Performance hierarchy: formula sheet

Key formulas

Three levels of the hierarchy

Strategic (long term, whole organisation) → Tactical (medium term, divisions/functions) → Operational (short term, day-to-day tasks)

Information gets more detailed, more frequent and more internal as you move down. It gets more summarised, external and forward-looking as you move up.

Cascade test

Individual target → supports team target → supports departmental target → supports corporate objective

Use this to test alignment. Any break in the chain suggests goal incongruence or a missing measure.

Quality of a target

Aligned + Controllable + Measurable + Time-bound

A practical checklist, not a fixed formula from the syllabus. Use it to judge cascaded targets.

SMART objectives

Specific, Measurable, Achievable, Relevant, Time-bound

Use it to test any objective you are given or asked to write. Some texts use slightly different wording for A and R, so state your meaning.

Performance hierarchy flow

Mission → Vision → Corporate objectives → Strategies → Unit objectives → CSFs → KPIs and targets

Each level should support the one above it. Gaps in this chain are a common weakness to point out.

Objective structure

Objective = measure + target level + time frame

For example, increase operating profit margin to 12% within three years. If one of the three parts is missing, the objective is not fully SMART.

Mendelow: key players

High power + High interest → Key players

Involve them in decisions. Their objectives get the highest priority and the most detailed measures.

Mendelow: keep satisfied

High power + Low interest → Keep satisfied

Consult them and avoid upsetting them. They can become key players if their interest rises.

Mendelow: keep informed

Low power + High interest → Keep informed

Communicate regularly. They can influence others or gain power through alliances.

Mendelow: minimal effort

Low power + Low interest → Minimal effort

Monitor only. Do not spend scarce management time here.

Stakeholder to measure link

Stakeholder → Objective → Measure → Target

Use this chain in every answer so your measures are tied to a named group.

Performance chain

Mission → Objectives → CSFs → KPIs → Targets

Each level must follow from the one above. Use this to structure answers.

SMART test for a KPI

Specific, Measurable, Achievable, Relevant, Time-bound

A commonly used checklist. Use it to judge whether a proposed KPI is suitable.

Customer retention rate

Customers retained at end of period ÷ customers at start of period × 100%

Count only customers who were there at the start. Exclude new customers won in the period.

Load factor

Seats occupied ÷ seats available × 100%

A typical KPI for transport and similar capacity-based businesses.

On-time delivery rate

Orders delivered on time ÷ total orders delivered × 100%

A service-quality KPI that links to a CSF of reliability.

Economic value added (EVA)

EVA = NOPAT − (capital employed × WACC)

NOPAT is net operating profit after tax, adjusted as the question directs. A positive EVA means value is created after charging for capital.

Residual income (RI)

RI = operating profit − (capital employed × required return)

Same idea as EVA but usually uses accounting profit before tax and a required rate set by the company.

Total shareholder return (TSR)

TSR = (closing share price − opening share price + dividends) ÷ opening share price

Assumes dividends are received in the period. It measures the owner's return, not management performance alone.

Market value added (MVA)

MVA = market value of the firm (equity plus debt) − capital invested

A positive MVA means the market believes management has added more value than the capital put in.

Value creation test

Return on capital > cost of capital

If the return is below the cost of capital, value is destroyed even when profit is positive.

Feedback control loop

Set standard → Measure actual → Compare → Act on variance

Corrective action comes after the results. It is reactive.

Feedforward control loop

Set target → Forecast outcome → Compare forecast with target → Adjust inputs or plans

Action comes before the results. It is proactive and depends on forecast quality.

Variance

Variance = Actual − Standard (or budget)

State whether it is favourable or adverse. It is the main feedback signal.

Features of good information

Relevant, accurate, timely, complete, understandable, cost-effective

Use as a checklist when evaluating any system or report.

Quick revision

• The hierarchy runs from strategic to tactical to operational, and measures should fit the level.
• Mission states purpose; vision states the desired future; objectives are specific targets.
• Good objectives are clear and measurable, and they should be consistent with each other.
• Stakeholders differ in power and interest, so their objectives may conflict.
• A critical success factor is what the organisation must get right; a KPI measures how well it does so.
• Each KPI should link to an objective and a CSF, otherwise it adds noise.
• Shareholder value is not the only measure; consider wider stakeholder outcomes too.
• Short-term profit focus can damage long-term value creation.
• Information should be relevant, timely, accurate and cost-effective for the user.
• Control systems should give managers data they can act on.
• Always apply points to the scenario, not just state theory.
• Finish with a clear, justified recommendation.

Common mistakes

• Giving textbook definitions of the three levels with no link to the scenario. Fix: Use named managers, measures and goals from the case in every paragraph. Definitions get few marks on their own.
• Placing financial measures only at the top and ignoring non-financial operational measures. Fix: Show that operational non-financial measures, such as defect rate or delivery time, drive the financial results above them.
• Treating mission and vision as the same thing. Fix: State that mission is current purpose and vision is future aspiration. Then say which part of the given statement does which job.
• Listing the definitions of SMART without applying them. Fix: Take each objective in the scenario and test it against each letter, quoting what is missing.
• Listing Mendelow's four boxes without applying them to the scenario. Fix: Name real stakeholders from the case, place each one, and justify the position with scenario facts.
• Assuming shareholders always come first. Fix: Judge priority by power, interest and legitimacy in the scenario. A regulator or major lender may outrank shareholders in a given case.
• Treating CSFs and KPIs as the same thing. Fix: Say that a CSF is what must be achieved and a KPI is how you measure it. Write them in separate columns or lines.
• Giving generic CSFs such as "profit" or "growth" for every business. Fix: Link each CSF to a fact in the case. If the firm competes on speed, make delivery time a CSF.
• Treating profit as value creation. Fix: Always compare return with the cost of capital. Use EVA or RI to show the charge for capital.
• Listing generic value drivers that are not linked to the strategy. Fix: Start with the strategy, then choose only drivers that support it and name the scenario fact behind each.

Exam tips

• Always tie each level to the scenario's strategy. Generic answers earn few marks.
• When asked to evaluate, look for conflicts between levels and between short-term and long-term targets.
• Use the verbs in the requirement. Design needs measures at each level. Evaluate needs strengths, weaknesses and a verdict.
• Mention controllability and managers' participation in target setting. Examiners often reward these points.
• Keep it practical on a phone or in the exam: label levels, link them, then write short paragraphs.
• Always link statements to the scenario. A definition of mission or vision on its own earns few marks.
• When asked to critique objectives, go through SMART letter by letter and name what is missing, then offer a rewritten version.
• Show the chain from objective to strategy to CSF to KPI. It demonstrates analysis, which supports professional skills marks.