1. STRATEGIC MANAGEMENT & BUSINESS POLICY 12 TH EDITION THOMAS L. WHEELEN J. DAVID HUNGER

2. Prentice Hall, Inc. ©2009 11-2 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

3. Prentice Hall, Inc. ©2009 11-3 1.Determine what to measure 2.Establish standards of performance 3.Measure actual performance 4.Compare actual performance with the standard 5.Take corrective action

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6. Prentice Hall, Inc. ©2009 11-6 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

7. Prentice Hall, Inc. ©2009 11-7 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

8. Prentice Hall, Inc. ©2009 11-8 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

9. Prentice Hall, Inc. ©2009 11-9 Enterprise Risk Management a corporate-wide, integrated process for managing uncertainties that could negatively or positively influence the achievement of objectives 1.Identify the risks using scenario analysis, brainstorming, or performing risk assessments 2.Rank the risks, using some scale of impact and likelihood 3.Measure the risks using some agreed-upon standard

10. Prentice Hall, Inc. ©2009 11-10 Primary Measures of Corporate Performance Return on Investment (ROI) Earnings per share (EPS) Return on equity (ROE) Operating cash flow –Free cash flow

11. Prentice Hall, Inc. ©2009 11-11 Popular Measures of Internet Companies Non-Financial Measures Stickiness Eyeballs Mindshare Monthly unique viewers

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14. Prentice Hall, Inc. ©2009 11-14 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

15. Prentice Hall, Inc. ©2009 11-15 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

16. Prentice Hall, Inc. ©2009 11-16 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

17. Prentice Hall, Inc. ©2009 11-17 Evaluating Top Management and the Board of Directors Chairman-CEO Feedback Instrument Management Audit Strategic Audit

18. Prentice Hall, Inc. ©2009 11-18 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

19. Prentice Hall, Inc. ©2009 11-19 Benchmarking- the continual process of measuring products, services and practices against the toughest competitors or those companies recognized as industry leaders

20. Prentice Hall, Inc. ©2009 11-20 1.Indentify the area or process to be examined 2.Find behavioral and output measures 3.Select an accessible set of competitors of best practices 4.Calculate the differences among the company’s performance measurements and those of the competitors and determine why the differences exist 5.Develop tactical programs for closing performance gaps 6.Implement the programs and compare the results

21. Prentice Hall, Inc. ©2009 11-21 International Measurement Issues Most widely used measurement techniques Return on investment Budget analysis Historical comparison International transfer pricing

22. Prentice Hall, Inc. ©2009 11-22 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

23. Prentice Hall, Inc. ©2009 11-23 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

24. Prentice Hall, Inc. ©2009 11-24 Lack of quantifiable objectives or performance standards Inability to use information systems to provide timely and valid information

25. Prentice Hall, Inc. ©2009 11-25 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

26. Prentice Hall, Inc. ©2009 11-26 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

27. Prentice Hall, Inc. ©2009 11-27 1.Controls should involve only the minimum amount of information needed to give a reliable picture of events (80/20 Rule) 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 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

28. Prentice Hall, Inc. ©2009 11-28 Approaches to Strategic Incentive Management Weighted-factor method Long-term evaluation method Strategic funds method

29. Prentice Hall, Inc. ©2009 11-29 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

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