3.7.3 Analysing the existing internal position of a business to assess strengths and weaknesses: overall performance

    0
    50

    How to analyse data other than financial statements to assess the strengths and weaknesses of a business

    Comparing performance over time:

    • A danger with just looking at one year’s results is that the numbers can hide a longer term issue in the business
    • By looking at data over several years, it is possible to see whether a trend is emerging. Public companies in the UK are required to publish a five-year summary of the income statement to help shareholders assess trends

     

    Comparing performance against competitors or the industry as a whole:

    • Assuming that the detailed information is available, a comparison against competitors provides a useful way for management and shareholders to assess relative performance.
    • Has the business’ revenues grown as fast as close competitors? How has the business performed compared with the market as a whole?

     

    Benchmarking against best-in-class businesses:

    • Comparison against other businesses who are not direct competitors can also be useful – particularly if they help set the standard that the business aims to achieve. Care has to be taken with this, though. The benchmark business might operate in a very different industry, with significantly different profit margins and balance sheet norms.

     

    The importance of core competences

    Core Competence = something unique a business has or can do strategically well

    The test of core competencies:

    • Do they provide access to a wide range of markets?
    • Do they contribute significantly to the end product received by the customers?
    • Are they difficult for competitors to imitate?

     

    Assessing short and long term performance

    Short term metrics:

    • Helps to indicate whether growth and return on investment for shareholders can be sustained (e.g. sales productivity and capital productivity)
    • These measures or performance indicate the current health of the business

     

    Medium term metrics:

    • Helps to predict whether a business can maintain or improve its performance over the next few years (e.g. commercial health, cost structure health, asset health)

     

    Long term metrics:

    • Helps measure the ability of a business to sustain or expand its current operations (e.g. anticipated changes in consumer tastes, new technology, share price)

     

    The value of different measure of assessing business performance

    The Kaplan and Norton Balanced Scorecard = a framework based on four perspectives which is a strategic planning and monitoring system used to ensure that a firms a citizens are linked to its vision statement

     

    The four perspectives:

    • Financial – how does the firm look to shareholders
    • Customer – how to customer view the firm
    • Internal – how well does it manage its operational processes
    • Innovation and Learning – can the firm continue to improve and create value, and it examines how an organisation learns and grows

     

    Advantages of the Balanced Scorecard:

    • Provides a broader view of business performance
    • Allows business progress to be monitored through the use of specific (SMART) targets
    • It links objectives closely to strategy
    • Targets can act as a motivator
    • Consistent monitoring allows weaknesses to be identified and hopefully solved

     

    Disadvantages of the Balanced Scorecard:

    • Some objectives are not easily quantifiable
    • Excessive numbers of targets can cause confusion and apathy
    • Getting the right balance between the four perspectives

     

    Elkington’s Triple Bottom Line = this is a bottom line that continues to measure profits, but also measures the organisation’s impact on people and the planet (a way of expressing a company’s impact and sustainability on both a local and global scale)

    People:

    • Considering the impact the firms actions have on all people involved with them
    • Everyone’s being taken into consideration
      • Companies should offer health care, goods working hours, opportunities, clean and safe working places, and doesn’t exploit their labour force
    • Include the community where the company does business

     

    Planet:

    • Reducing or eliminating their ecological footprint
    • They strive for sustainability – going green can be more profitable in the long run
    • Triple bottom line companies look at their entire life cycle of their actions
    • Reduce energy waste

     

    Profit:

    • The financial bottom line is the one that all companies share
    • Profits empower and sustain the community as a whole, and not just flow to the CEO and shareholders

    LEAVE A REPLY

    Please enter your comment!
    Please enter your name here