Chapter 11: Evaluation and Control - Business

Chapter 11

1. Evaluation and Control Chapter 11

2. 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.

3. SHORT-TERM ORIENTATION Top executives report that in many situations, they analyze neither the long-term implications of present operations on the strategy they have adopted nor the operational impact of a strategy on the corporate mission.

4. don’t realize their importance 01 02 believe that short-term considerations are more important than long-term considerations 03 aren’t personally evaluated on a long-term basis 04 don’t have the time to make a long-term analysis Long-term evaluations may not be conducted because executives:

5. GOAL DISPLACEMENT is the confusion of means with ends and occurs when activities originally intended to help managers attain corporate objectives become ends in themselves—or are adapted to meet ends other than those for which they were intended.

6. Two types of goal displacement are behavior substitution and sub-optimization. Behavior Substitution Sub-optimization refers to the phenomenon of 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. refers to the phenomenon of a unit optimizing its goal accomplishment to the detriment of the organization as a whole. The emphasis in large corporations on developing separate responsibility centers can create some problems for the corporation as a whole.

7. Guidelines for Proper Control In designing a control system, top management should remember that controls should follow strategy. Unless controls ensure the use of the proper strategy to achieve objectives, there is a strong likelihood that dysfunctional side effects will completely undermine the implementation of the objectives.

8. The following guidelines are recommended: Control should involve only the minimum amount of information needed to give a reliable picture of events: Too many controls create confusion. Focus on the strategic factors by following the 80/20 rule: Monitor those 20% of the factors that determine 80% of the results 2. Controls should monitor only meaningful activities and results, regardless of measurement difficulty: If cooperation between divisions is important to corporate performance, some form of qualitative or quantitative measure should be established to monitor cooperation.

9. 3. Controls should be timely so that corrective action can be taken before it is too late: Steering controls, 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. Controls 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: Heavy punishment for failure typically results in goal displacement. Managers will “fudge” reports and lobby for lower standards.

10. Strategic Incentive Management To ensure congruence between the needs of a corporation as a whole and the needs of the employees as individuals, management and the board of directors should develop an incentive program that rewards desired performance.

11. The following three approaches are tailored to help match measurements and rewards with explicit strategic objectives and time frames: ■ Weighted-factor method: ■ Long-term evaluation method: The weighted-factor method is particularly appropriate for measuring and rewarding the performance of top SBU managers and group-level executives when performance factors and their importance vary from one SBU to another. The long-term evaluation method compensates managers for achieving objectives set over a multiyear period. An executive is promised some compensation based on long-term performance.

12. ■ Strategic-funds method: The strategic-funds method encourages executives to look at developmental expenses as being different from expenses required for current operations. The accounting statement for a corporate unit enters strategic funds as a separate entry below the current ROI.

13. An effective way to achieve the desired strategic results through a reward system is to combine the three approaches: 01 02 Segregate strategic funds from short-term funds, as is done in the strategic-funds method. Develop a weighted-factor chart for each SBU. 03 Measure performance on three bases: The pretax profit indicated by the strategic-funds approach, the weighted factors, and the long-term evaluation of the SBUs’ and the corporation’s performance.

14. End of Chapter SUMMARY Having strategic management without evaluation and control is like playing football without any scoring or referees. Unless strategic management improves performance, it is only an exercise. In business, the bottom-line measure of performance is making a profit that exceeds that of our competitors. If people aren’t willing to pay more than what it costs to make a product or provide a service, that business will not continue to exist.