(a) An approach to assessing STS’s performance should reflect both the differences between subsidiaries or divisions within the group and the differences between the group as a whole and other companies in the same industry. The latter is likely to be more difficult because of the lack of detailed information on competitors. Detailed information will be available on the former, but interpretation is not necessarily simple.
The main problem of interpretation arises from the different environments in which subsidiaries or divisions operate. The question states that STS operates in Nordland, Northlandia, Southlandia, Eastlandia, and Oceania, so there does not currently seem to be a presence in Central Continent. These environments are likely to be very different from each other in terms of labor costs, market demand, and strength of competition. Moreover, the basic economic and financial conditions in these areas are also likely to be dissimilar: for example, different inflation rates and exchange rates will make comparisons difficult.
All of this is in addition to the general problems of assessing performance, which arise even within a single operating environment. For example, it is a commonplace finding in management literature that inappropriate measures and incentives can distort management behavior. This can lead to an emphasis on short-term strategies and corresponding neglect of longer-term investment, for example in research and development.
All of these problems apply equally in comparing the performance of the group as a whole with that of other similar companies. Here however additional factors complicate the picture even further:
STS operates in a highly specialized industry. It is unlikely that very many similar firms exist with which a comparison could be instituted.
Even if suitable competitors can be identified, it will be difficult to obtain sufficient detailed information on which to base a comparison. Published sources of information, such as annual financial statements, will offer highly summarized information, when what is really needed is disaggregated information, focusing particularly on electronic signaling equipment.
Many important items of information would be hard to access and evaluate even in the most favorable circumstances. For example, a key competitive factor in such an industry is the amount and quality of research and development work. Even if STS could find out how much a competitor is spending on R & D it would be extremely difficult to assess how effective this work might prove in the future.

(b) The question requires both financial and non-financial measures. These are considered in turn below.
Financial measures might include any or all of the following:

• Return on capital employed – in a sense the most important of all the financial indicators.
• Residual income.
• Other profitability ratios, such as gross profit percentage, net profit percentage.
• Asset turnover.
• Market share.
• Marketing costs as a percentage of sales.
• R & D spend both in absolute terms and as a percentage of revenue. As already noted, this is an industry where significant investment in R & D is essential for long-term success.
• Labour costs as a proportion of total costs, and labor costs per product. These figures are likely to vary a great deal from one country to another, which could provide important guidance to the management of STS.
• Sales growth by product and by country.
• Customer account profitability.
• Efficiency measures (comparing planned with actual use of resources).
  Non-financial measures might include any or all of the following:
• Quality of service (based, for example, on the number of customer complaints received, and the number of accounts gained or lost).
• Speed of response to customer needs.
• Innovation (based, for example, on the proportion of revenue arising from new products compared with the proportion arising from old products).
• Safety measures since this is a critically important issue in the type of product that STS supplies.
• The extent to which the company is adhering to socially and environmentally responsible policies.

(c) The Chief Executive of STS has settled on a strategy of international acquisition and joint ventures as a means of returning to sustained growth and profitability. This is clearly the main strategic objective in the proposed acquisition of WTC. The need for such an objective is evident from the details provided on STS’s recent performance: the most recent financial figures contrast very unfavorably with a previously impressive record. It is far from clear that the acquisition will provide an immediate boost in this respect, but in the longer-term STS’s management presumably expect an improved return for shareholders.
Another strategic objective would be to expand the geographical range of the company’s activities, so as to open up markets so far unexploited.
The market opportunities that may arise if the WTC acquisition goes ahead include the introduction of STS’s products first of all into Westland, where planned redevelopment of the railway network should provide substantial commercial opportunities, and perhaps later into other Central Continent countries, using WTC as a springboard. WTC will provide a manufacturing base on the Central Continent which may afford an important competitive advantage, particularly if other companies in this industry do not have such a base.
However, to exploit these opportunities it will be necessary to institute changes in WTC. In particular, the company’s quality problems must be addressed as a matter of urgency, as must the low skill levels among employees.

(d) Managerial considerations to be assessed ahead of the acquisition include the following points:

• Poor quality systems.
• A low level of skills and training among the workforces.
• Concerns about job security which may provoke negative reactions among the workforces. Good communication by STS is essential here in order to alleviate this and to demonstrate the potential for growth and success. If possible, STS should issue a clear statement about their intentions in regard to the workforce, as well as an explanation of their general employment policies.
• Possible hostility among existing shareholders, particularly the family that holds 40% of the WTC shares. STS must be alert to opportunities for securing the support, rather than the opposition, of this group.
  Cultural considerations are also important in this acquisition, and STS’s existing interests in a wide spread of countries should mean that the right experience is available to manage any potential problems that may arise. Possible cultural differences may include the attitude to quality, to staff training, to the general work ethos favored by STS and to the takeover itself, introducing as it does a foreign ownership of WTC.
  Financial considerations are also vital, especially since WTC is perceived to be under-capitalized. It is unclear whether STS itself has the funds to hand to remedy this situation, and this is an area that requires careful consideration.
  In due course, STS will wish to draw funds out of the new subsidiary, and this too is a financial matter that should be investigated ahead of the acquisition. In particular, it is important to establish that free movement of funds out of Westland will be permitted and feasible.

(e) The main problem in objective assessment after the acquisition will be the wide-ranging changes that will be necessary. This will make it difficult to compare the results before acquisition with those after acquisition.
For example, the new owners will inevitably install new management, which will lead in turn to new operating and marketing methods. Equally, there will be changes in culture, in training and in quality measures. These changes are likely to be so important in their effects that the new WTC will in effect be a different company from the existing WTC.
A final problem is that we are not told of any detailed performance criteria already in existence at WTC. If such measures have not been in use up to now it will be very difficult to establish the extent to which future performance represents an improvement on what has gone before.