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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
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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.
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Evaluation and Control

• Evaluation is vital to the organization’s well-


being 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.

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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?
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Evaluation and Control

BOARD
OF DIRECTORS

GENERAL
MANAGER

R&D CORPORATE STAFF

OPERATING CO. OPERATING CO.


OPERATING CO. OPERATING CO. OPERATING CO.
CAMEROON CAMEROON-
GABON C. A. R. D. R. C
YAOUNDE DOUALA

PRODUCT. PRODUCT PRODUCT PRODUCT


CHOCO. SPREAD CHOCO. BARS CHOCO TOFFEES 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.

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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.
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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

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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

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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.
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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 Standard of Actual


targets performance 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
Concurrent Control
Control

Input Processing Output

Feedback Control

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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.
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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.
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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.
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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.

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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

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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

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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.
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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.

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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
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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.

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Evaluation and Control

Balanced Scorecard
Area of Objectives Measure or Target Time Expectation Primary Responsibility

Customers Sales Growth 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
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Evaluation and Control

Balanced scorecard(Chococam)

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Evaluation and Control

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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

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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

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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

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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

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Evaluation and Control

• Using Benchmarking –

– Continual process of measuring products,


service, and practices against the
toughest competitors or those companies
recognized as industry leaders

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Evaluation and Control

• International Measurement Issues –

– International transfer pricing


– Repatriation of profit
– piracy

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Evaluation and Control

• Strategic Information Systems –

– Enterprise Resource Planning (ERP)


– Divisional and functional IS support

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Evaluation and Control

• Problems in Measuring Performance –

– Short-term orientation
– Goal displacement
• Behavior substitution
• Suboptimization

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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

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Evaluation and Control

• Strategic Incentive Management –

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

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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

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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

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