Wheelen Smbp13 Ppt 11

STRATEGIC MANAGEMENT & BUSINESS POLICY13TH EDITION

THOMAS L. WHEELEN J. DAVID HUNGER

Prentice Hall, Inc. ©2012 11-2

Evaluation and Control ensures that a company is achieving what it set out to accomplish by comparing performance with desired results and taking corrective action as needed


1. Determine what to measure2. Establish standards of performance3. Measure actual performance4. Compare actual performance with the

standard5. Take corrective action


Appropriate MeasuresPerformance is the end result of activity

Steering controls measure variables that influence future profitability

• Cost per passenger mile (airlines)• Inventory turnover ratio (retail)• Customer satisfaction


Types of Controls

• Output controls- specify what is to be accomplished by focusing on the end result

• Behavior controls specify how something is done through policies, rules, standard operating procedures and orders from supervisors

• Input controls emphasize resources


Activity Based Costing

• Activity based costing- allocates indirect and direct costs to individual product lines based on value-added activities going into that product

– Allows accountants to charge costs more accurately since it allocates overhead more precisely


Enterprise Risk Management a corporate-wide, integrated process for managing uncertainties that could negatively or positively influence the achievement of objectives

1. Identify the risks using scenario analysis, brainstorming, or performing risk assessments

2. Rank the risks, using some scale of impact and likelihood

3. Measure the risks using some agreed-upon standard


Primary Measures of Corporate Performance

• Return on Investment (ROI)• Earnings per share (EPS)• Return on equity (ROE)• Operating cash flow

– Free cash flow


Popular Measures of Internet Companies

Non-Financial Measures

• Stickiness• Eyeballs• Mindshare• Monthly unique viewers


Shareholder Value- the present value of the anticipated future streams of cash flows from the business plus the value of the company if liquidated

Economic Value Added (EVA)- measures the difference between the pre-strategy and post-strategy values for the business

EVA=After tax income-total annual cost of capital


Market Value Added (MVA)- measures the difference between the market value of a corporation and the capital contributed by shareholders and lenders

• Measures the stock market’s estimate of the net present value of a firm’s past and expected capital investment projects


Balanced score card– combines financial measures that tell results of actions already taken with operational measures on customer satisfaction, internal processes and the corporation’s innovation and improvement activities

• Financial• Customer• Internal business perspective• Innovation and learning


Evaluating Top Management and the Board of Directors

• Chairman-CEO Feedback Instrument• Management Audit• Strategic Audit


Primary Measures of Divisional and Functional Performance

Responsibility centers- used to isolate a unit so it can be evaluated separately from the rest of the corporation

• Standard cost centers• Revenue centers• Expense centers• Profit centers• Investment centers


Benchmarking- the continual process of measuring products, services and practices against the toughest competitors or those companies recognized as industry leaders


1. Indentify the area or process to be examined2. Find behavioral and output measures3. Select an accessible set of competitors of best

practices4. Calculate the differences among the

company’s performance measurements and those of the competitors and determine why the differences exist

5. Develop tactical programs for closing performance gaps

6. Implement the programs and compare the results


International Measurement Issues

Most widely used measurement techniques

• Return on investment• Budget analysis• Historical comparison• International transfer pricing


International Measurement Issues

Barriers to international trade

• Different standards for products and services– Safety/environmental– Energy efficiency– Testing procedures

• Counterfeiting/piracy• Control and Reward systems

– Multidomestic – loose– Multinational- tight control


Enterprise Resource Planning (ERP)- unites all of a company’s major business activities within a single family of software modules providing instant access throughout the organization

Radio Frequency Identification (RFID)- an electronic tagging technology used to improve supply chain efficiency

Divisional and Functional IS Support- used to support, reinforce, or enlarge business level strategy throughout the decision support system


• Lack of quantifiable objectives or performance standards

• Inability to use information systems to provide timely and valid information


Short term orientation- managers only consider current tactical or operational issues and ignore long-term strategic issues

• Lack of time• Do not recognize importance of long-term

issues• Are not evaluated on a long-term basis


Goal Displacement- confusion of the means with ends

• Behavior substitution- when people substitute activities that do not lead to goal accomplishment for activities that do lead to goal accomplishment because the wrong activities are rewarded

• Suboptimization- when a unit optimizing its goal accomplishment is to the detriment of the organization as a whole


1. Controls should involve only the minimum amount of information needed to give a reliable picture of events (80/20 Rule)

2. Controls should monitor only meaningful activities and results, regardless of measurement difficulty

3. Controls should be timely so that corrective action can be taken before it is too late

4. Long-term and short-term goals should be used

5. Controls should aim at pinpointing exceptions6. Emphasize the reward of meeting or

exceeding standards rather than punishment for failing to meet standards


Approaches to Strategic Incentive Management

• Weighted-factor method• Long-term evaluation method• Strategic funds method


Effective means to achieve results is through a reward system that combines all 3 approaches

• Segregate strategic funds from short-term funds• Develop a weighted factor chart for each SBU• Measure performance based on:

– Pre-tax profit (Strategic funds approach)– Weighted factors– Long-term evaluation of the SBU’s

performance


1. Is Figure 11-1 a realistic model of the evaluation and control process?

2. What are some examples of behavior controls? Outputcontrols? Input controls?

3. Is EVA an improvement over ROI, ROE, or EPS?4. How much faith can a manager place in transfer price

as a substitute for market price in measuring a profitcenter’s performance?

5. Is the evaluation and control process appropriate for a corporation that emphasizes creativity? Are control andcreativity compatible?


PowerPoint created by:

Ronald Heimler

• Dowling College- MBA• Georgetown University- BS Business

Administration• Adjunct Professor- LIM College, NY• Adjunct Professor- Long Island

University, NY• Lecturer- California State Polytechnic

University, Pomona, CA• President- Walter Heimler, Inc.

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Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall

Wheelen Smbp13 Ppt 11

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