Unit 5

Strategic Evaluation and Control

 Nature of Strategic Evaluation

• Strategic evaluation and control performs the crucial task of

keeping the organization on the right track.

• In the absence of such a mechanism, there would be no

means for strategists to find out whether or not the strategy is
producing the desired effect.
Through the process of strategic evaluation and control, the
strategists attempts to answer a set of questions, as mentioned
below.

1. Is the strategy guiding the organization towards its intended

objectives?
2. Is there a need to reformulate the strategy?
3. How is the organization performing?
4. Are the resources being utilized properly? If not then , what
needs to be done to ensure that resources are utilized properly
so that the objectives are met?
5. Are the time schedules being adhered to?
6. Is the organization and its managers doing things which ought
to be done?
 Barriers in Evaluation

1. Difficulties in measurement

Due to lack of valid information , proper evaluation techniques and

quantifiable parameters.

2. Resistance to evaluation

Evaluation process involves controlling the behavior of individuals

and is prone to resistance, which can be reduced by open
communication .
 Process of Evaluation

• Setting standards of performance

• Measurement of performance

• Analyzing variances

• Taking corrective action

 Importance of Strategic Evaluation

1. Checks on the validity of strategic choice.

2. Serves as a medium of feedback .
3. Facilitates appraisal and reward.
4. Facilitates successful culmination of the strategic
management process .
5. Creates inputs for new strategic planning .
 Strategic Controls

Four Types of Strategic Controls

1. Premise Control

2. Implementation Control

3. Strategic Surveillance

4. Special alert control

 1. Premise Control
Every strategy is based on certain assumptions about environmental (e.g.
favorable govt. policies), organizational (e.g. break through in R&D) and
industry related factors (e.g. change in level and quantum of
competition) . These are very significant factors and any change in them
impacts strategy to a great extent. Premise control serves the purpose of
continually testing the assumptions to find out whether they are still
valid or not . This enables the strategists to take corrective action at the
right time rather than waiting for long.

2. Implementation Control
The implementation of strategy results in a series of plans , programs and
projects . Resource allocation is done for implementing these.
Implementation control is aimed at evaluating whether the plans,
programs, and projects are actually guiding the organization towards its
predetermined objectives or not.
 3. Strategic Surveillance
Strategic surveillance is designed to monitor a broad range of
events inside and outside the company that are likely to impact
the course of a firm’s strategy . e.g. Knowledge management
and organizational learning .

4. Special Alert Control

Special alert control which means rapid response and
immediate reassessment of strategy in the light of sudden and
unexpected events . Special alert control can be exercised
through crisis management teams e.g. sudden fall of the
government at the Centre or state level ,sudden strategic
moves of the competitor , sudden change in the way industry
works or a natural disaster .
 Strategic Controls..
Other types of Strategic Controls
Output Controls (sales quotas, cost reduction OR / AND profit
objectives, survey of customer satisfaction)

Behavioral Control (following co. Procedures, getting to work on

time, making sales calls to potential customers, ISO 9000/ISO 14000,
monitoring of employee phone calls)

Input Control (education and experience of employees)

As per Muralidharan and Hamilton , an MNC as it moves through its

stages of corporate development , its emphasis on control should
move from output at first to behavioral and finally to input control.
 Activity based costing (ABC)
Activity based costing is an accounting method for allocating indirect
and fixed costs to individual product or product lines based on value
added activities going on in context to that product. This method is
useful in doing a value chain analysis of a firm’s activities for making
outsourcing decisions.

In contrast the traditional cost accounting focuses on obtaining a unit

cost by dividing the total cost by the number of items manufactured
during the period under considerations. Traditional costing is useful
when a company produces only a few products. This was true of
companies during the early part of twentieth century but not now.
ABC accounting allows to charge costs more accurately than the traditional
method as it allocates overhead far more precisely.

For e.g. A production line in a pen factory where black pens are
manufactured in large volume and blue pens in small volume .

Assume that it takes eight hours to retool (reprogram the machinery) to

shift the production from one kind of pen to other . The total cost
includes the supplies , the direct labor and the factory overheads. In this
instance a very significant cost is the cost of reprogramming the
machinery to switch from one pen to the other . If the co. produces 10
times as many black pens as blue pens , 10 times the cost of
reprogramming expenses will be allocated to the black pens as to the
blue pens under traditional costing method .
 Activity based costing(ABC) ..
ABC accounting in contrast first breaks down pen manufacturing into its
activities . Calculates an average cost of setting up a machinery and
charge the same against each batch of pens that requires
reprogramming regardless of the size of the run. Thus a product carries
only those costs for the overhead it actually consumes.

Management is now able to discover that the blue pens cost almost as
twice as black pens and will not be able to make a profit on these pens if
they don’t charge a higher price on blue pens . .

Unless there is a strategic reason (e.g. key customer, small demand from
market , good demand from selective markets) , the company will earn
significant profits if it stops manufacturing blue pens.
 Enterprise Risk Management(ERM)
ERM is a corporate wide , integrated process for managing the uncertainties
that could negatively or positively influence the achievement of
corporation’s objective. In the past organization’s managed risk of various
kinds viz. process risk , safety risk , insurance risk and other assorted risks
. As a result certain risks were properly managed while others were not .

The process of risk management involves three steps :

1. Identify the risk by performing risk self assessment .
2. Rank the risks using some scale of impact .
3. Measure the risk, using some agreed upon standard .
For e.g.
1. Microsoft uses scenario analysis to identify business risk .
2. DuPont uses EAR (earnings at risk) to measure impact of risk on reported
earnings.
3. Some co.s use VAR (Value at risk) to measure effect of unlikely events in
normal markets.
 Primary measures of corporate performance

1. Traditional Measures

2. Stakeholder Measures

3. Strategic audit

4. Balanced scorecard approach

 Primary measures of corporate performance..
1. Traditional Measures
a. Return on investment (ROI)
It is the result of dividing net income before taxes by the total amount
invested in the company.
b. Earnings per share(EPS)
which involves dividing net earnings by the amount of common stock (no.
of shares).
c. Return On Equity (ROE)
Which involves dividing net income by the total equity .
d. 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 .
e. Free cash flow
The amount of money a new owner can take out of the firm without
harming the business. Also termed as borrowings .
 Primary measures of corporate performance..
2. Stakeholder Measures
a. 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 .
b. Economic value added (EVA)
Extremely popular method . EVA = after tax operating income – (investment in
assets * weighted average cost of capital)
c. Market value added (MVA)
Is the difference between the market value of a corporation and the capital
contributed by the shareholders and lenders .
3. Strategic audit
Strategic audit provides a check list of problem areas or issues that enables a
systematic analysis of various corporate functions and activities to be done and
thereby providing solutions accordingly . It is a kind of management audit which
helps in identifying the problem areas , strength and weaknesses of an
organization. As such it help in evaluating performance of the top management.
 Primary measures of corporate performance.. 4. Balanced scorecard approach
In the balanced score card the management develops goals or objectives in each of the four areas :
1. Financial
how do we appear to shareholders ?
2. Customer perspective
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 ?

Goal (also termed as Key Performance Measures) is assigned in each area for Instance in case of
Financial : cash flow, quarterly sales growth , ROE etc.
Customer perspective : market share (competitive position goal) , customer satisfaction , percentage of
new sales coming from new products etc.
Internal business perspective – cycle time , unit cost (manufacturing excellence goal)
Innovation and learning – time to develop next generation products (technology leadership goal)

When the balanced scorecard complements corporate strategy , it improves performance . e.g.
DuPont’s uses the balanced score card to align employees, business units and shared services towards
productivity improvements and revenue growth .
 Primary measures of Divisional and Functional
performance

1. Responsibility centers

2. Benchmarking
 1. Responsibility Centers
Responsibility centers are used to isolate the unit so that it can be evaluated separately from rest of the
corporation . Each responsibility center therefore has its own budget , and is evaluated on its use of
budgeted resources . It is headed by a manager who is made responsible for the center’s
performance . The center uses the resources (cost or expenses) to produce a product or a service .
There are five major types of responsibility centers :
Sl. No. Type of responsibility center What resources it measures
Primarily used in manufacturing facilities . Computes
standard cost for each operation on the basis of
historical data . Total standard cost is multiplied by
1 Standard cost centers
the units produced. The result is expected cost of
production which is compared with the actual cost of
production .
Actual sales is compared with the previous year's
2 Revenue centres
sales to measure the effectiveness of sales a region .
Administrative, service or research deptt.They have
3 Expense centers
expenses but they indirectly contribute to revenues
A profit center is typically established whenever an
organization has control both over its resources and
4 Profit centres products and services. By having such centers , a
company can be organized into divisions or separate
product lines .

5 Investment centres Performance is measured in terms of the difference

between its resources and its servcies or products.
Apple emphasizes on a combination of cost , revenue and expense centers . General Electric operates with
investment centers
 2. Benchmarking
According to Xerox corporation , the company that pioneered this concept in the
Unites 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 involves the following steps :

1. Identify the area or process to be examined .

2. Find behavioral and output measures of the area or process and obtain
measurements.
3. Select 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 .
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 .
Problems in measuring performance
1. Lack of quantifiable objectives.
2. Inability of information system to provide timely and valid
information.

Guidelines for proper control

1. Control should involve the minimum amount of information
needed to give a reliable picture of events.
2. Control should monitor only meaningful activities and results.
3. Controls should be timely so that corrective action can be taken
before it is too late.