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EvaluationandControl
Chapter 11
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Learning Objectives
Understand the basic control process
Choose among traditional measures, such as ROI,and shareholder value measures, such as economic
value added, to properly assess performanceUse the balanced scorecard approach to develop
ey performance measures
!pply the benchmaring process to a function or anactivity
"evelop appropriate control systems to supportspeci#c strategies including performancemeasurement
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Evaluation and Control%rocess
*igure 11)1
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easuring %erformance
Performance end result of activity
Steering controls measure variables that in-uence future
pro#tability
Cost per available seat mile .airlines/Inventory turnover ratio .retail/
Customer satisfaction
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ypes of Controls
Output controls specify 2hat is to be accomplished by
focusing on the end result through the use of
objectives
Behavior controls specify ho2 something is done through
policies, rules, standard operating proceduresand orders from supervisors
Input controls emphasi3e resources
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!ctivity)4ased Costing
Activity-based costing allocates indirect and direct costs to
individual product lines based on value)added activities going into that product
!llo2s accountants to charge costs
more accurately because it allocatesoverhead more precisely
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Enterprise Risanagement
Enterprise Risk anagement corporate)2ide, integrated process for
managing uncertainties that couldnegatively or positively in-uence theachievement of objectives
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Enterprise Risanagement
he process of rating riss involvesthree steps7
18 Identify the riss using scenarioanalysis, brainstorming or performingris assessments
&8Ran the riss, using some scale ofimpact and lielihood
+8easure the riss using some agreed)upon standard
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raditional *inancialeasures
Return on investment !ROI" result of dividing net income before
ta:es by the total amount invested inthe company .typically measured bytotal assets/
Earnings per share !EPS"
dividing net earnings by the amount ofcommon stoc
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raditional *inancialeasures
Return on e#uity !ROE" involves dividing net income by total e # i l % f
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>on#nancial %erformanceeasures Used by Internet
4usiness ?enturesStickiness length of @eb site visit
Eyeballs number of people 2ho visit a @eb site
indshare
brand a2areness
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Ahareholder ?alue
Shareholder value the present value of the anticipated future
streams of cash -o2s from the business
plus the value of the company if li
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Ahareholder ?alue
arket value added !'A" measures the diBerence bet2een the
maret value of a corporation and thecapital contributed by shareholders andlenders
easures the stoc maret=s estimate
of the net present value of a #rm=s pastand e:pected capital investmentprojects
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4alanced Acore Card
Balanced scorecard combines #nancial measures that tell
the results of actions already taen 2ithoperational measures on customersatisfaction, internal processes and thecorporation=s innovation and
improvement activitiesthe drivers offuture #nancial performance
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4alanced Acore Card
In the balanced scorecard, managementdevelops goals or objectives in each of fourareas7
&inancial( Do2 do 2e appear toshareholders
)ustomer( Do2 do customers vie2 us
Internal business perspective( @hatmust 2e e:cel at
Innovation and learning( Can 2econtinue to improve and create value
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4alanced Acore Card
*ey performance measures measures that are essential for
achieving a desired strategic option
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Chairman)CEO *eedbac Instrument
Fuestionnaire focuses on four keyareas7
18Company performance,&8Leadership of the organi3ation+8eam)building and management
succession08Leadership of e:ternal
constituencies
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Atrategic !udit
Strategic audit provides a checlist of
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Responsibility Centers
Responsibility centers used to isolate a unit so it can be
evaluated separately from the rest ofthe corporation
has its o2n budget and is evaluated onits use of budgeted resources
headed by the manager responsible forthe center=s performance
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Responsibility Centers
Standar
d costcenters
Revenuecenters
E+pensecenters
Pro,tcenters
Investm
entcenters
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4enchmaring
Benchmarking the continual process of measuring
products, services and practices againstthe toughest competitors or thosecompanies recogni3ed as industryleaders
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4enchmaring
18Identify the area or process to be e:amined&8*ind behavioral and output measures+8Aelect an accessible set of competitors of best
practices08Calculate the diBerences among the company=s
performance measurements and those of thecompetitors and determine 2hy the diBerences
e:ist(8"evelop tactical programs for closingperformance gaps
58Implement the programs and compare the results
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Atrategic InformationAystems
Enterprise Resource Planning!ERP"
unites all of a company=s majorbusiness activities 2ithin a single familyof soft2are modules providing instantaccess throughout the organi3ation
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Atrategic InformationAystems
Radio fre#uency identi,cation!R&I"
an electronic tagging technology usedto improve supply)chain eGciency
ivisional and functional ISsupport used to support, reinforce or enlarge
business)level strategy throughout thedecision support system
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%roblems in easuring %erformance
Lac of
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Ahort)erm Orientation
Long)term evaluations may not be conductedbecause e:ecutives7
18"on=t reali3e their importance
&84elieve that short)term considerations aremore important than long)termconsiderations
+8!ren=t personally evaluated on a long)termbasis08"on=t have the time to mae a long)term
analysis
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Hoal "isplacement
.oal displacement confusion of means 2ith ends and occurs
2hen activities originally intended tohelp managers attain corporateobjectives become ends in themselvesor are adapted to meet ends other thanthose for 2hich they 2ere intended
behavior substitution andsuboptimi3ation
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Hoal "isplacement
Behavior substitution refers to the phenomenon of 2hen
people substitute activities that do notlead to goal accomplishment foractivities that do lead to goalaccomplishment because the 2rong
activities are being re2arded
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Hoal "isplacement
Suboptimi/ation refers to the phenomenon of a unit
optimi3ing its goal accomplishment tothe detriment of the organi3ation as a2hole
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Huidelines for %roperControl
18Controls should involve only the minimum amount ofinformation needed to give a reliable picture ofevents8
&8Controls should monitor only meaningful activitiesand results, regardless of measurement diGculty8
+8Controls should be timely so that corrective actioncan be taen before it is too late8
08Long)term and short)term goals should be used8
(8Controls should aim at pinpointing e:ceptions858Emphasi3e the re2ard of meeting or e:ceeding
standards rather than punishment for failing to meetstandards8
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!pproaches to Atrategic
Incentive anagement
@eighted)factor method
Long)term evaluationmethod
Atrategic funds method
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4usiness Atrength
Competitive %osition
*igure 11)&
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!pproaches to Atrategic
Incentive anagement
!n eBective 2ay to achieve the desiredstrategic results through a re2ard systemis to combine the three approaches7
18Aegregate strategic funds from short)termfunds
&8"evelop a 2eighted)factor chart for each
A4U+8easure performance based on pre)ta:pro#t, 2eighted factors and long)termevaluation of the A4U=s performance
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