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Strategic Control and EvaluationConcept of control in strategic managementStrategic 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:

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?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 controlPremise controlStrategic surveillanceSpecial alert controlImplementation controlPremise controlEvery strategy is based on certain planning premises-assumptions or predictionsPremise control is designed to check systematically and continuously whether the premises on which the strategy is based are still validIf a vital premise is no longer valid, the strategy may have to be changed.Planning premises are primarily concerned with environmental and industry factors.Environmental factorsA firm has little or no control over environmental factors.These factors influence over the success of the companys strategyStrategies are based on key premises such as inflation,technology,interest rates,regulation,and demographic/social changes etc.Industry factorsThe 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 controlStrategic surveillance is designed to monitor a broad range or events inside and outside the firm that are likely to affect the course of its industryThe basic idea behind strategic surveillance is that important yet unanticipated information may be uncovered by general monitoring of multiple information sourcesStrategic 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 controlA special alert control is the through and often rapid reconsideration of the firms strategy because of a sudden, unexpected eventThe tragic event of September 11,2001, an outside firms sudden acquisition of a leading competitor; an unexpected product difficultyIn 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 controlImplementation 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 Monitoring strategic thrusts/forces or projectsMilestone review

Monitoring strategic thrusts/forces or projectsSpecial 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 changeMilestone reviewsThe 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.CharacteristicsPremise controlImplementation controlStrategic surveillanceSpecial alert controlObjects of controlPlanning premises and projectionsKey strategic thrusts and milestonesPotential threats and opportunities related to the strategyOccurrence of recognizable but unlikely events Degree of focusing HighLowLowHighData acquisition:FormalizationCentralizationMediumLow HighMediumLowLowHighHighUse with:Environmental factorsIndustry factorsStrategy Specific factorsCompany specific factors YesYes

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No SeldomSeldom

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yesYesYes

Seldom

Seldom YesYes

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Seldom Characteristics of the four types of strategic controlPremise ControlTime 1Time 2Time 3Strategy formulationStrategy ImplementationImplementation ControlSpecial Alert ControlStrategic Surveillance

Role of Strategic Information SystemSIS 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.Enterprise resource planningRadio frequency identificationDivisional 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 standardThe 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 companyIt 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 reasonsInsufficient tailoring of the software to fit the companyInadequate training Insufficient implementation support This software has the following key coverage areasDistribution managementSupply chain managementCentralized procurementVendor managementCash cycleCentralized accountingProject managementBudgeting and monitoringPlant defect notificationWork order managementHR organizational and personnel administrationCustomer management Bill processingThe 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 efficiencyBy tagging containers and items with tiny chips companies use the tags as wireless bar codes to track inventory more efficiently RFID technology is currently in wide use as wireless computer passes for toll roads,tunnels,and bridges.Divisional and Functional IS supportThe 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 ControlTotal 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 IIThe 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 thinkingIt is build around an intense focus on:Customer satisfactionAccurate measurement of every critical variable in a businesss operation Continuous improvement of products, services and processes.Work relationships based on trust and teamwork.

Essentials Qualities TQMDefine quality and customer valueThe 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.

Develop a customer orientationDevelop a 80/20 rule and define customer value from internal side.Focus on internal /external customer value with quality, efficiency and responsiveness etc.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.Develop customer and supplier partnershipThis 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.Take a preventive approachManagement has to identify errors and seek to eliminate non value added work.Adopt an error free attitudeThis 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.Get the facts firstContinuous improvement oriented companied make decisions based on facts and statistics not on opinionsEncourage every manager and employee to participateWe can add customer value via employee participation,empowerment,participative decision making, extensive training and statistical techniques in quality.Create atmosphere of total involvementMaximum customer value cannot be achieved unless all areas of the organization apply quality concepts simultaneously.10.Strive for continuous improvementOrganizations 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 CostingActivity 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 PerformanceThe traditional corporate financial performance measures were ROI,EPS and ROE etc.However there are numerous other measures such as:Stakeholder measuresShareholder valueBalanced scorecard measuresThe other major modern methods are innovation and new product development as they are non financial measures.Traditional Financial MeasuresROI 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 ROIIt is used to compare with other firmsManager will use ROI as a short term over its long termIf profit is significant then current assets can be used to acquire fixed assets.ROI will depend on the economic condition of the countryLIFO,FIFO and inflation will influence ROIEPSIt has following limitationsIt is based on accrual income, the real conversion of income into cash will be delayed.It does not consider the time value of money.ROEIt has following limitationsIt is derived from accounting based dataEPS and ROE are often unrelated to a companys stock price.Operating Cash FlowIt 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 FlowIt 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.

Stakeholder categoryPossible near term measurePossible long term measuresCustomersSales ,New customers, number of new customer needs met/triesGrowth in sales, turnover of customer base, ability to control price Suppliers Cost of raw material, delivery time,inventory,availability of raw materialsGrowth rates of: raw material costs, delivery time, inventoryNew ideas from suppliers.Financial communityEPS,stock price, number of buy lists, ROEAbility to convince Wall Street of strategy, Growth in ROEEmployees Number of suggestions,productivity,number of grievancesNumber of internal promotionsTurnover CongressNumber of new pieces of legislation that affect the firmNumber of new regulations that affect industry ,ratio of cooperative vs. competitive encountersConsumer advocatesNumber of meetings, number of hostile encounters, number of times coilation formed, number of legal actionsNumber of changes in policy due to CA,Number of CA initiated calls for helpEnvironmentalistsNumber of meetings, number of hostile encounters, number of times coilations formed, number of EPA complaints, number of legal actionsNumber of changes in policy due to environmentalists, number of environmentalistShareholder valueAccounting based methods such as ROI,ROE and EPS are not reliable indicators of a corporations economic valueThe 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 value and be worth more than the capital invested in it. Types of Shareholder MeasuresEconomic Value AddedMarket Value AddedThe 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 AddedEVA=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 waysEarning more profit without using more capitalUsing less capitalInvesting capital in high return projectsMarket Value AddedIt 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 aspect.Balanced Scorecard Approach: Using Key Performance MeasuresBalanced scorecard uses the financial as well as non financial techniques to measure the corporate performanceThe 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 areasFinancial: how do we appear to shareholders?Customer: how do customers view us?Internal business perspective: what must we excel at?Innovation and learning: can we continue to improve and create value?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 BODsThrough 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 non-executive directors.They overlook the annual performance and evaluate the individual performance and submit the report to the chairmanThe audit committee will also formed to monitor overall corporate performance in the competition.

Primary measures of divisional and functional performanceCompanies 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 performance.Responsibility centersControl 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 centersStandard cost centersStandard 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 centersRevenue 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 centersThe expense centers are administrative, service and R&D etc.These costs company but they only indirectly contribute to revenue.4.Profit centersPerformance 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 centersAn 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 performanceThe 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 imitate, but perhaps even improve on its techniques.

It has the following stepsIdentify the area or process to be examined.Find the behavioral and output measures of the area or process and obtain measurements.Select an accessible set of competitors and best in class companies against which to benchmark.Calculate the difference among the companys performance measurements and those of the best in class and determine why the difference existDevelop critical programs for closing performance gapImplement the programs and then compare the resulting new measurements with those of the best in the class companies.Problems in Measuring PerformanceThe 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 operational strategic decisions.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 orientationTop 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 Dont realize their importanceBelieve that short run considerations are more important than long run considerationsAre nor personally evaluated on a long term basisDont have the time to make a long run analysisGoal displacementIf 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 were intended.

Behavior substitutionBehavior 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 not.

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.

SuboptimizationSuboptimization 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 control1.Control should involve only the minimum amount of information needed to give a reliable picture of the events.Too many controls create confusionMonitor 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 lateControls that monitor or measure the factors influencing performance, should be stressed so that advance notice of problems is given.Long term and short term controls should be usedIf only short term measures are emphasized a short term managerial orientation is likely.Control should aim at pinpointing exceptionsOnly activities or results that fall outside a predetermined tolerance range should call for action.Emphasize the reward of meeting or exceeding standards rather than punishment for failing to meet standards

Strategic Audit to Evaluate and Control PerforceA 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 Analysis Comments (+)Factors (-) FactorsI. Current SituationA. Past Corporate Performance IndexesB. Strategic Posture:Current MissionCurrent ObjectivesCurrent StrategiesCurrent PoliciesSWOT Analysis Begins:II. Corporate GovernanceA. Board of DirectorsB.Top ManagementIII.External Environment(EFAS)Natural EnvironmentSocietal EnvironmentTask EnvironmentIV. Internal Environment (IFAS)A. Corporate StructureB.Corporate CultureC.Corporate Resources1. Marketing 2. Finance3. R&D4. Operations and Logistics5. Human Resources6. Information TechnologyV. Analysis of Strategic Factors (SFAS)A. Key Internal and External Strategic Factors(SWOT)B.Review of Mission and ObjectivesSWOT Analysis Ends:Recommendation Begins:VI. Alternatives and RecommendationsA. Strategic Alternatives-pros and consB. Recommended StrategyVII. ImplementationVIII.Evaluation and ControlThe End