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STRATEGIC MANAGEMENT & BUSINESS POLICY13THEDITION

THOMAS L. WHEELEN J. DAVID HUNGER


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Prentice Hall, Inc. 2012 11-2

Evaluation and Controlensures that a company isachieving what it set out to accomplish by

comparing performance with desired results andtaking corrective action as needed


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1. Determine what to measure

2. Establish standards of performance

3. Measure actual performance4. Compare actual performance with the

standard

5. Take corrective action


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Appropriate MeasuresPerformanceis the end result of activity

Steering controlsmeasure variables that influencefuture profitability

Cost per passenger mile (airlines)

Inventory turnover ratio (retail)

Customer satisfaction


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Types of Controls

Output controls- specify what is to be accomplishedby focusing on the end result

Behavior controls specify how something is donethrough policies, rules, standard operatingprocedures and orders from supervisors

Input controls emphasize resources


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Activity Based Costing

Activity based costing- allocates indirect and directcosts 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


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Enterprise Risk Managementa corporate-wide,integrated process for managing uncertainties thatcould negatively or positively influence theachievement of objectives

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

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

likelihood3. Measure the risks using some agreed-upon

standard


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Primary Measures of Corporate Performance

Return on Investment (ROI)

Earnings per share (EPS)

Return on equity (ROE)

Operating cash flow

Free cash flow


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Popular Measures of Internet Companies

Non-Financial Measures

Stickiness

Eyeballs

Mindshare Monthly unique viewers


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

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

EVA=After tax income-total annual cost of capital


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Market Value Added (MVA)-measures thedifference between the market value of acorporation and the capital contributed by

shareholders and lenders

Measures the stock markets estimate of the netpresent value of a firms past and expected capital

investment projects


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Balanced score cardcombines financial measuresthat tell results of actions already taken withoperational measures on customer satisfaction,

internal processes and the corporations innovationand improvement activities

Financial

Customer

Internal business perspective

Innovation and learning


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Evaluating Top Management and the Board ofDirectors

Chairman-CEO Feedback Instrument

Management Audit

Strategic Audit


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Primary Measures of Divisional and FunctionalPerformance

Responsibility centers-used to isolate a unit so it

can be evaluated separately from the rest of thecorporation

Standard cost centers

Revenue centers

Expense centers Profit centers

Investment centers


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Benchmarking- the continual process of measuringproducts, services and practices against thetoughest competitors or those companies

recognized as industry leaders


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1. Indentify the area or process to be examined

2. Find behavioral and output measures

3. Select an accessible set of competitors of best

practices4. Calculate the differences among the companysperformance measurements and those of thecompetitors and determine why the differencesexist

5. Develop tactical programs for closing performancegaps

6. Implement the programs and compare the results


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International Measurement Issues

Most widely used measurement techniques

Return on investment

Budget analysis

Historical comparison

International transfer pricing


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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 Multidomesticloose Multinational- tight control


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Enterprise Resource Planning (ERP)- unites all ofa companys major business activities within asingle family of software modules providing instantaccess throughout the organization

Radio Frequency Identification (RFID)-anelectronic tagging technology used to improvesupply chain efficiency

Divisional and Functional IS Support-used tosupport, reinforce, or enlarge business levelstrategy throughout the decision support system


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Lack of quantifiable objectives or performancestandards

Inability to use information systems to providetimely and valid information


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Short term orientation-managers only considercurrent 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


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Goal Displacement- confusion of the means with ends

Behavior substitution- when people substitute

activities that do not lead to goalaccomplishment for activities that do lead togoal accomplishment because the wrongactivities are rewarded

Suboptimization- when a unit optimizing its goalaccomplishment is to the detriment of theorganization as a whole


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

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

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

4. Long-term and short-term goals should be used5. Controls should aim at pinpointing exceptions

6. Emphasize the reward of meeting or exceedingstandards rather than punishment for failing tomeet standards


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Approaches to Strategic Incentive Management

Weighted-factor method

Long-term evaluation method

Strategic funds method


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

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 SBUs performance


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1. Is Figure 11-1 a realistic model of the evaluation andcontrol 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 priceas a substitute for market price in measuring a profitcenters performance?

5. Is the evaluation and control process appropriate for a

corporation that emphasizes creativity? Are control andcreativity compatible?


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PowerPoint created by:

Ronald Heimler

Dowling College- MBA

Georgetown University- BS Business

Administration Adjunct Professor- LIM College, NY

Adjunct Professor- Long IslandUniversity, NY

Lecturer- California State PolytechnicUniversity, Pomona, CA

President- Walter Heimler, Inc.


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All rights reserved. No part of this publication may be reproduced,stored in a retrieval system, or transmitted, in any form or by any

means, electronic, mechanical, photocopying, recording, or otherwise,without the prior written permission of the publisher. Printed in the

United States of America.

Copyright 2012 Pearson Education, Inc.publishing as Prentice Hall

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