Download Is the evaluation and control process appropriate for a corporation

CHAPTER 11 Evaluation
& Control
STRATEGIC MANAGEMENT & BUSINESS POLICY
11TH EDITION
THOMAS L. WHEELEN
Prentice Hall, Inc. © 2008
J. DAVID HUNGER
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The evaluation and control
process
• Ensure that a company is achieving what
it set out to accomplish. It compares
performance with desired result and
provides the feed back necessary for
management to evaluate results and take
corrective action, as needed.
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Evaluation and Control
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A five step feedback model
• Determine what to measure : Top managers and
operational managers need to specify what
implementation process and results must be capable of
being measured in a reasonably objective and consistent
manner. The focus should be on the most significant
element in a process the ones that account for highest
proportion of expense or the greatest number of
problems. Measurement must be found for all important
areas, regardless of difficulty.
• Establish standards of performance: Standards used to
performance are detailed expressions of strategic
objectives they are measure of acceptable performance
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Cont,
results. Each standard usually includes a tolerance range
that defines acceptable deviation. Standards can be set
not only for final output but also for intermediate stages
of production output.
• Measure performance : measurement must be made at
predetermined times.
• Compare actual performance with the standard: if actual
performance results are within the desired tolerance
range. The measurement process stop here.
• Take corrective action: if actual results fall outside the
desired tolerance range action must be taken to correct
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Cont,
the deviation, the following questions must be answered:
1. Is the deviation only a chance fluctuation?
2. Are the process being carried out incorrectly?
3. Are the process appropriate to the achievement of the
desired standard? Action must be taken will not only
correct the deviation but also prevent it is happening
again.
4. Who is the best person to take corrective action?
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Evaluation and Control
Evaluation and Control Information –
–Performance data
–Activity reports
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Evaluation and Control
Measuring performance
• The end result of activity. Which measures to select
assess performance depends on the organizational unit
to be appraised and the objective to be achieved. The
objectives that were established earlier in the strategy
formulation part of strategic management process
(dealing with profitability, market share, and cost
reduction, among others) should certainly be used to
measure corporate performance once the strategies
have been implemented
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Types of control
• Control can be establish to focus on actual
performance results (out put), on the
activities that generate the performance
(behavior), or on resources that are used
in performance (input)
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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 causeeffect exists between activities (behaviors) and
results.
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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.
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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).
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Evaluation and Control
Types of Controls –
–Behavior controls
•ISO 9000 Standards Series is a way of
objectively documenting a company’s high level
of quality operation.
•ISO 14000 Standards Series is a way of to
document the company’s impact on the
environment.
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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
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Types of Controls
Enterprise Risk Management (ERM)
• (ERM) is a corporate wide, integrated process for
managing the uncertainties that could negatively or
positively influence the achievement of a corporation’s
objectives. In the past, was done in a fragmented
manner functions or business units. Individuals would
manage process risk, safety risk, and insurance,
financial and other assorted risks. As a result of this
fragmented approach, companies would take huge risks
in some areas of the business while over managing
substantially smaller risks in other areas.
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Enterprise Risk Management
(ERM)
• ERM is being adopted because of the increasing amount
of environmental uncertainty that can affect an entire
corporation. As a result, the position Chief Risk Officer is
one of the fastest growing executive position in US.
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Evaluation and Control
Types of Controls –
–Enterprise Risk Management (ERM)
•Identify risks: using scenario analysis or
brainstorming or performance risk self
assessments.
•Rank risks: using some scale of impact and
likelihood.
•Measure risks: using some agreed upon
standard.
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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
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Traditional Financial Measures
• Return on investment (ROI)
It is simply the result of dividing net income before taxes
by the total amount invested in the company (typically
measured by total assets).
• Earning per chair(EPC)
which involves dividing net earnings by the amount of
common stock, also has several deficiencies as an
evaluation of past and future performance.
• Return on equity(ROE)
Which involves dividing net income by total equity.
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Traditional Financial Measures
• Operating cash flow
• Which involves the amount of money generated by a
company before the cost of financing and taxes, is a
broad measure of a company’s funds. This is the
company’s net income plus depreciation plus depletion,
amortization, interest expense and income tax expense.
• Free cash flow:
• The amount of money a new owner can take out of the
firm without harming the business. This is net income
plus deprecation plus depletion, and amortization less
capital expenditure and dividends.
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Evaluation and Control
Primary Measures of Performance –
–Shareholder
•Shareholder value: can be defined as the
present value of anticipated future value stream
of cash flows from the business plus the value
of the company if liquidated.
•Economic value added (EVA)= after-tax
operating income – (investment in assets x
weighted average cost of capital)
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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.
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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.
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Market value added (MVA)
• The difference between market value of
corporation and the capital contributed by
shareholders and lenders.
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Evaluation and Control
Primary Measures of Performance –
–Balanced Scorecard Approach
•Financial
•Customer
•Internal business perspective
•Innovation and learning
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Evaluation and Control
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Evaluation and Control
Evaluating Top Management & Board –
–Chairman-CEO Feedback Instrument
–Management Audit
–Strategic Audit
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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.
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Evaluation and Control
Using Benchmarking –
–Continual process of measuring products,
service, and practices against the toughest
competitors or those companies recognized
as industry leaders
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Strategy Review
The firm’s internal and external
environments are dynamic. Therefore,
the best conceived and implemented
strategies become obsolete!
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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
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Strategy Review
Effective Strategy Evaluation
•
Adequate and timely feedback
The cornerstone of effective
evaluation
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Strategy Review
Strategy Evaluation
•
Must have both
 Short-
& long-term focus
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Strategy Review
Four Criteria (Richard Rumelt):
•
•
•
•
Consistency ‫االتساق‬
Consonance=fit or harmony ‫التكيف‬
Feasibility ‫يمكن التحقق‬
Advantage
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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.
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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.
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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.
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Strategy Review
Contemporary
Strategy
Evaluation
Difficulties
•
Increase in environment’s
complexity
•
Difficulty in predicting the
future with accuracy
•
Increasing number of
variables
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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
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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
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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?
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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?
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I.
Review Bases of Strategy
•
How far can our major competitors be
pushed before retaliating?
•
How could we more effectively cooperate
with our competitors?
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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?
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I.
Review Bases of Strategy
•
Do we now have other internal
weaknesses?
•
Are our external opportunities still
opportunities?
•
Are there now external opportunities?
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I.
Review Bases of Strategy
•
Are our external threats still threats?
•
Are there now other external threats?
•
Are we vulnerable to a hostile takeover?
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