TIM 431 Chapter 9 - Strategy Review Evaluation and Control

Auditing

"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."

The Balanced Scorecard: Approach

Approach to strategy evaluation aims to balance long-term with short-term concerns, to balance financial with non-financial concerns, and to balance internal with external concerns

The Nature of Strategy Evaluation

Consonance and advantage are mostly based on a firm's external assessment Consistency and feasibility are largely based on an internal assessment

Measuring Organizational Performance

Strategists use common quantitative criteria 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

Twenty-First-Century Challenges in Strategic Management

- Deciding whether the process should be more an art or science - Deciding whether strategies should be visible or hidden from stakeholders - Deciding whether the process should be more top-down or bottom-up in their firm

Additional Key Questions

- How good is the firm's balance of investments between high-risk and low-risk projects? - How good is the firm's balance of investments between long-term and short-term projects? - How good is the firm's balance of investments between slow-growing markets and fast-growing markets? - How good is the firm's balance of investments among different divisions? - To what extent are the firm's alternative strategies socially responsible? - What are the relationship among the firm's key internal and external strategic factors? - How are major competitors likely to respond to particular strategies?

Reviewing Bases of Strategy

- How have competitors reacted to our strategies? - How have competitors' strategies changed? - Have major competitors' strengths and weaknesses changed? - Why are competitors making certain strategic changes? - Why are some competitors' strategies more successful than others? - How satisfied are our competitors with their present market position and profitability? - How far can our major competitors be pushed before retaliating? - How could we more effectively cooperate with our competitors?

Contingency Planning

- If a major competitor withdraws form particular markets as intelligence reports indicate, what actions should our firm take? - If our sales objectives are not reached, what actions should our firm take to avoid profit losses? - If demand for our new product exceeds plans, what actions should our firm take to meet the higher demand? - In certain disasters occur, what actions should our firm take? - If a new technological advancement makes our new product obsolete sooner than expected, what actions should our firm take?

Problems with Quantitative Criteria

- Most quantitative criteria are geared to annual objectives rather than long term objectives - Different accounting methods can provide different results on many quantitative criteria - Intuitive judgements are almost always involved in deriving quantitative criteria

Why Strategy Formulation is More Difficult Today

1. A dramatic increase in the environment's complexity 2. The increasing difficulty of predicting the future with accuracy 3. The increasing number of variables 4. The rapid rate of obsolescence of even the best plans 5. The increase in the number of both domestic and world events affecting organizations 6. The decreasing time span for which planning can be done with any degree of certainty

Corrective Actions Possibly Needed to Correct Unfavorable Variances

1. Alter the firm's structure 2. Replace one or more key individuals 3. Divest a division 4. Alter the firm's vision and mission 5. Revise objectives 6. Alter strategies 7. Devise new policies 8. Install new performance incentives 9. Raise capital with stock or debt 10. Add or terminate salespersons, employees, or managers 11. Allocate resources differently 12. Outsource (or rein in) business functions

The Nature of Strategy Evaluation: Three basic activities

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

The Balanced Scorecard: Questions

1. How well is the firm continually improving and creating value along measures such as innovation, technological leadership, product quality, operational process efficiencies and so on? 2. How well is the firm sustaining and even improving upon its core competencies and competitive advantages? 3. How satisfied are the firm's customers?

Effective Contingency Planning

1. Identify both beneficial and unfavorable events that could possibly derail the strategy or strategies 2. Specify trigger points 3. Assess the impact of each contingent event 4. Develop contingency plans 5. Assess the counter-impact of each contingency plan 6. Determine early warning signals for key contingent events 7. For contingent events with reliable early warning signals, develop advance action plans to take advantage of the available lead time.

Rumelt's Criteria for Evaluating Strategies: Feasibility

A strategy must neither overtax available resources nor create unsolvable sub problems. The final broad test of strategy is its feasibility; that is, can the strategy be attempted within the physical, human and financial resources of the enterprise? The financial resources of a business are the easiest to quantify and are normally the first limitation against which strategy is evaluated. It is sometimes forgotten, however, that innovative approaches to financing are often possible. Devices, such as captive subsidiaries, sale-leaseback arrangements and typing plant mortgage to long-term contracts, have all been used effectively to help win key positions in suddenly expanding industries. A less quantifiable, but actually more rigid, limitation on strategic choice is that imposed by individual and organizational capabilities. In evaluating a strategy, it is important to examine whether an organization has demonstrated in the past that is possesses the abilities, competencies, skills and talents needed to carry out a given strategy.

Rumelt's Criteria for Evaluating Strategies: Advantage

A strategy must provide for the creation and/or maintenance of a competitive advantage in a selected area of activity. Competitive advantages normally are the result of superiority in one of three areas: (1) resources, (2) skills, or (3) position. The idea that the positioning of one's resources can enhance their combined effectiveness is familiar to military theorists, chess players and diplomats. Position can also play a crucial role in an organization's strategy. Once gained, a good position is defensible - meaning that it is so costly to capture that rivals are deterred from full-scale attacks. Positional advantage tends to be self-sustaining as long as the key internal and environmental factors that underlie it remain stable. This is why entrenched firms can be almost impossible to unseat, even if their raw skill levels are only average. Although not all positional advantages are associated with size, it is true that larger organizations tend to operate in markets and use procedures that turn their size into advantage, while smaller firms seek product/market positions that exploit other types of advantage. The principal characteristic of good position is that is permits the firm to obtain advantage from policies that would not similarly benefit rivals without the same position. Therefore, in evaluating strategy, organizations should examine the nature of positional advantages associated with a given strategy.

Rumelt's Criteria for Evaluation Strategies: Consistency

A strategy should not present inconsistent goals and policies. Organizational conflict and interdepartmental bickering are often symptoms of managerial disorder, but these problems may also be a sign of strategic inconsistency. Three guidelines help determine if organizational problems are due to inconsistencies in strategy: - If managerial problems continue despite changes in personnel and if they tend to be issue-based rather than people-based, then strategies may be inconsistent - If success for one organizational department means, or is interpreted to mean, failure for another department, then strategies maybe inconsistent - If policy problems and issues continue to be brought to the top for resolution, then strategies may be inconsistent

Rumelt's Criteria for Evaluating Strategies: Consonance

Refers to the need for strategists to examine sets of trends, as well as individual trends, in evaluating strategies. A strategy must represent an adaptive response to the external environment and to the critical changes occurring within it. One difficulty in matching a firm's key internal and external factors in the formation of strategy is that most trends are the result of interactions among other trends. For example: The day care explosion came about as a combined result of many trends that included a rise in the average level of education, increased inflation, and an increase in woman in the workforce. Although single economic or demographic trends might appear for many years, there are waves of change on the interaction level

Characteristics of an Effective Evaluation System

Strategy evaluation activities must be economical - Too much information can be just as bad as too little information - Too many controls can do more harm than good Activities should be meaningful - Should specifically relate to a firm's objectives Activities should provide timely information Activities should be designed to provide a true picture of what is happening Activities should not dominate decisions - Should foster mutual understanding, trust and common sense

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 forming criteria of evaluation Evaluating strategies on a continuous rather than on a periodic basis allows benchmarks of progress to be established and more effectively monitored Successful strategies combine patience with a willingness to promptly take corrective actions when necessary