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Strategy Evaluation and T
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Control R
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Learning Objectives.

01 03 05
Use the balanced scorecard Understand the impact of
Understand the basic control approach to develop key problems with measuring
process performance measures performance

02 04 06
Choose among traditional measures,
such as ROI, and shareholder value Apply the benchmarking Develop appropriate control
measures, such as economic value process to a function or an systems to support specific
added, to properly assess performance
activity strategies

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What is evaluation and control process?

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Evaluating an Implemented Strategy

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Corrective Action Questions

– Is the deviation a chance fluctuation?

– Are the processes being carried out correctly?

– Are the processes appropriate to achievement of the desired result?

– Who is the best person to take action?

 Strategic Audit
The strategic audit is a system to identify the extent of
implementing a company's strategies, its purposes, and
how to reach its goals.

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Evaluating an Implementation Strategy
Problem Areas/Corrections

●FORMULATION ●EXECUTION
○Assumptions oCommunications
○Scenarios oManagement Commitment
○Situation or Trend oLack of Feedback

• FUNCTIONAL STRATEGIES
o Consistent
o Resource Allocation

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 Measuring Performance

-The end result of activity.

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Primary Measures of Performance
Traditional Financial Measures
• Return on investment (ROI)
= Net Income before tax/Total Assets

• Earnings per share (EPS)

= Net Income/Number of shares outstanding

• Return on equity (ROE)

= Net Income/Total Equity

• Operating cash flow

● Takes into account cash generated by the company before financing and taxes.
● More accurate than EBITDA as it takes into account changes in working capital.

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 Primary Measures of Performance
Stakeholder Measure
Stakeholder Near Term Long Term
Customer Sales Growth in Sales
Supplier Cost Growth of Cost
Financial Comm. EPS Growth of ROE
Employees Productivity Turnover
Congress Access to Key # New regulations
Members
Consumer # Meetings Changes in policy
Advocates
Environmentalists # Meetings Changes in policy

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Primary Measures of Performance

Stakeholder Measure

•Shareholder value – present value

of anticipated future steams of
cash flows from the business plus
the liquidated value of the
company

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Primary Measures of Performance
Shareholder
•Economic value added (EVA)
=after-tax operating income – (investments in assets * weighted
cost of capital)
•A positive EVA = Generating Economic Value
•EVA improves by
•Earning more profit w/o using more capital
•Using less capital
•Investing in high return projects

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Primary Measures of Performance
Shareholder
•Market value added (MVA)
=(Market Capitalization + Debt) – Invested Capital

•MVA greater than zero means that the strategy

is creating value.

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Primary Measures of Performance
(Key Performance Factors or Critical Success Factors)

Balanced Scorecard Approach

○ Financial
○ Customer
○ Internal business perspective
○ Innovation and learning

Unique to a company based on their strategy

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Types of Controls
Behavior Controls
How something is done through policies, procedures, rules, SOP’s

Output Controls
What is to be accomplished; focus on end result through performance targets
.
Input Controls
Resources – skills, abilities, values, motives

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 Types of Controls

Input
Behavior Controls Output
•Activity Controls
Based Costing Controls
•ISO 9000 Standards Series •Enterprise Risk
(ABC)
- Quality •Allocation of indirect and Management (ERM)
•ISO 14000 Standards fixed costs to individual •Identify risks
Series - Environment products or product lines based
on value-added activities
•Rank risks
•Focus on overhead/fixed cost •Measure risks
rather than labor

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Evaluating Top Management & Board
–Chairman-CEO Feedback Instrument
-Company Performance
–Leadership of the organization
–Team building and management succession
–Leadership of external constituencies

–Management Audit – Activity or Function

–Strategic Audit – SWOT review

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Divisional & Functional Performance

Responsibility Centers
•Standard cost centers - Manufacturing
•Revenue centers - Sales
•Expense centers – Indirect cost/budget based
•Profit centers – (Revenue – Expenses) based
on Transfer Pricing
•Investment centers – ROI measures

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Using Benchmarking to Evaluate
Performance

According to Xerox Corporation, benchmarking is “the continual

process of measuring products, services, and practices against the
toughest competitors or those companies recognized as industry
leaders.”

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 International Measurement Issues

The three most widely used techniques for international performance

evaluation
are return on investment or ROI, budget analysis, and historical
comparisons. In one study, 95% of the corporate officers interviewed
stated that they use the same evaluation techniques for foreign and
domestic operations.

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 International Measurement Issues
BUDGET HISTORICAL
ROI
ANALYSIS COMPARISON
in a nutshell, involves closely involves evaluation and comparison
is a ratio between net
reviewing the details of a of a business’ previous
income and investment. It performances in order to assess
financial budget. The purpose
is used to evaluate the of budget analysis is to which techniques provides a good
efficiency of an investment understand and improve the result before, so that it can be re-use
or to compare the as a basis for forecasting future
way money is spent and
efficiencies of several performances or for the purpose of
managed. re-using the previous
different investments. measurement/s.

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 International Measurement Issues
CURRENCY
INFLATION TAX
EXCHANGE
RATES LAWS
is the price of a country’s refers to a general is an area of legal study in which
money in relation to public or sanctioned authorities,
progressive increase in
such as federal, state and
another country’s money. prices of goods and municipal governments use a
services in an economy. body of rules and
procedures to assess and collect
taxes in a legal context.

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 International Measurement Issues
INTERNATIONAL REPATRIATION
PIRACY
TRANSFER PRICING OF PROFIT
is an accounting practice is the ability of a firm to send refers to the unauthorized
foreign-earned profits duplication of copyrighted
that represents the
or financial assets back to the content that is
price that one division in a
firm’s home country in hard
company charges another then sold at substantially
currency such as
division for goods and lower prices in the ‘grey’
USD, EUR and others, after
services provided. meeting the host nation’s tax market.
obligations.

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Strategic Information Systems
Enterprise Resource Planning (ERP)
● is the integrated management of main business processes, often in real time and mediated by
software and technology.

Radio Frequency Identification (RFID)

● refers to a wireless system comprised of two components: tags and readers.

Divisional and Functional IS Support

● is used to support, reinforce, or enlarge its business-level strategy through its decision
support system

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 Problems in Measuring Performance
Short-term orientation
● or often termed short-termism – is defined as the excessive focus of
corporate executives, investors, and analysts on short-term quarterly
earnings at the expense of long-term corporate strategy, performance, and
sustainability.
-consider only current tactical or operational issues and ignore
long-term strategic ones

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 Problems in Measuring Performance
For example:
Honda has plants in Japan and the US. Japan is very long-term oriented, so the employees
work to build their future and the company's future, ensuring their long-term financial needs
are met. However, people working for Honda in the US are more focused on what can be
earned today to take care of immediate needs. There is much less thought of the future,
whether that future is for the person or for the company. It would be extremely difficult to get
a Japanese worker to think short-term and difficult to get a US worker to think long-term
because of the culture in which they grew up.

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 Problems in Measuring Performance

Goal displacement
● is the phenomenon by which the original and often radical or idealistic
goals of an organization are displaced by the inferior goals required to
maintain the organization and keep its leadership in power

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 Problems in Measuring Performance
For example:
The classic example of goal displacement is the shift that took place in the March of Dimes,
which was originally created in 1938 to find a treatment and cure for polio. After scientists
created vaccines to prevent its transmission in the 1950s and dramatically reduced the
occurrence of the disease in the U.S., the organization changed its focus to birth defects.

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Guidelines for Proper Control

• Minimum amount of information necessary

• Meaningful activities and results
• Timely
• Long and short-term
• Pinpointing exceptions
• Reward – Not Punishment

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Strategic Incentive Management
Weighted-factor method
Factors are weighted based on the SBU environment

Long-term evaluation method

Stock share price based on some index.

Strategic funds method

Remove R&D or Strategic investments from the financial performance

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An effective way to achieve the desired strategic results through a reward
system is to combine the three approaches:

1. Segregate strategic funds from short-term funds, as is done in the

strategic-funds method.
2. Develop a weighted-factor chart for each SBU.
3. Measure performance on three bases: The pretax profit indicated by the
strategic-funds approach, the weighted factors, and the long-term
evaluation of the SBUs’ and the corporation’s performance.

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 T
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THAT’S ALL N
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FOR TODAY Y
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