STRATEGIC MANAGEMENT BUSINESS POLICY 12 TH EDITION THOMAS
STRATEGIC MANAGEMENT & BUSINESS POLICY 12 TH EDITION THOMAS L. WHEELEN Prentice Hall, Inc. © 2009 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 2 Prentice Hall, Inc. © 2009
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 3 Prentice Hall, Inc. © 2009
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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 6 Prentice Hall, Inc. © 2009
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 7 Prentice Hall, Inc. © 2009
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 8 Prentice Hall, Inc. © 2009
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 9 Prentice Hall, Inc. © 2009
Primary Measures of Corporate Performance • • Return on Investment (ROI) Earnings per share (EPS) Return on equity (ROE) Operating cash flow – Free cash flow 10 Prentice Hall, Inc. © 2009
Popular Measures of Internet Companies Non-Financial Measures • • Stickiness Eyeballs Mindshare Monthly unique viewers 11 Prentice Hall, Inc. © 2009
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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 14 Prentice Hall, Inc. © 2009
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 market’s estimate of the net present value of a firm’s past and expected capital investment projects 15 Prentice Hall, Inc. © 2009
Balanced score card– combines financial measures • • that tell results of actions already taken with operational measures on customer satisfaction, internal processes and the corporation’s innovation and improvement activities Financial Customer Internal business perspective Innovation and learning 16 Prentice Hall, Inc. © 2009
Evaluating Top Management and the Board of Directors • • • Chairman-CEO Feedback Instrument Management Audit Strategic Audit 17 Prentice Hall, Inc. © 2009
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 18 Prentice Hall, Inc. © 2009
Benchmarking- the continual process of measuring products, services and practices against the toughest competitors or those companies recognized as industry leaders 19 Prentice Hall, Inc. © 2009
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 company’s 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 20 Prentice Hall, Inc. © 2009
International Measurement Issues Most widely used measurement techniques • • Return on investment Budget analysis Historical comparison International transfer pricing 21 Prentice Hall, Inc. © 2009
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 22 Prentice Hall, Inc. © 2009
Enterprise Resource Planning (ERP)- unites all of a company’s 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 23 Prentice Hall, Inc. © 2009
• Lack of quantifiable objectives or performance standards • Inability to use information systems to provide timely and valid information 24 Prentice Hall, Inc. © 2009
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 25 Prentice Hall, Inc. © 2009
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 26 Prentice Hall, Inc. © 2009
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 27 Prentice Hall, Inc. © 2009
Approaches to Strategic Incentive Management • • • Weighted-factor method Long-term evaluation method Strategic funds method 28 Prentice Hall, Inc. © 2009
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 SBU’s performance 29 Prentice Hall, Inc. © 2009
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1. Is Figure 11 -1 a realistic model of the evaluation and 2. 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 center’s performance? 5. Is the evaluation and control process appropriate for a corporation that emphasizes creativity? Are control and creativity compatible? 31
Power. Point 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. 32 Prentice Hall, Inc. © 2009
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