CMA Final · Strategic Performance Management and Business Valuation

Performance Measurement, Evaluation and Improvement Tools: formula sheet

Full chapter guide

Key formulas

Efficiency (productivity) measure: Productivity = Output ÷ Input; Use in physical units, e.g. units per labour hour. Compare with a standard or earlier period.
Percentage achievement against target: Achievement % = (Actual ÷ Target) × 100; Works for KPIs where higher is better. For defect or cost KPIs, a lower actual is better, so read the direction carefully.
Return on investment (financial measure example): ROI = Profit ÷ Capital employed × 100; State clearly which profit and which capital base you use.
Characteristics of a good measure: Strategic fit, specific, measurable, controllable, timely, comparable, cost-effective; A checklist, not a formula. Use it to judge any proposed KPI.
Four perspectives: Financial | Customer | Internal process | Learning and growth; Learn the order and the question each one asks. In a strategy map the chain of cause and effect runs from learning and growth up to financial.
Scorecard row: Objective → Measure → Target → Initiative; Use this structure for every perspective when you build a scorecard in an answer.
Customer retention rate: Retention rate (%) = (Customers at end − New customers acquired) ÷ Customers at start × 100; A common customer measure. Use only existing customers kept, not new ones.
Percentage achievement against target: Achievement (%) = Actual ÷ Target × 100; For measures where lower is better (defects, cycle time), use Target ÷ Actual × 100 or state clearly that lower is better.
Return on Investment: ROI = (Divisional profit ÷ Capital employed) × 100; Use the profit and capital definitions the question gives. Be consistent: if you use closing or average capital, state it.
Residual Income: RI = Divisional profit − (Capital employed × Required rate of return); The charge for capital is called the imputed interest or capital charge. Result is in rupees.
NOPAT: NOPAT = EBIT × (1 − tax rate); Apply tax to operating profit, not to profit after interest. Adjust EBIT first if the question asks.
Economic Value Added: EVA = NOPAT − (Invested capital × WACC); Invested capital is usually equity plus debt (net operating assets). Use the WACC given or compute it.
WACC: WACC = (E ÷ V) × Ke + (D ÷ V) × Kd × (1 − t); E and D are market or stated values, V = E + D. Cost of debt is after tax.
Project test under ROI and RI: Accept under RI if project return > required rate; accept under ROI if project return > current divisional ROI; This explains why the two measures can give different decisions.
Performance pyramid levels (top to bottom): Corporate vision → Business units → Business operating systems → Departments and work centres; Objectives cascade down. Measures are reported up. External effectiveness is on the left, internal efficiency on the right.
Pyramid measures by level: Business unit: market and financial. Operating systems: customer satisfaction, flexibility, productivity. Work centres: quality, delivery, cycle time, waste; Use this to match a measure to its level in a case.
Fitzgerald and Moon building blocks: Dimensions + Standards + Rewards; Dimensions split into results (financial performance, competitiveness) and determinants (quality, flexibility, resource utilisation, innovation).
Standards: three attributes: Ownership, Achievability, Fairness; Standards that staff do not own or cannot reach will not motivate.
Performance prism facets: Stakeholder satisfaction, Stakeholder contribution, Strategies, Processes, Capabilities; Starts from stakeholder wants and needs, not from strategy.
Results-determinants link: Determinants (drivers) → Results (outcomes); Results are lagging. Determinants are leading and are what management can act on.
Performance gap: Gap = Benchmark value − Own value; Express as a percentage of the benchmark for comparison: Gap % = (Benchmark − Own) ÷ Benchmark × 100. For cost-type measures, a positive own-minus-benchmark gap is unfavourable.
Six Sigma defect rate (DPMO): DPMO = (Number of defects ÷ (Units × Opportunities per unit)) × 10,00,000; Six Sigma level corresponds to 3.4 DPMO.
Yield: First-pass yield = Good units first time ÷ Units started × 100; Shows how much output needs no rework.
DMAIC sequence: Define → Measure → Analyse → Improve → Control; Used to improve an existing process. Keep the order in answers.
Kaizen vs BPR: Kaizen = small, continuous, bottom-up; BPR = radical, one-time, top-down; The most common comparison asked.
Target cost: Target cost = Target selling price − Target profit; Target profit may be a margin on price or a return on capital. Read which one the question gives.
Cost gap: Cost gap = Current (estimated) cost − Target cost; A positive gap must be closed by value engineering or redesign.
Value: Value = Function (or customer benefit) ÷ Cost; Value rises when function improves at the same cost, or cost falls at the same function.
Life cycle cost: Life cycle cost = Pre-production + Production + Marketing and distribution + Service and warranty + Disposal costs; Add all costs across the life. Discount them only if the question asks for present value.
Throughput: Throughput = Sales revenue − Totally variable cost (usually direct materials); Labour is treated as an operating cost unless it is truly variable.
Throughput per bottleneck hour: Return per factory hour = (Sales price per unit − Material cost per unit) ÷ Bottleneck hours per unit; Rank products on this to decide the production plan.
Cost per factory hour: Cost per factory hour = Total factory cost ÷ Total bottleneck hours available; Total factory cost = labour + overheads, i.e. all costs other than materials.
Throughput accounting ratio (TA ratio): TA ratio = Return per factory hour ÷ Cost per factory hour; Above 1 means the product earns more than the factory costs per hour. Below 1 means it loses value.

Quick revision

A KPI is a measure tied to a strategic objective; a measure that does not link to strategy is just data.
Use a mix of financial and non-financial measures so short-term profit does not hide long-term decline.
The Balanced Scorecard has four perspectives: financial, customer, internal business process, and learning and growth.
ROI = Profit ÷ Capital employed × 100; define profit and capital the way the question states.
Residual Income = Profit − (Capital employed × required rate of return).
ROI can make a manager reject a project that is above the company's required return but below the division's current ROI; RI avoids this.
EVA = NOPAT − (Invested capital × WACC); it is a form of residual income with adjusted figures.
A positive RI or EVA means value is created after charging for capital.
The Performance Pyramid links corporate vision to operations across levels, with external effectiveness and internal efficiency measures.
Benchmarking compares your performance with a standard, a competitor or the best practice, then acts on the gap.
Target Cost = Target selling price − Target profit; work backwards from the market.
Value analysis asks whether each function is delivered at the lowest cost; lean aims to remove waste while keeping value.

Common mistakes

Listing only financial measures for a service or quality-focused firm. Fix: Always add at least one customer, process or people measure tied to the strategy.
Naming KPIs without linking them to strategy. Fix: State the objective and critical success factor first, then the KPI that tracks it.
Listing only financial measures or only generic KPIs. Fix: Give at least one measure for each of the four perspectives, and make sure each links to the stated strategy.
Putting measures under the wrong perspective, such as defect rate under customer. Fix: Ask where the activity happens. Defects arise inside the process, so they are internal process. Customer complaints are customer.
Using profit after interest and tax for ROI or RI. Fix: Use divisional operating profit (before interest, and usually before tax unless told otherwise). For EVA use NOPAT, which is operating profit after tax but before interest.
Deducting interest and also charging the capital charge. Fix: Start from profit before interest. The capital charge already covers the cost of funds.
Saying the performance pyramid starts at the bottom with operations. Fix: Write both directions: objectives cascade from vision down, measures are reported up from work centres.
Treating all of Fitzgerald and Moon's dimensions as results. Fix: Group them. Results: financial performance and competitiveness. Determinants: quality, flexibility, resource utilisation and innovation.
Treating Kaizen and BPR as the same thing. Fix: Compare on size of change, speed, who drives it, risk and cost. Kaizen is incremental and involves everyone; BPR is radical and top-down.
Saying benchmarking means copying a competitor. Fix: Write that benchmarking identifies gaps and the practices behind better results, which are then adapted to your own context.

Exam tips

In case questions, tie every KPI to a stated objective or critical success factor from the case.
Give a balanced set: financial and non-financial, leading and lagging.
When numbers are given, state the direction of good performance before concluding.
Use the good-measure criteria as a checklist when asked to evaluate a measure.
For MCQs, watch words such as controllable, leading, lagging and non-financial; definitions are tested directly.
In MCQs, the usual traps are matching a measure to the right perspective and knowing which perspective is at the base of the strategy map. Learning and growth is the base, financial is the top.
In case answers, name the strategy first and tie every measure back to it. Generic KPIs lose marks.
When figures are given, calculate first and then comment. A recommendation after the numbers is what earns the final marks.