Evaluation and Control in Strategic Management
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Questions and Answers

What is a key component of the control process in strategic management?

  • Creating marketing strategies
  • Conducting employee performance reviews
  • Developing new strategic initiatives
  • Collecting performance data and activity reports (correct)

Which of the following best describes output controls?

  • They set guidelines for employee conduct.
  • They focus on the methods used to achieve results.
  • They concentrate on the final results achieved through performance. (correct)
  • They are designed to manage resource allocation.

How should performance be measured following the implementation of strategies?

  • Using objectives established during the strategy formulation phase (correct)
  • Based on the latest industry trends
  • By comparing with competitors' performance
  • Through employee satisfaction surveys

What initiates a strategy review in the control process?

<p>A gap between financial objectives and expected results (A)</p> Signup and view all the answers

What type of control focuses on the resources utilized in performance?

<p>Input controls (C)</p> Signup and view all the answers

Which of the following is an obstacle to effective control?

<p>The difficulty in creating relevant measures for important activities (D)</p> Signup and view all the answers

In strategic management, what is the purpose of evaluating implemented strategies?

<p>To identify performance gaps and corrective actions (A)</p> Signup and view all the answers

What factor should be considered when selecting measures for assessing performance?

<p>The specific objectives to be achieved and the organizational unit under review (B)</p> Signup and view all the answers

When should input controls be most appropriately applied?

<p>When output is difficult to measure and cause-effect is unclear (D)</p> Signup and view all the answers

Which type of control is most suitable when specific output measures are agreed upon but the cause-effect connection is not clear?

<p>Output controls (C)</p> Signup and view all the answers

Why do corporations following the strategy of concentric diversification utilize all three types of controls?

<p>To achieve synergy among divisions (D)</p> Signup and view all the answers

How is Return On Investment (ROI) calculated?

<p>Net income before taxes divided by total amount invested (A)</p> Signup and view all the answers

What is the primary purpose of a strategic audit?

<p>To pinpoint problem areas and highlight organizational strengths and weaknesses. (B)</p> Signup and view all the answers

What is the primary measure used to assess the financial performance of a corporation?

<p>Return On Investment (ROI) (D)</p> Signup and view all the answers

Which type of center focuses solely on measuring production without considering resource costs?

<p>Revenue centers (A)</p> Signup and view all the answers

What should top management establish to track stakeholder concerns effectively?

<p>Stakeholder measures specific to each category (B)</p> Signup and view all the answers

Which of the following is NOT a commonly used measure of corporate performance?

<p>Net profit margin (C)</p> Signup and view all the answers

In which type of responsibility center are standard costs primarily used for evaluation?

<p>Standard cost centers (B)</p> Signup and view all the answers

In which scenario would behavior controls be most appropriate?

<p>When the cause-effect relationship is well-established (C)</p> Signup and view all the answers

What is typically measured in an expense center?

<p>Engineered and discretionary expenses (A)</p> Signup and view all the answers

How is the performance of a responsibility center evaluated?

<p>By comparing actual costs or revenues to budgeted resources. (C)</p> Signup and view all the answers

Which of the following is NOT typically a characteristic of standard cost centers?

<p>Evaluation based on effectiveness rather than efficiency. (D)</p> Signup and view all the answers

What is the primary evaluation focus of revenue centers?

<p>Sales effectiveness (B)</p> Signup and view all the answers

Which department would typically be classified as an expense center?

<p>Research and development department (D)</p> Signup and view all the answers

What is a primary characteristic of a profit center?

<p>It requires a manager to have control over both resources and products. (B)</p> Signup and view all the answers

Which process is essential in benchmarking to evaluate performance?

<p>Identifying best practices from industry outsiders. (A)</p> Signup and view all the answers

What does the performance measurement of an investment center rely on?

<p>The difference between resources used and services or products provided. (D)</p> Signup and view all the answers

What is the first step in the benchmarking process?

<p>Identify the area or process to be examined. (A)</p> Signup and view all the answers

How does benchmarking aid in performance improvement?

<p>By providing insights into how others surpass one's performance. (D)</p> Signup and view all the answers

What is a common misconception about the benchmarking process?

<p>It focuses solely on internal analysis. (A)</p> Signup and view all the answers

Which step follows calculating performance measurement differences in the benchmarking process?

<p>Develop tactical programs for closing performance gaps. (A)</p> Signup and view all the answers

What distinguishes an investment center from a profit center?

<p>Investment centers measure performance based on resource usage and output. (B)</p> Signup and view all the answers

What is the formula for calculating Economic Value Added (EVA)?

<p>After tax operating income - (investment in assets x weighted average cost of capital) (C)</p> Signup and view all the answers

What does the balanced scorecard primarily incorporate in its assessment?

<p>Non-financial measures alongside financial measures (D)</p> Signup and view all the answers

Which area is NOT one of the four perspectives used in the balanced scorecard?

<p>Employee satisfaction perspective (C)</p> Signup and view all the answers

What is a key benefit of using the balanced scorecard approach?

<p>It provides an all-encompassing view of a company's value drivers. (C)</p> Signup and view all the answers

What is the focus of shareholder value analysis?

<p>Increasing shareholder wealth through cash flow analysis (A)</p> Signup and view all the answers

Which statement about non-financial assets in a company is accurate?

<p>They typically contribute 50% to 80% of a firm's overall value. (D)</p> Signup and view all the answers

Which of the following is NOT a key performance measure in the balanced scorecard?

<p>Cost reduction percentages (B)</p> Signup and view all the answers

Flashcards

Evaluation and Control

Using performance data and activity reports to monitor and adjust strategies.

Performance Measurement

Assessing the results of actions to see if objectives are achieved.

Output Controls

Focuses on end results and using objectives and targets to measure performance.

Behavior Controls

Focuses on the process of how tasks are done through policies and rules.

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Strategic Management Control

A process for evaluating strategies by using questions to find gaps between objectives and expectations.

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Control Process in Strategy

The process of evaluating implemented strategies to find problem origins for corrections.

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Performance

The end result of an activity, whether positive or negative.

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Control Types

Controls can focus on outputs (results), behaviors (processes), or inputs (resources).

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Conglomerate Diversification

A corporate strategy where divisions are managed independently, often relying mostly on output controls.

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Concentric Diversification

A corporate strategy utilizing all three types of controls to achieve synergy between different businesses, not as independent.

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Return On Investment (ROI)

A common measure of corporate performance calculated as net income before taxes divided by total assets.

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Earnings Per Share (EPS)

A measure of corporate performance calculated by dividing net earnings by the number of common shares outstanding.

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Stakeholder Measures

Criteria used to assess how a corporation impacts various stakeholders, including their direct and indirect concerns.

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Shareholder Value

The present value of future cash flows plus liquidation value of a company.

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EVA (Economic Value Added)

Measures company performance by subtracting cost of capital from after-tax operating income.

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Balanced Scorecard

A strategy performance measurement method incorporating financial and non-financial metrics.

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Key Performance Measures

Strategic measures essential for achieving strategic goals.

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Financial Perspective (Balanced Scorecard)

How the company appears to shareholders, measured by financial metrics.

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Customer Perspective (Balanced Scorecard)

Measuring how customers perceive the company.

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Internal Business Perspective (Balanced Scorecard)

Focuses on internal processes critical for the company.

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Innovation and Learning Perspective (Balanced Scorecard)

Focus on company's ability to improve and create value.

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Profit Center

An organizational unit that controls both its resources and products/services, aiming to maximize profits.

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Investment Center

An organizational unit responsible for both resources and products/services, measured by the difference between its resources and outputs.

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Benchmarking

A continuous process of comparing your products, services, and practices to the best performers in the industry.

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Benchmarking Step 1: Identify Area

Choose an area or process with the potential to significantly impact your competitive advantage.

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Benchmarking Step 2: Measure

Define behavioral and output measures for the chosen area, then collect data.

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Benchmarking Step 3: Select Competitors

Identify companies, including those in different industries, that perform the chosen process exceptionally well.

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Benchmarking Step 4: Analyze Differences

Compare your performance measurements to the best-in-class companies and understand the reasons behind the differences.

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Benchmarking Step 5: Close Gaps

Develop strategies and actions to improve your performance by closing the gaps with the best-in-class companies.

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Strategic Audit

A type of management audit that helps pinpoint corporate-wide problem areas and highlights strengths and weaknesses. It's like taking a comprehensive health check of a company.

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Responsibility Center

A unit within a corporation with its own budget, evaluated independently on its resource usage and performance.

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Standard Cost Center

A responsibility center primarily used in manufacturing, where costs are calculated based on historical data and compared to actual production costs.

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Revenue Center

A responsibility center that focuses on production (sales), measured in units or dollars, without considering resource costs.

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Expense Center

A responsibility center that incurs costs, but doesn't directly contribute to revenue. Examples include administration, service, and research departments.

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Engineered Expenses

Costs that can be calculated precisely based on specific factors.

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Discretionary Expenses

Costs that can only be estimated, based on judgment and future expectations.

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Effectiveness vs. Efficiency

Effectiveness refers to achieving goals, while efficiency focuses on resource usage. A revenue center might be judged based on effectiveness, while a standard cost center might be judged based on efficiency.

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Study Notes

Evaluation and Control Objectives

  • Understand the basic control process
  • Discuss the basis of measuring performance
  • Choose between ROI and shareholder value measures (like EVA) to assess performance appropriately

Evaluation and Control in Strategic Management

  • Evaluation and control information includes performance data and activity reports (gathered as part of step 3 in Figure 11-1)
  • This information needs to be relevant to what is being tracked.
  • Effective control is challenging due to the difficulty of creating appropriate metrics for activities and outputs.
  • Control process application in strategic management is shown in Figure 11-2
  • This process involves questions used for strategy evaluation, typically initiated when there's a gap between financial objectives and expected results.
  • Analyzing the answers helps pinpoint the origin of problems and determine corrective actions.

Evaluation and Control Process (Figure 11-1)

  • Step 1: Determine what to measure
  • Step 2: Establish predetermined standards
  • Step 3: Measure performance
  • Step 4: Assess if performance matches standards (Yes → Stop, No → Take corrective action)
  • Step 5: Take corrective action

Evaluating an Implemented Strategy (Figure 11-2)

  • Issue: Did existing strategies produce desired results?
  • Analyze if strategies were poorly executed, underlying assumptions were valid, and the situation & key trends were correctly diagnosed.
  • Check for alternative scenarios and analysis
  • Evaluate if strategies & their requirements were communicated effectively
  • Consider management commitment and follow-through

Measuring Performance

  • Performance is the final result of activity.
  • Choose metrics to measure organizational unit performance and objectives.
  • Use the objectives from the earlier strategic management process to measure corporate performance once strategies are implemented.

Types of Controls

  • Controls focus on actual performance (output), the activities generating performance (behavior), or the resources used (input).
  • Output controls specify desired outcomes (e.g., sales quotas)
  • Behavior controls define the processes for actions (e.g., procedures).
  • Input controls emphasize resources (e.g., employee skills).
  • Output, behavior, and input controls are not mutually exclusive

Primary Measures of Corporate Performance — Traditional Financial Measures

  • Return on Investment (ROI): Net income before taxes / total investment (typically total assets).
  • Earnings Per Share (EPS): Net earnings / number of common stocks.
  • Return on Equity(ROE): Net income / total equity.
  • Operating cash flow: Money generated before financing and tax costs; a measure of a company's funds.

Primary Measures of Corporate Performance — Stakeholder Measures

  • Each stakeholder has criteria for evaluating corporate performance.
  • Shareholder value = present value of future cash flow from operations + liquidation value.
  • Shareholder value analysis focuses on cash flow as a performance measure.
  • Economic Value Added (EVA): After-tax operating income – (Investment in assets x weighted average cost of capital)

Evaluation and Control Objectives (Lesson 14)

  • Explain the balanced scorecard approach.
  • Discuss primary measures of divisional and functional performance.
  • Apply the benchmarking process to a specific function or activity.

Balanced Scorecard Approach

  • Kaplan & Norton advocate for a "balanced scorecard" including both financial and non-financial measures.
  • Non-financial measures account for 50-80% of a company's value.
  • This combines financial results with operational measures of customer satisfaction, internal process efficiency, and corporate innovation.
  • Management sets goals in four areas: Financial, Customer, Internal Business Perspective, and Innovation & Learning.
  • Uses key performance indicators (KPIs) to achieve strategic objectives.

Balanced Scorecard Approach – Strategic Audit

  • Strategic Audit = management tool using a checklist to systematically analyze corporate functions & activities.
  • It's a diagnostic tool to identify problem areas & organizational strengths/weaknesses.
  • It can help determine why a certain area is causing problems and generate solutions.

Primary Measures of Divisional and Functional Performance

  • Control systems monitor functions, projects, or divisions, often using budgets.
  • Responsibility centers isolate units for separate performance evaluation.
  • Centers use resources (costs/expenses) to produce services/products (volume/revenue).
  • Five major types of responsibility centers: standard cost centers, revenue centers, expense centers, profit centers, and investment centers.

Using Benchmarking to Evaluate Performance

  • Benchmarking continually measures products, services, and practices against leading competitors.
  • This lets companies learn from industry best practices.
  • Typical benchmarking process steps: identify areas, find measures, select competitors, compare & determine differences, develop tactical programs, and implement/compare results.

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Evaluation and Control - Lessons 13-14 PDF

Description

This quiz explores the evaluation and control objectives critical for effective strategic management. It covers performance measurement techniques such as ROI and shareholder value measures, along with the challenges of establishing relevant metrics. Engage with key concepts that help bridge gaps between financial objectives and actual results.

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