Strategy Review, Evaluation, and Control PDF

Strategy Review, Evaluation, and Control Created by: Jhune Clyde F. Pepito Objectives 1. Describe a practical framework for evaluating strategies. 2. Explain why strategy evaluation is complex, sensitive, and yet essential for organizational success. 3. Discuss the importance of contingency plannin...

Strategy Review, Evaluation, and Control Created by: Jhune Clyde F. Pepito Objectives 1. Describe a practical framework for evaluating strategies. 2. Explain why strategy evaluation is complex, sensitive, and yet essential for organizational success. 3. Discuss the importance of contingency planning in strategy evaluation. 4. Discuss the role of auditing in strategy evaluation. 5. Explain how computers can aid in evaluating strategies. 6. Discuss the Balanced Scorecard. 7. Discuss three twenty-first-century challenges in strategic management. Nature of Strategy Evaluation The strategic-management process results in decisions that can have significant, long- lasting consequences. Erroneous strategic decisions can inflict severe penalties and can be exceedingly difficult, if not impossible, to reverse. Most strategists agree, therefore, that strategy evaluation is vital to an organization’s well-being; timely evaluations can alert management to problems or potential problems before a situation becomes critical.  3 Basic Activities in Strategy Evaluation 1. Examining the underlying bases of a firm’s strategy. 2. Comparing expected results with actual results. 3. Taking corrective actions to ensure that performance conforms to plans. Strategy evaluation is important because organizations face dynamic environments in which key external and internal factors often change quickly and dramatically. Success today is no guarantee of success tomorrow!  Described in Table 9-1, consonance and advantage are mostly based on a firm’s external assessment, whereas consistency and feasibility are largely based on an internal assessment.  The Process of Evaluating Strategies Strategy evaluation should initiate managerial questioning of expectations and assumptions, should trigger a review of objectives and values, and should stimulate creativity in generating alternatives and formulating criteria of evaluation.3 Regardless of the size of the organization, a certain amount of management by wandering around at all levels is essential to effective strategy evaluation. Strategy-evaluation activities should be performed on a continuing basis, rather than at the end of specified periods of time or just after problems occur. A Strategy-Evaluation Assessment Matrix Table 9-3 summarizes 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. Measuring Organizational Performance Measuring organizational Performance is another important strategy-evaluation activity. 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. 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). Measuring Organizational Performance Quantitative criteria commonly used to evaluate strategies are financial ratios, which strategists use to make three critical comparisons: 1. Comparing the firm’s performance over different time periods. 2. Comparing the firm’s performance to competitors’, 3. Comparing the firm’s performance to industry averages. Measuring Organizational Performance Some key financial ratios that are particularly useful as criteria for strategy evaluation are as follows: 1. Return on investment (ROI) 2. Return on equity (ROE) 3. Profit margin 4. Market share 5. Debt to equity 6. Earnings per share 7. Sales growth 8. Asset growth  Measuring Organizational Performance Some additional key questions that reveal the need for qualitative or intuitive 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. Taking corrective actions does not necessarily mean that existing strategies will be abandoned or even that new strategies must be formulated. The probabilities and possibilities for incorrect or inappropriate actions increase geometrically with an arithmetic increase in personnel. Any person directing an overall undertaking must check on the actions of the participants as well as the results that they have achieved. If either the actions or results do not comply with preconceived or planned achievements, then corrective actions are needed.  Taking Corrective Actions As indicated in Table 9-5, examples of changes that may be needed are altering an organization’s structure, replacing one or more key individuals, selling a division, or revising a business mission.  Taking Corrective Actions No organization can survive as an island; no organization can escape change. 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 over-come individuals’ resistance to change. Strategy evaluation can lead to strategy-formulation changes, strategy- implementation changes, both formulation and implementation changes, or no changes at all. Strategists cannot escape having to revise strategies and implementation approaches sooner or later.  Taking Corrective Actions Corrective actions should place an organization in a better position to capitalize upon 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. Perhaps most important, corrective actions strengthen an organization’s competitive position in its basic industry. Continuous strategy evaluation keeps strategists close to the pulse of an organization and provides information needed for an effective strategic-management system.  The Balanced Scorecard The Balanced Scorecard is an important strategy-evaluation tool. It is a process that allows firms to evaluate strategies from four perspectives: financial performance, customer knowledge, internal business processes, and learning and growth. Characteristics of an Effective Evaluation System Strategy evaluation must meet several basic requirements to be effective. First, strategy evaluation activities must be economical; too much information can be just as bad as too little information; and too many controls can do more harm than good. Strategy-evaluation activities also should be meaningful; they should specifically relate to a firm’s objectives. Characteristics of an Effective Evaluation System Strategy evaluation should be designed to provide a true picture of what is happening. For example, in a severe economic downturn, productivity and profitability ratios may drop alarmingly, although employees and managers are actually working harder. Strategy evaluations should fairly portray this type of situation. Characteristics of an Effective Evaluation System The strategy-evaluation process should not dominate decisions; it should foster mutual understanding, trust, and common sense. No department should fail to cooperate with another in evaluating strategies. Strategy evaluations should be simple, not too cumbersome, and not too restrictive. Contingency Planning Contingency plans can be defined as alternative plans that can be put into effect if certain key events do not occur as expected. Only high-priority areas require the insurance of contingency plans. Strategists cannot and should not try to cover all bases by planning for all possible contingencies. Contingency Planning Some contingency plans commonly established by firms include the following: 1. If a major competitor withdraws from particular markets as intelligence reports indicate, what actions should our firm take? 2. If our sales objectives are not reached, what actions should our firm take to avoid profit losses? 3. If demand for our new product exceeds plans, what actions should our firm take to meet the higher demand? 4. If certain disasters occur—such as loss of computer capabilities; a hostile takeover attempt; loss of patent protection; or destruction of manufacturing facilities because of earthquakes, tornadoes or hurricanes—what actions should our firm take? 5. If a new technological advancement makes our new product obsolete sooner than expected, what actions should our firm take? Contingency Planning Too many organizations discard alternative strategies not selected for implementation although the work devoted to analyzing these options would render valuable information. Alternative strategies not selected for implementation can serve as contingency plans in case the strategy or strategies selected do not work. When strategy-evaluation activities reveal the need for a major change quickly, an appropriate contingency plan can be executed in a timely way. Contingency plans can promote a strategist’s ability to respond quickly to key changes in the internal and external bases of an organization’s current strategy. Auditing Auditing is defined by the American Accounting Association (AAA) as “a systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between these assertions and established criteria, and communicating the results to interested users." Auditors examine the financial statement of firms to determine whether they have been prepared according to generally accepted accounting principles (GAAP) Generally accepted accounting principles and whether they fairly represent the activities of the firm. Independent auditors use a set of standards called generally accepted auditing standards (GAAS).  Business Ethics/ Social Responsibility/ Environmental Sustainability Presented by: Jhune Clyde F. Pepito Good ethics is good business. Bad ethics can derail even the best strategic plans. Business ethics can be defined as principles of conduct within organizations that guide decision making and behavior. Good business ethics is a prerequisite for good strategic management; good ethics is just good business! Code of Business Ethics Ethics Issues related to: Product safety foreign business practices Employee health cover-ups Sexual harassment takeover tactics AIDS in the workplace conflicts of interest Smoking employee privacy acid rain inappropriate gifts affirmative action security of company waste disposal records this has accentuated the need for strategists to develop a clear code of business ethics. Code of Business Ethics is a document that provides behavioral guidelines that cover daily activities and decisions within an organization. To ensure that the code is read, understood, believed, and remembered, periodic ethics workshops are needed to sensitize people to workplace circumstances in which ethics issues may arise.2 If employees see examples of punishment for violating the code as well as rewards for upholding the code, this reinforces the importance of a firm’s code of ethics. Whistle-blowing refers to policies that require employees to report any unethical violations they discover or see in the firm. The Securities and Exchange Commission (SEC) recently strengthened its whistle-blowing policies, virtually mandating that anyone seeing unethical activity report such behavior. Strategists are responsible for developing, communicating, and enforcing the code of business ethics for their organizations. Although primary responsibility for ensuring ethical behavior rests with a firm’s strategists, an integral part of the responsibility of all managers is to provide ethics leadership by constant example and demonstration. No society anywhere in the world can compete very long or successfully with people stealing from one another or not trusting one another, with every bit of information requiring notarized confirmation, with every disagreement ending up in litigation, or with government having to regulate businesses to keep them honest. Being unethical is a recipe for headaches, inefficiency, and waste. History has proven that the greater the trust and confidence of people in the ethics of an institution or society, the greater its economic strength. Business relationships are built mostly on mutual trust and reputation. Short-term decisions based on greed and questionable ethics will preclude the necessary self-respect to gain the trust of others. Bribes defined by Black’s Law Dictionary as the offering, giving, receiving, or soliciting of any item of value to influence the actions of an official or other person in discharge of a public or legal duty. is a gift bestowed to influence a recipient’s conduct. The gift may be any money, good, right in action, property, preferment, privilege, emolument, object of value, advantage, or merely a promise or undertaking to induce or influence the action, vote, or influence of a person in an official or public capacity. Social Policy It embraces managerial managerial philosophy and thinking at the highest level of the firm. Social policy concerns what responsibilities the firm has to employees, consumers, environmentalists, minorities, communities, shareholders, and other groups. After decades of debate, many firms still struggle to determine appropriate social policies. What Is a Sustainability Report? A sustainability report that reveals how the firm’s operations impact the natural environment. Managers and employees of firms must be careful not to become scapegoats blamed for company environmental wrongdoings. Harming the natural environment can be unethical, illegal, and costly. When organizations today face criminal charges for polluting the environment, they increasingly turn on their managers and employees to win leniency. Employee firings and demotions are becoming common in pollution-related legal suits. Reasons Why Firms Should “Be Green” Preserving the environment should be a permanent part of doing business for the following reasons: 1. Consumer demand for environmentally safe products and packages is high. 2. Public opinion demanding that firms conduct business in ways that preserve the natural environment is strong. 3. Environmental advocacy groups now have over 20 million Americans as members. 4. Federal and state environmental regulations are changing rapidly and becoming more complex. 5. More lenders are examining the environmental liabilities of businesses seeking loans. 6. Many consumers, suppliers, distributors, and investors shun doing business with environmentally weak firms. 7. Liability suits and fines against firms having environmental problems are on the rise.  Be Proactive, Not Reactive More firms are becoming environmentally proactive—doing more than the bare minimum to develop and implement strategies that preserve the environment. The old undesirable alternative of being environmentally reactive—changing practices only when forced to do so by law or consumer pressure more often today leads to high cleanup costs, liability suits, reduced market share, reduced customer loyalty, and higher medical costs. In contrast, a proactive policy views environmental pressures as opportunities and includes such actions as developing green products and packages, conserving energy, reducing waste, recycling, and creating a corporate culture that is environmentally sensitive.  ISO 14000/14001 Certification Governmental agencies in various countries, such as the Environmental Protection Agency (EPA) in the United States, have adopted ISO standards as part of their regulatory framework, and the standards are the basis of much legislation. Adoptions are sovereign decisions by the regulatory authorities, governments, and/or companies concerned. ISO 14000 refers to a series of voluntary standards in the environmental field. The ISO14000 family of standards concerns the extent to which a firm minimizes harmful effects on the environment caused by its activities and continually monitors and improves its own environmental performance. Included in the ISO 14000 series are the ISO 14001 standards in fields such as environmental auditing, environmental performance evaluation, environmental labeling, and life-cycle assessment.  ISO 14000/14001 Certification Governmental agencies in various countries, such as the Environmental Protection Agency (EPA) in the United States, have adopted ISO standards as part of their regulatory framework, and the standards are the basis of much legislation. Adoptions are sovereign decisions by the regulatory authorities, governments, and/or companies concerned. ISO 14000 refers to a series of voluntary standards in the environmental field. The ISO14000 family of standards concerns the extent to which a firm minimizes harmful effects on the environment caused by its activities and continually monitors and improves its own environmental performance. Included in the ISO 14000 series are the ISO 14001 standards in fields such as environmental auditing, environmental performance evaluation, environmental labeling, and life-cycle assessment. ISO 14000/14001 Certification Not being ISO 14001 certified can be a strategic disadvantage for towns, counties, and companies because people today expect organizations to minimize or, even better, to eliminate environmental harm they cause.16 The major requirements of an EMS under ISO 14001 include the following: Show commitments to prevention of pollution, continual improvement in overall environmental performance, and compliance with all applicable statutory and regulatory requirements. Identify all aspects of the organization’s activities, products, and services that could have a significant impact on the environment, including those that are not regulated. ISO 14000/14001 Certification Set performance objectives and targets for the management system that link back to three policies: (1) prevention of pollution, (2) continual improvement, and (3) compliance. Meet environmental objectives that include training employees, establishing work instructions and practices, and establishing the actual metrics by which the objectives and targets will be measured. Conduct an audit operation of the EMS. Take corrective actions when deviations from the EMS occur.