EVALUATING

STRATEGIC PROFIT
PERFORMANCE
Group 4
Akshit Bagaria A004
Rahil Doshi A013
Akash Gattani A017
Mridul Jain A028
Priyanka Jalan A030
Pragya Gupta A067
Measures and Conditions

Measures
 Effectiveness
 Efficiency

Conditions
 Ability to measure outputs
 Existence of predetermined standard of performance
 Ability to use variances to adjust inputs and / or process
Analyzing strategic profitability
Strategic profitability analysis is a tool to evaluate the success of a business in
generating profit for the implementation of its strategy.
Strategic profitability = profit (loss) from competitive effectiveness + profit (loss)
from competitive efficiencies

Variances include :-
• Profit plan variances (absolute and relative terms)
• Market share variances
• Revenue variances
• Product efficiency and cost variances
• Variances for non- variable products
 Profit Plan variances

The difference in the planned and actual

profit can be for a variety of reasons:-

 Large offsetting variances

 Unexpected change in revenue
 Cost of raw materials
 Increased demand
 Efficient use of resources
 Changes in competitive marketplace
Market Share Variances
Two key variables –
 Increase or decrease in profit due to change in market size
 Increase or decrease in profit due to change in market share

Market size variance = market size x planned market share x planned avg contribution
margin
Market share variance = market share x actual market size x planned avg contribution
margin

Market size variance - $32196 (F)

Market share variance - $55804 (F)
Revenue variance
Two sources of revenue based profit-

 Increase or decrease due to change in prices

 Increase or decrease in prices due to change in product mix

Sales price variance = actual total revenue – (product 1 standard SP x product 1 actual
volume) - …….n terms
Product mix variance = average standard contribution x actual unit volume

Sales price variance = $44950 (U)

Product mix variance = $23000 (F)
Variable costs variances
Two sources -
 Changes in the use of inputs in relation to outputs
 Changes in unit cost of the inputs

Efficiency variance = Actual units of output x (planned volume of input p.u. of output –
actual volume of inputs p.u. of output) x planned cost of 1 unit of input
Spending variance = Actual units of output x actual volume of inputs p.u. of output x
(planned cost of 1 unit of input – actual cost of 1 unit of input

Efficiency variance = $33176 (U)

Spending variance = $5304 (F)

10400 pieces sold during 20X1

Non variable cost variances
Spending variance = planned cost – actual cost

Types of non-variable costs

 Committed costs – These are expenses that the companies commit for a long period of
time. Eg – long term lease contract indexed to inflation.
 Discretionary costs – These are expenses that managers can easily adjust at will. Eg –
Advertising expenditure
 Activity Base Costs – These are indirect resources that are used in ways that wary with
cost driver activities other than manufacturing outputs. Eg – Warehousing costs may vary
with the number of shipping orders.
Additionally, for ABC we can estimate three variances –
 Impact due to changes in cost driver activity
 Impact due to changes in efficiency
 Impact due to changes in cost of resources
Interpreting and using strategic profitability variances

Having covered all the variances, we move on to search for explanations

 The next step involves searching for explanations and initiating action plans

Post this, we also need to make efficient use of analysis

 Strategic learning – The comparison between expected and actual performance leads
managers to review
 Assumptions and standards
 Cause and effect relationships
 To check if the strategy still holds some validity
 The effectiveness and efficiency of strategy implementation
Interpreting and using strategic profitability variances

 Early warning and corrective action – such an analysis warns the company
about possible events which may cause catastrophe for the company. It also
guards the company against any unforeseen occurrences which affect a company
 Performance evaluation – The comparison between actual and expected
performance serves to inform managers about efforts put into achieving goals.
Setting strategies and benchmarks also helps in motivating people and providing
a target to look up to.
THANK YOU