(KMBN 301) Unit 5: Strategy Evaluation & Control

Evaluation & Control process

Evaluation and Control in business refers to the process of measuring how well a company is achieving its goals and making adjustments when necessary to stay on track. It ensures that the company is working efficiently and effectively to meet its objectives.

Steps in the Evaluation & Control Process:

1. Set Clear Goals and Standards

First, a company needs to set clear goals and benchmarks (standards) that will help measure success. These could be sales targets, customer satisfaction levels, or production efficiency. Example: A company might set a goal of increasing its sales by 20% in the next year.

2. Measure Performance

Next, the company tracks its progress to see if it is meeting its goals. This involves collecting data and comparing it to the set standards. Example: After six months, the company reviews its sales and finds they have increased by 10% so far.

3. Compare Results to Standards

After measuring performance, the next step is to compare the actual results with the goals. This helps to identify whether the company is on track or falling short. Example: The company aimed for a 20% sales increase, but so far, it has only achieved 10%. This shows they are behind schedule.

4. Take Corrective Action

If the company is not meeting its goals, it needs to take corrective action. This means adjusting strategies or processes to get back on track. Example: The company might decide to increase its marketing budget, offer discounts, or introduce a new product to boost sales.

5. Re-Evaluate Regularly

The process of evaluation and control is ongoing. Regularly reviewing goals and results helps ensure the company stays on course and can adapt to changes in the market or its operations. Example: The company continues to evaluate its sales each month and adjusts its strategies if needed, ensuring long-term success.

Measuring performance

Measuring performance is all about evaluating how well something or someone is doing to reach a goal. In business or organizations, controls are tools or methods used to ensure that things are on track and goals are being met. 

Measuring performance means evaluating how well something is working or achieving its goals. In a business context, performance is often measured to see if goals are being met and to improve efficiency.

Types of Controls

1. Feedforward Control

This is about preventing problems before they happen by making adjustments in advance. This type of control happens before a process or activity starts. It’s about predicting problems and preventing them.

Example: A company checks the quality of raw materials before production starts to avoid defects in the final product.

2. Concurrent Control

This happens while the work is being done. It helps to monitor the process in real time and make changes if needed. This control happens while the process is ongoing. It’s about monitoring activities in real-time and making corrections immediately if things go wrong.

Example: A manager watches employees on the production line to ensure they're following the correct procedures and producing quality work.

3. Feedback Control

This occurs after the work is completed, where results are reviewed and adjustments are made for the future.This type of control happens after an activity is completed. It’s about reviewing results and learning from mistakes or successes to improve future performance.

Example: After a marketing campaign, a company reviews sales data to see how effective the campaign was and uses this info for better future campaigns.

Activity Based Costing (ABC)

Activity-Based Costing (ABC) is a method used to determine the true cost of a product or service by assigning costs based on the activities required to produce it. In simple terms, it helps businesses figure out exactly where they are spending money and what each product or service actually costs to make.

Activity-Based Costing (ABC) is a method used to calculate the cost of a product or service by identifying the activities involved in making it, and then assigning costs to those activities based on how much they are used. It gives a more accurate picture of costs compared to traditional methods.

Let’s say you run a small business that makes custom t-shirts. You have different costs involved, like materials, labor, and electricity. But not all costs are the same for every t-shirt.

Traditional costing might just divide the total costs equally between all t-shirts, but Activity-Based Costing would look at how much time, effort, and resources go into each activity.

Steps to ABC:

1. Identify Activities: For your t-shirts, activities could be:

• Cutting the fabric
• Printing the design
• Packaging the t-shirts

2. Assign Costs to Activities: You know you spend:

• $50 on fabric cutting
• $100 on printing designs
• $30 on packaging

3. Determine Cost Drivers: These are factors that influence costs. For example:

• Fabric cutting might take 1 hour per t-shirt
• Printing might take 2 hours per t-shirt
• Packaging might take 10 minutes per t-shirt

4. Allocate Costs: Now, you can calculate the cost for each activity based on how much each t-shirt uses of that activity.

If you make 10 t-shirts, the costs might break down like this:

• Cutting Fabric: $50 for 10 t-shirts → $5 per t-shirt
• Printing Design: $100 for 10 t-shirts → $10 per t-shirt
• Packaging: $30 for 10 t-shirts → $3 per t-shirt

So, the total cost for one t-shirt would be:

$5 (cutting) + $10 (printing) + $3 (packaging) = $18 per t-shirt

Why It’s Useful

ABC helps you see where you’re spending more money (e.g., printing or cutting fabric), and it can show which products are more expensive to make, even if they don’t seem like it at first. This lets you make smarter decisions about pricing and cost-cutting.

In summary, Activity-Based Costing helps businesses understand the true cost of their products by breaking down the activities involved and assigning costs based on those activities.

Enterprise Risk Management

Enterprise Risk Management (ERM) is a process that helps companies identify, assess, and manage potential risks that could affect their business. It involves looking at all the possible problems that could arise—like financial losses, reputational damage, or operational issues—and creating strategies to deal with them before they happen.

In other words, Enterprise Risk Management (ERM) is the process that businesses use to identify, assess, and manage risks that could affect their goals. It helps companies understand potential problems before they happen and take steps to reduce or eliminate these risks.

Example: Imagine you're running a small restaurant. Some of the risks you might face could include:

• Food supply issues: The supplier runs out of ingredients.
• Health and safety hazards: A customer gets sick after eating.
• Natural disasters: A storm damages your restaurant.

To manage these risks, you might:

• Find backup suppliers in case the main one can’t deliver ingredients.
• Implement strict health and safety checks to ensure food safety.
• Have an insurance policy to cover damage from a storm.

By identifying these risks and having plans in place, you're using Enterprise Risk Management to protect your restaurant from unexpected problems.

Primary Measures of Corporate Performance

Primary measures of corporate performance are key indicators that show how well a company is doing. These measures help businesses track their progress and determine if they're achieving their goals

Corporate performance refers to how well a company is doing in achieving its goals. The primary measures of corporate performance are:

• Profitability: This measures how much profit a company is making compared to its expenses. It shows if the company is earning more than it spends. Example: If a company earns ₹10,000 from sales and its costs are ₹6,000, the profit is ₹4,000. This shows the company is profitable.
• Revenue Growth: This measures the increase in a company's income over time. It indicates whether the company is expanding and attracting more customers. Example: If a company made ₹50,000 in 2023 and ₹60,000 in 2024, the revenue growth is 20%. It shows the company is growing.
• Return on Investment (ROI): This measures how much profit a company makes compared to the money invested in it. It helps to see if the company is making good use of its resources. Example: If a company invested ₹100,000 in a project and earned ₹150,000, the ROI would be 50%. This means the company made a good return on its investment.
• Market Share: This measures a company's sales as a percentage of the total market. A larger market share means the company is doing well compared to its competitors. Example: If the total market for mobile phones is ₹1,000,000, and a company sells ₹300,000 worth of phones, it has a 30% market share.
• Customer Satisfaction: This measures how happy customers are with the company's products or services. Satisfied customers are more likely to return and recommend the company. Example: If a company gets positive reviews from customers or has a high rating on review sites, it indicates good customer satisfaction.

These measures help companies understand how well they are performing and where they need to improve.

Balance Scorecard Approach to Measure Key Performance

The Balanced Scorecard is a tool that helps businesses measure their performance in a balanced way by focusing on four important areas. Instead of just looking at financial results, it considers other factors that contribute to long-term success. Here’s how it works:

• Financial Perspective: This focuses on the financial performance of the business, like profits and revenue. It answers questions like, "How well are we doing financially?" Example: A company wants to increase profits by 10% over the next year.
• Customer Perspective: This area looks at customer satisfaction and how well the business is meeting customer needs. It asks, "Are we delivering value to our customers?" Example: The company measures customer satisfaction through surveys, aiming to improve it by 15%.
• Internal Process Perspective: Here, the business examines its internal operations, like efficiency and productivity. It asks, "Are we improving our processes to deliver products or services better?" Example: The company wants to reduce the time it takes to deliver orders to customers by 20%.
• Learning and Growth Perspective: This area focuses on employee development and innovation. It asks, "Are we investing in our people and systems to grow and improve?" Example: The company plans to train 80% of its employees in new skills to improve productivity.

In short, the Balanced Scorecard helps a company look at its performance from four angles, not just financial results, to ensure long-term success. By balancing all these perspectives, businesses can make better decisions and improve overall performance.

Responsibility Centers

A responsibility center is simply a part of an organization where a manager is responsible for certain activities, and their performance is evaluated based on how well they manage those activities. It's like a "zone of responsibility" where someone is in charge of specific tasks, resources, or outcomes.

in other words, A responsibility center is a part of a business or organization where specific people or teams are responsible for certain tasks or outcomes. These centers are usually categorized based on what the person or team is responsible for controlling: costs, revenue, or profits.

There are different types of responsibility centers based on what the manager is responsible for. 

Here are some examples:

• Cost Center: The manager is responsible for controlling costs but not for revenue.  Example: A factory department that makes products. The manager's job is to keep the production costs low, but they don't directly handle sales or profits.
• Revenue Center: The manager is responsible for generating revenue, but not for controlling costs. Example: A sales team is responsible for selling products. Their goal is to generate as much revenue as possible by making sales, but they don't worry about the production costs.
• Profit Center: The manager is responsible for both costs and revenues, and their performance is evaluated based on profitability. Example: A retail store is responsible for both generating sales (revenue) and managing its expenses (like rent, salaries, etc.). The store’s profit is what matters most.
• Investment Center: The manager is responsible for revenues, costs, and making decisions about investments and resources. Example: A division in a large corporation that handles not just sales and costs, but also decides how to invest its profits into new projects or equipment to maximize future returns.

In short, a responsibility center helps clarify who is responsible for what in a business, making it easier to track performance and make decisions.

Benchmarking

Benchmarking is the process of comparing your business's performance, processes, or products against those of others, usually industry leaders or competitors, to identify areas for improvement

In other words, Benchmarking is the process of comparing your business's performance, products, or services with those of others in the same industry to identify best practices and areas for improvement.

Example: Imagine you're running a small bakery. You notice a popular bakery in your area always has long lines and great reviews. To improve your business, you decide to study what makes theirs successful. You visit their bakery, observe their menu, pricing, customer service, and marketing strategies. By comparing these aspects with your own bakery, you discover that they offer faster service and have a more appealing product display. You use these insights to make changes to your bakery, improving customer satisfaction and increasing sales.

So, benchmarking helps you learn from others and find ways to do things better.

Problems in Measuring Performance & Guidelines for Proper Control

Problems in Measuring Performance

• Lack of Clear Metrics: Sometimes, there are no clear or measurable goals, which makes it hard to assess performance accurately. Example: If a team is asked to "improve customer service," but no specific targets are set (like "reduce customer complaints by 20%"), it's difficult to measure if they are truly performing well.
• Subjective Judgments: Some performance measures are based on opinions rather than concrete data, leading to bias or unfair assessments. Example: A manager might rate an employee’s performance high based on personal liking rather than actual work achievements.
• Overlooking External Factors: External factors (like the economy or market trends) can affect performance but are often ignored, leading to misleading evaluations. Example: A sales team may not meet targets because of an economic downturn, but they might still be judged as underperforming, even though the situation is beyond their control.
• Focusing Only on Short-Term Results: Performance measurement often focuses too much on short-term goals rather than long-term success. Example: A company may push its sales team to meet quarterly targets, even if that means using aggressive tactics that might hurt the brand reputation in the long run.

Guidelines for Proper Control

• Set Clear, Specific Goals: Make sure the performance goals are clear, measurable, and aligned with the overall business strategy. Example: Instead of saying "improve sales," set a goal like "increase sales by 15% in the next quarter."
• Use Objective Data: Whenever possible, rely on data and facts to measure performance to avoid bias or personal opinion. Example: Measure customer service by tracking the number of complaints or positive reviews rather than just assuming the service is good.
• Consider External Factors: Be aware of external influences and adjust performance assessments accordingly. Example: If a company faces a supply chain disruption, it should factor that into its performance review, instead of blaming employees for missing targets.
• Balance Short-Term and Long-Term Goals: Focus on both immediate results and long-term growth to ensure sustainable performance. Example: A company can set quarterly targets for sales but also measure customer satisfaction to ensure that quick wins don’t harm long-term customer relationships.

Strategic Audit of a Corporation

A strategic audit is a process used by companies to evaluate their current business strategies and assess how well they are working to achieve the company’s goals. It’s like taking a "health check" of the company to see if it is heading in the right direction and if any changes need to be made.

Key Steps in a Strategic Audit:

• Analyze the Company’s Current Strategy: Look at the company’s goals and the plan it has in place to achieve them.
• Review External Factors: Understand how the market, competitors, and other outside factors are affecting the company.
• Evaluate Internal Factors: Check how well the company’s resources, employees, and processes are working.
• Identify Issues: Find any problems or areas where the company is not performing as well as it should.
• Make Recommendations: Suggest ways to improve the strategy to help the company grow and succeed.

Example: Imagine a company that sells eco-friendly products. The company might conduct a strategic audit to evaluate how well its current marketing strategy is working.

• Current Strategy: The company uses social media to promote its products and relies on word-of-mouth to attract new customers.
• External Factors: The audit may reveal that competitors are using influencer marketing, and the target market is more active on Instagram than Facebook.
• Internal Factors: The company may realize that it doesn't have enough employees to handle customer inquiries quickly, which is affecting customer satisfaction.
• Issues: Sales are lower than expected because the marketing strategy is not reaching enough people, and there are customer complaints about slow response times.
• Recommendations: The audit could recommend expanding the social media strategy to include Instagram influencers, hiring more customer service staff, and improving the website for a better user experience.

By conducting a strategic audit, the company can identify what’s working, what isn’t, and make the necessary changes to improve its business strategy.

Unit 4: Strategy Choice and Analysis | Unit 3: Strategy Formulation | Unit 2: Environmental Scanning | Unit 1: Introduction of Strategic Management & Corporate Governance