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MGT603 - Strategic Management - Lecture Handout 44

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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:

  1. Return on investment
  2. Return on equity
  3. Profit margin
  4. Market share
  5. Debt to equity
  6. Earnings per share
  7. Sales growth
  8. Asset growth

But there are some potential problems associated with using quantitative criteria for evaluating strategies. First, most quantitative criteria are geared to annual objectives rather than long-term objectives. Also, different accounting methods can provide different results on many quantitative criteria. Third, intuitive judgments are almost always involved in deriving quantitative criteria. For these and other reasons, qualitative criteria are also important in evaluating strategies. Human factors such as high absenteeism and turnover rates, poor production quality and quantity rates, or low employee satisfaction can be underlying causes of declining performance. Marketing, finance/accounting, R&D, or computer information systems factors can also cause financial problems. Seymour Tilles identified six qualitative questions that are useful in evaluating strategies:

  1. Is the strategy internally consistent?
  2. Is the strategy consistent with the environment?
  3. Is the strategy appropriate in view of available resources?
  4. Does the strategy involve an acceptable degree of risk?
  5. Does the strategy have an appropriate time framework?
  6. Is the strategy workable?

Some additional key questions that reveal the need for qualitative or intuitive judgments in strategy evaluation are as follows:

  1. How good is the firm's balance of investments between high-risk and low-risk projects?
  2. How good is the firm's balance of investments between long-term and short-term projects?
  3. How good is the firm's balance of investments between slow-growing markets and fast-growing markets?
  4. How good is the firm's balance of investments among different divisions?
  5. To what extent are the firm's alternative strategies socially responsible?
  6. What are the relationships among the firm's key internal and external strategic factors?
  7. How are major competitors likely to respond to particular strategies?

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