Ch. 9 | Strategic Performance Measures

01

Executive Overview

The Big Picture

Why This Chapter Matters in the SCPM Syllabus

Chapter 9 is the apex chapter of SCPM — it synthesises cost management, divisional performance, sustainability, and strategic execution into a single performance ecosystem. Every concept here directly answers: "How do we know if our strategy is working?"

In exams, this chapter consistently yields high-mark case study questions (16–20 marks) requiring students to compute ROI/RI/EVA and evaluate non-financial frameworks like the Balanced Scorecard or TBL.

Real-World Application

Indian Context Examples

HUL computes and discloses EVA in its Annual Report, using CAPM for cost of equity.
Tata Steel uses Balanced Scorecard integrating safety, environment, and financial KPIs across plants.
Infosys publishes a Triple Bottom Line report — Environmental, Social, and Economic disclosures.
IRCTC (a divisionalised entity) uses ROI-like metrics to evaluate its Rail Neer, Tourism, and Catering divisions independently.
SEBI-regulated fund houses must report AUM-based performance (ROI equivalent) to investors.

Chapter Architecture

Four Pillars of the Chapter

Foundation: Performance Management System — 4 Stage Model (Structure → Responsibility → Measures → Review)
Linkage: CSFs & KPIs — how strategy cascades into measurable targets
Measurement: Pure Financial (ROI, RI, EVA, EPS, NPV) vs. Integrated Tools (BSC, Pyramid, BBM, TBL)
Quality: The role of TQM and lean systems in strengthening the PMS

💡 Core Examiner Theme: No single financial measure is sufficient. The chapter argues for a balanced, multi-dimensional view — financial + non-financial, short-term + long-term, internal + external. Every major concept in this chapter is a solution to the limitation of pure profit-based reporting.

02

Conceptual Deep-Dive

Foundation: PMS, CSFs & KPIs

A. The Four-Stage Performance Management System

The WHY

Why a Staged Approach?

Without structure, performance measurement is impossible — you cannot hold someone accountable for what they don't control. The 4-stage model ensures that organisational design precedes measurement design. You first define who is responsible, then for what, then measure how well.

STAGE 1 Organisational Structure Define roles, authority & coordination

STAGE 2 Responsibility Accounting Cost / Revenue / Profit / Investment Centres

STAGE 3 Identify CSFs → Set KPIs Financial + Non-financial measures & targets

STAGE 4 Review & Corrective Action KPI Dashboard → Divergence → Action

Responsibility Centres — Classification

Centre Type	Manager Controls	Key Measure	Example
Cost Centre	Costs only	Cost variance vs. budget	HR Dept, Production floor
Revenue Centre	Revenue only	Revenue vs. target	Sales division
Profit Centre	Costs & Revenue	Profit vs. target	Product division (P&L owner)
Investment Centre	Costs, Revenue & Assets	ROI / RI / EVA	SBU, wholly-owned subsidiary

Key Insight: A responsibility centre can change its nature — a university faculty department (cost centre) that starts conducting MDPs and consultancy becomes a profit centre.

B. CSFs vs. KPIs — The Critical Distinction

Critical Success Factors (CSFs)

Definition: Aspects or areas of action vital for strategic objective attainment
Industry-specific and segment-specific
Identify WHAT must go right
4 Sources (Rockart): Industry structure, Competitive strategy & geography, Environmental factors, Temporary influences
Example: For an IT helpdesk — "Restoring normal service" is the CSF

VS

Key Performance Indicators (KPIs)

Definition: Performance management instruments to measure and monitor achievement of objectives (i.e., signals of performance in CSF areas)
Must be SMART
Specify HOW performance is tracked
KPI Targets are formally called Thresholds
Example: "Average Turnaround Time ≤ 4 hours" is the KPI for the above CSF

KPI Quality Check — Mnemonic S · M · A · R · T

SSpecific — Clearly and unambiguously defined
MMeasurable — Has means to quantify (not vague)
AAttainable — Realistic; achievable given resources
RRelevant — Aligned to organisational strategic goals
TTime-constrained — Has designated start and end dates

⚠️ Common Exam Mistake: Students often write CSF and KPI as synonyms. Remember: CSF is the WHAT (the critical area); KPI is the HOW (the signal/measure). One CSF can have multiple KPIs.

03

Conceptual Deep-Dive

Pure Financial Performance Measures

2.1 Gross Profit Ratio

The WHY

Profit data is widely used because it is readily available (statutory requirement), universally understood by managers, and enables cross-company comparison. Absolute GP is size-distorted, so the ratio is preferred.

Gross Profit Ratio GP Ratio = (Gross Profit / Net Sales) × 100
Gross Profit = Net Sales − Cost of Goods Sold

Limitations

Drawbacks of Gross Profit

Ignores selling, distribution, and administrative costs
Poor correlation with shareholder wealth creation
Contribution margin is more useful for short-term decisions
Can be manipulated by changing inventory valuation methods

2.2 Return on Capital Employed (ROCE)

ROCE Formula ROCE = [PBIT (Operating Profit) / Average Capital Employed] × 100
Capital Employed = Total Assets − Current Liabilities = Shareholders' Capital + Long-term Debt

Why Average Capital Employed?

Uses average of opening and closing capital employed to reflect the resources available throughout the period, not just at year-end.

Key Criticism

ROCE discourages capital investment — an increase in capital reduces ROCE if PBIT doesn't rise proportionately. This encourages short-termism.

2.3 Return on Investment (ROI) High Freq.

Historical Origin

DuPont (USA, 1920s) pioneered ROI as a divisional measure. ROI = ROCE applied at the Investment Centre / SBU level.

ROI Formula ROI = (Divisional Operating Profit / Divisional Assets Employed) × 100

The Sub-Optimisation Problem

A manager evaluated on ROI will reject any project whose return is below the division's current ROI, even if the project's return exceeds the company's overall cost of capital. This destroys goal congruence.

Classic Example: Division α (ROI = 13%) rejects a project yielding 10% because it would lower divisional ROI — but the company's cost of capital is only 8%. The project should be accepted for the company's benefit but is rejected by the division manager. This is sub-optimisation.

Other Limitations of ROI

Poor correlation with shareholders' wealth (research evidence)
Can be distorted by accounting policies (e.g., depreciation methods)
Ignores the time value of money
Encourages manipulation of asset base (disposing assets to boost ROI)

2.4 Residual Income (RI) High Freq.

Key Definition

"Residual Income is the excess of controllable profit over a predetermined organisation-wide minimum hurdle rate (cost of capital charge) on the investment controllable by the divisional manager. Higher RI = Better performance."

RI Formula RI = Controllable Profit − (Cost of Capital % × Controllable Investment)

✅ Advantage over ROI

Under RI, a manager will accept all projects where return exceeds cost of capital — this promotes goal congruence. In the same Division α example: RI from the 10% project is positive (₹0.40 lacs), so the manager accepts → correct decision for the company.

❌ Key Limitation of RI

RI is an absolute measure. A large division will nearly always show higher RI than a small division, even if the smaller one is more efficient. Therefore, RI is not suitable for comparing divisions of different sizes.

Resolution: Set targeted/budgeted RI levels for each division consistent with asset size and market conditions, rather than comparing absolute RI figures.

ROI vs. RI — Head to Head Comparison

Dimension	ROI	RI
Type of Measure	Relative (percentage)	Absolute (rupee amount)
Investment Acceptance Benchmark	Project ROI vs. Divisional ROI	Project return vs. Cost of Capital
Goal Congruence	❌ Often leads to sub-optimisation	✅ Promotes goal congruence
Cross-division Comparison	✅ Works across different-sized divisions	❌ Size effect distorts comparisons
Risk of manipulation	❌ Higher (asset disposal, off-balance sheet)	Medium
Shareholder wealth correlation	❌ Poor (research evidence)	Moderate

2.5 Earnings Per Share (EPS)

EPS Formula (Basic) EPS = Profit After Tax (less Preference Dividends) / Weighted Average No. of Ordinary Shares Outstanding

Benefits

Defined precisely by accounting standards (IndAS 33 / AS 20)
Readily available; easily understood by shareholders
Useful for inter-temporal (period-to-period) comparison

Limitations

Weak correlation with shareholder wealth (research)
Capital structure differences make cross-company comparison invalid
Accounting policies can distort EPS
Absolute in nature despite being a ratio — context needed

Enhancement: Use P/E Ratio (Current Market Price / EPS) to overcome cross-company comparison limitations. P/E reflects what investors are willing to pay per rupee of earnings.

2.6 Economic Value Added (EVA) High Freq.

Origin & Purpose

Developed by Joel Stern & Bennett Stewart (Stern Stewart & Co., New York, 1990s). EVA is a measure of economic profit, designed to overcome accounting profit limitations:

Accounting profit ignores the cost of equity capital — companies only create wealth when returns exceed all capital costs (debt + equity)
Accounting profit can be manipulated by accounting policies

EVA Formula EVA = NOPAT − (WACC × Capital Employed)

NOPAT = Operating Profit After Tax (before interest deduction)
WACC = Weighted Average Cost of Capital (Debt + Equity)

Two Methods to Compute NOPAT

Method 1: From Operating Profit
Start with PBIT
Less: Adjusted Tax (tax charged + interest × tax rate)
= NOPAT

Method 2: From PAT
Start with Profit After Tax
Add: Interest × (1 − Tax Rate)
= NOPAT

Standard EVA Adjustments (Stern Stewart)

Item	Adjustment to Profit (NOPAT)	Adjustment to Capital Employed
Non-Cash Expenses (provisions, etc.)	Add back to profit	Add to capital employed (opening balance)
Marketing / Brand expenditure	Add back (capitalise)	Add to capital employed
R&D Expenditure (long-term benefit)	Add back (capitalise)	Add to capital employed
Staff Training & Development	Add back (capitalise)	Add to capital employed
Accounting Depreciation vs. Economic	Replace with Economic Depreciation	Adjust asset values
Tax	Use Tax Paid (cash basis), not accrual	Adjust for deferred tax

When Does EVA Increase?

Greater Efficiency: Grow operating profits without employing more capital
Profitable Growth: Invest additional capital in projects that return more than the cost of capital
Liquidate Unproductive Capital: Divest assets/projects yielding less than cost of capital

Limitations of EVA

Absolute measure — cannot compare enterprises of different sizes directly
Largely based on historical data
Adjustments (Stern Stewart) can be complex and subjective

Indian Example: HUL computes and discloses EVA in its Annual Report. For 2021-22, HUL used pre-tax cost of debt = 6.43%, cost of equity = 9.09% (using CAPM — risk-free rate 6.84%, market risk premium 3.68%, beta 0.614).

2.7 Net Present Value (NPV)

NPV Formula NPV = PV of Cash Inflows − PV of Cash Outflows
Accept if NPV > 0 | Under capital rationing, rank by Profitability Index (PV Inflow / PV Outflow)

Key Advantages

Strongest correlation with shareholder wealth
Considers time value of money
Accounts for all cash flows including terminal values
Cash flows less subject to manipulation than profits
Superior to IRR for mutually exclusive projects

Limitations

Based on assumptions (WACC, cash flows, timing)
Complex for comparing different-scale projects
Cost of capital depends on financial leverage (APV resolves this)
Not suitable for ongoing performance evaluation (point-in-time measure)

Sensitivity Analysis of NPV: Calculates the % change in a variable (revenue, cost, discount rate) that would reverse the investment decision (NPV → 0). This identifies the Key/Critical Factor requiring tightest control.

04

Conceptual Deep-Dive

Integrated Financial + Non-Financial Tools

Why Non-Financial Measures? Financial measures are: (a) historically oriented, (b) internally focused, (c) short-term biased, and (d) susceptible to window dressing. The following tools integrate non-financial dimensions to ensure sustainable performance, not merely profitable performance.

3.1 Balanced Scorecard (BSC) High Freq.

Author & Concept

Robert S. Kaplan & David P. Norton. The BSC displays organisational performance across four dimensions, acknowledging interests of shareholders, customers, and employees while balancing long-term and short-term goals.

Core Philosophy: Strategy must be translated into action through linked objectives, measures, targets, and initiatives across four perspectives.

🎯 VISION & STRATEGY — The Common Core

💰 Financial Perspective

"How do we look to shareholders?"

ROI / ROCE growth
Revenue growth & profitability
Cost reduction efficiency
Shareholder value (EVA / NPV)

👥 Customer Perspective

"How do customers view us?"

Customer satisfaction scores
Retention & acquisition rates
Market share
On-time delivery, defect rates

⚙️ Internal Business Perspective

"At what must we excel?"

Process cycle time efficiency
Quality defect rates
Manufacturing cycle efficiency (MCE)
After-sales service quality

🌱 Learning & Growth Perspective

"How do we improve and create value?"

Employee training & capabilities
Information system capabilities
Staff motivation & empowerment
No. of new products/innovations

Key Benefits of BSC

Balance: Blend of financial and non-financial
Integration: Internal + external perspectives
Strategic linkage: Short-term actions → long-term objectives
Motivational: "What gets measured gets done"
Flexible: Measures can change as strategy evolves
Counters short-termism by rewarding employee development, R&D, etc.

Why BSC Fails?

Managers mistakenly think using any non-financial measures means they have a BSC
Senior executives wrongly delegate scorecard responsibility to middle management
Companies copy measures from "best-in-class" firms instead of designing their own
Scorecard treated as a reporting tool only rather than a management tool

Linkage Between Perspectives: Improved Learning & Growth → Improves Internal Processes → Satisfies Customers → Delivers Financial Results. They are causally linked — not independent silos.

3.2 Performance Pyramid (SMART) Medium Freq.

Author & Concept

F. Cross & R.L. Lynch (1989) — "The SMART Way to Define and Sustain Success." SMART = Strategic Measurement Analysis and Reporting Technique. A 4-level hierarchy linking corporate vision to operational performance.

LEVEL 1 Corporate Vision Long-term success & competitive advantage

LEVEL 2 — Business Units Market & Financial Objectives CSFs at SBU/Division level

LEVEL 3 — Business Operating Systems Customer Satisfaction · Flexibility · Productivity Strategic objectives guided by L2

LEVEL 4 — Departments & Work Centres Quality · Delivery · Cycle Time · Waste Operational measures — status check for L3

Flow of Objectives: Top → Bottom (strategic objectives cascade down)
Flow of Measures: Bottom → Top (operational data feeds upward)
Left side: External effectiveness (non-financial)
Right side: Internal efficiency (financial)

Key Limitation: Performance Pyramid addresses only two stakeholder categories — shareholders and customers. This limitation is addressed by the Performance Prism Model, which considers expectations and contributions of all stakeholders.

Performance Pyramid vs. Balanced Scorecard

Dimension	Balanced Scorecard	Performance Pyramid
Financial + Non-financial	✅ Yes	✅ Yes
Internal + External	✅ Yes	✅ Yes
Hierarchical level differentiation	❌ No (flat 4 perspectives)	✅ Yes — 4 levels cascade
Operational-Strategic linkage	Indirect	✅ Explicit & direct
First to acknowledge financial & non-financial complementarity	❌	✅ Yes
All stakeholders	Partial	❌ Only shareholders + customers

3.3 Building Block Model (Fitzgerald & Moon) High Freq.

Context

Fitzgerald & Moon. Originally designed for service industries, now broadly applicable. Built on three interdependent blocks: Dimensions → Standards → Rewards.

Block 1: DIMENSIONS (The CSFs)

Goals for the Business

Divided into Results and Determinants

RESULTS (Outcomes)

Financial Performance — profitability, liquidity, overall strength
Competitive Performance — market share vs. rivals, distinctive product features

DETERMINANTS (Drivers)

Quality — delivering goods/services consistently per customer expectations
Flexibility — responsiveness to change (e.g., sudden demand surge)
Innovation — new products & new ways of doing things
Resource Utilisation — efficiency in using assets for objectives

Block 2: STANDARDS (The KPIs)

Measures Used

Standards must have three characteristics:

Equity — Equally challenging for all parts of the business. Differential relaxation creates perceptions of unfairness.
Ownership — Employees must be involved in identifying measures (not imposed). Ownership = responsibility for results.
Achievable — Realistic targets (e.g., based on competitor actual results). Impossible targets destroy motivation.

Block 3: REWARDS (Motivators)

Incentive Schemes

Rewards must have three characteristics:

Motivation — Linked to business goals. (If sales growth desired → bonus linked to units sold increase)
Clear — Communicated in advance. Employees must understand what is rewarded and how it will be measured.
Controllability — Employees rewarded/penalised only for results within their control or influence.

BBM's Unique Value: The Building Block Model explicitly links corporate strategy achievement to human resource management — by making standards clear and tied to controllable factors, it keeps employees motivated to meet targets. This is its distinguishing feature vs. BSC.

Building Block Model — Dimensions Mnemonic R · F · I · R · U

RDeterminants: Resource Utilisation
FDeterminants: Flexibility
IDeterminants: Innovation
RResults: Financial & Competitive Performance
QDeterminants: Quality

Standards: E-O-A (Equity · Ownership · Achievable) | Rewards: M-C-C (Motivation · Clear · Controllability)

3.4 Triple Bottom Line (TBL) Medium Freq.

Origin

Coined by John Elkington (1994). Rooted in the Brundtland Commission Report (1987) on Sustainable Development: "Development that meets the needs of the present without compromising the ability of future generations to meet their own needs."

TBL extends traditional accountancy into modern Sustainability Reporting, considering environmental and social performance alongside financial performance.

🌍 PLANET (Environmental)

Environmental Bottom Line

Impact on air, water, ground resources
Emissions & ecological footprints
Reduction of carbon footprint
Waste management & recyclability
Example: Tata Steel reporting scope 1 & 2 carbon emissions per tonne of steel

👨‍👩‍👧 PEOPLE (Social)

Social Equity Bottom Line

Corporate governance & ethics
Employee health, safety & human capital development
Human rights (no child labour, fair wages)
Community welfare initiatives (CSR)
Example: Wipro's CSR spend on rural education

💰 PROFIT (Economic)

Economic Bottom Line

Traditional financial performance
Adding value to shareholders
Maintaining/improving profitability
Tax compliance & transparent reporting
Example: Net profit, EPS, ROCE

Planet ✓/✗	People ✓/✗	Profit ✓/✗	Outcome	Example
✅	✅	❌	Bearable	Organic farming co-op: eco-friendly, fair wages, but financially unviable
❌	✅	✅	Equitable	Cracker/fireworks manufacturer: profitable, employs people, but pollutes heavily
✅	❌	✅	Viable	Tobacco company: profitable, eco-neutral, but socially harmful
✅	✅	✅	SUSTAINABLE	Infosys: profitable + green initiatives + employee welfare + community CSR

TBL vs. Shareholder Approach: TBL adopts a stakeholder approach (all stakeholders matter) vs. the traditional shareholder-centric model. TBL is effectively a substitute for full cost accounting with an even wider perspective, encompassing externalities.

05

Conceptual Deep-Dive

Role of Quality in Performance Measurement Systems

Cost of Quality

Quality-Related Costs

Cost of Conformance ("Good Cost") — investing to prevent defects:

Prevention Costs: Quality training, supplier evaluation, product design review, quality planning
Appraisal Costs: Inspection, testing, quality audits, process monitoring

Cost of Non-Conformance ("Bad Cost") — paying for defects:

Internal Failure Costs: Scrap, rework, re-testing, downtime
External Failure Costs: Warranty claims, returns, customer complaints, lost goodwill, litigation

Inverse Relationship: Higher rigour of Quality Management System → Lower cost of non-conformance (and vice versa).

Role of QMS in PMS

Quality Management as PMS Support

A Quality Management System (QMS) is a set of coordinated activities directing and controlling performance for continuous improvement.

Cost of conformance = expense of maintaining QMS

Positive Impact on Performance

Reduce overall cost of quality to optimal level
Improve customer satisfaction (higher perceived value)
Empower staff/managers through involvement in improvement drives

Lean Production & PMS

Lean = philosophy of cutting out waste and unnecessary activities. A lean system gets "the right thing to the right place at the right time", improving operational performance.

Quality in MIS

Good quality information = Reliable + Accurate + Timely + Objective + Complete. Only a functional, reliable, interactive MIS can assure this quality.

Cost of Quality — Mnemonic (Two categories × Two sub-types each) P · A · I · E

PConformance: Prevention Cost (training, design, planning)
AConformance: Appraisal Cost (inspection, testing, audits)
INon-Conformance: Internal Failure (scrap, rework)
ENon-Conformance: External Failure (returns, warranty, litigation)

06

Exam Strategy

The Examiner's Lens

Trigger Points — Case Study Keywords

Keyword in Case Study	Concept Triggered	Exam Frequency
"Division / SBU performance", "evaluate manager"	ROI → RI → EVA comparison	High
"reject new investment", "decline project", "sub-optimal"	ROI sub-optimisation → RI as solution	High
"shareholder value", "wealth creation", "cost of equity"	EVA, NPV	High
"non-financial", "balanced view", "customer satisfaction"	Balanced Scorecard — identify perspective	High
"service industry", "motivation", "reward scheme"	Building Block Model	Medium
"strategy to operations", "link operational to corporate"	Performance Pyramid	Medium
"sustainability", "social responsibility", "environmental impact"	Triple Bottom Line — classify under P/P/P	Medium
"critical success factor", "key performance indicator", "SMART"	CSF vs. KPI linkage	High
"cost of quality", "prevention", "appraisal", "scrap", "warranty"	Quality costs — PAIE classification	Medium
"NOPAT", "WACC", "economic profit", "HUL"	EVA calculation with adjustments	High

Common Mistakes — Where Students Lose Marks

Mistake 1: ROI & RI

Using Goal Congruence Language Incorrectly

Students compute ROI/RI correctly but then fail to explain why the manager's decision is sub-optimal and what the company should do instead. Always: Compute → Explain behaviour → State company's optimal decision → Conclude on goal congruence/sub-optimisation.

Mistake 2: EVA

Incorrect NOPAT Adjustments

Common errors: Using tax charged (accrual) instead of tax paid. Forgetting to add back non-cash items. Not adjusting for R&D or marketing capitalisation. Using closing capital employed instead of opening (beginning of period investment earns the return).

Mistake 3: BSC

Misclassifying Perspectives

A common error is placing employee training under Internal Perspective instead of Learning & Growth. Placing product defect rate under Customer instead of Internal Business Process. Always ask: who performs the activity? Customers experience → Customer; Company processes → Internal; Employees grow → Learning.

Mistake 4: TBL

Wrong Category Classification

Tax payments → Economic (not Social). Employee training → Social. Reducing paper usage → Environmental. Pure marketing strategy → Not a TBL item (or marginally Economic). Hospital deaths → Social (clinical quality). Child labour by supplier → Social.

Mistake 5: CSF vs. KPI

Treating Them as Synonyms

Examiner specifically tests this distinction. CSF = "restoring service" (the critical area). KPI = "average turnaround ≤ 4 hours" (the measurable signal). Never write "the CSF is the number of customer complaints per month" — that's a KPI, not a CSF.

Mistake 6: BBM

Confusing Dimensions Sub-categories

Determinants are the drivers (Quality, Flexibility, Innovation, Resource Utilisation) — inputs. Results are the outcomes (Financial Performance, Competitive Performance). Students often mix these or add random items. Stick to the 6 specific dimensions.

Inter-Connectivity with Other Chapters

This Chapter's Concept	Links To	How They Connect
ROI / RI / EVA	Ch. 8 — Divisional Performance & Transfer Pricing	Transfer pricing affects divisional profit → affects ROI/RI calculations
Balanced Scorecard	Ch. 5 — Strategic Analysis (SWOT, Porter)	BSC translates strategic objectives derived from competitive analysis into measurable KPIs
Triple Bottom Line	Ch. 11 — Environmental Accounting	TBL's Planet dimension operationalises full cost/environmental accounting concepts
Quality Costs (PAIE)	Ch. 4 — Activity Based Costing	ABC helps identify and allocate quality-related costs accurately across activities
CSF & KPI	Ch. 1 — Strategy formulation	Corporate strategy → CSFs → KPIs → Performance Measurement Matrix (full chain)
EVA Adjustments	Ch. 3 — Costing (R&D, marketing treatment)	EVA requires capitalising R&D and marketing spend that GAAP expenses — links to cost classification
Short-termism	Ch. 8 — Agency Theory	Short-termism arises from agency conflicts where managers optimise personal metrics (ROI) over company value

07

Visual Synthesis

Master Comparison Table & Logic Flowchart

Master Comparison: All Non-Financial/Integrated Tools

Dimension	Balanced Scorecard	Performance Pyramid	Building Block Model	Triple Bottom Line
Authors	Kaplan & Norton	Cross & Lynch	Fitzgerald & Moon	Elkington (1994)
Origin Year	1992	1989	Early 1990s	1994
Primary Target	All organisations	Manufacturing/All	Service industries	Sustainability reporting
Financial Included?	✅ Yes (1 of 4 perspectives)	✅ Yes (Level 2)	✅ Yes (in Results)	✅ Yes (Profit bottom line)
Non-Financial Included?	✅ Yes (3 perspectives)	✅ Yes (Levels 3 & 4)	✅ Yes (Determinants)	✅ Yes (People & Planet)
Environmental/Social?	❌ Limited	❌ Limited	❌ Limited	✅ Explicit & central
Operational-Strategic Link	Indirect (causal chain)	✅ Explicit hierarchy	Through standards	❌ Not primary focus
HR/Employee Focus	Learning & Growth	Productivity level	✅ Central (Rewards block)	People bottom line
Stakeholders Covered	Shareholders + Customers	Shareholders + Customers only	Owners + Customers + Employees	✅ All stakeholders
Strategic Alignment	✅ Core strength	✅ Core strength	Moderate	❌ Sustainability-focused
Key Unique Feature	4-perspective balanced view	4-level hierarchy; operational cascade	Clear reward-standard linkage; HR focus	3P Sustainability reporting; stakeholder approach

Master Comparison: Financial Performance Measures

Measure	Formula	Type	Best For	Key Limitation
GP Ratio	(GP / Sales) × 100	Relative	Product profitability analysis	Ignores operating costs below gross margin
ROCE	(PBIT / Avg. Capital Employed) × 100	Relative	Overall entity profitability	Discourages capital investment; short-termism
ROI	(Divisional OP / Divisional Assets) × 100	Relative	Divisional comparison (same size)	Sub-optimisation; poor shareholder wealth link
RI	Controllable Profit − (CoC% × Investment)	Absolute	Goal congruence in divisions	Cannot compare different-sized divisions
EPS	PAT (less Pref. Div.) / Wt. Avg. Shares	Per-share ratio	Inter-temporal (year-to-year) comparison	Capital structure differences; weak wealth link
EVA	NOPAT − (WACC × Capital Employed)	Absolute	True economic value creation; shareholder wealth	Complex adjustments; absolute (size effect)
NPV	PV Inflows − PV Outflows	Absolute	Investment appraisal; shareholder wealth maximisation	Assumption-dependent; not for ongoing performance

Logic Flowchart: EVA Computation Process

Follow this sequence for every EVA question to avoid missing adjustments

STEP 1: START WITH Operating Profit (PBIT) From Income Statement — before interest & tax

STEP 2: ADD BACK (Capitalise) Non-Cash Items + R&D + Marketing + Training These create future value — should not reduce current period profit

STEP 3: ADJUST DEPRECIATION Replace Accounting Dep. with Economic Dep. Add accounting dep., deduct economic dep. from adjusted profit

STEP 4: DEDUCT TAX Use Tax PAID (not tax charged) Adjust: Tax Paid + Tax saving on interest = Full tax on operating profit

RESULT: NOPAT Net Operating Profit After Tax Profit attributable to all capital providers, before any financing costs

STEP 5: CAPITAL EMPLOYED Opening Capital + All Capitalised Items Add back all items capitalised in Step 2; add non-cash items to opening capital

STEP 6: COMPUTE WACC WACC = (Equity% × Ke) + (Debt% × Kd after-tax) Always use POST-TAX cost of debt: Kd(after-tax) = Kd(pre-tax) × (1 − Tax Rate)

FINAL STEP EVA = NOPAT − (WACC × Capital Employed) Positive EVA → Value created for shareholders | Negative EVA → Value destroyed

08

Memory Tools

Retain & Recall

Master Mnemonic Collection

4-Stage PMS — Remember with O · R · E · R

OOrganisational Structure — Define roles & authority
RResponsibility Accounting — Identify responsibility centres
EEstablish CSFs, KPIs & Targets
RReview via KPI Dashboard & take corrective action

Rockart's 4 CSF Sources S · C · E · T

SStructure of the particular industry
CCompetitive strategy, industry position & geography
EEnvironmental factors (macro)
TTemporary influences (short-term pressures)

BSC — 4 Perspectives (think FILC) F · I · L · C

FFinancial — "How do we look to shareholders?"
IInternal Business Process — "At what must we excel?"
LLearning & Growth — "How do we improve & create value?"
CCustomer — "How do customers view us?"

BBM — Standards Characteristics E · O · A

EEquity — Equally challenging across divisions
OOwnership — Employees involved in setting measures
AAchievable — Realistic and motivating targets

Rewards = M-C-C: Motivation · Clear · Controllability

TBL — 3 Dimensions 3 · P's

PPlanet — Environmental bottom line
PPeople — Social equity bottom line
PProfit — Economic bottom line

All 3 acceptable = Sustainable | Only 2 = Bearable/Equitable/Viable

EVA Increases When (3 ways) G · E · L

GGreater Efficiency — More profit without more capital
EEarning > Cost — New capital returns exceed WACC
LLiquidate Unproductive — Remove assets earning below WACC

3-Point Revision Checklist — Verify Your Mastery

1

Can you compute ROI, RI & EVA from scratch? Given a case with divisional data, can you: (a) calculate all three measures, (b) explain which investment decision each metric leads the manager to take, (c) identify whether goal congruence is achieved, and (d) recommend the correct metric with justification?

2

Can you apply BSC, Performance Pyramid, BBM & TBL to a novel case? Given a new company scenario, can you: (a) identify the correct non-financial framework being tested, (b) classify given data points into the correct perspectives/dimensions/categories, (c) comment on performance vs. targets, and (d) identify shortcomings of the approach?

3

Can you critically evaluate and compare performance measures? Can you: (a) distinguish CSF from KPI with original examples, (b) explain why pure financial measures are insufficient with at least 3 specific arguments, (c) compare any two tools from the chapter on 4+ dimensions, and (d) classify quality costs into PAIE with Indian industry examples?

Quick-Fire Reference — Key Definitions to Reproduce

RI: "Excess of controllable profit over a predetermined organisation-wide minimum hurdle rate (cost of capital charge) on the investment controllable by the divisional manager."

EVA: "A measure of economic profit — the difference between NOPAT and the opportunity cost of invested capital (WACC × Capital Employed)."

CSF: "Aspects or areas of action vital for the attainment of strategic objectives, specific to the industry and segment in which the business operates."

KPI: "Performance management instruments used to measure and monitor the achievement of objectives so as to determine the level of success of actions."

Sustainable Development (Brundtland, 1987): "Development that meets the needs of the present without compromising the ability of future generations to meet their own needs."

BBM — Determinants: "Performance areas which influence the results (Quality, Flexibility, Innovation, Resource Utilisation)."

Sub-optimisation: "A situation where divisional managers make decisions in the best interest of their division but at the expense of overall company welfare — caused by ROI-based evaluation."