Question

Briefly outline the key issues in section 3 in the research report by Drury and El-Shishini (2005) -- link: https://www.cimaglobal.com/Documents/Thought_leadership_docs/2009-12-16-tech_resrep_divisional_performance_measurement.pdf

Focus on the following questions:

• •What is the difference between economic performance and managerial performance?
• •What are the limitations of financial metrics in general? State two ways in which the limitations maybe addressed?
• •Under what conditions may the use of ROI, in particular, lead to ‘under-investment’?
• •How does the use of residual income avoid the ‘under-investment’ problem?
• •Why is ROI the most commonly used financial metric?
• •How does the use of EVA© mitigate some of the shortcomings of traditional financial metrics?

Answer 1

Economic Performance: Economic Performance is everything about economy, and it is meausred in terms of GDP , which is the Market value of all goods and services produced by economy in a year. Some of the economic indicators are spending , inflation, deflation, employemnt opportunities available

Mangerial Performance: Where as Mangerial performance measures company performance and process or individual Teams, departments,and other organizational units, it is measured by productivity , techniques,working environment, labour management relationship.

Limitations of Financial metrics:

1. Not always comparable to companies

2. Subject to errors/ Frauds, can be overcome by deciding not taking decisions based on it

ROI

It helps us to understand how well an investment is performing, this helps ensure that return will be more than cost invested

Why is ROI most commonly used:

• It helps check propect of investment and not waste time and money
• It helps identify potential return on investment opportunities
• Helps in comparitive analysis

How is EVA benificial over Traditional?:

EVA is economic value added is a measure of company performance by deducting cost of capital from operating profit and adjust taxes

1 It helps taking decision which increases value of shareholders.

2. It helps understand whether investing in a company or not is good

3, It helps understand and consider assets and exepenses while taking decisions