Business Policy and Strategy Lecture-30 1

Recap IMPLEMENTING STRATEGIES: MANAGEMENT AND OPERATIONS ISSUES  Management Perspectives 1. ANNUAL OBJECTIVES 2. POLICIES 3. RESOURCE ALLOCATION 4. MANAGING CONFLICT 5. MATCHING STRATEGY WITH STRUCTURE 6. RESTRUCTURING, REENGINEERING, AND E-ENGINEERING 7. LINKING PERFORMANCE AND PAY TO STRATEGIES 8. MANAGING RESISTANCE TO CHANGE 9. MANAGING THE NATURAL ENVIRONMENT 10. CREATING A STRATEGY-SUPPORTIVE CULTURE 11. PRODUCTION/OPERATIONS CONCERNS 12. HUMAN RESOURCE CONCERNS 2

Today’s Lecture STRATEGY REVIEW, EVALUATION, AND CONTROL – The Nature of Strategy Evaluation – A Strategy-Evaluation Framework – The Balanced Scorecard – Published Sources of Strategy-Evaluation Information – Characteristics of an Effective Evaluation System – Contingency Planning – Auditing – 21st Century Challenges in Strategic Management 3

CHAPTER OBJECTIVES After studying this chapter, you should be able to do the following: 1.Describe a practical framework for evaluating strategies. 2.Explain why strategy evaluation is complex, sensitive, and yet essential for organizational success. 3.Discuss the importance of contingency planning in strategy evaluation. 4.Discuss the role of auditing in strategy evaluation. 5.Explain how computers can aid in evaluating strategies. 6.Discuss the Balanced Scorecard. 7.Discuss three 21st century challenges in strategic management. 4

Importance of Strategy Evaluation Organizations are most vulnerable, when they are at the peak of their success --R.T. Lenz Strategy Review -- Strategies become obsolete -- Internal environments are dynamic -- External environments are dynamic Strategy Evaluation Vital to the organization’s well-being Alert management to potential/actual problems in a timely fashion Erroneous strategic decisions can have severe negative impact on organizations 5

Importance of Strategy Evaluation It is impossible to demonstrate conclusively that a particular strategy is optimal, but it can be evaluated for critical flaws. There are four criteria to use in evaluating a strategy: a. consistency b. consonance c. feasibility d. Advantage These trends make strategy evaluation difficult: a. dramatic increase in environmental complexity b. difficult in predicting future c. increasing number of variables d. rapid rate of obsolescence e. increase in the number of world events affecting the organization f. decreasing time spans for planning 6

The Process of Evaluating Strategies 1. Strategy evaluation is necessary for all sizes and kinds of organizations. Strategy evaluation should initiate managerial questioning of expectations and assumptions, trigger a review of objectives and values, and stimulate creativity in generating alternatives and formulating criteria of evaluation. 2. Evaluating strategies on a continuous rather than a periodic basis allows benchmarks of progress to be established and more effectively monitored. 3. Managers and employees of the firm should continually be aware of progress being made toward achieving the firm's objectives. As critical success factors change, organizational members should be involved in determining appropriate corrective actions. 7

Strategy Evaluation, Review & Control Consonance Consistency Feasibility Advantage Rummelt’s 4 Criteria 8

Consistency: Strategy should not present inconsistent goals & policies Consonance:Need for strategies to examine sets of trends Feasibility: Neither overtax resources or create unsolvable sub-problems Advantage:Creation or maintenance of competitive advantage 9

Difficulties in Strategy Evaluation 1.Increase in environment’s complexity 2.Difficulty predicting future with accuracy 3.Increasing number of variables 4.Rate of obsolescence of plans 5.Domestic and global events 6.Decreasing time span for planning certainty 10

STRATEGY-EVALUATION FRAMEWORK Review of underlying bases of strategy  Develop revised EFE Matrix  Develop revised IFE Matrix Review effectiveness of strategy  Competitors’ reaction to strategy  Competitors’ change in strategy  Competitors’ changes in strengths & weaknesses  Reasons for competitors’ strategic change  Reasons for competitors’ successful strategies  Competitors’ present market positions & profitability  Potential for competitor retaliation  Potential for cooperation with competitors 11

Monitor Strengths & Weaknesses; Opportunities & Threats  Are strengths still strengths?  Have we added additional strengths?  Are weaknesses still weaknesses?  Have we developed other weaknesses?  Are opportunities still opportunities?  Other opportunities develop?  Are threats still threats  Other threats emerged?  Are we vulnerable to hostile takeover? 12

Evaluation Framework I. Review Underlying Bases Continue present course II. Measure Firm Performance III. Take Corrective Actions Differences? Yes NO Yes NO 13

Measuring Organizational Performance – Compare expected to actual results – Investigate deviations from plan – Evaluate individual performance – Progress toward stated objectives Quantitative Criteria for Strategy Evaluation – Compare performance over different periods – Compare performance to competitors – Compare performance to industry averages 14

Key Financial Ratios – Return on investment (ROI) – Return on equity (ROE) – Profit margin – Market Share – Debt to equity – Earnings per share (EPS) – Sales growth – Asset growth 15

Qualitative Evaluation of Strategy – Internal consistency of strategy – Consistency with environment – Appropriateness in view of resources – Acceptable degree of risk – Appropriate time frame – Workability of the strategy 16

Balanced Scorecard Evaluate strategies from 4 perspectives: – Financial performance – Customer knowledge – Internal business processes – Learning & growth 17

Balanced Scorecard Area of ObjectivesMeasure or TargetTime ExpectationPrimary 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 Ch 9-18

Strategy-Evaluation Assessment Matrix Continue courseYesNo Corrective actionsNoYesNo Corrective actionsYes No Corrective actionsNo Yes Corrective actionsYesNoYes Corrective actionsNoYes Corrective actionsYes Corrective actionsNo Result Has the firm progressed satisfactorily toward achieving its stated objectives? Have major changes occurred in the firm’s external strategic position? Have major changes occurred in the firm’s internal strategic position? 19

Contingency Planning: Alternative plans that can be put into effect if certain key events do not occur as expected 21 st Century Challenges in Strategic Management Process is more an “art” than “science” Should strategies be visible or hidden from stakeholders Should process be more top-down or bottom up 20

Summary – The Nature of Strategy Evaluation – A Strategy-Evaluation Framework – The Balanced Scorecard – Published Sources of Strategy-Evaluation Information – Characteristics of an Effective Evaluation System – Contingency Planning – Auditing – 21st Century Challenges in Strategic Management 21

Next Chapter Revision from lecture