Topic 9 Evaluation & Control Purpose of evaluation and control is to monitor performance and take...

Topic 9Topic 9Evaluation & ControlEvaluation & Control

Purpose of evaluation and control is to monitor Purpose of evaluation and control is to monitor performance and take corrective actionperformance and take corrective action

• Strategic controlStrategic control• Operational controlOperational control

Strategic Management Strategic Management ModelModel

1.9 Strategic Management Model (Fig. 1.2) p. 9

Strategy Formulation

Strategy Implementation

Evaluation and Control

Mission

Objectives

Strategies

Policies

Feedback/Learning

Environmental Scanning

Societal Environment

General Forces

Task Environment

Industry Analysis

Structure Chain of Command

Resources Assets, Skills

Competencies, Knowledge

Culture Beliefs, Expectations,

Values

Reason for existence

What results to accomplish by when Plan to

achieve the mission & objectives Broad

guidelines for decision making

Programs

Activities needed to accomplish a plan

Budgets

Cost of the programs Procedures

Sequence of steps needed to do the job

Process to monitor performanceand take corrective action

Performance

External

Internal

© 1998 Addison Wesley Longman, Inc. TM-3

Make Comparisons

to Past Periods and to Industry

Averages for the Company

Make Comparisons

to Past Periods and to Industry

Averages for the Company

By Product

By Division

By Department

By Geographic Area

By Salesperson

By Strategic Business Unit

By Product

By Division

By Department

By Geographic Area

By Salesperson

By Strategic Business Unit

Measure Organizational Performance

©1999 Prentice Hall


Rumelt’s criteria for Rumelt’s criteria for evaluation strategies which evaluation strategies which

can be used to pick can be used to pick strategies and can be used strategies and can be used

for control.for control.• Consistency -- Do strategies conflict with each other, do Consistency -- Do strategies conflict with each other, do

they fit goals, is their they fit goals, is their goal displacement?goal displacement? Examples of Examples of displacement are when subunit goals displace the displacement are when subunit goals displace the organization’s goals or when behavior such as working organization’s goals or when behavior such as working hard is substituted for results (behavior substitution).hard is substituted for results (behavior substitution).

• Consonance -- Do strategies fit sets of trends which Consonance -- Do strategies fit sets of trends which usually involve interaction between trends?usually involve interaction between trends?


Rumelt’s criteria Rumelt’s criteria (continued)(continued)

Feasibility of strategy -- Are resources available, Feasibility of strategy -- Are resources available, capital, materials, financial etc. Is time capital, materials, financial etc. Is time available? Are human resource skills, abilities, available? Are human resource skills, abilities, competencies available? Are workers willing competencies available? Are workers willing and motivated? (ARE YOU TRYING TO DO and motivated? (ARE YOU TRYING TO DO EVERYTHING?—even best organizations can’t EVERYTHING?—even best organizations can’t do everything.)do everything.)

Advantage of strategy (Do we have superior Advantage of strategy (Do we have superior competencies in resources, skills?, have we competencies in resources, skills?, have we been positioned correctly? Distinctive been positioned correctly? Distinctive competencies are used.competencies are used.


Factors that we are likely to use to Factors that we are likely to use to help us pick and control strategies. help us pick and control strategies. These are also likely to be included on These are also likely to be included on

your evaluation matricesyour evaluation matrices..Target $ profit, target profit Target $ profit, target profit

percentpercent

Fit with mission and goals of Fit with mission and goals of companycompany

Risk of strategy if not Risk of strategy if not successful and dollar successful and dollar time risk time risk

Market share goal also Market share goal also market rank goalmarket rank goal

Cost improvement $ or %Cost improvement $ or %

• Fit with core and Fit with core and distinctive competenciesdistinctive competencies

a

Evaluation and Control Evaluation and Control ProcessProcess

Below Add Feedback Loop Below Add Feedback Loop to 1&2to 1&2

Yes

Determine what to

measure.

Measure performance.

Take corrective

action.

STOP

NoDoes

performance match

standards?

Establish predetermined

standards.

1 2 3 4 5

1. Determine What to 1. Determine What to Measure -Measure -

• Concentrate on the 20% of items that cause 80% Concentrate on the 20% of items that cause 80% of difficulties.of difficulties.

• Develop controls for Develop controls for critical success factorscritical success factors – – would often involve your would often involve your distinctive distinctive competencies.competencies.

• Use Use steering controlssteering controls such as statistical process such as statistical process control that help stop waste early and quickly control that help stop waste early and quickly before products or processes began to commit before products or processes began to commit errors. These controls can be operational.errors. These controls can be operational.

2. Establish Standards2. Establish Standards• Usually allow a Usually allow a tolerance leveltolerance level (70% - 80% - 90%) (70% - 80% - 90%)• Sometimes use Sometimes use benchmarksbenchmarks - compare against - compare against

best in class. (An explanation of benchmarking best in class. (An explanation of benchmarking is explained in slides ahead.)is explained in slides ahead.)

• In a business operating at 70%-90% of capacity, In a business operating at 70%-90% of capacity, this capacity might become our Standard this capacity might become our Standard Operating Procedure (SOP).Operating Procedure (SOP).

3. Measure performance3. Measure performance

Measure and control behaviors. This type of control is input Measure and control behaviors. This type of control is input control. This type of control is not as good as output control. This type of control is not as good as output control because----control because----

• Effort doesn’t always yield performance. (A salesperson Effort doesn’t always yield performance. (A salesperson might make many calls but never close the sale.)might make many calls but never close the sale.)

Output controlsOutput controls• Measure objectives attained such as products made, Measure objectives attained such as products made,

services completed. And quality levels attained (there are services completed. And quality levels attained (there are numerous output controls other than units produced, numerous output controls other than units produced, sales, profits or ROI)sales, profits or ROI)

4. Compare Actual 4. Compare Actual Performance With:Performance With:

• Standards - standard costs industry ratios, and ISO 9000, Standards - standard costs industry ratios, and ISO 9000, 1, 2, 3, 4 comprehensive measures of product and process 1, 2, 3, 4 comprehensive measures of product and process (product measures of quality, durability, performance etc. (product measures of quality, durability, performance etc. -- Process measures of output/input, waste, time, down -- Process measures of output/input, waste, time, down time etc.) ISO key elements are how you test products, time etc.) ISO key elements are how you test products, keep records, train employees and fix problems. Use keep records, train employees and fix problems. Use especially in Europe.especially in Europe.

5. Take corrective action5. Take corrective action• Chance deviationChance deviation• Actual problemsActual problems• Revise system as necessaryRevise system as necessary

Steps in the Benchmarking Steps in the Benchmarking ProcessProcess

These are Way of These are Way of Establishing StandardsEstablishing Standards

1.1. Identify area / process to be examinedIdentify area / process to be examined

2.2. Find behavioral and output measures of the product/service or process Find behavioral and output measures of the product/service or process and obtain measurementsand obtain measurements

3.3. Select a set of competitors and best-in-class companies against which to Select a set of competitors and best-in-class companies against which to benchmarkbenchmark

4.4. Calculate differences between company’s performance measurements Calculate differences between company’s performance measurements and those of the best-in-class and determine (wand those of the best-in-class and determine (whyhy does the differences does the differences exist?)exist?)

5.5. Develop tactical programs for closing performance gapsDevelop tactical programs for closing performance gaps

K.C. School district and accreditationK.C. School district and accreditation

6.6. Implement the programs, measure the results, and compare results with Implement the programs, measure the results, and compare results with those of the best-in-class companiesthose of the best-in-class companies


Yes

Determine what to

measure.


Take corrective

action.

STOP

NoDoes

performance match

standards?


standards.

1 2 3 4 5

Primary Measures of Primary Measures of Corporate PerformanceCorporate Performance

• Return on investment (ROI)Return on investment (ROI)• Net income before taxes/total assetsNet income before taxes/total assets• Return on equityReturn on equity• Profit and profit trendsProfit and profit trends• Economic value added (may replace ROI)Economic value added (may replace ROI)• Shareholders value (share price + dividends)Shareholders value (share price + dividends)

• In picking a strategy EBIT versus EPS is used to compare In picking a strategy EBIT versus EPS is used to compare the value of debt financing versus shareholder financing the value of debt financing versus shareholder financing under various earnings scenarios..see text.under various earnings scenarios..see text.

A Major Way of Measuring A Major Way of Measuring Performance by Investors Is Performance by Investors Is

Shareholders Value = Shareholders Value = Appreciation of Stock Price Appreciation of Stock Price

and Dividendsand Dividends


Financial Controls continuedFinancial Controls continued

Pro Forma Financial Statements

Pro forma (projected) financial statement analysis is a central strategic-implementation technique because it allows an organization to examine the expected results of various actions and approaches.

Financial Budgets

A financial budget is a document that details how funds will be obtained and spent for a specific period of time.

©1999 Prentice Hall

Another Way of Measuring Another Way of Measuring Performance Is the Use of Performance Is the Use of

ResponsibilityResponsibility CentersCentersA responsibility center is a way of isolating a A responsibility center is a way of isolating a

business unit so it can be directly evaluatedbusiness unit so it can be directly evaluated

Responsibility CentersResponsibility Centers

• Standard cost centersStandard cost centers• Revenue centersRevenue centers• Expense centersExpense centers• Profit centersProfit centers• Investment centersInvestment centers

The method you would most like to be able to use is The method you would most like to be able to use is the profit center #2 and the the profit center #2 and the investment center #1investment center #1

Another way of Measuring Another way of Measuring Performance: Balanced Performance: Balanced

ScorecardScorecardGive each of the categories 25% out of 100% when evaluating Give each of the categories 25% out of 100% when evaluating company or management performancecompany or management performance

1. Financial 100pts 25%1. Financial 100pts 25%2. Customer2. Customer 100pts 25% 100pts 25%3. Internal business perspective 100pts 25%3. Internal business perspective 100pts 25%4. Innovation and learning 100pts 25%4. Innovation and learning 100pts 25%

Total 400pts 100%Total 400pts 100%There has been a tendency to give no points for innovation and There has been a tendency to give no points for innovation and

learning or internal development costing resources now but learning or internal development costing resources now but not showing a profit in the near termnot showing a profit in the near term

Another way of Measuring Another way of Measuring Performance is use Performance is use Strategic Incentive Strategic Incentive

Management ApproachManagement ApproachApproaches to tie rewards with strategic performanceApproaches to tie rewards with strategic performance

Weighted-factorWeighted-factor method instead of allocating weights method instead of allocating weights equally as in equally as in balance scorecardbalance scorecard approach give greater approach give greater weights to factors that you are trying to promote in weights to factors that you are trying to promote in companycompany

Strategic-funds method (see next slide)Strategic-funds method (see next slide)

Weighted Factor Approach to Strategic Inventive Weighted Factor Approach to Strategic Inventive ManagementManagement

Strategic Business UnitCategory

High Growth Firm

Return on assets10%

Cash flow0%

Strategic-funds programs (developmental expenses)45%

Market-share increase45%

100%

Medium Growth FirmReturn on assets25%

Cash flow25%



100%

Weighted Factor Approach to Strategic Inventive Weighted Factor Approach to Strategic Inventive ManagementManagement

10.9Weighted Factor Approach (Table 10.3) CONTINUED p. 250

Low Growth Firm

Return on assets50%

Cash flow50%



100%

Source: Reprinted by permission of the publisher from “The Performance Measurement and Reward System: Critical to Strategic Management,” by Paul J. Stonich, from Organizational Dynamics (Winter 1984), p. 51. Copyright © 1984 by American Management Association, New York. All rights reserved.

Problems in Measuring Problems in Measuring PerformancePerformance

• Short-term orientationShort-term orientation• Goal displacement is the confusion of means and ends. Goal displacement is the confusion of means and ends.

This occurs when activities originally intended to meet goals This occurs when activities originally intended to meet goals become ends in themselves –become ends in themselves –or are adapted to meet ends or are adapted to meet ends other than those for which they were intended.other than those for which they were intended.

• 2-types of goal displacement are below.2-types of goal displacement are below.• 1. Behavior substitution1. Behavior substitution (The appearance of doing is valued more (The appearance of doing is valued more

than actually accomplishing something, I.E. Manager is always at than actually accomplishing something, I.E. Manager is always at work looking busy but little gets done. We measure behavior, work looking busy but little gets done. We measure behavior, because it is easy to see.)because it is easy to see.)

• 2. Sub-optimization2. Sub-optimization (one part of organization optimizes their (one part of organization optimizes their operations at the expense of other parts of the organizationoperations at the expense of other parts of the organization----machines are not serviced until the breakdown, this may keep machines are not serviced until the breakdown, this may keep maintenance expenses down but it could waste the time of the maintenance expenses down but it could waste the time of the production department, and require salespersons to fight harder to production department, and require salespersons to fight harder to get and keep customers because of late deliveryget and keep customers because of late delivery

10.6Problems in Measuring Performance p. 245–247

We Are Only Going to Be We Are Only Going to Be Able to Do Steps 1 & 2 of Able to Do Steps 1 & 2 of

Evaluation & Control ModelEvaluation & Control Model

• Determine what to measure?Determine what to measure?• Establish predetermined standardsEstablish predetermined standards


Yes

Determine what to

measure.


Take corrective

action.

STOP

NoDoes

performance match

standards?


standards.

1 2 3 4 5

Main Elements of Strategic AuditMain Elements of Strategic Audit

I. Current situationI. Current situationA.A. Current performance Current performance

including overall financialincluding overall financial PerformancePerformanceB. Strategic postureB. Strategic posture

Ii. Corporate governanceIi. Corporate governance A. A. Board of directorsBoard of directors B. Top managementB. Top management

Iii. External environment (Threats Iii. External environment (Threats and Opportunities)and Opportunities) A. SocietalA. Societal

B. Task (industry)B. Task (industry) C. Opportunities and threats C. Opportunities and threats

Iv. Internal environment (Strengths Iv. Internal environment (Strengths

and Weaknesses)and Weaknesses) A. StructureA. Structure

B. CultureB. Culture C. Resources (mkt, fin, r&d, C. Resources (mkt, fin, r&d,

etc.)etc.)

V. Analysis of Strategic FactorsV. Analysis of Strategic Factors

A.A. SWOT Analysis (Pick SWOT Analysis (Pick factors) factors)

B. Review Mission and B. Review Mission and Objectives (maybe change)Objectives (maybe change)

C. Come up with problems C. Come up with problems using TOWS, Portfolio using TOWS, Portfolio analysis, or cluster analysis, analysis, or cluster analysis, etc.etc.

VI. Strategic Alternatives and VI. Strategic Alternatives and RecommendationsRecommendations

A. Come up with alternative A. Come up with alternative strategies (Develop scenarios)strategies (Develop scenarios)

B. Recommended strategyB. Recommended strategy

VII. Implementation (org and culture VII. Implementation (org and culture changes) and changes) and

A. ProgramsA. Programs

B. BudgetsB. Budgets

VIII. Evaluation and ControlVIII. Evaluation and Control

A. Each program controlA. Each program control

B. Adequate overall control B. Adequate overall control measures measures

Strategic Management Strategic Management ModelModel

1.9 Strategic Management Model (Fig. 1.2) p. 9

Strategy Formulation

Strategy Implementation

Evaluation and Control

Mission

Objectives

Strategies

Policies

Feedback/Learning

Environmental Scanning

Societal Environment

General Forces

Task Environment

Industry Analysis

Structure Chain of Command

Resources Assets, Skills

Competencies, Knowledge

Culture Beliefs, Expectations,

Values

Reason for existence

What results to accomplish by when Plan to

achieve the mission & objectives Broad

guidelines for decision making

Programs

Activities needed to accomplish a plan

Budgets

Cost of the programs Procedures

Sequence of steps needed to do the job

Process to monitor performanceand take corrective action

Performance

External

Internal

• The endThe end

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