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STRATEGIC MANAGEMENT & BUSINESS POLICY11TH EDITION

THOMAS L. WHEELEN J. DAVID HUNGER

CHAPTER 11 Evaluation & Control

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Evaluation and Control

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Evaluation and Control

Evaluation and Control Information –

–Performance data –Activity reports

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Evaluation and Control

Measuring performance –

–The end result of activity

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Evaluation and Control

Types of Controls ––Behavior controls

•Some examples of behavior controls are company procedures, quotas of sales calls to potential customers, and rules regarding attendance and tardiness. •Behavior controls are very appropriate when results are hard to measure and a clear cause-effect exists between activities (behaviors) and results.

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Evaluation and Control

Types of Controls –

–Output controls•What is to be accomplished; focus on end result through performance targets.•Some examples of output controls are sales quotas, cost reduction or profit objectives, and surveys of customer satisfaction.

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Evaluation and Control

Types of Controls –

–Input controls•Resources – skills, abilities, values, motives.•Input controls are the least useful and are most appropriate when output is difficult to measure and there is no clear cause-effect relationship between behavior and performance (such as in college teaching).

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Evaluation and Control

Types of Controls –

–Behavior controls•ISO 9000 Standards Series•ISO 14000 Standards Series

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Evaluation and Control

Types of Controls –

–Activity Based Costing (ABC)•Allocation of indirect and fixed costs to individual products or product lines•Based on value-added activities•More accurate charge of costs

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Evaluation and Control

Types of Controls –

–Enterprise Risk Management (ERM)•Identify risks•Rank risks•Measure risks

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Evaluation and Control

Primary Measures of Performance –

–Traditional Financial Measures•Return on investment (ROI)•Earnings per share (EPS)•Return on equity (ROE)•Operating cash flow•Free cash flow

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Evaluation and Control

Primary Measures of Performance –

–Shareholder•Shareholder value•Economic value added (EVA)•Market value added (MVA)

Is EVA really an improvement over ROI, ROE, or EPS?

•  Economic value added (EVA) is being increasingly recommended as an improvement over traditional measures because of EVA's strong relationship to a company's stock price. It uses stock price to measure the difference between the pre-strategy and post-strategy value of a corporation. However, EVA is often difficult to calculate. It is for this reason that more simpler measures like ROI, ROE, and EPS continue to have widespread usage.

• Another limitation of EVA is this its concern with only one aspect of the task environment - the stockholder. The conclusion seems clear. There is no one best measure or group of measures.

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Is the evaluation and control process appropriate for a corporation that emphasizes

creativity?

•  Control is not ignored. Data is just not collected on intermediate activities such as time in the office or manner of dress.

• The emphasis tends to be on the end-result of activities rather than upon the activities themselves. To be successful, they need both talent and discipline.

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Market value added (MVA)

• The difference between market value of corporation and the capital contributed by shareholders and lenders.

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Evaluation and Control

Primary Measures of Performance –

–Balanced Scorecard Approach•Financial•Customer•Internal business perspective•Innovation and learning

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Evaluation and Control

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Evaluation and Control

Evaluating Top Management & Board –

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

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Evaluation and Control

Divisional & Functional Performance –

–Responsibility Centers•Standard cost centers. Based on historical data•Revenue centers. •Expense centers profit centers•Investment centers. Difference between revenues and cost.

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Evaluation and Control

Using Benchmarking –

–Continual process of measuring products, service, and practices against the toughest competitors or those companies recognized as industry leaders

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Evaluation and Control

International Measurement Issues –

–International transfer pricing–Repatriation of profit–Piracy: copying top products and sell abroad

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Strategy Review

The firm’s internal and external environments are dynamic. Therefore, the best conceived and implemented

strategies become obsolete!

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Strategy Review

Strategy Evaluation—the 3 Basics

• Examining the underlying basis of the firm’s strategy

• Comparing actual to expected results• Taking corrective action to address

performance gaps

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Strategy Review

Effective Strategy Evaluation

• Adequate and timely feedbackThe cornerstone of effective

evaluation

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Strategy Review

Strategy Evaluation

• Must have bothShort- & long-term focus

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Strategy Review

Four Criteria (Richard Rumelt):

• Consistency االتساق• Consonance=fit or harmony التكيف• Feasibility التحقق يمكن• Advantage

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Consistency=uniformity

• If policy problems/issues continue to be brought to the top for resolution, then strategies may be inconsistent.

• If success for one department means failure for another department, then strategies may be inconsistent.

• If managerial problems continue despite changes in personnel and are issue based, then strategies may be inconsistent.

A strategy should not present inconsistent goals and policies

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Consonance= adapt, fit

• Difficult in matching key internal and external factors in formulation of strategy.

• Most trends are the result of interactions among other trends.

• Strategy must represent an adaptive response to the external environment and critical changes occurring within it.

Strategists need to examine sets of trends as well as individual trends in evaluating

strategies.

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Feasibility

• Important to examine whether in the past the organization has demonstrated the capabilities, abilities, competencies, skills, and talents to carry out strategy.

• Limitation on strategic choice imposed by individual and organizational capabilities must be considered.

• Can the strategy be attempted within the physical, human and financial resources of the enterprise?

Strategy must neither overtax available resources nor create unsolvable subproblems.

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Strategy Review

• Increase in environment’s complexity

• Difficulty in predicting the future with accuracy

• Increasing number of variables

Contemporary Strategy

EvaluationDifficulties

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Strategy Review

• Rate of obsolescence of even the best plans

• Increase in domestic and world events

• Decreasing time span for which planning can be done with any certainty

Contemporary Strategy

EvaluationDifficulties

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Strategy Review

Process of Evaluating Strategies:

• Should initiate managerial questioning of expectations and assumptions

• Should trigger a review of objectives and values

• Should stimulate creativity in generating alternatives and criteria of evaluation

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I. Review Bases of Strategy

• Develop a Revised Evaluation Framework Matrix:

• How have competitors reacted to our strategies?

• How have competitors’ strategies changed?

• Have major competitors’ strengths and weaknesses changed?

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I. Review Bases of Strategy

• Why are competitors making certain strategic changes?

• Why are some competitors’ strategies more successful than others?

• How satisfied are our competitors with their present market positions and profitability?

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I. Review Bases of Strategy

• How far can our major competitors be pushed before retaliating?

• How could we more effectively cooperate with our competitors?

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I. Review Bases of Strategy

Key Questions in Evaluating Strategy:

• Are our internal strengths still strengths?

• Have we added other internal strengths?

• Are our internal weaknesses still weaknesses?

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I. Review Bases of Strategy

• Do we now have other internal weaknesses?

• Are our external opportunities still opportunities?

• Are there now external opportunities?

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I. Review Bases of Strategy

• Are our external threats still threats?

• Are there now other external threats?

• Are we vulnerable to a hostile takeover?