strategic management chap 12 evaluation and control with (case studies).

1. Evaluation and control
Presented by:-
Raksha Sharma
PQ-04
MPharm+ MBA
(NMIMS)

2. Pizza Hut – Stuck in the Middle
Pizza
hut was
failed
Due to
change in
industry
In 2016 they
reached 14100
locations
They had found that
there sales was
decreased by 3.5%
from previous year
There was change in
customer demand, as
they want pizza of
there choice
Way of order was
also of there
choice online or
having it there
Online and
mobile ordering
has 50% rival of
dominos
Customer
demand fresh
veggies and
gluten free and
fast service
Now people prefer
fast casual
preparation &
pizza hut kitchen
were closed
earlier
They made
several changes in
there system
considering all
parameters
After this
they decide to
remodel there
other stores
They tract the effect of
change & the system
was true evaluation
and control challenge

3. Determine
what to
measure
Establish
predetermined
Standards
Measure
Performance
Take
corrective
actions
Does
Performa-
nce match
standard?
Stop
Yes
No
Measuring Performance

4. Measuring performance conti….
• If strategic management processes were
inappropriately used then performance results are
undesirable .
• Top managers must know about undesire
performance so that they can develop new
implementation program and procedures.
• Obstacle to effective control is the difficulty in
developing appropriate measures of important
activities and control.

5. Measuring performance conti….
• Performance is end result of activity,
• To assess performance based on organizational unit to
be appraised and the objective to be achieved selective
measures are taken.
• The objective that were established earlier in the
strategy formulation part of strategic management
process (deals with profitability, market share, cost
reduction )is used to measure corporate performance
when the strategies are implemented.

6. Appropriate Measures
• Return on Investment (ROI)
• Earnings Per Share (EPS)
These measures are appropriate for evaluating a
corporation's ability to achieve a profitability objective.
As corporation’s major objective is profitability , ROI
and EPS can be calculated after profits totaled period.
Therefore a firm needs develop measures that can
predict profitability .
these are referred as steering controls because the
variable they measures influence profitability in future.

7. Appropriate Measures Examples
 Airlines, for example, closely monitor cost per
available seat mile (CASM). In 2002 CASM was 7.4¢
the lowest among all, contrast with US Airways 11.6¢
the highest in industry. Due to low cost southwest got
competitive advantage. The cost was raised up to
12.7¢ in 2015, just after its merger with American
Airlines. After a while it was replaced as most low-cost
airline by spirit Airlines whose CASM is 10.1¢.
 An example of a steering control used by retail stores
is the inventory turnover ratio, in which a retailer’s
cost of goods sold is divided by the average value of its
inventories. E.g:- office depot increased its inventory
turnover ratio from 6.9 to 7.5 in year.
 Another steering control is customer satisfaction.

8. Types Of Controls
Output Controls
•Specify what is to be accomplished
•Focus on end result of behaviors
through use of objectives and
performance targets or
milestones.
•Eg:- sales quota, specific cost
reduction, etc.
Behaviors Control
•It specifies how something is
done through policies, rules,
SOP’s and order from superior.
•Eg :- (Company monitors the
employees phone calls and PC’s,
once a supervisor caught spending
6 to 8 hrs/day in watching videos ,
job searching & downloading.)
Input Controls
Emphasize on resources ,
knowledge, skills, abilities, values,
motive of employees.
Eg:- yrs. of experience, yrs. of
education etc.
Eg:- Murlidharan and hamiltion emphasize on following stages of development in sequence.

9. Type of control contii..
ISO 9000 Series of Quality
Standards
•A way of objectively
documenting a company’s high-
level of quality operations
•ISO 9001 require firm to
separately document design
process and output, and verify
work.
ISO 14000 Series of Quality
Standards
•Establishes how to document
the company’s
impact on the environment
•ISO 14001 specify that
companies should establish,
maintain and continuously
improve an environmental
management system.

10. Solar Power and the Grid
Only electric industry is
more concerned about
established procedure
and minimizing
fluctuations in business
model
Due to storm the
power grid was
down and issue
was in
fluctuation in
power demand
For backup
they were
using
generators to
available
excess power
Solar array work
good in shining sun
even modest cloud
cause fluctuations
in output.
For duke battery
system mean
smoothing out
sudden swings
in output from
arrays heling
the grid to
recharge battery.
Aquion
batteries are
cheap, non
toxic, made of
salt water,
carbon &
MnO2.
Study shows
market of
batteries is grew
by 243% and
expect to grow
$2.5 B by 2020
Instead of chemical
reaction ultracapacitors
stored energy like electric
field, they are high power
batteries sustained for
several hours
Duke had 600
megawatts of
solar capacity
by 2016
This was good for
environment as well
good solution to
industry’s problem
Duke had partnership
with Aquion to develop
batteries with
ultracapacitor to
smooth-out fluctuation
The solar
array had
added new
wrinkle to
issue in
industry

11. Activity-based costing
• It allocates indirect and fixed costs to individual
product lines based on value-added activities going
into that product
• This method is used in constructing value chain
analysis of firm activities for making outsourcing
decision.
• Traditional cost accounting is use when direct labor
account for total cost and company produce very
few products.
• Allows accountants to charge costs more accurately
than traditional, since it allocates overhead more
precisely.

12. Example pen Manufacturing company
+
Mfg black & blue pen
Retooling machine
require 8 hrs TC= supplies (for both pen ) + DL+
FOH
OH cost includes cost
of reprogramming
If company produces 10x of black pen
than blue then the reprogramming
expense will allocate to black pen
(As per traditional costing method)
(As per Activity based costing)
Make 2 different
activities in pen mfg
Now its easy to
calculate trigger cost
of retooling
This shows that the product
carries only those cost for
which overheads are
consume
Management estimate blue
pen cost is 2X as of black
pen
Unless Company charge
higher price for blue pen they
will not get profit or unless
there is any reason for selling
company will earn
greater profit if
stop making blue
pen

13. Enterprise risk management
• Enterprise risk management
– Corporate-wide, integrated process for managing
uncertainties that could negatively or positively
influence the achievement of objectives.
– Previously risk was managed in fragments within
business function.
– Process risk
– Safety risk
– Insurance and financial risk

14. Enterprise risk management contii….
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.

15. Primary measures for corporate
performance
• Previously even for simple financial measures such as
ROI and EPS were used to access overall performance
of firm.
• But now analyst recommend other methods such as:-
 Stakeholder measures
 Shareholder measure
 Balanced scorecard approach.

16. Primary measures for corporate
performance contii…
Even tough these methods has supporters as well
detractors the recent trend is towards more complicated
financial measures.
Eg:- Research shows that companies pursuing strategies
founded on innovation and new product development
now tend to non-financial over financial measures.

17. Traditional Financial Measures
• 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 common stock
• Return on equity (ROE)
dividing net income by total equity

18. Traditional Financial Measures contii..
• Operating cash flow
– the amount of money generated by a company
before the cost of financing and taxes
• Free cash flow
– the amount of money a new owner can take out of
the firm without harming the business

19. Non–financial Performance Measures
Used by Internet Business Ventures
• Stickiness
– length of website visit
• Eyeballs
– number of people who visit a website
• Mindshare
– brand awareness

20. Shareholder value
• Shareholder value can be defined as the present value
of the anticipated future stream of cash flows from the
business plus the value of the company if liquidated.
• In simple term it (SVA) is expressed as a
company's capital costs from stock and bond
issues subtracted from its net operating profit after
tax (NOPAT).
• SVA = NOPAT - Cost of Capital
• For instance, if a company's NOPAT is $200,000 and
its capital costs are $50,000, its SVA would be
$150,000 ($200,000 - $50,000 = $150,000).

21. Economic value-added (EVA)
Economic value added (EVA) is an internal
management performance measure that compares
net operating profit to total cost of capital,
It measures the difference between the pre-strategy
and post-strategy values for the business.
• Economic value added (EVA) is also referred to
as economic profit.
• The formula for EVA is:
• EVA = Net Operating Profit After Tax -
(Capital Invested x WACC)

22. Economic value-added (EVA)
contii..
• EG:- Assume that Company XYZ has the following
components to use in the EVA formula:
NOPAT = $3,380,000
Capital Investment = $1,300,000
WACC = .056 or 5.60%
• EVA = $3,380,000 - ($1,300,000 x .056) = $3,307,200
• The positive number tells Company XYZ more than
covered its cost of capital. A negative number indicates
that the project did not make enough profit to cover
the cost of doing business.

23. Market value-added (MVA)
It Measures difference between market value of a
corporation and capital contributed by shareholders
and lenders
• The formula used to find market value added is:
• Market Value Added = Market Value -
Capital Invested
• steps to calculate MVA
• 1. add all the capital ( shareholders and bondholders
& retained earnings)
• 2. reclassify certain accounting expense to reflect the
future earnings
• 3. Total the value of all outstanding stock adding it to
company debt .

24. Market value-added (MVA)
contii…
• For example, if bondholders and shareholders have
contributed $1,000,000 to form Company XYZ and
during its existence since inception and it is currently
listed on the stock exchange with a stock market
value of $2,000,000, it can be said that the MVA of the
company is $1,000,000.

25. The End of the Cash Register Receipt
Each yr in US
more than 9 m
trees cut down for
making cash
receipt which is
simply thrown
after sometime
In 1990’s company
started moving
towards E-receipts,
but then dot-com
brought it to
temporary end.
E-receipts
benefits was
saving printing,
landfill waste &
provide customer
with electronic
record.
For retailers cost was
saving and promotion
became easier because
they were having
customer email id’s
Most company
started switching
to ER, Walmart
had develop ER
locker app
Few companies
start using smart
receipts to provide
value to customer
Smart receipt shows
customer email id’s
and provide
information videos
about product install
or provide link.
Through links it also
provide coupons or
surveys (all information is
gather by retailer so that
you can be targeted more
precisely)

26. Balanced scorecard
• Balanced scorecard
– combines financial measures that tell results of
actions already taken with operational measures on
customer satisfaction, internal processes, and
corporation’s innovation and improvement
activities—the drivers of future financial
performance

27. Balanced Scored Card Approach
Financial
Internal
business
perspective
Customer
Innovation
and
learning
How do we
appear to
shareholde
rs?
How do
customers view
us?
What must we
excel at?
Can we
continue
to improve
and create
value?
In the balanced scorecard, management develops goals or
objectives in each of four areas:

28. Example: Upward Airlines

29. Key performance measures
• Key performance measures
– measures that are essential for achieving a desired
strategic option
• measures that are essential for achieving a desired
strategic option.
• Example :- cash flow, sales growth, conversion time,
customer turnover rate, etc.
• Is a business that chooses to use the percentage of
income it receives from its returning customers as its
KPI.

30. Key performance measures contii…
• 2013 global survey by bain and company reported 73%
of fortune 1000 companies in North America were
projected to use a version of balance scorecard.
• Du Pont engineering polymers division used the
balanced scorecard to align employees, business
units,& shared services around common strategy
involve productivity improvements and revenue
growth.

31. Evaluation of top management and board
of directors
• Through strategy audit and compensation committees,
a board of directors is charged closely evaluating job
performance of CEO and top management team.
• Recent study state that 98%of boards used financial
measures as the key criteria for CEO and top
management performance evaluation while less than
half organization look towards more qualitative
measures, such as customer satisfaction(37%) ,
innovation (24%).

32. Chairman-CEO Feedback Instrument
Many companies evaluate there CEO by 17-item
questionnaire.
• The questionnaire focuses on four key areas:
1.Company performance
2.Leadership of the organization.
3.Team-building and management succession.
4.Leadership of external constituencies.
Some board members had understand that CEO should
be evaluated beyond financial performance.

33. Chairman-CEO Feedback Instrument
contii…
• Some board members had understand that CEO
should be evaluated beyond financial performance.
• They grade them on 6 characteristics
1. Vision
2. HR
3. Proper capital allocation
4. Culture of organization
5. Decision making
6. Performance

34. Management audits
• Management audits
– developed to evaluate activities such as corporate
social responsibility, functional areas like the
marketing department, and divisions such as the
international division
– useful to boards of directors in evaluating
management’s handling of various corporate
activities

35. Strategic audits
• Strategic audits
– provides checklist of questions, by area or issue,
enabling systematic analysis of various corporate
functions and activities to be made
– useful as diagnostic tool to pinpoint corporate-wide
problem areas and to highlight organizational
strengths and weaknesses

36. Primary measures of Divisional and
functional performance
• Companies use various techniques to evaluate and
control performance in divisions, (SBU’s) strategic
business unit and functional areas.
• if corporation of composed of SBU’s and division units
then they use many performance measures (ROI,
EVA) & functional measures (market share &
sales/employee (marketing) unit cost and percentage
defects.
• EG:- FedEx used Enhanced Tracker Software with its
COSMOS database to track the progress of its 2.5 to
3.5 M shipments daily

37. Responsibility centers
• 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

38. Responsibility Centers
Investme
nt centers
• Performanc
e is
measured
in terms of
difference
between its
resources
and its
services or
products.
Profit
centers
• Performanc
e is
measured
in different
revenues
(which
measures
production)
and
expenditur
es .
Expense
centers
• Resources
measured
in dollars ,
without
considerati
on for
service or
product.
Revenue
centers
• Production
in terms of
unit or
dollar
sales, here
profits are
notconsider
sales dept
has less
influence
over cost of
product sell
cost
centers
• Used in
manufactur
ing
The result
is expected
cost of
production.

39. Using Benchmarking To Evaluate
Performance
• Benchmarking
– the continual process of measuring products,
services and practices against the toughest
competitors or those companies recognized as
industry leaders

40. Steps of benchmarking process
1. Identify area or process to be examined
2. Find behavioral and output measures
3. Select accessible set of competitors of best practices
4. Calculate differences among company’s performance
measurements and competitors; determine why
differences exist
5. Develop tactical programs for closing performance
gaps
6. Implement the programs and compare the results

41. Benchmarking Example
• In 2015 survey by Bain and company of companies of
various sizes across globe found that benchmarking
was second most used tool (with strategic planning).
• It can also increase sales, improve goals, boost
employee motivation

42. Counterfeit Goods & Pirated Software:
A Global Problem
15% to 20 % of
goods in china
counterfeit i.e,
(tide,
budwiser,
malboro)
Yamaha
estimates 5
out of every 6
bikes bearing
brand name
are fake
Fake cisco
network
router & nokia
mobile phones
are easily
found in china
market
P&G estimate
15% soap &
detergents are
china brands
costing 150$ M
loss to company
One person
disclose that he
can make 1000
Nike shoes in 10
days costing
4$/pair.
Automotive
resources market
research shows
Profit margin is
more on counterfeit
(80%) than real
(15%)
Thousands of
counterfeit are
active in china
in various
types of
factories
Also found
that factory in
donguan make
fake callaway
golf club bag
at rate of
500/week
Shipped goods
across
different
countries
According to business
software alliance & ISDC
35% of software in
computers are pirated
World cost of
software
piracy was
63$ B in 2016
21% software in
Us is pirated and
it is now 26-30%
in European
union.

43. Strategic Information Systems
• Before performance measures can have any impact on
strategic management, they first communicate this to
people who are responsible for formulating and
implementing strategic plans. This function is perform
by strategic information system
• It can be computer-based, manual, formal or informal.
• E.g.:- checkout registers in Walmart transmit
information hourly to computers at the company
headquarters. So that managers know every morning
that how many items sold each day, and through this
they can predict of future days.

44. Strategic Information Systems contii..
• Enterprise resource planning (ERP)
– unites all of a company’s major business activities,
from order processing to production, within a single
family of software modules
– provides instant access to critical information to
everyone in the organization, from the CEO to the
factory floor worker
– Three reasons of ERP fail
1. Insufficient tailoring of software to fit the
company
2. Inadequate training
3. Insufficient implementation support

45. Strategic Information Systems contii…
• Radio frequency identification (RFID)
– an electronic tagging technology used to improve
supply chain efficiency
• Divisional and functional strategic information
support
– used to support, reinforce, or enlarge business level
strategy throughout the decision-support system

46. Problems in Measuring Performance
• Lack of quantifiable objectives or performance
standards
• Inability to use information systems to provide timely
and valid information
• The act of monitoring and measuring performance
can cause side effect which interfere overall corporate
performance.

47. Short-Term Orientation
Long-term evaluations may not be conducted because
executives:
• Don’t realize their importance.
• Believe that short-term considerations are more
important than long-term considerations.
• Aren’t personally evaluated on a long-term basis.
• Don’t have the time to make a long-term analysis.

48. Short-Term Orientation contii..
• Many accounting based measures (EPS & ROI)
encourage short term orientation.
• Growth in Eps is an important driver of near term
stock price, managers are biased against investment
that might reduce short – term EPS.
• One limitation of ROI performance measure is its
short term nature, which realize short term benefits
for company.
• ROI figure can be manipulated by managers.

49. Short-Term Orientation Example
• HP acquire British Firm Autonomy for $11.1 B in 2011
and write down $8.8 B in 2012 as the company find
significant accounting errors. Multiple lawsuits were
filed against HP, Its officers, directors and accounting
firm involved with autonomy before acquisition, later
HP broke up into 2 companies HP enterprise was able
to use unique capabilities that autonomy owned to
dramatically pushed into cloud computing.

50. 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
– behavior substitution and sub optimization

51. Goal Displacement contii…
• Behavior substitution
– phenomenon of pursuing substitute activities that
do not lead to goal accomplishment instead of
activities that do lead to goal accomplishment
because the wrong activities are being rewarded
– E.g.:- sears management thought they could
improve employee productivity by trying
performance reward, they paid commission to its
autoshop employees as percentage of repair bill. BS
resulted as employees altered their behavior to fit
the reward system, the results were over-billed
customers, charge for work never done, and a
scandal that tarnish sears reputation for many
years.

52. Behavior Sub optimization
• Refers to phenomenon of a unit optimizing its goal
accomplishment to the detriment of the organization
as a whole
• Eg:- sears in 2016 classic example of type of
dysfunction the company had spiraled downward the
hand of investor and CEO Eddie Lampert. An Ayn
Rand fan, he split the company into 30 autonomous
units , each with its own executives and board of
directors , to boost “visibility and accountability”.

53. Guidelines for Proper 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.

54. Approaches to Strategic Incentive
Management
Weighted-factor method
Appropriate for
measuring and
rewarding the
performance of top
SBU managers and
group level executives
when performance
vary from one unit to
other.
Long-term evaluation method
Compensates
managers for
achieving objectives
set over a multilayer
period.
Strategic funds method
Encourages
executives to look at
developmental
expenses required for
current operations.

55. Approaches to Strategic Incentive
Management
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.
2. Develop a weighted factor chart for each SBU.
3. Measure performance based on pre-tax profit,
weighted factors and long-term evaluation of the
SBU’s performance.

56. Business Strength/Competitive Position

58. 1. Which of the following personality characteristics are
associated with people who are likely to exhibit violent
behavior on job ?
A. Neurotic
B. Optimistic
C. Extraverted
D. Negative

59. 2. Which of the following is categorized as indirect
payment portion of employees compensation ?
A. Wages
B. Salaries
C. Commission
D. Employer - paid Insurance

60. 3. Operating profit held with firm after deducting cost of
capital is classified as
A. benefits added into salaries
B. investments added
C. capitals added
D. economic value added

61. 4. In an activity based cost system; an activity/unit of
work or task with differentiated purposes will be
classified as
A. different task
B. purpose cost
C. an activity
D. an allocation cost

62. 5. Formula to calculate return on investment, according
to profitability analysis in DuPont method is
A. return on sales * investment turnover
B. return on sales + investment turnover
C. return on sales - investment turnover
D. investment turnover + residual income

63. 6. Which of following is an example of internal business
perspective in balanced scorecard?
A. employee turnover rates
B. operating capabilities and number of patents
C. operating income and revenue growth
D. customer satisfaction and market share

64. 7. The manager who is responsible for only the cost of
the company is classified as?
A. cost center
B. revenue center
C. profit center
D. investment center

65. 8. output , behavior and input control are not ---------------
?
A. Interrelated
B. Interchangeable
C. Appropriate
D. Dependent on each other

66. 9. Among the following which is not non-financial
performance measures?
A. Operating cash flow
B. Mindshare
C. Eyeballs
D. stickiness

67. 10. Transfer tech pricing is commonly used in
-------?
A. Horizontally integrated corporations
B. Vertically integrated corporations
C. Mutual agreement procedures
D. Advance pricing process