006 = -1.48U  negligible so not
material
2. Cost variances (operating efficiency variances):
- Non-variable cost variance = 3,500 – 3,00 = -500U
- Variable cost variance = 144 + 282 = 426F

Reconcile:
Budgeted Net profit 5,064
Competitive effectiveness variances:
Volume variances:
Market size variance 483.87F
Market share variance -149.59U
Product mix variance -1.48U 332.8F
Price variance 22F

Operating efficiency variances:

Variable cost efficiency variance 426F
Non variable cost variance -500U -74U

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Actual profit 5,348

 Market growth – growth in market size

 Loss of market share

+ Market size variance = Diff in mk size*planned mk share*planned avg CM

=*

Competitive effectiveness variances:

1. Volume Effects variance — difference between CM reflected in profit plan and CM
reflected in flexible budget => impact on profit of volume being higher than we had
anticipated
This was decomposed into:
+ Market size variance => favourable impact of profit / profit being higher because
size of the market was greater than we forecast (so we sold more)
+ Market share variance => unfavourable impact of profit / profit being lower
because we captured less of the market than we anticipated
+ Product mix variance => unfavourable impact of profit / profit being lower because
we sold more of the lower CM product in our ratio/mix of sales than we anticipated
2. Sales Price variance => unfavourable so the selling price we actually achieved was higher
than the sales price budgeted.
=> This increase in sales price increases the volume effects
=> This leaves us overall with an favourable competitive effectiveness variance, so
our story is that we’re implementing strategy particularly effectively.

Operating efficiency variances

1. Variable Cost - Flexible Budget variances — difference between flexible budget and actual
results (composed of usage/efficiency and cost/price effects)
+ Direct Materials variance => favourable
+ Direct Labour variance => favourable / positive effect on profit because we have
used less labour or have paid a lower labour rate
Overall, operating efficiency looks favourable.
2. Non-variable Cost variance => unfavourable — non-variable costs were slightly higher
than we had planned.

Question 10: Profit planning cycle – Connection between Profit Variance Analysis (PVA) and
Profit planning
- The first diagram is profit variance analysis which is a form of management report that
consider the firm’s profitability in the market relative to planned performance
- The second diagram is Profit planning which is an exercise in testing (competing) strategies
and considering the resources required to operationalize those strategies. It may include

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ideas such as deleting and/or introducing new products amongst other initiatives that seek
to improve performance with time.
 The combination of those two diagrams is Profit Planning Cycle which is a cyclic
processes of developing business plans, managing performance and reporting performance
against those plans

Question 11: Bulle – strategic investment model

• Strategic alignment = how consistent is the proposal with the company’s intended
business strategy, along with the
• competitive advantage, which is the likelihood of future opportunities (e.g., new projects,
growth) for the company
• Brand reputation = impact on brand reputation and how the consumer will associate the
brand

Compared to the previous key criteria that require projects to generate a positive net
present value (NPV) over the life of the project to be accepted, SIEM could facilitate better
strategic investment decisions that take into account market factors and open up more
opportunities. Based on the old model, Valentina’s proposal would be rejected as the NPV
generated is not positive. The financials of the proposal are only an estimate and there is
also uncertainty of those numbers. The old model also favours the “do not invest” option,
presumes that continuation of the cash flow stream while ignoring strategic opportunities
that may be taken up by a competitor, hence, a moving baseline. Proposals with larger
outlays and longer payback periods like Valentina’s are likely to be rejected despite the
competitive advantage it may bring.

However, using the new model, the orange juice proposal would pass the hurdle and be
able to be accepted to proceed. This new model does not compromise the financial aspect
by including the average ROI as part of the assessment, while giving relatively less weighting
to the NPV so that strategic investment decisions that benefit in the long term are not
neglected. The market shift towards healthier drinks is also considered under the “strategic
alignment” metric so that the company stays competitive whilst not deviating from its
business goals. Brand reputation is also included as a positive association with the brand will
potentially increase sales of all other products of the brand

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Metric Measure Calculation Weighting Score Reasoning/assessment
ROI Average % over life of the project The average NPV, 15%
20%
capped at 20%
NPV Likert scale of 1 to 5: 1 = 0% $(210,000) A fundamental financial indicator that
(1) Negative and poses great financial risk; 2 = 5%  (2) = 5% reflects true benefits over life of
(2) Negative and poses little financial risk; 3 = 12% investment, ensuring firm seek growth
(3) Neutral, does not affect financial risk; 4 = 28% 25% and improve performance
(4) Positive and poses little financial benefit; 5 = 25%
(5) Positive and poses great financial benefit
Payback Years 1 year at 15% and 3 years 6
period 10 years at 0% 15% months
 [10 – years)*15%  6.75%
Strategic Likert scale of 1 to 5: 1 = 0%  (5) = 25%
alignment (1) marginally consistent with intended strategy 2 = 5%
3 = 10%
(2) slightly consistent with intended strategy
4 = 15% 20%
(4) somewhat consistent with intended strategy 5 = 20%
(5) very consistent with intended strategy
(6) extremely consistent with intended strategy
Competitive Likert scale of 1 to 5: 1 = 0%  (3) = 10% It is essential that the project being
advantage 2 = 5% undertaken provides the competitive
(1) competitive product / not market leader
3 = 10% advantage to maintain the business
(2) competitive product / short-run market leader 4 = 15% position in top companies in the
5 = 20% 20% industry.
(3) competitive product / medium-run market leader
(4) competitive product / long-run market leader
(5) unique product / long-run market leader
Brand Likert scale of 1 to 5: 1 = 0%  (4) = 12% Encompass the social and ethical impact
reputation 2 = 5% of actions, as reflected in the public
(1) very low-level benefit
3 = 9% perception of the firm should be a
(2) low-level benefit 4 = 12% consideration to the investment
5 = 15% 15% proceed
(3) medium-level benefit
(4) high-level benefit
(5) optimal benefit
100% 79.75%
Total score Hurdle of 50% as minimum

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a) The NPV is given a score of -3 due to it being a negative value. This is because by having a
negative NPV, it means that the inflows which are to be generated by the company are less
than the outflows, meaning that the investment is worth less than the costs.

The payback period has a negative likert score as well, due to it taking a large proportion of
estimated life of the project. This is an issue, as it suggests the company will need a large
amount of time to bounce back from the initial cash outflow which occurred during this
investment. This means it will be harder to finance other unexpected expenses during this
time.

b) The new SIEM can facilitate better strategic investment strategy because it not only
evaluates financial criteria but also realizes the qualitative factors as well. The purpose of
orange juice investment proposal is to link Bulle with heathier image which is a new aspect
that the org persuaded. Since the juice industry is highly competitive and has significant
barriers to entry, the comparable advantage factor is likely to be consider when applying
new investment strategy. The brand awareness might be used to notice whether the orange
juice is the new items when mentioning the brand name Bulle.

Furthermore, the use of weights in the model allows the org to clearly define which areas
places the most importance and priorities role which adhere to those factors. For example,
if a firm has a very small weightage on environmental impact, they need to spend less time
to improving the sustainability of its products. It allows the firm to focus and priorities what
is important to them.

The weight also ensure that all the factors are account for, in how a company runs. Even
factors which hold 1% of weights, are still given a likert score. To do this, companies must
still analyze these factors, and rate it on the scale. This give a clearer and fuller
understanding on how it runs.

Factor Weight Likert (-5 to 5) Score

NPV 25% -3 -75
Payback 10% -3 -30
Competitive advantage 25% -1 -25
Brand name 25% 1 25
Customer satisfaction 15% 2 20
Weighted index 100% -85

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Question 12: Kilgors strategic capital investment simulation
If Kilgors management, through the capital investment review committee wanted to pursue
an alternative model to the SIM that combined qualitative assessment in conjunction with
quantitative assessment, what do you advise in terms of a suitable model?

 Applying 2 different perspectives of strategic investment model:

- Expert judgement: evaluate and rank investment proposals using qualitative
information and narratives as well as quantitative information
- Cybernetics model: quantifying all factors and use mathematical models to evaluate
and rank investment proposals

Kilgors SIM Model components: all quantified using a weighted index of likert-style ratings

 Construct a part-quantitative, part-qualitative hybrid version model that combines

qualitative and quantitative assessments to enhance the quality/value of decision-making
within the organisation

 Could redraft the existing model, leaving the existing quantitative method but redesign it
with regards to its qualitative nature – may need to assess whether the Likert scale ratings
represent reliable weightings, risks and magnitude of risks assessment should be
undertaken to understand reasons behind the components and treat them quantitatively.

 Qualitative part: Take factors and address them upfront as a screening device for
example (assessed in management conversations). E.g. impact on the reputation of the firm.
If a project is likely to have a negative impact on the reputation of the firm, don’t want this
information hidden within an overall score - we want to know this upfront from the outset
because it’s a game-changer and wouldn’t bother with the rest of the quantitative analysis

 Quantitative part: NPV, payback period, IRR calculation, able to pull some of the factors
out of the qualitative model to consider as part of the evaluation process which is supported
with a form of quantitative analysis – supplemented analysis in relation to qualitative
analysis to rank projects

Question 13: Kilgors Wine division – strategy map & BSC

Strategy
Strategic levers => BSC and performance measures based on strategy of business
=> Measures, Calculation, Explanation

 Financial perspective:

 Customer perspective:

 Internal business process perspective:

 Learning & growth perspective:

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Perspective Strategic Measures Explanation
objective
Financial Improve NPV
revenue across
each product
range
Increase Return on Investment
shareholder Operating profit/Asset employed
value
Customer Improve Net revenue growth by customer
customer value
Internal Increase
business productivity
process Improve Quality index
quality, cost
and flexibility
of mnfg
Learning Attract and Top-talent turnover
and growth retain high- Number of employee with high
quality qualifications and experience/Total number
personnel of employees
Research and Research and development cost
development
Training Average training hours per employee
investment total number of traning hours
total number of employees

Question 14: Kilgors BSC

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Question 15: Birch Paper, Eccles articles
1. BIRCH PAPER

West papers $430

Eire papers $432

a. Less profit to Southern $ 36
b. Less profit to Thompson $ 5
$391

Thompson $480
a. Less profit to Southern $112
b. Less profit to Thompson $ 80
$288

• Intervene: can get lower costs (Thompson)

+ Result in serving low-cost bid interests for firm
+ Profits can be shared evenly between divisions (considering bargaining power)
> Force Thompson’s SP at $430 (market)
> Share profit evenly between Thompson & Southern?
> Use of dual price?
+ Undermine the decentralise policy
+ Compromises the sourcing autonomy of divisional managers
+ A new policy may be required to avoid ongoing disputes
• Overlook/Not intervene: => Northern may buy from West Papers
+ Result in increased costs (relatively small given transaction <5% of total volume)
+ No (little) profits are generated for Thompson & Southern
+ Leaves conflict to divisional managers & may unresolved
=> Preserves the decentralisation policy
=> Strengthen relationship with suppliers
=> No impact on quality, assume no material differences between inputs

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2. ECCLES
“Transfer pricing schemes are a means of generating information and control for
implementing corporate, business unit, and product strategy”

Eccles Five characteristics that influence internal transfer pricing policy:

- the nature of corporate strategy and the strategic planning process;
- the primary means of control by top management;
- the criteria for performance measurement, evaluation, and reward;
- the definition of fairness in the company; and
- the nature of the managerial processes. How managers communicate with each
other/ how are decisions made?

Three categories of organisation

Common internal transfer pricing problems

1. Performance problems: If problems are internal, then ITP helps, but if problem is
external, it is unlikely that ITP can resolve external problems like recession
2. Interpersonal disputes among managers
3. Power imbalance: A unit manager may be dependent on the other unit but not vice
versa
4. Demand fluctuations: In times of high demand, managers are happy with buying at
full costs, but the selling unit can sell at a much higher price to external markets
5. Product pricing: Recognise that product pricing involves issues beyond costs.

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