Evaluation and

Control
Evaluation and Control
in Strategic
Management

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

2
Evaluation and Control in Strategic
Management

• Determine what to measure

• Establish standards of
performance
• Measure actual performance
• Compare actual performance
with the standard
• Take corrective action

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Evaluation and Control in
Strategic Management

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Measuring Performance

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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Measuring Performance

• 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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Measuring Performance

• 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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Measuring Performance

• 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
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Measuring Performance

• Primary Measures of Corporate Performance

• Return on Investment (ROI) - It is simply the result of dividing net
income before taxes by the total amount invested in the company
• Earnings per share (EPS) - which involves dividing net earnings by
the amount of common stock
• Return on equity (ROE) - which involves dividing net income by
total equity
• Operating cash flow - the amount of money generated by a
company before the cost of financing and taxes
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Measuring Performance

• 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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Measuring Performance

• 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

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Measuring Performance

• 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 - How do we appear to shareholders?
• Customer - How do customers view us?
• Internal business perspective - What must we excel at?
• Innovation and learning - Can we continue to improve and create
value?
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Measuring Performance

• Balanced score card - Each goal in each area (for example, avoiding bankruptcy in the
financial area) is then assigned one or more measures, as well as a target and an
initiative.
• These measures can be thought of as key performance measures—measures that are
essential for achieving a desired strategic option.
• For example, a company could include cash flow, quarterly sales growth, and ROE as
measures for success in the financial area. It could include market share (competitive
position goal), customer satisfaction, and percentage of new sales coming from new
products (customer acceptance goal) as measures under the customer perspective. It
could include cycle time and unit cost (manufacturing excellence goal) as measures under
the internal business perspective. It could include time to develop next-generation
products (technology leadership objective) under the innovation and learning perspective.

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Measuring Performance

• Evaluating Top Management and the Board of

Directors
• Chairman-CEO Feedback Instrument – evaluating their CEO
by using a 17-item questionnaire
• The questionnaire focuses on four key areas: (1) company
performance, (2) leadership of the organization, (3) team-
building and management succession, and (4) leadership of
external constituencies

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Measuring Performance

• Evaluating Top Management and the Board of

Directors
• Management Audit - are very useful to boards of directors in
evaluating management’s handling of various corporate
activities.
• Management audits have been developed to evaluate
activities such as corporate social responsibility, functional
areas like the marketing department, and divisions such as
the international division.
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Measuring Performance

• Evaluating Top Management and the Board of Directors

• Strategic Audit - The strategic audit provides a checklist of
questions, by area or issue, that enables a systematic analysis
of various corporate functions and activities to be made.
• It is a type of management audit and is extremely useful as a
diagnostic tool to pinpoint corporatewide problem areas and to
highlight organizational strengths and weaknesses

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Measuring Performance

• Responsibility centers- used to isolate a unit so it can be

evaluated separately from the rest of the corporation
• Standard cost centers: Standard cost centers are primarily used in
manufacturing facilities.
• Standard (or expected) costs are computed for each operation on
the basis of historical data. In evaluating the center’s performance,
its total standard costs are multiplied by the units produced.
• The result is the expected cost of production, which is then
compared to the actual cost of production.

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Measuring Performance

• Responsibility centers
• Revenue centers: With revenue centers, production, usually in terms of
unit or dollar sales, is measured without consideration of resource
costs (for example, salaries).
• The center is thus judged in terms of effectiveness rather than
efficiency.
• The effectiveness of a sales region, for example, is determined by
comparing its actual sales to its projected or previous year’s sales.
• Profits are not considered because sales departments have very
limited influence over the cost of the products they sell.
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Measuring Performance

• Responsibility centers
• Expense centers: Resources are measured in dollars, without
consideration for service or product costs.
• Thus budgets will have been prepared for engineered expenses (costs
that can be calculated) and for discretionary expenses (costs that can
be only estimated).
• Typical expense centers are administrative, service, and research
departments.
• They cost a company money, but they only indirectly contribute to
revenues.
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Measuring Performance

• Responsibility centers
• Profit centers: Performance is measured in terms of the difference
between revenues (which measure production) and expenditures (which
measure resources).
• A profit center is typically established whenever an organizational unit
has control over both its resources and its products or services.
• By having such centers, a company can be organized into divisions of
separate product lines.
• The manager of each division is given autonomy to the extent that he or
she is able to keep profits at a satisfactory (or better) level.
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Measuring Performance

• Responsibility centers
• Investment centers: An investment center’s performance is measured
in terms of the difference between its resources and its services or
products
• For example, two divisions in a corporation made identical profits, but
one division owns a $3 million plant, whereas the other owns a $1
million plant.
• Both make the same profits, but one is obviously more efficient; the
smaller plant provides the shareholders with a better return on their
investment
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Measuring Performance

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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Measuring Performance

• Steps in Benchmarking
• Identify 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
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Problems in Measuring Performance

• 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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Problems in Measuring Performance

• 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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Guidelines for Proper Control

• 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
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