Global Business Strategy

Evaluation & control

 Overview

The evaluation and control process ensures that the company is achieving what
it set out to accomplish.

It compares performance with desired results and provides the feedback necessary for
management to evaluate results and take corrective action, as needed.

Standards used to measure performance are detailed expressions of strategic

objectives. They are measures of acceptable performance results.
 Evaluation and Control in Strategic Management

• Evaluation and control information consists of performance data and activity

reports.

• Evaluation and control information must be relevant to what is being monitored.

• One of the obstacles to effective control is the difficulty in developing appropriate

measures of important activities and outputs.
 Evaluation and Control

Performance is the end result of activity. Which measures to select to assess

performance depends on the organizational unit to be appraised and the objectives to be
achieved.

Some measures, such as Return on Investment (ROI), are appropriate for evaluating
the corporation´s or division´s ability to achieve a profitability objective.

ROI can be computed only after profits are totaled for a period. It tells what happened
after the fact, not what is happening or what will happen.

A firm, therefore, needs to develop measures that predict likely profitability.

These are referred to as steering controls because they measure variables that
influence future profitability.
 Behavior and Output Controls

Behavior Controls specify how something is to be done through policies, rules,

standard operating procedures, and orders from a superior.

One example of an increasingly popular behavior control is the ISO 9000 Standards
Series on Quality Management and Assurance developed by the International
Standards Association of Geneva, Switzerland.

In one survey of manufacturing executives, 81% of the executives found that

Certification in ISO 9000 increased their commitment to quality and gave them a
strategic advantage over noncertified competitors.
 Activity-Based Costing

Activity-Based Costing (ABC) is an accounting method for allocating indirect and fixed
costs to individual products or product lines based on the value – added activities going
into that product.

This accounting method is very useful in doing a value chain analysis of a firm’s
activities for making outsourcing decisions.

Traditional Cost Accounting, in contrast, focuses on valuing a company’s inventory for

financial reporting purposes. To obtain a unit’s cost, cost accountants typically add
direct labor to the cost of materials. Then they compute overhead from rent to R&D
expenses, based on the number of direct labor hours is takes to make a product. To
obtain unit cost, they divide the total by the number of items made during the period
under consideration.
 Activity-Based Costing

Traditional cost accounting is useful when direct labor accounts for most of total costs
and a company produces just a few products requiring the same processes. This may
have been true of companies during the early part of the twentieth century, but it is no
longer relevant today when overhead may account for as much as 70% of
manufacturing costs.

The appropriate allocation of indirect costs and overhead has thus become crucial for
decision making.

The use of traditional cost accounting at IBM blinded management to the true costs of
its PC business.
 Activity-Based Costing

• ABC accounting allows accountants to charge costs more accurately than the
traditional method because it allocates overhead far more precisely.

• Activity-based costing can be used in many types of industries.

• ABC costing is crucial if management is to assess the profitability of different

customers and to make strategic decisions regarding growth or retrenchment.
 Traditional Financial Measures

The most used measures of corporate performance (in terms of profits) are:

Return on Investment (ROI): dividing net income before taxes by total assets.

Earnings per Share (EPS): dividing net earnings by the amount of common stock.

Return on Equity (ROE): dividing net income by total equity.

 Traditional Financial Measures
Return on Investment, Return on Equity, and Earnings per Share are no more reliable
indicators of a corporation’s economic value.

Many corporations are using Shareholder Value as a better measure of corporate

performance and strategic management effectiveness.

Shareholder Value can be defined as the present value of the anticipated future
stream of cash flows from the business plus the value of the company if
liquidated.

Arguing that the purpose of a company is to increase shareholder wealth, shareholder

value analysis concentrates on cash flow as the key measure of performance.
 Shareholder Value Measures

The New York consulting firm Stern Stewart & Company devised and popularized two
shareholder value measures: Economic Value Added (EVA) and Market Value Added
(MVA).

Economic Value Added (EVA) has become an extremely popular shareholder value
method of measuring corporate and divisional performance and may replace ROI as the
standard performance measure.

Economic Value Added (EVA) is the after-tax operating profit minus the total
annual cost of capital.
 Shareholder Value Measures

EVA is the difference between the pre-strategy and post-strategy value for the
business.

Compare that figure to pretax operating earnings. If the difference is positive, the
strategy (and the management employing it) is generating value for the shareholders.
If it is negative, the strategy is destroying shareholder value.

Roberto Goizueta, CEO of Coca Cola explains, “We raise capital to make our product,
and sell it at an operating profit. Then we pay the cost of that capital. Shareholders
pocket the difference”.
 Shareholder Value Measures

Market Value Added (MVA) measures the stock market’s estimate of the net present
value of a firm’s past and expected capital investment projects.

Studies have shown that EVA is a predictor of MVA. Consecutive years of positive EVA
generally lead to a soaring MVA.

Research also reveals that CEO turnover is significantly correlated with MVA and EVA,
whereas ROA an ROE are not.

This suggests that EVA and MVA are more appropriate measures of the market’s
evaluation of a firm’s strategy and its management than are the traditional measures of
corporate performance.
 Balanced Scorecard Approach

Using Key Performance Measures

Rather than evaluate a corporation using a few financial measures, Kaplan and Norton
argue for a “balanced scorecard”, including nonfinancial as well as financial measures.

The Balanced Scorecard combines financial measures that tell the results of actions
already taken with operational measures on customer satisfaction internal processes,
and the corporation’s innovation and improvement activities, the drivers of future
financial performance.
 Balanced Scorecard

Using Key Performance Measures

Management should develop goals or objectives in each of four areas:

Financial: 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?

 Balanced Scorecard
These measures can be thought of as key performance measures that are essential for
achieving a desired strategic option.

Financial Perspective: It could include cash flow, sales growth, ROI, ROE as
measures for success in the financial area.

Customer Perspective: It could include market share, sales coming from new
products (customer acceptance goal), customer satisfaction.

Internal Processes Perspective: It could include cycle time, unit cost, labor
productivity, delivery reliability.

Learning and Development Perspective: It could include training hours, hours spent
in R&D, IT utilization, digital transformation penetration.
 Balanced Scorecard

Balanced Scorecard is concerned primarily with overall corporate profitability as

measured quantitatively by Return on Investment (ROI), Return on Equity (ROE),
Earnings per Share (EPS), and Shareholder Value.

The Board, however, is also concerned with other factors.

Members of the Board generally agree that a CEO’s 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.
 Balanced Scorecard
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Compañía Minera Atacocha S.A.A. GENERAL STRATEGIC MAP OF CMA 2007
05/09/2007

Increment Sales by 5%
Fullfil Investment
Financial Programs in 100%.
Reduce Social Risk Cost.
Perspective Increment Measurable
Reduce Operational Costs by 5%
Reserves by 17%

Improve relationships
Customer´s with communities.
Pespective

Implement sustainability
development projects. Increment Production
of Concentrated Finish construction of the Dam
Increment drilling
Mineral by 5%. by the end of the year.
Internal Processes activities by 20%.
Perspective

Increment production
(extraction of mineral)by 5%. Improve Internal Processes in
25% of the Areas.

Improve internal Improve Job

communication and Environment by 20%
Learning and Develop Planning Culture team work
Development Increment IT utilization
Perspective by 20%.
Implement Training
Develop Security Culture Programs for all the Areas.