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MGT603 - Strategic Management - Lecture Handout 45

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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.

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 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 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, email, 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.

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 earningsper- 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 longterm 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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