Strategic Management - MGT603

MGT603 - Strategic Management - Lecture Handout 01

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NATURE OF STRATEGIC MANAGEMENT

Objectives:

This Lecture provides an overview of strategic management. It introduces a practical, integrative model of the strategic-management process and defines basic activities and terms in strategic management and discusses the importance of business ethics. After reading this lecture you will be able to know that:
What Is Strategic Management?
Discuss the nature of strategy formulation, implementation, and evaluation activities.

What is strategic management?

Strategic Management can be defined as “the art and science of formulating, implementing and evaluating cross-functional decisions that enable an organization to achieve its objective.”

Definition:

“The on-going process of formulating, implementing and controlling broad plans guide the organizational in achieving the strategic goods given its internal and external environment”.

MGT603 - Strategic Management - Lecture Handout 02

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KEY TERMS IN STRATEGIC MANAGEMENT

Objectives

This Lecture provides an overview of strategic management. It introduces a practical, integrative model of the strategic-management process and defines basic activities and terms in strategic management and discusses the importance of business ethics. After reading this lecture you will be able to know that:
Key Terms in Strategic Management What is meant by adopting to change?

Adapting to change

Organizational survival depends on:

Continuous monitoring of internal and external factors
Well-timed changes
Effective adaptation calls for a long-run focus
Incremental rise in degree of change
1. Technology
2. E-commerce
3. Merger-mania
4. Demographics

The strategic management process is based on the belief that organization should continuously monitor internal and external events and trends so that timely change can be made as needed. The rate and magnitude of changes that affect the organization are increasing dramatically. Consider for example, Ecommerce, laser surgery, the war on terrorism, economic recession and the aging population etc. To survive all organizations must be capable of astutely identifying and adapting to change. The need to adapt to change leads organizations to key strategic management questions, such as “What kind of business should we become?” “Are we in right field?” “Should we reshape our business?” “Are new technologies being developed that could put us out of business?”

MGT603 - Strategic Management - Lecture Handout 03

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INTERNAL FACTORS & LONG TERM GOALS

Objectives:

After reading this lecture you will be able to know that:

What are Internal Factors?
- Financial ratios
- Performance levels
- Industry averages
- Survey results
What is the importance of strategies in achieving Long term objectives?
What are the Financial and Non financial benefits of Strategic Management?

Long-Term Objectives

Objectives can be defined as specific results that an organization seeks to achieve in pursuing its basic mission. Long-term objectives represent the results expected from pursuing certain strategies. Strategies represent the actions to be taken to accomplish long-term objectives. The time frame for objectives and strategies should be consistent, usually from two to five years.
Objectives are essential for organizational success because they state direction; aid in evaluation; create synergy; reveal priorities; focus coordination; and provide a basis for effective planning, organizing, motivating and controlling activities. Objectives should be challenging, measurable, consistent, reasonable, and clear. In a multidimensional firm, objectives should be established for the overall company and for each division.

MGT603 - Strategic Management - Lecture Handout 04

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BENEFITS OF STRATEGIC MANAGEMENT

Objectives:

After reading this lecture you will be able to know that:

What are Non financial benefits of Strategic Management?
Why firms do no strategic planning?
Pitfalls to avoid in strategic planning
Business Ethics
Global challenges

Non- financial Benefits

Increased employee productivity
Improved understanding of competitors’ strategies
Greater awareness of external threats
Understanding of performance reward relationships
Better problem-avoidance
Lesser resistance to change

Besides helping firms avoid financial demise, strategic management offers other tangible benefits, such as an enhanced awareness of external threats, an improved understanding of competitors' strategies, increased employee productivity, reduced resistance to change, and a clearer understanding of performance-reward relationships. Strategic management enhances the problem-prevention capabilities of organizations because it promotes interaction among manager’s at all divisional and functional levels. Interaction can enable firms to turn on their managers and employees by nurturing them, sharing organizational objectives with them, empowering them to help improve the product or service, and recognizing their contributions. In addition to empowering managers and employees, strategic management often brings order and discipline to an otherwise floundering firm. It can be the beginning of an efficient and effective managerial
system. Strategic management may renew confidence in the current business strategy or point to the need for corrective actions. The strategic-management process provides a basis for identifying and rationalizing the need for change to all managers and employees of a firm; it helps them view change as an opportunity rather than a threat.

MGT603 - Strategic Management - Lecture Handout 05

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COMPREHENSIVE STRATEGIC MODEL

Objective:

The extent of manager and employee involvement in developing vision and mission statements can make a difference in business success. This lecture provides guidelines for developing these important documents.

Mission statement:

An enduring statement of purpose
Distinguishes one firm from another in the same business
A declaration of a firm’s reason for existence

Mission is the purpose of or a reason for organization existence. Mission is a well convincible statement included fundamental and unique purpose which makes it different from other organization. It identifies scope of it operation in terms of product offered and market served. Mission also means what we are and what we do. A survey in a North America and in Europeans corporation reveal that 60% to 75% have written or formal and remaining has no written or formal mission.

Illustration:

Nest vision computer college mission statement reveals:-

“We are dealing in all activities which includes in IT, definition”.

Qarshi Laborites Mission Statement,

“Production of herbal product is our mission”.

Mission Statements are also known as:

Creed statement
Statement of purpose
Statement of philosophy
Statement of business principles

MGT603 - Strategic Management - Lecture Handout 06

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CHARACTERISTICS OF A MISSION STATEMENT

Objectives:

Every organization has a unique purpose and reason for being. This uniqueness should be reflected in vision and mission statements. The nature of a business vision and mission can represent either a competitive advantage or disadvantage for the firm. An organization achieves a heightened sense of purpose when strategists, managers, and employees develop and communicate a clear business vision and mission. After reading this lecture, you will be able to know that for what purposes mission statements have such an importance in a business firm.

Characteristics of good Mission Statements:

Mission statements can and do vary in length, contend, format, and specificity. Most practitioners and academicians of strategic management consider an effective statement to exhibit nine characteristics or components. Because a mission statement is often the most visible and public part of the strategic management process, it is important that it includes all of these essential components.
Effective mission statements should be:

Broad in scope
Generate range of feasible strategic alternatives
Not excessively specific
Reconcile interests among diverse stakeholders
Finely balanced between specificity & generality
Arouse positive feelings and emotions
Motivate readers to action
Generate the impression that firm is successful, has direction, and is worthy of time, support, and investment
Reflect judgments re: future growth
Provide criteria for selecting strategies
Basis for generating & screening strategic options
Are dynamic in orientation

MGT603 - Strategic Management - Lecture Handout 07

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EXTERNAL ASSESSMENT

Objectives:

This lecture examines the tools and concepts needed to conduct an external strategic-management audit.

The Nature of an External Audit
Economic Forces

External Assessment:

Prediction is very difficult, especially about the future.
Neils Bohr
External Strategic Management Audit Is also called:

Environmental scanning
Industry analysis

In this lecture we will examine the tools and concepts needed to conduct an external strategic-management audit (sometimes called environmental scanning or industry analysis). An external audit focuses on identifying and evaluating trends and events beyond the control of a single firm, such as increased foreign competition, population shifts to the Sunbelt, an aging society, information technology, and the computer revolution. An external audit reveals key opportunities and threats confronting an organization so that managers can formulate strategies to take advantage of the opportunities and avoid or reduce the impact of threats. This chapter presents a practical framework for gathering, assimilating, and analyzing external information.

MGT603 - Strategic Management - Lecture Handout 08

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KEY EXTERNAL FACTORS

Objectives:

Increasing turbulence in markets and industries around the world means the external audit has become an explicit and vital part of the strategic-management process. This lecture provides a framework for collecting and evaluating economic, social, cultural, demographic, environmental, political, governmental, legal, technological, and competitive information. Firms that do not mobilize and empower their managers and employees to identify, monitor, forecast, and evaluate key external forces may fail to anticipate emerging opportunities and threats and, consequently, may pursue ineffective strategies, miss opportunities, and invite organizational demise. Firms not taking advantage of the Internet are falling behind technologically.

Economic Forces:

It is important to monitor key economic factors such as:

Foreign countries’ economic conditions
Import/export factors
Demand shifts for goods/services
Income differences by region/customer
Price fluctuations
Exportation of labor & capital
Monetary policies
Fiscal policies
Tax rates
ECC policies (European policies)
OPEC policies (Organization of Petroleum exporting countries)
LDC policies (Less developed countries)

Price fluctuation refers to general price fluctuation. They affect the economic factors and affect the customers buying behaviors. The customers are more conscious about the economic changes and responds according to the changes in key variable factors. So, any change in the price affects the customer buying trend directly.

MGT603 - Strategic Management - Lecture Handout 09

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EXTERNAL ASSESSMENT (KEY EXTERNAL FACTORS)

Objectives:

A major responsibility of strategists is to ensure development of an effective external-audit system. This includes using information technology to devise a competitive intelligence system that works. The externalaudit approach described in this Lecture can be used effectively by any size or type of organization.
Typically, the external-audit process is more informal in small firms, but the need to understand key trends and events is no less important for these firms.

Key external Factors:

Racial equality
Average level of education
Government regulation
Attitudes toward customer service
Attitudes toward product quality
Energy conservation
Social responsibility
Value placed on leisure time
Recycling
Waste management
Air & water pollution
Ozone depletion
Endangered species

The leisure time has increased the leisure activities due to which recreational activities have been increased and also it has given the growth to leisure industries also.

MGT603 - Strategic Management - Lecture Handout 10

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TECHNOLOGICAL FORCES

Revolutionary technological forces:

Profound impact on organizations
- Internet
- Semiconductors
- XML (extensible markup lang.) technologies
- UWB (ultra wideband wireless) communications

Revolutionary technological changes and discoveries such as superconductivity, computer engineering, thinking computers, robotics, unemployed factories, miracle drugs, space communications, space manufacturing, lasers, cloning, satellite networks, fiber optics, biometrics, and electronic funds transfer are having a dramatic impact on organizations. Superconductivity advancements alone, which increase the power of electrical products by lowering resistance to current, are revolutionizing business operations, especially in the transportation, utility, health care, electrical, and computer industries.
The Internet is acting as a national and even global economic engine that is spurring productivity, a critical factor in a country's ability to improve living standards. The Internet is saving companies billions of dollars in distribution and transaction costs from direct sales to self-service systems. For example, the familiar Hypertext Markup Language (HTML) is being replaced by Extensible Markup Language (XML). XML is a programming language based on "tags" whereby a number represents a price, an invoice, a date, a zip code, or whatever. XML is forcing companies to make a major strategic decision in terms of whether to open their information to the world in the form of catalogs, inventories, prices and specifications, or attempt to hold their data closely to preserve some perceived advantage. XML is reshaping industries, reducing prices, accelerating global trade, and revolutionizing all commerce. Microsoft has reoriented most of its software development around XML, replacing HTML.
Ultra-wideband (UWB) wireless communications that sends information on tiny wave pulses may soon replace continuous radio waves, allowing ever-smaller devices to do vastly more powerful wireless communications. The Federal Communications Commission (FCC) is slow to approve UWB in fear of its disrupting existing wireless communication, but UWB technology pioneered by Time Domain of Huntsville, Alabama, has the potential to permanently change the way all individuals and businesses communicate worldwide.

MGT603 - Strategic Management - Lecture Handout 11

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INDUSTRY ANALYSIS

Objectives:

The EFE Matrix and five-force model can help strategists evaluate the market and industry, but these tools must be accompanied by good intuitive judgment. Multinational firms especially need a systematic and effective external-audit system because external forces among foreign countries vary so greatly. This lecture provides you complete details of EFE matrix as a component of SWOT analysis.

Competitive Intelligence Programs and competitive analysis:

Systematic and ethical process for gathering and analyzing information about the competition’s activities and general business trends to further a business’ own goals.

competitive analysis

The central point lays the stress on rivalry of the competing firm. This relates to the intensity of the rivalry. How the firms compete with each other and to what extent? That should be taken into account very carefully.

MGT603 - Strategic Management - Lecture Handout 12

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IFE MATRIX

Objectives:

This Lecture focuses on identifying and evaluating a firm's strengths and weaknesses in the functional areas of business, including management, marketing, finance/accounting, production/operations, research and development, and computer information systems. Relationships among these areas of business are examined. Strategic implications of important functional area concepts are examined. The process of performing an internal audit is described in these lectures.

The Nature of an Internal Audit
Integrating Strategy and Culture
Management
Marketing
Finance/Accounting
Production/Operations
Research and Development
Management Information Systems
The Internal Factor Evaluation Matrix (IFE)

The Internal Factor Evaluation (IFE) Matrix

Great spirits have always encountered violent opposition from mediocre minds.
-- Albert Einstein
A summary step in conducting an internal strategic-management audit is to construct an Internal Factor Evaluation (IFE) Matrix. This strategy-formulation tool summarizes and evaluates the major strengths and weaknesses in the functional areas of a business, and it also provides a basis for identifying and evaluating relationships among those areas. Intuitive judgments are required in developing an IFE Matrix, so the appearance of a scientific approach should not be interpreted to mean this is an all-powerful technique. A thorough understanding of the factors included is more important than the actual numbers. Similar to the EFE Matrix and Competitive Profile Matrix, an IFE Matrix can be developed in five steps:

MGT603 - Strategic Management - Lecture Handout 13

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FUNCTIONS OF MANAGEMENT:

Objectives:

This lecture provides all the information regarding what are the core functions of management in a business firm.

Functions of management

MGT603 - Strategic Management - Lecture Handout 14

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FUNCTIONS OF MANAGEMENT

Objectives:

After reading this lecture, you will be able to know about the functions of management and how firm formulate strategies in order to perform these functions.

Marketing:

Marketing can be described as the process of defining, anticipating, creating, and fulfilling customers' needs and wants for products and services.
There are seven basic functions of marketing:

Customer analysis,
Selling products/services,
Product and service planning,
Pricing,
Distribution,
Marketing research, and
Opportunity analysis.

Understanding these functions helps strategists identify and evaluate marketing strengths and weaknesses.

Customer Analysis

Customer analysis—the examination and evaluation of consumer needs, desires, and wants—involves administering customer surveys, analyzing consumer information, evaluating market positioning strategies, developing customer profiles, and determining optimal market segmentation strategies. The information generated by customer analysis can be essential in developing an effective mission statement. Customer profiles can reveal the demographic characteristics of an organization's customers. Buyers, sellers, distributors, salespeople, managers, wholesalers, retailers, suppliers, and creditors can all participate in gathering information to identify customers' needs and wants successfully. Successful organizations continually monitor present and potential customers' buying patterns.

MGT603 - Strategic Management - Lecture Handout 15

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INTERNAL ASSESSMENT (FINANCE/ACCOUNTING)

Objectives:

Financial condition is often considered the single best measure of a firm's competitive position and overall attractiveness to investors. Determining an organization's financial strengths and weaknesses is essential to formulating strategies effectively. A firm's liquidity, leverage, working capital, profitability, asset utilization, cash flow, and equity can eliminate some strategies as being feasible alternatives. Financial factors often alter existing strategies and change implementation plans. After reading this lecture, you will be able to know that what are the basics types of ratios and who business measure its financial strength using these ratios analysis.

Finance/Accounting Functions

Determining financial strengths and weaknesses key to strategy formulation
Investment decision (Capital budgeting)
Financing decision
Dividend decision

According to James Van Horne, the functions of finance/accounting comprise three decisions: the investment decision, the financing decision, and the dividend decision.
Financial ratio analysis is the most widely used method for determining an organization's strengths and weaknesses in the investment, financing, and dividend areas. Because, the functional areas of business are so closely related, financial ratios can signal strengths or weaknesses in management, marketing, production, research and development, and computer information systems activities.
The investment decision, also called capital budgeting, is the allocation and reallocation of capital and resources to projects, products, assets, and divisions of an organization. Once strategies are formulated, capital budgeting decisions are required to implement strategies successfully. The financing decision concerns determining the best capital structure for the firm and includes examining various methods by which the firm can raise capital (for example, by issuing stock, increasing debt, selling assets, or using a combination of these approaches). The financing decision must consider both shortterm and long-term needs for working capital. Two key financial ratios that indicate whether a firm's financing decisions have been effective are the debt-to-equity ratio and the debt-to-total-assets ratio. Dividend decisions concern issues such as the percentage of earnings paid to stockholders, the stability of dividends paid over time, and the repurchase or issuance of stock. Dividend decisions determine the amount of funds that are retained in a firm compared to the amount paid out to stockholders.
Three financial ratios that are helpful in evaluating a firm's dividend decisions are the earnings-pershare ratio, the dividends-per-share ratio, and the price-earnings ratio. The benefits of paying dividends to investors must be balanced against the benefits of retaining funds internally, and there is no set formula on how to balance this trade-off. For the reasons listed here, dividends are sometimes paid out even when funds could be better reinvested in the business or when the firm has to obtain outside sources of capital:

MGT603 - Strategic Management - Lecture Handout 16

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ANALYTICAL TOOLS

After reading this lecture you will be able to know that how analytical tools affects the firms internal decisions.

Research and Development

The fifth major area of internal operations that should be examined for specific strengths and weaknesses is research and development (R&D). Many firms today conduct no R&D, and yet many other companies depend on successful R&D activities for survival. Firms pursuing a product development strategy especially need to have a strong R&D orientation.
The purpose of research and development are as follows:

Development of new products before competition
Improving product quality
Improving manufacturing processes to reduce costs

Organizations invest in R&D because they believe that such investment will lead to superior product or services and give them competitive advantages. Research and development expenditures are directed at developing new products before competitors do, improving product quality, or improving manufacturing processes to reduce costs.
One article on planning emphasized that effective management of the R&D function requires a strategic and operational partnership between R&D and the other vital business functions. A spirit of partnership and mutual trust between general and R&D managers is evident in the best-managed firms today. Managers in these firms jointly explore; assess; and decide the what, when, why, and how much of R&D. Priorities, costs, benefits, risks, and rewards associated with R&D activities are discussed openly and shared. The overall mission of R&D, thus, has become broad-based, including supporting existing businesses, helping launch new businesses, developing new products, improving product quality, improving manufacturing efficiency, and deepening or broadening the company's technological capabilities.
Every organization tries to finance as much project as they can. Therefore, R & D budget is important. What are the bases for the budget?

MGT603 - Strategic Management - Lecture Handout 17

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THE INTERNAL FACTOR EVALUATION (IFE) MATRIX

Objectives:

In multidivisional firms, each autonomous division or strategic business unit should construct an IFE Matrix. Divisional matrices then can be integrated to develop an overall corporate IFE Matrix. Both external and internal evaluation together called SWOT analysis for any business firm. After reading this lecture you will be able to prepare IFE and EFE matrixes for any business planning.

The Internal Factor Evaluation (IFE) Matrix

A summary step in conducting an internal strategic-management audit is to construct an Internal Factor Evaluation (IFE) Matrix. This strategy-formulation tool summarizes and evaluates the major strengths and weaknesses in the functional areas of a business, and it also provides a basis for identifying and evaluating relationships among those areas. Intuitive judgments are required in developing an IFE Matrix, so the appearance of a scientific approach should not be interpreted to mean this is an allpowerful technique. A thorough understanding of the factors included is more important than the actual numbers. Similar to the EFE Matrix and Competitive Profile Matrix, an IFE Matrix can be
developed in five steps:

List key internal factors (10-20)
- Strengths & weaknesses
Assign weight to each (0 to 1.0)
- Sum of all weights = 1.0
Assign 1-4 rating to each factor
- Firm’s current strategies response to the factor
Multiply each factor’s weight by its rating
- Produces a weighted score
Sum the weighted scores for each
- Determines the total weighted score for the organization

Highest possible weighted score for the organization is 4.0; the lowest, 1.0. Average = 2.5

MGT603 - Strategic Management - Lecture Handout 18

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TYPES OF STRATEGIES

Objectives:

This lecture brings strategic management to life with many contemporary examples. Sixteen types of strategies are defined and exemplified, including Michael Porter's generic strategies: cost leadership, differentiation, and focus. Guidelines are presented for determining when different types of strategies are most appropriate to pursue. An overview of strategic management in nonprofit organizations, governmental agencies, and small firms is provided. After reading this lecture you will be able to know about:

Long term objectives:
Types of Strategies
Integration strategies

Strategies in Action:

Even if you’re on the right track, you’ll get run over if you just sit there.
-- Will Rogers
Hundreds of companies today embrace strategic planning because:

Quest for higher revenues
Quest for higher profits

Many firms have to use strategic planning in order to earn revenues and more profits.

Long term objectives

Long-term objectives represent the results expected from pursuing certain strategies. Strategies represent the actions to be taken to accomplish long-term objectives. The time frame for objectives and strategies should be consistent, usually from two to five years.

MGT603 - Strategic Management - Lecture Handout 19

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TYPES OF STRATEGIES

Objectives:

Types of Strategies
Integration strategies

Horizontal Integration:

Seeking ownership or increased control over competitors
Horizontal integration refers to a strategy of seeking ownership of or increased control over a firm's competitors. One of the most significant trends in strategic management today is the increased use of horizontal integration as a growth strategy. Mergers, acquisitions, and takeovers among competitors allow for increased economies of scale and enhanced transfer of resources and competencies. Increased control over competitors means that you have to look for new opportunities either by the purchase of the new firm or hostile take over the other firm. One organization gains control of other which functioning within the same industry.
It should be done that every firm wants to increase its area of influence, market share and business.

Guidelines for Horizontal Integration:

Four guidelines when horizontal integration may be an especially effective strategy are:

Firm can gain monopolistic characteristics without being challenged by federal government
Competes in growing industry
Increased economies of scale provide major competitive advantages
Faltering due to lack of managerial expertise or need for particular resources

When an organization can gain monopolistic characteristics in a particular area or region without being challenged by the federal government for "tending substantially" to reduce competition When an organization competes in a growing industry
When increased economies of scale provide major competitive advantages
When an organization has both the capital and human talent needed to successfully manage an expanded organization
When competitors are faltering due to a lack of managerial expertise or a need for particular resources that an organization possesses; note that horizontal integration would not be appropriate if competitors are doing poorly because overall industry sales are declining

MGT603 - Strategic Management - Lecture Handout 20

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TYPES OF STRATEGIES

Objectives:

Types of Strategies
Intensive strategies

Intensive Strategies

Market penetration, market development, and product development are sometimes referred to as intensive strategies because they require intensive efforts to improve a firm's competitive position with existing products.

Intensive Strategies

Market Penetration

A market-penetration strategy seeks to increase market share for present products or services in present markets through greater marketing efforts. This strategy is widely used alone and in combination with other strategies. Market penetration includes increasing the number of salespersons, increasing advertising expenditures, offering extensive sales promotion items, or increasing publicity efforts.

MGT603 - Strategic Management - Lecture Handout 21

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TYPES OF STRATEGIES

Objectives:

Types of Strategies
Diversification strategies

Diversification Strategies

There are three general types of diversification strategies: concentric, horizontal, and conglomerate. Over all, diversification strategies are becoming less popular as organizations are finding it more difficult to manage diverse business activities. In the 1960s and 1970s, the trend was to diversify so as not to be dependent on any single industry, but the 1980s saw a general reversal of that thinking. Diversification is now on the retreat.

MGT603 - Strategic Management - Lecture Handout 22

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TYPES OF STRATEGIES

Objectives:

Types of Strategies
Defensive strategies

Defensive Strategies

In addition to integrative, intensive, and diversification strategies, organizations also could pursue retrenchment, divestiture, or liquidation.

Divestiture

Selling a division or part of an organization is called divestiture. Divestiture often is used to raise capital for further strategic acquisitions or investments. Divestiture can be part of an overall retrenchment strategy to rid an organization of businesses that are unprofitable, that require too much capital, or that do not fit well with the firm's other activities.

MGT603 - Strategic Management - Lecture Handout 23

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STRATEGY-FORMULATION FRAMEWORK

Learning Objectives

After understanding this topic you able to understand the basic phenomena of strategy formulation frame work and also under stand the stages of strategy formulation frame work

Objectives:

Objective placing an important role in strategic management Strategic analysis and choice largely involves making subjective decisions based on objective information. This topic includes important concepts that can help strategists generate feasible alternatives, evaluate those alternatives, and choose a specific course of action. Behavioral aspects of strategy formulation are described, including politics, culture, ethics, and social responsibility considerations. Modern tools for formulating strategies are described, and the appropriate role of a board of directors is discussed

A Comprehensive Strategy-Formulation Framework

Important strategy-formulation techniques can be integrated into a three-stage decision-making framework, as shown below. The tools presented in this framework are applicable to all sizes and types of organizations and can help strategists identify, evaluate, and select strategies.

MGT603 - Strategic Management - Lecture Handout 24

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THREATS-OPPORTUNITIES-WEAKNESSES-STRENGTHS (TOWS) MATRIX

Learning object

After understanding this chapter you are able to understand TOWS matrix and also understand how to scan internal and external environment of the organization

The Threats-Opportunities-Weaknesses-Strengths (TOWS) Matrix

The Threats-Opportunities-Weaknesses-Strengths (TOWS) is also named as SWOT analysis. A TWOS Analysis is a strategic planning tool used to evaluate the Threats, Opportunities and Strengths, Weaknesses, involved in a project or in a business venture or in any other situation requiring a decision. This is an important tool in order to formulate strategy. This Matrix is an important matching tool that helps managers develops four types of strategies: SO Strategies (strength-opportunities), WO Strategies (weakness- opportunities), ST Strategies (strength-threats), and WT Strategies (weakness-threats).The most difficult part of TOWS matrix is to match internal and external factor.
Once the objective has been identified, TOWS are discovered and listed. TOWS are defined precisely as follows:

Strengths are attributes of the organization that are helpful to the achievement of the objective.

Weaknesses are attributes of the organization that are harmful to the achievement of the objective.

Opportunities are external conditions that are helpful to the achievement of the objective.

Threats are external conditions that are harmful to the achievement of the objective.

MGT603 - Strategic Management - Lecture Handout 25

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THE STRATEGIC POSITION AND ACTION EVALUATION (SPACE) MATRIX

Learning objective

After understanding this chapter you are able to understand SPACE matrix and also understand how to prepare the space matrix of any organization and how it is helpful for strategic formulation framework

The Strategic Position and Action Evaluation (SPACE) Matrix

The Strategic Position and Action Evaluation (SPACE) Matrix is another important Stage 2 matching tool of formulation framework. It explains that what is our strategic position and what possible action can be taken. It is not closed matrix. It is prepared on graph. This follow counter clock wise direction. It contains four-quadrant named aggressive, conservative, defensive, or competitive strategies. The axes of the SPACE Matrix represent two internal dimensions financial strength [FS] and competitive advantage [CA]) and two external dimensions (environmental stability [ES] and industry strength [IS]). These four factors are the most important determinants of an organization's overall strategic position.

overall strategic position.

MGT603 - Strategic Management - Lecture Handout 26

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THE STRATEGIC POSITION AND ACTION EVALUATION (SPACE) MATRIX

These dimensions are explained below:

Internal Strategic Position

External Strategic Position Financial Strength (FS) Environmental Stability (ES) Risk involved in businessImpact of technology Price elasticity of demand Debt to equity ratio
Working capital condition
Leverage
Political situation Liquidity Demand variability Ease of exit from market Price range of competing products Cash flow statement Rate of inflation Return on investment Competitive pressure Competitive Advantage (CA) Industry Strength (IS) Access to the market
Market share
Demand and supply factors Resource utilization Growth potential Quality of product and services Profit potential Product life cycle Financial stability Customer loyalty Technological know-how Capacity, location and layout Productivity, capacity utilization Technological know-how Capital intensity Backward and forward integration Ease of entry into market

After the selection of variables the rating is assigned to each. After the addition of these variables taking the average. For example financial strength is explain below

MGT603 - Strategic Management - Lecture Handout 27

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BOSTON CONSULTING GROUP (BCG) MATRIX

Learning objective

After understanding this chapter you are able to understand BCG and IE matrices and also understand how to prepare these matrices for any organization and what its practical implementation in various organizations.

Boston Consulting Group (BCG) Matrix

The Boston Consulting Group (BCG) is a management consulting firm founded by Harvard Business School alum Bruce Henderson in 1963. The growth-share matrix is a chart created by group in 1970 to help corporation analyze their business units or product lines, and decide where to allocate cash. It was popular for two decades, and is still used as an analytical tool.
To use the chart, corporate analysts would plot a scatter graph of their business units, ranking their relative market shares and the growth rates of their respective industries. This led to a categorization of four different types of businesses:

four different types of businesses

Cash cows Units with high market share in a slow-growing industry. These units typically generate cash in excess of the amount of cash needed to maintain the business. They are regarded as staid and boring, in a "mature" market, and every corporation would be thrilled to own as many as possible. They are to be "milked" continuously with as little investment as possible, since such investment would be wasted in an industry with low growth.

MGT603 - Strategic Management - Lecture Handout 28

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BOSTON CONSULTING GROUP (BCG) MATRIX

Learning objective

The Internal-External (IE) Matrix

This is also an important matrix of matching stage of strategy formulation. This matrix already explains earlier. It relate to internal (IFE) and external factor evaluation (EFE). The findings form internal and external position and weighted score plot on it. It contains nine cells. Its characteristics is a s follow

Positions an organization’s various divisions in a nine-cell display.
Similar to BCG Matrix except the IE Matrix:
- Requires more information about the divisions
- Strategic implications of each matrix are different
Based on two key dimensions
- The IFE total weighted scores on the x-axis
- The EFE total weighted scores on the y-axis
Divided into three major regions
- Grow and build – Cells I, II, or IV
- Hold and maintain – Cells III, V, or VII
- Harvest or divest – Cells VI, VIII, or IX

MGT603 - Strategic Management - Lecture Handout 29

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GRAND STRATEGY MATRIX

Learning objective

Grand strategy matrix is a last matrix of matching strategy formulation framework. It same as important as BCG, IE and other matrices. This chapter enables you to understand the preparation of GS matrix

This chapter also enables you to understand the last stage (decision stage) of strategy formulation frame work and also explain that how it is prepared

Grand Strategy Matrix

This is also an important matrix of strategy formulation frame work. Grand strategy matrix it is popular tool for formulating alternative strategies. In this matrix all organization divides into four quadrants. Any organization should be placed in any one of four quadrants. Appropriate strategies for an organization to consider are listed in sequential order of attractiveness in each quadrant of the matrix. It is based two major dimensions

Market growth
Competitive position

All quadrant contain all possible strategies

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GRAND STRATEGY MATRIX

Learning objective

The Quantitative Strategic Planning Matrix (QSPM)

The last stage of strategy formulation is decision stage. In this stage it is decided that which way is most appropriate or which alternative strategy should be select. This stage contains QSPM that is only tool for objective evaluation of alternative strategies. A quantitative method used to collect data and prepare a matrix for strategic planning. It is based on identified internal and external crucial success factors. That is only technique designed to determine the relative attractiveness of feasible alternative action.

This technique objectively indicates which alternative strategies are best. The QSPM uses input from Stage 1 analyses and matching results from Stage 2 analyses to decide objectively among alternative strategies. That is, the EFE Matrix, IFE Matrix, and Competitive Profile Matrix that make up Stage 1, coupled with the TOWS Matrix, SPACE Analysis, BCG Matrix, IE Matrix, and Grand Strategy Matrix that make up Stage 2, provide the needed information for setting up the QSPM (Stage 3).

Preparation of matrix

Now the question is that how to prepare QSPM matrix. First it contains key internal and external factors. An internal factor contains (strength and weakness) and external factor include (opportunities and threats). It relates to previously IFE and EFE in which weight to all factors. Weight means importance to internal and external factor. The sum of weight must be equal to one. After assigning the weights examine stage-2 matrices and identify alternatives strategies that the organization should consider implementing. The top row of a QSPM consists of alternative strategies derived from the TOWS Matrix, SPACE Matrix, BCG Matrix, IE Matrix, and Grand Strategy Matrix. These matching tools usually generate similar feasible alternatives. However, not every strategy suggested by the matching techniques has to be evaluated in a QSPM. Strategists should use good intuitive judgment in selecting strategies to include in a QSPM. After assigning the weight to strategy, determine the attractiveness score of each and afterwards total attractiveness score. The highest total attractiveness score strategy is most feasible.

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THE NATURE OF STRATEGY IMPLEMENTATION

Learning objective

Strategy in action means strategy implementation. This chapter guides you to understand how to implement the strategy and what problems an organization faced in order to implement strategy. This chapter also explains objective and policies.

The Nature of Strategy Implementation

It is possible to turn strategies and plans into individual actions, necessary to produce a great business performance. But it's not easy. Many companies repeatedly fail to truly motivate their people to work with enthusiasm, all together, towards the corporate aims. Most companies and organizations know their businesses, and the strategies required for success. However many corporations - especially large ones - struggle to translate the theory into action plans that will enable the strategy to be successfully implemented and sustained. Here are some leading edge methods for effective strategic corporate implementation. These advanced principles of strategy realization are provided by the very impressive Foresight Leadership organization, and this contribution is gratefully acknowledged.
Most companies have strategies, but according to recent studies, between 70% and 90% of organizations that have formulated strategies fail to execute them.
A Fortune Magazine study has shown that 7 out of 10 CEOs, who fail, do so not because of bad strategy, but because of bad execution.
In another study of Times 1000 companies, 80% of directors said they had the right strategies but only 14% thought they were implementing them well.
Only 1 in 3 companies, in their own assessment, were achieving significant strategic success.
The message clear - effective strategy realization is key for achieving strategic success. Successful strategy formulation does not guarantee successful strategy implementation. It is always more difficult to do something (strategy implementation) than to say you are going to do it (strategy formulation)! Although inextricably linked, strategy implementation is fundamentally different from strategy formulation. Strategy formulation and implementation can be contrasted in the following ways:

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RESOURCE ALLOCATION

Learning objective

This chapter consists of resource allocation and how it is important for the success of the organization. It also include the “Conflict” its types and how to reduce it.

Resource Allocation

In strategic planning, a resource-allocation decision is a plan for using available resources, especially human resources especially in the near term, to achieve goals for the future. It is the process of allocating resources among the various projects or business units.
The plan has two parts: Firstly, there is the basic allocation decision and secondly there are contingency mechanisms. The basic allocation decision is the choice of which items to fund in the plan, and what level of funding it should receive, and which to leave unfunded: the resources are allocated to some items, not to others.
There are two contingency mechanisms. There is a priority ranking of items excluded from the plan, showing which items to fund if more resources should become available; and there is a priority ranking of some items included in the plan, showing which items should be sacrificed if total funding must be reduced.
Resource allocation is a major management activity that allows for strategy execution. In organizations that do not use a strategic-management approach to decision making, resource allocation is often based on political or personal factors. Strategic management enables resources to be allocated according to priorities established by annual objectives. Nothing could be more detrimental to strategic management and to organizational success than for resources to be allocated in ways not consistent with priorities indicated by approved annual objectives.
All organizations have at least four types of resources that can be used to achieve desired objectives: financial resources, physical resources, human resources, and technological resources. Allocating resources to particular divisions and departments does not mean that strategies will be successfully implemented. A number of factors commonly prohibit effective resource allocation, including an overprotection of resources, too great an emphasis on short-run financial criteria, organizational politics, vague strategy targets, a reluctance to take risks, and a lack of sufficient knowledge.
Managers normally have many more tasks than they can do. Managers must allocate time and resources among these tasks. Pressure builds up. Expenses are too high. The CEO wants a good financial report for the third quarter. Strategy formulation and implementation activities often get deferred. Today's problems soak up available energies and resources. Scrambled accounts and budgets fail to reveal the shift in allocation away from strategic needs to currently squeaking wheels.
The real value of any resource allocation program lies in the resulting accomplishment of an organization's objectives. Effective resource allocation does not guarantee successful strategy implementation because programs, personnel, controls, and commitment must breathe life into the resources provided. Strategic management itself is sometimes referred to as a "resource allocation process."

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ORGANIZATIONAL STRUCTURE

Learning Objective

After the completion of this topic you understand the organizational structure its types. This chapter also include strategic business unit. This also includes Restructuring, Reengineering, and E-Engineering.

Organizational Structure

Functional Structure

The organization is structured according to functional areas instead of product lines. The functional structure groups specialize in similar skills in separate units. This structure is best used when creating specific, uniform products. A functional structure is well suited to organizations which have a single or dominant core product because each subunit becomes extremely adept at performing its particular portion of the process. They are economically efficient, but lack flexibility. Communication between functional areas can be difficult.
The most widely used structure is the functional or centralized type because this structure is the simplest and least expensive of the seven alternatives. A functional structure group’s tasks and activities by business function such as production/operations, marketing, finance/accounting, research and development, and computer information systems. A university may structure its activities by major functions that include academic affairs, student services, alumni relations, athletics, maintenance, and accounting. Besides being simple and inexpensive, a functional structure also promotes specialization of labor, encourages efficiency, minimizes the need for an elaborate control system, and allows rapid decision making. Some disadvantages of a functional structure are that it forces accountability to the top, minimizes career development opportunities, and is sometimes characterized by low employee morale, line/staff conflicts, poor delegation of authority, and inadequate planning for products and markets.

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RESTRUCTURING

Learning Objectives

This chapter enables you the concept of Restructuring, Reengineering and the difference between them. This chapter also includes merits and demerits of these topics. After understanding this chapter you also understand various pay strategies and also how to manage environment.

Restructuring

Restructuring is the corporate management term for the act of partially dismantling and reorganizing a company for the purpose of making it more efficient and therefore more profitable. It generally involves selling off portions of the company and making severe staff reductions.
Restructuring is often done as part of a bankruptcy or of a takeover by another firm, particularly a leveraged buyout by a private equity firm such as KKR. It may also be done by a new CEO hired specifically to make the difficult and controversial decisions required to save or reposition the company.

Characteristics

The selling of portions of the company, such as a division that is no longer profitable or which has distracted management from its core business, can greatly improve the company's balance sheet. Staff reductions are often accomplished partly through the selling or closing of unprofitable portions of the company and partly by consolidating or outsourcing parts of the company that perform redundant functions (such as payroll, human resources, and training) left over from old acquisitions that were never fully integrated into the parent organization.
Other characteristics of restructuring can include:

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PRODUCTION/OPERATIONS CONCERNS
WHEN IMPLEMENTING STRATEGIES

Learning objectives

The main objective of this chapter to enable to students about production and operation issue relating to strategy implementation.

Production/Operations Concerns When Implementing Strategies

Strategy in action means implementation requires complete transparent process. Production/operations department that mainly concern with the achievement of organization goals and targets. Production processes typically constitute more than 70 percent of a firm's total assets. Production department plays a crucial role for implemeting organization strategy. Production-concerned decisions on plant location, plant size, , product design, choice of equipment, size of inventory, inventory control, quality control, cost control, use of standards, shipping and packaging, and technological innovation, job specialization, employee training, equipment and resource utilization. All these factors place an important impact on success and failure of the strategy.
The following examples of adjustments in production systems that could be required to implement various strategies are provided in Table for both for-profit and nonprofit organizations. For instance, note that when a bank formulates and selects a strategy to add ten new branches, a production-related implementation concern is site location.

Strategy Implementation and Production and Service Management
Type of Organization	Strategy Being Implemented	System Adjustments Production
Hospital	Adding a TB center (Product Development)	Purchase specialized equipment and add specialized people.
Bank	Opening ten new branches (Market Development)	Perform site location analysis.
Computer company	Purchasing a retail distribution chain (Forward Integration)	Alter the shipping, packaging, and transportation systems.
Steel manufacturer	Acquiring a fast-food chain (Conglomerate Diversification)	Improve the quality control system.

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MARKET SEGMENTATION

Learning objectives

The main objective of this chapter to enable to students about concern marketing issue such marketing segmentation, marketing mix and product positioning relating to strategy implementation.

Market segmentation

Market segmentation is the process in marketing of grouping a market (i.e. customers) into smaller subgroups. This is not something that is arbitrarily imposed on society: it is derived from the recognition that the total market is often made up of submarkets (called 'segments'). These segments are homogeneous within (i.e. people in the segment are similar to each other in their attitudes about certain variables). Because of this intra-group similarity, they are likely to respond somewhat similarly to a given marketing strategy. That is, they are likely to have similar feeling and ideas about a marketing mix comprised of a given product or service, sold at a given price, distributed in a certain way, and promoted in a certain way.

The Need for Market Segmentation

The marketing concept calls for understanding customers and satisfying their needs better than the competition. But different customers have different needs, and it rarely is possible to satisfy all customers by treating them alike.

Mass marketing refers to treatment of the market as a homogenous group and offering the same marketing mix to all customers. Mass marketing allows economies of scale to be realized through mass production, mass distribution, and mass communication. The drawback of mass marketing is that customer needs and preferences differ and the same offering is unlikely to be viewed as optimal by all customers. If firms ignored the differing customer needs, another firm likely would enter the market with a product that serves a specific group, and the incumbent firms would lose those customers.

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MARKET SEGMENTATION

Learning objectives

The main objective of this chapter to enable to students about concern marketing issue such marketing segmentation, marketing mix and product positioning relating to strategy implementation.

Marketing Mix

Marketing decisions generally fall into the following four controllable categories:

Product
Price
Place (distribution)
Promotion

The term "marketing mix" became popularized after Neil H. Borden published his 1964 article, The Concept of the Marketing Mix. Borden began using the term in his teaching in the late 1940's after James Culliton had described the marketing manager as a "mixer of ingredients". The ingredients in Borden's marketing mix included product planning, pricing, branding, distribution channels, personal selling, advertising, promotions, packaging, display, servicing, physical handling, and fact finding and analysis. E. Jerome McCarthy later grouped these ingredients into the four categories that today are known as the 4 P's of marketing, depicted below:

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FINANCE/ACCOUNTING ISSUES

Learning objectives

The main objective of this chapter to enable to students about accounting and finance issue relating to strategy implementation.
Like marketing and human resource concern while implementing strategy the other important issue is accounting and finance. Several issue that concern with accounting and finance to strategy implementation: obtaining desired amount of needed capital, developing pro forma financial statements, preparing financial budgets, and evaluating the worth of a business. Some examples of decisions that may require finance/accounting policies are:

To raise the amount of capital by issuing shares or obtaining a debt from external parties.
To enhance the inventory turn over level
To make or buy fixed assets.
To extend the time of accounts receivable.
To establish a certain percentage discount on accounts within a specified period of time.
To determine the amount of cash that should be kept on hand
To determine an appropriate dividend payout ratio.
To use LIFO, FIFO

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RESEARCH AND DEVELOPMENT ISSUES

Learning objectives

The main objective of this chapter to enable to students about research and development issue relating to strategy implementation.
Going public means selling off a specific percentage of the business to others in order to raise capital; consequently, it shifts the owners' control of the firm. Going public is not recommended for companies that initial costs can be too high for the firm to generate sufficient amount of cash inflows to make going public worthwhile. The firm must have sufficient amount of capital to bear out lawyer, underwriter and other documentation cost in order to form the business. In addition to initial costs involved with a stock offering, there are costs and obligations associated with reporting and management in a publicly held firm. For firms with more than $10 million in sales, going public can provide major advantages:

It can allow the firm to raise capital to develop new products,
To build plants,
Expand, grow, and market products and services more effectively.

Before going public, a firm must have quality management with a proven track record for achieving quality earnings and positive cash flow. The company also should enjoy growing demand for its products. Sales growth of about 5 or 6 percent a year is good for a private firm, but shareholders expect public companies to grow around 10 to 15 percent per year.

Research and Development (R&D) Issues

Research and development (R&D) management can plays part in strategy implementation.
“New products and improvement of existing products that allow for effective strategy implementation”

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STRATEGY REVIEW, EVALUATION AND CONTROL

Learning objectives

The last step of strategy frame work model is control evaluation. In this chapter the main concern is evaluation process its importance and porter five forces model

Evaluation

Evaluation is the systematic determination of merit, worth, and significance of something or someone. Evaluation often is used to characterize and appraise subjects of interest in a wide range of human enterprises, including the Arts, business, computer science, criminal justice, education, engineering, foundations and non-profit organizations, government, health care, and other human services.

In the field of evaluation, there is some degree of disagreement in the distinctions often made between the terms 'evaluation' and 'assessment.' Some practitioners would consider these terms to be interchangeable, while others contend that evaluation is broader than assessment and involves making judgments about the merit or worth of something (an evaluand) or someone (an evaluee). When such a distinction is made, 'assessment' is said to primarily involve characterizations – objective descriptions, while 'evaluation' is said to involve characterizations and appraisals – determinations of merit and/or worth. Merit involves judgments about generalized value. Worth involves judgments about instrumental value. For example, a history and a mathematics teacher may have equal merit in terms of mastery of their respective disciplines, but the math teacher may have greater worth because of the higher demand and lower supply of qualified mathematics teachers. A further degree of complexity is introduced to this argument when working in different languages, where the terms 'evaluation' and 'assessment' may be variously translated, with terms being used that convey differing connotations related to conducting characterizations and appraisals.

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PORTER SUPPLY CHAIN MODEL

Learning Objective

This topic concern with the porter supply chain model. After studying this chapter you are able to understand that what are major forces of supply chain model and how it affects the performance of the organization.

Porter supply chain model

The Value Chain framework of Michael Porter is a model that helps to analyze specific activities through which firms can create value and competitive advantage.

The activities of the Value Chain

Primary activities (line functions)
- Inbound Logistics. Includes receiving, storing, inventory control, transportation planning.
- Operations. Includes machining, packaging, assembly, equipment maintenance, testing and all other value-creating activities that transform the inputs into the final product.
- Outbound Logistics. The activities required to get the finished product at the customers:
  warehousing, order fulfillment, transportation, distribution management.
- Marketing and Sales. The activities associated with getting buyers to purchase the product, including: channel selection, advertising, promotion, selling, pricing, retail management, etc.
- Service. The activities that maintain and enhance the product's value, including: customer support, repair services, installation, training, spare parts management, upgrading, etc.
Support activities (Staff functions, overhead)
- Procurement. Procurement of raw materials, servicing, spare parts, buildings, machines, etc.
- Technology Development. Includes technology development to support the value chain activities. Such as: Research and Development, Process automation, design, redesign.
- Human Resource Management. The activities associated with recruiting, development (education), retention and compensation of employees and managers.
- Firm Infrastructure. Includes general management, planning management, legal, finance, accounting, public affairs, quality management, etc.

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STRATEGY EVALUATION

Learning objectives

This topic covers various aspects concerning with the strategy evaluation and enables you to understand the process of strategy evaluation.

Four Criteria (Richard Rummelt): He explains four criteria for strategy valuation. These four criteria are as follow

Consistency
Consonance
Feasibility
Advantage

Consistency
Strategy should not present inconsistent goals and policies.

Conflict and interdepartmental bickering symptomatic of managerial disorder and strategic inconsistency

Consonance
Need for strategies to examine sets of trends

Adaptive response to external environment
Trends are results of interactions among other trends

Feasibility
Neither overtaxes resources nor creates unsolvable sub problems

Organizations must demonstrate the abilities, competencies, skills and talents to carry out a given strategy

Advantage
Creation or maintenance of competitive advantage

Superiority in resources, skills, or position

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REVIEWING BASES OF STRATEGY

Reviewing the underlying bases of an organization's strategy could be approached by developing a revised EFE Matrix and IFE Matrix. A revised IFE Matrix should focus on changes in the organization's management, marketing, finance/accounting, production/operations, R&D, and computer information systems strengths and weaknesses. A revised EFE Matrix should indicate how effective a firm's strategies have been in response to key opportunities and threats. This analysis could also address such questions as the following:

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 positions and profitability?
How far can our major competitors be pushed before retaliating?
How could we more effectively cooperate with our competitors?

Numerous external and internal factors can prohibit firms from achieving long-term and annual objectives. Externally, actions by competitors, changes in demand, changes in technology, economic changes, demographic shifts, and governmental actions may prohibit objectives from being accomplished. Internally, ineffective strategies may have been chosen or implementation activities may have been poor. Objectives may have been too optimistic. Thus, failure to achieve objectives may not be the result of unsatisfactory work by managers and employees. All organizational members need to know this to encourage their support for strategy-evaluation activities. Organizations desperately need to know as soon as possible when their strategies are not effective. Sometimes managers and employees on the front line discover this well before strategists.
External opportunities and threats and internal strengths and weaknesses that represent the bases of current strategies should continually be monitored for change. It is not really a question of whether these factors will change, but rather when they will change and in what ways. Some key questions to address in evaluating strategies are given here.

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MEASURING ORGANIZATIONAL PERFORMANCE

Learning Objectives

This topic concern with various is for measuring the performance of an organization.

Measuring organizational performance

To determine that which objectives are most important in the evaluation of strategies can be difficult. Strategy evaluation is based on both quantitative and qualitative criteria. Selecting the exact set of criteria for evaluating strategies depends on a particular organization's size, industry, strategies, and management philosophy. An organization pursuing a retrenchment strategy, for example, could have an entirely different set of evaluative criteria from an organization pursuing a market-development strategy. Quantitative criteria commonly used to evaluate strategies are financial ratios, which strategists use to make three critical comparisons: (1) comparing the firm's performance over different time periods, (2) comparing the firm's performance to competitors', and (3) comparing the firm's performance to industry averages. Some key financial ratios that are particularly useful as criteria for strategy evaluation are as follows:

Return on investment
Return on equity
Profit margin
Market share
Debt to equity
Earnings per share
Sales growth
Asset growth

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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 strategyevaluation 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 strategyevaluation 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.