Unit 6 Strategy Evaluation and Control

8/10/2019 Unit 6 Strategy Evaluation and Control

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Review progress periodically to determine whether changes are necessary, as issues or problems

may not arise immediately. It is important that corrective action is taken as soon as possible and

practical, in order for strategies to be effective and achieve set out goals.

Strategic control systems are the formal target-setting, measurement, and feedback systems that

allow strategic managers to evaluate whether a company is achieving superior efficiency, quality,innovation, and customer responsiveness and implementing its strategy successfully.

Managers may choose to implement various control systems to monitor strategy implementation.Managers may implement formal monitoring or periodic reviews to determine the organizations

performance. Incentives may also be utilised by managers, to motivate and encourage employees

to work towards the outlined goals and objectives. Such incentives may include bonuses, rewardsand share allocations.

TYPES OF CONTROL

Strategic control involves tracking a strategy as it's being implemented. It's also concerned with

detecting problems or changes in the strategy and making necessary adjustments. As a manager,

you tend to ask yourself questions, such as whether the company is moving in the right direction,

or whether your assumptions about major trends and changes in the company's environment are

correct. Such questions necessitate the establishment of strategic controls.

Depending on the stages at which control is exercised, it may be of three types:

Control of inputs that are required in an action, known as feed forward control;

Control at different stages of action process, known as concurrent, real-time, or

steering control; and

Post action control based on feedback from the completed action, known as feedback

control.

Feed-forward controls,sometimes called preliminary or preventive controls, attempt to identify

and prevent deviations in the standards before they occur. Feed-forward controls focus on

human, material, and financial resources within the organization.

Concurrent controls monitor ongoing employee activity to ensure consistency with qualitystandards. These controls rely on performance standards, rules, and regulations for guiding

employee tasks and behaviours. Their purpose is to ensure that work activities produce the

desired results.

Feedback controls involve reviewing information to determine whether performance meets

established standards. For example, suppose that an organization establishes a goal of increasing

its profit by 12 percent next year. To ensure that this goal is reached, the organization must


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monitor its profit on a monthly basis. After three months, if profit has increased by 3 percent,

management might assume that plans are going according to schedule.

In order for quality control to be precisely and accurately applied by members of the quality

control team, a strategy is necessary. The specifics of quality control strategies depend on the

types of manufactured products. For example, a manufacturer of chemical resins used in plasticproducts may strategize their quality control based upon the functionality and components of the

resins. In this example, chemists are usually a necessary part of the quality control team that will

develop strategies. In food manufacturing, quality control strategies may require assistance from

chemists, chemical engineers and packaging engineers with advanced skills in determining

proper preparation temperatures and quality of food grade packaging. In most instances, a

regulatory expert is part of the development of quality control strategies. This insures product

excellence according to compliance regulations.

Important Features of Manufacturing Quality Control Strategy

There are several important features that are contained in most quality control strategies:

Quality of raw materials used in manufacturing

Adherence to processing guidelines

Overall end product quality

Manufacturing equipment and packaging quality and efficiency

Production operation timeliness and efficiency

When new products are manufactured, it takes research and development to reach productionstage. Quality control strategies influence research and development as well as production ofmanufactured products. This makes quality control a singularly internal affair to meet specific

manufacturing goals and guidelines. Further production of manufactured products may be halted

if strategies are omitted.

Obstacles to Achieving Quality

There are many reasons why an organization fails to attain its quality goals but six are of extreme

importance:

1. Lack of leadership by top management: People in the upper management may be

committed to the quality goals of the organization but lack of visible leadership and

evidence of this commitment has a damaging effect on the rest of the organization.


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2. Reliance on specific techniques as the primary means of achieving quality goals:Techniques such as statistical process control, quality circles, quality function

deployment etc. address only a specific part of the problem.3. Underestimating the time and resources required: Typically 10% of the time of the

upper and middle management and professional specialists is required to achieve

breakthroughs in quality. This time must be found without adding extra personnel. Achange of priorities by delaying or eliminating other activities is needed.4. Lack of infrastructure for quality: For major activities the management delegates

responsibilities after setting up mechanisms that include goals, responsibilities, plans and

a structure for carrying out the task on hand. Such elements are very vague or missingwith respect to quality.

5. Failure to understand the skepticism for a new quality program : Employees have

seen previous quality programs go down the drain. The management needs to present

convincingly (1) a proof of the need for the quality effort and (2) demonstratedetermination to make the new program a success.

6. Failure to start small and learn from pilot activities: In a haste to achieve big

results rapidly massive training takes place with the hope that simultaneous advances canbe made on all fronts. The common mistake made in quality projects is the tendency to

bite more than one can chew. People grow tired of projects that seem to take forever. The

ideal way to go is to start off with small pilot projects that will be completed within six

months.

An organization embarking on a quality project would do well to learn about the reasons forfailure of other organizations.

Activity-based management and activity-based costing (ABM/ABC) have brought aboutradical change in cost management systems.ABM has grown largely out of the work of theTexas-based Consortium for Advanced Manufacturing-International (CAM-I). No longer is

ABMs applicability limited to manufacturing organizations. The principles and philosophies ofactivity-based thinking apply equally to service companies, government agencies and process

industries. The acronym itself has evolved from ABC to ABCM (activity-based cost

management) to ABM, and the application of ABC evolved from a manufacturing productcosting orientation to a management philosophy of activity management applied in industries and

organizations other than manufacturing.

Activity-based costing and activity-based management have been around for more than

fifteen years. Most forward-thinking companies have implemented them, or are in the process ofdoing so.

ABC is not a method of costing, but a technique for managing the organization better. It is a one-off exercise which measures the cost and performance of activities, resources and the objects

which consume them in order to generate more accurate and meaningful information for

decision-making. ABM draws on ABC to provide management reporting and decision making.ABM supports business excellence by providing information to facilitate long-term strategic

decisions about such things as product mix and sourcing. It allows product designers to


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understand the impact of different designs on cost and flexibility and then to modify their

designs accordingly. ABM also supports the quest for continuous improvement by allowing

management to gain new insights into activity performance by focusing attention on the sourcesof demand for activities and by permitting management to create behavioral incentives to

improve one or more aspects of the business.

What are the outputs of an ABM information system?

Organizations that are designing and implementing ABM will find there are five basic

information outputs: the cost of activities and business processes; the cost of non-value-added

activities; activity-based performance measures; accurate product/service cost (cost objects); cost

drivers

The cost of activities and business processes

Since activities form the very core of what a business does, the basic output of the ABM system

must be to provide relevant cost information about what a business does. Instead of reportingwhat money is spent for and by whom, costs are assigned to activities.

The cost of non-value-added activities

Some activities add value to a product or service, while some do not. A non-value added activity

is an activity that is considered not to contribute to customer value or to the organizationsneed.


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This is defined as waste. Identification of waste is valuable to management. This crucial

information output provides a focal point for improvement efforts.

Activity-based performance measures

In addition to cost information for business processes and activities, the ABM system mustreport information and data on activity performance. Knowing the total cost of activity isinsufficient to measure activity performance. Activity measures of quality, cycle time,

productivity and customer service may also be required to judge activity Performance.

Measuring the performance of activities provides a scorecard to report how well improvementefforts are working and is an integral port of continuous improvement.

Accurate product/service cost (cost objects)

Products and services are provided to markets and customers through various distribution

channels or contractual relationships. Because products and services consume resources at

different rates and require different levels of support, costs must be accurately determined.Accurate product and service cost information is vital for selecting the individual and segmented

markets where an organization competes and for pricing in those markets. Accurate product and

service cost information is a key information output of the ABM systems.

Cost drivers

The final output of an ABM system is cost driver information. A cost driver is any factor thatcauses change in the cost of an activity. For example, the quality of parts received by an activity,

for example the percent-age which is defective is a determining factor in the work required by

that activity, because the quality of parts received affects the resources required to perform the

activity. An activity may have multiple cost drivers associated with it

Primary Measures of Corporate Performance

The days when simple financial measures such as ROI or EPS were used alone to assess

the overall corporate performance are coming to an end. Analysts now recommend a

broad range of methods to evaluate the success or failure of a strategy. Some of these

methods are stakeholder measures, shareholder value and the balance scorecard approach.

Traditional financial methods - these methods were used to measure corporate

performance in terms of profit.

ROI

EPS

ROE

Operating Cash flow

Free cash flow


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Stakeholder Measures top management should establish one or more simple stakeholder

measures for each stakeholder category according to its own set of criteria.

Shareholder value This can be defined as the present value of anticipated future stream ofcash flows from the business plus the value of the company, if liquidated. The New York

consulting firm Stern Stewart & Company devised and popularised two shareholder value

measures known as the Economic value Added (EVA) and the Market Value Added (MVA).

The basic concepts of these are that businesses should not invest in projects unless they can

generate profit above the cost of capital.

Economic value added (EVA) is a performance measure developed by Stern Stewart & Co that

attempts to measure the true economic profit produced by a company. It is frequently also

referred to as "economic profit", and provides a measurement of a company's economic success

(or failure) over a period of time.

Market value added (MVA),on the other hand, is simply the difference between the current

total market value of a company and the capital contributed by investors (including both

shareholders and bondholders). MVA is not a performance metric like EVA, but instead is a

wealth metric; measuring the level of value a company has accumulated over time. As a

company performs well over time, it will retain earnings

Balanced Scorecard

Evaluate strategies from 4 perspectives:

1. Financial performance: how do we appear to shareholders?

2. Customer knowledge: how do customers view us?

3. Internal business processes: what must excel us?

4. Learning & growth: Can we continue to improve and create value?

Besides, performance of people and performance according to stakeholders can be added.

Management Audit is used to evaluate how management handle the various corporate activities

such as

Corporate social responsibilities

Functional areas of the organization


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Strategic Auditprovides a checklist of questions, by area or issue that enables a systematic

analysis of various corporate functions and activities to be made.

It is useful as a diagnostic tool to pinpoint corporate-wide problems

Divisional & Functional Perf ormance

Responsibility Centersare used to isolate a unit so that it can be evaluated

separately from the rest of the corporation

Standard cost centers

Revenue centers

Expense centers

Profit centers

Investment centers

Using Benchmarking

Continual process of measuring products, service, and practices against the

toughest competitors or those companies recognized as industry leaders

I nternational M easurement I ssues

International transfer pricing

Repatriation of profit

piracy

Strategic I nformation Systems

Enterprise Resource Planning (ERP)

Divisional and functional IS support

Problems in Measur ing Performance


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Short-term orientation

Goal displacement

Behavior substitution

Sub - optimization

Guideli nes for Proper Contr ol

Minimum amount of information necessary

Meaningful activities and results

Timely

Long and short-term

Pinpointing exceptions

Meeting/exceeding standards

The final step in the strategic management process is evaluating results. Managers must evaluate

the results to determine how effective their strategies have been and what corrections are

necessary. All strategies are subject to future modification because internal and external factors

are constantly changing


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c) Importance of small business and entrepreneurial ventures

Developing personal relationships- small businesses are well placed to build personal

relationships with customers, employees, and suppliers. With a small business you know

who you are dealing with; you can 'put a face' to the person you are in contact with.

Person-to-person interaction is as important as ever in building strong relationships. Responding flexibly to problems and challenges - in a small business there is little

hierarchy or chain of command. Large businesses may have set ways of operating and

establish procedures that are hard to change. Small businesses are often far more flexible.It can also reach a quick decision on whether or not it can do what is required.

Inventiveness and innovation - small businesses are well positioned to introduce and

develop new ideas. This is due to their owners not having to report or seek approval fromanyone else. For example, when Anita set up The Body Shop, she developed a range of

environmentally friendly cosmetics in unsophisticated packaging. This would have been

frowned on in a conventional cosmetics company.

Low overheads - due to the small scale of operation, small businesses have lower

overhead costs. They operate in small premises with low heating and lighting costs, andlimited rent and rates to pay. Low costs result in lower prices for consumers.

Catering for limited or niche markets-large firms with high overheads must producehigh levels of output to spread costs. By contrast, small firms are able to make a profit on

much lower sales figures. They can therefore sell into much smaller markets: e.g. a local

window cleaner serving a few hundred houses, a specialist jewellery maker with personalclients.

Employment generation

Mobilization of resources and entrepreneurial skill:

Equitable distribution of income:

Regional dispersal of industries:

Provides opportunities for development of technology: Indigenization:

Promotes exports:

Supports the growth of large industries:

Better industrial relations:

The Concept of Environmental Scanning

Environmental scanning is the monitoring, evaluating, and disseminating of information from theexternal and internal environment to key people within the corporation or organization. (Kazmi,

2008). Environmental scanning is a process of gathering, analyzing, and dispensing information

for tactical or strategic purposes. The environmental scanning process entails obtaining both

factual and subjective information on the business environments in which a company isoperating or considering entering.

There are three modes by which organizations scan their environment:


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Ad-hoc scanning - short term, infrequent examinations usually initiated by a crisis:organizations scan it environment as a result of crisis that is affecting the company at the

moment and analyze the situation to know if the problem is internal or external.

regular scanning - studies done on a regular schedule (e.g. once a year): most very

conscious organizations can see environment scanning as a program that should be doneregularly and as such, most of such organizations do it every year.

Continuous scanning - (also called continuous learning) - continuous structured data

collection and processing on a broad range of environmental factors. (Kazmi, 2008)

Issues in environmental scanning:

Since the environment is an indispensable tool in management, it should not be takenwith kids glove as it can influence the organization to achieve its stipulated objectives

from time to time. The organization should endeavourer to train and retrain their employee in areas of

environment so as to create a conductive working environment for the organization.

There should be technological planning and innovation towards organizationperformance.

Manager should keep abreast of the development in the level of technology in business

parlance.

Communication of the strategies to all key managers so as to have uniform objectives.

There should be regular review of strategies as the environment tends to change to otherfactors.

Problems facing the strategic environment scanning should be dealt with before it affects

the performance of the organization. There should be more research on best strategies to be adopted in the organization so as

to ensure the achievement of the organization goals and objectives.

The management of the organization should continue to take environmental forces (both

internal and external) seriously as a way of controlling and minimizing the impact of

environment instability.

There are a number of reasons why environmental scanning might not be successful in an

organization. The amount of information may be vast, resulting in an information overload in

which vital pieces could be unobserved or missed. In addition scanners may not be aware of

several sources of important information. Analyzing the gained and existing information can be

too tricky because of the lack of organization, knowledge and complexity of the material offered.

Furthermore in some cases information may not be accurate for the time. This is predominantly

common on quickly altering markets, such as strongly influenced by technology.

In addition when the activity is performed by a team, there are also possible inconveniences such

as; the understanding of the information collected, determination of importance, experience with

the matter, verbal communication practice, time restrictions.


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Documents

Unit 6 Strategy Evaluation and Control