Strategic Management Principles & Cases

Dr. Khaled Bekhet

Strategic Evaluation & Control

Chapter (10)
Team Harmony activity
The required list of work to do to
collect points;
Ensure that it stays covered until the
end of the activity explanation
(10 Minutes to prepare).

3
 Learning Objectives

1. Understand the basic control process

2. Choose among traditional measures, such as ROI, and
shareholder value measures, such as economic value
added, to properly assess performance
3. the balanced scorecard approach to develop key
performance measures
4. Apply the benchmarking process to a function or an
activity
5. Develop appropriate control systems to support specific
strategies including performance measurement
6. Identify Problems in Measuring Performance
 Corrective Actions

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?

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 Measuring Performance

Performance
 end result of activity
Steering controls (real time control (likely Future
Profitability), enabling corrective action)
 measure variables that influence future profitability
Cost per available seat mile (airlines)
Inventory turnover ratio (retail)
Customer satisfaction (service)
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 Types of Controls

 Input controls
 emphasize resources: For Example: Manufacturing Resources,
Knowledge, Skills, ….
 Output controls
 specify what is to be accomplished by focusing on the end result through
the use of objectives: For example: production targets, cost reduction
targets, profit objectives, customer satisfaction surveys

 Behavior controls
 specify how something is done through policies, rules, standard
operating procedures and orders from supervisors: Example: ISO 9000
Quality Management uses Policies, rules, SOP’s, directives
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 Activity-Based Costing (ABC)

Activity-based costing
 Allocation of indirect and fixed costs to individual products or
product lines based on value-added activities
 Focus on overhead/fixed cost rather than labor

Allows accountants to charge costs more accurately because

it allocates overhead more precisely

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 Example Applying ABC Costing

X Pen manufactures black pen for 90% of volume

and blue pen for 10% of volume. Retooling takes 8
hours. ABC analyses process and charges retooling cost
to the batch being produced. Versus traditional
method which is to allocate costs volume wise!

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Primary measures of corporate performance

Return on
Investment (ROI)

Traditional Earnings per

Share (EPS)
Financial
Measures
Return on
Equity (ROE)

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 Primary measures of corporate performance

• ROI = Net income before tax/ Total net assets

• EPS=Earnings/No of equity shares

• ROE= net income/equity

All the above can be manipulated. Any one solely is Not
adequate measure of corporate performance.

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Primary measures of corporate performance
Stakeholder Measure

Stakeholder Short Term Long Term

Customer Sales Growth in Sales
Supplier Cost Growth of Cost
Financial Comm. EPS Growth of ROE
Employees Productivity Turnover
Government Access to Key # New regulations
Members
Consumer Advocates # Meetings Changes in policy

Environmentalists # Meetings Changes in policy

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 Primary measures of corporate performance

 Balanced scorecard
The balanced scorecard (BSC) is a strategic planning
and management system that organizations use to:
 Communicate what they are trying to accomplish
 Align the day-to-day work that everyone is doing with strategy
 Prioritize projects, products, and services
 Measure and monitor progress towards strategic targets

The BSC suggests that we view the organization from four

perspectives, and to develop objectives, measures (KPIs),
targets, and initiatives (actions) relative to each of these
points of view:
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 Balanced Score Card

 Financial: organizational financial performance and the

use of financial resources.
 Customer: Performance from the point of view the
customer
 Internal business perspective: organizational
performance through the lenses of the quality and
efficiency related to our product or services
 Innovation and learning: views organizational
performance through the lenses of human capital,
infrastructure, technology, culture and other capacities.

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 Balanced Score Card

Example Under each area , include key

performance measures(KPI’s) , initiative, and
target
•Finance: Cash flow, total expenses, 100%
•Customer: Market share, sales from new products, 100%
•Internal Business Processes: Quality, number of
defected items, 100%
•Innovation & Learning Process: Recruitment Efficiency,
Training hours for recruitment officers, 100%

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 Nonfinancial Performance Measures
Used by Internet Business Ventures

Stickiness
 length of Web site visit
Eyeballs
 number of people who visit a Web site
Mindshare
 brand awareness

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 Enterprise Risk Management

Enterprise Risk Management

 corporate-wide, integrated process for
managing uncertainties that could negatively
or positively influence the achievement of
objectives

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 Evaluating Top Management

– Board of Directors evaluate CEO performance

through:
• Company Performance
• EPS
• Leadership of the organization
• Team building and management succession
• Leadership of external stake holders

- Management Audit – Activity or Function

• Strategic Audit – SWOT review

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 Evaluation and Control

Benchmarking:
– an analytical tool used to determine
whether a firm’s value chain activities are
competitive compared to rivals and thus
conducive to winning in the marketplace

– entails measuring costs of value chain

activities across an industry to determine
“best practices”

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 Problems in Measuring Performance

Lack of quantifiable objectives or performance

standards
Inability to use information systems to provide
timely and valid information
Short-term orientation
Goal displacement (confusion of means with ends)
 Behavior substitution
 Suboptimization

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 Goal Displacement

 Goal displacement
 confusion of means with ends occurs when activities originally
intended to help managers attain corporate objectives become
ends in themselves—or are adapted to meet ends other than those
for which they were intended

 Ends are what you are trying to achieve while means are how you
get there. Sometimes these get confused. For example, these are
means:
 Process Improvement
 Education & Training
 Compensation
 Technology
 Quality
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 Behavior substitution

Behavior substitution
 refers to the phenomenon of when people substitute
activities that do not lead to goal accomplishment for
activities that do lead to goal accomplishment because
the wrong activities are being rewarded.
 For Example a production department wants to produce
more of easy making items to achieve certain number of
units produced regardless what is needed by sales and
marketing team.

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 Sub optimization

Suboptimization
 refers to the phenomenon occurs when different subunits
each attempt to reach a solution that is optimal for that
unit, but that may not be optimum for the organization as
a whole.
 For example, the quality control department of a
factory may want to introduce a program that will
guarantee that every unit that is produced is
perfect. However, the higher cost and the resulting
high price would lead to a disaster for the overall
company in the form of lower sales.
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 Guidelines for Proper Control:
(Control should follow strategy)

–Minimum amount of information necessary

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

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 REVIEW QUESTIONS

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 Questions-Choose one Best Answer

1) ________ is a corporate-wide, integrated process to manage

the uncertainties that could negatively or positively influence the
achievement of the corporation's objectives. 1) _______

A) ISO 14000 Series

B) Market Value Added
C) Activity-based costing
D) Enterprise Risk Management
E) Input controls

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 Questions-Choose one Best Answer

6) All of the following are examples of behavior controls

EXCEPT 6) _______

A) sales revenue.
B) monitoring employees' Internet usage.
C) monitoring employees' phone calls.
D) monitoring employees' PCs.
E) using ISO 14000 Standards Series.

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 Questions-Choose one Best Answer

7) All of the following are examples of output controls

EXCEPT 7) _______

A) getting to work on time.

B) sales quotas objectives.
C) profit objectives.
D) specific cost reduction objectives.
E) surveys of customer satisfaction.

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 Questions-Choose one Best Answer

8) Which of the following is NOT considered an adequate

measure by itself of corporate performance? 8) _______

A) operating cash flow

B) EPS
C) ROI
D) ROE
E) all of the above

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 Questions-Choose one Best Answer

9) Controls which measure variables that influence future

profitability are called 9) _______

A) output controls.
B) steering controls.
C) activity controls.
D) influencing controls.
E) behavior controls.

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 Questions-Choose one Best Answer

11) Suboptimization occurs when 11) ______

A) a division or functional unit views itself as a separate entity and

refuses to cooperate with other divisions or units to the detriment
of the organization as a whole.
B) managers tend to focus more of their attentions on those
aspects which are measurable than on those which are not.
C) there is a failure to produce at or near full capacity.
D) managers concentrate too much on short-term performance
objectives.
E) individuals are placed into positions not suited to their abilities.
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Thank You