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STRATEGIC MANAGEMENT & BUSINESS POLICY10TH EDITION

THOMAS L. WHEELEN J. DAVID HUNGER

CHAPTER 10 Evaluation & Control

“If you can’t measure it, you can’t manage it”Garvin 1993

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Evaluation and Control

Evaluation and Control –

- Process that ensures that the company is achieving what it set out to accomplish- Compare performance with desire results and provide feedback for management to take corrective action

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5 Step Model of Evaluation and Control

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Evaluation and Control

Measuring performance –Performance = The end result of activity

–Traditional Financial Measures (after the fact)–Return on investment (ROI)–Earnings per share (EPS)–Return on equity (ROE)–Operating cash flow

–Steering Controls–Goes beyond traditional measures–Measures that predict likely (future) profitability–Examples: Social Responsibility, Employee Development, etc.

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Evaluation and Control

Types of Controls – Depending on the focus–Output controls (Focus on actual performance)

•What is to be accomplished; focus on end result through performance targets

–Behavior controls (Focus on activities that generate performance)

•How something is done through policies, procedures, rules, SOP’s

–Input controls (Focus on resources used to generate performance)

•Focus on Resources used to generate performance – skills, abilities, values, motives

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Evaluation and Control

Other Types of Controls –

–Activity Based Costing (ABC)•Accounting method to allocate indirect and fixed costs to individual products or product lines•It is based on the value-added activities (VC Analysis) going into the product, and it provides a more accurate charge of costs

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Evaluation and Control

Primary Measures of Corporate Performance

–Stakeholder Measures•Set one or more simple measures to assess each stakeholder concerns

–Shareholder Measures•Shareholder value

–Present value of the anticipated future stream of cash flows plus the value of the company if liquidated.

•Economic value added (EVA)–After tax operating income – Cost of Invested Capital (investment in assets x weighted average cost of capital)

•Market value added (MVA)–Difference between the market value of a corporation and capital contributed by shareholders and lenders

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Evaluation and Control

–Balanced Scorecard Approach: •Combine financial measures (of past performance) with operational measures (that can predict future performance) on customer satisfaction, internal processes, and corporation innovation activities.

•Financial Perspective (How do we appear to shareholders?)•Customer Perspective (How do customers view us?)•Internal Business Perspective (What must we excel at?)•Innovation and Learning Perspective (Can we continue to improve and create value?)

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Evaluation and Control

Measures of Business and Functional Performance –

–Responsibility Centers (5 types)Can generate coordination problems and prevent from achieving synergies

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

–Benchmarking •Continual process of measuring products, service, and practices against competitors or industry leaders

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Evaluation and Control

Strategic Information Systems – Communicate performance measures to those formulating and implementing the strategic plan

–At corporate level firms use Enterprise Resource Planning (ERP) Software that unite all activities for instant access by key personnel–At Divisional and functional level the Information system is used to support the business level strategies through some type of decision support system

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Evaluation and Control

Problems in Measuring Performance –

–Short-term orientation–Goal displacement

•Behavior substitution – One may substitute behavior for behavior with best reward•Sub optimization – Optimization of one division in detriment of the whole corporation

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Evaluation and Control

Guidelines for Proper Control –

1. Control should involve only the minimum amount of information necessary (80-20 rule)

2. Monitor only meaningful activities and results3. Control should be timely (Correct before it is

too late)4. Balance Long and short-term orientation5. Pinpointing exceptions (Take action only if falls

out the tolerance range)6. Use to Reward meeting/exceeding standards

(avoid punishment)