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Strategic Management

<<< Previous CHARACTERISTICS OF AN EFFECTIVE EVALUATION SYSTEM:Contingency Planning
 
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Strategic Management ­ MGT603
VU
Lesson 45
CHARACTERISTICS OF AN EFFECTIVE EVALUATION SYSTEM
Learning Objectives
After study this lecture you are in position to explain the importance and qualities of good evaluation
system.
Qualities of good evaluation system
A Good evaluation system must posses various qualities. It must meet several basic requirements to be
effective. First, strategy-evaluation activities must be economical; too much information can be just as bad
as too little information; and too many controls can do more harm than good. Strategy-evaluation
activities also should be meaningful; they should specifically relate to a firm's objectives. They should
provide managers with useful information about tasks over which they have control and influence.
Strategy-evaluation activities should provide timely information; on occasion and in some areas, managers
may need information daily. For example, when a firm has diversified by acquiring another firm, evaluative
information may be needed frequently. However, in an R&D department, daily or even weekly evaluative
information could be dysfunctional. Approximate information that is timely is generally more desirable as
a basis for strategy evaluation than accurate information that does not depict the present. Frequent
measurement and rapid reporting may frustrate control rather than give better control. The time
dimension of control must coincide with the time span of the event being measured.
Strategy evaluation should be designed to provide a true picture of what is happening. For example, in a
severe economic downturn, productivity and profitability ratios may drop alarmingly, although employees
and managers are actually working harder. Strategy evaluations should portray this type of situation fairly.
Information derived from the strategy-evaluation process should facilitate action and should be directed to
those individuals in the organization who need to take action based on it. Managers commonly ignore
evaluative reports that are provided for informational purposes only; not all managers need to receive all
reports. Controls need to be action-oriented rather than information-oriented.
The strategy-evaluation process should not dominate decisions; it should foster mutual understanding,
trust, and common sense! No department should fail to cooperate with another in evaluating strategies.
Strategy evaluations should be simple, not too cumbersome, and not too restrictive. Complex strategy-
evaluation systems often confuse people and accomplish little. The test of an effective evaluation system is
its usefulness, not its complexity.
Large organizations require a more elaborate and detailed strategy-evaluation system because it is more
difficult to coordinate efforts among different divisions and functional areas. Managers in small companies
often communicate with each other and their employees daily and do not need extensive evaluative
reporting systems. Familiarity with local environments usually makes gathering and evaluating information
much easier for small organizations than for large businesses. But the key to an effective strategy-
evaluation system may be the ability to convince participants that failure to accomplish certain objectives
within a prescribed time is not necessarily a reflection of their performance.
There is no one ideal strategy-evaluation system. The unique characteristics of an organization, including
its size, management style, purpose, problems, and strengths, can determine a strategy-evaluation and
control system's final design. Robert Waterman offered the following observation about successful
organizations' strategy-evaluation and control systems:
Successful companies treat facts as friends and controls as liberating. Morgan Guaranty and Wells Fargo
not only survive but thrive in the troubled waters of bank deregulation, because their strategy evaluation
and control systems are sound, their risk is contained, and they know themselves and the competitive
situation so well. Successful companies have a voracious hunger for facts. They see information where
others see only data. They love comparisons, rankings, anything that removes decision-making from the
realm of mere opinion. Successful companies maintain tight, accurate financial controls. Their people
don't regard controls as an imposition of autocracy, but as the benign checks and balances that allow them
to be creative and free.
Contingency Planning
A basic premise of good strategic management is that firms plan ways to deal with unfavorable and
favorable events before they occur. Too many organizations prepare contingency plans just for
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unfavorable events; this is a mistake, because both minimizing threats and capitalizing on opportunities
can improve a firm's competitive position.
Regardless of how carefully strategies are formulated, implemented, and evaluated, unforeseen events such
as strikes, boycotts, natural disasters, arrival of foreign competitors, and government actions can make a
strategy obsolete. To minimize the impact of potential threats, organizations should develop contingency
plans as part of the strategy-evaluation process. Contingency plans can be defined as alternative plans that can
be put into effect if certain key events do not occur as expected. Only high-priority areas require the
insurance of contingency plans. Strategists cannot and should not try to cover all bases by planning for all
possible contingencies. But in any case, contingency plans should be as simple as possible.
Some contingency plans commonly established by firms include the following:
1. If a major competitor withdraws from particular markets as intelligence reports indicate, what
actions should our firm take?
2. If our sales objectives are not reached, what actions should our firm take to avoid profit losses?
3. If demand for our new product exceeds plans, what actions should our firm take to meet the higher
demand?
4. If certain disasters occur--such as loss of computer capabilities; a hostile takeover attempt; loss of
patent protection; or destruction of manufacturing facilities because of earthquakes, tornados, or
hurricanes--what actions should our firm take?
5. If a new technological advancement makes our new product obsolete sooner than expected, what
actions should our firm take?
Too many organizations discard alternative strategies not selected for implementation although the work
devoted to analyzing these options would render valuable information. Alternative strategies not selected
for implementation can serve as contingency plans in case the strategy or strategies selected do not work.
When strategy-evaluation activities reveal the need for a major change quickly, an appropriate contingency
plan can be executed in a timely way. Contingency plans can promote a strategist's ability to respond
quickly to key changes in the internal and external bases of an organization's current strategy. For example,
if underlying assumptions about the economy turn out to be wrong and contingency plans are ready, and
then managers can make appropriate changes promptly.
In some cases, external or internal conditions present unexpected opportunities. When such opportunities
occur, contingency plans could allow an organization to capitalize on them quickly. Linneman and
Chandran reported that contingency planning gave users such as DuPont, Dow Chemical, Consolidated
Foods, and Emerson Electric three major benefits: It permitted quick response to change, it prevented
panic in crisis situations, and it made managers more adaptable by encouraging them to appreciate just
how variable the future can be. They suggested that effective contingency planning involves a seven-step
process as follows:
1. Identify both beneficial and unfavorable events that could possibly derail the strategy or strategies.
2. Specify trigger points. Calculate about when contingent events are likely to occur.
3. Assess the impact of each contingent event. Estimate the potential benefit or harm of each
contingent event.
4. Develop contingency plans. Be sure that contingency plans are compatible with current strategy
and are economically feasible.
5. Assess the counter impact of each contingency plan. That is, estimate how much each contingency
plan will capitalize on or cancel out its associated contingent event. Doing this will quantify the
potential value of each contingency plan.
6. Determine early warning signals for key contingent events. Monitor the early warning signals.
7. For contingent events with reliable early warning signals, develop advance action plans to take
advantage of the available lead time.
Auditing
A frequently used tool in strategy evaluation is the audit. Auditing is defined by the American Accounting
Association (AAA) as "a systematic process of objectively obtaining and evaluating evidence regarding
assertions about economic actions and events to ascertain the degree of correspondence between those
assertions and established criteria, and communicating the results to interested users." People who
perform audits can be divided into three groups: independent auditors, government auditors, and internal
auditors. Independent auditors basically are certified public accountants (CPAs) who provide their services
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to organizations for a fee; they examine the financial statements of an organization to determine whether
they have been prepared according to generally accepted accounting principles (GAAP) and whether they
fairly represent the activities of the firm. Independent auditors use a set of standards called generally
accepted auditing standards (GAAS). Public accounting firms often have a consulting arm that provides
strategy-evaluation services.
Two government agencies--the General Accounting Office (GAO) and the Internal Revenue Service
(IRS)--employ government auditors responsible for making sure that organizations comply with federal
laws, statutes, and policies. GAO and IRS auditors can audit any public or private organization. The third
group of auditors are employees within an organization who are responsible for safeguarding company
assets, for assessing the efficiency of company operations, and for ensuring that generally accepted
business procedures are practiced. To evaluate the effectiveness of an organization's strategic-management
system, internal auditors often seek answers to the questions posed in Table 9-5.
The Environmental Audit
For an increasing number of firms, overseeing environmental affairs is no longer a technical function
performed by specialists; it rather has become an important strategic-management concern. Product
design, manufacturing, transportation, customer use, packaging, product disposal, and corporate rewards
and sanctions should reflect environmental considerations. Firms that effectively manage environmental
affairs are benefiting from constructive relations with employees, consumers, suppliers, and distributors.
Instituting an environmental audit can include moving environmental affairs from the staff side of the
organization to the line side. Some firms are also introducing environmental criteria and objectives in their
performance appraisal instruments and systems. Conoco, for example, ties compensation of all its top
managers to environmental action plans. Occidental Chemical includes environmental responsibilities in all
its job descriptions for positions.
Using Computers to Evaluate Strategies
When properly designed, installed, and operated, a computer network can efficiently acquire information
promptly and accurately. Networks can allow diverse strategy-evaluation reports to be generated for--and
responded to by--different levels and types of managers. For example, strategists will want reports
concerned with whether the mission, objectives, and strategies of the enterprise are being achieved. Middle
managers could require strategy-implementation information such as whether construction of a new
facility is on schedule or a product's development is proceeding as expected. Lower-level managers could
need evaluation reports that focus on operational concerns such as absenteeism and turnover rates,
productivity rates, and the number and nature of grievances. As indicated in the E-Commerce Perspective,
Virtual Close is a Cisco Systems software product that promises to revolutionize the strategy-evaluation
process. Virtual Close allows strategists to close the financial books for the company on a daily or even
hourly basis, rather than on a quarterly or annual basis.
Business today has become so competitive that strategists are being forced to extend planning horizons
and to make decisions under greater degrees of uncertainty. As a result, more information has to be
obtained and assimilated to formulate, implement, and evaluate strategic decisions. In any competitive
situation, the side with the best intelligence (information) usually wins; computers enable managers to
evaluate vast amounts of information quickly and accurately. Use of the Internet, World Wide Web, e-
mail, and search engines can make the difference today between a firm that is up-to-date or out-of-date in
the currentness of information the firm uses to make strategic decisions.
A limitation of computer-based systems to evaluate and monitor strategy execution is that personal values,
attitudes, morals, preferences, politics, personalities, and emotions are not programmable. This limitation
accents the need to view computers as tools, rather than as actual decision-making devices. Computers can
significantly enhance the process of effectively integrating intuition and analysis in strategy evaluation. The
General Accounting Office of the U.S. Government offered the following conclusions regarding the
appropriate role of computers in strategy evaluation:
The aim is to enhance and extend judgment. Computers should be looked upon not as a provider of
solutions, but rather as a framework which permits science and judgment to be brought together and
made explicit. It is the explicitness of this structure, the decision-maker's ability to probe, modify, and
examine "What if?" alternatives that is of value in extending judgment.
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The Nature of Strategy Evaluation
The strategic-management process results in decisions that can have significant, long-lasting consequences.
Erroneous strategic decisions can inflict severe penalties and can be exceedingly difficult, if not impossible,
to reverse. Most strategists agree, therefore, that strategy evaluation is vital to an organization's well-being;
timely evaluations can alert management to problems or potential problems before a situation becomes
critical. Strategy evaluation includes three basic activities: (1) examining the underlying bases of a firm's
strategy, (2) comparing expected results with actual results, and (3) taking corrective actions to ensure that
performance conforms to plans.
Adequate and timely feedback is the cornerstone of effective strategy evaluation. Strategy evaluation can
be no better than the information on which it operates. Too much pressure from top managers may result
in lower managers contriving numbers they think will be satisfactory.
Strategy evaluation can be a complex and sensitive undertaking. Too much emphasis on evaluating
strategies may be expensive and counterproductive. No one likes to be evaluated too closely! The more
managers attempt to evaluate the behavior of others, the less control they have. Yet, too little or no
evaluation can create even worse problems. Strategy evaluation is essential to ensure that stated objectives
are being achieved.
In many organizations, strategy evaluation is simply an appraisal of how well an organization has
performed. Have the firm's assets increased? Has there been an increase in profitability? Have sales
increased? Have productivity levels increased? Have profit margin, return on investment, and earnings-
per-share ratios increased? Some firms argue that their strategy must have been correct if the answers to
these types of questions are affirmative. Well, the strategy or strategies may have been correct, but this
type of reasoning can be misleading, because strategy evaluation must have both a long-run and short-run
focus. Strategies often do not affect short-term operating results until it is too late to make needed
changes.
Conclusion
Strategy-evaluation framework that can facilitate accomplishment of annual and long-term objectives.
Effective strategy evaluation allows an organization to capitalize on internal strengths as they develop, to
exploit external opportunities as they emerge, to recognize and defend against threats, and to mitigate
internal weaknesses before they become detrimental.
Strategists in successful organizations take the time to formulate, implement, and then evaluate strategies
deliberately and systematically. Good strategists move their organization forward with purpose and
direction, continually evaluating and improving the firm's external and internal strategic position. Strategy
evaluation allows an organization to shape its own future rather than allowing it to be constantly shaped by
remote forces that have little or no vested interest in the well-being of the enterprise.
Although not a guarantee for success, strategic management allows organizations to make effective long-
term decisions, to execute those decisions efficiently, and to take corrective actions as needed to ensure
success. Computer networks and the Internet help to coordinate strategic-management activities and to
ensure that decisions are based on good information. A key to effective strategy evaluation and to
successful strategic management is an integration of intuition and analysis.
A potentially fatal problem is the tendency for analytical and intuitive issues to polarize. This polarization
leads to strategy evaluation that is dominated by either analysis or intuition, or to strategy evaluation that is
discontinuous, with a lack of coordination among analytical and intuitive issues.1
Strategists in successful organizations realize that strategic management is first and foremost a people
process. It is an excellent vehicle for fostering organizational communication. People are what make the
difference in organizations.
The real key to effective strategic management is to accept the premise that the planning process is more
important than the written plan, that the manager is continuously planning and does not stop planning
when the written plan is finished. The written plan is only a snapshot as of the moment it is approved. If
the manager is not planning on a continuous basis--planning, measuring, and revising--the written plan
can become obsolete the day it is finished. This obsolescence becomes more of a certainty as the
increasingly rapid rate of change makes the business environment more uncertain.
THE END
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Table of Contents:
  1. NATURE OF STRATEGIC MANAGEMENT:Interpretation, Strategy evaluation
  2. KEY TERMS IN STRATEGIC MANAGEMENT:Adapting to change, Mission Statements
  3. INTERNAL FACTORS & LONG TERM GOALS:Strategies, Annual Objectives
  4. BENEFITS OF STRATEGIC MANAGEMENT:Non- financial Benefits, Nature of global competition
  5. COMPREHENSIVE STRATEGIC MODEL:Mission statement, Narrow Mission:
  6. CHARACTERISTICS OF A MISSION STATEMENT:A Declaration of Attitude
  7. EXTERNAL ASSESSMENT:The Nature of an External Audit, Economic Forces
  8. KEY EXTERNAL FACTORS:Economic Forces, Trends for the 2000ís USA
  9. EXTERNAL ASSESSMENT (KEY EXTERNAL FACTORS):Political, Governmental, and Legal Forces
  10. TECHNOLOGICAL FORCES:Technology-based issues
  11. INDUSTRY ANALYSIS:Global challenge, The Competitive Profile Matrix (CPM)
  12. IFE MATRIX:The Internal Factor Evaluation (IFE) Matrix, Internal Audit
  13. FUNCTIONS OF MANAGEMENT:Planning, Organizing, Motivating, Staffing
  14. FUNCTIONS OF MANAGEMENT:Customer Analysis, Product and Service Planning, Pricing
  15. INTERNAL ASSESSMENT (FINANCE/ACCOUNTING):Basic Types of Financial Ratios
  16. ANALYTICAL TOOLS:Research and Development, The functional support role
  17. THE INTERNAL FACTOR EVALUATION (IFE) MATRIX:Explanation
  18. TYPES OF STRATEGIES:The Nature of Long-Term Objectives, Integration Strategies
  19. TYPES OF STRATEGIES:Horizontal Integration, Michael Porterís Generic Strategies
  20. TYPES OF STRATEGIES:Intensive Strategies, Market Development, Product Development
  21. TYPES OF STRATEGIES:Diversification Strategies, Conglomerate Diversification
  22. TYPES OF STRATEGIES:Guidelines for Divestiture, Guidelines for Liquidation
  23. STRATEGY-FORMULATION FRAMEWORK:A Comprehensive Strategy-Formulation Framework
  24. THREATS-OPPORTUNITIES-WEAKNESSES-STRENGTHS (TOWS) MATRIX:WT Strategies
  25. THE STRATEGIC POSITION AND ACTION EVALUATION (SPACE) MATRIX
  26. THE STRATEGIC POSITION AND ACTION EVALUATION (SPACE) MATRIX
  27. BOSTON CONSULTING GROUP (BCG) MATRIX:Cash cows, Question marks
  28. BOSTON CONSULTING GROUP (BCG) MATRIX:Steps for the development of IE matrix
  29. GRAND STRATEGY MATRIX:RAPID MARKET GROWTH, SLOW MARKET GROWTH
  30. GRAND STRATEGY MATRIX:Preparation of matrix, Key External Factors
  31. THE NATURE OF STRATEGY IMPLEMENTATION:Management Perspectives, The SMART criteria
  32. RESOURCE ALLOCATION
  33. ORGANIZATIONAL STRUCTURE:Divisional Structure, The Matrix Structure
  34. RESTRUCTURING:Characteristics, Results, Reengineering
  35. PRODUCTION/OPERATIONS CONCERNS WHEN IMPLEMENTING STRATEGIES:Philosophy
  36. MARKET SEGMENTATION:Demographic Segmentation, Behavioralistic Segmentation
  37. MARKET SEGMENTATION:Product Decisions, Distribution (Place) Decisions, Product Positioning
  38. FINANCE/ACCOUNTING ISSUES:DEBIT, USES OF PRO FORMA STATEMENTS
  39. RESEARCH AND DEVELOPMENT ISSUES
  40. STRATEGY REVIEW, EVALUATION AND CONTROL:Evaluation, The threat of new entrants
  41. PORTER SUPPLY CHAIN MODEL:The activities of the Value Chain, Support activities
  42. STRATEGY EVALUATION:Consistency, The process of evaluating Strategies
  43. REVIEWING BASES OF STRATEGY:Measuring Organizational Performance
  44. MEASURING ORGANIZATIONAL PERFORMANCE
  45. CHARACTERISTICS OF AN EFFECTIVE EVALUATION SYSTEM:Contingency Planning