Chapter 2- Performance Hierarchy- Brief Notes to be accompanied by workbook
Objectives
PPQ in class- Qu. 1(i)-Sample March/June 2019-Folt Manufacturing
PPQ in class- Qu. 1(i)-Sept/Dec 2020- Dep’t for Internal Affairs
PPQ in class- Qu. 3(a+b)-Stokeness- Specimen Sept 2018 (Porter’s 5 Forces)
PPQ in class-Qu. 1 (b)-Fiag Bicycles-March/June 2021 (PESTEL)
1
1. Mission vs. Vision – Broad Difference
Mission – what was the business set up for?
Vision – where is the business going? Ideal destination point in the
future
REAL WORLD EXAMPLE- ACCA's mission is to:
• Provide opportunity and access to people of ability around the world and
support our members throughout their careers in accounting, business and
finance
• Achieve and promote the highest professional, ethical and governance
standards
• Advance the public interest
• Be a global leader in the profession'
How useful is the ACCA 's mission statement as a basis for developing
strategy?
2
2. KPIs
Quantitative Financial – Quantitative Non-Financial-
expressed in terms of not expressed in money or
money (e.g.Sales, Profits) ratios, but can be in #s and
and financial ratios (e.g.GP %. E.g. # of complaints, % of
%) rejects
Qualitative Non-Financial-
neither expressed in money,
#s or %. Captions and broad
based descriptions are used
which are not easily
measurable as described.
Further parameters are to
be determined. E.g.
customer satisfaction, staff
morale
3. Exam Focus
For APM; be able to
Identify CSFs for an org
Suggest appropriate KPIs for the CSFs- Financial and Non-Financial
Detect whether an org's current Performance Management System is capturing
appropriate info to measure or assess achievement of CSFs. Advise the company on changes to
be made.
4. Risk and Uncertainty
3
Risk is where a decision maker has knowledge that several different future outcomes
are possible, the probabilities of which are known or can be estimated, usually due to
past experience.
Uncertainty is where the future is unknown and the decision maker has no past
experience on which to base predictions of change, so that outcomes cannot be
predicted or assigned probabilities.
Use of Probability
The term ‘probability’ refers to the likelihood or chance that a certain event will occur,
with potential values ranging from 0 (the event will not occur) to 1 (the event will
definitely occur). For example, the probability of a tail occurring when tossing a coin is
0.5, and the probability when rolling a dice that it will show a four is 1/6 (0.166). The
total of all the probabilities from all the possible outcomes must equal 1, ie some
outcome must occur.
A real world example could be that of a company forecasting potential future sales from
the introduction of a new product in year one (Table 1).
From Table 1, it is clear that the most likely outcome is that the new product generates
sales of £1,000,000, as that value has the highest probability.
Expected values
Using the information regarding the potential outcomes and their associated
probabilities, the expected value of the outcome can be calculated simply by multiplying
the value associated with each potential outcome by its probability. Referring back
to Table 1, regarding the sales forecast, then the expected value of the sales for year
one is given by:
Expected value
= ($500,000)(0.1) + ($700,000)(0.2) + ($1,000,000)(0.4) + ($1,250,000)(0.2) +
($1,500,000)(0.1)
= $50,000 + $140,000 + $400,000 + $250,000 + $150,000
= $990,000
4
In this example, the expected value is very close to the most likely outcome, but this is
not necessarily always the case. Sometimes the expected value does not correspond to
any of the individual potential outcomes.
Attitude to Risk - Decision-making criteria
The decision outcome resulting from the same information may vary from manager to
manager as a result of their individual attitude to risk. We generally distinguish between
individuals who are;
risk averse- dislike risk and acts on the assumption that the worst outcome will
occur
risk seeking- content with risk, interested in trying to secure the best outcomes,
no matter how small the chance that they may occur
risk neutral – concerned with what might be the most likely outcome
Similarly, the appropriate decision-making criteria used to make decisions are often
determined by the individual’s attitude to risk.
Decision Making Technique based on Risk Attitude
Maximin Criteria – matched to Risk Averse company/Stakeholder- Select the option
that gives the Best of the Worst outcomes. Maximise the minimum profit- Highest
Minimum Profit.
This criteria is based upon a risk-averse (cautious) approach and bases the order
decision upon maximising the minimum payoff.
Minimax regret Criteria- matched to Risk Averse company/Stakeholder- Select the
option that minimises the impact of it turning out to be the wrong option. It minimises the
regret from making a 'wrong' decision (lowest opportunity cost)
This approach attempts to minimise the regret from making the wrong decision and is
based upon first identifying the optimal decision for each of the weather outcomes.
Maximax Criteria- matched to Risk Seeker company/Stakeholder- Select the option
that gives the maximum possible return. Maximises the maximum achievable profit.
5
This criteria is based upon a risk-seeking (optimistic) approach and bases the order
decision upon maximising the maximum payoff.
Expected Values Criteria- matched to Risk Neutral company/Stakeholder- Select
the option with the most likely outcome based on Expected Values
