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 Prentice Hall, Inc. ©2012

Determine what to measure Establish standards of performance Measure actual performance Compare actual performance with the standard Take corrective action Prentice Hall, Inc. ©2012

Prentice Hall, Inc. ©2012

Prentice Hall, Inc. ©2012

Performance is the end result of activity 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 Number of students compared to number of lecturers (university) Prentice Hall, Inc. ©2012

Evaluation and Control Types of Controls – Behavior controls: Focus on activities that generate performance. (bureaucratic) It specifies how something is to be done through policies, rules, standards and procedures. Behavior controls are very appropriate when results are hard to measure and a clear cause-effect exists between activities (behaviors) and results. Prentice Hall, Inc. © 2012 Prentice Hall 2006

Examples of Behavior controls: Evaluation and Control Examples of Behavior controls: ISO 9000 Standards Series: Quality assurance. ISO 14000 Standards Series: for environment awareness. Companies monitoring employees phone calls. Monitoring employees attendance. Prentice Hall, Inc. © 2012 Prentice Hall 2006

Types of Controls – Output controls 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. © 2012 Prentice Hall 2006

Types of Controls – Input controls 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. © 2012 Prentice Hall 2006

Types of Control Exhibit 18.9 Copyright © 2005 Prentice Hall, Inc. All rights reserved.

Activity Based Costing (ABC) Activity based costing- allocates indirect and direct costs to individual product lines based on value-added activities going into that product Allows accountants to charge costs more accurately since it allocates overhead more precisely Prentice Hall, Inc. ©2012

Steps of ranking risks: Enterprise Risk Management a corporate-wide, integrated process for managing uncertainties that could negatively or positively influence the achievement of objectives. E.g., hire a chief risk officer in corp. Steps of ranking risks: 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 Prentice Hall, Inc. ©2012

Primary Measures of Corporate Performance Using financial Racio Return on Investment (ROI) Earnings per share (EPS) Return on equity (ROE) Operating cash flow Free cash flow Prentice Hall, Inc. ©2012

Popular Measures of Internet Companies Non-Financial Measures Stickiness: length of web site visit. Eyeballs: number of people who visit the site. Mindshare: brand awareness. Monthly unique viewers: registered users. Prentice Hall, Inc. ©2012

Prentice Hall, Inc. ©2012

Prentice Hall, Inc. ©2012

Shareholder Value- the present value of the anticipated future streams of cash flows from the business plus the value of the company if liquidated. The idea of EVA and MVA: bus. Should not invest in projects unless their profit above the cost of the capital. The New York consulting firm Stern Stewart & Company devised and popularized two shareholder value measures: economic value added (EVA) and market value added (MVA). Prentice Hall, Inc. ©2012

Economic Value Added (EVA)- measures the difference between the pre-strategy and post-strategy values for the business. EVA=After tax income - total annual cost of capital Prentice Hall, Inc. ©2012

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 Prentice Hall, Inc. ©2012

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 Prentice Hall, Inc. ©2012

Evaluating Top Management and the Board of Directors Very popular in USA, Europe and Asia to use objective method to evaluate the performance of their CEO. Chairman-CEO Feedback Instrument Management Audit: very useful to boards of directors in evaluating management’s handling of various corporate activities. Strategic Audit: strategic planning framework. Prentice Hall, Inc. ©2012

This very much linked to ABC Primary Measures of Divisional and Functional Performance This very much linked to ABC 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 Prentice Hall, Inc. ©2012

The benchmarking process usually involves the following steps: Benchmarking- the continual process of measuring products, services and practices against the toughest competitors or those companies recognized as industry leaders. The benchmarking process usually involves the following steps: Prentice Hall, Inc. ©2012

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 Prentice Hall, Inc. ©2012

International Measurement Issues In one study, 95% of the corporate officers interviewed, stated that they use the same evaluation techniques for foreign and domestic operations. Most widely used measurement techniques Return on investment Budget analysis Historical comparison International transfer pricing Prentice Hall, Inc. ©2012

Barriers to international trade International Measurement Issues Barriers to international trade Different standards for products and services Safety/environmental Energy efficiency Testing procedures counterfeit/ imitation: copies of well-known name-brand products and selling them globally as well as locally, e.g., copying Nike. Copying most used in developing countries. Management Control and Reward systems. Companies may use: Multi-domestic – loose control (more power) Multinational- tight control (less delegation). Prentice Hall, Inc. ©2012

Lack of quantifiable objectives or performance standards Inability to use information systems to provide timely and valid information Prentice Hall, Inc. ©2012

Short term orientation- managers only consider current tactical or operational issues and ignore long-term strategic issues. Why: Lack of time Do not recognize importance of long-term issues Are not evaluated on a long-term basis Prentice Hall, Inc. ©2012

Goal Displacement- confusion of the means with ends Goal Displacement- confusion of the means with ends. It include 2 types: behavior substitution and suboptimization. Prentice Hall, Inc. ©2012

Behavior substitution Behavior substitution refers to a phenomenon when people substitute activities that do not lead to goal accomplishment for activities that do lead to goal accomplishment because the wrong activities are being rewarded. Managers tend to focus their behavior on activities that are clearly measureable, e.g., ignore non-financial measures, focus on number of units sold and profit, Prentice Hall, Inc. ©2012

Suboptimization- when a unit optimizing its goal accomplishment is to the detriment of the organization as a whole. The emphasis in large corporations on developing separate responsibility centers can create some problems for the corporation as a whole. A division or functional unit views itself as a separate entity. Prentice Hall, Inc. ©2012

Long-term and short-term goals should be used Controls should involve only the minimum amount of information needed to give a reliable picture of events (80/20 Rule): Monitor those 20% of the factors that determine 80% of the results 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/identifying exceptions Emphasize the reward of meeting or exceeding standards rather than punishment for failing to meet standards Prentice Hall, Inc. ©2012

Approaches to Strategic Incentive Management 1)Weighted-factor method: Appropriate for measuring and rewarding the performance of top SBU managers and group-level executives when performance factors and their importance vary from one SBU to another. E.g., high-performing (star) SBUs is measured equally in terms of ROI, cash flow, market share, and progress on several future-oriented strategic projects Prentice Hall, Inc. ©2012

Prentice Hall, Inc. ©2012

2)Long-term evaluation method The long-term evaluation method : compensates managers for achieving objectives set over a multiyear period. An executive is promised some company stock or “performance units”. for example, might set a particular objective in terms of growth in earnings per share during a five-year period. The giving of awards would be contingent on the corporation’s meeting that objective within the designated time. Prentice Hall, Inc. ©2012

3)Strategic funds method: It encourages executives to look at developmental expenses as being different from expenses required for current operations. The accounting statement for a corporate unit enters strategic funds as a separate entry below the current ROI. It is, therefore, possible to distinguish between expense dollars consumed in the generation of current revenues and those invested in the future of a business. Prentice Hall, Inc. ©2012

Effective means to achieve results is through a reward system that combines all 3 approaches Segregate/separate 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 Prentice Hall, Inc. ©2012

Strategy Review The firm’s internal and external environments are dynamic. Therefore, the best conceived and implemented strategies become obsolete! Prentice Hall, Inc. © 2012

Strategy Evaluation—the 3 Basics 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 Prentice Hall, Inc. © 2012

Effective Strategy Evaluation Strategy Review Effective Strategy Evaluation Adequate and timely feedback The cornerstone of effective evaluation Prentice Hall, Inc. © 2012

Strategy Review Strategy Evaluation Must have both Short- & long-term focus Prentice Hall, Inc. © 2012

Strategy Review Four Criteria (Richard Rumelt): Consistency/ sameness الاتساق/التطابق Consonance=fit or harmony التكيف Feasibility يمكن التحقق Advantage Prentice Hall, Inc. © 2012

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. Prentice Hall, Inc. © 2012

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. Prentice Hall, Inc. © 2012

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, abilities, competencies, skills, and talents to carry out strategy. Prentice Hall, Inc. © 2012

Strategy Review Contemporary Strategy Evaluation Difficulties Increase in environment’s complexity Difficulty in predicting the future with accuracy Increasing number of variables Contemporary Strategy Evaluation Difficulties Prentice Hall, Inc. © 2012

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 Contemporary Strategy Evaluation Difficulties Prentice Hall, Inc. © 2012

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 Prentice Hall, Inc. © 2012

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? Prentice Hall, Inc. © 2012

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? Prentice Hall, Inc. © 2012

I. Review Bases of Strategy How far can our major competitors be pushed before retaliating? How could we more effectively cooperate with our competitors? Prentice Hall, Inc. © 2012

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? Prentice Hall, Inc. © 2012

I. Review Bases of Strategy Do we now have other internal weaknesses? Are our external opportunities still opportunities? Are there now external opportunities? Prentice Hall, Inc. © 2012

I. Review Bases of Strategy Are our external threats still threats? Are there now other external threats? Are we vulnerable to a hostile takeover? Prentice Hall, Inc. © 2012

What is the relationship between control and strategy What is the relationship between control and strategy? Mention and discuss 3 of measuring performance tools business may use? What are the measure problems when measuring performance? Design a controlling system to: a ministry – bank- university. Use the different types of systems, measure, and tools. What are some examples of behavior controls? Output controls? Input controls? Is the evaluation and control process appropriate for a corporation that emphasizes creativity? Are control and creativity compatible? Prentice Hall, Inc. ©2012