Evaluation and Control in Strategic Management

1. CHAPTER 11 Evaluation & Control STRATEGIC MANAGEMENT & BUSINESS POLICY11TH EDITION THOMAS L. WHEELEN J. DAVID HUNGER

2. 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.

3. Evaluation and Control

4. 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

5. 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

6. Cont, the deviation, the following questions must be answered: • Is the deviation only a chance fluctuation? • Are the process being carried out incorrectly? • 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. • Who is the best person to take corrective action?

7. Evaluation and Control • Evaluation and Control Information – • Performance data • Activity reports

8. 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

9. 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)

10. 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 cause-effect exists between activities (behaviors) and results.

11. 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.

12. 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).

13. 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.

14. 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

15. 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.

16. 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.

17. 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.

18. 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

19. 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.

20. 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.

21. 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)

22. 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.

23. 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.

24. Market value added (MVA) • The difference between market value of corporation and the capital contributed by shareholders and lenders.

25. Evaluation and Control • Primary Measures of Performance – • Balanced Scorecard Approach • Financial • Customer • Internal business perspective • Innovation and learning

26. Evaluation and Control

27. Evaluation and Control • Evaluating Top Management & Board – • Chairman-CEO Feedback Instrument • Management Audit • Strategic Audit

28. 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.

29. Evaluation and Control • Using Benchmarking – • Continual process of measuring products, service, and practices against the toughest competitors or those companies recognized as industry leaders

30. Strategy Review The firm’s internal and external environments are dynamic. Therefore, the best conceived and implemented strategies become obsolete!

31. 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

32. Strategy Review Effective Strategy Evaluation • Adequate and timely feedback • The cornerstone of effective evaluation

33. Strategy Review Strategy Evaluation • Must have both • Short- & long-term focus

34. Strategy Review Four Criteria (Richard Rumelt): • Consistency الاتساق • Consonance=fit or harmony التكيف • Feasibility يمكن التحقق • Advantage

35. 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.

36. 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.

37. 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.

38. Increase in environment’s complexity • Difficulty in predicting the future with accuracy • Increasing number of variables Strategy Review Contemporary Strategy Evaluation Difficulties

39. 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 Strategy Review Contemporary Strategy Evaluation Difficulties

40. 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

41. 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?

42. 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?

43. I. Review Bases of Strategy • How far can our major competitors be pushed before retaliating? • How could we more effectively cooperate with our competitors?

44. 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?

45. I. Review Bases of Strategy • Do we now have other internal weaknesses? • Are our external opportunities still opportunities? • Are there now external opportunities?

46. I. Review Bases of Strategy • Are our external threats still threats? • Are there now other external threats? • Are we vulnerable to a hostile takeover?