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Strategy Review, Evaluation, & Control

Importance of Strategic Evaluation


The need for feedback Appraisal and reward Check on the validity of strategic choice Congruence between decisions and intended strategy Successful culmination of the strategic management process Creating inputs for new strategic planning

Ability to coordinate the tasks performed

Strategy Review Evaluation & Control


3 Basic Activities to review, evaluate & control
1. 2. 3.

Examine the underlying bases of a firms strategy Compare expected to actual results Identify corrective actions to ensure that performance conforms to plans

Strategy Evaluation, Review & Control


Consistency
Rummelts 4 Criteria

Consonance Feasibility Advantage

Strategy Evaluation, Review & Control


Consistency
n

Strategy should not present inconsistent goals & policies

Strategy Evaluation, Review & Control


Consonance
n

Need for strategies to examine sets of trends

Strategy Evaluation, Review & Control


Feasibility
n

Neither overtax resources or create unsolvable sub-problems

Strategy Evaluation, Review & Control


Advantage
n

Creation or maintenance of competitive advantage

Strategy Evaluation, Review & Control


Monitor Strengths & Weaknesses; Opportunities & Threats
n n n n

Are strengths still strengths? Have we added additional strengths? Are weaknesses still weaknesses? Have we developed other weaknesses?

Strategy Evaluation, Review & Control


Monitor Strengths & Weaknesses; Opportunities & Threats
n n n n n

Are opportunities still opportunities? Other opportunities develop? Are threats still threats Other threats emerged? Are we vulnerable to hostile takeover?

I. Review Underlying Bases

Evaluation Framework

Differences?

N O II. Measure Firm Performance


Differences?

Y e s

III. Take Corrective Actions

N O
Continue present course

Y e s

Strategy Evaluation, Review & Control


Key Financial Ratios
n n n n

Return on investment (ROI) Return on equity (ROE) Profit margin Market Share

Strategy Evaluation, Review & Control


Key Financial Ratios
n n n n

Debt to equity Earnings per share (EPS) Sales growth Asset growth

Barriers in Evaluation
Limits of Controls Difficulties in measurement Resistance to evaluation Short-termism Relying on efficiency versus effectiveness

Strategic Control and Operational Control

Strategic Control

Strategic Control
n

Are the premises made during strategy formulation proving to be correct? Is the strategy guiding the organization towards its intended objectives? Are the organization & the managers doing things which ought to be done? Is there a need to change & reformulate the strategy?

Types of Strategic Controls


1. 2. 3. 4.

Premise control Implementation control Strategic surveillance Special alert control

Premise Control
n

Necessary to identify the key assumptions (government policies, nature of competition, breakthrough in R&D) & keep track of any change in them so as to assess their impact on strategy & its implementation Continually tests the assumptions Responsibility: Corporate Planning Staff

n n

Implementation Control
n

n n -

To evaluate whether the plans, programmes & projects, resulting from implementation of the strategy, are actually guiding the organization towards its predetermined objectives or not. May lead to Strategic rethinking Can be put into practice through Identification & monitoring of strategic thrusts and Milestone Review

Strategic Surveillance
Designed to monitor a broad range of events inside & outside the company that are likely to threaten the course of a firms strategy. n Is a more general form of control n Information for this can be obtained through formal yet simple strategic information scanning systems like Knowledge management systems & organizational learning
n

Special Alert Control


n

n n

Based on a trigger mechanism for rapid response & immediate reassessment of strategy in light of sudden & unexpected events (eg: sudden fall of a govt., natural catastrophe, unfortunate industrial disaster etc.) Hope for the best ~ Prepare for the worst Can be handled by formulation of contingency strategies,& by assigning responsibility of unforeseen events to crisis management teams

Operational Control
Aimed at the allocation and use of organisational resources Concerned with action or performance

Operation Control
n

n n

n n

Recognizing the linkages that exist between strategic planning and mgt control is vital to org success. John C. Cammilus, Mgt Consultant. It takes the last phase of mgt functions. Done in order to ensure if the org achieves the obj or not. To measure the strategic actions. To give feedback and action decision.

OPERATIONAL CONTROL
n

It is aimed at the allocation and use of organizational resources through an evaluation of the performance of organizational units, such as divisions, SBUs and so on, to assess their contribution to the achievement of organizational objectives.

How do Strategic Control and Operational Control Differ


Attribute 1. Basic question 2. Aim Strategic Control Operational Control
Are we moving in the right How are we performing? direction? Proactive, continuous questioning of the basic direction of strategy future direction Allocation and use of organisational resources

3. Main Concern

Steering the organizations Action control

4. Focus 5. Time Horizon 6. Main Techniques

External environment Long- term Environmental scanning, information gathering, questioning and review

Internal organization Short- term Budgets, schedules, and MBO

Evaluation Techniques for Strategic Control


Strategic Momentum Control These types of evaluation techniques are aimed at assuring that the assumptions on the basis of which strategies were formulated are still valid and what needs to be done in order to allow the organisation to maintain its existing strategic momentum.
1.

Responsibility control centres.

Organizations are required to make strategic leaps in order to make significant changes when the environment is relatively unstable. It can assist such organizations by helping to define the new strategic requirements and to cope with emerging environmental realities.
1) Strategic issue management. 2) Strategic field analysis. 3) Systems modeling. 4) Scenarios

Evaluation Techniques for Operational Control


Internal Analysis The internal analysis, which consists of the value chain analysis, quantitative analysis and qualitative analysis, deals with the identification of the strengths and weaknesses of a firm in absolute terms
1. 2.

Value chain analysis Quantitative analysis

Comparative Analysis Which consist of of historical analysis, industry norms and benchmarking, compares the performance of a firm with its own past performance or with other firms.
1.

Historical analysis 2. Industry norm

Comprehensive Analysis Which includes balanced scorecard and key factor rating, adopts a total approach rather than focusing on one area of activity or a function of department. 1) The balanced scorecard 2) Key Factor Rating

Technique of Strategy Evaluation, Review & Control


The Balanced Scorecard
n

Evaluate strategies from 4 perspectives: 1. Financial performance 2. Customer knowledge 3. Internal business processes 4. Innovation & Learning Besides, performance of people and performance according to stakeholders can be added

Balanced Scorecard

Balanced Scorecard

Balanced Scorecard
Area of Objectives Measure or Target Time Expectation Primary Responsibility Customers 1 2 Managers/Employees 1 2 Operations/Processes 1 2 Community/Social Responsibility 1 2 Business Ethics/Natural Environment 1 2 Financial 1 2

Strategy-Evaluation Assessment Matrix

Have major changes occurred in the firms internal strategic No position?


Yes Yes Yes Yes No No No

Have major changes occurred in the firms external strategic No position?


Yes Yes No No Yes Yes No

Has the firm progressed satisfactorily toward achieving its stated objectives?
No No Yes No Yes No Yes Yes

Result

Corrective actions Corrective actions Corrective actions Corrective actions Corrective actions Corrective actions Corrective actions Continue course

Strategic Control of Capacity


n

Must have right amount of capacity to produce to customer demands

*If there is excess capacity fixed costs must be spread over fewer units thereby making the units cost more

*If there is insufficient capacity the company must incur additional costs to generate more capacity

A Capacity Management Example


Company A and Company B each manufacture one product that is very similar in nature. Company A recently invested in modern machinery (new technology) that reduces its manufacturing labor cost. Company B continues to be labor intensive using its older machinery. Accordingly, Company A has much more fixed factory overhead annually than Company B (Rs 1,500,000 compared to Rs 600,000). The respective selling price and variable costs per unit are as follows:

Company A
Selling Price Direct Mat. Direct Labor Var. Overhead Rs20.00 Rs2.00 Rs1.00 Rs1.00

Company B
Rs20.00 Rs2.00 Rs6.00 Rs1.00

Required: Compute the gross margins on the product of each company. Assume an annual volume of production and sales of 100,000 units; then 200,000 units.

Solution:
(100,000 Units) Cost: Variable Costs/Unit Rs4.00 Rs9.00 Company A Company B

Fixed Cost/Unit Total Cost/Unit Selling Price Total Gross Margin (200,000 Units) The only Change is Fixed costs per unit Total Gross Margin

Rs 15.00 Rs19.00 Rs20.00 Rs 100,000

Rs 6.00 Rs15.00 Rs 20.00 Rs 500,000

Rs7.50 Rs1,700,000

Rs3.00 Rs1,600,000

Cost-Volume-Profit Analysis

Revenue Line

$
Fixed Costs & Total Costs Line

Break Even Point

of Pr

ea Ar it

Contribution Margin

ss o

e Ar

Variable Cost Line

Activity Level

Strategy Evaluation, Review & Control


21st Century Challenges in Strategic Management

n n

Process is more an art than science Should strategies be visible or hidden from stakeholders- Highly debatable Should process be more top-down or bottom up

In conclusionall else fails then..