SM Module 5

Concept And Nature Of Strategic Evaluation And Control

Strategic evaluation and control may be defined as the process of determining
the effectiveness of the chosen strategy in achieving the organisation's
objectives and taking corrective actions wherever necessary
The key features of strategic evaluation and control are as follows:
(i) Strategic evaluation and control has two major aspects-judging the
effectiveness of strategy in terms of its results, and taking necessary corrective
actions. These two aspects (evaluative and corrective) are intertwined.
(ii) Strategic evaluation and control is an ongoing process.
(iii) The basic purpose of strategic evaluation and control is to evaluate the
success of strategy formulation and implementation in achieving organisational
objectives.
(iv) Strategic evaluation and control helps to keep the organisation on the right
track. Without this mechanism, strategists cannot find out whether or not
strategy is producing the desired results.

Need For And Importance Of Strategic Evaluation And Control

The process of strategic management is incomplete without evaluation and
control. Strategic evaluation and control plays a vital role in strategic
management. It provides the following benefits:

1. Verification of Strategic Choice: Strategic evaluation and control provides

a check on the validity of strategic choice. Strategy is formulated in the
context of a specific situation. Changes in environment occur over time. As
an ongoing process, strategic evaluation and control reveals whether the
chosen strategy continues to be valid or relevant over time.

2. Congruence between Strategy and Decisions: In order to implement the

chosen strategy, managers make several decisions. Strategic evaluation
and control helps to judge whether these decisions are consistent with the
requirements of the strategy. It puts a pressure on managers to exercise
their discretion carefully.

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 3. Assessment of Progress: Strategy is not an end in itself. It is rather a
means for achieving organisational objectives. Evaluation and control of
strategy indicates the progress made by the organisation towards its
objectives. Progress should be measured both during and after strategy
implementation so that remedial actions can be taken as early as possible.

4. Linkage between Performance and Rewards: Strategic evaluation and

control measures performance which is the objective basis for rewarding
employees. Performance based rewards helps to motivate, retain and
attract talent.

5. Feedback for Future Planning: Evaluation and control of strategy provide

valuable inputs for strategic planning in future. The information and
experience gained through it help strategists in making appropriate
changes in strategy, and necessary improvements in strategy
implementation.

6. Overcoming Resistance to Change: Control process helps in introducing

planned change in the organisation. Strategists can use the control system
to ensure continuing attention to strategic initiatives and to communicate
new strategic agenda. They can develop beliefs, attitudes and values to
ensure desired behaviour. Discussion and debate about strategic moves
can be encouraged.

7. Functional Coordination: Strategy implemention involves several key tasks.

A task is a set of interrelated functions. Individuals perform different
functions. It is necessary to coordinate functions performed by individual
managers and groups other wise they may work at cross purposes. They
may pursue goals which are not consistent with divisional and
organisational objectives. Strategic evaluation and control helps to create
and sustain coordination among different functions.

Participants In Strategic Evaluation And Control

Strategic evaluation and control is a part of strategic management process.
Therefore. all those who are involved in strategy formulation and
implementation should participate in strategic evaluation and control, except
the consultants and other advisors. Large shareholders and lenders (e.g.,
financial institutions) are interested in the security of the principal and returns
rather than in longterm success of the company. In case of public sector

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 enterprises government participates in strategic evaluation and control through
its nominees. Thus, the main participants in the process of strategic evaluation
and control are as follows:

1. Board of Directors: The board of directors periodically evaluates the overall

financial performance and longterm success of the company. However,
practices may differ among companies. In some companies, the promoter
CEO exercises the real power in strategic evaluation. In case of family
owned companies, the head of the family or family council exercises
strategic control. In multinational corporations strategic control is exercised
by parent firms. The controlling ministries evaluate and control in public
sector enterprises.

2. Chief Executive: The chief executive is responsible for overall performance

of the company. But the chief executive is not involved in the evaluation of
day-to-day or routine performance. The role of chief executive in strategic
control is limited to broad parameters such as market share, return on
investment, earnings per share, etc.

3. Other Managers: The heads of SBUs are responsible for overall control of
their respective business units. Functional heads exercise control over their
functional departments. They are concerned more with operational control
and with preparing control reports for higher authorities. For example, the
marketing manager attempts to control sales volume, market share, brand
loyalty, etc. Financial controller, company secretary and auditors exercise
control through financial analysis, budgeting and reporting. Middle level
managers may provide information and feedback and take corrective
actions as per directions from higher level managers.

Role Of Organisational Systems In Evaluation And Control

Strategic evaluation and control process operates in the context of various
organisational systems used for strategy implementation. The information,
planning development, appraisal and reward systems play direct or indirect role
in strategic control.

1. Information System: The information system provides feedback about the

organisation's progress and is, therefore, closely related with the control. It
provides the right information at the right time to the right person so that
timely corrective action is taken. Computerised information systems

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 generate real time information for evaluation and control. For example, a
marketing manager can have instant access to sales and distribution data
from the company's branches/offices all over the country. On the basis of
such data, corrective actions are taken quickly whenever deviations from
key performance indicators occur.

2. Planning System: Planning is the basis of control as a plan guides the

behaviour and activities in the organisation. Control measures progress or
performance towards goals and standards specified in planning.
Performance measures are specified in strategically important areas. These
measures should relate to the domain of managers who are responsible for
exercising control.

3. Development System: The development system seeks to enhance

organisational capability; to achieve better results. It involves preparing
people to perform better in their present and likely future jobs. It is not
directly or closely related to evaluation but helps in preventing deviations
from strategic measures of performance. The development system helps
strategists to initiate and implement corrective action.

4. Appraisal System: Appraisal System involves systematic evaluation of an

individual's performance on the job and potential for development. It
indicates how people are performing. This feedback serves as the basis for
rewards and corrective actions

5. Reward System: Performance based rewards motivate employees to work

towards the achievement of organisational objectives. Reward system,
therefore, helps to avoid or minimise deviations.

Barriers To Evaluation And Control

The main barriers to the strategic evaluation and control process are as follows:

1. Resistance to Evaluation: The evaluation process faces the psychological

barrier of accepting own mistakes. Top management formulates strategy
and also exercises strategic control. It may put the blame on operating
management for mistakes in strategy formulation by finding faults in
strategy implemention. Such a self-serving approach is likely to worsen the
situation by developing corrective actions. Top executives must adopt an
objective attitude to avoid this tendency. They must be willing to admit their
mistakes and ready to lose face for the benefit of the organisation. Open

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 communication among the participants in the evaluation process also helps
to overcome resistance to evaluation and control.

2. Problems in Measurement: Several problems arise in the measurement of

actual performance or results. The information system may fail to provide
valid and timely information. Objectives and performance cannot be
quantified in many areas. Measurement techniques or criteria used in
evaluation may not be fully reliable and valid. Lack of uniformity and
objectivity in measurement distorts the control system. Better information
system, quantification of objectives, standardised procedures for
measurement, and reliable/valid measurement systems help to overcome
these difficulties.

3. Limits of Control: Strategists find it very difficult to decide the limits of

control. Too much controls inhibit initiative and creativity, impede efficient
performance and restrict managerial freedom. On the other hand, too little
controls, make evaluation ineffective, create problems in coordination, and
encourage indiscriminate use of managerial discretion. Managers can
overcome this dilemma of too much versus too less control by learning
from experience

4. Focus on Short term: Quite often managers focus on immediate results and
short term achievements. They may ignore longterm impact of strategy. It is
tedious to judge longterm implications and immediate assessment is easier
and more convenient. In order to overcome this bias the attitude to
measurement should be positive. The focus needs to be on finding out the
factors that obstruct good performance.

5. Emphasis on Efficiency: Efficiency means doing things rightly 'while

effectiveness means doing the right things. What constitutes effective
performance is not always clear. When wrong parameters are used to
measure performance rewards may be given for performance that does not
really contribute to organisational objectives. Therefore, the focus should
be on effectiveness rather than on efficiency.

Requirements For Effective Evaluation And Control

In order to make evaluation effective, control system should be matched with
the requirements of the strategy. For example, under the cost leadership
strategy, the control system must provide frequent and comprehensive reports

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 on costs. On the other hand, in case of differentiation strategy, the focus should
be on building unique features in the firm's offering. Such a fit between
strategy and evaluation helps to make control system effective. Some other
requirements of an effective control system are given below:

(i) Control should monitor only relevant activities and results

(ii) Control system should generate minimum information because too much
information creates clutter and confusion.

(iii) Both performance evaluation and corrective actions should be done at the
most appropriate time.

(iv) Control system should focus on exceptional outcomes.

(v) There should be a balanced focus on longterm and short term performance.

(vi) Those achieving or exceeding performance standards should be properly

rewarded.

Concept And Types Of Strategic Control

Strategic control is the process of judging whether the chosen strategy is
progressing in the right direction and producing the desired results and taking
corrective actions whenever necessary In the words of Julian and Scifres,
"Strategic control involves the monitoring and evaluating of plans, activities and
results with a view towards future action, providing a warning signal through
diagnosis of data, and triggering appropriate interventions, be they either
tactical adjustment or strategic reorientation." Strategic control is the process
of tracking the strategy as it is being implemented, detecting any problem areas
and making necessary adjustments.

While formulating strategy, the strategists make several assumptions about

external and internal environment of the organisation. There is a time gap
between strategy formulation and strategy implementation. During this
intervening period the assumptions made during strategy formulation may
become invalid or irrelevant. Moreover, strategy implementation by itself is a
time consuming process. Therefore, it becomes necessary to continually
assess the validity of the strategy and to modify the strategy in view of the
changing conditions.

In the process of strategic control, the strategists seek answers to the following
questions:

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 (i) Are the premises made during strategy formulation proving to be correct?

(ii) Is the strategy guiding the organisation towards its desired objectives?
(ii) Is the strategy being implemented properly?
(iv) Is there any need for change in the strategy? If yes, what type of change is
required? In this way, strategic central serves as an early warning system.
Strategic controls are of the following types:

1. Premise Control: A strategy is based on certain premises or assumptions

about the internal and external environment of the organisation. Some of
these assumptions are critical and any change in them has a major impact
on the strategy.
The purpose of premise control is to identify the key assumptions, monitor
changes in them and assess the impact of these changes on the strategy
and its implementation. For example, an organisation may choose its
strategy on the assumptions of favorable government policies and a
technological breakthrough. Premise control systematically and continually
assesses the validity of these assumptions made during formulation of
strategy and implementation. Whenever there is a major change in them
strategists have to revise the strategy. The corporate planning staff of the
company can be assigned the responsibility of identifying, key assumptions
and continually checking their validity. The salesforce or marketing
research department may be asked to monitor competitors moves and
other developments in the market. The trigger points at which a change in
strategy is required should be identified. For example, Lafarge of France
dropped the idea of setting up a green field project for manufacturing
cement in India when it found overcapacity in the industry. It opted for
takeover strategy to enter India. Similarly, Tata Motors acquired land to
manufacture its Nano Car in West Bengal. But it shifted the factory to
Gujarat When the West Bengal government opposed the project.

2. Implementation Control: Evaluating whether the plans, projects and

programmes developed to implement strategy are actually guiding the
organisation towards its predetermined objectives or not is called
implementation control. Whenever it is felt that allocation of resources to a
project, plan or programme is not yielding the expected benefits, the same
is resisted. In this way implementation control may result in strategic
rethinking. The purpose is to judge whether the strategy requires change in

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 the context anes of unfolding events and results of strategy
implementation.

There are two main methods of implementation control - strategic thrusts

and review of milestones. Identification and monitoring of strategic thrusts
helps in effective deployment of resources.

For example, concept development, product development and test

marketing are the main thrusts in introducing a new product. At each of
these stages, information is generated. On the basis of such feedback, the
company can decide whether to abandon the proposed product or to
modify its features to make it acceptable in the market. Milestones can be
decided on the basis of critical events, major resource allocations, etc.
These milestones may be reviewed in terms of time and cost as and when
these are reached. The milestone review can also be conducted when a
major environmental change has happened or a major uncertainty is
resolved. The aim of milestone review is to critically examine the progress
in strategy implementation and plan for future contingencies so that the
company's objectives are achieved.

3. Strategic Surveillance: The purpose of strategic surveillance is to monitor

a broad range of events inside and outside the organisation that may
influence the results of chosen strategies. These events may either
threaten or facilitative the strategies. For example, competitors' new
strategies or non acceptance of strategies by a group of employees may
threaten the existing strategies. On the other hand, favourable changes in
government policies may facilitate implementation of chosen strategies.
Thus, strategic surveillance is a sort of internal and external environmental
scanning that reveals the hidden information that may be critical for
strategy implementation.

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 4. Special Alert Control: Sudden and unexpected events occur in business
environment. Fall of a government, a technological innovation, entry of a
predatory competitor, an industrial disaster, a natural catastrophe are
examples of such events. Such crises may threaten the course of a
strategy. An organisation can respond quickly and properly if it gets in early
signal of sudden and unexpected events. Special alert control is designed
to detect such events at an early stage.

Concept And Process Of Operational Control

Operational control is the process of evaluating the performance of strategic
business nits, divisions, etc., and their contribution to the achievement of
organisational objectives. The results of strategic actions are assessed under
operational control, Strategists seek answers to the following questions in
operational control:
(i) How is the organisation performing?

(ii) Are the organisational resourses being utilised properly?

(ii) Are the time schedules being adhered to?

(iv) What actions are needed to ensure proper utilisation of resources and to
act organisational objectives?

Table 13.2: Difference Between Strategic Control and Operational Control

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 Source: J.A. Pearce III and R.B. Robinson, Jr. Strategic Management: Strategy
Formulation and Implementation (3rd edn.), (Homewood, III. Richard D. Irwin,
1988), pp. 404-419.

The process of operational control consists of the following elements or

steps.

These elements are interrelated. Objectives, strategies and plans result in a set
of performance standards. Actual performance is measured and compared with
the standards. Gap between the two (variance) is analysed to identify the
causes. On the basis of feedback. necessary corrective actions are taken

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 which may involve revision of objectives/strategies/plans, adjustment of
standards or improvement in actual performance.

1. Setting Performance Standards: On the basis of objectives and strategies,

standards are set in key areas of performance. For example, cost reduction
is the main objective for a company using a cost leadership strategy. Cost
standards may be set in production, marketing, finance and other functional
areas. These standards represent the desired cost levels which should be
reasonable and feasible. A range in terms of minimum and maximum may
be prescribed to provide some flexibility.

Both quantitative (e.g., return on investment, market share, growth rate in

sales, net profit, etc., and qualitative (e.g., consistency workability and
appropriateness) criteria are used to evaluate performance.

2. Measuring actual Performance: The actual results are measured in terms

of control standards. Accounting, reporting, information and communication
system are used for this purpose. Measurement is difficult in case of
managerial performance. It is desirable to measure performance at the right
time e.g., at the end of a specific activity or task. Performance should be
measured frequently (e.g., every month or quarter) rather than at the end of
the financial year.

3. Analysing Variances: Comparison of actual performance with the

standards reveals gap, if any. When the variance is within tolerate limits, it
is considered insignificant and no corrective action is needed. Significant
variances are analysed to find out their causes. Variances may be caused
by internal or controllable factors (e.g., employee inefficiency) and external
or uncontrollable factors (e.g., non-availablity of power, economic
slowdown, etc.)

4. Taking Corrective Actions: An organisation is not a self-regulating system.

Managerial actions are needed to create an equilibrium. Corrective actions
may involve.

(a) revision of objectives, strategies and plans in case these are not
workable.
(b) resetting performance standard in case these are too high and
impractical;
(c) improving performance in case it is not optimum

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 Several factors may cause poor performance. Faulty resource allocation,
inappropriate organisational structure and systems, defective leadership styles,
low performing culture, inconsistent functional plans are some of these factors.

Techniques For Strategic Control

Strategic evaluation and control involves assessment of the changing
environment and their impact on the organisation's strategy. The techniques
used for strategic control may be classified into two broad categories on the
basis of type of environment Strategic momentum control is usitable for
organisations operating in a relatively stable environment) Strategic leap control
is more appropriate for organisations functioning in a relatively turbulent
environment.

1. Strategic Momentum Control: The techniques in this category are

designed to assure that the assumptions on the basis of which strategies
were formulated are still valid. The organisation takes steps to maintain its
strategic momentum.
The techniques of strategic momentum control are as under:
(a) Responsibility Control Centres: A responsibility centre is assigned the
responsibility for a specific area. It is designed on the basis of the
measurement of inputs and outputs. There are four types of responsibility
centres revenue, expense, profit and investment centres.

(b) Key Success Factors: In this technique, the organisation focusses on the
factors that contribute to the success of strategies. On the basis of these
factors, the strategists can judge whether or not the strategies are leading
to the achievement of organisational objectives.

(c) Generic Strategies: This technique is based on the assumption that the
organisation's strategies are comparable to those of similar organisations.
On the basis of such a comparison, the organisation can judge why and
how other organisaitons are implementing particular strategies. It can judge
align its strategies with them.

2. Strategic Leap Control: In a turbulent environment, an organisation has to

make strategic leaps. Strategic leap control helps the organisation to
identify the strategic changes needed to cope with the changing
environment. The techniques used for strategic leap control are as follows:

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 (a) Strategic issue management: It involves identification of strategic issues
and assessing their impact on the organisation. A strategic issue is any
development, either inside or outside the organisation, which is likely to
have significant impact on the ability of the organisation to achieve its
objectives. Managing strategic issues well in time helps the organisation to
avoid the adverse impact of sudden changes in the environment:
The organisation can design contingency plans to shift strategies whenever
necessary.
(b) Strategic field analysis: It means examining the nature and extent of
synergies that exist or can be developed between different parts of the
organisation. The organisation can move towards its objectives by taking
advantage of existing and possible synergies.
(c) Systems modelling: Under it, the essential features of the organisation
and its environment are simulated through computer based models. On the
basis of such simulation the organisation can assess the impact of
changing environment and can take premptive strategic actions.
(d) Scenarios: These are perceptions about the environment which the
organisation is likely to face in future. Such scenarios enable the
organisation to focus its strategies on forthcoming developments.

How To Make Strategic Control Effective

Lorange, Morton and Ghoshal make the following recommendations for keeping
strategic control creative and viable".
(i) Use strategic control teams drawn together from various parts of the
organisation. Better follow the informal organisation structure and the cross
lines of authority to draw individuals with new insights. Composition of the
strategic control team should change regularly to assure fresh ideas and avoid
stagnation.
(ii) Top management must be involved in the interpretation of key success
factors and how they are monitored.

(iii) Strategic control must focus on bottlenecks in the critical success factors
and on changes in the success factors.
(iv) Flexibility must be obtained within the strategic control process so that
budgets formats, agendas, and other organisational procedures can meet the

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 demands of the particular control context.

According to the model given in Fig. 13.2., top managers must ensure
consistency between four variables.

Quinn suggests the following steps for effective strategic control.

1. Create Commitment: Executives provide broad goals, a proper climate, and

resource support. By allowing various groups to develop and present
proposals for strategies, mangers are able to build commitment among the
groups to support the final strategy.

2. Maintain Objectivity: Top Managers should avoid taking a stand on issues

too early in the generation and evaluation process. When managers take a
position, the generation of new alternatives often ceases and the evaluation
of existing alternatives is often biased.

3. Eliminate Options Two Levels Down: Managers can maintain their position
of neutrality and avoid rejecting proposals by encouraging, discouraging, or
killing options through subordinates.

4. Develop Focus and Consensus: By controlling membership on committees,

managers ✓are able to influence, and if desired, receive the wanted
proposals. Properly selected committees can broaden support for and
increase commitment to new strategies.

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 5. Empower Champions: Managers are given responsibility for developing
new ideas and programmes. As the programme is evaluated and gains
support, these individuals tend to become committed to the programme or
strategy. Once it is given final approval, these managers are then willing to
champion the strategy and guide it through whatever hurdles are necessary
to get it operating effectively.

6. Develop Strategies Incrementally, but not Piecemeal: It is management's

responsibility to make certain that strategies are integrated and appropriate
for the environment in which the firm is operating. Strategies may be
developed in incremental steps, but they must be made to fit together in a
unified, integrated, and cohesive whole.

7. Recognise Continuing Dynamics: Strategies do not remain constant and

fixed for long periods. Part of the executive's responsibility is to gain
consensus and support for the new strategy, but at the same time scope
must be maintained to modify or terminate the strategy. Managers should
use discretion in making certain that the organisation does not become
overcommitted to the new strategy and unwilling to change at some future
point.
Some more guidelines are as follows:

8. Minimum Amount of Information: Control should involve only the minimum

amount of information needed to given a reliable picture of events. Too
many controls create confusion. Focus on the strategic factors by following
the 80/20 rule i.e., monitor those 20% of the factors that determine 80% of
the results.

9. Monitor Only Meaningful Activities and Results: Controls should monitor

only meaningful activities and results, regardless of difficulty of
measurement.

10. Timely Control: Controls should be timely so that corrective action can be
taken before it is too late. Steering controls, that monitor or measure the
factors influencing performance, should be stressed so that advance notice
of problems is given.

11. Use both Longterm and Short term Controls: If only short term measures
are emphasised, a short term managerial orientation is likely.

12. Pinpoint Exceptions: Controls should aim at pinpointing exceptions; only

those activities or results that fall outside a predetermined tolerance range

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 should call for action.

13. Emphasize Rewards: Emphasize the reward of meeting or exceeding

standards rather than punishment for failing to meet standards.

Strategic Audit
Strategic audit is a comprehensive and systematic evaluation of all facets of the
strategic management process. There is no universally accepted method of
strategic audit. Both quantitative and qualitative techniques are used for
strategic audit. Return on investment, growth in sales volume, market share,
etc. are examples of quantitative measures.

Techniques For Operational Control

The focus of operational control is on the allocation and use of organisational
resources. Several techniques are used to judge financial and non-financial
performance of an organisation. Some of these techniques are given below:

1. Activity-Based Costing: Traditional costing does not reveal cause effect

relationship in cost involved and in value created by an activity. Cooper and
Kaplan" developed activity based costing to overcome this problem.
Activity based costing is a system of assigning costs to activities involved
in producing products/services. Cost centres are created and overheads
are assigned to these centres. For example, production scheduling,
machine set up, materials buying and materials management may be
treated as cost centres in a manufacturing organisation. The cost of these
activities/centres are assigned to relevant product/services. Thus, directs
and indirect costs are assigned to activities (not to cost centres) such as
processing an order, attending to a customer complaint, setting up a
machine, etc.

Activity-based costing offers several advantages:

(i) It helps in allocating resources to those activities that create more value
(ii) It helps in understanding the behaviour of overhead costs and their
relationship to products/services, customers, etc

(iii) Its focus is on activities not resources. Therefore, it generates move

relevant information for measuring performance.

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 (iv) It helps in cost control by ascertaining costs of each activity and sub-
activity.

Activity-based costing suffers from many limitations:

(i) It generates considerable information for which computer based
information system is needed .

(ii) Its focus is on cost reduction and not on customer satisfaction.

(iii) It is based on the assumption that the volume of activities is not
dependent on the volume of operations.

2. Budgetary Control: Budgetary control is the process of using budgets to

control activities and performance of an organisation. Budgets are prepared
to establish performance standards and actual performance is compared
with budgetary standards. In case of undesirable variation between the
two, necessary corrective actions are taken. Both overall performance and
performance in functional areas can be controlled through budgets. Sales
budget, production budget, finance budget, cash budget, etc, are functional
budgets. Master budget is an integrated summary of all other budgets.

Budgetary control offers many advantages:

(i) Budgetary control helps in making judicious use of scarce resources
(ii) Budgets provide quantitative standards of performance
(iii) Budgeting involves people at all levels which facilitate mutual
cooperation and coordination between different functions.

Budgetary control suffers from some limitations:

(i) Budgetary control tends to create rigidity in the functioning of the
organisation
(ii) Focus on budgeted figures rather than on results may hamper efficiency
and effectiveness.

3. Return on Investment: The amount of profit in relation to total investment is

known as return on investment (ROI). Thus, ROI Net Profit Total Investment
Comparison of ROI over time period indicates trends in the firm's
profitability. ROI of the firm can be compared with the ROI of similar firms in
the same industry. ROI is a single comprehensive indicator of corporate
performance.

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 ROI offers many advantages:
(i) It reflects the efficiency in the use of new resources
(ii) It helps in rational allocation of resources
(iii) It facilitates decentralisation of authority.
(iv) It can be used as a total control technique.

ROI suffers from several limitations:

(i) Valuation of investment is difficult as it may be original cost, depreciated
cost or replacement cost. During inflation the problem of price adjustment
arises
(ii) ROI is related to risk, higher the return higher the risk

(iii) The focus on short run ROI may hamper R & D and other such areas
which are necessary for longterm profitability
(iv) ROI may lead to excessive focus on financial performance
(v) In case one division sells to another, the problem of transfer pricing
arises
(vi) Business cycles and industry conditions affect ROI.

4. Shareholder Value: Shareholders contribute capital of a company and

assume risk of business. Therefore, the value created by a company for its
shareholders can be used to judge its performance. Shareholder value is
the present worth of anticipated profits. In case of listed company,
shareholder value is expressed in terms of Market Value Added (MVA). It is
the difference between acquisition value and market value of shares.
Shareholder value is derived from Economic Value Added (EVA) which in
turn has been derived from Return On Value Added (ROVA). ROVA is
expressed as profit before tax divided by value added. ROVA helps to
identify the causes of decline. Necessary corrective actions can be taken
on the basis of such early warning signals.

EVA means excess of profit after tax over cost of capital. However, market
price of shares fluctuates widely due to cyclical, seasonal and several other
factors unrelated to corporate performance.

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 Shareholder value alone does not reflect organisational effectiveness.
These are several stakeholder groups in addition to shareholders.
Employees, customers, suppliers, dealers, government, local community
are stakeholders. Value created for them should also be taken into account
in assessing an organisation's overall performance.

5. Ratio Analysis: A financial ratio measures relationship between two

financial variables, Financial ratios are commonly used to measure
operating performance of business firms.
These ratios are grouped into four major categories:
(i) Liquidity Ratios: These ratios indicate a firm's ability to pay its short term
debts current ratio (current assets/current liabilities) indicates the extent to
which current assets are adequate to pay current liabilities. Quick ratio
(liquid assets/current liabilities) better indicates ability to pay current
liabilities.
(ii) Profitability Ratios: These ratios indicate a firm's ability to earn profit in
relation to its sales and investment. Profit margin (selling price-cost per
unit) and return on investment are the main profitability ratios.
(iii) Leverage Ratios: These ratios indicate ratio between equity (owners'
funds) and debt. Debt-equity ratio (debt/equity), and interest coverage ratio
(interest/profit) are the main leverage ratios.
(iv) Activity Ratios: These ratios indicate how the firm's funds are being
used. Inventory turnover ratio (sales/inventory) indicates how effectively
the firm is managing its inventory. Receivable turnover ratio
(sales/receivable) shows how promptly the firm is collecting dues form its
debtors. Assets turnover ratio (sales/assets) shows how effectively the firm
is using its assets to generate sales.

6. Management By Objectives (MBO): Peter Ducker developed the system of

MBO. Under this system, superior and subordinates jointly decide the
objectives through mutual consultation. Performance is continuously
evaluated against these objectives. MBO system operates on the basis of
commitment and self-control.

7. Network Techniques: Programme Evaluation and Review Technique (PERT)

and Critical path method (CPM) are two widely used network techniques.
Both techniques use network diagram wherein activities and events are

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 shown with their logical relationships. These techniques are used for
control of time schedules and costs in projects.

8. Key Success Factors: Monitoring of key success factors helps in

suggesting strategy implementation. Product quality, customer service,
productivity, employee motivation and morale, market share are examples
of key success factors.
The techniques given above focus on financial performance. Some of the
techniques used to judge social performance are as follows:

9. Social Audit: Corporate social audit means a systematic assessment of the

social impact of an organisation's activities. On the basis of social audit, a
social report is prepared to indicate the organisation's role in serving the
society and in discharging its social responsibilities.

10. Environmental Audit: Sustainable development has become a key issue all
over the world. Business firms are now expected to contribute to
environmental protection and sustainable development. Environmental audit
is a systematic assessment of the impact of a firm's activities on the
environment. It helps to provide accurate, comprehensive and meaningful
information on the firm's role in sustaining the environment.

SM Module 5 20