Chapter 10. Evaluation and Control. Evaluation and Control. Evaluation and Control. Types of Control: Measuring Performance:

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1 Chapter 10 Measuring Performance: Performance = end result of activity Measures depend on organizational unit The behavior rewarded (evaluated) is the behavior that can be expected!! Measures: Activity-based costing (ABC) The 7-S Framework Traditional Financial Measures ROI, ROE, ROP, EPS, etc. Stakeholder Measures Published Information Benchmarking Steering Controls, SPC Types of Control: Behavior Controls Policies, rules, SOP s, directives Output Controls Objectives, targets, milestones Input Controls Resources, knowledge, skills, values 1

2 Activity-Based Costing: ABC Allocating indirect and fixed costs to individual product lines based on the value-added activities going into that product. Return on Investment (ROI) Traditional Financial Measures Earnings per Share (EPS) Return on Equity (ROE) Shareholder Value Present value of the anticipated future stream of cash flows plus the value of the company if liquidated. 2

3 Economic Value Added (EVA) EVA = After tax operating income (investment in assets x weighted average cost of capital) Market Value Added (MVA) Difference between the market value of a corporation and capital contributed by shareholders and lenders. Balanced Scorecard: 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?) 3

4 Responsibility Center Measurement Used to isolate a unit so that it can be evaluated separately from the rest of the corporation. Standard (or expected) cost centers Usually used in manufacturing facilities and based on historical data. Revenue centers Production (units or dollars sales) measured without consideration of resource costs. Expense centers Resources are measured in dollars without consideration for service or production costs. Profit centers Performance is measured in terms of the difference between revenues and expenditures. Investment centers Factoring the asset base into the performance evaluation. Definition of Benchmarking The continual process of measuring products, services, and practices against toughest competitors or those companies recognized as industry leaders. Guidelines for Appropriate Control Control should involve only the minimum amount of information. Monitor only meaningful activities and results. Should be timely. Should use both long-term and short-term controls. Controls should aim at pinpointing exceptions. Emphasize the reward of meeting or exceeding the standards. 4

5 : Strategic Incentive Management Approaches to Tie Rewards with Strategic Performance Weighted-factor method Appropriate when executive performance factors and their importance vary from one SBU to another. Long-term evaluation method This method compensates manager for achieving objectives set over a multiyear period. Strategic-funds method View of developmental expenses as different from operational expenses. : 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 a kind of management audit and is extremely useful as a diagnostic tool to pinpoint corporatewide problem areas and to highlight organizational strengths and weaknesses. Audit Steps: Evaluate current performance results. Review corporate governance. Scan and assess the external environment. Scan and assess the internal environment. Analyze strategic factors using SWOT. Generate and evaluate strategic alternatives. Implement strategies. Evaluate and control. 5