Strategic Control and

Evaluation

Concept of control in strategic

management
Strategic efforts to track a strategy as
it
is
being
implemented,detect
problems or changes in its underlying
premises
and
make
necessary
adjustments.
Strategic control is concerned with
guiding action on behalf of the strategy
as that action is taking place and when
the end result is still several years off.
The prime concern of managers in
strategic controls are:

1. Are we moving in the proper

direction? Are key things falling into
place? Are our assumptions about
major trends and changes correct?
Are we doing the critical things that
needs to be done? Should we adjust
or abort the strategy?
2. How we are performing? Are
objectives and schedules being met?
Are costs, revenues and cash flows
matching projections? Do we need
to make operational changes?

Types of control
1. Premise control
2. Strategic surveillance
3. Special alert control
4. Implementation control
Premise control
.Every strategy is based on certain planning
premises-assumptions or predictions
.Premise control is designed to check systematically
and continuously whether the premises on which
the strategy is based are still valid
.If a vital premise is no longer valid, the strategy
may have to be changed.
.Planning premises are primarily concerned with
environmental and industry factors.

Environmental factors
A firm has little or no control over environmental factors.
These factors influence over the success of the companys
strategy
Strategies are based on key premises such as
inflation,technology,interest
rates,regulation,and
demographic/social changes etc.
Industry factors
The performance of the firms in a given industry is
affected by industry factors.
Competitors,suppliers,product subtitutes,and barriers to
entry are some of them in which strategic assumptions are
made.
Tracking all of these premises is expensive and time
consuming.
Managers must select premises whose change is likely and
have major impact on the firm and its strategy.

Strategic surveillance/supervision control

Strategic surveillance is designed to monitor a
broad range or events inside and outside the firm
that are likely to affect the course of its industry
The basic idea behind strategic surveillance is
that important yet unanticipated information may
be uncovered by general monitoring of multiple
information sources
Strategic surveillance must be kept as unfocused
as possible.
It should be a loose environmental scanning
Strategic surveillance provides an ongoing broad
based awareness in all daily operations that may
uncover information relevant to the firms
strategy.

Special alert control

A special alert control is the through and often
rapid reconsideration of the firms strategy
because of a sudden, unexpected event
The tragic event of September 11,2001, an
outside firms sudden acquisition of a leading
competitor; an unexpected product difficulty
In many firms, crisis teams handle the firms
initial response to unforeseen events that may
have an immediate effect on its strategy.
Firms have developed contingency plans along
with crisis teams to respond to circumstances.

Implementation control
Implementation control is designed to
assess whether the overall strategy
should be change in light of the results
associated with the incremental actions
that implement the overall strategy.
The two basic types of implementation
control are
1. Monitoring strategic thrusts/forces or
projects
2. Milestone review

Monitoring strategic thrusts/forces or

projects
Special efforts that are early steps in
executing a broader strategy usually
involving significant resource commitments
yet where predetermined feedback will help
management determine whether continuing
to pursue the strategy is appropriate or
whether it needs adjustment of major
change
Milestone reviews
The milestone reviews take place a full scale
reassessment of the strategy and of the
advisability of continuing or refocusing the
firms direction.

 The milestone may be critical events

,major resource allocation or simply
the passage of a certain amount of
time.

Characteristics of the four types of strategic control

Characterist Premise
Implementa Strategic
Special alert
ics
control
tion control
surveillance control
Objects
control

of Planning
premises
and
projections

Key
strategic
thrusts and
milestones

Potential
threats and
opportunitie
s related to
the strategy

Occurrence
of
recognizable
but unlikely
events

Degree
focusing

of High

Low

Low

High

High
Medium

Low
Low

High
High

Yes
Yes

Seldom
Seldom

Yes
Yes

Yes
Yes

No

Yes

Seldom

Yes

No

yes

Seldom

Seldom

Data
acquisition:
Formalizatio Medium
n
Low
Centralizatio
n
Use with:
Environment
al factors
Industry
factors
Strategy
Specific
factors

Strategic
Surveillance

Premise Control

Special Alert Control

Implementation Control
Strategy
Time
1
formulation

Strategy Implementation
Time 2

Time 3

Role of Strategic Information

System

SIS is computer based

manual, formal or
informal IS, which is applied in the formulation
and implementation of strategic plans.
The information system allows all business
processes automatically by computers in some
organizations, without any managerial input.
The following are the some types of strategic
information system practiced by multinational
companies in this world.
1. Enterprise resource planning
2. Radio frequency identification
3. Divisional and functional is support

Enterprise Resource Planning (ERP)

ERP is a software that unites all of a
companys major business activities from
order processing to production, within a
single family of a software modules.
The system provides instant access to
critical information to everyone in the
organization from the CEO to the factory
floor worker.
It is the business information system in
global standard
The major providers of this software are
SAP
AG,Oracle
(including
People
Soft),J.D.Edwards,Baan, and SSA.

 One of the limitations of this software is

that it is not suitable to every company
It demands a high level of standardization
throughout the corporation and is
extremely complicated.
The failure chance while installing this
system is also very high because of the
following reasons
1. Insufficient tailoring of the software to fit
the company
2. Inadequate training
3. Insufficient implementation support

This software has the following key coverage areas

1. Distribution management
2. Supply chain management
3. Centralized procurement
4. Vendor management
5. Cash cycle
6. Centralized accounting
7. Project management
8. Budgeting and monitoring
9. Plant defect notification
10.Work order management
11.HR organizational and personnel administration
12.Customer management
13.Bill processing

 The major benefit via installing this

software is for gaining competitive
advantage, streamlining operations,
and managing a lean manufacturing
system.
Radio
Frequency
Identification
(RFID)
Radio frequency identification is an
electronic tagging technology used
in a number of companies to
improve supply chain efficiency
By tagging containers and items

 RFID technology is currently in wide use as

wireless
computer
passes
for
toll
roads,tunnels,and bridges.
Divisional and Functional IS support
The information system should be used to
support, reinforce, or enlarge its business
level strategy through its decision support
system.
An SBU pursuing a strategy of overall cost
leadership could use its information system
to reduce costs either by improving labor
productivity or improving the use of other
resources such as inventory or machinery
(Merrill Lynch)

 However , some SBU might want to

pursue a differentiation strategy.
They can use information system to
add uniqueness to the product or
service and contribute to quality,
service or image through the
functional areas.(FedEx)

Quality Control
Total quality management is an
umbrella management for the quality
programs.
The concept of TQM was developed by
American W. Edwards Deming and J.M.
Juran after the World War II
The
concept
gained
the
huge
popularity by 1970s.
During
this
time
Japanese
manufacturers acquired unquestioned
reputations for their superior quality.

 TQM is viewed as virtually a new

organizational culture and way of
thinking
It is build around an intense focus
on:
a. Customer satisfaction
b. Accurate measurement of every
critical variable in a businesss
operation
c.
Continuous
improvement
of
products, services and processes.
d. Work relationships based on trust

Essentials Qualities TQM

1. Define quality and customer value
.The organization should have define
quality in the job,department,and
throughout the company.
.It has to developed from the
customers perspective and has to
issue a written policy.
.The customer value can be found in
the combination of all the three such
as quality, price and speed.

2. Develop a customer orientation

. Develop a 80/20 rule and define customer
value from internal side.
. Focus on internal /external customer value
with quality, efficiency and responsiveness
etc.
3. Focus on the companys business processes.
.The ways customer value is enhanced across
business processes in several functions are:
marketing,operations,research
and
development, accounting, purchasing and
personnel etc.

4. Develop customer and supplier partnership

.This concept says that suppliers are partners in
meeting customer needs, and customers are
partners by providing input so the company and
suppliers
can
meet
and
exceed
those
expectations.
5. Take a preventive approach
.Management has to identify errors and seek to
eliminate non value added work.
6. Adopt an error free attitude
.This concept hold the notion that every
individuals performance standard has to set and
manager has to demonstrate and communicate
error free attitude at every level and work.

7. Get the facts first

. Continuous improvement oriented companied
make decisions based on facts and statistics
not on opinions
8. Encourage every manager and employee to
participate
. We can add customer value via employee
participation,empowerment,participative
decision making, extensive training and
statistical techniques in quality.
9. Create atmosphere of total involvement
. Maximum customer value cannot be achieved
unless all areas of the organization apply
quality concepts simultaneously.

10.Strive for continuous improvement

Organizations quickly find that
continually
improving
quality,
efficiency, and responsiveness in
their
processes,products,and
services is not just good business;
it's a necessity for long run survival.

Activity Based Costing

 Activity based costing is a accounting

method.
This method allocates indirect and fixed
costs to individual products or product
lines.
It is based on the value-added activities
going into that product.
Traditional accounting method focuses on
valuing a companys inventory for
financial reporting purposes.
The per unit cost will be calculated with
the summation of direct as well as indirect
cost to number of units produced.

 ABC costing allows accountants to charge

more reasonable cost than traditional one.
For instance imagine a production line in a
pen factory where black pens are made in
high volume and blue pens in a low volume.
Assume that it takes 8 hours to retool to shift
production from one kind of pen to the other.
In this case the significant cost is also
observed by retooling activities.
If the company produces 10 times as many
black pens as to the blue pens, 10 times the
cost of reprogramming expenses will be
allocated to the black pens as to the blue pens
under the traditional cost accounting method.

 However, ABC method breaks down

pen manufacturing into its activities.
The accountants calculates an
average cost of setting up the
machinery and charges it against
each batch of pens that requires
retooling regardless the size of the
run.
Thus a product carries only those
costs for the overhead it actually
consumes.

Measures of Corporate
Performance

 The traditional corporate financial

performance measures were ROI,EPS
and ROE etc.
However there are numerous other
measures such as:
1. Stakeholder measures
2. Shareholder value
3. Balanced scorecard measures
.The other major modern methods are
innovation
and
new
product
development as they are non financial
measures.

Traditional Financial Measures

ROI
Advantages

Disadvantages

ROI includes all revenues, costs

and expenses etc.

ROI is sensitive with

depreciation.

It is calculated to evaluate the

corporate manager, division or
SBU.

It discourage further investment

or upgrading new ones due to
older depreciation asset value
will increase the ROI

It is used to compare with other

firms

Manager will use ROI as a short

term over its long term

If profit is significant then current ROI will depend on the economic

assets can be used to acquire
condition of the country
fixed assets.
LIFO,FIFO and inflation will
influence ROI

EPS
It has following limitations
1. It is based on accrual income, the real
conversion of income into cash will be
delayed.
2. It does not consider the time value of
money.
ROE
.It has following limitations
1. It is derived from accounting based data
2. EPS and ROE are often unrelated to a
companys stock price.

Operating Cash Flow

It is the amount generated by a company before the cost
of financing and taxes.
It
is
the
companys
net
income
plus
depreciation,depletion,amortization,interest expense and
income tax expense.
Free cash Flow
It is the net income plus depreciation,depletion,and
amortization less capital expenditures and dividends.
It is harder to manipulate than earnings, the number can
be increased by selling accounts receivable, classifying
outstanding checks as accounts payable, trading
securities, and capitalizing certain expenses, such as
direct response advertising.
Now a days these traditional financial measures are out
of practice because these measures have also limitations.
The companies are practicing different financial and non
financial measures as well.

Stakeholder Measures
Each stakeholder has its own set of
criteria to determine how well the
corporation is performing.
These criteria typically deal with the
direct and indirect impacts of corporate
activities on stakeholder interests.
Top management should establish one
or more stakeholder measures for each
stakeholder category so that it can keep
track of stakeholder concerns.
The following figure outlines a sample
scorecard with stakeholders.

Stakehold
er
category

Possible near term measure

Possible long term

measures

Customers

Sales ,New customers, number of

new customer needs met/tries

Growth in sales, turnover of

customer base, ability to
control price

Suppliers

Cost of raw material, delivery

time,inventory,availability of raw
materials

Growth rates of: raw material

costs, delivery time, inventory
New ideas from suppliers.

Financial
community

EPS,stock price, number of buy lists, Ability to convince Wall Street

ROE
of strategy, Growth in ROE

Employees

Number of
suggestions,productivity,number of
grievances

Number of internal promotions

Turnover

Congress

Number of new pieces of legislation

that affect the firm

Number of new regulations that

affect industry ,ratio of
cooperative vs. competitive
encounters

Consumer
advocates

Number of meetings, number of

hostile encounters, number of times
coilation formed, number of legal
actions

Number of changes in policy

due to CA,Number of CA
initiated calls for help

Environme
ntalists

Number of meetings, number of

hostile encounters, number of times
coilations formed, number of EPA

Number of changes in policy

due to environmentalists,
number of environmentalist

Shareholder value
Accounting based methods such as ROI,ROE
and EPS are not reliable indicators of a
corporations economic value
The organizations now a days use shareholder
value to measure of corporate performance
and strategic management effectiveness.
Shareholder value represent the anticipated
future stream of cash flows from the business
plus the value if the company is liquidated.
Shareholder value analyses the cash flow or
increment of shareholders wealth.
The value of a corporation is the present value
of future cash flow at the cost of capital.
As long as the returns from a business exceed
its cost of capital, the business will create

Types of Shareholder Measures

1. Economic Value Added
2. Market Value Added
.The basic motive of EVA and MVA is that
businesses do not invests in projects unless they
can generate a profit above a cost of capital.
Economic Value Added
.EVA=after tax operating income- investment in
assets*weighted average cost of capital (WACC)
.+ if positive the strategy is creating
shareholder value.
.- if negative the strategy is destroying
shareholder value.

 We can increase the shareholder value in

three ways
1. Earning more profit without using more
capital
2. Using less capital
3. Investing capital in high return projects
Market Value Added
.It is the difference between the market
value of a corporation and the capital
contributed by shareholders and lenders.
.It measures the stock markets estimate of
the net present value of a firms past and
expected capital investment projects.

MVA=current market value of stock

and debt-capital invested by the
company i.e. shareholders fund,
bondholders fund, retained earnings
and R&D etc.
One of the limitation of these
measures is that these measures
only touch the financial interests of
the shareholders.
However they ignore the other
stakeholders
such
as
environmentalists and employees

Balanced Scorecard Approach: Using

Key Performance Measures
Balanced scorecard uses the financial as
well as non financial techniques to
measure the corporate performance
The
balanced
scorecard
combines
financial measures that tells the results
of actions already taken with operational
measures on customer satisfaction,
internal processes, and the corporations
innovation and improvement activities.
The non financial areas are the drivers of
future financial performance.

 In the balanced scorecard the

management develops the goals
and objectives in the following given
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

 The above mentioned elements are known as key

performance measures.
The overall goal of these measures are to avoid
corporate bankruptcy.
A company could include cash flow, quarterly
sales growth, and ROE as measures for success in
the financial area.
The market share,customer satisfaction, and
percentage of new sales coming from new
products as measure under the customer
perspective.
The cycle time and unit cost of manufacturing are
measures under the internal business perspective.
The time to develop next generation products
(technology leadership objective) under the
innovation and learning perspective.

Evaluating top management and the BODs

Through its strategy,audit,and compensation
committee, a board of directors closely evaluates
the job performance of the CEO and the top
management team.
Majority of MNCs boards review the CEOs
performance using a formalized process.
The objective of CEOs performance evaluation are
very important given that CEOs tend to evaluate
senior managements performance significantly
more positively than do other executives.
The board will review the overall corporate
profitability as measured by ROI,ROE,EPS and
shareholder value.
The absence of short term profitability certainly
contributes to the firing of any CEO.

 The compensation committee of the BOD will

claim that a CEOs ability to establish strategic
direction, build a management team, and
provide leadership are more critical in the long
run than are a few quantitative measures.
The BOD will evaluate top management not
only on the typical output oriented quantitative
measures, but also on behavioral measures.
The BOD also monitors the individual directors
performance.
The BOD committee will evaluate the board in
three areas such as monitoring management
performance and development/compensation
and statutory compliance and good corporate
governance.

 The compensation committee will

evaluate
executive
and
nonexecutive directors.
They
overlook
the
annual
performance and evaluate the
individual performance and submit
the report to the chairman
The audit committee will also
formed to monitor overall corporate
performance in the competition.

Primary measures of divisional

and functional performance
Companies
use
a
variety
of
techniques to evaluate and control
performance in divisions, Bus, and
functional areas.
If the corporation is composed of
SBUs or divisions, it will use many of
the same performance measures as
ROI,ROE or EPS etc.
For the separate isolated unit such
as R&D unit the corporation
established the responsibility centre.

 During strategy formulation and

implementation, top management
approves a series of programs and
supporting operating budgets from
its business units.
During evaluation and control,
actual expenses are contrasted with
planned expenditures, and the
degree of variance is assessed.
The top level management will
develop
to
assess
different
responsibility centers to evaluate
divisional
and
functional

Responsibility centers
Control systems can be established to
monitor
specific
functions,projects,or
divisions.
Budgets are one type of control system
that is typically used to control the
financial indicators of performance.
Responsibility centers are used to isolate a
unit so that it can be evaluated separately
from the rest of the corporation.
Each responsibility centre has its own
budget and is evaluated on its use of
budgeted resources.

 The centre uses resources to

produce a service or a product.
There are five types of responsibility
centers
1. Standard cost centers
.Standard cost centers are primarily
used in manufacturing facilities.
.The standard cost is the average
historical cost of the particular
product and be used to compare
with actual cost of the product.

2.Revenue centers
Revenue centers is concerned with the
unit sales or dollar sales volume.
The centre is judged in terms of
effectiveness rather than efficiency.
The actual sales are compared with
projected sales i.e. previous years sales.
3. Expense centers
The expense centers are administrative,
service and R&D etc.
These costs company but they only
indirectly contribute to revenue.

4.Profit centers
Performance is measured in terms of the
difference
between
revenues
and
expenditures.
A profit center is typically established
whenever an organizational unit has
control over both its resources and its
products or services.
A company can be organized into
divisions of separate product lines.
The manager of each division is given
autonomy to keep profits at a
satisfactory level.

5.Investment centers
An investment centers performance
is measured in terms of the
difference between its resources and
its services or products.
The
best
used
measure
of
investment center performance is
ROI.

Using benchmarking to evaluate

performance
The continual process of measuring
products,services,and
practices
against the toughest competitors or
those companies recognized as
industry leaders is known as
benchmarking.
Benchmarking
involves
openly
learning how others do something
better than ones own company so
that the company not only can

It has the following steps

1. Identify the area or process to be examined.
2. Find the 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 difference among the companys
performance measurements and those of the
best in class and determine why the difference
exist
5. Develop
critical
programs
for
closing
performance gap
6. Implement the programs and then compare the
resulting new measurements with those of the
best in the class companies.

Problems in Measuring Performance

The measurement of performance is

a crucial part of evaluation and
control.
The lack of quantifiable objectives or
performance standards and the
inability of the information system to
provide timely and valid information
are two obvious control problems.
Without
objective
and
timely
measurements,
it
would
be
extremely
difficult
to
make

 However,
the
use
of
timely,
quantifiable standards does not
guarantee good performance.
The very act of monitoring and
measuring performance can cause
side effects that interfere with
overall corporate performance.
Among the most frequent negative
side effect are a short term
orientation and goal displacement.

Short term orientation

Top executives report that they analyze neither
the long term implications of the present
operations on the strategy nor the operational
impact of a strategy on the corporate mission.
Long run evaluation is not appropriate because
executives
1. Dont realize their importance
2. Believe that short run considerations are more
important than long run considerations
3. Are nor personally evaluated on a long term
basis
4. Dont have the time to make a long run
analysis

Goal displacement
If
not
carefully
work
done,
monitoring
and
measuring
of
performance can actually result in a
decline
in
overall
corporate
performance.
Goal displacement is the confusion
of means with ends and occurs when
activities originally intended to help
managers
attain
corporate
objectives
becomes
ends
in
themselves-or are adapted to meet
ends other than those for which they

Behavior substitution
Behavior substitution refers to a
phenomenon
when
people
substitute activities that do not lead
to goal accomplishment for activities
that do lead to goal accomplishment
because the wrong activities are
being rewarded.
Managers like most other people,
tend to focus more of their attention
on behaviors that are clearly
measurable than on those that are

 Employees often receive little or no reward for

engaging in hard to measure activities such as
cooperation and initiative.
However easy to measure activities might
have little or no relationship to the desired
good performance.
People tend to substitute behaviors that are
recognized and rewarded for behaviors that
are
ignored,
without
regard
to
their
contribution to goal accomplishment.
For example when we tie employees
productivity to reward system, the employees
would alter their behavior to fit reward system.
For example sales man commission in
percentage on the sales volume etc.

Suboptimization
Suboptimization refers to the phenomenon of a unit
optimizing its goal accomplishment to the detriment of
the organization as a whole.
The responsibility centers sometimes refuse to cooperate
with other units or divisions in the same corporation if
cooperation could in some way negatively affect its
performance evaluation.
For example suboptimization occurs when a marketing
department approves an early shipment date to a
customer as a means of getting an order and forces the
manufacturing department into overtime production for
that one order.
Production costs are raised, which reduces the
manufacturing departments overall efficiency.
The end result might be that, although marketing
achieves its sales goals, the corporation as a whole fails
to achieve its expected profitability.

Guidelines for proper control

1. Control should involve only the minimum amount of
information needed to give a reliable picture of the
events.
Too many controls create confusion
Monitor 20% of the factors that determine 80% of the
results.
2. Controls should monitor only meaningful activities and
results, regardless of measurement difficulty.
If we are measuring cooperation between the divisions
to monitor the corporate performance we have to
establish the qualitative and quantitative measures.
3. Control should be timely so that corrective action can
be taken before it is too late
Controls that monitor or measure the factors
influencing performance, should be stressed so that
advance notice of problems is given.

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. Control
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

Strategic Audit to
Evaluate and Control
Perforce
A strategic audit
provides a checklist

of
questions, by area or issue, that enables a
systematic analysis to be made of various
corporate functions and activities.
A strategic audit is a type of management
audit and is extremely useful as a diagnostic
tool to pinpoint corporate wide problem areas
and to highlight organizational strengths and
weaknesses.
A strategic audit can help determine why a
certain area is creating problems for a
corporation and help generate solutions to the
problem.

Strategic Audit Heading

I. Current Situation
A. Past Corporate Performance Indexes
B. Strategic Posture:
Current Mission
Current Objectives
Current Strategies
Current Policies
SWOT Analysis Begins:
II. Corporate Governance
A. Board of Directors
B.Top Management
III.External Environment(EFAS)
Natural Environment
Societal Environment
Task Environment
IV. Internal Environment (IFAS)
A. Corporate Structure
B.Corporate Culture
C.Corporate Resources
1. Marketing
2. Finance
3. R&D
4. Operations and Logistics
5. Human Resources
6. Information Technology
V. Analysis of Strategic Factors (SFAS)
A. Key Internal and External Strategic Factors(SWOT)
B.Review of Mission and Objectives
SWOT Analysis Ends:Recommendation Begins:
VI. Alternatives and Recommendations
A. Strategic Alternatives-pros and cons
B. Recommended Strategy
VII. Implementation
VIII.Evaluation and Control

Analysis
(+)Factors (-) Factors

Comments

The End