Strategy Evaluation and Governance

9.1 The Strategy-Evaluation Process

The strategy-evaluation process includes three basic activities:

1. Examine the underlying bases of a firm's strategy.

2. Compare expected results with actual results.

3. Take corrective actions to ensure that performance conforms to plans.

Strategy evaluation is essential to ensure that stated objectives are being achieved. Strategists
need to create an organizational culture where strategy evaluation is viewed as an opportunity to
make the firm better, so the firm can compete better, and so everyone in the firm can share in the
firm's increased profitability.

strategy evaluation must have both a long-run and short-run focus. Bad strategies may not affect
short term operating results until it is too late to make needed changes, and excellent strategies
may take several years instead of months to produce great results.

Strategy evaluation is important because firms face dynamic environments in which key external
and internal factors often change quickly and dramatically.

It is impossible to demonstrate conclusively that a particular strategy is optimal or even to

guarantee that it will work. But any strategy must provide for the creation or maintenance of a
competitive advantage in a selected area of activity. Competiive advantages normally are the
result of superiority in one of three areas: (1) resources, (2) skills, or (3) position.

Strategy evaluation is becoming increasingly difficult because domestic and world economies
are today more interrelated, product life cycles are shorter, technological advancements are
faster, change occurs rapidly, competitors abound globally, planning cycles are shorter, and
social media and smartphones have changed everything. A fundamental problem facing
managers today is how to effectively manage a workforce that increasingly demands fairness,
openness, transparency, flexibility, and involvement. Managers need empowered employees
acting responsibly.

Managers and employees of a firm should be kept up to date regarding progress being made
toward achieving a firm's objectives. If assumptions, expectations, or results deviate significantly
from forecasts, then strategy evaluation is needed. Evaluating strategies is like formulating and
implementing strategies in the sense that people make the difference. Through involvement in
the process of evaluating strategies, managers and employees become committed to keeping the
firm moving steadily toward achieving objectives.

9.2 Three Strategy-Evaluation Activities

Table 9-1 summarizes three strategy-evaluation activities in terms of key questions that should
be addressed, alternative answers to those questions, and appropriate actions for an organization
to take. Notice that corrective actions are almost always needed except when (1) external and in
ternal factors have not significantly changed and (2) the firm is progressing satisfactorily toward
achieving stated objectives.

Reviewing Bases of Strategy

Relationships among strategy-evaluation activities are illustrated in Figure 9-2.

As shown, reviewing the underlying bases of an organization's strategy could be approached by

developing a revised EFE Matrix and IFE Matrix. A revised IFE Matrix should focus on changes
in the organization's management, marketing, finance, accounting, production, and information
systems (MIS) strengths and weaknesses. A revised EFE Matrix should indicate how effective a
firm's strategies have been in response to key opportunities and threats. This analysis could also
address such questions as the following:

1. How have competitors reacted to our strategies?

2. How have competitors' strategies changed?

3. Have major competitors' strengths and weaknesses changed?

4. Why are competitors making certain strategic changes?

5. Why are some competitors' strategies more successful than others?

6. How satisfied are our competitors with their present market positions and profitability?

7. How far can our major competitors be pushed before retaliating?

8. How could we more effectively cooperate with our competitors?

Organizations desperately need to know as soon as possible when their strategies are not
effective. Sometimes managers and employees on the front lines discover this well before
strategists. It is not a question of whether underlying key external and internal factors will
change, but rather when they will change and in what ways. Here are some key questions to
address in evaluating strategies:

1. Are our internal strengths still strengths?

2. Have we added other internal strengths? If so, what are they?

3. Are our internal weaknesses still weaknesses?

4. Do we now have other internal weaknesses? If so, what are they?

5. Are our external opportunities still opportunities?

6. Are there now other external opportunities? If so, what are they?

7. Are our external threats still threats?

8. Are there now other external threats? If so, what are they?

9. Are we vulnerable to a hostile takeover?

Measuring Organizational Performance

Another important strategy-evaluation activity is measuring organizational performance. This

activity includes comparing expected results to actual results, investigating deviations from
plans, evaluating individual performance, and examining progress being made toward meeting
stated objectives. Both long-term and annual objectives are commonly used in this process.
Criteria for evaluating strategies should be measurable and easily verifiable. Criteria that predict
results may be more important than those that reveal what already has happened. For
example,rather than simply being informed that sales in the last quarter were 20 percent under
what was expected, strategists need to know that sales in the next quarter may be 20 percent
below standard unless some action is taken to counter the trend. Really effective control requires
accurate forecasting.

Failure to make satisfactory progress toward accomplishing long-term or annual objectives

signals a need for corrective actions. Many factors, such as unreasonable policies, unexpected
turns in the economy, unreliable suppliers or distributors, or ineffective strategies, can result in
unsatisfactory progress toward meeting objectives. Problems can result from ineffectiveness (not
doing the right things) or inefficiency (poorly doing the right things).
Determining which objectives are most important in the evaluation of strategies can be difficult.
Strategy evaluation is based on both quantitative and qualitative criteria. Selecting the exact set
of criteria for evaluating strategies depends on a particular organization's size, industry,
strategies, and management philosophy. Strategists use financial ratios to make three critical
comparisons:

1. Compare the firm's performance over different time periods.

2. Compare the firm's performance to competitors.

3. Compare the firm's performance to industry averages.

Many variables can and should be included in measuring organizational performance. As

indicated in Table 9-2, typically a favorable or unfavorable variance is recorded monthly.
quarterly, and annually, and resultant actions needed are then determined.

Several additional key questions that reveal the need for qualitative judgments in strategy
evaluation are as follows:

1. How good is the firm's balance of investments between high-risk and low-risk projects?

2. How good is the firm's balance of investments between long-term and short-term projects?

3. How good is the firm's balance of investments between slow-growing markets and fast-
growing markets?

4. How good is the firm's balance of investments among different divisions?

5. To what extent are the firm's alternative strategies socially responsible?

6. What are the relationships among the firm's key internal and external strategic factors?

7. How are major competitors likely to respond to particular strategies?

Taking Corrective Actions

The final strategy-evaluation activity, taking corrective actions, requires making changes to
competitively reposition a firm for the future.
As indicated in Table 9-3, examples of changes that may be needed. Taking corrective actions
does not necessarily mean that existing strategies will be abandoned or even that new strategies
must be formulated.

Taking corrective actions is necessary to keep an organization on track toward achieving stated
objectives. Taking corrective actions raises employees' and managers' anxieties. Research
suggests that participation in strategy-evaluation activities is one of the best ways to overcome
individuals' resistance to change. According to Erez and Kanfer, individuals accept change best
when they have a cognitive understanding of the changes, a sense of control over the situation,
and an awareness that necessary actions are going to be taken to implement the changes. The
mostsuccessful organizations today continuously adapt to changes in the competitive
environment. It is not sufficient today to simply react to change. Managers must anticipate
change and be the creator of change.

Corrective actions should place an organization in a better position to capitalize on internal

strengths; to take advantage of key external opportunities; to avoid, reduce, or mitigate external
threats; and to improve internal weaknesses. Corrective actions should have a proper time
horizon and an appropriate amount of risk. They should be internally consistent and socially
responsible. Continuous strategy evaluation keeps strategists close to the pulse of an organization
and provides information needed for an effective strategic-management system.

In many cases, the benefits of strategy evaluation are much more far-reaching, for the outcome
of the process may be a fundamentally new strategy that will lead, even in a business that is
already turning a respectable profit, to substantially increased earnings.

9.3 The Balanced Scorecard

Developed in the early 1990s by Harvard Business School professors Robert Kaplan and David
Norton, and refined continually through today, the balanced scorecard is a strategy evaluation
and control technique. The technique is based on the need of firms to "balance" financial
measures that are often used exclusively in strategy evaluation with nonfinancial measures such
as product quality, business ethics, environmental sustainability, employee mo rale, pollution
abatement, community involvement, and customer service. An effective balanced scorecard
contains a carefully chosen combination of strategic and financial objectives tailored to the
company's business.

The overall aim of a balanced scorecard is to "balance" shareholder objectives with customer and
operational objectives. These sets of objectives interrelate and many even conflict.
The firm examines six key issues in evaluating its strategies: (1) Customers, (2)
Managers/Employees, (3) Operations/ Processes, (4) Community/Social Responsibility, (5)
Business Ethics/Natural Environment, and (6) Financial.

The balanced scorecard approach to strategy evaluation aims to balance term with short-term
concerns, to balance financial with nonfinancial concerns, and to balance internal with external
concerns. The balanced scorecard could be constructed differently-that is, adapted to particular
firms in various industries with the underlying theme or thrust being the same, which is to
evaluate the firm's strategies based on both key quantitative and qualitative measures.

9.4 Boards of Directors: Governance Issues

Boards of Directors: Governance Issues
1. Definition of Governance as per the National Association of Corporate Directors

Corporate governance refers to the system of rules, practices, and processes by which a
company is directed and controlled. It involves balancing the interests of various
stakeholders, such as shareholders, management, customers, suppliers, financiers,
government, and the community.

2. The Board's Responsibility for Overseeing and Guiding Management

The board of directors plays a critical role in providing guidance and oversight to a
company's management. This includes making important decisions, setting strategic
direction, and ensuring the organization's actions align with its mission and the best interests
of its stakeholders.

3. The Increasing Accountability and Changing Roles of Boards

Boards are facing greater scrutiny and responsibility in today's complex business landscape.
They are expected to actively engage in strategic decision-making, risk management, and
ethical governance. Their roles continue to evolve.

4. The Decline of CEOs Serving as Chair of the Board

There's a growing trend toward separating the roles of CEO and board chair to enhance board
independence and objectivity. This separation reduces potential conflicts of interest and can
improve corporate governance.

5. The Importance of Governance in Protecting Shareholders' Interests

 Sound corporate governance is essential for safeguarding the interests of shareholders. It
helps ensure transparency, accountability, and responsible management, which, in turn,
promotes the long-term success of the company and the protection of shareholders'
investments.

Board of Director Duties and Responsibilities

Boards of directors have a wide range of duties and responsibilities, which we can categorize into four
main areas. Let's go over each of them:

1. **Control and Oversight Over Management**: This includes selecting the CEO, evaluating
management's performance, setting salaries, ensuring managerial integrity through auditing, and more.

2. **Adherence to Legal Prescriptions**: Boards need to keep abreast of laws, ensure the organization
complies with legal requirements, pass necessary resolutions, and make significant financial decisions.

3. **Consideration of Stakeholders' Interests**: Boards must monitor various aspects, such as product
quality, labor policies, community relations, and maintain a positive public image.

4. **Advancement of Stockholders' Rights**: This involves safeguarding stockholders' equity,

stimulating corporate growth, ensuring equitable representation, and providing transparency through
reporting and meetings.

These duties and responsibilities are pivotal in maintaining corporate governance and ensuring the
organization's integrity and performance.

Principles of Good Governance

As we've discussed the roles and responsibilities of boards, there are certain principles that guide good
governance. BusinessWeek offers a set of principles that are particularly noteworthy:

1. **Limiting the Number of Firm's Executives on the Board**: It's essential to avoid having too many
executives from the firm on the board.

2. **Restrictions on Executives' Participation in Key Board Committees**: Executives should not serve
on committees that oversee their own activities, like audit or compensation committees.

3. **Ownership of the Firm's Equity by All Board Members**: This aligns the interests of board
members with those of the shareholders.

4. **Attendance Requirements for Board Meetings**: It's crucial for board members to actively
participate and contribute to meetings.
5. **Self-Evaluation of the Board's Performance**: Boards should assess their own performance without
top management's influence.

6. **Separation of CEO and Chairperson Roles**: It's generally recommended that the CEO and Chair of
the Board roles are held by different individuals.

7. **Avoiding Interlocking Directorships**: To prevent conflicts of interest, directors should not sit on
each other's boards.

These principles aim to ensure transparency, accountability, and effective governance.

In conclusion, boards of directors play a pivotal role in corporate governance, safeguarding the interests
of shareholders, and ensuring the integrity and success of the organization. The landscape of corporate
governance is evolving, with a focus on greater accountability and adherence to best practices.

9.5 Challenges In Strategic Management

Art vs. Science and Visibility of Strategies
Strategic management is often described as a blend of art and science. On one hand, it's the systematic
assessment of external and internal environments, research, and careful evaluation of alternatives. This
represents the "science" side of the equation. On the other hand, there's the "artistic" approach, which
emphasizes holistic thinking, intuition, creativity, and imagination.

Strategists must decide which approach is more effective for their organizations. Laura Alber, the CEO of
Williams-Sonoma, wisely suggests blending art with science, emphasizing that the best solutions often
arise from such a blend.

In today's increasingly complex and competitive business world, thorough research and analysis play a
crucial role in the decision-making process. While intuition and experience are essential, they need to be
complemented with data and competitive intelligence to make informed decisions.

Visible or Hidden Strategies, Contingency Planning, and Auditing

The second challenge revolves around whether an organization's strategies should be open or hidden from
stakeholders. This is a significant debate, and here's why:

(Elaborate on the points listed on the slide)

- Visibility of strategies encourages contributions from employees and stakeholders. It fosters

transparency, democracy, and improves communication, understanding, and commitment.

- Investors, creditors, and other stakeholders are more inclined to support a firm when they understand its
direction.
- It promotes workplace democracy, which is favored by most organizations.

- Participation and openness enhance organizational cohesion.

However, there are valid reasons for keeping strategies hidden to some extent. It can protect critical
information from rival firms, limit criticism, and safeguard employees from being lured away by
competitors.

Moving on, we also face the challenge of contingency planning. This challenge involves preparing for
unexpected events that could make our carefully crafted strategies obsolete.

Contingency plans are alternative plans that can be put into effect if key events do not unfold as expected.
While organizations cannot plan for every possible contingency, having simple contingency plans is
crucial for swift response to changes.

Lastly, auditing, which is a systematic process of evaluating the degree of correspondence between
economic actions and established criteria, is a fundamental tool for strategy evaluation. It helps
organizations ensure that their strategies are effective and compliant with regulations.

Now, as we conclude, it's important to remember that these challenges require a balanced approach. Art
and science, openness and secrecy, and proactive planning are all part of effective strategic management.

9.6 Guidelines for Effective Strategic Management

Let's dive right into the first set of guidelines:

1. **A People Process:** Strategic management should be more about involving people than just
paperwork. It's a collaborative effort where all stakeholders have a role to play.

2. **A Learning Process:** Strategic management isn't a one-time task but an ongoing process of
learning. It equips managers and employees with the tools to address key strategic issues and find viable
solutions.

3. **Words Supported by Numbers:** In the evaluation and formulation of strategies, it's essential to
prioritize qualitative aspects backed by quantitative data. This balance helps in making well-informed
decisions.

4. **Simplicity and Variability:** Keep the process simple, understandable, and non-routine. Vary
assignments, team compositions, meeting formats, settings, and planning calendars to keep it fresh and
dynamic.

5. **Open-Mindedness:** Encourage open-mindedness and a spirit of inquiry within the organization.

Willingness to consider new information, viewpoints, and ideas is essential for effective strategic
management.
6. **Welcoming Bad News:** Instead of avoiding challenges or unwelcome news, welcome them. A true
picture of what's happening in the organization is critical for informed decision-making.

Now, let's continue with the next set of guidelines:

7. **Avoiding Bureaucracy:** Strategic management should not become a self-perpetuating bureaucratic

mechanism. It should be about learning, adaptability, and achieving results.

8. **Steering Clear of Rituals:** Avoid making the process ritualistic, stilted, orchestrated, or overly
formal. Flexibility and responsiveness to change should be its core.

9. **Jargon-Free Language:** Eliminate vague planning jargon and obscure language. Clear and
straightforward communication is vital.

10. **No Dominance Over Decisions:** The process should not dominate decisions but should foster
mutual understanding, trust, and common sense.

11. **Not Ignoring Qualitative Information:** Don't disregard qualitative information in decision-
making. Recognize that subjective factors play a role, but strive to be as objective as possible.

12. **No Technicians Monopoly:** Don't allow technical experts to monopolize the planning process. A
variety of perspectives is essential.

In conclusion, these guidelines form the bedrock of effective strategic management. They ensure that the
process is inclusive, dynamic, and responsive to the ever-changing business environment. Successful
organizations treat strategic management as an ongoing journey of learning and adaptability.