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Assessing The Firm's Operational And Strategic Health

To aid in control, firms will occasionally perform audits to ensure that certain aspects of
their operations are in order. Such audit may includeoperational audits (assessing the
firm's operating health) and strategic audits (assessing the firm's strategic health).

Measures Of Organizational Health


Measures or indicators of a firm's current operating and strategic health are shown in
Table 6-5 and 6-6. As the tables show, to assess a firm's current operating health, shortterm financial, market, technological, and production position are used, while current
strategic health is based on strategic market position, technological position, production
capabilities, and financial health.

Strategic Audit Measurement Methods


There are several generally accepted methods for measuring organizational performance.
One way for categorizing these methods divides into the distinct types: qualitative and
quantitative. However, a few methods do not fall neatly into one or other of these
categories but rather are a combination of both types.

Qualitative Organizational Measurements


There is no universally endorsed list of critical questions designed to reflect important
facets of organizational operations. However, several that might be useful to the
practicing managers are presented below.
Sample Questions to be asked for Qualitative Organizational Measurement

Are the financial policies with respect to investment dividends and financing
consistent with opportunities likely to be available?

Has the company defined the market segments in which it intends to operate
sufficiently specifically with respect to both product lines and market segments?
Has it clearly defined the key capabilities needed for success?

Does the company have a viable plan for developing a significant and defensible
superiority over competition with respect to these capabilities?

Will the business segments in which the company operates provide adequate
opportunities for achieving corporate objectives? Do they appear as attractive as
to make it likely that an excessive amount of investment will be drawn to the
market from other companies? Is adequate provision being made to develop
attractive new investment opportunities?

Are the management, financial, technical and other resources of the company
really adequate to justify an expectation of maintaining superiority over
competition in the key areas of capability?

Does the company have operations in which it is not reasonable to expect to be


more capable than competition? If so, can the board expect them to generate
adequate returns on invested capital? Is there any justification for investing
further in such operations, even just to maintain them?

Has the company selected business that can reinforce each other by contributing
jointly to the development of key capabilities? Or are there competitors that have
combinations of operations which provide them with an opportunity to gain
superiority in the key resource areas? Can the company's scope of operations be
revised so as to improve its position vis--vis competition?

To the extent that operations are diversified, has the company recognized and
provided for the special management and control systems required?

Qualitative Organizational Measurements


There is no universally endorsed list of critical questions designed to reflect important
facets of organizational operations. However, several that might be useful to the
practicing managers are presented below.
Sample Questions to be asked for Qualitative Organizational Measurement

Are the financial policies with respect to investment dividends and financing
consistent with opportunities likely to be available?

Has the company defined the market segments in which it intends to operate
sufficiently specifically with respect to both product lines and market segments?
Has it clearly defined the key capabilities needed for success?

Does the company have a viable plan for developing a significant and defensible
superiority over competition with respect to these capabilities?

Will the business segments in which the company operates provide adequate
opportunities for achieving corporate objectives? Do they appear as attractive as
to make it likely that an excessive amount of investment will be drawn to the
market from other companies? Is adequate provision being made to develop
attractive new investment opportunities?

Are the management, financial, technical and other resources of the company
really adequate to justify an expectation of maintaining superiority over
competition in the key areas of capability?

Does the company have operations in which it is not reasonable to expect to be


more capable than competition? If so, can the board expect them to generate
adequate returns on invested capital? Is there any justification for investing
further in such operations, even just to maintain them?

Has the company selected business that can reinforce each other by contributing
jointly to the development of key capabilities? Or are there competitors that have
combinations of operations which provide them with an opportunity to gain
superiority in the key resource areas? Can the company's scope of operations be
revised so as to improve its position vis--vis competition?

To the extent that operations are diversified, has the company recognized and
provided for the special management and control systems required?

The Evaluation Of Corporate Strategy


Each organization has its own approach to evaluation. There are not absolute answers as
to the proper evaluation standards. However, there are three basic questions to ask in
strategy evaluation:
1. Is the existing strategy any good?
2. Will the existing strategy be good in the future?
3. Is there a need to change a strategy?
The first question may need additional detailing to indicate whether the current strategy
is useful and beneficial to the organization.
Seymour Tilles has written a classic article on the qualitative assessment of organizational
performance. This article serves several particular questions to be asked for evaluation.
These questions are:
1. Is the strategy internally consistent? Internal consistency refers to the cumulative
impact of various strategies on the organizations. According to Tilles, a strategy
must be judged not only in relationships to other strategies.
2. Is organizations strategy consistent with its environment? An important test of
strategy is whether the chosen strategy in consistent with environment
(constituent demands, competition, economy, product / industry life cycle,

suppliers, customers) - whether the really make sense with respect to what is
going on outside.
3. Is the strategy appropriate in view of available resources? Resources are those
things that company is or has and that help it to achieve its corporate objectives.
Included are money, competence, facilities and other. Without appropriate
resources, organization simply cannot make strategic work.
4. Does the strategy involve an acceptable degree of risk? Strategy and resources,
taken together, determine the degree of risk which the company is undertaken.
Each company must determine the amount of risk it wishes to incur. This is a
critical managerial choice. In attempting to assess the degree of risk associated
with a particular strategy, management must assess such issues as the total
amount of resources a strategy requires, the proportion of the organization's
resources that a strategy will consume, and the amount of time that must be
committed.
5. Does the strategy have an appropriate time horizon? A significant part of every
strategy is the time horizon on which it is based. For example, a new product
developed, a plant put on stream, a degree of market penetration, become
significant strategic objectives only if accomplished by a certain time.
Management must ensure that the time necessary to implement the strategy is
consistent. Inconsistency between these two variables can make it impossible to
reach goals in a satisfactory way.
6. Is the strategy workable?

Quantitative Organizational Measurements


Quantitative measurements provide information and insight as to how well an
organization is accomplishing its goods and objectives. In attempting to evaluate the
effectiveness of corporate strategy quantitatively, we can see how the firm has done
compared wit its own history, or compared with its competitors.
Many quantitative measures may be developed to determine performance results. These
standards expressed in quantitative terms include:
1. Sales (growth of sales)
2. Net profit
3. Dividend returns
4. Return on equity
5. Return on investment
6. Return on capital

7. Marker share
8. Earnings per share
The list is long and many other factors could be included. The objective of all of these
endeavors is financial control.
But financial control is only part of the total strategic management control process. Much
of the activity affects financial performance in non financial nature. This include
consideration of labor efficiency and productivity; production quantity turnover, and
tardiness; on a very limited basis, human resources accounting and personnel satisfaction
measures; more commonly, management by objectives systems; social analysis;
operational audits of any functional, divisional, or staff component, distribution cost and
efficiency; management audits modeling; and so forth.
The list is almost endless and there is no time to discuss each item here.
Which factors should be used? Establishing the standards and tolerance limit is not as
easy as we might expect. Managers need to first define the critical success factors - the
factors which are most important to the strategy and being successful in the business.
Most of these measures are internal. But objective assessments can also be made by
comparing the firm's results of similar firms (see sectionBenchmarking)
Below we present a set of worthwhile guidelines that managers might follow in designing
and implementing more comprehensive strategic audits.
A strategic audit is conducted in three phases: diagnosis to identify how, where, and in
what priority in-depth analyses need to be made; focused analysis; and generation and
testing recommendation. Objectivity and the ability to ask critical, probing questions are
key requirements for conducting a strategic audit.
Phase one: Diagnosis
The diagnostic phase includes the flowing tasks:
1. Review key document such as:
o Strategic plan
o Business or operational plans
o Organizational arrangements
o Major policies governing matters such as resource allocation and
performance measurement.
2. Review financial, market, and operational performance against benchmarks and
industry norms to identify jet variances and emerging trends.
3. Gain an understanding of:

o Principal roles, responsibilities, and reporting relationships.


o Decision - making processes and major decisions made.
o Resources, including physical facilities, capital, management, technology.
o Interrelationships between functional staffs and business or operating units.
4. Identify strategic implications of strategy for organization structure, behavior
patterns, systems, and processes.
o Define interrelationships and linkages to strategy.
5. Determine internal and external perspectives.
o Survey the attitudes and perceptions of senior and middle managers and
other key employees to assess the extent to which these are consistent with
the strategic direction of the firm. One way to accomplish this task is
through carefully focused interviews and / or questionnaires, wherein
employees are asked to identify and make trade-offs among the objectives
and variables they consider most important.
o Interview a carefully selected sample of customers and prospective
customers and other key external sources to gain understanding of how the
company is viewed.
6. Identify aspects of the strategy that are working well. Formulate hypotheses
regarding problems and opportunities for improvement based on the findings
above. Define how and in what order each should be pursued.
Phase two: Focused analysis
1. Test the hypotheses concerning problems and opportunities for improvement
through analysis of specific issues.
o Identify interrelationships and dependencies among components of the
strategic system.
2. Formulate conclusions as to weaknesses in strategy formulation, implementation
deficiencies, or interactions between the two.
Phase three: Recommendations
1. Develop alternative solutions to problems and ways of capitalizing on
opportunities.

o Test [these alternatives] in light of their resource requirements, risk,


rewards, priorities, and other applicable measures.
2. Develop specific recommendations.
o Develop an integrated, measurable, and time - phased action plan to
improve strategic results.

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