ACCAspace ACCA P5. Provided by. Advanced Performance management (APM) 高级业绩管理第三十一讲 ACCA Lecturer: Jerry Lin

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1 ACCAspace Provided by ACCA Research ACCA Institute Research ACCA 课程研究学院 Institute ACCA P5 Advanced Performance management (APM) 高级业绩管理第三十一讲 ACCA Lecturer: Jerry Lin

2 Syllabus Relational diagram of main capabilities Strategic planning and control (A) Economic fiscal, market and environmental factors (B) Performance measurement systems and design (C) Strategic performance measurement (D) Performance evaluation and corporate failure (E) Current developments and emerging issues in performance management (F) 2

3 Syllabus Part E. Performance evaluation and corporate failure 1 Alternative views of performance measurement and management(a) 2 Alternative views of performance measurement and management(b) 3 Strategic performance issues in complex business structures 4 Predicting and preventing corporate failure 3

4 Review: Strategic performance issues in complex business structures 1.1. Strategic models used in assessing business performance Porter's five forces model Boston Consulting Group (BCG) portfolio matrix 1.2. Performance measurement problems in complex business structures Joint ventures: Strategic alliances Multinationals Virtual organizations A supply chain 4

5 1.1. Predicting business failure 1.2. Models to predict business failure Z-scores Argenti's A score 1.3.Performance improvement strategies and corporate Failure 1.4.Organisational survival and life cycle issues 5

6 1.1. Predicting business failure Corporate decline arises from the decline in the industry and from poor management. It is still possible to make money in declining industries, just as it is possible to 'turn round' declining companies. two types of industrial decline (a) Product revitalization occurs when the decline is temporary (eg owing to a recession in consumer demand). (b) Endgame occurs when a firm (and the industry) is confronted with substantially lower demand for its products. 6

7 1.1. Predicting business failure Declining companies: External (a) Decrease in the company's profitability (b) Decreasing sales volume (ie sales revenue adjusted for inflation) (c) An increase in gearing (debt as a proportion of equity) (d) A decrease in liquidity, as measured by accounting ratios (e) Restrictions on the dividend policy (f) Financial engineering (eg changes in accounting policies and periods) (g) 'Top management fear' 7

8 1.1. Predicting business failure Slatter identifies four stages in the crisis: (a) Blinded stage or crisis denial. (b) Inaction or hidden crisis (c) Faulty action or disintegration (d) Crisis and collapse (or dissolution) 8

9 1.1. Predicting business failure Strategic failure: The Icarus paradox arises when a successful model becomes overrigid, hampering innovation and reducing flexibility. 9

10 1.2. Models to predict business failure Business failure can be predicted by Z-scores, using a number of financial variables, or by a model such as Argenti's model, which emphasizes defects, mistakes and symptoms. These two models show how quantitative and qualitative measures of performance can both be used to predict business failure. 10

11 1.2. Models to predict business failure: Z-scores Five key indicators of the likely failure or non-failure of businesses: (a) Liquidity (b) Profitability (c) Activity/efficiency (d) Leverage (e) Solvency These five indicators were then used to derive a Z-score. 11

12 1.2.1.Z-scores The Z-score is calculated as follows. Z = 1.2X X X X X5 Where X1 = working capital/total assets (to measure liquidity) X2 = retained earnings/total assets (to measure cumulative profitability) X3 = earnings before interest and tax/total assets (to measure activity/efficiency, by looking at the productivity of assets) X4 = market value of equity/book value of total debt (a form of gearing) X5 = sales/total assets (to measure solvency) The Z-score model suggests that firms with a Z-score of 3.0 or more are likely to be financially sound. and relatively safe. 12

13 1.2.1.Z-scores The value of Z-scores. An individual Z-score is only valid for a single point in time No fully accepted model for predicting future business failures has yet been established It can be difficult to draw conclusions about the future of companies whose score falls within the 'grey area' ( ) because the model does not provide a prediction for them. Some Z-score models have been developed specifically for individual industries or sizes of organization. The Z-score model was originally designed for manufacturing company 13

14 Argenti's A score Argenti believed that business failure followed a predictable system. Defect Mistakes Symptoms Failure Defects: Passive board Lack of budgetary control Mistakes: Over-trading (expanding faster than cash funding) Gearing high bank overdrafts/loans Failure of large project jeopardizes the company Symptoms: Deteriorating ratios Creative accounting signs of window-dressing Declining morale and declining quality 14

15 1.3.Performance improvement strategies and corporate Failure These 'Ten Commandments' were: (a) You must have a strategy. (b) You must have controls. (c) The Board must participate. (d) You must avoid one-man rule (having an autocratic CEO). (e) There must be management in depth. (f) You must ensure you are informed of, and react to, change. (g) The customer is king. (h) Do not misuse computers. (i) Do not manipulate your accounts. (j) Organise to meet employees' needs 15

16 1.3.Performance improvement strategies and corporate Failure Strategic drift occurs when strategies develop incrementally but fail to keep up with the changing environment of the organization. (a) Contraction in order to cut the cost base while maintaining revenue (b) Reinvestment in organisational capability and efficiency (c) Rebuilding with a concentration on innovation 16

17 1.4.Organisational survival and life cycle issues Assuming the life cycle pattern applies, in order to survive and prosper firms need new products to take the place of declining ones. Different control measures are appropriate at different stages. The life cycle can be determined by technology or customer demand. 17

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