Chapter 10 Strategic Management

Strategic Management
N. Chandrasekaran,
Chandrasekaran Vice
President Currently, Take
Solutions Ltd
P.S. Ananthanarayanan,
Ananthanarayanan
Visiting faculty at Bharathidasan

Institute of Management (BIM),
Trichy
Oxford University Press 2011
Chapter 10
Evaluation and Control
Evaluation and
Control
Unless strategy evaluation is performed
seriously and systematically and unless
strategists are willing to act on the results,
energy will be used up defending
yesterday. No one will have the time,
resources or will to work on exploiting
today, let alone to work on making
tomorrow.
Peter Drucker
Learning Objectives
To understand the nature of evaluation and

control, their importance, and the barriers they
face
To measure performance through management

information systems, executive information
systems, and group decision-making systems
To classify the types of controls such as balanced

score card, budgets and budgetary controls,
economic value added, and ratio analysis
To evaluate control techniques such as feedback

and online systems, strategic audits, strategic
incentive management, strategic momentum
controls, and strategic leap controls
IMPORTANCE OF EVALUATION AND CONTROL
Strategy formulation and implementation should

followed up by strategy evaluation and control
Evaluating strategies on a continuing basis involves

checking whether the strategys intended goals and
milestones are being achieved
This assessment includes all the four dimensions in a

spacetime relationship namely, length, breadth, height,
time
To understand the internal and external environment

factors whether any major changes have taken place in
those areas
If such changes have taken place, it becomes necessary

to identify them and measure the impact of such changes
on the strategy being implemented.
This evaluation has to be enriched by a proper control

system helping to provide the necessary mid-course
correction or modification
be
Sample matrix evaluation
This analysis should address the following factors

Internal
External
1. Continuing consistency of
the internal strategy
implemented
1.Competitors reaction to
companys strategy
implementation
2. Relevance of the time

framework of strategy
implementation
2. Change in competitors
strategy in relation to
companys strategy
implementation
3. Actual workability of the

timetable of strategy
implementation
4. Responsible accounting and
resource allocation as
envisaged
3. Relationship between
internal and external strategy
factors
4.Any change in opportunities
and threats as a result of
strategy implementation
5. Any change in internal

5. Any uncontrollable external
strengths and weaknesses
as
Stated objectives
1.
Any
change
in
the
stated
internal/external/social objectives as a result
of strategy implementation to be reviewed
2.
Any
change
in
the
stated
of strategy implementation impacted by
change in statutory policies to be reviewed
3.
Any
change
in
the
stated
of strategy implementation impacted by
change in environment to be reviewed
Strategy Evaluation
Framework
BARRIERS TO EVALUATION
Short-termism
Efficiency
Impact
and effectiveness
of globalization
MEASURING PERFORMANCE, STRATEGIC

AND
SYSTEMS
INFORMATION,
These can be classified
under
two separate heads, that
is, non-financial and financial
Financial
Non- Financial
1.Shareholders
perspective
(a) Return on investment
(b) Return on equity
(c) Economic value added
(d) Asset growth
1.Customer perspective
2. Employee perspective
3.Market share and
competitors perspective
4. Innovation and learning
perspective
2. Innovation and learning

perspective
Innovation and learning perspective can be classified

under both financial and non-financial
The criteria can be further classified as quantitative

and qualitative.
Strategy formulation and strategy implementation

involve various levels of management for different
hierarchies of management decisions. These are as
follows:
1. High-level (strategic) management develops longrange view culminating in corporate planning.

2.
Middle-level (tactical) management carries out

corporate planning by assembling the material, and
organizing
labour
and
staff
for
strategy
implementation.
3. Low-level (operational) management is involved in

supervision, directing, and controlling various
strategic activities.
The information systems

o
Management information systems (MIS)
Executive information systems (EIS)
Group information systems (GIS)
Strategic
information requirements can be

both structured and unstructured
Structured
problems mainly relate to

functional
perspectives
such
as
manufacturing, marketing, human resources
development, finance, administration, and
research and development
Contd..
Group decision-making systems and decision support
systems have become very important to keep a
control over strategy implementation.
Mid-course correction can take place both due to

structured as well as unstructured changes.
The unstructured problems can be addressed by

decision support systems (DSS), which provide
information that is unstructured by request
DSS has been effective in the following areas:
1. Materials management
2. Marketing information in a time horizon
3. Projection of sales and revenues under different
conditions
TYPES OF CONTROL
Strategic control
Premise
control
Implementation
Strategic
Special
control
surveillance
alert control
Evaluation control techniques
Evaluation control techniques can be exercised

in three ways according to their requirement
1.
Internal
analysis,
which
involves
performance,
events,
and
assumptions.
underlying the formulated strategy relating to
internal organization
2. Comparative analysis, which involves
comparing the original benchmarks developed
in the formulated strategy on an industry basis
and deciding whether they still hold good
3. Comprehensive analysis, which is a blend of
the other two approaches
Contd..
Operational
Efficiency
Quality
control
control
control
Innovation
control
Responsiveness
to customer control
TOOLS USED FOR EVALUATION

AND CONTROL
1. Balanced scorecard
2. Budgets and budgetary controls
3. Economic value added (EVA)
4. Ratio analysis
Balanced scorecard
perspectives
Budgets and Budgetary

Controls
Modes
Time
mode
Functional mode
Flexibility mode
Specialty Budgets
Zero base budget
Programmed budget
Sunrise budget
Sunset budget
Economic Value Added

EVA = NOPAT c* (CAPITAL)
(EVA)
EVA = CAPITAL(r c*)
EVA = {PAT [ PAT + INT (1 t) c*(CAPITAL)]}
EVA = PAT Ke EQUITY
Where
NOPAT is net operating profit after tax
c* is cost of capital
CAPITAL is economic book value of capital employed in
the firm
r is return on capital = NOPAT/CAPITAL
PAT is profit after tax
INT is interest expense of the firm
t is marginal tax rate of the firm
Ke is cost of equity
EQUITY is equity employed by the firm
EVA
IMPLEMENTATION
1. Enunciate clearly the commitment of top management to
EVA.
2. Identify one of the four equations for evaluation.
3. Identify EVA centers .
4. Codify drivers of EVA.
5. Introduce reward system for achievement.
6. Attempt total awareness of the concept of various levels of
hierarchy through proper education
Improvements in EVA can be done by
Improving operating performance (functional-level strategy)
Improving profitability of capital employed (business-level

strategy)
Divesting unprofitable lines of investment/investing in new

lines of business (global-level strategy)
Reduction of cost of capital (corporate-level strategy)

Ratio Analysis
This is used to measure the achievement of milestones
in strategic formulation and implementation exercise via
ratios that are relevant for long-term evaluation
A company analysis, be it for buying stocks, for mergers

and acquisitions, or for drawing up growth plans, calls
for enduring ratios that reflect a companys strengths
and weaknesses in total
Ratio analysis tool

Five Cs
analysis
Character
Capacity
Capital
Collateral
Conditions
Company analysis using the five Cs
Different viewpoints
Peters and Waterman
IDBI Study
1. Compound equity
growth
1. Compounded growth
rate of sales
2. Market value to book

value ratio
(a)
Return
on
total
capital
(b) Return on equity
(c) Return on sales
2. Compounded growth
rate of assets
3. Trend of profit before
tax to capital employed
4. Trend of working
capital to gross sales
5. Dividend coverage
over a time horizon
6. Debtequity ratio over
a time horizon
Strategy evaluation
Strategic
audit
Strategic incentive management
Strategic momentum control
Strategic leap control
Important
strategic
audit
Does the company have adequate internal control system
commensurate with the size of the company and the nature
queries
of its business for conducting a proper strategic audit?
Does the company have a suitable information system

including management, executive and group decision
information systems, commensurate with the size of the
company and nature of the business for conducting a proper
strategic audit?
Does the company employ strategic measuring tools such as

bench marking, ratio analysis, economic value added, and
market value added, for conducting a proper strategic audit?
Has the company developed the necessary targets/standards

for various strategic business units in respect of
functional/business/global/corporate strategic performance
for the purposes of comparison with actuals?
Does the company have an internal strategic audit system

commensurate with the size of the nature of business?
Has the company evolved a system of cash flow control

especially to check that funds raised on short-term basis
have not been used for long-term investments?
Has the company put in place adequate security and

confidentiality with respect to information in the system
and the features of the system for conducting a proper
strategic audit?
Are the systems flexible enough for taking into

consideration
the
fluctuations
in
the
strategic
performance? Do they need any improvements for
conducting a proper strategic audit?
How far has the company implemented the strategic

management system with due regards to costs and
benefit?
Does
the
company
identify
the
areas
of
excessive/optimum
costs,
favourable/unfavourable
results and areas of deficiencies for correction?
Has the company continuously evolved during

implementation of the strategy by identified major
internal and external changes that were not anticipated
at the time of original strategy formulation?
Strategic incentives
management
Strategic momentum control
The velocity with which a company grows and

progresses towards a particular milestone is determined
by its strategy framework for a particular time horizon
Strategic leap control
Certain strategies are aimed at out

competitors at a phenomenal growth rate.
performing
This would require the best of inputs and outputs as

also infrastructural requirements for maintaining a high
growth rate
Governments provide incentives that lagged earlier

identifying the primary need of particular sectors.
EX: Special purpose vehicles (SPVs), subsidies, special

economic zones (SEZs)
More Questions
Ratio
analysis is an integral part of both

operational and strategic control. Discuss.
A new product has been invented at the

laboratory
level
and
it
promises
to
revolutionize the industry in the next decade.
How will you develop a strategy for this
product?
manufacturing company has offered a

license for contract formulation to another
company in a far off country. How will you
develop strategic control for this company?

Chapter 10 Strategic Management

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Strategic Management

Visiting faculty at Bharathidasan

Evaluation and Control

Oxford University Press 2011

Oxford University Press 2011

To understand the nature of evaluation and

To measure performance through management

To classify the types of controls such as balanced

To evaluate control techniques such as feedback

IMPORTANCE OF EVALUATION AND CONTROL

Strategy formulation and implementation should

Evaluating strategies on a continuing basis involves

This assessment includes all the four dimensions in a

To understand the internal and external environment

If such changes have taken place, it becomes necessary

This evaluation has to be enriched by a proper control

Sample matrix evaluation

This analysis should address the following factors

2. Relevance of the time

3. Actual workability of the

5. Any change in internal

Oxford University Press 2011

Oxford University Press 2011

MEASURING PERFORMANCE, STRATEGIC

2. Innovation and learning

Innovation and learning perspective can be classified

Oxford University Press 2011

The criteria can be further classified as quantitative

Strategy formulation and strategy implementation

1. High-level (strategic) management develops longrange view culminating in corporate planning.

Middle-level (tactical) management carries out

3. Low-level (operational) management is involved in

Oxford University Press 2011

The information systems

Management information systems (MIS)

Executive information systems (EIS)

Group information systems (GIS)

information requirements can be

problems mainly relate to

Oxford University Press 2011

Mid-course correction can take place both due to

The unstructured problems can be addressed by

DSS has been effective in the following areas:

Oxford University Press 2011

Oxford University Press 2011

Oxford University Press 2011

Evaluation control techniques

Evaluation control techniques can be exercised

Oxford University Press 2011

TOOLS USED FOR EVALUATION

Oxford University Press 2011

Oxford University Press 2011

Budgets and Budgetary

Economic Value Added

EVA = {PAT [ PAT + INT (1 t) c*(CAPITAL)]}

EVA = PAT Ke EQUITY

Improving operating performance (functional-level strategy)

Improving profitability of capital employed (business-level

Divesting unprofitable lines of investment/investing in new

Reduction of cost of capital (corporate-level strategy)

A company analysis, be it for buying stocks, for mergers

Ratio analysis tool

Company analysis using the five Cs