Strategy Evaluation and Control Chapter Seven PDF

Chapter seven: Strategy Evaluation and Control Up on completion of this unit, the learner is expected to:  The nature of strategy evaluation  A strategy evaluation framework  Characteristics of An effective evaluation system  The contingency model  Strategic Control: C...

Chapter seven: Strategy Evaluation and Control Up on completion of this unit, the learner is expected to:  The nature of strategy evaluation  A strategy evaluation framework  Characteristics of An effective evaluation system  The contingency model  Strategic Control: Control Process 1  Introduction Evaluation is the systematic determination of merit, worth, and significance of something or someone. Evaluation often is used to characterize and appraise subjects of interest in a wide range of human enterprises, including the Arts, business, computer science, criminal justice, education, engineering, foundations and non-profit organizations, government, health care, and other human services. 2  7.1 The nature of strategy evaluation The strategic-management process results in decisions that can have significant, long-lasting consequences. Strategy evaluation includes three basic activities: 1. examining the underlying bases of a firm's strategy, 2. comparing expected results with actual results, and 3. taking corrective actions to ensure that performance conforms to plans. 3  Purpose of strategy evaluation Strategy evaluation is vital to the organization’s well-being Alert management to potential or actual problems in a timely fashion Erroneous/wrong strategic decisions can have severe negative impact on organizations 4  Basic Activities – 1.Examining the underlying bases of a firms’ strategy 2.Comparing expected to actual results 3.Corrective actions to ensure performance conforms to plans In many organizations, evaluation is an appraisal of performance – Have assets increased? Increase in profitability? Increase in sales? Increase in productivity? 5  Four Criteria (Richard Rummelt): Consistency: Strategy should not be Conflict and interdepartmental backbiting symptomatic of managerial disorder and strategic inconsistency Consonance/harmony: Need for strategies to examine sets of trend Adaptive response to external environment Feasibility: Organizations must demonstrate the abilities, competencies, skills and talents to carry out a given strategy Advantage: Creation or maintenance of competitive advantage 6  The process of evaluating Strategies 1. Strategy evaluation is necessary for all sizes and kinds of organization. 2. Evaluating strategies on continuous rather than a periodic basis allows benchmark of progress to established and more effectively monitored 3. Managers and employees of the firm should be continually aware of progress being made towards achieving the firm’s objectives. 7  7.2 A strategy evaluation framework 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 internal factors have not significantly changed and (2)The firm is progressing satisfactorily toward achieving stated objectives. 8 9  1. REVIEWING BASES OF STRATEGY Reviewing the EFE Matrix 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? 10  Conti….. 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 strike back? 8. How could we more effectively cooperate with our competitors? 11  Conti….. Some key IFE questions to address 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? 12  Conti… 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? 13  Measuring Organizational Performance Criteria for evaluating strategies should be measurable and easily verifiable. 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. 14  Conti… Some key financial ratios that are particularly useful as criteria for strategy evaluation are as follows: 1. Return on investment 2. Return on equity 3. Profit margin 4. Market share 5. Debt to equity 6. Earnings per share 7. Sales growth 8. Asset growth 15  six qualitative questions to evaluating strategies: 1. Is the strategy internally consistent? 2. Is the strategy consistent with the environment? 3. Is the strategy appropriate in view of available resources? 4. Does the strategy involve an acceptable degree of risk? 5. Does the strategy have an appropriate time framework? 6. Is the strategy workable? 16  Conti…. Some additional key questions 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? 17  Taking Corrective Actions The probabilities and possibilities for incorrect or inappropriate actions increase geometrically with an arithmetic increase in personnel. If either the actions or results do not comply with preconceived or planned achievements, then corrective actions are needed. 18  7.3. Characteristics of An effective evaluation system strategy-evaluation activities must be economical meaningful, provide timely provide a true picture of what is happening. reports that are provided for informational purposes only Controls need to be action-oriented rather than information-oriented. Successful companies treat facts as 19  7.4. The contingency model (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 try to cover all bases by planning for all possible contingencies. But in any case, contingency plans 20  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? 3. If demand for our new product exceeds plans, what actions should our firm take? 4. If certain disasters occur—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? 21  effective contingency planning involves a seven-step process as follows:and unfavorable 1. Identify both beneficial events that could possibly 2. Specify trigger points. Calculate about when contingent events are likely to occur. 3. Assess the impact of each contingent event. 4. Develop contingency plans. Be sure that contingency plans are compatible with current strategy and are economically feasible. 22  Conti…. 5. Assess the counter impact of each contingency plan. Doing this will quantify the potential value of each contingency plan. 6. Determine early warning signals for key contingent events. Monitor the early warning signals. 7. For contingent events with reliable early warning signals, develop advance action plans to take advantage of the available lead time. 23  7.5. Strategic Control: Control Process Strategic control systems are the formal target-setting, measurement, and feedback systems that allow strategic managers to evaluate whether a company is achieving superior efficiency, quality, innovation, and customer responsiveness and is implementing its strategy successfully. 24  Conti… An effective control system should have three characteristics: 1.it should be flexible enough to allow managers to respond as necessary to unexpected events; 2.it should provide accurate information, giving a true picture of organizational performance; and 3.it should supply managers with the information in a timely manner, because making decisions on the basis of outdated information is a recipe for failure. 25 26  End of the chapter And the course 27