REVIEWING BASES OF STRATEGY:Measuring Organizational Performance

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Strategic Management MGT603

Lesson 43

REVIEWING BASES OF STRATEGY

Reviewing the underlying bases of an organization's strategy could be 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 computer information systems

strengths and weaknesses. A revised EFE Matrix should indicate how effective a firm's strategies have been

in response to key opportunities and threats. This analysis could also address such questions as the

following:

1. How have competitors reacted to our strategies?

2. How have competitors' strategies changed?

3. Have major competitors' strengths and weaknesses changed?

4. Why are competitors making certain strategic changes?

5. Why are some competitors' strategies more successful than others?

6. How satisfied are our competitors with their present market positions and profitability?

7. How far can our major competitors be pushed before retaliating?

8. How could we more effectively cooperate with our competitors?

Numerous external and internal factors can prohibit firms from achieving long-term and annual

objectives. Externally, actions by competitors, changes in demand, changes in technology, economic

changes, demographic shifts, and governmental actions may prohibit objectives from being accomplished.

Internally, ineffective strategies may have been chosen or implementation activities may have been poor.

Objectives may have been too optimistic. Thus, failure to achieve objectives may not be the result of

unsatisfactory work by managers and employees. All organizational members need to know this to

encourage their support for strategy-evaluation activities. Organizations desperately need to know as soon

as possible when their strategies are not effective. Sometimes managers and employees on the front line

discover this well before strategists.

External opportunities and threats and internal strengths and weaknesses that represent the bases of

current strategies should continually be monitored for change. It is not really a question of whether these

factors will change, but rather when they will change and in what ways. Some key questions to address in

evaluating strategies are given here.

1. Are our internal strengths still strengths?

2. Have we added other internal strengths? If so, what are they?

3. Are our internal weaknesses still weaknesses?

4. Do we now have other internal weaknesses? If so, what are they?

5. Are our external opportunities still opportunities?

6. Are there now other external opportunities? If so, what are they?

7. Are our external threats still threats?

8. Are there now other external threats? If so, what are they?

9. Are we vulnerable to a hostile takeover?

Measuring Organizational Performance

Another important strategy-evaluation activity is measuring organizational performance. This activity includes

comparing expected results to actual results, investigating deviations from plans, evaluating individual

performance, and examining progress being made toward meeting stated objectives. Both long-term and

annual objectives are commonly used in this process. 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. For example, rather than simply being informed that sales last quarter were 20

percent under what was expected, strategists need to know that sales next quarter may be 20 percent

below standard unless some action is taken to counter the trend. Really effective control requires accurate

forecasting.

Failure to make satisfactory progress toward accomplishing long-term or annual objectives signals a need

for corrective actions. Many factors, such as unreasonable policies, unexpected turns in the economy,

unreliable suppliers or distributors, or ineffective strategies, can result in unsatisfactory progress toward

meeting objectives. Problems can result from ineffectiveness (not doing the right things) or inefficiency

(doing the right things poorly).

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Determining 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?5

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?

Taking Corrective Actions

The final strategy-evaluation activity, taking corrective actions, requires making changes to reposition a firm

competitively for the future. Examples of changes that may be needed are altering an organization's

structure, replacing one or more key individuals, selling a division, or revising a business mission. Other

changes could include establishing or revising objectives, devising new policies, issuing stock to raise

capital, adding additional salespersons, allocating resources differently, or developing new performance

incentives. Taking corrective actions does not necessarily mean that existing strategies will be abandoned

or even that new strategies must be formulated.

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

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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.

No organization can survive as an island; no organization can escape change. Taking corrective actions is

necessary to keep an organization on track toward achieving stated objectives. In his thought-provoking

books, Future Shock and The Third Wave, Alvin Toffler argued that business environments are becoming so

dynamic and complex that they threaten people and organizations with future shock, which occurs when the

nature, types, and speed of changes overpower an individual's or organization's ability and capacity to

adapt. Strategy evaluation enhances an organization's ability to adapt successfully to changing

circumstances. Brown and Agnew referred to this notion as corporate agility.

Taking corrective actions raises employees' and managers' anxieties. Research suggests that participation in

strategy-evaluation activities is one of the best ways to overcome individuals' resistance to change.

According to Erez and Kanfer, individuals accept change best when they have a cognitive understanding

of the changes, a sense of control over the situation, and an awareness that necessary actions are going to

be taken to implement the changes.

Strategy evaluation can lead to strategy-formulation changes, strategy-implementation changes, both

formulation and implementation changes, and no changes at all. Strategists cannot escape having to revise

strategies and implementation approaches sooner or later. Hussey and Langham offered the following

insight on taking corrective actions:

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. It is necessary, therefore, to overcome such

resistance by creating situations of participation and full explanation when changes are envisaged.

Corrective actions should place an organization in a better position to capitalize upon internal strengths; to

take advantage of key external opportunities; to avoid, reduce, or mitigate external threats; and 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. Perhaps most importantly, 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. Carter Bayles described the benefits of strategy evaluation as

follows:

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