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CHAPTER TWELVE
EVALUATION AND CONTROL
This chapter examines the final segment of strategic management—the evaluation of performance and the control of
work activities. Beginning with a basic five-step feedback model, measures of corporate, divisional, and functional
performance are described. Activity-based costing and enterprise risk management are explained. Advantages and
limitations of ROI, ROE, and EPS as performance measures are listed. Economic value added (EVA) and market
value added (MVA) are proposed as measures of shareholder value. The balanced scorecard is explained.
Responsibility centers are suggested to pinpoint performance in various parts of the corporation. Benchmarking is
discussed as a way to compare a company’s products, services, and practices with industry leaders. The chapter also
discusses transfer pricing and information systems in controlling international activities and processes. The chapter
explains two of the most frequent negative side effects of the monitoring and measuring of performance activities—
short-term orientation and goal displacement. Guidelines are presented to help keep the likelihood of occurrence of
these negative side effects to a minimum. Long-term incentive plans are also recommended to better link
compensation to strategic performance.
LEARNING OBJECTIVES
1. Explain how various types of measures and controls are utilized to properly assess performance including
activity-based costing, ERM, ROI, and EVA.
2. Develop a balanced scorecard to examine key performance measures of a company.
TOPICS OUTLINE COVERED
1. Measuring Performance
a. Appropriate Measures
b. Types of Controls
2. Using Benchmarking to Evaluate Performance
3. Strategic Information Systems
a. Enterprise Resource Planning
4. Problems in Measuring Performance
a. Short-Term Orientation
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SUGGESTED ANSWERS TO MYMANAGEMENTLAB QUESTIONS
12-1. Explain why ROI might not be the best measure of firm performance?
The most commonly used measure of corporate performance is ROI. It is simply the result of dividing net income
12-2. What are the best methods for evaluating the top management team?
Through its strategy, audit, and compensation committees, a board of directors closely evaluates the job
SUGGESTED ANSWERS TO DISCUSSION QUESTIONS
12-3. Why is strategic control important in monitoring the process of strategy implementation?
Strategic control is very important in the strategy implementation process. Strategic control requires careful
12-4. What are some examples of behavior controls? Output controls? Input controls?
Behavior controls specify how something is to be done through policies, rules, standard operating procedures, and
orders from a superior. Output controls specify what is to be accomplished by focusing on the end result of the
12-5. Why is EVA an important component of the strategic management process?
EVA (economic value added) is a measure of financial performance based on the difference between the return on
capital and the cost of that capital to a company. A positive EVA indicates that the company’s activities are creating
12-6. Is the balanced scorecard a useful tool for developing, controlling and enhancing the strategy
implementation process of an organization? Why or why not?
The balanced scorecard is a very useful tool in the strategy implementation process of an organization. This
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12-7. Is the evaluation and control process appropriate for a corporation that emphasizes creativity? Are
control and creativity compatible? Explain. (This is an open question.)
This is a wide-open question meant to generate discussion. The chapter does not mention this issue. There is some
feeling that a large number of controls do constrain creative impulses. The argument seems to be that a person’s
mind must be able to run free without constraint in order to generate new innovative concepts. Data from advertising
ADDITIONAL DISCUSSION QUESTIONS FOR INSTRUCTORS
These are not found in the text and may be used by the instructor for classroom discussion or exams.
A12-1. Why bother with shareholder value or a stakeholder scorecard? Isn’t it simpler to evaluate a
corporation and its SBUs just by using standard measures such as ROI or earnings per share?
The answer to the second question is a simple yes. The standard measures, such as sales, profits, earnings per share,
return on investment, and so on, are certainly easier to grasp and more commonly used than any of the proposed
“improved” models. Then why bother with these interesting measures such as ROVA or shareholder value as
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A12-2. Is benchmarking just another fad or is it really useful for all firms? Why?
Benchmarking involves learning how other successful companies do something and imitating or perhaps even
improving on their techniques. Pioneered in the United States by Xerox Corporation, benchmarking is similar to the
time-tested practice of “reverse engineering” in which a company buys the product of another company to take it
A12-3. Why are goal displacement and short-run orientation likely side effects of the monitoring of
performance? What can a corporation do to avoid them?
Goal displacement and short-run orientation are likely side effects of evaluation and control because no system can
be all-inclusive. Goal displacement occurs because people find it easier to focus on a surrogate of performance (the
measure) than on the performance itself. To the extent that the measure tends to be confused with what it is
supposed to be measuring, work activities will be oriented more toward the measures and less toward actual
SUGGESTIONS FOR STRATEGIC PRACTICE EXERCISE
America’s Most Admired Companies
This exercise is a good opportunity to discuss the measures used by Fortune magazine to evaluate a corporation’s
overall performance. The survey measures what it calls “eight key attributes of reputation.” They are Innovation,
People Management, Use of Corporate Assets, Social Responsibility, Quality of Management, Financial Soundness,
