Strategic Management and Business Policy 15 e Global
Strategic Management and Business Policy 15 e, Global Edition Chapter 12 Evaluation and Control Copyright © 2018 Pearson Education, Ltd. All Rights Reserved. .
Learning Objectives 12 -1 Explain how various types of measures and controls are utilized to properly assess performance including activity-based costing, ERM, ROI, and EVA 12 -2 Develop a balanced scorecard to examine key performance measures of a company 12 -3 Apply the benchmarking process to a function or an activity Copyright © 2018 Pearson Education, Ltd. All Rights Reserved. . 12 -2
Figure 12 -1: Evaluation and Control Process Copyright © 2018 Pearson Education, Ltd. All Rights Reserved. . 12 -3
Measuring Performance • Performance – end result of activity • One of the obstacles to effective control is the difficulty in developing appropriate measures of important activities and outputs. Copyright © 2018 Pearson Education, Ltd. All Rights Reserved. . 12 -4
Appropriate Measures • Steering controls – measure variables that influence future profitability • Cost per available seat mile (airlines) • Inventory turnover ratio (retail) • Customer satisfaction Copyright © 2018 Pearson Education, Ltd. All Rights Reserved. . 12 -5
Types of Controls (1 of 2) • Output controls – specify what is to be accomplished by focusing on the end result through the use of objectives • Behavior controls – specify how something is done through policies, rules, standard operating procedures and orders from supervisors • Input controls – emphasize resources Copyright © 2018 Pearson Education, Ltd. All Rights Reserved. . 12 -6
Traditional Financial Measures (1 of 2) • Return on investment (ROI) – result of dividing net income before taxes by the total amount invested in the company (typically measured by total assets) • Earnings per share (EPS) – dividing net earnings by the amount of common stock Copyright © 2018 Pearson Education, Ltd. All Rights Reserved. . 12 -7
Traditional Financial Measures (2 of 2) • Return on equity (ROE) – involves dividing net income by total equity • Operating cash flow – the amount of money generated by a company before the cost of financing and taxes • Free cash flow – the amount of money a new owner can take out of the firm without harming the business Copyright © 2018 Pearson Education, Ltd. All Rights Reserved. . 12 -8
Non–financial Performance Measures Used by Internet Business Ventures • Stickiness – length of website visit • Eyeballs – number of people who visit a website • Mindshare – brand awareness Copyright © 2018 Pearson Education, Ltd. All Rights Reserved. . 12 -9
Shareholder Value (1 of 3) • Shareholder value – the present value of the anticipated future streams of cash flows from the business plus the value of the company if liquidated Copyright © 2018 Pearson Education, Ltd. All Rights Reserved. . 12 -10
Shareholder Value (2 of 3) • Economic value-added (EVA) – measures the difference between the prestrategy and post-strategy values for the business. – after-tax operating income minus the total annual cost of capital Copyright © 2018 Pearson Education, Ltd. All Rights Reserved. . 12 -11
Shareholder Value (3 of 3) • Market value-added (MVA) – Measures difference between market value of a corporation and capital contributed by shareholders and lenders • Measures the stock market’s estimate of the net present value (NPV) of a firm’s past and expected capital investment projects. Copyright © 2018 Pearson Education, Ltd. All Rights Reserved. . 12 -12
Balanced Scorecard (1 of 3) • Balanced scorecard – combines financial measures that tell results of actions already taken with operational measures on customer satisfaction, internal processes, and corporation’s innovation and improvement activities—the drivers of future financial performance Copyright © 2018 Pearson Education, Ltd. All Rights Reserved. . 12 -13
Balanced Scorecard (2 of 3) In the balanced scorecard, management develops goals or objectives in each of four areas: 1. Financial: How do we appear to shareholders? 2. Customer: How do customers view us? 3. Internal business perspective: What must we excel at? 4. Innovation and learning: Can we continue to improve and create value? Copyright © 2018 Pearson Education, Ltd. All Rights Reserved. . 12 -14
BSC Perspectives Copyright © 2018 Pearson Education, Ltd. All Rights Reserved. . https: //www. balancedscorecard. org/BSC-Basics/About-the-Balanced-Scorecard
Strategy Mapping Copyright © 2018 Pearson Education, Ltd. All Rights Reserved. . https: //www. balancedscorecard. org/BSC-Basics/About-the-Balanced-Scorecard
Balanced Scorecard (3 of 3) • Key performance measures – measures that are essential for achieving a desired strategic option Copyright © 2018 Pearson Education, Ltd. All Rights Reserved. . 12 -17
Measures (KPI) Copyright © 2018 Pearson Education, Ltd. All Rights Reserved. . https: //www. balancedscorecard. org/BSC-Basics/About-the-Balanced-Scorecard
Management Audits • Management audits – developed to evaluate activities such as corporate social responsibility, functional areas like the marketing department, and divisions such as the international division – useful to boards of directors in evaluating management’s handling of various corporate activities Copyright © 2018 Pearson Education, Ltd. All Rights Reserved. . 12 -19
Strategic Audits • Strategic audits – provides checklist of questions, by area or issue, enabling systematic analysis of various corporate functions and activities to be made – useful as diagnostic tool to pinpoint corporatewide problem areas and to highlight organizational strengths and weaknesses Copyright © 2018 Pearson Education, Ltd. All Rights Reserved. . 12 -20
Using Benchmarking To Evaluate Performance • Benchmarking – the continual process of measuring products, services and practices against the toughest competitors or those companies recognized as industry leaders Copyright © 2018 Pearson Education, Ltd. All Rights Reserved. . 12 -21
Benchmarking 1. Identify area or process to be examined 2. Find behavioral and output measures 3. Select accessible set of competitors of best practices 4. Calculate differences among company’s performance measurements and competitors; determine why differences exist 5. Develop tactical programs for closing performance gaps 6. Implement the programs and compare the results Copyright © 2018 Pearson Education, Ltd. All Rights Reserved. . 12 -22
Problems in Measuring Performance • Lack of quantifiable objectives or performance standards • Inability to use information systems to provide timely and valid information Copyright © 2018 Pearson Education, Ltd. All Rights Reserved. . 12 -23
Short-Term Orientation Long-term evaluations may not be conducted because executives: • Don’t realize their importance. • Believe that short-term considerations are more important than long-term considerations. • Aren’t personally evaluated on a long-term basis. • Don’t have the time to make a long-term analysis. Copyright © 2018 Pearson Education, Ltd. All Rights Reserved. . 12 -24
Goal Displacement (1 of 3) • Goal displacement – confusion of means with ends – occurs when activities originally intended to help managers attain corporate objectives become ends in themselves—or are adapted to meet ends other than those for which they were intended – behavior substitution and suboptimization Copyright © 2018 Pearson Education, Ltd. All Rights Reserved. . 12 -25
Goal Displacement (2 of 3) • Behavior substitution – phenomenon of pursuing substitute activities that do not lead to goal accomplishment instead of activities that do lead to goal accomplishment because the wrong activities are being rewarded Copyright © 2018 Pearson Education, Ltd. All Rights Reserved. . 12 -26
Goal Displacement (3 of 3) • Suboptimization – refers to phenomenon of a unit optimizing its goal accomplishment to the detriment of the organization as a whole Copyright © 2018 Pearson Education, Ltd. All Rights Reserved. . 12 -27
Guidelines for Proper Control (1 of 2) 1. Controls should involve only the minimum amount of information needed to give a reliable picture of events. 2. Controls should monitor only meaningful activities and results, regardless of measurement difficulty. 3. Controls should be timely so that corrective action can be taken before it is too late. Copyright © 2018 Pearson Education, Ltd. All Rights Reserved. . 12 -28
Guidelines for Proper Control (2 of 2) 4. Long-term and short-term goals should be used. 5. Controls should aim at pinpointing exceptions. 6. Emphasize the reward of meeting or exceeding standards rather than punishment for failing to meet standards. Copyright © 2018 Pearson Education, Ltd. All Rights Reserved. . 12 -29
- Slides: 29