Strategic Management Business Policy 12th Edition Thomas L W

Strategic Management Business Policy12th Editionthomas L Wheelen

Evaluate and control are critical components within strategic management, ensuring that a company's activities align with its strategic objectives. This process involves measuring actual performance against established standards, analyzing differences, and implementing corrective actions as necessary. The evaluation process is essential for maintaining organizational focus, adapting to environmental changes, and achieving competitive advantage.

The first step in evaluation and control is to determine what to measure. Organizations select key performance indicators (KPIs) that reflect strategic priorities. These measures can be financial, such as return on investment (ROI), earnings per share (EPS), or return on equity (ROE), or non-financial, such as customer satisfaction, market share, or innovation rates. Establishing performance standards provides a benchmark against which actual results are compared. These standards can be based on historical data, industry benchmarks, or strategic targets.

Once standards are set, actual performance data are collected through various measurement systems. Comparing these results with the standards helps identify deviations that require attention. For example, if customer satisfaction scores fall below the target, management can investigate causes and develop strategies to enhance service quality. The comparison process involves analyzing variances and understanding their implications for strategic objectives.

Corrective actions are then taken to address performance gaps. These might involve revising strategies, reallocating resources, improving operational processes, or providing additional training. An effective evaluation system ensures that necessary adjustments are made promptly, maintaining strategic alignment and organizational effectiveness.

Types of Controls

Various control types support the evaluation process. Output controls focus on the end results, such as profit margins or customer satisfaction levels, specifying what is to be achieved. Behavior controls regulate actions and conduct through policies, rules, standard operating procedures, and supervision, emphasizing how tasks should be performed. Input controls monitor resources like capital, labor, or raw materials, ensuring they are used efficiently and effectively. An integrated control framework balances these control types to support strategic goals comprehensively.

Performance Measurement Tools

Activity-Based Costing (ABC) is a significant tool that allocates indirect and direct costs based on the activities that generate them. ABC enables organizations to understand the true cost of products and services, leading to more accurate pricing and resource allocation. This method enhances managerial decision-making by providing detailed insights into cost drivers and profitability at a granular level.

Enterprise Risk Management (ERM) is another pivotal framework that addresses uncertainties affecting strategic objectives. ERM involves identifying potential risks via scenario analysis and risk assessments, ranking them based on impact and likelihood, and measuring them using standardized scales. This proactive approach helps organizations mitigate threats and capitalize on opportunities, aligning risk management with strategic planning.

Key Performance Metrics

Primary measures of corporate performance include financial metrics such as ROI, EPS, ROE, operating cash flow, and free cash flow, which reflect the company's profitability and liquidity. For internet-based companies, non-financial measures like website traffic (eyeballs), user engagement (stickiness), and market share (mindshare) are also crucial indicators of success.

Shareholder value metrics like Economic Value Added (EVA) and Market Value Added (MVA) focus on the economic returns generated for shareholders. EVA calculates the excess profit over the cost of capital, providing a nuanced view of value creation, while MVA assesses the difference between market valuation and invested capital, indicating market perceptions of future growth prospects.

Balanced Scorecard Approach

The Balanced Scorecard integrates financial measures with operational and strategic indicators across four perspectives: financial, customer, internal business processes, and innovation and learning. This comprehensive approach links performance metrics to strategic objectives, fostering organizational alignment and continuous improvement. It emphasizes not only financial results but also customer satisfaction, operational efficiency, and organizational learning.

Evaluation of Top Management and Corporate Governance

The effectiveness of top management and boards of directors can be evaluated through various instruments, including management audits, strategic audits, and feedback instruments. These evaluations assess leadership's ability to guide strategy implementation and maintain corporate accountability. Ensuring sound governance practices supports strategic integrity and organizational success.

Model of Evaluation and Control Process

Figure 11-1 depicts a systematic model of evaluation and control involving setting standards, measuring performance, analyzing deviations, and taking corrective action. While comprehensive, the model's realism depends on its alignment with organizational culture and strategic context. In dynamic, innovative environments, traditional controls may need adaptation to promote flexibility and creativity.

Examples of Control Types

Behavior controls include policies, procedures, and supervisory directives—such as quality assurance protocols or safety regulations—that influence how tasks are performed. Output controls encompass sales targets and customer satisfaction ratings, focusing on results. Input controls involve resource allocations like budgets and staffing, ensuring that resources align with strategic priorities.

Economic Value Added versus Traditional Measures

While ROI, ROE, and EPS are widely used, EVA offers an improved measure by accounting for the cost of capital, providing a clearer picture of value creation. EVA's consideration of true economic profit makes it a valuable metric for strategic decision-making, especially for organizations seeking sustainable growth.

Measuring Profit Center Performance and Transfer Pricing

Transfer prices are often used to evaluate profit centers; however, their effectiveness depends on whether market prices are available and reliable. Managers should be cautious, as transfer prices that deviate from market prices can distort performance assessments. Using market-based transfer pricing enhances the accuracy and fairness of profit measurement.

Control and Creativity

In organizations emphasizing creativity, excessive controls can hinder innovation. A balanced approach involves flexible guidelines and decentralized authority, fostering an environment where creativity can flourish alongside strategic control mechanisms. Encouraging autonomy while maintaining strategic oversight supports both innovation and goal achievement.

Conclusion

In sum, evaluation and control are vital for strategic management success. They provide the feedback necessary for continuous improvement, strategic alignment, and organizational adaptability. While traditional control systems support stability, fostering creativity requires a nuanced approach that balances oversight with freedom. Ultimately, integrating effective measurement tools, performance metrics, and adaptable control processes enables organizations to navigate complex environments and achieve strategic objectives efficiently.

References

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