This two-part article aims to give clarity on the level of response that is required in an APM answer. It will address a specific past exam question that caused considerable difficulty in the March 2021 session. The article follows on from the first part (see 'Related links'), which gave examples of weak answers, and this one will discuss two possible pass standard solutions to this question.
Reading through the answer and the marker’s comments should help candidates to avoid basic mistakes and gain a better understanding of the breadth and depth of solution that a marker is expecting. Comments are made in [ ] after each paragraph, where appropriate.
Before reading this article, it is essential to have read the scenario and requirement for Question 1, part (b) (i) of the March 2021 APM exam and it will be helpful to keep these to hand. The requirement is repeated here for clarity.
Requirement:
Write a report to the chief executive officer (CEO) to respond to his instructions for work on the following areas:
(b) the performance report at Fiag focussed on
(i) whether the report addresses the company’s objectives and the report’s presentation
(14 marks)
The first example here (numbered 3 to be consistent with the earlier article) is based on several, very good solutions seen. The spelling and grammar have been slightly tidied up but not perfected so that this solution is understandable but not overly polished. This solution’s length reflects real exam efforts.
The current performance report has the following merits to it:
It represents the results for the last two years, allowing for historic benchmarking. This allows Fiag to see, overall if they have been improving or worsening.
[Comment: A good general presentation point to begin with and the appropriate use of the jargon term ‘historic benchmarking’].
The report includes one industry average, thus allowing for some external benchmarking and preventing the company from having a purely internal focus and putting the company’s performance into perspective. However, this could be improved with more external measures for other categories in the report.
[Comment: The key issue here is that the presence of only one industry average is not particularly helpful for perspective, so is a valid point].
The format of the report is a standard profit and loss format and should be easy to read for anyone used to dealing with financial reports to understand and be able to use to make business decisions.
[Comment: As the board of Fiag will probably be used to doing so this is another useful but minor point in the report’s favour].
A short commentary is included which can help explain some of the underlying trends and reasons for Fiag’s performance as shown in the report.
[Comment: Indeed, commentaries can be useful in providing reasons for performance and trends. Although this commentary also has some negatives associated with it in that is short and not particularly helpful, containing an inaccurate calculation as we will see later].
However, there are some drawbacks with the report:
The report is obviously made up of purely financial information. It’s difficult (almost impossible) to understand for non-financial people and members of the board. This is helpful information for the financial managers, but it will prove of little use for the top level of the company.
[Comment: This point is a little confused. It actually appears to be making two points. First, that there is the lack of non-financial data and secondly the use of excessive financial jargon. It might also be considered insulting to the board to imply they cannot read a what is essentially a basic income statement. It would be improved by a specific example of how the report goes wrong or how to improve the report – for example, which key numbers should be highlighted].
The report consists only of financial information, lacking information on some non-financial aspects which are very important for Fiag’s business, such as quality of the bicycles, customer base and customer experience (they talk about the joy of cycling and a broad customer base in the objectives).
[Comment: This may not be perfectly put but is an excellent point as it is justified by using the objectives of the company and better than the one above which was trying to make some of the same points].
Some vital financial information is missing as well. Fiag is a venture capital backed company stating sustainable growth in returns to shareholders as its primary objective – but there are no measures of shareholders’ wealth on the report. It could be useful to include such traditional measures as total shareholders return (TSR), price to earnings (P/E), earnings and dividend yields and such.
[Comment: Again, this is well justified by reference to the main objective. A more logical approach would have been to put this point ahead of the previous one, signifying its priority as reviewing the report’s ability to address the first objective. It is also developed by giving examples of what measures could be appropriate].
External data to allow for further benchmarking would be useful as mentioned in the first part of this report. Currently Fiag only have an industry average for operating margin. Other averages or direct competitor information would help benchmarking further.
[Comment: This point is a little vague – what would Fiag be benchmarking against the competition specifically? It needs to be linked to the objectives again but does make a valid general point about the need for benchmarks].
As we know, Fiag has a new type of bicycle that it has developed and some of its other bikes have been redesigned. The report should split out the revenues (and profits, if possible, using ABC) for the different types of bikes sold. This segmental analysis would allow Fiag to see if any ‘Dog’ products should be discontinued and allow focus on manufacturing the products that are best at creating shareholder wealth – the ‘Stars’ in the product portfolio.
[Comment: Here is a good illustration of how to use the models that the APM syllabus contains in a suitable context. It is a common mistake here to realise the BCG matrix may help but then to wander away into a lengthy (and unnecessary) definition and description of the BCG matrix. The solution has used the jargon correctly in context and demonstrated this in the specific advice given. A very good approach].
It also would assist managerial decision making and appraisal if this year’s budget figures appeared on the report allowing for a comparison of the actual results against expectations.
[Comment: Again, a short but valid point and note that this solution does not just say include budget comparatives, it states why].
The report does not include any data relating to quality of the bicycles. There is no internal quality data available, such as reject rates or rework. There is also no direct external quality data, such as customer returns or warranty claims.
[Comment: This is a vast improvement on the earlier comment about the need for data for benchmarking. Here the exact data required and the reasons for it (linked to the objectives) are stated].
With regard to a broad customer base the report again provides nothing to help Fiag identify whether they are managing to reach many types of customer or not. The commentary says that the revenue for the new and redesigned models grew but it is not clear if this relates to returning customers, the current customer type, or new groups of customers entirely.
[Comment: This point further develops the need for benchmarks for the other objectives. It makes it clear that the company cannot effectively monitor achievement without data].
The commentary is very brief and there is no data in the report that can be used to back-up the first comment about the increase in revenues for new and redesigned bicycles such as a segmental analysis of the bicycle types. The PBT can easily be seen to have improved from the report itself, the commentary here adds nothing. The final comment is factually incorrect. It states a small difference in operating margin – this difference is not 1.8% but 1.8 percentage points the true percentage difference ((6.6-4.8)/6.6 is 27.7%.
[Comment: This final comment deals with the final part of the report, the commentary and it’s inadequacies. It also points out that it is misleading in that the percentage change in margin is calculated incorrectly – this form of calculation error is often performed by candidates themselves in this exam. There are several points worthy of credit in this paragraph].
Summary:
Overall, the answer has a good logical structure – merits then drawbacks which is what is expected when the verb ‘evaluate’ is used. Within the lists of points, there is some effort to prioritise, but this could be improved – see the third drawback, it should have been moved up and appeared earlier given the priority of that objective.
More and different points could be made, but in a time-limited examination this is an excellent effort. It may be worth noting that this answer contains c.600 words while the poor answer example for the same question (in the earlier article) had c.800 words and would have scored less than half as many marks. Quality not quantity is what markers, and your future employers seek.
A detailed commentary on this solution is provided at the end.
Current performance report
The current report has a number of strengths and weaknesses. These will be discussed according to whether the report:
The current mission of the company can be broken down into three parts:
The report does not directly measure shareholder value which could be done through considering net present value or economic value added (EVA™) and dividends. The current report uses period profits as its main measure of performance. This can suffer from being short term unlike the shareholder value measures mentioned.
The report does compare year on year performance which gives an indication of what direction the company’s fortunes are going in and is helpful in controlling the organisation.
There is an indirect measure of the customer value being offered by the company through the operating margin which, when compared to the industry average, gives a partial measure of value but without data on the price/volume mix compared to competitors, it is difficult to be conclusive about this. Revenue changes compared to the overall industry would aid in giving an impression of the attractiveness of Fiag’s offering to the customer. However, with no budget information given it is difficult to see if the company is performing even as it expected on an internal level.
Measuring the appeal of the products to the broad range of customers will be difficult and involves subjective non-financial measurements. Customer loyalty and price elasticity of demand will give some indication of the appeal of the new and redeveloped products and the older versions. It will be difficult without directly surveying customers to identify exactly why customers choose Fiag bicycles over the competition.
The report does not split out the types of bicycle to allow further analysis of what it and is not selling well. This limits its appeal as a strategic decision-making tool. As already mentioned, the reporting of performance year on year is a helpful control tool. However, as the various types of cycles will have differing margins and growth rates it would be advisable to provide more detail here.
Selling and marketing, which is a significant cost, is not attributed to individual product or ranges and it would be expected that the Zoam product would account for a large proportion of this charge, hence it would be a good idea to see this split out as well as the revenue, as mentioned above.
Administration expenses have improved slightly, and the commentary makes it clear that this includes the government grant for Zoam. Even after removing this grant the expenses have reduced but no reason is provided which given the usually fixed nature of these costs would be useful.
In terms of presentation, the data is clear, and, in a form, which would be easily recognisable to those used to reading accounts. The short narrative commentary highlights some of the key features in the report but is rather limited in contents and usefulness given the lack of underlying segmental analysis and also the incorrect percentage change in operating profit. It should be 27.3% ((6.6-4.8)/6.6) as well as it not really supporting the objectives clearly.
To summarise, additional information which could be supplied in the report also includes:
[Overall commentary:
As with all model solutions, this is longer than a marker would expect to see produced in the time limits of the exam. This model solution has more than 14 marks within it (probably about 20 marks).
However, this is the top of the standard expected in terms of the depth of points made – not beyond that standard. It would be wise to study how each point is supported by evidence or argument from the scenario or else is developed. The answer tries to avoid making unsupported judgements. As an example, it continuously ensures that it does not only say ‘How’ but ‘Why’.
Another feature of the model solution is its logical structure. The model solution begins with the most important point of view: the board’s perspective. It lays out the strategy and then assesses whether the report is measuring the achievement of the strategy. Then, it goes deeper by considering the supporting objectives. Finally, it finishes with probably, the least important points about general presentation and provides a short summary.
Having read this article, prepare (or if already done)/review your own solution to this question so that you can see where improvements can be made.]
Written by members of the APM examining team