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STRATEGY EVALUATION
AND
CONTROL
 Evaluation and Control
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Process
 The evaluation and control process
ensures that a company is achieving
what it set out to accomplish.

 It compares performance with desired

results and provides the feedback
necessary for management to evaluate
results and take corrective action, as
needed.
 Evaluation and Control
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Process
 This process can be viewed as a five-step feedback
model:
1. Determine what to measure: Top managers and
operational managers need to specify what implementation
processes and results will be monitored and evaluated.
2. Establish standards of performance: Standards used
to measure performance are detailed expressions of
strategic objectives. They are measures of acceptable
performance results.
3. Measure actual performance: Measurements must be
made at predetermined times
4. Compare actual performance with the standard: If
actual performance results are within the desired tolerance
range, the measurement process stops here.
 Evaluation and Control
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Process
Evaluation and
control steps
 Measuring Performance
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 Performance
 end result of activity
 A firm needs to develop measures that predict
likely profitability referred to as steering
controls
 Steering controls
 measure variables that influence future profitability
 Every industry has its own set of metrics that
tends to predict profit
 Cost per available seat mile (airlines)
 Inventory turnover ratio (retail)
 Customer satisfaction (banking)
 Types of Controls
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 Output controls
 specify what is to be accomplished by focusing
on the end result through the use of objectives
 Behavior controls
 specify how something is done through
policies, rules, standard operating procedures
and orders from supervisors
 Input controls
 emphasize resources/inputs
 Activity-Based Costing
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 Activity-based costing (ABC)

 allocates indirect and direct costs to individual
product lines based on value-added activities
going into that product
 ABC allows accountants to charge costs more
accurately because it allocates overhead more
precisely
 This accounting method is very useful in
doing a value-chain analysis of a firm’s
activities for making outsourcing decisions.
 Enterprise Risk
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Management
 Enterprise Risk Management
 corporate-wide, integrated process for managing
uncertainties that could negatively or positively
influence the achievement of objectives
 In the past, managing risk was done in a fragmented
manner within functions or business units.
 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.
 ERM is being adopted because of the increasing
amount of environmental uncertainty that can affect
an entire corporation.
 Enterprise Risk
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Management
The process of rating risks involves three
steps:
1. Identify the risks using scenario
analysis, brainstorming or performing
risk assessments
2. Rank the risks, using some scale of
impact and likelihood
3. Measure the risks using some agreed-
upon standard
 Traditional Financial
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Measures
 The most commonly used measure
of corporate performance (in terms
of profits) is return on investment
(ROI).
 Return on investment (ROI)
 result of dividing net income before taxes
by the total amount invested in the
company (typically measured by total
assets)
 Earnings per share (EPS)
 dividing net earnings by the amount of
 Traditional Financial
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Measures
 Return on equity (ROE)
 involves dividing net income by total equity
 Operating cash flow
 the amount of money generated by a
company before the cost of financing and
taxes, is a broad measure of a company’s
funds
 Shareholder Value
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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 post-strategy values for the
business
 after-tax operating income minus the total
annual cost of capital
 Shareholder Value
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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 market’s estimate
of the net present value of a firm’s past
and expected capital investment
projects
 Balanced Score Card
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 Balanced scorecard
 combines financial measures that tell the
results of actions already taken with
operational measures on customer
satisfaction, internal processes and the
corporation’s innovation and improvement
activities—the drivers of future financial
performance
 Balanced Score Card
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In the balanced scorecard, management

develops goals or objectives in each of four
areas:
 Financial: How do we appear to

shareholders?
 Customer: How do customers view us?

 Internal business perspective: What

must we excel at?

 Innovation and learning: Can we

continue to improve and create value?

 Balanced Score Card
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 Key performance measures
 Each goal in each area is assigned one or
more measures, as well as a target and an
initiative
 These measures can be thought of as key
performance measures.
 Key performance measures
 measures that are essential for achieving a desired
strategic option
 For example, a company could include cash
flow, quarterly sales growth, and ROE as
measures for success in the financial area.
 Management Audit
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 Management audits
 developed to evaluate activities such as
corporate social responsibility, functional
areas such as the marketing department,
and divisions such as the international
division
 useful to boards of directors in evaluating
management’s handling of various
corporate activities
 Strategic Audit
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 Strategic audit
 provides a checklist of questions, by area or
issue, that enables a systematic analysis of
various corporate functions and activities
 It is a type of management audit and is
extremely useful as a diagnostic tool to
pinpoint corporate-wide problem areas and
to highlight organizational strengths and
weaknesses
 Responsibility Centers
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 Responsibility centers
 used to isolate a unit so it can be evaluated
separately from the rest of the corporation
 has its own budget and is evaluated on its
use of budgeted resources
 headed by the manager responsible for the
center’s performance
 Responsibility Centers
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Standar Revenu
Expense
d cost e
centers
centers centers
Investm
Profit
ent
centers
centers
 Responsibility Centers…
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 Standard cost centers are primarily used in

manufacturing facilities.
 With revenue centers, production, usually in terms of
unit or birr sales, is measured without consideration of
resource costs (for example, salaries).
 Typical expense centers are administrative, service
and research departments.
 A profit center is typically established whenever an
organizational unit has control over both its resources
and its products or services.
 An investment center’s performance is measured in
terms of the difference between its resources and its
services or products.
 Benchmarking
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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
 Benchmarking
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1. Identify the area or process to be examined

2. Find behavioral and output measures
3. Select an accessible set of competitors of best
practices
4. Calculate the differences among the company’s
performance measurements and those of the
competitors and determine why the differences
exist
5. Develop tactical programs for closing
performance gaps
6. Implement the programs and compare the results
 Problems in Measuring Performance
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 Lack of quantifiable objectives or

performance standards
 Inability to use information systems to
provide timely and valid information
 Short-Term Orientation
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Long-term evaluations may not be

conducted because executives:
1. Don’t realize their importance

2. Believe that short-term considerations

are more important than long-term

considerations
3. Aren’t personally evaluated on a long-

term basis
4. Don’t have the time to make a long-term

analysis
 Goal Displacement
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 Goal displacement
 confusion of means with ends and 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
 Types of goal displacement:
 behavior substitution and suboptimization
 Goal Displacement
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 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
 Managers, like most other people, tend
to focus more of their attention on
behaviors that are clearly measurable
than on those that are not.
 Goal Displacement
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 Suboptimization
 refers to the phenomenon of a unit
optimizing its goal accomplishment to the
detriment of the organization as a whole
 To the extent that a division or functional
unit views itself as a separate entity, it
might refuse to cooperate with other
units or divisions in the same
corporation.
 Guidelines for Proper
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Control
1. Controls should involve only the minimum amount
of information needed to give a reliable picture of
events.
2. Controls should monitor only meaningful activities
and results, regardless of measurement difficulty.
3. Controls should be timely so that corrective action
can be taken before it is too late.
4. Long-term and short-term goals should be used.
5. Controls should aim at pinpointing exceptions.
6. Emphasize the reward of meeting or exceeding
standards rather than punishment for failing to
meet standards.