STRATEGIC MANAGEMENT & BUSINESS POLICY

13TH EDITION
THOMAS L. WHEELEN

J. DAVID HUNGER

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

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1.
2.
3.
4.

Determine what to measure

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

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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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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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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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Enterprise Risk Management a corporate-wide,

integrated process for managing uncertainties
that could negatively or positively influence the
achievement of objectives
1.
2.
3.

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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Primary Measures of Corporate

Performance

Return on Investment (ROI)

Earnings per share (EPS)
Return on equity (ROE)
Operating cash flow

Free cash flow

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Popular Measures of Internet Companies

Non-Financial Measures

Stickiness
Eyeballs
Mindshare
Monthly unique viewers

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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 poststrategy values for the business
EVA=After tax income-total annual cost of capital

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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 markets estimate of the

net present value of a firms past and
expected capital investment projects

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Balanced score card combines financial

measures that tell results of actions already

taken with operational measures on customer
satisfaction, internal processes and the
corporations innovation and improvement
activities
Financial
Customer
Internal business perspective
Innovation and learning

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Evaluating Top Management and the

Board of Directors

Chairman-CEO Feedback Instrument

Management Audit
Strategic Audit

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Primary Measures of Divisional and

Functional Performance
Responsibility centers- used to isolate a unit

so it can be evaluated separately from the

rest of the corporation
Standard cost centers
Revenue centers
Expense centers
Profit centers
Investment centers

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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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1.
2.
3.
4.

5.
6.

Indentify 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 companys
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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International Measurement Issues

Most widely used measurement techniques

Return on investment
Budget analysis
Historical comparison
International transfer pricing

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International Measurement Issues

Barriers to international trade

Different standards for products and services

Safety/environmental
Energy efficiency
Testing procedures

Counterfeiting/piracy
Control and Reward systems
Multidomestic loose
Multinational- tight control

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Enterprise Resource Planning (ERP)- unites all

of a companys major business activities within a

single family of software modules providing
instant access throughout the organization

Radio Frequency Identification (RFID)- an

electronic tagging technology used to improve

supply chain efficiency

Divisional and Functional IS Support- used to

support, reinforce, or enlarge business level

strategy throughout the decision support system

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Lack of quantifiable objectives or

performance standards

Inability to use information systems to

provide timely and valid information

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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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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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1.
2.
3.
4.
5.
6.

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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Approaches to Strategic Incentive

Management

Weighted-factor method
Long-term evaluation method
Strategic funds method

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Effective means to achieve results is through

a reward system that combines all 3
approaches

Segregate strategic funds from short-term funds

Develop a weighted factor chart for each SBU
Measure performance based on:
Pre-tax profit (Strategic funds approach)
Weighted factors
Long-term evaluation of the SBUs
performance

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1. Is Figure 11-1 a realistic model of the evaluation and

control process?
2. What are some examples of behavior controls? Output
controls? Input controls?
3. Is EVA an improvement over ROI, ROE, or EPS?
4. How much faith can a manager place in transfer price
as a substitute for market price in measuring a profit
centers performance?
5. Is the evaluation and control process appropriate for a
corporation that emphasizes creativity? Are control and
creativity compatible?

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PowerPoint created by:

Ronald Heimler
Dowling College- MBA
Georgetown University- BS Business
Administration
Adjunct Professor- LIM College, NY
Adjunct Professor- Long Island
University, NY
Lecturer- California State Polytechnic
University, Pomona, CA
President- Walter Heimler, Inc.
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