Business Policy and Strategic

Management
Week 14 Lecture
Recap of Lecture 13
• Which Marketing theories contribute the most to the strategic
management?
• What are the basic resources of capital are used in strategy
implementation?
• What are the three R&D approaches in strategy implementation?
Recap of Lecture 13
• Market segmentation and product positioning are important to strategy
implementation.
• Debt and equity are two resources commonly used to support
strategy implementation.
• The three R&D approaches are be the first firm to market new
products, be an innovative imitator of successful products, and be a
low-cost producer by mass-producing products.
Strategy Evaluation
• Strategy evaluation is vital to an organization’s well-being; timely
evaluations can alert management to the problems or potential
problems before a situation becomes critical
• Strategy evaluation is based on both quantitative and qualitative
criteria
• The imperative for strategic evaluation is brought about by two key
factors:
1) The need to know how well the firm is performing through clear
benchmarking to measure how well or poor the company is doing
2) To adapt to organizational and environmental uncertainty
Strategy Evaluation (con’t)
• 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
• Richard Rumelt offers four criteria that could be used to evaluate a
strategy:
1) Consistency – Internal Assessment
2) Consonance – External Assessment
3) Feasibility – Internal Assessment
4) Advantage – External Assessment
Strategy Evaluation (con’t)
• Rumelt’s Criteria for Evaluating Strategies
1) Consistency
• A strategy should not present inconsistent goals and policies. Organizational conflict and
interdepartmental bickering are often symptoms of managerial disorder, but these
problems may also be a sign of strategic inconsistency.
• Three guidelines help determine if organizational problems are due to inconsistencies in
strategy:
• If managerial problems continue despite changes in personnel and if they tend to be issue-
based rather than people-based, then strategies may be inconsistent.
• If success for one organizational department means, or is interpreted to mean, failure for
another department, then strategies may be inconsistent.
• If policy problems and issues continue to be brought to the top for resolution, then strategies
may be inconsistent.
Strategy Evaluation (con’t)
• Rumelt’s Criteria for Evaluating Strategies
2) Consonance
• Consonance refers to the need for strategists to examine sets of trends, as well as
individual trends, in evaluating strategies.
• A strategy must represent an adaptive response to the external environment and to the
critical changes occurring within it.
• One difficulty in matching a firm’s key internal and external factors in the formulation of
strategy is that most trends are the result of interactions among other trends.
• For example, the day-care explosion came about as a combined result of many trends that
included a rise in the average level of education, increased inflation, and an increase in
women in the workforce.
• Although single economic or demographic trends might appear steady for many years,
there are waves of change going on at the interaction level.
Strategy Evaluation (con’t)
• Rumelt’s Criteria for Evaluating Strategies
3) Feasibility
• A strategy must neither overtax available resources nor create unsolvable sub-problems.
• The final broad test of strategy is its feasibility:
• Can the strategy be attempted within the physical, human, and financial resources of the
enterprise?
• The financial resources of a business are the easiest to quantify and are normally the first limitation
against which strategy is evaluated. It is sometimes forgotten, however, that innovative approaches
to financing are often possible. Devices, such as captive subsidiaries, sale-leaseback arrangements,
and tying plant mortgages to long-term contracts, have all been used effectively to help win key
positions in suddenly expanding industries.
• A less quantifiable, but actually more rigid, limitation on strategic choice is that imposed by
individual and organizational capabilities.
• In evaluating a strategy, it is important to examine whether an organization has demonstrated
in the past that it possesses the abilities, competencies, skills, and talents needed to carry out
a given strategy.
Strategy Evaluation (con’t)
• Rumelt’s Criteria for Evaluating Strategies
4) Advantage
• A strategy must create or maintain a competitive advantage in a selected area of activity.
• Competitive advantages are the result of superiority in one of three areas:
• (1) resources, (2) skills, or (3) position
• Position plays a crucial role in an organization’s strategy.
• Once gained, a good position is defensible—meaning that it is so costly to capture that rivals are
deterred from full-scale attacks.
• Positional advantage tends to be self-sustaining as long as the key internal and environmental
factors that underlie it remain stable.
• Although not all positional advantages are associated with size, it is true that larger organizations
tend to operate in markets and use procedures that turn their size into advantage, while smaller
firms seek product/market positions that exploit other types of advantage.
• The principal characteristic of good position is that it permits the firm to obtain advantage
from policies that would not similarly benefit rivals without the same position.
Strategy Evaluation (con’t)
• Who monitor the evaluation and control process?
• Strategic control can be exerted by the chief executive officer (CEO), the
board of directors, or even individuals outside the top management team.
• The roles played by boards of directors, institutional investors, and
shareholders who monitor firm strategies and often instigate control vary
across firms.
• The influence of the board and others notwithstanding, ongoing strategic
control is largely a function performed by the top management team.
Strategy Evaluation (con’t)
• Strategy-Evaluation Framework
1) Review the underlying bases of an organization’s strategy
2) Measure organizational performance
3) Take corrective actions
Strategy Evaluation (con’t)
• Strategy-Evaluation Assessment Matrix
Strategy Evaluation (con’t)
• Strategy-Evaluation Framework
1) Review the underlying bases of an organization’s strategy
• Not really a question of whether external and internal factors will change but rather when
they will change and in what ways
• 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 management information systems strengths
and weaknesses
• Ineffective strategies may have been chosen or implementation activities may have been poor
• Objectives may have been too optimistic
• A revised EFE Matrix should indicate how effective a firm’s strategies have been in response to key
opportunities and threats
• Actions by competitors, changes in demand, changes in technology, economic changes,
demographic shifts, and governmental actions may prevent objectives from being
accomplished
Strategy Evaluation (con’t)
• Strategy-Evaluation Framework
2) Measure organizational performance
• To compare expected results to actual results, investigating deviations from plans,
evaluating individual performance, and examining progress being made toward meeting
stated long-term and annual objectives
• Criteria for evaluating strategies should be measurable and easily verifiable
• Criteria that predict results may be more important than those that reveal what already
has happened
• Really effective control requires accurate forecasting
• For examples: unreasonable policies, unexpected turns in the economy, unreliable suppliers
or distributors, or ineffective strategies, can result in unsatisfactory progress toward meeting
objectives
Strategy Evaluation (con’t)
• Strategy-Evaluation Framework
2) Measure organizational performance
• Selecting the exact set of criteria for evaluating strategies depends on a particular
organization’s size, industry, strategies, and management philosophy
• Quantitative criteria commonly used to evaluate strategies are financial ratios, which
strategists use to make three critical comparisons:
i. Comparing the firm’s performance over different time periods
ii. Comparing the firm’s performance to competitors’
iii. Comparing the firm’s performance to industry averages
Strategy Evaluation (con’t)
• Strategy-Evaluation Framework
2) Measure organizational performance
• Some key financial ratios that are particularly useful as criteria for strategy evaluation are
as follows:
i. Return on investment (ROI)
ii. Return on equity (ROE)
iii. Profit margin
iv. Market share
v. Debt to equity
vi. Earnings per share
vii. Sales growth
viii. Asset growth
Strategy Evaluation (con’t)
• Strategy-Evaluation Framework
2) Measure organizational performance
• Potential problems are associated with using quantitative criteria for evaluating
strategies:
i. Most quantitative criteria are geared to annual objectives rather than long-term objectives
ii. Different accounting methods can provide different results on many quantitative criteria
iii. Intuitive judgments are almost always involved in deriving quantitative criteria
Strategy Evaluation (con’t)
• Strategy-Evaluation Framework
2) Measure organizational performance
• Qualitative criteria used when quantitative criteria cannot address the gaps between
expectation and actual results
• 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
• Two key questions must be asked:
• What are the relationships among the firm’s key internal and external strategic factors?
• How are major competitors likely to respond to particular strategies?
Strategy Evaluation (con’t)
• Strategy-Evaluation Framework
3) Take corrective actions
• When gaps are found, firm is required to make changes to competitively reposition the firm
for the future
• The probabilities and possibilities for incorrect or inappropriate actions increase geometrically with
an arithmetic increase in personnel
• Any person directing an overall undertaking must check on the actions of the participants as well as
the results that they have achieved
• If either the actions or results do not comply with preconceived or planned achievements, then
corrective actions are needed
• Taking corrective actions raises employees’ and managers’ anxieties but participation in
strategy-evaluation activities is one of the best ways to overcome individuals’ resistance to
change
• Resistance to change is often emotionally based and not easily overcome by rational argument
• Resistance may be based on such feelings as loss of status, implied criticism of present
competence, fear of failure in the new situation, annoyance at not being consulted, lack of
understanding of the need for change, or insecurity in changing from well-known and fixed
methods
Strategy Evaluation (con’t)
• Strategy-Evaluation Framework
3) Take corrective actions
• Corrective actions should place an organization in a better position:
i. To capitalize upon internal strengths
ii. To take advantage of key external opportunities
iii. To avoid, reduce, or mitigate external threats
iv. To improve internal weaknesses
• Corrective actions should have a proper time horizon and an appropriate amount of risk
• They should be internally consistent and socially responsible
• Corrective actions strengthen an organization’s competitive position in its basic industry
• Continuous strategy evaluation keeps strategists close to the pulse of an organization
and provides information needed for an effective strategic-management system
Strategy Evaluation (con’t)
• Strategy-Evaluation Framework
3) Corrective action examples
Strategy Evaluation (con’t)
• Strategy-Evaluation Framework
3) Strategy-evaluation Tool
• Balanced Scorecard
• A process that allows firms to evaluate strategies from four perspectives:
i. Financial performance
ii. Customer/client knowledge
iii. Internal business processes
iv. Development/innovation/learning and growth
• For example: Vodafone Group’s Balanced Scorecard
Strategy Evaluation (con’t)
• Strategy-Evaluation Framework
3) Strategy-evaluation Tool
• Balanced Scorecard
• Aims to balance long-term with
short-term concerns, to balance
financial with nonfinancial
concerns, and to balance internal
with external concerns
Strategy Evaluation (con’t)
Strategy Evaluation (con’t)
• Strategy-Evaluation Framework
3) Strategy-evaluation Tool
• Balanced Scorecard
i. Financial perspective
• On the top of the Balanced Scorecard strategy map
• Revenue Growth and Productivity objectives are commonly stated in this perspective
• Revenue Growth objective can be achieved by:
• Developing new revenue sources (creating new products and services) –
Product Leadership strategy
• Improving current profitability (working on customer value proposition) –
Customer Value strategy
• Productivity objective incorporates the projection of Operation Excellence strategy:
• Decreasing costs
• Resource optimization
Strategy Evaluation (con’t)
• Strategy-Evaluation Framework
3) Strategy-evaluation Tool
i. Financial Perspective
• Balance inside the Financial perspective
Strategy Evaluation (con’t)
• Strategy-Evaluation Framework
3) Strategy-evaluation Tool
i. Financial Perspective
• Balance inside the Financial perspective
• Managers tend to focus on what can give faster results (Productivity objectives), and
tend to ignore long term opportunities provided by Revenue Growth objectives
• Cascading across three levels
• Lagging measures are typically “output” oriented, easy to measure but hard to improve or
influence while leading measures are typically input oriented, hard to measure and easy to
influence
Strategy Evaluation (con’t)
• Strategy-Evaluation Framework
3) Strategy-evaluation Tool
i. Financial Perspective
• Cascading across three levels
• For example:
• Operational Excellence generic
strategy
• Decreasing costs objective is
a projection of such strategy
on Financial perspective
Strategy Evaluation (con’t)
• Strategy-Evaluation Framework
3) Strategy-evaluation Tool
i. Financial Perspective
• For example: Decrease Costs
• Executive level (For example: Electronics and Appliances Business Division)
• Objective: Decrease Costs
• Lagging measure: Achieved costs reduction, %, (an “output” or outcome)
• Leading measure: Time invested in the analysis of the problem which leads to cost
reduction, (“input path” or activities needed to reach the output)
• Initiative: Build development and marketing costs map
Strategy Evaluation (con’t)
• Strategy-Evaluation Framework
3) Strategy-evaluation Tool
i. Financial Perspective
• For example: Decrease Costs
• Department level (For example: R&D Department)
• Objective: Decrease production costs
• Lagging measure: Achieved production costs reduction, %
• Leading measure: The number of experts interviewed about the problem
• Initiative: Build production costs map; Determine possible improvement
opportunities
Strategy Evaluation (con’t)
• Strategy-Evaluation Framework
3) Strategy-evaluation Tool
i. Financial Perspective
• For example: Decrease Costs
• Employee level (For example: Senior Engineer of R&D Department)
• Objective: Decrease product testing costs
• Lagging measure: Achieved testing costs reduction, %
• Leading measure: The number of tested solutions
• Initiative: Find and implement test automation tool
Strategy Evaluation (con’t)
• Strategy-Evaluation Framework
3) Strategy-evaluation Tool
ii. Customer/Client Perspective
• The term “Customer” includes those who pay for your products or services and those to whom
you pay or those who work together with you as your partners
• Partners (dealer, distributor)
• Customers
Strategy Evaluation (con’t)
• Strategy-Evaluation Framework
3) Strategy-evaluation Tool
ii. Customer/Client Perspective
• Follow the Financial perspective in the Balanced Scorecard strategic map
• Three generic objectives:
• Product quality
• Customer experience
• Price and Time
• For examples:
• Add and retain high-value customers objective
• Achieve and retain win-win partner relations
Strategy Evaluation (con’t)
• Strategy-Evaluation Framework
3) Strategy-evaluation Tool
Strategy Evaluation (con’t)
• Strategy-Evaluation Framework
3) Strategy-evaluation Tool
ii. Customer/Client Perspective
• For examples:
• Add and retain high-value customers
objective
• Desired outcome (“Customer
retention”) and then we ask “What
customer’s need do we need to
satisfy to achieve better customer
retention?
• Provide High Product Quality
Strategy Evaluation (con’t)
• Strategy-Evaluation Framework
3) Strategy-evaluation Tool
ii. Customer/Client Perspective
• For examples: Provide High Product Quality
• Executive level (For example: Electronics and Appliances Business Division)
• Objective: Provide High Product Quality
• Lagging: Product return rate, %
• Leading: Quality control & assurance, units or pieces
• Initiative: Quality management
Strategy Evaluation (con’t)
• Strategy-Evaluation Framework
3) Strategy-evaluation Tool
ii. Customer/Client Perspective
• For examples: Provide High Product Quality
• Department level (For example: R&D Department)
• Objective: Provide High Product Quality
• Lagging: Critical problems reported, %
• Leading: Repeat problems, % (this will actually show the quality of the quality
process itself)
• Leading: Quality control & assurance, units or pieces
• Initiative: Analyze quality problems, suggest an appropriate quality control plan
Strategy Evaluation (con’t)
• Strategy-Evaluation Framework
3) Strategy-evaluation Tool
ii. Customer/Client Perspective
• For examples: Provide High Product Quality
• Employee level (For example: Senior Engineer of R&D Department)
• Objective: Provide High Product Quality
• Lagging: The number of cases when A-type problem appeared
• Leading: Repeat A-type problem, %
• Initiative: Analyze and prepare quality control measures for A-type problems
Strategy Evaluation (con’t)
• Strategy-Evaluation Framework
3) Strategy-evaluation Tool
iii. Internal Business Processes Perspective
• For examples: Product Leadership Strategy
• Developing new products objective
Strategy Evaluation (con’t)
• Strategy-Evaluation Framework
3) Strategy-evaluation Tool
iii. Internal Business Processes Perspective
• For examples: Product Leadership Strategy
• Developing new products objective
Strategy Evaluation (con’t)
• Strategy-Evaluation Framework
3) Strategy-evaluation Tool
iii. Internal Business Processes Perspective
• For examples: Developing new products objective
• Executive level (For example: Electronics and Appliances Business Division)
• Objective: Develop certain number of new products per year
• Lagging: Marketable new products out of all existing products, %
• Leading: Qualified prototype of new products for approval, units
• Initiative: Interdepartmental meetings for all related departments
Strategy Evaluation (con’t)
• Strategy-Evaluation Framework
3) Strategy-evaluation Tool
iii. Internal Business Processes Perspective
• For examples: Developing new products objective
• Department level (For example: R&D Department)
• Objective: Develop new products
• Lagging: Successful prototype rate, %
• Leading: Quality control and testing phase of prototype, numbers
• Initiative: Brainstorming Meetings among all engineers
Strategy Evaluation (con’t)
• Strategy-Evaluation Framework
3) Strategy-evaluation Tool
iii. Internal Business Processes Perspective
• For examples: Developing new products objective
• Employee level (For example: Senior Engineer of R&D Department)
• Objective: Turn at least certain number of ideas into prototype per year
• Lagging: New design blueprints and concepts, numbers
• Leading: Analyze in-demand features and conduct feasibility studies
• Initiative: Technological research sessions using market analysis data
Strategy Evaluation (con’t)
• Strategy-Evaluation Framework
3) Strategy-evaluation Tool
iv. Development/innovation/learning and growth Perspective
• Explain what the company has to learn in order to:
• Satisfy customer’s needs
• Improve business processes
• Achieve financial goals
Strategy Evaluation (con’t)
• Strategy-Evaluation Framework
3) Strategy-evaluation Tool
iv. Development/innovation/learning and growth Perspective
• Explain what the company has to learn in order to:
• Satisfy customer’s needs
• Improve business processes
• Achieve financial goals
• Whatever objective you have in the “Learning and Growth” perspective, it should not be by
itself
Strategy Evaluation (con’t)
• Strategy-Evaluation Framework
3) Strategy-evaluation Tool
iv. Development/innovation/learning and growth Perspective
• 3 typical objectives for the “Learning and Growth” perspective:
• Employee capabilities (core competencies and skills)
• Information system capabilities
• Strategy awareness and motivation
Strategy Evaluation (con’t)
• Strategy-Evaluation Framework
3) Strategy-evaluation Tool
iv. Development/innovation/learning and growth Perspective
• For example: Strategy awareness and motivation objective
Strategy Evaluation (con’t)
• Strategy-Evaluation Framework
3) Strategy-evaluation Tool
iv. Development/innovation/learning and growth Perspective
• For example: Strategy awareness and motivation
• Executive level (For example: Electronics and Appliances Business Division)
• Objective: Strategy awareness and motivation among line-level employees
• Lagging measure: Average strategy awareness score according to the survey
conducted in all departments
• Leading measure: Average number of hours spent in strategy awareness training per
quarter per employee
• Initiative: Conduct a certain number of workshops per quarter
Strategy Evaluation (con’t)
• Strategy-Evaluation Framework
3) Strategy-evaluation Tool
iv. Development/innovation/learning and growth Perspective
• For example: Strategy awareness and motivation
• Department level (For example: R&D Department)
• Objective: Teach employees what type of creative activities support company
strategy and how
• Lagging measure: Research and Development and company strategy alignment
awareness score according to the survey
• Leading measure: The percentage of current research activities explained in the
context of the strategy
• Initiative: Conduct a certain number of seminars per quarter
Strategy Evaluation (con’t)
• Strategy-Evaluation Framework
3) Strategy-evaluation Tool
iv. Development/innovation/learning and growth Perspective
• For example: Strategy awareness and motivation
• Employee level (For example: Senior Engineer of R&D Department)
• Objective: Attend strategy awareness training
• Lagging measure: Training exam score
• Leading measure: Hours spend on strategy awareness training
• Initiative: Conduct a certain number of training sessions with exams per quarter
Strategy Evaluation (con’t)
• Characteristics of Effective Strategy Evaluation
• Strategy evaluation activities must be economical
• Too much information can be just as bad as too little information
• Too many controls can do more harm than good
• Strategy-evaluation activities also should be meaningful
• Should specifically relate to a firm’s objectives
• 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
• 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
• 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
• 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
• Controls need to be action-oriented rather than information-oriented
Strategy Evaluation (con’t)
• Characteristics of Effective Strategy Evaluation
• Strategy-evaluation process should not dominate decisions
• Should foster mutual understanding, trust, and common sense
• No department should fail to cooperate with another in evaluating strategies
• Strategy evaluations should be simple
• Not too cumbersome, and not too restrictive
• Complex strategy-evaluation systems often confuse people and accomplish little
• Test of an effective evaluation system is its usefulness, not its complexity