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EvaluationandControl

Chapter 11

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Learning Objectives

Understand the basic control process

Choose among traditional measures, such as ROI,and shareholder value measures, such as economic

value added, to properly assess performanceUse the balanced scorecard approach to develop

ey performance measures

!pply the benchmaring process to a function or anactivity

"evelop appropriate control systems to supportspeci#c strategies including performancemeasurement

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Evaluation and Control%rocess

*igure 11)1

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easuring %erformance

Performance end result of activity

Steering controls measure variables that in-uence future

pro#tability

Cost per available seat mile .airlines/Inventory turnover ratio .retail/

Customer satisfaction

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ypes of Controls

Output controls specify 2hat is to be accomplished by

focusing on the end result through the use of

objectives

Behavior controls specify ho2 something is done through

policies, rules, standard operating proceduresand orders from supervisors

Input controls emphasi3e resources

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!ctivity)4ased Costing

Activity-based costing allocates indirect and direct costs to

individual product lines based on value)added activities going into that product

!llo2s accountants to charge costs

more accurately because it allocatesoverhead more precisely


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Enterprise Risanagement

Enterprise Risk anagement corporate)2ide, integrated process for

managing uncertainties that couldnegatively or positively in-uence theachievement of objectives


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Enterprise Risanagement

he process of rating riss involvesthree steps7

18 Identify the riss using scenarioanalysis, brainstorming or performingris assessments

&8Ran the riss, using some scale ofimpact and lielihood

+8easure the riss using some agreed)upon standard


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raditional *inancialeasures

Return on investment !ROI" result of dividing net income before

ta:es by the total amount invested inthe company .typically measured bytotal assets/

Earnings per share !EPS"

dividing net earnings by the amount ofcommon stoc

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raditional *inancialeasures

Return on e#uity !ROE" involves dividing net income by total e # i l % f

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>on#nancial %erformanceeasures Used by Internet

4usiness ?enturesStickiness length of @eb site visit

Eyeballs number of people 2ho visit a @eb site

indshare

brand a2areness


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Ahareholder ?alue

Shareholder value the present value of the anticipated future

streams of cash -o2s from the business

plus the value of the company if li

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Ahareholder ?alue

arket value added !'A" measures the diBerence bet2een the

maret value of a corporation and thecapital contributed by shareholders andlenders

easures the stoc maret=s estimate

of the net present value of a #rm=s pastand e:pected capital investmentprojects

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4alanced Acore Card

Balanced scorecard combines #nancial measures that tell

the results of actions already taen 2ithoperational measures on customersatisfaction, internal processes and thecorporation=s innovation and

improvement activitiesthe drivers offuture #nancial performance


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4alanced Acore Card

In the balanced scorecard, managementdevelops goals or objectives in each of fourareas7

&inancial( Do2 do 2e appear toshareholders

)ustomer( Do2 do customers vie2 us

Internal business perspective( @hatmust 2e e:cel at

Innovation and learning( Can 2econtinue to improve and create value

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4alanced Acore Card

*ey performance measures measures that are essential for

achieving a desired strategic option


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Chairman)CEO *eedbac Instrument

Fuestionnaire focuses on four keyareas7

18Company performance,&8Leadership of the organi3ation+8eam)building and management

succession08Leadership of e:ternal

constituencies


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Atrategic !udit

Strategic audit provides a checlist of

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Responsibility Centers

Responsibility centers used to isolate a unit so it can be

evaluated separately from the rest ofthe corporation

has its o2n budget and is evaluated onits use of budgeted resources

headed by the manager responsible forthe center=s performance

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Responsibility Centers

Standar

d costcenters

Revenuecenters

E+pensecenters

Pro,tcenters

Investm

entcenters

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4enchmaring

Benchmarking the continual process of measuring

products, services and practices againstthe toughest competitors or thosecompanies recogni3ed as industryleaders

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4enchmaring

18Identify the area or process to be e:amined&8*ind behavioral and output measures+8Aelect an accessible set of competitors of best

practices08Calculate the diBerences among the company=s

performance measurements and those of thecompetitors and determine 2hy the diBerences

e:ist(8"evelop tactical programs for closingperformance gaps

58Implement the programs and compare the results

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Atrategic InformationAystems

Enterprise Resource Planning!ERP"

unites all of a company=s majorbusiness activities 2ithin a single familyof soft2are modules providing instantaccess throughout the organi3ation


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Atrategic InformationAystems

Radio fre#uency identi,cation!R&I"

an electronic tagging technology usedto improve supply)chain eGciency

ivisional and functional ISsupport used to support, reinforce or enlarge

business)level strategy throughout thedecision support system

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%roblems in easuring %erformance

Lac of

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Ahort)erm Orientation

Long)term evaluations may not be conductedbecause e:ecutives7

18"on=t reali3e their importance

&84elieve that short)term considerations aremore important than long)termconsiderations

+8!ren=t personally evaluated on a long)termbasis08"on=t have the time to mae a long)term

analysis


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Hoal "isplacement

.oal displacement confusion of means 2ith ends and occurs

2hen activities originally intended tohelp managers attain corporateobjectives become ends in themselvesor are adapted to meet ends other thanthose for 2hich they 2ere intended

behavior substitution andsuboptimi3ation


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Hoal "isplacement

Behavior substitution refers to the phenomenon of 2hen

people substitute activities that do notlead to goal accomplishment foractivities that do lead to goalaccomplishment because the 2rong

activities are being re2arded

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Hoal "isplacement

Suboptimi/ation refers to the phenomenon of a unit

optimi3ing its goal accomplishment tothe detriment of the organi3ation as a2hole

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Huidelines for %roperControl

18Controls should involve only the minimum amount ofinformation needed to give a reliable picture ofevents8

&8Controls should monitor only meaningful activitiesand results, regardless of measurement diGculty8

+8Controls should be timely so that corrective actioncan be taen before it is too late8

08Long)term and short)term goals should be used8

(8Controls should aim at pinpointing e:ceptions858Emphasi3e the re2ard of meeting or e:ceeding

standards rather than punishment for failing to meetstandards8

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!pproaches to Atrategic

Incentive anagement

@eighted)factor method

Long)term evaluationmethod

Atrategic funds method

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4usiness Atrength

Competitive %osition

*igure 11)&

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!pproaches to Atrategic

Incentive anagement

!n eBective 2ay to achieve the desiredstrategic results through a re2ard systemis to combine the three approaches7

18Aegregate strategic funds from short)termfunds

&8"evelop a 2eighted)factor chart for each

A4U+8easure performance based on pre)ta:pro#t, 2eighted factors and long)termevaluation of the A4U=s performance

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Wheelen 14e ch11

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