Chapter 9 Strategy Review, Evaluation and Control

Dr., prof. Tatjana Volkova

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Learning Outcomes
After studying this chapter you will be able to: Describe practical framework for evaluating strategies; Explain why strategy evaluation is complex, sensitive and essential for organizational success; Discuss the importance of contingency planning in strategy evaluation; Discuss the role of auditing in strategy evaluation; Explain how computers can aid in evaluating strategies; Discuss the balanced scorecard Discuss 21st century challenges in strategic management
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Outline
1.
2. 3.

4.
5. 6.

The Nature of Strategy Evaluation Strategy Evaluation Framework Measuring Organizational Performance The Balanced Scorecard Auditing 21st Century Challenges in Strategic Management

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1. The Nature of Strategy Evaluation

Timely evaluations can alert management to problems or potential problems before situation becomes critical Strategy evaluation is essential to ensure that stated objectives are being achieved adequate and timely feedback is the cornerstone of effective strategy evaluation Evaluation may be expensive and counterproductive Strategy evaluation must have a long run and short run focus Success today is no guarantee of success tomorrow
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Strategy Review, Evaluation & Control

3 Basic Activities
1.
2. 3.

Examine the underlying bases of a firms strategy Compare expected to actual results Identify corrective actions to ensure that performance conforms to plans

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Why strategy evaluation is more difficult today ?

Environment complexity Difficulty to predict future with accuracy Increasing number of variables The rapid rate of obsolescence of even best plans Increasing number of both domestic and world events affecting organizations The decrasing time span for which planning can be done with any degree of certainty
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Issues for managers

How to ensure that empowered employees acting in entrepreneurial manner; How to effectively control employees in light of modern organizational demands for greater flexibility, innovation, creativity and initiative form employees
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Strategy Review, Evaluation, & Control

Consistency
Rumelts 4 Criteria for Strategy Evaluation

Feasibility
Advantage

Consonance
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Rumelts 4 Criteria for Strategy Evaluation

Consistency Consonance Feasibility Advantage

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Strategy should not present inconsistent goals & policies Need for strategies to examine sets of trends Neither overtax resources or create unsolvable sub-problems Creation or maintenance of competitive advantage
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The Process of Evaluating Strategies

Management by wandering around; Performed on a continuous basis; Awareness of progress being made Broad involvement of staff

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2. Strategy evaluation framework

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Have major changes occured in the firms internal strategic position No Yes Yes

Have major changes occured in the firms external strategic position No Yes Yes

Has the firm progressed satisfactorily toward achieving its stated objectives No Yes No

Result

Take corrective actions Take corrective actions Take corrective actions

Yes
Yes

No
No

Yes
No

Take corrective actions

Take corrective actions

No
No

Yes
Yes
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Yes
No

Take corrective actions

Take corrective actions
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No

No

Yes

present strategic course

Strategy Review, Evaluation, & Control

Monitor Strengths & Weaknesses; Opportunities & Threats

Are strengths still strengths? Have we added additional strengths? Are weaknesses still weaknesses? Have we developed other weaknesses?

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Monitor Strengths & Weaknesses; Opportunities & Threats

Are opportunities still opportunities? Other opportunities develop? Are threats still threats Other threats emerged? Are we vulnerable to hostile takeover?

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Factors influencing success of strategy implementation

External

Competition Changes in demand Changes in technology Economic changes Demographic shifts Governmental actions

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Factors influencing success of strategy implementation

Internal Poor strategies chosen Poor implementation activitities Too optimistic objectives Weak organizational structure Unfunctional culture Poor quality management Unadequate resources, etc
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Evaluation Framework

I. Review Underlying Bases

Differences?

Yes III. Take Corrective Actions

NO II. Measure Firm Performance

Differences?

Yes

NO
Continue present course

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3. Measuring organizational performance

Determine objectives for evaluation Select criteria (both quantitative and qualitative) Problems for using quantitative criteria: 1. More associated with annual objectives 2. Different accounting methods used provide different uncomparable results

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Measuring organizational performance

Key Financial Ratios

Return on investment (ROI) Return on equity (ROE) Profit margin Market Share Debt to equity Earnings per share (EPS) Sales growth Asset growth
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Qualitative questions (Tilles)

Is the strategy internally consistent? Is the strategy consistent with the environment? Is the strategy appropriate in view of available resources? Does the strategy involve an acceptable degree of risk? Is the strategy workable?
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Additional key questions

How good is the firms balance of investment between high risk and low risk? How good is the firms balance of investment between long term and short term projects? How good is the firms balance of investment between slow growing and fast growing markets?
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Taking corrective actions

Making changes to competitively reposition a company for the future: Alerting an organizational structure Replacing staff when necessary Selling division (s) Revising a business mission, objectives Issuing stock
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Taking correcting actions dont mean that new strategies must be formulated

Is necessary to keep an organization on track toward stated objectives Strategy evaluation enhances an organizations ability and capacity to adapt to changing circumstances; Participation of the staff in evaluation activities helps to overcome resistance to the change;
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Strategy evaluation can lead to:

1. 2. 3. 4.

strategy-formulation changes Strategy-implementation changes Both formulation and implementation changes No changes at all, but sooner or later changes will take place

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4. The Balanced Scorecard

-- Evaluate strategies from 4 perspectives: 1. Financial performance 2. Customer knowledge 3. Internal business processes 4. Learning & growth
Video : what is a balancescored ?

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The Balanced Scorecard analysis:

How well company is continually imprving and creating value along measures such as innovation, technological leadership, product quality, operational process efficinecies....

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The Balanced Scorecard analysis:

How well is the company sustaining or even improving upon its core competencies and competitive advantages?

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The Balanced Scorecard analysis:

How satisfied are our customers?

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Published sources of Strategy Evaluation Information

North American Industry Classifictaion System; Magazine Fortune ( The World Most Admired Companies) The Annual Report on American Industry Business week Industry week Duns Business Month The Economist World Competitiveness Report

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www.tata.com

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Effective Evaluation System

Strategy evaluation activities must be economical Avoiding too much information also to little information Avoid too many control Activities should be meaningful Should provide to managers useful information Must be designed to provide true picture Should facilitate action rather than information oriented Foster mutual understanding, trust, respect Should be simple

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Contingency Planning
Alternative plans that can be put into effect if certain key events do not occur as expected To minimize the impact of unforeseen events (government actions; strikes, natural disasters, etc. ) To capitalizing on opportunities

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5. Auditing
Financial audits determine correspondence between assertions based on strategic plan & established criteria

Environmental audits ensure sound and safe practices

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Auditing
a systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondance between these assertions and established criteria and communicating results to interested users American Accounting Association Independant auditors are certified public accountants examining the financial statements of an company whether they fairly represent the activities; Independant auditors use a set of standarts called generally accepted auditing standarts
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The environmental audit

Environment affairs becoming an important strategic management concern; Main issues for environmental consideration: Product design Manufacturing Transportation Packaging Product disposal Corporate rewards and sunctions

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6. 21st Century Challenges in Strategic Management

Process is more an art than science Should strategies be visible or hidden from stakeholders Should process be more top-down or bottom up

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Challenges

Should the strategic management process be more an art or a science? Should strategies be visible or hidden from stakeholders?

Should the strategic management process be more top-down or bottom-up?

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The Visible or Hidden Issue

Reasons for Openness

All stakeholders can readily contribute to the process, which results in many excellent ideas. Investors and creditors have a greater basis for supporting a firm. Visibility promotes democracy and secrecy promotes autocracy. Participation and openness enhances understanding, commitment, and communication within the firm.

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The Visible or Hidden Issue

Without secrecy, competitive intelligence can learn and exploit information. Secrecy limits criticism, second guessing, and hindsight. Participants in a visible strategy become more attractive to rival firms who may lure them away. Secrecy limits rival firms from imitating or duplicating the firms resources and abilities undermining the firm.
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The Top-Down or Bottom-Up Approach

The Top-Down Approach: Top executives are the only persons in the firm with the collective experience, acumen, and fiduciary responsibility to make key strategy decisions.

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The Top-Down or Bottom-Up Approach

The Bottom-Up Approach:

Lower- and middle-level managers and employees who will be implementing the strategies need to be actively involved in the process of formulating the strategies to assure their support and commitment

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