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Strategic Performance Management Guide

This chapter discusses the link between performance management and strategy. It explains that performance management involves setting goals and measuring outcomes to help an organization achieve its strategic objectives. It also discusses how value chain analysis and McKinsey's 7S framework can help integrate business functions and link them to performance measures. Organization structure, culture and strategy also influence performance measurement. The chapter outlines challenges in measuring performance in complex business structures like strategic alliances, joint ventures and multinationals. Finally, it covers using performance measures to predict and prevent corporate failure.

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67 views9 pages

Strategic Performance Management Guide

This chapter discusses the link between performance management and strategy. It explains that performance management involves setting goals and measuring outcomes to help an organization achieve its strategic objectives. It also discusses how value chain analysis and McKinsey's 7S framework can help integrate business functions and link them to performance measures. Organization structure, culture and strategy also influence performance measurement. The chapter outlines challenges in measuring performance in complex business structures like strategic alliances, joint ventures and multinationals. Finally, it covers using performance measures to predict and prevent corporate failure.

Uploaded by

CA8512
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

© The Institute of Chartered Accountants of India

ii

This Study Material has been prepared by the faculty of the Board of Studies (Academic). The
objective of the Study Material is to provide teaching material to the students to enable them to
obtain knowledge in the subject. In case students need any clarification or have any suggestion for
further improvement of the material contained herein, they may write to the Director of Studies.
All care has been taken to provide interpretations and discussions in a manner useful for the
students. However, the Study Material has not been specifically discussed by the Council of the
Institute or any of its committees and the views expressed herein may not be taken to necessarily
represent the views of the Council or any of its Committees.
Permission of the Institute is essential for reproduction of any portion of this material.

© THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA


All rights reserved. No part of this book may be reproduced, stored in a retrieval system, or
transmitted, in any form, or by any means, electronic, mechanical, photocopying, recording, or
otherwise, without prior permission, in writing, from the publisher.

Basic draft of this publication was prepared by CA. Vandana D Nagpal.

Edition : April, 2023

Committee/Department : Board of Studies (Academic)

E-mail : bosnoida@[Link]

Website : [Link]

Price : ` /- (For All Modules)

ISBN No. : 978-81-19472-06-2

Published by : The Publication & CDS Directorate on behalf of


The Institute of Chartered Accountants of India,
ICAI Bhawan, Post Box No. 7100,
Indraprastha Marg, New Delhi 110 002 (India)
Printed by :

© The Institute of Chartered Accountants of India


iii

CONTENTS
Chapter-1 Introduction to Strategic Cost Management
Chapter-2 Modern Business Environment
Chapter-3 Lean System and Innovation
Chapter-4 Specialist Cost Management Techniques
Chapter-5 Management of Cost Strategically for Emerging Business Models
Chapter-6 Strategic Revenue Management
Chapter-7 Strategic Profit Management
Chapter-8 An Introduction to Strategic Performance Management
Chapter-9 Strategic Performance Measures in Private Sector
Chapter-10 Strategic Performance Measures in The Non-For-Profit Organisations
Chapter-11 Preparation of Performance Reports
Chapter-12 Divisional Transfer Pricing
Chapter-13 Standard Costing
Chapter-14 Case Study
Appendix
Skill Assessment

© The Institute of Chartered Accountants of India


iv

DETAIL CONTENTS
CHAPTER-8 AN INTRODUCTION TO STRATEGIC PERFORMANCE MANAGEMENT
Chapter Overview ..............................................................................................................8.2
A. Performance management and its link to strategy .................................................8.3
1. What is strategy? .......................................................................................................8.3
2. What is performance management? ...........................................................................8.3
3. Interlinking of performance management and strategy ................................................8.4
4. Importance of interlinking of performance management and strategy
multifolds under modern and dynamic business environment ......................................8.6
B. Role of performance management in business integration using models
such as value chain and McKinsey’s 7S .................................................................8.6
1. Introduction ...............................................................................................................8.6
2. Business integration ..................................................................................................8.6
3. Value chain/ value chain analysis ...............................................................................8.7
3.1 Description of activities & margin ........................................................................8.8
3.2 How an organisation uses value chain to gain and sustain competitive
advantage (desired performance)? ................................................................... 8.10
3.3 Linkage of value chain analysis and performance management ......................... 8.12
4. McKinsey’s 7S ......................................................................................................... 8.13
4.1 Elements of 7S ................................................................................................. 8.14
4.2 Effective use of 7S framework for business integration ...................................... 8.23
4.3 McKinsey’s 7S model and performance management ........................................ 8.24
C. Influence of organisation's structure, culture and strategy on performance
measurement ......................................................................................................... 8.25
1. The influence of structure ........................................................................................ 8.26
2. The influence of culture ............................................................................................ 8.26
3. The influence of strategy .......................................................................................... 8.27
D. Strategic performance issues in complex business structures ........................... 8.27
1. What are complex business structure? ..................................................................... 8.27
2. Complex business structures - problems & solutions thereto ..................................... 8.28
2.1 In case of strategic alliance .............................................................................. 8.29
2.2 In case of joint venture ..................................................................................... 8.29
2.3 In case of multinationals ................................................................................... 8.29
2.4 In case of complex supply chain ....................................................................... 8.30

© The Institute of Chartered Accountants of India


v

2.5 In case of virtual organisations ......................................................................... 8.30


E. Behavioural aspects .............................................................................................. 8.31
1. Accountability .......................................................................................................... 8.31
1.1 Accountability and accounting .......................................................................... 8.31
1.2 Accountability and control ................................................................................. 8.31
2. Performance measures (CSFS & KPIS thereto) acts as stiumli ................................. 8.32
3. Management styles & culture modifies behaviour, therefore influence
performance ............................................................................................................ 8.32
F. Predicting and preventing corporate failure ......................................................... 8.33
1. Introduction ............................................................................................................. 8.33
2. Why do companies fail? ........................................................................................... 8.33
3. Need of predicting the corporate failure .................................................................... 8.34
4. Predicting corporate failure ...................................................................................... 8.34
4.1 Quantitative models .......................................................................................... 8.34
4.2 Qualitative models ............................................................................................ 8.39
4.3 Preventing corporate failure .............................................................................. 8.41
Summary ......................................................................................................................... 8.42
Test Your Knowledge – MCQs ......................................................................................... 8.43
Test Your Knowledge – Case-lets .................................................................................... 8.49

CHAPTER-9 STRATEGIC PERFORMANCE MEASURES IN PRIVATE SECTOR


Chapter Overview ..............................................................................................................9.2
A. Performance management system in private sector ...............................................9.2
B. Interlinking of critical success factors & key performance indicators to
performance measurement ......................................................................................9.4
C. Performance measures ............................................................................................9.6
1. Pros and Cons of the use of performance measures ...................................................9.7
2. Financial performance measures ................................................................................9.8
2.1 Gross profit ........................................................................................................9.8
2.2 Return on capital employed (ROCE) ...................................................................9.8
2.3 Return on investment (ROI) .............................................................................. 9.10
2.4 Residual income (RI) ........................................................................................ 9.11
2.5 Earnings per share (EPS) ................................................................................. 9.14
2.6 Economic value added (EVA) .......................................................................... 9.15
2.7 Net present value (NPV) .................................................................................. 9.18

© The Institute of Chartered Accountants of India


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3. Non-financial performance measures ...................................................................... 9.19


3.1 Balanced scorecard - linkage between performance measures ......................... 9.21
3.2 Performance pyramid - link strategy, operations and performance .................... 9.29
3.3 The building block model - link between achievement of the corporate
strategy and the management of human resources .......................................... 9.33
3.4 triple bottom line (TBL) .................................................................................... 9.35
D. The role of quality in performance measurement systems, especially in
context of management information ..................................................................... 9.38
1. Effect of quality practices on PMS and quality-related cost ....................................... 9.38
2. Role of quality management system as sub-set or support system to PMS ................ 9.38
3. Role of lean production system as sub-set or support system to PMS ....................... 9.38
4. Quality in management information systems (MIS) ................................................... 9.39
Summary ........................................................................................................................ 9.39
Test Your Knowledge- MCQs ........................................................................................... 9.40
Test Your Knowledge ...................................................................................................... 9.42
Answers/ Solutions .......................................................................................................... 9.53

CHAPTER-10 STRATEGIC PERFORMANCE MEASURES IN THE NON-FOR-PROFIT


ORGANISATIONS
Chapter overview ............................................................................................................ 10.2
A. Not-for-profit Organisations .................................................................................. 10.2
1. Key characteristics................................................................................................... 10.3
B. Performance measurement .................................................................................... 10.3
1. Challenges for measuring performance and way-out ................................................. 10.4
1.1 Difficult to quantify the cost and benefits ........................................................... 10.4
1.2 Performance and commitment of state (or governments of state) ...................... 10.4
1.3 Measuring the utility of funds ............................................................................ 10.5
C. Models for measuring the performance ................................................................ 10.5
1. Value for money (VFM) framework ........................................................................... 10.5
2. Adapted balanced scorecard by Kaplan .................................................................... 10.6
3. Other performance measures ................................................................................... 10.7
D. Performance measurement process ...................................................................... 10.7
Summary ......................................................................................................................... 10.7
Test Your Knowledge- Caselet Based MCQs .................................................................... 10.8
Test Your Knowledge .................................................................................................... 10.10
Answers/ Solutions ........................................................................................................ 10.12

© The Institute of Chartered Accountants of India


vii

CHAPTER-11 PREPARATION OF PERFORMANCE REPORTS


Chapter Overview ............................................................................................................ 11.2
A. Performance management system ........................................................................ 11.2
B. Responsibility accounting ..................................................................................... 11.3
C. Performance reports and its role in the performance management
system in context of the responsibility accounting .............................................. 11.3
1 Performance report .................................................................................................. 11.3
2 Role of performance reports ..................................................................................... 11.3
3 Aspects involved in preparation of performance reports ............................................ 11.4
3.1 Have clear idea about the need and use-case for user/receipt .......................... 11.4
3.2 Establishment of Objective in light of Organisational Objective
(Vision or Mission) ............................................................................................ 11.4
3.3 Add an Executive Summary .............................................................................. 11.5
3.4 The Real Stuff - Performance Assessment ........................................................ 11.5
3.5 Layout is key - Visual Elements & Narrative Commentary can be added ............ 11.5
3.6 Details quoted shall be cross-checked .............................................................. 11.5
4 Types of performance reports .................................................................................. 11.6
D. External reporting frameworks that are relevant to strategic performance
management ........................................................................................................... 11.6
1. Triple bottom line (TBL report) ................................................................................. 11.6
2 Global reporting initiative report (GRI report) ............................................................ 11.7
3. ESG reporting .......................................................................................................... 11.7
4. Integrated report <IR> .............................................................................................. 11.7
E. Analyse the performance reports to take required action .................................... 11.8
Summary ......................................................................................................................... 11.8
Test Your Knowledge – MCQs ......................................................................................... 11.9

CHAPTER-12 DIVISIONAL TRANSFER PRICING


Chapter Overview ............................................................................................................ 12.2
A. Transfer pricing ..................................................................................................... 12.2
1. Utility of transfer pricing ........................................................................................... 12.3
2. A question of fair value? .......................................................................................... 12.4
B. Transfer pricing methods ...................................................................................... 12.5
1. Market based transfer price ...................................................................................... 12.6
2. Cost based transfer price ....................................................................................... 12.10
3. Negotiation based transfer price ............................................................................. 12.13

© The Institute of Chartered Accountants of India


viii

C. Transfer pricing and goal congruence ................................................................ 12.13


D. Transfer pricing decision, different circumstances ............................................ 12.16
1. Different capacity levels ......................................................................................... 12.16
2. Different demand levels ......................................................................................... 12.20
E. Proposals for resolving transfer pricing conflict ................................................ 12.23
1. Dual rate transfer pricing system ............................................................................ 12.23
2. Two part transfer pricing system ............................................................................ 12.23
F. International transfer pricing ............................................................................... 12.24
Summary ....................................................................................................................... 12.29
Test Your Knowledge- Caselet Based MCQs .................................................................. 12.33
Test Your Knowledge .................................................................................................... 12.39
Answers/ Solutions ........................................................................................................ 12.47

CHAPTER-13 STANDARD COSTING


Chapter Overview ............................................................................................................ 13.2
A. Analysis of advanced variances ............................................................................ 13.2
1. Planning and operational variances .......................................................................... 13.2
2. Variance analysis in activity based costing ............................................................... 13.8
3. Learning curve impact on variances ......................................................................... 13.9
4. Relevant cost approach to variance analysis .......................................................... 13.12
5. Variance analysis and throughput accounting ......................................................... 13.13
6. Variance analysis in advanced manufacturing environment ..................................... 13.13
7. Variance analysis in service sector......................................................................... 13.13
8. Variance analysis in public sector .......................................................................... 13.14
B. Standard marginal costing .................................................................................. 13.14
C. Reconciliation of profit ........................................................................................ 13.16
D. Investigation of variances ................................................................................... 13.24
1. Factors to be considered when investigating variance ............................................ 13.24
2. Method used for investigating variance ................................................................... 13.25
E. Possible interdependence between variances .................................................... 13.25
F. Interpretation of variances .................................................................................. 13.26
1. Material price variance ........................................................................................... 13.26
2. Material usage variance ......................................................................................... 13.26
3. Labour rate variance .............................................................................................. 13.26
4. Labour efficiency variance ..................................................................................... 13.27
5. Overhead variances ............................................................................................... 13.27

© The Institute of Chartered Accountants of India


ix

6. Sales price variance .............................................................................................. 13.27


7. Sales volume variance ........................................................................................... 13.27
G. Reporting of variances ........................................................................................ 13.31
H. Behavioural issues .............................................................................................. 13.31
I. Standard costing in contemporary business environment ................................. 13.32
J. Formulae .............................................................................................................. 13.33
1A. Sales variances (absorption costing) ...................................................................... 13.34
1B. Sales variances (marginal costing) ......................................................................... 13.36
1C. Sales variances (turnover or value) ........................................................................ 13.39
2. Direct material variances........................................................................................ 13.41
3. Direct labour variances .......................................................................................... 13.43
4. Fixed production overhead variances ..................................................................... 13.45
5. Variable production overhead variances ................................................................. 13.48
Summary ....................................................................................................................... 13.49
Test Your Knowledge- MCQs ......................................................................................... 13.51
Test Your Knowledge .................................................................................................... 13.55
Answers/Solutions ......................................................................................................... 13.65

CHAPTER-14 CASE STUDY


Essentials for case study ................................................................................................. 14.3
CS-1: Poter’s five forces .................................................................................................. 14.4
CS-2: Competitive advantage ........................................................................................ 14.11
CS-3: Triple bottom line ................................................................................................. 14.14
CS-4: Performance measurement in not for profit sector ................................................ 14.19
CS-5: Pricing strategy ......................................................................................................... 14.23

APPENDIX
Standard Normal Cumulative Probability Table ........................................................................A.1
Logarithms ..............................................................................................................................A.3
Antilogarithms .........................................................................................................................A.6

SKILL ASSESSMENT

© The Institute of Chartered Accountants of India

Common questions

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The effectiveness of accountability systems in organizations is influenced by various behavioral aspects, such as employees' perception of fairness, the organizational climate of trust, and the alignment of accountability mechanisms with intrinsic and extrinsic motivation. An environment that fosters open communication and clear expectations enhances accountability systems, as employees are more likely to take ownership of their roles. In contrast, if accountability is seen as punitive or if goals are unrealistic, it may result in demotivation and decreased compliance .

Standard costing offers several advantages in contemporary business environments, such as providing a benchmark for evaluating performance, simplifying budgeting processes, and aiding in cost control through variance analysis. However, it also has limitations, including its rigidity in rapidly changing markets, potential motivational issues due to its focus on cost reduction over innovation, and its sometimes limited applicability in service-oriented or highly customized product environments. Businesses must balance these pros and cons, adapting the approach to fit specific operational contexts .

Value chain analysis helps organizations in sustaining a competitive advantage by enabling them to identify specific activities that add value to their products and services. By optimizing these activities and eliminating inefficiencies, companies can deliver greater value to customers than their competitors. This can be achieved through cost leadership, differentiation strategies, or a focus strategy that targets specific market segments. Additionally, linking value chain analysis to performance management helps organizations to continuously measure and improve their processes, ensuring sustained competitive advantage .

McKinsey's 7S framework can be effectively used for business integration by aligning an organization’s structure, strategy, systems, shared values, style, staff, and skills to ensure coordinated efforts and shared objectives among different business units. This alignment allows for smoother implementation of strategic initiatives, helping employees across departments understand their roles in the organization's overall success. The 7S model encourages consistency in processes and behaviors, which enhances integration and reduces resistance to change .

Triple bottom line (TBL) reports can be utilized in strategic performance management systems by providing a comprehensive framework that evaluates and integrates economic, social, and environmental performance. These reports help organizations set sustainable goals, measure their progress, and communicate their commitments to sustainability. By incorporating TBL metrics into strategic management systems, companies can ensure that their strategies are aligned with long-term value creation for stakeholders, thus improving transparency, accountability, and operational effectiveness across economic, social, and environmental dimensions .

Corporate culture plays a crucial role in the effectiveness of performance measurement systems by influencing how performance metrics are perceived and accepted by employees. A positive culture that values transparency, accountability, and continuous improvement encourages employees to engage with performance metrics actively and use them as a guide for personal and professional development. In contrast, a negative culture may lead to resistance or manipulation of data. Therefore, aligning performance measurement systems with the existing corporate culture can enhance their acceptance and effectiveness .

Financial performance measures such as Return on Investment (ROI) and Economic Value Added (EVA) contribute to strategic decision-making by providing critical insights into the profitability and value creation of projects and investments. ROI offers a straightforward metric to evaluate efficiency and assess the potential return of proposed projects. EVA, on the other hand, measures the value created over and above the required return of the company's shareholders, which influences strategic choices focused on maximizing shareholder wealth. These measures help managers prioritize resource allocation and investment decisions .

Implementing a Quality Management System (QMS) as a subset of performance measurement systems can greatly enhance an organization's ability to consistently deliver products and services that meet customer expectations and comply with regulatory requirements. It fosters a culture of continuous improvement, leading to enhanced organizational efficiency and reduced waste. Moreover, integrating QMS into performance measurement systems ensures that quality-related metrics are systematically tracked and analyzed, guiding strategic decisions and driving quality improvements across all organizational processes .

Organizations can predict and prevent corporate failure by using quantitative models that analyze financial ratios, trends, and statistical patterns to identify potential red flags. These models may include Z-score analysis and financial distress predictions. Qualitative models, on the other hand, consider non-financial indicators such as management quality, company reputation, and market conditions. Both types of models provide a comprehensive view of potential risks, allowing organizations to implement preventative measures such as revised financial strategies, organizational restructuring, and improved governance practices to mitigate risks of failure .

Not-for-profit organizations face challenges in measuring performance due to the difficulty in quantifying social impact and benefits, variability in funding, and the lack of profit-oriented metrics. Strategies to overcome these challenges include adopting the Value for Money (VFM) framework, which focuses on efficiency, effectiveness, and economy; using adapted balanced scorecards to align social mission with performance metrics; and implementing qualitative measures that assess stakeholder satisfaction and community impact .

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