STRATEGIC MANAGEMENT & BUSINESS POLICY

13TH EDITION
THOMAS L. WHEELEN J. DAVID HUNGER

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

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1. 2. 3. 4.

Determine what to measure Establish standards of performance Measure actual performance Compare actual performance with the standard 5. Take corrective action

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Appropriate Measures Performance 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

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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

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Activity Based Costing

Activity based costing- allocates indirect and direct costs to individual product lines based on valueadded activities going into that product
Allows accountants to charge costs more accurately since it allocates overhead more precisely

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Enterprise Risk Management a corporate-wide,

integrated process for managing uncertainties that could negatively or positively influence the achievement of objectives

1.
2.

3.

Identify the risks using scenario analysis, brainstorming, or performing risk assessments Rank the risks, using some scale of impact and likelihood 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 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 poststrategy values for the business

EVA=After tax income-total annual cost of capital

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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 markets estimate of the net present value of a firms past and expected capital investment projects

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Balanced score card combines financial measures

that tell results of actions already taken with operational measures on customer satisfaction, internal processes and the corporations innovation and improvement activities Financial Customer Internal business perspective Innovation and learning

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Evaluating Top Management and the Board of Directors

Chairman-CEO Feedback Instrument Management Audit Strategic Audit

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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

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Benchmarking- the continual process of measuring

products, services and practices against the toughest competitors or those companies recognized as industry leaders

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1. 2. 3. 4.

5. 6.

Indentify the area or process to be examined Find behavioral and output measures Select an accessible set of competitors of best practices Calculate the differences among the companys performance measurements and those of the competitors and determine why the differences exist Develop tactical programs for closing performance gaps 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

Multidomestic loose Multinational- tight control

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Enterprise Resource Planning (ERP)- unites all of

a companys 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
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Lack of quantifiable objectives or performance standards Inability to use information systems to provide timely and valid information

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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

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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

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1. 2. 3. 4. 5. 6.

Controls should involve only the minimum amount of information needed to give a reliable picture of events (80/20 Rule) Controls should monitor only meaningful activities and results, regardless of measurement difficulty Controls should be timely so that corrective action can be taken before it is too late Long-term and short-term goals should be used Controls should aim at pinpointing exceptions Emphasize the reward of meeting or exceeding standards rather than punishment for failing to meet 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 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 SBUs performance

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1. Is Figure 11-1 a realistic model of the evaluation and control process? 2. What are some examples of behavior controls? Output controls? 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 profit centers performance? 5. Is the evaluation and control process appropriate for a corporation that emphasizes creativity? Are control and creativity 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 Island University, NY Lecturer- California State Polytechnic University, Pomona, CA President- Walter Heimler, Inc.
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