A 2.

2 STRATEGIC
PERFORMANCE
MANAGEMENT
REVISION SESSION
Presented By: CPA
Sunday Kalisa
NATURE OF THE PAPER: A 2.2 STRATEGIC
PERFORMANCE MANAGEMENT
INSTRUCTIONS:
Time Allowed: 3 hours 45 minutes (15 minutes reading and 3 hours 30 Minutes writing).
This examination has two sections: A & B. Section A has one Compulsory Question while section B has three
optional questions to choose any two. In summary attempt three questions.
Marks allocated to each question are shown at the end of the question. Show all your workings where
necessary.
PAPER AIM

This subject paper aims at ensuring that students have the ability to conduct a critical, strategic analysis of
unfamiliar business situations. This includes the ability to select, integrate, and apply the appropriate techniques
and approaches in order to identify problems, opportunities and recommend strategies in specific situations. It
builds on technical knowledge of Managerial Finance, Management Accounting and other disciplines acquired in
the earlier Examination stages.
SOME TIPS FOR A SUCCESSFUL EXAM
PREPARATION
• Make a realistic revision schedule
• Find a revision style that fits you
• Customise your notes to make them more personal
• Make sure you understand everything
• Look at past exam papers
• Take regular short breaks
• Reward yourself
• Ask for help
• Effectively handle exam days
PREPARING FOR AN OPEN BOOK EXAM
The following strategy will facilitate students to better prepare for an open book exam:
• Preparation is key
• Do not place too much emphasis
on reference materials
• Organise your reference material
• Familiarise yourself with key
concepts
• Do not plagiarise
• Manage your time effectively
STRATEGY

• A strategy may be defined as a plan of action designed to achieve long-term

organizational objectives. Objectives and policies are formalized within a
framework of a corporate strategy.
• Organizations should have a strategy because:
i. It helps an organization to define and understand its purpose;
ii. It provides a business roadmap;
iii.It helps staff to cooperate together in order to achieve business goals such as
reducing costs, expanding market share, improving quality and improving
customer care;
iv. It also facilitates in setting a set of values whilst providing business purpose.
 PERFORMANCE MEASUREMENT SYSTEM
• Mission statement
• A mission statement describes an organisation’s basic function in society regarding its products and services that it offers to
its customers.
• A mission statement should therefore address:
• Organisation’s vision over the long-term
• The bases of detailed objectives
• The main purpose of the organisation
• The main activities of the organisation
• The key organisation values.

• Benefits of having clearly defined objectives

• Stimulate and motivate staff
• Improve effectiveness and efficiency
• Objectives provide a basis of measurement or control
• They do facilitate in performance appraisal
 COSTING TECHNIQUES

1. Life cycle costing: This track and accumulates costs and revenues attributable to each product over the
entire product life cycle which facilitates in determining a product or service total profitability as opposed
to the traditional costing methods that accumulates costs based on the financial accounting year.
• The component elements may include:
• Research and development costs
• The cost of purchasing any technical data required
• Training costs
• Production costs
• Distribution costs
• Marketing costs – customer service, branding
• Inventory costs
• Retirement and disposal costs etc.
 The product life cycle:
• The product life cycle – This refers to a process through which a product undergoes from the time it is
launched until it dies out. The process is made up of five stages:
• Introduction stage – This is a stage where a product is characterized with no profit as a result of being
launched. At this level, competition is either non-existent or limited though with high growth levels.
• Growth stage – At this level, profits start to emerge to cover on a bit of expenses incurred at the
introductory level, attributed to the products being accepted at the market in bigger numbers.
• Maturity stage - At this level, there is stiff market competition with various players coming up with
diverse marketing strategies including advertising, promotional campaigns that attract the use and
rewarding of loyalties.
• Saturation stage – At this level, sales growth appears to be in decline which leads to a lower profit per
unit as more competitors join the market.
• Decline stage – This is the last level of the product life cycle characterized with a slow but accelerated
decline in sales and profits. For some players this is the time that they may have to start thinking about
product withdrawal.
The product life cycle – Graphical representation
 Evaluation of the Product life cycle
• Marketing – During the product life cycle, it may be important to adjust some of the marketing approaches
being deployed such as promotions, advertisements etc.
• Continuous assessment - It is a requirement that organizations severally assess both the internal and
external factors that could affect the product to facilitate establishment of an effective marketing plan.
• Product support – Products need to be supported by other variables including an effective marketing mix.
• Response to change – management should ensure that the organization’s products can respond to eminent
changes.
• Appreciation of the product life cycle – management should be able to acknowledge that their products will
not last forever, and that at a certain point in time the product will reach a decline stage and therefore
prepare accordingly.
• Reduced product cost – being able to plan, design and develop a product at such an early stage improves an
organisation’s cost management process, a move that contributes to cost reduction thereby providing an
opportunity for the organisation to effectively compete in the market.
 IMPLICATIONS OF LIFE CYCLE COSTING
• Return maximisation over the Product Life Cycle – Between 70-90% of a product’s life cycle costs are determined
by the early decisions made most probably at the design or development stage.
• Minimise the marketing time – This refers to the time from the conception of the product up to its launch.
• Minimise Break-even Time (BET) – A short breakeven time is vital in keeping an organisation liquid.
• Maximise the length of the lifespan – Since product life cycles are not predetermined, as they are set by either
management or competitors’ actions, it becomes easier to create other products uses depending on the lifecycle of the
material.
• Minimise product proliferation – If products are updated or superseded too quickly, the life cycle is cut short and the
product may just cover its Research and Development costs before its successor is launched.
• Manage the product’s cash flow – Life cycle costing contributes to the effective and efficient management of a
products cash flows.
• Customer life cycles – Customers also have lifecycles and any organisation would wish to maximise the return from a
customer over their life cycle by for example encouraging customer loyalty.
ACTIVITY BASED COSTING (ABC)
ABC is a costing technique that involves the identification of the factors which cause
the costs of an organisation’s main activities to change based on the usage levels.

The five steps of activity-based costing

• Step 1. Identify costly activities.

• Step 2. Assign overhead costs to the activities identified in step 1.

• Step 3. Identify the cost driver for each activity.

• Step 4. Calculate a predetermined overhead rate for each activity.

• Step 5. Allocate overhead costs to products.

 QUESTION ONE:
2021 QUESTION
Profitability of a Business by offering services to X,Y and Z where Total Sales
Income is Frw 180,000 per client

X Y Z Monthly
cost Frw

Hours spent on preparing accounts and providing 6 4 8 120,000

advice
Number of requests for missing information 5 12 4 60,000

Number of payment reminders sent 3 8 10 30,000

Number of client meetings held 5 4 2 90,000

QUICK SOLUTION
SOLUTION
cost per
Monthly
X Y Z Total cost
cost Frw
driver
Hours spent on preparing accounts and providing
6 4 8 18 120,000 6,667
advices
Requests for missing information 5 12 4 21 60,000 2,857
Payment reminder sent 3 8 10 21 30,000 1,429
Client meetings held 5 4 2 11 90,000 8,182

Cost per client

X Y Z
Hours spent on preparing accounts and providing 40,000 26,667 53,333
Requests for missing information 14,286 34,286 11,429
Payment reminder sent 4,286 11,429 14,286
Client meetings held 40,909 32,727 16,364
Total cost 99,481 105,108 95,411

Profitability X Y Z

Sales 180,000 180,000 180,000

Total cost 99,481 105,108 95,411
Profit 80,519 74,892 84,589

Z is the most Profitable with usage of ABC

 ADVANTAGES OF ABC
• Better basis for cost apportionment by identifying the real nature of cost behaviour.
• Overheads are traced to the product which increases a better understanding of the
overhead costs and cost drivers.
• More realistic and accurate product costs thereby leading to more accurate pricing
decisions.
• ABC influences managers to consider the drivers of cost within their businesses which
greatly improves the manager’s decision making as they can use more reliable product
cost data.
• ABC provides a useful means of getting financial and non-financial data by tracing costs
to areas of managerial responsibility, processes, customers, departments besides the
product costs.
• ABC brings attention to cost behaviour and helps in the reduction of costs by comparing
the resources required under ABC with the resources that are currently provided.
 DISADVANTAGES OF ABC
There are difficulties that emerge during the implementation of the ABC system such as
picking cost drivers and varying cost driver rates.
• Disadvantage to smaller organisations.
• A full ABC system having several cost pools and cost drivers is more complex and more
expensive to operate than traditional product costing systems.
• Technology level: The level of technology and manufacturing environment prevailing in
different firms also affect the application of ABC.
• Time: The ABC system is very time consuming as it requires management to estimate
costs of activity pools and to identify and measure cost drivers to serve as cost allocation
bases.
• Fashion based: Some organisations may just decide to deploy ABC because it is
fashionable not because management really need it to make informed product costing
decisions.
 Qn 2 st
The financial and other information for Romano Laptops are given below: Data for the year ending 31 March 2021

Volume (units) 23,800

Frw“000” Frw “000”
Material 406,500
Labour 38,790
Packaging and transport 21,180
Subtotal 466,470
Overhead costs
Customer service 77,350
Purchasing and receiving 24,510
Inventory management 14,670
Administration of production 25,370
Subtotal 141,900
Total 608,370
Labour time per unit 3 hours

Data collected for the year

Number of minutes on call to customers 899,600
Number of purchase orders raised 21,400
Number of components used in production 618,800

Order 2122
Units ordered 16
Frw
Direct Material 273,280
Labour 26,080
Packaging and transport 14,240
Other activities relating to the order:
Number of minutes on call to customers 1,104
Number of purchase orders raised 64
Number of components used in production 512
Administration of production (absorbed as a general overhead) 3 labour
Quick Soln
Answer

Customer service 77,350,000 899,600 86

Purchasing and receiving 24,510,000 21,400 1,145
Inventory management 14,670,000 618,800 24
Administration of production 25,370,000 71,400 355

W5: Administration of prodn 16 *3 48

Cost per unit for Order 2122

Customer service 1,104 94,925 5,933
Purchasing and receiving 64 73,301 4,581
Inventory management 512 12,138 759
Administration of production 48 17,055 1,066

Cost Curre nt me thod standard

ABCcost
costFrw
pe r unit Frw
Direct cost (446470/23) 19,600 19,600
Overhead allocated [141,900,000/(23800*3)]*3 5,962
Customer service 5,933
Purchasing and receiving 4,581
Inventory management 759
Administration of production 1,066
Total cost 25,562 31,938
Markup (45%)
Price 37,064 46,311
 RISK AND UNCERTAINTY

Risk preference:
• Risk seeker – interested in the best outcome no matter the occurrence chances.
• Risk neutral – decision maker is concerned with the most likely outcome.
• Risk averse - decision maker is concerned that the worst outcome is likely to occur.
• Making decision about the future is uncertain hence the need for incorporating uncertainty
in decision making:
• Research and conservatism – estimating outcomes in a conservative manner in order to
provide a built-in safety factor. Most widely used approach which shows a full range of
possible outcomes (worst and best possible) from a decision, hence requiring the
preparation of pay-off tables.
 QUESTION 3:
X Y Z
Price per unit in Frw 4,000 4,300 4,400
Expected sales volumes in units
Best possible 16,000 14,000 12,500
Most Likely 14,000 12,500 12,000
Worst possible 10,000 8,000 6,000

Variable coste per unit 2,000 2,000 2,000

Fixed costs 20,000,000
QUICK SOLN 3
Contribution per unit 2,000 2,300 2,400

Total contribution towards fixed costs

Best possible 32,000,000 32,200,000 30,000,000
Most Likely 28,000,000 28,750,000 28,800,000
Worst possible 20,000,000 18,400,000 14,400,000

Action
Circumstances A B C
I 70 60 70
II - 10 20 - 5
III 80 0 5
IV 60 100 115

Maximax C
Maximin B

MiniMax Regret Rule A B C

I 0 10 0
II 30 0 25
III 0 80 75
IV 55 15 0
85 105 100

The lowest of the maximum regrets is 85 with Action A which should be selected.
 PAY OFF TABLES
They help to identify and record all possible outcomes (pay offs) in situations where the action taken affects the outcomes.
• Probabilities and expected values:

• Expected values indicate what an outcome is likely to be in the long term with repetition by assigning probabilities to different outcomes
to evaluate the worth of a decision. In such a case the Optimum decision will be one with the Highest Expected Values.
• NB: Look at the information provided clearly so that you don’t confuse profits with Costs.

• Decision Rules: The “play it safe” basis for decision making is referred to as the maximin basis – Maximise the minimum profits
(decision maker selects the alternative that offers the least unattractive of the worst outcomes – alternative that maximises the minimum
profits) while the one for best outcome is known as maximax basis – maximise the maximum achievable profits.
• The ‘opportunity loss’ basis for decision making is known as the minimax regret – Aims at minimising the regret from making the wrong
decision!
• Regret for any combination of action and circumstances = Profit for best action in circumstances – Profit for the action chosen in those
circumstances.
• Drawback of Maximin: defensive and conservative – leave out opportunities of profit maximisation; and it also ignores the probability of
each different outcome taking place.
• Drawback of maximax: It ignores probabilities and it is over optimistic.
 DUE TO UNCERTAINTIES, WE MAY NOT BE ABLE TO FORECAST FUTURE EVENTS:

• Political and economic changes: When there are political and economic changes in an economy,
uncertainty is created which make it difficult to forecast future sales and the related costs.

• Environmental changes: When the environment changes, it is believed that it will have a
considerable impact on an organisation’s markets and products.

• Technological changes: Technology is changing by the day and therefore the past cannot be
relied upon to tell the future.

• Technological advancements: The advent of advanced manufacturing technology is changing

the cost structure of so many organisations. Besides, faster machinery may arise which change
the way output levels are currently being produced.

• Social changes: Alterations in taste and preferences including changes in social acceptability of
different products may cause difficulties in forecasting future sales levels.
 PLANNING AND CONTROL
Budgeting

• A budget is a quantified plan of action for a forthcoming accounting period.

• Why budgeting: The objectives of a budgetary planning and control system may include:

i. Ensure achievement of organisation’s objectives

ii. Compel planning – management to look ahead
iii.Communicate ideas and plans
iv. Coordinate’s activities to ensure maximum integration of efforts towards a common goal
v. Provides a framework for responsibility accounting
vi.Establish a system of control
vii.Motivate employees to improve their performance
INCREMENTAL BUDGETING VS ROLLING
BUDGET
• Incremental Budgeting: It is a process of budgeting which considers current year’s results as a base
and adjusts it with an extra amount for estimated growth or inflation in the next year.
Advantages are:

• It is relatively quick – less time consuming, and easy to prepare.

• It is suitable to environments that are stable.

A rolling budget
• Is a budget which gets updated continuously by adding a further period whilst dropping the earliest
one, bidding at preparing targets and plans which are more realistic and certain. The rationale for
rolling budgets is that, anticipated conditions could have changed from the time the budget was
prepared due to several reasons such as new technologies in place, changed environmental
conditions, among many other factors.
DISADVANTAGES OF TRADITIONAL BUDGETS
• Inefficiencies are carried forward since cost levels are rarely subjected to close scrutiny.
• Traditional budgets are inefficient form of budgeting as they allow or encourage budget
slack and wasteful spending which is totally unethical.
• Time consuming
• Value to users
• Shareholder value
• Rigidity
• Protection
• Stifle innovation
• Sales focus
• Forgotten strategy
• Reinforces dependence culture
ROLLING BUDGET
Q1 Q2 Q3 Q4
Q1 Actual (Frw 000)
(Frw 000) (Frw 000) (Frw 000) (Frw 000)
Revenue 87,600 89,790 92,035 94,335 89,660
Cost of sales 48,180 49,385 50,620 51,885 49,315
Gross profit 39,420 40,405 41,415 42,450 40,345
Distribution cost 7,885 8,080 8,285 8,490 8,070
Administration cost 21,070 21,070 21,070 21,070 21,070
Operating profit 10,465 11,255 12,060 12,890 11,205

On the basis of Q1 results, sales volume growth of 3% per quarter is now expected.

Q2 Forecast Q3 Forecast Q4 Forecast Q1 Forecast

Q1 Actual (Frw 000)
(Frw 000) (Frw 000) (Frw 000) (Frw 000)
Revenue 89,660 92,350 95,120 97,974 100,913
Cost of sales 49,315 50,794 52,318 53,888 55,504
Gross profit 40,345 41,555 42,802 44,086 45,409
Distribution cost 8,070 8,312 8,561 8,818 9,083
Administration cost 21,070 21,070 21,070 21,070 21,070
Operating profit 11,205 12,173 13,171 14,198 15,256
 FINANCIAL PERFORMANCE MEASURES -
SNAPSHOT
Expect you to be in position to calculate the financial measures: Financial ratios: such as:

• Liquidity ratio: Liquidity ratios indicate the ability to meet short-term obligations to creditors as they mature or come due: CA/CL.

• Cash ratio: The cash ratio is a liquidity measure that shows a company's ability to cover its short-term obligations using only cash and
its cash equivalents. Cash and Cash Equivalent/Current Liabilities

• Net Gearing Ratio: Net gearing is a measure of a company’s financial leverage. Net gearing ratio is defined as total borrowings
divided by shareholders' funds.

 50% gearing – Highly geared; > 25% - low risk; A gearing ratio between 25% and 50% - considered optimal or normal.

• Return on Capital Employed (ROCE)

• The return on capital employed shows how much operating income is generated for each Franc of capital invested. A higher ROCE is
always more favourable, as it indicates that more profits are generated per Franc of capital employed. EBIT/Capital Employed (TA -
CL).

• Dividend pay-out ratio

• The dividend pay-out ratio measures the percentage of net income that is distributed to shareholders in the form of dividends during the
 FINANCIAL PERFORMANCE MEASURES Cont’d
• NB: As a general principle, these performance measures are only meaningful if they are used for comparison:
over time; with other companies, and or with other measures of performance / with other industries.

• NB: Financial measures are open to misinterpretation and manipulation and hence the need to encourage managers
to concentrate also on those variables that cannot be expressed in monetary terms. Cost cutting may lead to short-
term benefits but dangerous to future plans i.e., performance and motivation could be affected including labour
turn over.

• Of recent there has been an increased usage of NFPIs due to changes in cost structures – modern technologies
require huge investment and shortened product life cycles; the competitive environment – where companies
compete in terms of product quality, delivery, reliability, after sale services and customer satisfaction; and the
manufacturing environment – focus on reducing throughput times, inventory levels and set-up times to counteract
the traditional profit – related measures that are also myopic in nature. NFP Measures may give a timely indication
of the level of performance achieved than financial ratios and may be less susceptible to distortion by factors such
as uncontrollable variations in the effect of market forces on operations.

• A Combination of financial and non-financial measures is likely to be the most successful though NFPIs do also have merits.
PERFORMANCE MEASUREMENT MODELS
BALANCED SCORECARD:
• A balanced scorecard may be defined as a performance management and strategy development methodology that
deploys both financial and non-financial measures relating to an organisation’s critical success factors. Goal and
Measure when evaluating performance.

• Financial perspective: This perspective is concerned with measuring of the traditional financial performance such
as earnings per share, sales, costs, share price, profits etc.

• Customer perspective: This perspective relates to the extent at which customers are satisfied of their needs and
market segments in which an organisation competes e.g product or service reliability, satisfaction on price or quality
etc.

• Internal business perspective: This perspective focusses on what an organisation must excel at to meet the
customer needs such as faster delivery, improved quality of materials, better production processes etc.

• Innovation and learning perspective: This perspective focusses on how a business is improving its ability to
innovate, improve, and learn so as to enable success with the critical operations and processes.
 PERFORMANCE PYRAMID
• An organisation operates at various levels supporting each other to achieve organisational objectives. The performance
pyramid therefore underlines the links running between an organisation’s vision and its functional objectives.
At the top level that is where the market and financial objectives are set

At the strategic business unit level that is where strategies are developed to facilitate the achieving of both financial and
market objectives set at the top level above as explained below:

• Customer satisfaction could be realised by meeting customer expectations in form of better-quality products and services.

• Flexibility depicts the level of responsiveness towards the business operating system as a whole.

• Productivity refers to the management of organisational resources such as labour and time.

These in turn are supported by more specific operational arrangements:

• Quality – The quality of a product or service should be consistent for its intended purpose.

• Delivery – This refers to the means through which a product or service is delivered i.e., speed, distribution methods etc.

• Cycle time – This depicts the process time of all processes from start till the end.

• Cost – Being able to eliminate all non-value adding activities.

The linkage should be cross cutting such that a reduction in process time and enhanced distribution network
enhances customer satisfaction which contributes to the realisation of both market and financial objectives.
 FEATURES OF SERVICE BUSINESS
• Simultaneous: The production and consumption of a service are simultaneous which makes it difficult to be
inspected for quality, nor can be it returned if it is not what was required. Poor quality coffee can only be
determined after a customer has already tasted it.
• Heterogenous: The service received will be changing each time it is received. It appears impossible to consistently
deliver the same quality of service. The coffee served on Monday’s will different from that served the next day.
• Intangible: The performance of a service entails many other intangible factors. Personality of the person serving
you, quality of the service itself etc.
• Perishable: A service cannot be stored neither can it be bought in bulk. There is no work in progress for services as
it is usually seen with products. Coffee can be served one cup at a time in the coffee shop and therefore cannot be
stored or served in bulk similar to other products.
• No transfer of ownership: Service costing does not result in the transfer of property. The purchase of a service only
allows the customer access to or a right to use a facility.

Though there are some dynamics of service businesses, Fitzgerald and Moon’s building blocks ought to provide a
solution underpinned by the modern view that’s states that something can only be difficult to measure, if it is not
clearly defined enough.
 BUILDING BLOCKS OF DIMENSIONS, STANDARDS
AND REWARDS
• The 3 Standards are Ownership, Achievability and Equity:
• STANDARDS:
• Ownership – This requires that staff take ownership of
standards by participating in the budget standard -setting
processes. With this they can be more motivated unlike the
budgetary slack that might be introduced.
• Achievability – A balance must be struck between
management between what the organisation and the employee
perceive as achievable. I.e., Standards should be set slightly
higher to ensure there is some sense of achievement and also
not too low, to demotivate achievability.
• Equity – This should be seen as occurring when a standard is
applied for performance measurement purposes. Eg Divisions
operating in different countries should not be accessed against
the same standards.
 BUILDING BLOCKS OF DIMENSIONS,
STANDARDS AND REWARDS Cont’d
REWARDS:
The Reward Structure of the performance measurement
system should guide staff to work towards the set
standards. These are Clarity, Motivation and
Controllability.
• Clarity – The organization's goals and objectives
must be clear enough to all staff being appraised.
• Motivation – Staff should be motivated to work
towards achievement of organization's objectives.
The clear the goal the more motivated they will be,
provided the targets are in agreement.
• Controllability – Managers should have an element
of control especially in their own areas of
responsibility. Not to be held responsible for costs
they can’t control.
DIMENSIONS:
• Competitive Performance – Focusing on aspects
such as sales growth and market share
• Financial Performance – Focusing on
profitability, capital structure etc.
• Quality of Service – looks at reliability, courtesy
and competence
• Flexibility – able to deliver at the right speed,
respond to precise customer specifications, coping
with fluctuations in demand etc.
• Resource utilisation – How efficiently resources
are being utilised.
• Innovation – in terms of innovation process and
the success of individual innovations.
ASSESSING AN ORGANISTION’S SITUATION OR EXTERNAL ENVIRONMENT

SWOT analysis: SWOT (strengths, WEAKNESSES:

weaknesses, opportunities, and threats) Lack of management team experience
analysis is a framework used to evaluate
a company's competitive position and to Lack of technology in use
develop strategic planning. Declining profitability
STRENGTH: Lack of marketing information
Location Poor inventory management
Profitability Lack of risk management policy
Liquidity position
Use of debt
Economies of Scale
ASSESSING AN ORGANISTION’S SITUATION OR EXTERNAL ENVIRONMENT

OPPORTUNITIES:
Adopting advanced Technology
New product ranges with higher
margins
Development of online ordering
You should also watch out for
changes in government policy
related to your field. And changes
in social patterns, population
profiles, and lifestyles can all
throw up interesting opportunities.
• THREATS
• The competition level is high
• Price competition may reduce
profitability
• New businesses could enter the
market relatively easily
• Customer loyalty may be low
STRATEGIC MODELS USED IN PLANNING AND ASSESSING BUSINESS PERFORMANCE

Porters five forces Model • The power of buyers:

Customers want better quality products at relatively
• Porter's Five Forces is a simple but powerful tool that you lower prices; satisfying this want may therefore push
can use to identify the main sources of competition in your profits further down. Position of buyers is influenced
industry or sector. by several other factors:
The threat of entry: i. Ratio of buyers compared to sellers
i. Economies of scale ii. Switching costs
ii. Product differentiation iii. Whether the product is standardised or
iii. Capital requirements specialised;
iv. Switching costs iv. Customer’s ability to take over the supplier;
v. Easy access to distribution channels v. Price awareness;
vi. This learning curve effect and other independent vi. When product quality is important to the
economies of scale customer.
vii. Government action such as establishing new laws
STRATEGIC MODELS USED IN PLANNING AND ASSESSING BUSINESS PERFORMANCE
Porters five forces Model
• Porter's Five Forces is a simple but powerful tool that you
can use to identify the main sources of competition in your
industry or sector.
The threat of substitutes
There are other players in the industry, selling similar
products. This weakens power further through competitive
price offerings, though with some differentiation the threat
could be mitigated.
Competitive rivalry
Easy entry will enhance the competitive rivalry.
With the level of competitive rivalry, it appears there are no
chances of easily pushing volumes and consequently earning
higher profits due to price competition, advertising battles,
sales promotion campaigns, new product introduction to the
market, improving after sales services or providing guarantees
or warranties.
• The power of suppliers:
Switching costs are low and therefore moving from one
supplier to another may not be a problem. The company
is able to integrate forward by taking over suppliers
easily.
Whether there are just one or two dominant suppliers to
the industry, able to charge monopoly or oligopoly
prices;
The threat of new entrants or substitute products to the
supplier’s industry;
Whether the suppliers have other customers outside the
industry, and therefore do not have to rely on the
industry for the majority of their sales;
The importance of the supplier’s product to the
customer’s business.
 THE BCG PORFOLIO MATRIX
• The BCG portfolio matrix provides a method of positioning products through their life cycles in terms of
market growth and market share. A BCG matrix helps businesses understand their current and future
competitive landscapes.
The process can help business owners improve products, identify new opportunities, and even determine
services to eliminate.
• Stars – These are products with a high share of a high growth market, though they require some
investments to maintain their market position.

• Cash cows – These are products with a high share of a low growth market. These might require less
investment though generating high levels of cash income.

• Question marks – These are products that possess a low share of a high growth market, with potential to
become stars though with some investment reluctance as sufficient market retention may not be guaranteed
at this level.

• Dogs – These are products with a low share of a low growth market, and these are allowed to be killed off.
LIMITATIONS IN USING THE BCG MATRIX
• The model is too simplistic in the four
classifications used in that some products are
falling in more than one category.

• The market is not always easy to define mainly for

organisations operating in specialised markets.

• The model does not consider the relationship

between divisions or any links between products
for example there may be a relationship between
bread and cakes which is apparently ignored.

• The model requires the collection of large amounts

of data which is time consuming and expensive.
PESTELE ANALYSIS
PESTEL analysis is a framework or tool used by marketers to analyse and monitor the macro-environmental
(external marketing environment) factors that have an impact on an organisation.
Political factors - Is about how and to what degree a government intervenes in the economy. This can include –
government policy, political stability or instability in overseas markets, foreign trade policy, tax policy.
Economic – Economic factors have a significant impact on how an organisation does business and also how
profitable they are.
Social – Also known as socio-cultural factors, are the areas that involve the shared belief and attitudes of the
population.
Technological – We all know how fast the technological landscape changes and how this impacts the way we
market our products.
Environmental – They have become important due to the increasing scarcity of raw materials, pollution targets,
doing business as an ethical and sustainable company, carbon footprint targets set by governments.
Legal – Legislative issues that may have an impact of businesses. Legal factors include - health and safety,
equal opportunities, advertising standards, consumer rights and laws, product labelling and product safety.
Ethical Factors - The most recent addition to PESTEL is the extra E - making it PESTELE or STEEPLE. This
stands for ethical, and includes ethical principles and moral or ethical problems that can arise in a business.
 In March 2021, the following data applied:

QN: PREVIOUS EXAM

Standard cost of a cake (no adjustment for the organic Actual production details
ingredient change) • The new organic cakes production approach was
adopted at the start of march 2021, following the
decision by the new Production Manager, though
Ingredients Kg Frw Ingredients Kg Frw 000 no change was made at that time to the standard
cost card. The company operates a responsibility
based standard costing system which allocates
variances to specific individuals. The Production
Manager is allocated variances for material price
Flour 0.10 600 per Kg Flour 5,700 3,705
(total for all ingredients), material mix and material
yield.
Eggs 0.10 3,500 per Kg Eggs 6,600 28,050
Required:
Butter 0.10 8,500 per Kg Butter 6,600 59,400
• Critically evaluate the performance of the
Sugar 0.10 2,500 per Kg Sugar 4,578 13,735 Production Manager of Mezeneza Cakes for the
month of March 2021 based on the original
Normal Loss 10% of total Actual Loss 1,878 standard cost.
input
 DIVISIONAL STRUCTURE AND PERFORMANCE MEASURES
TRANSFER PRICING

• A transfer price is the price at which goods or services are transferred from one department to another, or from one member of a
group to another.

• Criteria for a design of a transfer price policy

• Transfer price is a means of promoting divisional autonomy without prejudicing divisional performance measurement or
hampering overall corporate profit maximisation. Head office is therefore tasked to dysfunctional decision making by profit
centres.

• Transfer price should reflect the opportunity cost of sale to the supplying division and the opportunity cost to the buying division
through it is NOT possible to have an optimal decision for the organisation as a whole in meeting the criteria of goal
congruence, managerial effort and sub-unit autonomy simultaneously

• Market based transfer price is the ideal transfer price.

• Adjusted market price often cheaper than external sales due to some savings in selling and administration costs, bad debt risks,
delivery costs etc. It is therefore reasonable for the buying Division to request for over the external market price and hence a
transfer price which is slightly lower than the external market price.
Advantages of Market Value Transfer Prices
• Divisional autonomy – In a decentralised company, divisional managers should have the autonomy to make output, selling and buying
decisions which appear to be in the best interest of the Division’s performance.
• Corporate profit maximisation – Division selling to each other at a market transfer price would be expected to benefit from a better
quality of service, greater flexibility, dependability of supply which leads to cheaper cost of administration, selling and transport, a
move that a benefit to the company as a whole.
• Divisional performance measurement – Where a market price exists but a transfer price exists different from the external market price,
divisional managers may argue about the volume of internal transfers.
Disadvantages of market value transfer prices
• The market price may be a temporary one induced by adverse economic conditions, dumping or depending on the volume of output
supplied to the external market by the Division.
• A transfer price at market value might under some circumstances be a disincentive for a Divisional to utilise its spare capacity thereby
missing out on the marginal contribution to profits.
• The option to either buy or sell in an open market may not readily exist for some products that do not have an equivalent market price.
• The external market price for the transferred item might be imperfect and then you find that the transferring Division is left with no
choice when wanting to sell more, but to reduce the price.
TRANSFER PRICING CONT’D
Factors to be considered when setting a multinational transfer price

• Exchange rate fluctuation – The value of a transfer of goods between profit centres in different countries may equally depend on fluctuations in the currency
exchange rate. I.e A Franc visa vis a shilling if a Rwanda company is transacting with its Ugandan subsidiary.

• Taxation in different countries – Companies will tend to manipulate their profits especially when the tax regimes between profit centres are different by
reducing profits in a country with a low tax rate. 30% tax rate in Rwanda and a company is transacting with its subsidiary in Burundi where the tax rate is
40%.

• Import tariffs – Multinational companies will intend to import goods at a minimised cost in order to keep the transfer price at a minimum value especially in
situations where import tariffs are imposed.

• Exchange control – This situation may occur when a subsidiary in one country, where transfer of profits is restricted, and it sells to another in another country
at an exorbitantly higher prices disguising profits as sales revenues.

• Anti-dumping legislation – This occurs when governments take action to protect home industries by restricting multinational companies from transferring
goods into a home country cheaply. For example, by insisting on the use of a fair market value as the transfer price.

• Competitive pressures – Transfer pricing can be used to enable profit centres to match or undercut local competitors.

• Repatriation of funds – Multinational companies may repatriate profits to their countries of origin by inflating transfer prices for goods sold to subsidiaries in
countries where inflation is high, thereby reducing subsidiaries’ profits and consequently saving their value.
Thank You

SOME QUESTIONS AND FEEDBACK ARE WELCOME!!!