BUSINESS POLICY

1. Is Figure 10.1 a realistic model of the evaluation and control process? Ans: Figure 10.1 is certainly not a complete model of the control process. The model is adequate as a simple representation of the basic steps in evaluation and control.For example, it does not include the development of an information system so that performance can be measured in step 3.The model is a negative feedback system which does not include any positive feedback, such as giving praise and recognition when performance exceeds the standard. Recognizing and rewarding performance that exceeds what is expected is an important part of human motivation and should be included in any evaluation and control process.

2. What are some examples of behavior controls? Output controls? Input controls? Ans: Behavior controls focus on how something is to be done through policies, rules, standard operating procedure etc. Output controls focus on what is to be accomplished by focusing on the end result of the behaviors and performance targets etc.Input controls focus on Resources, such a knowledge, skills, abilities, values, and motives of employees. Examples of behavior controls are company procedures and rules regarding attendance and tardiness.Examples of output controls are sales quotas, cost reduction or profit objectives. Examples of input controls are years of education and experience.

3. Is EVA an improvement over ROI, ROE, or EPS? Ans: Economic value added (EVA) is being raising 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.It is simpler measures like ROI, ROE, and EPS.Like the traditional measures, shareholder value can be manipulated in the short run by following a profit strategy or by manipulating the buying and selling of stock. There is no one best measure or group of measures. The key is to use those measures which have the most value to those most affected by corporate performance.

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BUSINESS POLICY

4. How much faith can a manager place in a transfer price as a substitute for a market price in measuring a profit center's performance?

Ans: The use of a transfer price allows a corporation to convert a cost or expense center into a profit center.This sounds like a good way to avoid the kind of suboptimization often occurring in large corporations. To the extent that the transfer price reflects the true market price of the items in question, this approach can improve efficiency within a corporation. If, however, it is difficult to decide upon a "fair market price".The exact amount of the transfer price is open to manipulation by powerful, interested parties within the corporation.

5. Is the evaluation and control process appropriate for a corporation that emphasizes creativity? Are control and creativity compatible?

Ans: There is some feeling that a large number of controls do constrain creative impulses. It seems to be that a person's mind must be able to run free without constraint to generate new innovative concepts. Data from advertising agencies and R&D labs do suggest that corporations emphasizing creativity tend to reduce the number of controls used. 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 (output controls) rather than upon the activities themselves (behavior controls).To the extent that managers attempt to regulate the activities which go into creativity, they may destroy the very thing.

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