CHAPTER 11 Evaluation Control STRATEGIC MANAGEMENT BUSINESS POLICY

Evaluation and Control Prentice Hall, Inc. © 2008 11 -2

Evaluation and Control Information – –Performance data –Activity reports Prentice Hall, Inc. © 2008

Evaluation and Control Measuring performance – –The end result of activity Prentice Hall, Inc.

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 causeeffect exists between activities (behaviors) and results. Prentice Hall, Inc. © 2008 11 -5

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. Prentice Hall, Inc. © 2008 11 -6

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). Prentice Hall, Inc. © 2008 11 -7

Evaluation and Control Types of Controls – –Behavior controls • ISO 9000 Standards Series

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 Prentice Hall, Inc. © 2008 11 -9

Evaluation and Control Types of Controls – –Enterprise Risk Management (ERM) • Identify risks

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 Prentice Hall, Inc. © 2008 11 -11

Evaluation and Control Primary Measures of Performance – –Shareholder • Shareholder value • Economic

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. Prentice Hall, Inc. © 2008 11 -13

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. Prentice Hall, Inc. © 2008 11 -14

Market value added (MVA) • The difference between market value of corporation and the

Evaluation and Control Primary Measures of Performance – –Balanced Scorecard Approach • Financial •

Evaluation and Control Prentice Hall, Inc. © 2008 11 -17

Evaluation and Control Evaluating Top Management & Board – –Chairman-CEO Feedback Instrument –Management Audit

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. Prentice Hall, Inc. © 2008 11 -19

Evaluation and Control Using Benchmarking – –Continual process of measuring products, service, and practices against the toughest competitors or those companies recognized as industry leaders Prentice Hall, Inc. © 2008 11 -20

Evaluation and Control International Measurement Issues – –International transfer pricing –Repatriation of profit –Piracy:

Strategy Review The firm’s internal and external environments are dynamic. Therefore, the best conceived and implemented strategies become obsolete! 22

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 23

Strategy Review Effective Strategy Evaluation • Adequate and timely feedback ØThe cornerstone of effective evaluation 24

Strategy Review Strategy Evaluation • Must have both Ø Short- & long-term focus 25

Strategy Review Four Criteria (Richard Rumelt): • • Consistency ﺍﻻﺗﺴﺎﻕ Consonance=fit or harmony ﺍﻟﺘﻜﻴﻒ Feasibility ﺍﻟﺘﺤﻘﻖ ﻳﻤﻜﻦ Advantage 26

Consistency=uniformity A strategy should not present inconsistent goals and policies • If managerial problems continue despite changes in personnel and are issue based, then strategies may be inconsistent. • If success for one department means failure for another department, then strategies may be inconsistent. • If policy problems/issues continue to be brought to the top for resolution, then strategies may be inconsistent. 27

Consonance= adapt, fit Strategists need to examine sets of trends as well as individual trends in evaluating strategies. • Strategy must represent an adaptive response to the external environment and critical changes occurring within it. • Most trends are the result of interactions among other trends. • Difficult in matching key internal and external factors in formulation of strategy. 28

Feasibility Strategy must neither overtax available resources nor create unsolvable subproblems. • Can the strategy be attempted within the physical, human and financial resources of the enterprise? • Limitation on strategic choice imposed by individual and organizational capabilities must be considered. • Important to examine whether in the past the organization has demonstrated the capabilities, competencies, skills, and talents to carry out strategy. 29

Strategy Review Contemporary Strategy Evaluation Difficulties • Increase in environment’s complexity • Difficulty in predicting the future with accuracy • Increasing number of variables 30

Strategy Review Contemporary Strategy Evaluation Difficulties • 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 31

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 32

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? • 33

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? 34

I. Review Bases of Strategy • How far can our major competitors be pushed before retaliating? • How could we more effectively cooperate with our competitors? 35

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? 36

I. Review Bases of Strategy • Do we now have other internal weaknesses? • Are our external opportunities still opportunities? • Are there now external opportunities? 37

I. Review Bases of Strategy • Are our external threats still threats? • Are there now other external threats? • Are we vulnerable to a hostile takeover? 38