University of Cape Coast School of Business
Evaluation and Control Group Members:
Edward Nii Amar Amarteifio Edna N. A. Okorley Eba Owona Theocryte Sergeot
March 2009
1
Evaluation and Control
Learning Objectives • Understand the basic, control process • Choose among traditional measures, such as Return on Investment (ROI) and shareholder value measures such as economic value added, to properly assess performance • Use the balanced scorecard approach to develop key performance measures • Apply the benchmarking process to a function or an activity • Understand the impact of problem with measuring performance
2
Evaluation and Control
Introduction • Strategy can neither be formulated nor adjusted to changing circumstances without a process of strategy evaluation. • Whether performed by an individual or as part of an organisational review procedure, strategy evaluation forms an essential step in the process of guiding an enterprise. 3
Evaluation and Control
• Evaluation is vital to the organization’s wellbeing because: • It compares performance with desired results and gives feedback for management to evaluate and take corrective • It alerts management to potential/actual problems in a timely fashion. 4
Evaluation and Control
Strategy evaluation is often an appraisal of performance. Strategists ask questions like:
• Have the firm’s assets increased? • Has there been an increase in profitability? • Has there been an increase in sales? • Has there been an increase in productivity? • Have profit margins, ROI, and EPS ratios increased? 5
Evaluation and Control
BOARD OF DIRECTORS
GENERAL MANAGER
R&D
OPERATING CO. CAMEROON YAOUNDE
CORPORATE STAFF
OPERATING CO. GABON
PRODUCT. CHOCO. SPREAD
OPERATING CO. C. A. R.
PRODUCT CHOCO. BARS
OPERATING CO. D. R. C
OPERATING CO. CAMEROONDOUALA
PRODUCT CHOCO TOFFEES
PRODUCT CHOCO DRINK
Evaluation and Control
What is Strategic Evaluation • Glueck and Jauch have defined strategic evaluation as follows: “Evaluation of strategy is that phase of the strategic management process in which the top managers determine whether their strategic choice as implemented is meeting the objectives of the enterprise.
7
Evaluation and Control
There are two aspects in this phase of strategic management: • Evaluation which emphasizes measurement of results of a strategic action and • Control which emphasizes on taking necessary actions in the light of gap that exists between intended results and actual results in the strategic action. 8
Evaluation and Control
Difficulties in Strategy Evaluation
• • • • •
Difficulty predicting future with accuracy Increasing number of variables Rate of obsolescence of plans Domestic and global events Decreasing time span for planning certainty
9
Evaluation and Control
Evaluation and Control Process This process ensures that the company achieves what it was set out to achieve. It compares actual with desired performance and provides feedback necessary for management to evaluate results and take corrective action where necessary. This process can be viewed in five steps 10
Evaluation and Control
• Determine what to measure -this involves clarification of the aims to be achieved, i.e. the aims and objectives must be stated in clear terms that should include specific deadlines • Establish standard of performance – requires realistic measurement by which the degree and quality of goal achievement can be determined. 11
Evaluation and Control
• Measure actual performance – this should be an ongoing repetitive process, actual frequency of measurement being dependent on the type of activity • Comparing actual performance against standards – this involves comparing measured results with established targets or standards previously set. • Take corrective action – if actual results fall outside the desired tolerance rang, action must be taken to rectify the deviation 12
Evaluation and Control
Evaluation and Control
Objectives and targets
Standard of performance
Actual performance
Comparing for any deviations
Rectify by taking corrective action
•
Basic steps in the control process, adapted and modified from Mullins, L.J., Management and organizational behaviour, 4th edition, London, Pitman 14 Publishing, p. 595
Evaluation and Control
Strategic and Operational Control: A Comparison
• Strategic control is the process of taking into accounts the changing assumptions both external and internal to the organisation on which a strategy is based, continually evaluating the strategy as it is being implemented and taking corrective actions to adjust strategy according to changing conditions or taking necessary actions to realign strategy implementation • Are the premises made during the strategy formulation process proving to be correct? • Is the strategy being implemented properly? • Is there any need for change in the strategy? If yes, what is the type of change required to ensure strategic effectiveness? 15
Evaluation and Control
• Operational control focuses on the results of strategic action and is aimed at evaluating the performance of the organisation as a whole, different SBUs and other units. • How is the organisation performing? • Are the organisational resources being utilised properly? • What are the actions required to ensure the proper utilization of resources in order to meet organisational objectives? 16
Evaluation and Control
Types of Organizational Controls
• Depending on the stages at which control is exercised, it may be of three types: • Control of inputs that are required in an action, known as feed forward control; • Control at different stages of action process, known as concurrent, real-time, or steering control; and • Post action control based on feedback from the completed action, known as feedback control. 17
Evaluation and Control
Feed-forward Control
Concurrent Control
Input
Processing
Output
Feedback Control
18
Evaluation and Control
• Feed-forward controls, sometimes called preliminary or preventive controls, attempt to identify and prevent deviations in the standards before they occur. Feed-forward controls focus on human, material, and financial resources within the organization. 19
Evaluation and Control
• Concurrent controls monitor ongoing employee activity to ensure consistency with quality standards. These controls rely on performance standards, rules, and regulations for guiding employee tasks and behaviours. Their purpose is to ensure that work activities produce the desired results. 20
Evaluation and Control
• Feedback controls involve reviewing information to determine whether performance meets established standards. For example, suppose that an organization establishes a goal of increasing its profit by 12 percent next year. To ensure that this goal is reached, the organization must monitor its profit on a monthly basis. After three months, if profit has increased by 3 percent, management might assume that plans are going according to schedule. 21
Evaluation and Control
Some Control Techniques
• Activity-Based Costing (ABC) is a method used for the allocation of indirect and fixed cost to individual product lines based on the value-added activities going into that product. This method is useful in doing a value chain analysis of a firm’s activities for making outsourcing decisions. 22
Evaluation and Control
• Enterprise Risk Management (ERM) is an integrated process for managing the uncertainties that could negatively or positively influence the achievement of a corporation’s objectives. The process of rating risk involves the following – Identify the risk using scenario analysis or brainstorming – Rank the risk using some scale of impact and likelihood – Measure the risk using some agreed upon standard 23
Evaluation and Control
Primary Measures of Corporate Performance
• The days when simple financial measures such as ROI or EPS were used alone to assess the overall corporate performance are coming to an end. Analysts now recommend a broad range of methods to evaluate the success or failure of a strategy. Some of these methods are stakeholder measures, shareholder value and the balance scorecard approach. 24
Evaluation and Control
• Traditional financial methods - these methods were used to measure corporate performance in terms of profit. • • • • •
ROI EPS ROE Operating Cash flow Free cash flow 25
Evaluation and Control
• Stakeholder Measures – top management should establish one or more simple stakeholder measures for each stakeholder category according to its own set of criteria
26
Evaluation and Control
• Shareholder value – This can be defined as the present value of anticipated future stream of cash flows from the business plus the value of the company, if liquidated. The New York consulting firm Stern Stewart & Company devised and popularised two shareholder value measures known as the Economic value Added (EVA) and the Market Value Added (MVA). The basic concepts of these are that businesses should not invest in projects unless they can generate profit above the cost of capital. 27
Evaluation and Control
• Economic value added (EVA) is a performance measure developed by Stern Stewart & Co that attempts to measure the true economic profit produced by a company. It is frequently also referred to as "economic profit", and provides a measurement of a company's economic success (or failure) over a period of time.
28
Evaluation and Control
• Market value added (MVA), on the other hand, is simply the difference between the current total market value of a company and the capital contributed by investors (including both shareholders and bondholders). MVA is not a performance metric like EVA, but instead is a wealth metric; measuring the level of value a company has accumulated over time. As a company performs well over time, it will retain earnings 29
Evaluation and Control
Balanced Scorecard Balanced Scorecard Evaluate strategies from 4 perspectives: 1. Financial performance: how do we appear to shareholders? 2. Customer knowledge: how do customers view us? 3. Internal business processes: what must excel us? 4. Learning & growth: Can we continue to improve and create value? Besides, performance of people and performance according to stakeholders can be added. 30
Evaluation and Control
Balanced Scorecard Area of Objectives Customers
Measure or Target Sales Growth
Time Expectation
Primary Responsibility
In 2 years
1 2 Managers/Employees 1 2 Operations/Processes 1 2 Community/Social Responsibility 1 2 Business Ethics/Natural Environment 1 2 Financial 1 2
31
Evaluation and Control
Balanced scorecard(Chococam)
32
Evaluation and Control
33
Evaluation and Control
Evaluating Top Management & BoD – – Chairman-CEO Feedback Instrument using the 17-item questionnaire developed by Ram Charan. – It focuses on • Company performance • Leadership of the organization • Team building and management succession • Leadership of external constituencies
34
Evaluation and Control
• Management Audit is used to evaluate how management handle the various corporate activities such as • Corporate social responsibilities • Functional areas of the organization
35
Evaluation and Control
• Strategic Audit – provides a checklist of questions, by area or issue, that enables a systematic analysis of various corporate functions and activities to be made. • It is useful as a diagnostic tool to pinpoint corporate-wide problems
36
Evaluation and Control
• Divisional & Functional Performance – – Responsibility Centers – are used to isolate a unit so that it can be evaluated separately from the rest of the corporation • • • • •
Standard cost centers Revenue centers Expense centers Profit centers Investment centers 37
Evaluation and Control
• Using Benchmarking – – Continual process of measuring products, service, and practices against the toughest competitors or those companies recognized as industry leaders
38
Evaluation and Control
• International Measurement Issues – – International transfer pricing – Repatriation of profit – piracy
39
Evaluation and Control
• Strategic Information Systems – – Enterprise Resource Planning (ERP) – Divisional and functional IS support
40
Evaluation and Control
• Problems in Measuring Performance – – Short-term orientation – Goal displacement • Behavior substitution • Suboptimization
41
Evaluation and Control
• Guidelines for Proper Control – – Minimum amount of information necessary – Meaningful activities and results – Timely – Long and short-term – Pinpointing exceptions – Meeting/exceeding standards 42
Evaluation and Control
• Strategic Incentive Management – – Weighted-factor method – Long-term evaluation method – Strategic funds method
43
Evaluation and Control
Conclusion The final step in the strategic management process is evaluating results. Managers must evaluate the results to determine how effective their strategies have been and what corrections are necessary. All strategies are subject to future modification because internal and external factors are constantly changing 44
Evaluation and Control
THANK YOU FOR LISTENING TO US. ALL CONSTRUCTIVE SUGGESTIONS AND CONTRIBUTIONS ARE WELCOME. FOR FURTHER EXPLANATION CONTACT THE GROUP CORDINATOR – MR OWONA EBA 45
