Description
covers topics like criteria for evaluation, strategic control, operational control, benchmarking, balanced score card, responsibility centers, Good Corporate Governance.
Strategic evaluation and control
Strategic Evaluation & Control
• SEC offers valuable feedback on how things are moving. • Helps in identifying rewarding behaviours, pinpointing responsibilities and failures • Helps in finding solution to unforeseen changes in environment during implementation phase.
Criteria for evaluation
• Consistency: with organisational goals
– If managerial problems tend to be issue based rather than people based strategy is inconsistent
• Consonance: environment
with
internal
and
external
– One trend may be outcome of combination of factors
• Constraint Resolution: financial resources
physical, human and
– Often financial constraints easier to find out but also easier to resolve
• Competitive Advantage: against competitors
– Superiority in resources, skills and position – Positional advantage self sustainable as long as key environmental factors remain stable
Criteria for evaluation
Stakeholder Customer Near term measure Sales New customers Cost of raw material Delivery time inventory EPS ROE Productivity Number of grievances Long term measure Growth in sales Price Growth rate of cost, delivery time, inventory Availability of raw material Growth rate
Supplier
Financial community / Shareholder Employees
Social groups
Number of internal promotions Turnover Number of hostile encounters Number of changes in policy Legal actions
R. E. Freeman
Evaluating implemented strategy
Did the strategy produce desired result
Was it poorly executed Premises and assumptions valid Alternative scenarios assessed current situation evaluated Effective communication
Conclusions Poor communication
Committed management Regular monitoring
Weak top management support Failure to establish feedback mechanism
Strategy formulation adversely affected
Incorrect strategy formulation
Functional strategies consistent Resource allocation sufficient
Incorrect formulation of Functional strategies Incorrect assessment of Resource requirement
Successful implementation
Strategic control
• Strategy implementation is a dynamic process • Are we moving in the right direction?
– Assumptions taken during the process of strategy formulation and implementation may change.
• Strategic control is an early warning system
– Not an end term evaluation
• Hence strategic control is of four types
– – – – Premise control Operational control Strategic surveillance Strategic alert control
Strategic control
• Premise control
– Continuously checking validity of such premises and assumptions on which strategy formulated – Responsibility lies with corporate planning team – Identify key assumptions and monitor them regularly
• Implementation Control
– Whether the plans, programmes, projects are guiding toward corporate strategy? – Identify strategic thrusts for evaluation – Determine milestones for review
Strategic control
• Strategic Surveillance
– Potential threats and opportunities that are likely to affect the strategy
• Strategic alert control
– Trigger mechanism for unrecognizable events – Crisis management
Operational control
• How are we moving/performing? • Evaluation and control over short period • Concerned with Internal environment factors
– Allocation and use of resources – Performance indicators
• Techniques
– – – – – – Quantitative performance measures Benchmarking Balanced score card Management Audits Responsibility centres Network techniques: PERT, CPM
Quantitative performance measures
• Return on Investment • Return on Value Added: net profit before tax / (sales-cost of sales)
– Converted into percentage
• Economic Value Added:
– operating profit after tax - total amount of annual cost of capital
• Direct link with stock price • Can improve EVA by
– Earning more profit without using more capital – Earning more profit using less capital – Investing capital in high return projects
Benchmarking
• Benchmarking has been defined as "the process of identifying, understanding, and adopting outstanding practices from organizations anywhere in the world to help one's organization improve its performance?? (Cogley & Sargent, 2001)
• “The practice of being humble enough to admit that someone else is better at something and being wise enough to learn how to match and even surpass them at it” (American Productivity and Quality Centre)
Benchmarking
What to benchmark? • Performance benchmarking
– Determining how good you are against the benchmark
• Process benchmarking
– Comparing the practices and methods
• Strategic benchmarking
– Comparing long term significant decisions and actions
Benchmarking
Whom to benchmark? • Internal benchmarking
– Between divisions and departments
• Competitive benchmarking
– Comparison against best competitor
• Functional benchmarking
– Comparing process against best practices in the same sector but may be against a non competitive firm
• Generic benchmarking
– Against anyone anywhere
Benchmarking
Limitations • Needs to be done on a continuous basis for effective results • Financial statements may not provide sufficient information
– They provide lagging indicators
• Difficult to find comparable benchmarking in all areas
– Often one has to rely on second best option
Balanced Score Card
Proposed by Kaplan and Norton • Tries to do away the heavy reliance on financial indicators and to build a holistic system of measurement • A comprehensive strategic management system • Keeps the scores of strengths and weaknesses • Enables quantitative as well as qualitative analysis of the organisation. • Identifies key drivers of performance and focusing attention on the goals and targets
Balanced Score Card
EVA
How do we look at shareholders? How do customers see us?
Financial
Profitability
Growth Differentiation
Customer
Cost Response Product development
Can we continue to improve? What must we excel at?
Operations
Demand Management
Order Fulfillment Leadership
Organisational
Organisational learning Ability to change
Management Audit
• Complete audit of the organisation
– – – – Vision Mission Top management Functions of organisation
• • • • • • Marketing Finance Operations HR IS R&D
Responsibility centres
• Responsibility Centres: a unit that can be evaluated separately from the rest of the organization • Most companies use a combination of Responsibility Centres
– – – – – Standard cost centre Revenue centre Expense centre Profit centre Investment centre
Problems in Evaluation and Control
• Too much control prevents from taking initiatives and experimenting through calculated risk • Qualitative aspects cannot be measured with high degree of reliability • Often becomes a fault finding exercise. • Short term orientation – 98% of 400 US Chief executives admitted that they focused on next quarter?s earnings – Over 50% believed that institutional investors as well as individual investors pressurize to improve short term performance
Problems in Evaluation and Control
• Goal displacement: confusion of means with ends • Behaviour substitution
– No reward for intuition, cooperation – Quantifiable measures drive out non quantifiable measures
• Suboptimisation
– Creation of several responsibility centres may take away holistic approach
Guidelines for proper control
• Focused control: too many controls create confusion • Monitor only meaningful activities and results regardless of measurement difficulties • Control by exception: results falling out of predefined tolerance limit • Should be timely • Should be long term as well as short term • Should be to reward and not to punish
Strategic incentive management
• Tie rewards, compensation to performance for improved productivity • Incentive plans should be linked to corporate and divisional strategy • Techniques
– Weighted Factor Method: assign weights to different performance criteria for different levels of growth – Long Term Evaluation: performance units earned over number of years converted into money – Strategic Funds Method: separate strategic funds (futuristic) from operating funds (current)
Corporate Governance
Corporate Governance
? The system by which companies are directed and controlled. ? The way in which the affairs of the corporations are handled by their respective Boards and Officers. ? Current focus of corporate governance is Stakeholders not shareholders.
Corporate Governance
• Due to global concern about unethical practices adopted by large number of publicly held companies, need was felt to review corporate governance. • In UK, the Cadbury Committee (1992) and the Hampel Committee (1995) have gone into the various aspects, specially, the financial matters, related to the governance of companies by its board.
Corporate Governance
• In India, the CII devised a code of desirable corporate governance under chairmanship of Rahul Bajaj in 1997. • Several committees followed:
– Kumar Mangalam Committee on Corporate Governance (1999) – Naresh Chandra Committee on Corporate Audit and Governance (2002) – Narayan Murthy SEBI Committee on Corporate Governance (2003) – National Foundation for Corporate Governance by the Ministry of Corporate Affairs of the GOI in partnership of CII, Institute of Company Secretaries and the Institute of CA of India
Corporate Governance
NFCG defines Corporate Governance • In narrow sense „Corporate Governance involves a set of relationships amongst the company?s management, its board of directors, shareholders and other stakeholders. These relationships which involve various rules and incentives, provide the structure through which objectives of the company are set and the means of attaining those objectives and monitoring performance are determined.? • In broad sense „Corporate Governance is the extent to which companies are run in an open and honest manner.?
Good Corporate Governance
• According to NFCG the key elements of good Corporate Governance are
– Transparency of corporate structures and operations – Accountability of management and board – Responsibility toward employees, creditors, suppliers and local communities.
? In holistic terms Good Corporate governance is concerned with instituting: ? An effective board ? Code of governances ? Transparency in disclosure of information related to financial and operational performance ? Reliability of financial reporting ? Effective auditing and evaluation system ? Effectiveness and efficiency of operations ? Compliance with laws and regulations and ? Proper risk management system ? Safeguarding of assets ? Encouraging whistle bowing policies
Good Corporate Governance
Corporate Governance
• Organisational Perspective– Maximizing the value, subject to meeting the organisation?s financial, legal and other contractual obligations.
• Societal Perspective– Corporate governance is about nurturing enterprises while ensuring accountability in the exercise of power and patronage therefore minimizing the divergence between private and social returns.
Social Responsibility
• Corporate citizenship • Social Responsibility tells what an organisation „ought to do? • Social Responsibility should be considered in all aspects of strategy formulation and implementation including vision, mission, objectives • Still a debatable issue
Different Views On CSR
• Major activity of business is economic, where social functions should be left to other institutions like government – Milton Friedman, ‘only social responsibility of business was to maximise profits for shareholders, staying within the realm of law?“The business of business is business”. – Elaine Sternberg, ‘there is a human rights case against CSR, which is that a stakeholder approach to management deprives shareholders of their property rights.?
Different Views On CSR
• Social responsiveness is imperative for business. Primarily part of the society and have to serve the societal interests – Keith Davis ‘social responsibility rises from an Enlightened Self Interest where organisations realize that it is in their own best interest to act in ways that community considers socially responsible.
Different Views On CSR
• Middle path: All corporates should not try to take up all social issues.
• Economic goals and social responsiveness need not be conflicting rather should be achieved simultaneously. • Porter and Kramer
– CSR is not an issue of pitting business against society rather it is a relationship of interdependence. – It should not be thought of in a generic way rather something appropriate to company?s strategy.
Some facts
• David Wheeler and Maria Sillanpa in “The Stakeholder Corporation” state
– that by 1998, 51 out of the 100 largest economies were not nation states, but corporations. – General Motors was bigger than Denmark; – Toyota was bigger than South Africa.
At the same time • In 1999, the United Nations reported
– that the world's then three richest people - Bill Gates of Microsoft, the Sultan of Brunei and the Walton family of the Wall Mart retail chain - were worth more than the combined gross domestic product of the world's 34 poorest nations.
Social Responsibility
• Social responsibility is to be interlinked with all phases of strategic management • Legal code of conduct • Market pressures • Social pressures • Major areas of concern
– Pollution, health, education, community, social welfare, rural development
CSR Benefits
• Corporates have experienced a range of bottom line benefits, which include improved financial performance • Enhanced brand image & reputation • Increased ability to attract and retain employees • Easier access to capital
– The Social Investment Forum reports that, in the U.S. in 1999, there is more than $2 trillion in assets under management in portfolios that use screens linked to ethics, the environment, and corporate social responsibility.
CSR in India
• Research on 536 companies in India (2005)
– 42 % companies are not active in CSR. – Older companies & those with greater turnovers were more likely to be socially responsible.
• Companies more than 40 years old & turnover greater than Rs 5 billion were found to follow a consistent CSR strategy.
– 17 % have a written policy on CSR.
• 26 % PSU?s have written policy on CSR. • Only 6 % Private companies have written policy on CSR.
Preferred areas for CSR
CSR in India
Meeting Environmental Standards Adhering to Labour Standards Donating money to Social causes Education Health Natural Resource Management
Compani es 84 % 76 % 76 % 66 % 56 % 38 %
Community Support Infrastructure Development Livelihood – Non farm based activities Farm based activities
28 % 23 % 20 % 12 %
CSR: International comparison
Country
United Kingdom India Indonesia Mean of Seven countries*
CSR Penetration Rate 98% 72% 24% 41%
Source: Chambers, Chapple, Moon and Sullivan (2003)
*India, Indonesia, Malaysia, the Philippines, Singapore, South Korea and Thailand
doc_860541665.pptx
covers topics like criteria for evaluation, strategic control, operational control, benchmarking, balanced score card, responsibility centers, Good Corporate Governance.
Strategic evaluation and control
Strategic Evaluation & Control
• SEC offers valuable feedback on how things are moving. • Helps in identifying rewarding behaviours, pinpointing responsibilities and failures • Helps in finding solution to unforeseen changes in environment during implementation phase.
Criteria for evaluation
• Consistency: with organisational goals
– If managerial problems tend to be issue based rather than people based strategy is inconsistent
• Consonance: environment
with
internal
and
external
– One trend may be outcome of combination of factors
• Constraint Resolution: financial resources
physical, human and
– Often financial constraints easier to find out but also easier to resolve
• Competitive Advantage: against competitors
– Superiority in resources, skills and position – Positional advantage self sustainable as long as key environmental factors remain stable
Criteria for evaluation
Stakeholder Customer Near term measure Sales New customers Cost of raw material Delivery time inventory EPS ROE Productivity Number of grievances Long term measure Growth in sales Price Growth rate of cost, delivery time, inventory Availability of raw material Growth rate
Supplier
Financial community / Shareholder Employees
Social groups
Number of internal promotions Turnover Number of hostile encounters Number of changes in policy Legal actions
R. E. Freeman
Evaluating implemented strategy
Did the strategy produce desired result
Was it poorly executed Premises and assumptions valid Alternative scenarios assessed current situation evaluated Effective communication
Conclusions Poor communication
Committed management Regular monitoring
Weak top management support Failure to establish feedback mechanism
Strategy formulation adversely affected
Incorrect strategy formulation
Functional strategies consistent Resource allocation sufficient
Incorrect formulation of Functional strategies Incorrect assessment of Resource requirement
Successful implementation
Strategic control
• Strategy implementation is a dynamic process • Are we moving in the right direction?
– Assumptions taken during the process of strategy formulation and implementation may change.
• Strategic control is an early warning system
– Not an end term evaluation
• Hence strategic control is of four types
– – – – Premise control Operational control Strategic surveillance Strategic alert control
Strategic control
• Premise control
– Continuously checking validity of such premises and assumptions on which strategy formulated – Responsibility lies with corporate planning team – Identify key assumptions and monitor them regularly
• Implementation Control
– Whether the plans, programmes, projects are guiding toward corporate strategy? – Identify strategic thrusts for evaluation – Determine milestones for review
Strategic control
• Strategic Surveillance
– Potential threats and opportunities that are likely to affect the strategy
• Strategic alert control
– Trigger mechanism for unrecognizable events – Crisis management
Operational control
• How are we moving/performing? • Evaluation and control over short period • Concerned with Internal environment factors
– Allocation and use of resources – Performance indicators
• Techniques
– – – – – – Quantitative performance measures Benchmarking Balanced score card Management Audits Responsibility centres Network techniques: PERT, CPM
Quantitative performance measures
• Return on Investment • Return on Value Added: net profit before tax / (sales-cost of sales)
– Converted into percentage
• Economic Value Added:
– operating profit after tax - total amount of annual cost of capital
• Direct link with stock price • Can improve EVA by
– Earning more profit without using more capital – Earning more profit using less capital – Investing capital in high return projects
Benchmarking
• Benchmarking has been defined as "the process of identifying, understanding, and adopting outstanding practices from organizations anywhere in the world to help one's organization improve its performance?? (Cogley & Sargent, 2001)
• “The practice of being humble enough to admit that someone else is better at something and being wise enough to learn how to match and even surpass them at it” (American Productivity and Quality Centre)
Benchmarking
What to benchmark? • Performance benchmarking
– Determining how good you are against the benchmark
• Process benchmarking
– Comparing the practices and methods
• Strategic benchmarking
– Comparing long term significant decisions and actions
Benchmarking
Whom to benchmark? • Internal benchmarking
– Between divisions and departments
• Competitive benchmarking
– Comparison against best competitor
• Functional benchmarking
– Comparing process against best practices in the same sector but may be against a non competitive firm
• Generic benchmarking
– Against anyone anywhere
Benchmarking
Limitations • Needs to be done on a continuous basis for effective results • Financial statements may not provide sufficient information
– They provide lagging indicators
• Difficult to find comparable benchmarking in all areas
– Often one has to rely on second best option
Balanced Score Card
Proposed by Kaplan and Norton • Tries to do away the heavy reliance on financial indicators and to build a holistic system of measurement • A comprehensive strategic management system • Keeps the scores of strengths and weaknesses • Enables quantitative as well as qualitative analysis of the organisation. • Identifies key drivers of performance and focusing attention on the goals and targets
Balanced Score Card
EVA
How do we look at shareholders? How do customers see us?
Financial
Profitability
Growth Differentiation
Customer
Cost Response Product development
Can we continue to improve? What must we excel at?
Operations
Demand Management
Order Fulfillment Leadership
Organisational
Organisational learning Ability to change
Management Audit
• Complete audit of the organisation
– – – – Vision Mission Top management Functions of organisation
• • • • • • Marketing Finance Operations HR IS R&D
Responsibility centres
• Responsibility Centres: a unit that can be evaluated separately from the rest of the organization • Most companies use a combination of Responsibility Centres
– – – – – Standard cost centre Revenue centre Expense centre Profit centre Investment centre
Problems in Evaluation and Control
• Too much control prevents from taking initiatives and experimenting through calculated risk • Qualitative aspects cannot be measured with high degree of reliability • Often becomes a fault finding exercise. • Short term orientation – 98% of 400 US Chief executives admitted that they focused on next quarter?s earnings – Over 50% believed that institutional investors as well as individual investors pressurize to improve short term performance
Problems in Evaluation and Control
• Goal displacement: confusion of means with ends • Behaviour substitution
– No reward for intuition, cooperation – Quantifiable measures drive out non quantifiable measures
• Suboptimisation
– Creation of several responsibility centres may take away holistic approach
Guidelines for proper control
• Focused control: too many controls create confusion • Monitor only meaningful activities and results regardless of measurement difficulties • Control by exception: results falling out of predefined tolerance limit • Should be timely • Should be long term as well as short term • Should be to reward and not to punish
Strategic incentive management
• Tie rewards, compensation to performance for improved productivity • Incentive plans should be linked to corporate and divisional strategy • Techniques
– Weighted Factor Method: assign weights to different performance criteria for different levels of growth – Long Term Evaluation: performance units earned over number of years converted into money – Strategic Funds Method: separate strategic funds (futuristic) from operating funds (current)
Corporate Governance
Corporate Governance
? The system by which companies are directed and controlled. ? The way in which the affairs of the corporations are handled by their respective Boards and Officers. ? Current focus of corporate governance is Stakeholders not shareholders.
Corporate Governance
• Due to global concern about unethical practices adopted by large number of publicly held companies, need was felt to review corporate governance. • In UK, the Cadbury Committee (1992) and the Hampel Committee (1995) have gone into the various aspects, specially, the financial matters, related to the governance of companies by its board.
Corporate Governance
• In India, the CII devised a code of desirable corporate governance under chairmanship of Rahul Bajaj in 1997. • Several committees followed:
– Kumar Mangalam Committee on Corporate Governance (1999) – Naresh Chandra Committee on Corporate Audit and Governance (2002) – Narayan Murthy SEBI Committee on Corporate Governance (2003) – National Foundation for Corporate Governance by the Ministry of Corporate Affairs of the GOI in partnership of CII, Institute of Company Secretaries and the Institute of CA of India
Corporate Governance
NFCG defines Corporate Governance • In narrow sense „Corporate Governance involves a set of relationships amongst the company?s management, its board of directors, shareholders and other stakeholders. These relationships which involve various rules and incentives, provide the structure through which objectives of the company are set and the means of attaining those objectives and monitoring performance are determined.? • In broad sense „Corporate Governance is the extent to which companies are run in an open and honest manner.?
Good Corporate Governance
• According to NFCG the key elements of good Corporate Governance are
– Transparency of corporate structures and operations – Accountability of management and board – Responsibility toward employees, creditors, suppliers and local communities.
? In holistic terms Good Corporate governance is concerned with instituting: ? An effective board ? Code of governances ? Transparency in disclosure of information related to financial and operational performance ? Reliability of financial reporting ? Effective auditing and evaluation system ? Effectiveness and efficiency of operations ? Compliance with laws and regulations and ? Proper risk management system ? Safeguarding of assets ? Encouraging whistle bowing policies
Good Corporate Governance
Corporate Governance
• Organisational Perspective– Maximizing the value, subject to meeting the organisation?s financial, legal and other contractual obligations.
• Societal Perspective– Corporate governance is about nurturing enterprises while ensuring accountability in the exercise of power and patronage therefore minimizing the divergence between private and social returns.
Social Responsibility
• Corporate citizenship • Social Responsibility tells what an organisation „ought to do? • Social Responsibility should be considered in all aspects of strategy formulation and implementation including vision, mission, objectives • Still a debatable issue
Different Views On CSR
• Major activity of business is economic, where social functions should be left to other institutions like government – Milton Friedman, ‘only social responsibility of business was to maximise profits for shareholders, staying within the realm of law?“The business of business is business”. – Elaine Sternberg, ‘there is a human rights case against CSR, which is that a stakeholder approach to management deprives shareholders of their property rights.?
Different Views On CSR
• Social responsiveness is imperative for business. Primarily part of the society and have to serve the societal interests – Keith Davis ‘social responsibility rises from an Enlightened Self Interest where organisations realize that it is in their own best interest to act in ways that community considers socially responsible.
Different Views On CSR
• Middle path: All corporates should not try to take up all social issues.
• Economic goals and social responsiveness need not be conflicting rather should be achieved simultaneously. • Porter and Kramer
– CSR is not an issue of pitting business against society rather it is a relationship of interdependence. – It should not be thought of in a generic way rather something appropriate to company?s strategy.
Some facts
• David Wheeler and Maria Sillanpa in “The Stakeholder Corporation” state
– that by 1998, 51 out of the 100 largest economies were not nation states, but corporations. – General Motors was bigger than Denmark; – Toyota was bigger than South Africa.
At the same time • In 1999, the United Nations reported
– that the world's then three richest people - Bill Gates of Microsoft, the Sultan of Brunei and the Walton family of the Wall Mart retail chain - were worth more than the combined gross domestic product of the world's 34 poorest nations.
Social Responsibility
• Social responsibility is to be interlinked with all phases of strategic management • Legal code of conduct • Market pressures • Social pressures • Major areas of concern
– Pollution, health, education, community, social welfare, rural development
CSR Benefits
• Corporates have experienced a range of bottom line benefits, which include improved financial performance • Enhanced brand image & reputation • Increased ability to attract and retain employees • Easier access to capital
– The Social Investment Forum reports that, in the U.S. in 1999, there is more than $2 trillion in assets under management in portfolios that use screens linked to ethics, the environment, and corporate social responsibility.
CSR in India
• Research on 536 companies in India (2005)
– 42 % companies are not active in CSR. – Older companies & those with greater turnovers were more likely to be socially responsible.
• Companies more than 40 years old & turnover greater than Rs 5 billion were found to follow a consistent CSR strategy.
– 17 % have a written policy on CSR.
• 26 % PSU?s have written policy on CSR. • Only 6 % Private companies have written policy on CSR.
Preferred areas for CSR
CSR in India
Meeting Environmental Standards Adhering to Labour Standards Donating money to Social causes Education Health Natural Resource Management
Compani es 84 % 76 % 76 % 66 % 56 % 38 %
Community Support Infrastructure Development Livelihood – Non farm based activities Farm based activities
28 % 23 % 20 % 12 %
CSR: International comparison
Country
United Kingdom India Indonesia Mean of Seven countries*
CSR Penetration Rate 98% 72% 24% 41%
Source: Chambers, Chapple, Moon and Sullivan (2003)
*India, Indonesia, Malaysia, the Philippines, Singapore, South Korea and Thailand
doc_860541665.pptx