- 20 Marks
Question
BOK is an autonomous division of Large Plc. BOK carries out large engineering jobs to individual customer specifications. The manager of the division will retire within next year, and Henry Femi, the CEO of Large Plc., has used a recruitment agency to identify a suitable successor, Mary Tako. Henry believes that Mary has excellent relevant experience in another company in the country and has offered her a 4-year contract position at BOK. The terms of the offer include a generous compensation package linked to the profit earned by BOK during the 4 years. Henry believes that BOK has been a very successful division and that a high-calibre manager, such as Mary, has great potential to continue to expand that success. In order to impress Mary on the recent success of BOK, Henry provided her with the following comparative financial data about the recent performance of the division (Table 1):
Table 1: Comparative Financial Data
| 2018 | 2017 | |
|---|---|---|
| Turnover | 27,000,000 | 26,000,000 |
| Net profit | 5,600,000 | 5,200,000 |
| Bad debts | 132,000 | 130,000 |
It can be assumed that the inflation rate in each of the two years was 3% per annum.
Mary indicated that she would need some additional information before deciding on whether to accept the employment offer. The following is an extract from a balanced scorecard (Table 2) which was prepared at Mary’s request:
Table 2: Balanced Scorecard Data
| Theme | 2018 | 2017 |
|---|---|---|
| Customer theme: | ||
| Number of customers | 120 | 100 |
| Average revenue per customer (₦) | 225,000 | 260,000 |
| Market share | 9% | 8% |
| Internal process theme: | ||
| Percentage of jobs completed with errors | 3% | 4% |
| Average job completion time (days) | 5.5 | 7 |
| Learning & growth themes: | ||
| Staff turnover rate | 10% | 5% |
| Training expenditure (₦) | 1,000,000 | 1,000,000 |
Required:
a. i. Analyze the change in the financial performance of BOK between 2017 and 2018 using the information provided in Table 1. (3 Marks)
ii. Evaluate the change in the performance of BOK between 2017 and 2018, using the information contained in the balanced scorecard (Table 2). In addition, discuss the significant reasons why this analysis may be more relevant than your answer to part (ai) in helping Mary to decide whether or not to accept the offer. (13 Marks)
b. Mary has indicated that she would only be willing to accept the employment offer if she can be convinced about the potential for growth in the division. As the outgoing manager, you are required to provide her with an analysis of BOK’s competitive position and growth prospects based on the information provided. (4 Marks)
Answer
(a) i. Financial Performance Analysis of BOK (2017 vs 2018):
a. Turnover:
• Increase: ₦27m/₦26m = 1.04 = 4% increase.
• Exceeds the rate of inflation (3%); indicates some modest growth.
Net profit:
• Increase in absolute terms = ₦400,000
• Increase in % terms = ₦400,000/₦5,200,000 = 7.7%
Rising faster than sales revenue (and inflation); suggests “real”
price increases being achieved (or better cost control
Bad debts:
• This is a minimal expense and the change between the two
years is insignificant. See computation below:
(a) ii. Balanced Scorecard Performance Evaluation (2017 vs 2018):
- Customer Theme:
- Number of customers increased from 100 to 120, indicating growth in customer base.
- Average revenue per customer decreased from ₦260,000 to ₦225,000, which may imply either increased competition or reduced pricing power.
- Market share improved from 8% to 9%, reflecting better competitive positioning.
- Internal Process Theme:
- Percentage of jobs with errors decreased from 4% to 3%, indicating improved quality control.
- Average job completion time reduced from 7 days to 5.5 days, showing increased efficiency.
- Learning & Growth Theme:
- Staff turnover rate increased from 5% to 10%, indicating potential issues with employee satisfaction or retention.
- Training expenditure remained constant at ₦1,000,000, suggesting a stable investment in staff development.
Relevance of Balanced Scorecard Analysis: The balanced scorecard provides a more comprehensive view of BOK’s performance beyond financial metrics alone. It captures customer satisfaction, internal process efficiency, and employee growth, which are critical for long-term success. This holistic perspective can be crucial for Mary in assessing whether to accept the offer, as it highlights operational strengths and weaknesses not apparent in financial figures alone.
(b) Analysis of BOK’s Competitive Position and Growth Prospects:
- Competitive Position:
- The increase in market share suggests that BOK is gaining a stronger foothold in the market, which is favorable for long-term growth.
- The reduction in error rates and faster job completion times enhances customer satisfaction and potentially leads to repeat business.
- Growth Prospects:
- The rise in the number of customers, coupled with the potential for improved operational efficiency, indicates that BOK has opportunities to expand its market presence.
- The company may need to address the decline in average revenue per customer and rising staff turnover to sustain growth.
- Topic: Balanced Scorecard
- Series: MAY 2019
- Uploader: Kwame Aikins