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

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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 Prentice Hall, Inc. ©2012

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 Prentice Hall, Inc. ©2012

Activity Based Costing 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

Enterprise Risk Management a corporate-wide, integrated process for managing uncertainties that could negatively or positively influence the achievement of objectives 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 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 Eyeballs Mindshare Monthly unique viewers Prentice Hall, Inc. ©2012

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EVA=After tax income-total annual cost of capital 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 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 Chairman-CEO Feedback Instrument Management Audit Strategic Audit Prentice Hall, Inc. ©2012

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 Prentice Hall, Inc. ©2012

Benchmarking- the continual process of measuring products, services and practices against the toughest competitors or those companies recognized as industry leaders 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 Most widely used measurement techniques Return on investment Budget analysis Historical comparison International transfer pricing Prentice Hall, Inc. ©2012

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 Prentice Hall, Inc. ©2012

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 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 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 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 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) 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 Prentice Hall, Inc. ©2012

Approaches to Strategic Incentive Management Weighted-factor method Long-term evaluation method Strategic funds method Prentice Hall, Inc. ©2012

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 Prentice Hall, Inc. ©2012

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Is Figure 11-1 a realistic model of the evaluation and control process? What are some examples of behavior controls? Output controls? Input controls? Is EVA an improvement over ROI, ROE, or EPS? How much faith can a manager place in transfer price as a substitute for market price in measuring a profit center’s performance? Is the evaluation and control process appropriate for a corporation that emphasizes creativity? Are control and creativity compatible? Prentice Hall, Inc. ©2012

PowerPoint 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. Prentice Hall, Inc. ©2012

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