CHAPTER 11 Evaluation & Control STRATEGIC MANAGEMENT & BUSINESS POLICY 11TH EDITION THOMAS L. WHEELEN J. DAVID HUNGER Prentice Hall, Inc. © 2008 Prentice Hall 2006

Evaluation and Control Prentice Hall, Inc. © 2008 Prentice Hall 2006

Evaluation and Control Information – Performance data Activity reports Prentice Hall, Inc. © 2008 Prentice Hall 2006

Measuring performance – Evaluation and Control Measuring performance – The end result of activity Prentice Hall, Inc. © 2008 Prentice Hall 2006

Types of Controls – Behavior controls 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 cause-effect exists between activities (behaviors) and results. Prentice Hall, Inc. © 2008 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. © 2008 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. © 2008 Prentice Hall 2006

Types of Controls – Behavior controls ISO 9000 Standards Series Evaluation and Control Types of Controls – Behavior controls ISO 9000 Standards Series ISO 14000 Standards Series Prentice Hall, Inc. © 2008 Prentice Hall 2006

Types of Controls – Activity Based Costing (ABC) 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 Prentice Hall 2006

Types of Controls – Enterprise Risk Management (ERM) Identify risks Evaluation and Control Types of Controls – Enterprise Risk Management (ERM) Identify risks Rank risks Measure risks Prentice Hall, Inc. © 2008 Prentice Hall 2006

Primary Measures of Performance – 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 Prentice Hall 2006

Primary Measures of Performance – Evaluation and Control Primary Measures of Performance – Shareholder Shareholder value Economic value added (EVA) Market value added (MVA) Prentice Hall, Inc. © 2008 Prentice Hall 2006

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

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

Market value added (MVA) The difference between market value of corporation and the capital contributed by shareholders and lenders. Prentice Hall, Inc. © 2008

Primary Measures of Performance – Evaluation and Control Primary Measures of Performance – Balanced Scorecard Approach Financial Customer Internal business perspective Innovation and learning Prentice Hall, Inc. © 2008 Prentice Hall 2006

Evaluation and Control Prentice Hall, Inc. © 2008 Prentice Hall 2006

Evaluating Top Management & Board – Evaluation and Control Evaluating Top Management & Board – Chairman-CEO Feedback Instrument Management Audit Strategic Audit Prentice Hall, Inc. © 2008 Prentice Hall 2006

Divisional & Functional Performance – 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 Prentice Hall 2006

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 Prentice Hall 2006

International Measurement Issues – Evaluation and Control International Measurement Issues – International transfer pricing Repatriation of profit Piracy: copying top products and sell abroad Prentice Hall, Inc. © 2008 Prentice Hall 2006

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

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

Effective Strategy Evaluation Strategy Review Effective Strategy Evaluation Adequate and timely feedback The cornerstone of effective evaluation

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

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

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.

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.

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.

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

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

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

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?

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?

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

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?

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

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