EVALUATION AND CONTROL
MEASURING PERFORMANCE

MANAGEMENT - PEM/BAMNG
Pavel Adámek
adamek@opf.slu.cz

    EVALUATION AND CONTROL
OUTLINE OF THE LECTURE
1.Evaluation and Control in Management
2.
2.Measuring Performance
3.
3.Strategic Information Systems
4.
4.Guidelines for Proper Control

    EVALUATION AND CONTROL
INTRODUCTION
•Having strategic management without evaluation and control is like playing football without any
goalposts.
•
•Unless strategic management improves performance, it is only an exercise.
•In business, the bottom-line measure of performance is making a profit.
•
The sticky issue is:
–How should we measure performance?
–Is measuring profits sufficient?
–Does an income statement tell us what we need to know?
–Should two managers receive the same bonus when their divisions earn the same profit, even though
one division is much smaller than the other?

    EVALUATION AND CONTROL
1. EVALUATION AND CONTROL IN MANAGEMENT
•Evaluation and control information consists of performance data and activity reports.
•It compares performance with desired results and provides the feedback necessary for management to
evaluate results and take corrective action, as needed.
•If undesired performance results because the strategic management processes were inappropriately
used, operational managers must know about it so that they can correct the employee activity.
•One of the obstacles to effective control is the difficulty in developing appropriate measures of
important activities and outputs.
•An application of the control process to strategic management provides strategic managers with a
series of questions to use in evaluating an implemented strategy.
•

    EVALUATION AND CONTROL
1. EVALUATION AND CONTROL IN STRATEGIC MANAGEMENT
•The evaluation and control process ensures that a company is achieving what it set out to
accomplish. This process can be viewed as a 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. Standards
can be set not only for final output but also for intermediate stages of production output.
–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.
–5. Take corrective action
•

    EVALUATION AND CONTROL
1. EVALUATION AND CONTROL IN STRATEGIC MANAGEMENT
•Such a strategy review is usually initiated when a gap appears between a company’s financial
objectives and the expected results of current activities.
•
Evaluation and Control Process

    EVALUATION AND CONTROL
1. EVALUATION AND CONTROL IN STRATEGIC MANAGEMENT
Evaluating an Implemented Strategy
SOURCE: From “The Strategic Review,” Planning Review, Jeffrey A. Schmidt, 1998

    EVALUATION AND CONTROL
2. MEASURING PERFORMANCE
•Performance is the end result of activity. Select measures to assess performance based on the
organizational unit to be appraised and the objectives to be achieved.
•The objectives that were established earlier in the strategy formulation part of the strategic
management process (dealing with profitability, market share, and cost reduction, among others)
should certainly be used to measure corporate performance once the strategies have been
implemented.
•
•Some measures, such as return on investment (ROI) and earnings per share (EPS), are appropriate
for evaluating a corporation’s or a division’s ability to achieve a profitability objective.
–This type of measure, however, is inadequate for evaluating additional corporate objectives such
as social responsibility or employee Development.

    EVALUATION AND CONTROL
2. MEASURING PERFORMANCE
•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.
–This measure shows how hard an investment in inventory is working; the higher the ratio, the
better.
–
•Another steering control is customer satisfaction.
–Research reveals that companies that score high on the American Customer Satisfaction Index (ACSI)
have higher stock returns and better cash flows than do those companies that score low on the ACSI.
•A change in a firm’s customer satisfaction typically works its way through a firm’s value chain
and is eventually reflected in quarterly profits.
–To help executives keep track of important steering controls, Netsuite developed dashboard
software that displays critical information in easy-to-read computer graphics assembled from data
pulled from other corporate software programs.
•
•

    EVALUATION AND CONTROL
2. MEASURING PERFORMANCE
Types of Control
•Controls can be established to focus on actual performance results (output), the activities that
generate the performance (behavior), or on resources that are used in performance (input).
•
–Output controls specify what is to be accomplished by focusing on the end result of the behaviors
through the use of objectives and performance targets or milestones.
–
–Behavior controls specify how something is to be done through policies, rules, standard operating
procedures, and orders from a superior.
–
–Input controls emphasize resources, such as knowledge, skills, abilities, values, and motives of
employees.
–

    EVALUATION AND CONTROL
2. MEASURING PERFORMANCE
Types of Control
•Examples of increasingly popular behavior controls are the ISO 9000 and 14000 Standards Series on
quality and environmental assurance, developed by the International Standards Association of
Geneva, Switzerland.
•
•Using the ISO 9000 Standards Series (composed of five sections from 9000 to 9004) is a way of
objectively documenting a company’s high level of quality operations. Using the ISO 14000 Standards
Series is a way to document the company’s impact on the environment.

    EVALUATION AND CONTROL
2. MEASURING PERFORMANCE
Activity-Based Costing
•Activity-based costing (ABC) is a recently developed accounting method for allocating indirect and
fixed costs to individual products or product lines based on the value-added activities going into
that product.
•
•This accounting method is thus very useful in doing a value-chain analysis of a firm’s activities
for making outsourcing decisions.
–Traditional cost accounting, in contrast, focuses on valuing a company’s inventory for financial
reporting purposes. To obtain a unit’s cost, cost accountants typically add direct labor to the
cost of materials.
•

    EVALUATION AND CONTROL
2. MEASURING PERFORMANCE
Primary Measures of Corporate Performance
•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 balanced scorecard
approach.
•
•Even though each of these methods has supporters as well as detractors, the current trend is
clearly toward more complicated financial measures and an increasing use of non-financial measures
of corporate performance.
•

    EVALUATION AND CONTROL
2. MEASURING PERFORMANCE
Primary Measures of Corporate Performance
•The most commonly used measure of corporate performance (in terms of profits) is Return On
Investment (ROI).
•
•Earnings Per Share (EPS), which involves dividing net earnings by the amount of common stock, also
has several deficiencies as an evaluation of past and future performance.
•
•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. This is the company’s net income plus depreciation,
depletion, amortization, interest expense, and income tax expense.
•

    EVALUATION AND CONTROL
2. MEASURING PERFORMANCE
Primary Measures of Corporate Performance
•At the same time, these traditional financial measures are very appropriate when used with
complementary financial and non-financial measures.
•
–For example, some non–financial performance measures often used by Internet business ventures are
stickiness (length of Web site visit), eyeballs (number of people who visit a Web site), and
mindshare (brand awareness). Mergers and acquisitions may be priced on multiples of MUUs (monthly
unique users) or even on registered users.

    EVALUATION AND CONTROL
2. MEASURING PERFORMANCE
A Sample Scorecard for “Keeping Score” with Stakeholders
SOURCE: R. E. Freeman, Strategic Management: A Stakeholder Approach

    EVALUATION AND CONTROL
2. MEASURING PERFORMANCE
Shareholder Value
•Shareholder value can be defined as the present value of the anticipated future stream of ash
flows from the business plus the value of the company if liquidated.
•
•Arguing that the purpose of a company is to increase shareholder wealth, shareholder value
analysis concentrates on cash flow as the key measure of performance.
•
•The New York consulting firm Stern Stewart & Company devised and popularized two shareholder value
measures: economic value added (EVA) and market value added (MVA)

    EVALUATION AND CONTROL
2. MEASURING PERFORMANCE
Balanced Scorecard Approach: Using Key Performance Measures
•Rather than evaluate a corporation using a few financial measures, Kaplan and Norton argue for a
“balanced scorecard,” that includes non-financial as well as financial measures.
•
•In the balanced scorecard, management develops goals or objectives in each of four areas:
•
1.Financial: How do we appear to shareholders?
2.Customer: How do customers view us?
3.Internal business perspective: What must we excel at?
4.Innovation and learning: Can we continue to improve and create value?

    EVALUATION AND CONTROL
2. MEASURING PERFORMANCE
Evaluating Top Management and the Board of Directors
•Through its strategy, audit, and compensation committees, a board of directors closely evaluates
the job performance of the CEO and the top management team.
–The vast majority of American (91%), European (75%), and Asian (75%) boards review the CEO’s
performance using a formalized proces.
•Objective evaluations of the CEO by the board are very important given that CEOs tend to evaluate
senior management’s performance significantly more positively than do other executives.
•The board is concerned primarily with overall corporate profitability as measured quantitatively
by ROI, ROE, EPS, and shareholder value.
•

    EVALUATION AND CONTROL
2. MEASURING PERFORMANCE
Evaluating Top Management and the Board of Directors
•Management audits are very useful to boards of directors in evaluating management’s handling of
various corporate activities.
•
•Management audits have bee developed to evaluate activities such as corporate social
responsibility, functional areas such as the marketing department, and divisions such as the
international division.
•
•These can be helpful if the board has selected particular functional areas or activities for
improvement.
•

    EVALUATION AND CONTROL
2. MEASURING PERFORMANCE
Evaluating Top Management and the Board of Directors
•The strategic audit is a type of management audit. The 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 type of management audit and is extremely useful as a diagnostic tool to pinpoint
corporatewide problem areas and to highlight organizational strengths and weaknesses.

    EVALUATION AND CONTROL
2. MEASURING PERFORMANCE
Primary Measures of Divisional and Functional Performance
•Companies use a variety of techniques to evaluate and control performance in divisions, strategic
business units (SBUs), and functional areas.
– If a corporation is composed of SBUs or divisions, it will use many of the same performance
measures (ROI or EVA, for instance) that it uses to assess overall corporate performance.
•During strategy formulation and implementation, top management approves a series of programs and
supporting operating budgets from its business units.
–During evaluation an control, actual expenses are contrasted with planned expenditures, and the
degree of variance is assessed. This is typically done on a monthly basis.
–
•In addition, top management will probably require periodic statistical reports summarizing data on
such key factors.

    EVALUATION AND CONTROL
2. MEASURING PERFORMANCE
Primary Measures of Divisional and Functional Performance
•According to Xerox Corporation, the company that pioneered this concept in the United States,
benchmarking is “the continual process of measuring products, services, and practices against the
toughest competitors or those companies recognized as industry leaders“.
•The benchmarking process usually involves the following steps:
1.Identify the area or process to be examined. It should be an activity that has the potential to
determine a business unit’s competitive advantage.
2.Find behavioral and output measures of the area or process and obtain measurements.
3.elect an accessible set of competitors and best-in-class companies against which to benchmark.
4.Calculate the differences among the company’s performance measurements and those of the
best-in-class and determine why the differences exist.
5.Develop tactical programs for closing performance gaps.
6.Implement the programs and then compare the resulting new measurements with those of the
best-in-class companies.

    EVALUATION AND CONTROL
3. STRATEGIC INFORMATION SYSTEMS
•Before performance measures can have any impact on strategic management, they must first be
communicated to the people responsible for formulating and implementing strategic plans.
•Strategic information systems can perform this function. They can be computer based or manual,
formal or informal.
•Many corporations around the world have adopted enterprise resource planning (ERP) software.
–ERP unites all of a company’s major business activities, from order processing to production,
within a single family of software modules. The system provides instant access to critical
information to everyone in the organization, from the CEO to the factory floor worker.
–Because of the ability of ERP software to use a common information system throughout a company’s
many operations around the world, it is becoming the business information systems’ global standard.
–The major providers of this software are SAP AG, Oracle, Baan, and SSA and others.

    EVALUATION AND CONTROL
4. GUIDELINES FOR PROPER CONTROL
Guidelines for Proper Control
1.Control should involve only the minimum amount of information needed to give a reliable picture
of events: Too many controls create confusion. Focus on the strategic factors by following the
80/20 rule: Monitor those 20% of the factors that determine 80% of the results.
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 controls should be used: If only short-term measures are emphasized, a
short-term managerial orientation is likely.
5.Controls should aim at pinpointing exceptions: Only activities or results that fall outside a
predetermined tolerance range should call for action.
6.Emphasize the reward of meeting or exceeding standards rather than punishment for failing to meet
standards:

    EVALUATION AND CONTROL
SUMMARY OF THE LECTURE
•In business, the bottom-line measure of performance is making a profit.
•
•Evaluation and control is one of the most difficult parts of strategic management.
•
•That’s why we need to use not only the traditional measures of financial performance, such as net
earnings, ROI, and EPS, but we need to consider using EVA or MVA and a balanced scorecard, among
other possibilities.
•
•The measurement of performance can and does result in short-term oriented actions and goal
displacement.
•
•

    EVALUATION AND CONTROL
SUMMARY OF THE LECTURE
•Once the appropriate performance measurements are taken, it is possible to learn whether the
strategy was successful.
•As shown in the model of strategic management depicted at the beginning this lecture, the measured
results of corporate performance allow us to decide whether we need to reformulate the strategy,
improve its implementation, or gather more information about our competition.
–Top executives report that in many situations, they analyze neither the long-term implications of
present operations on the strategy they have adopted nor the operational impact of a strategy on
the corporate mission. Long-run evaluations may not be conducted because executives:
•don’t realize their importance,
•believe that short-run considerations are more important than long-run considerations,
•aren’t personally evaluated on a long-term basis, or
•don’t have the time to make a long-run analysis.
•
•