Strategic Evaluation and control in

Strategic Management

Lecture 4
March 12, 2018
Strategic Evaluation and control
 Strategic evaluation and control is defined
as the process of determining the
effectiveness of a given strategy in
achieving the organizational objectives and
taking corrective actions wherever
required.

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Types of General control systems
Basically, there are three types of general
control systems:
1. Output control (i.e. control on actual
performance results)
2. Behavior control (i.e. control on activities
that generate the performance)
3. Input control (i.e. control on resources that
are used in performance)
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 Basic Characteristics of Effective Evaluation and Control System
Effective strategy evaluation systems must meet several basic requirements. They must be:
1. Simple: Strategy evaluation must be simple, not too comprehensive and not too restrictive. Complex systems often
confuse people and accomplish little. The test of an effective evaluation system is its simplicity not its complexity.
2. Economical: Strategy evaluation activities must be economical. Too many controls can do more harm than good.
3. Meaningful: Strategy evaluation activities 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.
4. Timely: Strategy evaluation activities should provide timely information. For example, when a firm has diversified into
a new business by acquiring another firm, evaluative information may be needed at frequent intervals. Time dimension of
control must coincide with the time span of the event being measured.
5. Truthful: Strategy evaluation should be designed to provide a true picture of what is happening. Information should
facilitate action and should be directed to those individuals who need to take action based on it.
6. Selective: The control systems should focus on selective criteria like key important factors which are critical to
performance. Insignificant deviations need not be focused.
7. Flexible: They must be flexible to take care of changing circumstances.
8. Suitable: Control systems should be suitable to the needs of the organization. They must conform to the nature and
needs of the job and area to be controlled.
9. Reasonable: Control standards must be reasonable. Frequent measurement and rapid reporting may frustrate control.
10. Objective: A control system would be effective only if it is unbiased and impersonal. It should not be subjective and
arbitrary. Otherwise, people may resent them.
11. Acceptable: Controls will not work unless they are acceptable to those who apply them.
12. Foster Understanding and Trust: Control systems should not dominate decisions. Rather they should foster mutual
understanding, trust and common sense. No department should fail to cooperate with another in evaluating and control of
strategies.
13. Fix Responsibility for Failure: An effective control system must fix responsibility for failure. Detecting deviations
would be meaningless unless one knows where they are occurring and who is responsible for them. Control system should
also pinpoint what corrective actions are needed.
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Types of Strategic Controls

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Evaluation and Control in
Strategic Management
 Evaluate the outcomes: The success of an initiative is determined by
the extent to which intended and unintended policy outcomes are
achieved and how they have affected stakeholders.
 Planning for evaluation should identify and map baseline information
as well as ensure that ongoing access to consistent data sources will
be available through monitoring over the life of the initiative. Data
can be quantitative (hard or numerical data) or qualitative (soft or
categorical).
 Those managing an evaluation need to focus on asking good
questions to assess the data collected. Credibility of an evaluation is
enhanced through sound evidence, professional and ethical standards,
and the degree of independence of the evaluator. Effective evaluation
is the result of a planning process over the life of the initiative.

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Strategy Evaluation
Strategy evaluation is having 3 Basics

 Examining the underlying basis of the

firm’s strategy
 Comparing actual to expected results
 Taking corrective action to address
performance gaps

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Principles of Strategy Evaluation
 Consistency: The strategy must not present mutually
inconsistent goals and policies.
 Consonance/compatibility: The strategy must represent an
adaptive response to the external environment and to the
critical changes occurring within it.
 Advantage: The strategy. must provide for the creation
and/or maintenance of a competitive advantage in the
selected area of activity.
 Feasibility: The strategy must neither overtax available
resources nor create unsolvable sub problems.

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 Categories of Evaluation
According to the purpose of evaluation, it is classified into the following categories:
 Strategic evaluation concerns mainly the analysis and assessment of interventions
at the level of strategic goals. The object of strategic evaluation consists of the
analysis and appraisal of the relevance of general directions of interventions
determined at the programming stage. One of the significant aspects of strategic
evaluation consists of the verification of the adopted strategy with respect to the
current and anticipated social and economic situation.
 Operational evaluation is closely linked to the process (NSRF-National Strategic
Reference Framework) and OP management and monitoring. The purpose of
operational evaluation consists of providing support to the institutions responsible
for the implementation of NSRF and OP with regards to the achievement of the
assumed operational objectives by providing practically useful conclusions and
recommendations.
 From the point of view of timing of the performed evaluation, it is classified into; i)
ex ante evaluation (prior to the launch of NSRF or OP implementation), ii) ongoing
evaluation (in the course of NSRF or OP implementation), iii) ex post evaluation
(after completion of NSRF or OP implementation).

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THE CHALLENGE OF EVALUATION
 Are the objectives of the business
appropriate?
 Are the major policies and plans
appropriate?
 Do the results obtained to date confirm or
refute critical assumptions on which the
strategy rests?

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Levels of Strategy Evaluation

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 Levels of Evaluations
Levels Description
Level-1 Formative: early stages of policy development and are intended to inform
(Less
. the policy. In other words, some operationalization or implementation of
Specific) the policy has occurred, but changes or amendments can still be made.
Summative: when a policy is fairly mature, and are intended to determine
whether to end, amend, or extend the policy.

Level-2 Goals: whether or not a policy meets goals, and to what extent
Process: Is the policy operating according to the relevant rules / laws /
obligations?, Is the target population being served by the policy?, Does the
process match the goals of the policy?
Outcomes: Outcome evaluations assess the achievements (outcomes) of a
policy.
Outcome Is the policy having an impact?, if so, how much of an impact is
the policy having? if not, why is the policy failing to have an impact?
Level-3 Normative: assess the worth of a policy (Example: Are the policy’s goals
Specific realistic?)
Descriptive: as the name suggests, describe goals, outcomes, and processes,
but do not form judgments (Example: Are goals clearly articulate?).
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A General Model of Controlling
in Strategic Management

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 6 steps of effective strategy evaluation

Step-1 Identify Stakeholders

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Step-2 Describe project and Understand
Program

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Step-3 Design Evaluation

effectiveness relates to how well a treatment works in

the practice of medicine, as opposed to efficacy, which
measures how well treatment works in clinical trials or
laboratory studies. Elegance is Quality
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Step-4 Gather Evidence

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Step-5 Analyze Results

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Step-6 Report Findings

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Strategy Evaluation Techniques

Quantitative Analysis:

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

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Return on Investment
 Return on investment (ROI) is performance measure used to
evaluate the efficiency of investment. It compares the magnitude and
timing of gains from investment directly to the magnitude and timing
of investment costs. It is one of most commonly used approaches for
evaluating the financial consequences of business investments,
decisions, or actions.

Formula:
Return on Investment = Net profit after interest and tax / Total Assets

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Return on Equity (ROE)
Return on equity (ROE) is a measure of
profitability that calculates how many Rs
of profit a company generates with each dollar of
shareholders' equity. ROE is more than a
measure of profit; it's a measure of efficiency. A
rising ROE suggests that a company is increasing
its ability to generate profit without needing as
much capital. It also indicates how well a
company's management is deploying the
shareholders' capital. In other words, the higher
the ROE the better. Falling ROE is usually a
problem
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 Formula
 The formula for ROE is:
 ROE = Net Income/Shareholders' Equity
 ROE is sometimes called "return on net worth."
 Example:
 Let's assume Company XYZ generated Rs 10 million
in net income last year. If Company XYZ's
shareholders 'equity equaled Rs 20 million last year,
then using the ROE formula, we can calculate
Company XYZ's ROE as:
 ROE = Rs 10,000,000/Rs 20,000,000 = 50%
 This means that Company XYZ generated Rs 0.50
of profit for every Rs1 of shareholders' equity last
year, giving the stock an ROE of 50%.

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Profit Margin
 A measure of how well a company controls its costs. It is calculated
by dividing a company's profit by its revenues and expressing the
result as a percentage. The higher the profit margin is, the better the
company is thought to control costs. Investors use the profit margin
to compare companies in the same industry and well as between
industries to determine which are the most profitable

Formula: Net Income/Sales

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Market Share
 Market share is the percentage of a market (defined in
terms of either units or revenue) accounted for by a
specific entity. Increasing market share is one of the most
important objectives of business. The main advantage of
using market share as a measure of business performance
is that it is less dependent upon macro-environmental
variables, such as the state of the economy or changes in
tax policy

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Debt to Equity Ratio
 The debt-to-equity ratio shows the proportion of equity and debt a
firm is using to finance its assets, and the ability for shareholder
equity to fulfill obligations to creditors in the event of a business
decline. A low debt-to-equity ratio indicates lower risk, since debt
holders have less claim on the company's assets. A higher debt-to-
equity ratio, on the other hand, shows that a company has been
aggressive in financing its growth with debt, and there may be a
greater potential for financial distress if earnings do not exceed the
cost of borrowed funds.
Formula: Debt-to-equity ratio = total liabilities / total
shareholders' equity

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 Earnings Per Share (EPS)
 The term earnings per share (EPS) represents
the portion of a company's earnings, net
of taxes and preferred stock dividends, that is
allocated to each share of common stock. EPS is
a carefully scrutinized metric that is often used as
a barometer to gauge a company's profitability
per unit of shareholder ownership. As
such, earnings per share is a key driver of share
prices. It is also used as the denominator in the
frequently cited P/E ratio.
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 Example
 Let's assume that during the fourth quarter,
Company XYZ reported net income of Rs 4
million. During the same time frame, the
company had a total of 10 million shares
outstanding. In this particular case, the
company's quarterly earnings per share
(or EPS) would be Rs 0.40, calculated as
follows:
 Rs 4 million / 10 million shares = Rs 0.40
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Sales Growth
 Sales Growth Ratio/Rate is a measure of
the percentage increase in sales between
the two time periods.
Formula:
Sales Growth Rate = (Current month's sales
- Last month's sales) / (Last month's sales)
* 100

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Assets Growth
 The Total Assets of a financial institution include all line
items on the institution’s balance sheet that earn revenue;
such assets include loans outstanding, securities and cash.
Calculation
 Asset Growth Rate (Year-over-Year) = (Total Assets -
Total Assets from Same Quarter of Prior Year) / Total
Assets from Same Quarter of Prior Year

 Asset Growth Rate (Quarterly) = (Total Assets - Total

Assets from Prior Quarter) / Total Assets from Prior
Quarter
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Other Evaluation Techniques

 Stakeholder’s Audit
 Reporting Systems (Daily, Weekly,
Monthly Management reports and
Business Reviews)
 Management Information system
 Budgets
 Organizational Audit
 TQM

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 Program Evaluation and Review Technique (PERT)
• PERT developed by the US Navy with Booz Hamilton
Missile/Submarine -program 1958.
• PERT (Programme Evaluation Review Technique) are
project management techniques, which have been created
out to plan, schedule and control complex projects.
• Road map for a particular program or project in which all
of the major elements (events) have been completely
identified, together with their corresponding
interrelations‘
• PERT charts are often constructed from back to front
because, for many projects, the end date is fixed and the
contractor has front-end flexibility.
• The components of PERT are; activity, events & network.
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 NETWORK

 Graphical portrayal of activities and event

 Shows dependency relationships between
tasks/activities in a project
 Clearly shows tasks that must precede
(precedence) or follow (succeeding) other tasks
in a logical manner
 Clear representation of plan – a powerful tool
for planning and controlling project

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Example of Simple Network –
Survey

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 DEFINITION OF TERMS IN A NETWORK
 Activity : any portions of project (tasks) which required
by project, uses up resource and consumes
time – may involve labor, paper work,
contractual negotiations, machinery operations
Activity on Arrow (AOA) showed as arrow, AON
– Activity on Node
 Event : beginning or ending points of one or more
activities, instantaneous point in time, also
called ‘nodes’

 Network : Combination of all project activities and the events

PRECEEDING SUCCESSOR
ACTIVITY

EVENT

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Emphasis on Logic in Network Construction
 Construction of network should be based on logical or
technical dependencies among activities
 Example - before activity ‘Approve Drawing’ can be
started the activity ‘Prepare Drawing’ must be
completed
 Common error – build network on the basis of time
logic (a feeling for proper sequence ) see example
below

WRONG !!!
CORRECT 
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 Sequence of activities
 Can start work on activities A and B anytime, since
neither of these activities depends upon the
completion of prior activities.
 Activity C cannot be started until activity B has been
completed
 Activity D cannot be started until both activities A
and C have been completed.
 The graphical representation (next slide) is referred to
as the PERT network

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 Network of Four Activities
Arcs indicate project activities

A D
1 3 4

B C

Nodes correspond to the beginning

and ending of activities

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 BENEFITS OF PERT NETWORK

 Shows interdependence of all tasks, work packages, and

work units.
 Helps proper communications between departments
and functions.
 Determines expected project completion date.
 Identifies so-called critical activities, which can delay the
project completion time.
 Identified activities with slacks that can be delayed for
specified periods without penalty, or from which
resources may be temporarily borrowed
 Determines the dates on which tasks may be started or
must be started if the project is to stay in schedule.
 Shows which tasks must be coordinated to avoid
resource or timing conflicts.
 Shows which tasks may run in parallel to meet project
completion date
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Balance Score Card
 A balanced scorecard is a performance metric used in strategic
management to identify and improve various internal functions of a
business and their resulting external outcomes. It is used to measure
and provide feedback to organizations. Data collection is crucial to
providing quantitative results, as the information gathered is
interpreted by managers and executives, and used to make better
decisions for the organization.

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