STRATEGIC MANAGEMENT & BUSINESS POLICY

12
TH
EDITION
THOMAS L. WHEELEN J. DAVID HUNGER

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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


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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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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

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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





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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

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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


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Primary Measures of Corporate Performance

Return on Investment (ROI)
Earnings per share (EPS)
Return on equity (ROE)
Operating cash flow
Free cash flow

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Popular Measures of Internet Companies

Non-Financial Measures

Stickiness
Eyeballs
Mindshare
Monthly unique viewers

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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

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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 markets estimate of the net
present value of a firms past and expected capital
investment projects

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Balanced score card combines financial measures
that tell results of actions already taken with
operational measures on customer satisfaction,
internal processes and the corporations innovation
and improvement activities
Financial
Customer
Internal business perspective
Innovation and learning

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Evaluating Top Management and the Board of
Directors

Chairman-CEO Feedback Instrument
Management Audit
Strategic Audit


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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


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Benchmarking- the continual process of measuring
products, services and practices against the
toughest competitors or those companies
recognized as industry leaders


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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 companys
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

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International Measurement Issues

Most widely used measurement techniques

Return on investment
Budget analysis
Historical comparison
International transfer pricing


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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

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Enterprise Resource Planning (ERP)- unites all of
a companys 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

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Lack of quantifiable objectives or performance
standards

Inability to use information systems to provide
timely and valid information


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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


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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

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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

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Approaches to Strategic Incentive Management

Weighted-factor method
Long-term evaluation method
Strategic funds method

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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 SBUs performance

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

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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.

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