STRATEGIC EVALUATION AND CONTROL

Transcription

1 EXCEL PROFESSIONAL INSTITUTE CORPORATE STRATEGY, ETHICS AND GOVERNANCE-2.6 STRATEGIC EVALUATION AND CONTROL

2 The main subtopics to consider under strategic evaluation and control are; Strategic Control and Critical Success Factor Evaluating Strategic Options Evaluation techniques

3 Strategic control It is mainly measurement of performance, which tends to be based on financial criteria. It is therefore a means of monitoring the achievement of strategic objectives. Critical success factor They are the few key areas where an organization must excel at in order to outperform its competitors. As such, CSF are underpinned by the core competences which leads to an organization success.

4 It is important to understand how objectives, critical success factors (CSF) and key performance indicators (KPI) relates to each other. Once an organisation has established its objectives, it needs to identify the key factors and processes that will enable it to achieve those objectives. These key factors are the CSF. Environmental Element Basis of analysis PESTEL Macro-environment Key drivers of change Scenarios Five forces influence Industry or sector all aspects of its operations. Cycles of For competition example, if a company Strategic groups Market segments Competitors and market CSFs In an effective organisation, the factors that are crucial to success will identifies excellent customer service as a CSF, then recruitment process, training, appraisal and reward systems should all be geared towards promoting customer-service skills in staff.

5 Ones an organization has identified its CSFs, it also needs to know whether it is delivering on them. This is done by using KPI, which measures how well the organization is performing against its CSFs. KPIs are the hard data which tell the organization how well it is performing. KPI must be measurable. Considering the example above, suggested KPIs are Overall Customer satisfaction, conversion rate, customer retention, net promoter score, etc. Objective CSF KPI (must be measurable)

6 Managers need information for better decision making and control. CSFs can therefore be used to determine the information requirements for an organization's executive information system. This is because they identify the Legal key areas of performance that managers need most information about. CSF could also act as a trigger for change in relation to organization information systems. If organization information systems currently do not provide managers with the information they need to monitor performance Sociocultural Factors in key areas, then the systems will need to be changed to provide all needed information.

7 Staff tends to focus on key areas that are being measured at the expense of other areas. As a result, it is vital that the range of KPIs selected is balanced across the organization as a whole. This is one of the reasons why most organizations uses multidimensional performance measures such as balanced score card.

8 Strategies should be assessed to ensure they are suitable, acceptable and feasible. Once an organization has identified its correct strategic position and the difficult options available to it, it then has to choose which of those options it wants to pursue. According to the rational model, individual s strategies must be evaluated against a number of criteria before a strategy is chosen. Johnson, schools and Whittington narrow this criteria down to three; suitability, acceptability and feasibility. Suitability should always be done first since little can be done If a strategy is unsuitable.

9 Suitability relate to the strategic logic of the strategy. The strategy must be consistent with the company s current strategic position and its operational circumstances. Under suitability, the organization will look at whether or not the strategy plays to its strengths or whether it makes use of weaknesses. Does the strategy make use of environmental opportunities? Does it guard against threats? Is it suitable in relation to the way environmental factors and competition are changing. Eg. if a company uses a cost leadership strategy and a basis for a proposed strategy is differentiation, this might not be suitable.

10 The acceptability of a strategy relates to whether it is acceptable to an organisation s stakeholders. The key stakeholders are those with high power and high interest in an organisation and it is important that any potential strategy is acceptable to them. Therefore the level of risk and returns associated with a strategy are likely to be critical in determining how acceptable it is. Strategy geared towards maximisation of shareholder wealth can be evaluated using investment appraisals techniques and ratios such as ROI, profits, growth, EPS, NPV, etc.

11 Feasibility asks whether the strategy can be infact be implemented. Thus do we have the resource to deliver on the strategy? Other relevant questions to answer are; Is there enough money? Is there the ability to deliver on the goods/services specified in the strategy? Can we deal with the likely responses that competitors will make? Do we have access to technology, materials and other resources? Do we have enough time to implement the strategy? Etc.

12 Resource deployment analysis makes a wider assessment of feasibility in terms of resources and competences. Strategies which do not make use of the existing competences and which therefore call for new competences to be acquired might not be feasible due to time constraints Resource Audit The M model could be useful for assessing feasibility. Does the organization have the resources and competences it needs to implement the strategy successfully? Resource audit is a review of all aspect of the resources the organization uses. The Ms model categorizes the factors as following;

13

14 Techniques such as decision trees, cost/ benefit analysis, ranking and scoring, scenario building, decision matrices and sensitivity analysis could all be useful in evaluating the strategic decisions of an organization.

15 It is pictorial method of showing a sequence of interrelated decisions and their expected outcomes. Decision trees can incorporate both the probabilities of and value of expected outcomes, and are used in decision making. (CIMA official terminology) Decision trees are a useful tool for helping managers choose between different courses of action. The tree structure allows them to lay out options and investigate the possible outcomes of choosing these options.

16 There are two stages in preparing a decision tree. Drawing the tree itself, to show all the choices and outcomes Putting in the numbers: the probabilities, outcomes values and expected values (EVs) Decision trees are useful in; Clarifying strategic decisions when they are complex Using risk (in probability terms) as an input to quantifying the decision options Ranking the relative cost s and benefits of the options

17

18 C/B analysis is a strategy evaluation technique often used in the public sector, where many of the costs and benefits of a project are intangible. Cost /benefit analysis involves comparison between the cost of the resources used, plus any other costs imposed by an activity and the value of the financial and nonfinancial derived. It can help businesses to negotiate with public sector officials. For example most large building projects have to get planning permission from the local authority. Local government officials will sometimes insist on certain social benefits to be included in a project.

19 Ranking and scoring methods are less precise than decision trees. Some goals may be hard to quantify, and strategic decisions generally take more matters into account than can be dealt with by uncertain estimates of probability. This is best illustrated by a simple example. The objectives are weighted in relative importance (so that minimizing competitive threats is the most important)

20 Scenario building is one method of dealing with potentially unpredictable environmental changes. Types of scenarios Macro scenarios are used to consider possible future environmental conditions overall. Industry Scenarios deals with an individual industry in more detail. Building scenarios Normally a team is selected to develop scenarios, preferably of people from diverse backgrounds.

21 Steps in scenario planning (Mercer) Decide on the drivers for change (environmental analysis help determine key factor Bring drivers together into a viable framework Produce seven to nine mini scenarios Group mini-scenarios into two or three larger scenarios (containing all topics) Write the scenarios Identify issues arising

22 A decision matrix is a way of comparing outcomes with a variety of circumstances. Outcomes can be selected on a number of basis, then the decision matrix clarifies the choice. When a decision has to be made, there will be a range of possible actions. Each action will have certain consequences, or payoffs. The payoff from any given action will depend on the circumstances (eg. high or low demand). For a decision like this a payoff table can be prepared.

23 Payoff table for decision on level of advertising expenditure (payoffs in GH 000 of profit after advertising expenditure)

24 (a) Hope for the best: the maximax rule can be applied in two equivalent ways; Maximise the maximum profit Minimise the minimum costs or losses Using this rule, we would decide on high expenditure as this offers the best of the favourable outcomes. In this case, economy condition 1, since this offers the highest profit; minimising cost or loss does not apply.

25 (b) Expect the worst: the minimax rule also has two equivalent versions Maximise the minimum profit Minimise the maximum costs or losses Using this rule we examine economy condition 3 since this causes the greatest losses. Here we would choose low expenditure. (c) Minimax regret rule; this is another possible approach which considers the extent to which we might come to regret an action we had chosen.

26 Sensitivity analysis is a modelling and risk assessment procedure in which changes are made to significant variables in order to determine the effect of these changes on the planned outcome. Sensitivity analysis involves asking what if? questions. By changing the value of different variables in a decision model, a number of different outcomes will be produced. Eg. Wage increases can be altered to 10% from 5%.

27

28 END OF CHAPTER THANK YOU