Makerere University Business School Strategic Management Course

STRATEGY EVALUATION & CONTROL

Introduction

Strategic evaluation is the strategic management process phase in which managers provide assurance that the chosen strategy is implemented and is meeting business objectives. By this time, plans are already specified, activities assigned, resources provided, policies in place and leadership system and style formed. There is a need for:

An evaluation and control system, A reward system and An effective information system

Introduction Cont.

The evaluation system

Helps to recycle feedback into new strategic planning Double-checks strategic choice for appropriateness & consistency with the environment

Need for evaluation of consistency in application to lower organisation levels

Questions answered by C & E

Are decisions consistent with policy? Are there sufficient resources? Is the environment still as anticipated? To what extent are targets being met? Are the plans still relevant or should they be changed?

C & E Process

1.

2. 3. 4.

The organisation structure and style provide the main mechanism. There are 4 inter-related activities in the evaluation process: Establishing targets, standards & implementation plans. Measuring actual performance Analysing deviations Determining necessary modifications

The role of a strategist

Evaluation should take place at different organisation levels review levels The corporate level executive

Evaluates overall corporate strategy Monitors SBU evaluation It inter-connects elements financial elements of the plan

The budget is a useful control tool

The budget, however, lacks nonfinancial and other assumptions for strategic control.

The strategist Cont.

A controller may be appointed near the top position in a staff position

In charge of strategy information system but without line responsibility Internal audit committees Executive committees at board level External auditors

Other evaluation and control set-ups:

These evaluate and control top management.

Motivation to evaluate Top managers must be motivated to evaluate Unwillingness to evaluate is a common cause of strategy failure Failure experience may increase motivate to evaluate Performance reward for achievement of objectives also increases motivation to evaluate.

The Reward System

Top management rewards in many firms, are done irrespective of strategy evaluation

Executives make proposals to the board for themselves These include salary changes and promotions

Strategic demands should guide the reward system. Performance measures should be established in time before the actual implementation Rewards should then be based on these standards after the actual performance.

Reward system - Cont.

Performance rewarded should be in the managers discretion

Significant environmental effects on performance should not have a big impact on the managers penalty

Career development should also be considered

There is need for rotations Enough time should be allowed to individuals Rewards and penalties should consider performance of predecessors

Dysfunctional evaluation behaviour

It is often difficult to tie cause-effect relationships of strategic unit performance In case of failure, there is room for

Everyone to defend oneself Presenting results as successful e.g. short-term results, promise for long-term success. Claim responsibility for good performance

Top management tends to

Blame subordinates when there is strategic failure

Control & Evaluation Areas There are 3 major areas where managers make decisions: Criteria for evaluation Feedback system and control areas Outcomes of strategic evaluation

Criteria for evaluation Evaluation can be based on objective or subjective factors Criteria depend on the evaluation purpose and situation Quantitative factors (supported by some qualitative factors) are more relevant for the past and present Qualitative factors are more relevant for testing whether the strategy will be applicable or not.

Quantitative criteria Performance is compared with

Historical results and Competitors Standard numbers / ratios

Such factors include

Profitability results e.g. net profit Investment performance indicators e.g. dividend rates, earnings per share, return on capital, Market performance e.g. market share, sales growth

Quantitative criteria Cont. There are challenges in

Selection of which factors to use Set tolerance limits

The guide should come from key success factors for strategy success

Qualitative Criteria Subjective assessment should supplement quantitative performance measures More appropriate to the entire organisation strategy evaluation especially before a major change of direction There are 3 broad qualitative criteria categories

Consistency, appropriateness and workability

Consistency & Appropriateness

Consistency with: Objectives Environmental assumptions Internal conditions Appropriateness with respect to: Resource capabilities Risk preference Time horizon

Workability
Addresses Feasibility Stimulation managers commitment, consensus among executives, personal aspirations among executives.

Measuring Feedback
Timing of measurement What feedback to provide

Evaluation & Corrective action

Use of timely information to

Determine causes of deviations Take corrective action Reward performance

Reading Assignment

In Bakunda & Ngoma, read about

1.

2.

Why managers spend more time on strategic panning and less on control. Types of control

Strategic plan control, Annual plan control and Profitability and efficiency controls