Suggested Answers For Q.39 LOPTEN

Q.
39 Lopten
Report
To: Board of Lopten Industries
From: Consultant
Date: xxxxxx
Subject: Strategic performance and performance indicators
Introduction
The report calculates the KPIs suggested by the board for measuring Lopten’s
performance, and then evaluate the effectiveness of those KPIs in addressing issues
in the company’s external environment. The report also evaluates how well the KPIs
measure performance in relation to Lopten’s CSFs. The report assesses the balance
between planning and controlling represented by the KPIs. Finally, the report
evaluates two marketing strategies and their impact on Lopten’s ability to achieve
its target operating profit in two years’ time.
(i) KPIs
The Board has identified a number of KPIs which can be used to assess the
performance of the Beeland operations. These are shown below:
Cheerful Posh
1 Total profit ($m):
Revenue 448 308
VC (255 x 1.12)/(325 x 0.44) (285.6) (143)
Contribution 162.4 165
Fixed costs (120) (120)
42.4 45
2 Average sales price per unit ($)
(448/1.12)/ (308/0.44) 400 700
3 Contribution per unit ($)

(162.4/1.12)/(165/0.44) 145 375
4 Market share (%)

(1.12/9.33)/(0.44/1.33) 12% 33%
5 Margin of safety (%)

BEP (Sales units) = FC/Contribution per unit
(120/145)/ (120/375) 0.83 0.32
Margin of safety (Sales – BEP)/Sales
((1.12 – 0.83)/1.12 )/ ((0.44 – 0.32)/0.44) 26% 27%
6 ROCE (%)
(42.4/326) / (45/250) 13% 18%
7 Total quality costs ($m) (VC+ FC)

(20 x 1.12 + 6)/ (30 x 0.44 + 6) 28.4 19.2
8 Consumer awards won 1 4

(ii) Issues in Lopten’s external environment
Political factor – government grant

The government of has given grants to an international manufacturer (one of
Lopten’s competitors) which has opened a factory in Beeland. Lopten
manufactures in Kayland and imported its products into Beeland. Thus, Lopten
is not eligible for the grant.
Monitoring average sales price per unit of Lopten’s machines (compared to
the competitor’s machines) could indicate whether the government grants
` have enabled the competitor to sell its machines more cheaply than Lopten
can.
Similarly, the market share KPI could also help Lopten assess whether the
government’s actions are influencing Lopten’s market share.
Economic factor – market growth

The growth of the middle class, and rising incomes in Beeland, is leading to
an increase in demand for Lopten’s products.
The current measure of market share provide an indicator of the rate at

which sales of Lopten’s washing machines are increasing relative to its
competitors’ sales. However, the KPIs do not directly include any measure of
sales growth rate.
Social factor – customer tastes

As rising national income in Beeland, customers may have changed their
preferences from the basic product (Cheerful) to the more expensive product
(Posh).
A measure of the sales growth rates for the two products would be useful for
identifying changes in demand, but the KPIs do not currently provided this.
However, a market share KPI could be useful for identifying how successful
Lopten is in selling products – particularly Posh.
Technological factor – reduced costs

New technology could improve the efficiency of the manufacturing process
for Lopten’s existing products. Thus, a more effective indicator to measure this
impact with technological developments have had on the manufacturing
process would be ‘manufacturing cost per unit’.
(iii) Links between CSFs and KPIs
CSF – Dominant market presence
KPI – Market share
The market share provides an indication of Lopten’s presence in the market,
but in order to gauge whether or not it dominates the market, Lopten’s market
share also needs to be compared with its competitors.
CSF – Maximise profit within acceptable risk

KPIs: Profit, contribution per unit, ROCE, Margin of safety
 Profit for each product
The amount of profit earned for each product is one of the Lopten’s
KPIs, so this should encourage a focus on profits. Although the KPI only
show profit for a single period, monitoring this profit figure over a
number of periods will highlight trends in the level of profit being
earned.
 Contribution per unit
This KPI can also be used to monitor how effectively Lopten is
controlling its variable costs relative to the price of its products. A focus
on cost control should lead to increase profits.
 ROCE
ROCE KPI also encourages profit maximization although there could be
concerns that using it as a profit measure encourages short-termism
behavior.
 Margin of safety to measure risk
This KPI provides an indication of the extent to which sales would have
to fall before Lopten reaches a breakeven profit situation. It could
provide an indication of the level of risk relating to the marketing and
pricing strategies of both types of washing machine.
CSF – Maintaining brand image for above average quality

KPIs – Quality costs and Consumer awards
 Consumer awards
The number of consumer awards won provides an indicator of the
reputation of Lopten’s product, as consumers are unlikely to give a
product for an award if they are unsatisfied with the quality of the
product.
 Quality costs
This KPI gives an indication of how much Lopten has spent on quality
management. Further analysis the quality costs into costs of
conformance and costs of non-conformance. Lopten should spent
more costs of conformance in order to have a good quality of product
(iv) KPIs and planning
KPIs which are to be used for planning rather than control need to be
forward-looking.
The suggested KPIs include some measures for planning indicators which are
margin of safety and consumer awards won.
Margin of safety
This KPI is useful as a planning indicator as it addresses the risk making a loss
going forward.
Consumer awards
The number of consumer awards won could also be useful as a planning
indicator. Customer’s perceptions of Lopten’s product will shape the
company’s ability to increase sales in the future.
Planning vs control
In general terms, planning activities tend to be high level, strategic activities,
whereas control measures tend to be more appropriate at an operational
level. The suggested KPIs appear to be a greater focus on control indicators
rather than planning indicators.
(v) Marketing strategies

Plan A
Most recent Year 1 Year 2
$’m $’m $’m
Contribution:
Cheerful 162.4 (x 1.04) 168.9 (x 1.04) 175.7
Posh 165 (x 1.04) 171.6 ( x 1.04) 178.5
Fixed costs (240) (240) (240)
Profit 87.4 100.5 114.2
Plan B
Most recent Year 1 Year 2
$’m $’m $’m
Contribution:
Cheerful 162.4 162.4 162.4
Posh 165 ( x 1.15) 189.8 (x 1.15) 218.2
Fixed costs (240) (240) (240)
Profit 87.4 112.2 140.6
The target operating profit in two year’s time is $135 million.

If the board chooses Plan A, a target profit will not be achieved as there will
be an adverse performance gap of approximately $21 million.
If the board adopts Plan B, the target profit figure could be achieved.
However, there is more uncertainty around the figures used in Plan B than
those in Plan A. In particular, Plan B assumes an annual growth rate of 15% in
demand for Posh.
Conclusion
Lopten’s current KPIs focus primarily on internal aspects of performance, rather than
including a balance of internal and external factors. In addition, the link between
the KPIs and Lopten’s CSFs – particularly the need to obtain a dominant market
presence appears relatively weak.
Current, the suggested KPIs appears to be on control, rather than planning; whereas
the board’s focus should ideally be more forward-looking. The board should
consider revising the KPIs used, in order to address these concerns. The current
marketing plan (Plan A) will not achieve Lopten’s target profit of $135 million in two
year’s time. Therefore the company could be advised to adopt Plan B, which has
the potential to achieve the target figure. The Plan B’s growth figure should be
detailed evaluation for its realistic.

Suggested Answers For Q.39 LOPTEN

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Q.

3 Contribution per unit ($)

4 Market share (%)

5 Margin of safety (%)

7 Total quality costs ($m) (VC+ FC)

8 Consumer awards won 1 4

Political factor – government grant

Economic factor – market growth

The current measure of market share provide an indicator of the rate at

Social factor – customer tastes

Technological factor – reduced costs

CSF – Maximise profit within acceptable risk

CSF – Maintaining brand image for above average quality

(v) Marketing strategies

The target operating profit in two year’s time is $135 million.

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