CHAPTER 11 Evaluation
& Control
STRATEGIC MANAGEMENT & BUSINESS POLICY
10TH EDITION
THOMAS L. WHEELEN
Prentice Hall, Inc. © 2006
J. DAVID HUNGER
11-1
Evaluation and Control
Evaluation and Control Process
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Evaluation and Control
Corrective Action Questions
– Is the deviation a chance fluctuation?
– Are the processes being carried out correctly?
– Are the processes appropriate to achievement of the
desired result?
– Who is the best person to take action?
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Strategic Audit Outline
I.
Current Situation
Current Performance
Mission-Objectives-Strategies-Policies
II.
Corporate Governance
BOD and Management
III.
External Environment (O-T)
Societal-Task
IV.
Internal Environment (S-W)
Structure-Culture-Resources by Functional Area
V.
Analysis of Strategic Factors
SWOT-Review of Mission/Objectives
VI.
Strategic Alternatives/Recommendations
Corporate-Business-Functional
VII. Implementation
Programs-Cost-Priorities
VIII. Evaluation and Controls
Feedback-Standards-Measures
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Evaluation and Control
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Evaluation and Control
Evaluating an Implementation Strategy
Problem areas/Corrections
•Formulation
•Assumptions
•Scenarios
•Situation or Trend
•Execution
•Communications
•Management Commitment
•Lack of Feedback
•Functional Strategies
•Consistent
•Resource Allocation
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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
•How something is done through policies,
procedures, rules, SOP’s
–Output controls
•What is to be accomplished; focus on end
result through performance targets
–Input controls
•Resources – skills, abilities, values, motives
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Evaluation and Control
Types of Controls –
–Behavior controls
•ISO 9000 Standards Series - Quality
•ISO 14000 Standards Series - Environment
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11-9
Evaluation and Control
Types of Controls –
–Output Control
•Activity Based Costing (ABC)
•Allocation of indirect and fixed costs to individual
products or product lines based on value-added
activities
•Focus on overhead/fixed cost rather than labor
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Evaluation and Control
Types of Controls –
–Input Control
•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)
=Net Income before tax/Total Assets
•Earnings per share (EPS)
=Net Income/Number of shares outstanding
•Return on equity (ROE)
= Net Income/Total Equity
•Operating cash flow
Takes into account cash generated by the company
before financing and taxes.
More accurate than EBITDA as it takes into account
changes in working capital.
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11-12
Evaluation and Control
Primary Measures of Performance –
–Stakeholder Measure
Stakeholder
Near Term
Long Term
Customer
Sales
Growth in Sales
Supplier
Cost
Growth of Cost
Financial Comm.
EPS
Growth of ROE
Employees
Productivity
Turnover
Congress
Access to Key
Members
# New regulations
Consumer
Advocates
# Meetings
Changes in policy
Environmentalists
# Meetings
Changes in policy
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Evaluation and Control
Primary Measures of Performance –
–Shareholder Measures
•Shareholder value – present value of
anticipated future steams of cash flows from the
business plus the liquidated value of the
company
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Evaluation and Control
Primary Measures of Performance –
–Shareholder
•Economic value added (EVA)
=after-tax operating income – (investments in assets *
weighted cost of capital)
•A positive EVA = Generating Economic Value
•EVA improves by
•Earning more profit w/o using more capital
•Using less capital
•Investing in high return projects
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Evaluation and Control
Primary Measures of Performance –
–Shareholder
•Market value added (MVA)
=(Market Capitalization + Debt) – Invested Capital
•MVA greater than zero means that the strategy
is creating value.
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Evaluation and Control
Primary Measures of Performance –
(Key Performance Factors or Critical Success Factors)
–Balanced Scorecard Approach
•Financial
•Customer
•Internal business perspective
•Innovation and learning
Unique to a company based on their strategy
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Evaluation and Control
Evaluating Top Management & Board –
–Chairman-CEO Feedback Instrument
–Company Performance
–Leadership of the organization
–Team building and management succession
–Leadership of external constituencies
–Management Audit – Activity or Function
–Strategic Audit – SWOT review
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Evaluation and Control
Divisional & Functional Performance –
–Responsibility Centers
•Standard cost centers - manufacturing
•Revenue centers - sales
•Expense centers – Indirect cost/budget based
•Profit centers – (Revenue – Expenses) based
on Transfer Pricing
•Investment centers – ROI measures
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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
–American Productivity & Quality Center
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Evaluation and Control
International Measurement Issues –
–Currency Exchange Rates
–Inflation
–Tax Laws
–International transfer pricing
–Repatriation of profit
–Piracy
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Evaluation and Control
Strategic Information Systems –
–Enterprise Resource Planning (ERP)
–Divisional and functional IS support
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Evaluation and Control
Problems in Measuring Performance –
“If you can't measure it you can’t control it.” (M Whitman)
–Short-term orientation
–Goal displacement
•Behavior substitution
What you reward is what you get.
•Sub-optimization
Unit goals override organization goals.
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Evaluation and Control
Guidelines for Proper Control –
–Minimum amount of information necessary
–Meaningful activities and results
–Timely
–Long and short-term
–Pinpointing exceptions
–Reward – Not Punishment
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Evaluation and Control
Strategic Incentive Management –
–Weighted-factor method
Factors are weighted based on the SBU environment
–Long-term evaluation method
Stock share price based on some index
–Strategic funds method
Remove R&D or Strategic investments from the financial
performance
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Evaluation and Control
Strategic funds method
Account
Sales
Amount
$12,300,000
Cost of Sales
-6,900,000
Gross Margin
$5,400,000
G&A
-3,700,000
ROS (Performance Measurement)
Strategic Funds
Pretax Profit
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1,700,000
-1,000,000
700,000
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CHAPTER 11 Evaluation
& Control
STRATEGIC MANAGEMENT & BUSINESS POLICY
10TH EDITION
THOMAS L. WHEELEN
Prentice Hall, Inc. © 2006
J. DAVID HUNGER
11-27