Slide of strategic management w12

Learning objectives• Describe strategy evaluation • Identify the key results areas that can be used to improve business performance • Explain how scenario planning can be used for strate

BMA799

STRATEGIC MANAGEMENT

Lecture 12:

Strategic Evaluations

Learning objectives

• Describe strategy evaluation

• Identify the key results areas that can be used to improve business performance

• Explain how scenario planning can be used for strategy evaluation

• Comprehend how a company’s value can be created and analysed

• Recognise how the McKinsey 7-S model can be used for strategy evaluation and execution

• Discuss the balanced scorecard model as an approach to strategy evaluation

• Describe a framework to identify key success factors

• Appreciate the need for ongoing strategy evaluation in uncertain times

• Let us consider two key questions:

• Why, in the same market environment, do some companies prosper while others struggle to

What is strategy evaluation?

• Strategy evaluation refer to the appraisal of plans and results of plans that centrally concern or affect the basic mission of the enterprise

• Rumelt stated that the evaluation of strategy

should provide answers to the following questions:

• Are the objectives of the business appropriate?

• Are the major policies and plan appropriate?

• Do the results obtained to date confirm or refute critical assumptions on which the strategy rests?

What is strategy evaluation?

• It is argued that strategy evaluation should take three forms at different stages of the strategic

management process

• Performance evaluation and strategic appraisal

• Strategy evaluation and selection

• Evaluation and control of strategy outcomes

What is strategy evaluation?

• Evaluation also involves the determination of the value of the company’s strategy

• Managers can compare the value of a strategy before it was chosen with the value of the strategy after it has been implemented

• By doing so, managers identify whether the strategy has achieved what it was expected to achieve

• Monitoring is an ongoing activity performed within the

company to check if a strategy which is being

implemented is on the right track

Evaluative tools

• Strategic — ‘SWOT analysis’, ‘achievement of

objectives’, and ‘closing the planning gap’

• Financial — returns on investments, level of risk,

based on standard measures of organisational

performance

• Organisational — acceptability, involvement,

internal fit and consistency, motivational

Key result areas (KRAs)

• Key result areas (KRAs) are set of objectives that the organisation focuses on to ensure that it is

improving its operations in a way that will

increase business performance in the desired

Scenario planning in strategy evaluation

• Scenario planning involves the structural use of

management judgement to construct multiple

‘script-like characterisations of possible futures’

• These characteristics focus on the dynamics of how a particular future might unfold by studying causal relationships, dominating trends, the

behaviour of key players and internal consistency

Scenario planning in strategy evaluation

Fig 12.1

Scenario planning in strategy evaluation

• The evaluation of strategy within scenario planning process has to meet the following criteria:

• Transparency

• Ease of judgement

• Versatility

• Flexibility

PART B

Evaluating Value

Evaluating value

• Business is about creating value

• Value, in its broadest sense, refers to the amount

of money customers are willing to pay for a good

or service

• The challenge for business strategy is, first, to

create value for customers and, second, to

extract some of that value in the form of profit for the company

• Value can be created in two ways: by production and by commerce

Linkages between companies’ profit and

value

• Profit maximisation means maximising the net

present value of profits over the life time of a

company

• Profit maximisation leads to maximising the value

of the company

• The value of the company is calculated in the

same way as for any other asset — the net

present value (NPV) of the returns to that asset

Company value and shareholder value

• As part of strategy evaluation, some issues worth consideration are:

• How does maximising company value relate to the goal of maximising shareholder value?

• Does company value less debt really equal the share market value of a company’s equity?

• Is maximisation of company value same as

maximisation of shareholder value?

Applying DCF analysis to valuations

• A major difficulty in using DCF analysis to value companies and business units is forecasting cash flows sufficiently far into the future

• Given the level of uncertainty affecting most

businesses, even one-year forecasts of profits

and cash flows may be difficult

• To estimate future cash flows, assumptions may need to be made

Valuing strategies

• The same approach used to value companies can

be applied to evaluate alternative strategies

• Applying company value analysis to appraising

business strategies involves several steps:

• identifying strategy alternatives

• estimating the cash flows associated with each strategy

• estimating the implications of each strategy for the cost of capital

• selecting the strategy that generates the highest NPV

PART C

McKinsey 7s and the Balance Scorecard

The McKinsey 7-S model

• To achieve the desired performance targets,

organisational strategy should be supported with appropriate mechanisms of implementation

• Strategy implementation incorporates a broad

range of interrelated changes

• 7-S Model was introduced by McKinsey and

Company partners

• The model describes the seven factors for

effective strategy execution

The McKinsey 7-S model

• The 7-S model describes the seven factors critical for effective strategy execution

The balanced scorecard

• The balanced scorecard methodology provides

an integrated framework for balancing financial

and strategic goals, and extending these

balanced performance measures down the

organisation to individual business units and

departments

• Developed by Kaplan and Norton, it considers the long term performance of the organisation rather than predominantly financial criteria of short term nature

The balanced scorecard

• The performance measures combine the answers

to four questions:

• how do we look to shareholders?

• how do customers see us?

• what must we excel at?

• can we continue to improve and create value?

The balanced scorecard strategy map

Fig 12.2

Linkages between the 7-S model and the

balanced scorecard

Table 12.1

Assessment of the balanced scorecard

as an evaluation technique

• The balanced score card is an effective tool to assess strategy success by using financial and non-financial measures

• It examines strategy from four different

perspectives

• This technique forces organisations to pool

information that is normally dispersed among various documents of the organisation

Key success factors

• The factors that consistently lead to the success

of a strategy are referred to as the key success

factors

• There is an extensive body of a literature on

identification of these factors

• These factors have also been called critical

success factors or just success factors

Strategy evaluation in uncertain times

• Companies require flexibility in decision-making in uncertain times

• This is also relevant to strategy evaluation

• In a time of a rapid, fundamental, and universally perceptible change, expanding roles of

governments, re-evaluation of imbalances in

global trade and capital markets, and pervasive uncertainty, companies have to continuously

reassess their business models to unlock

unexpected opportunities

• This session has covered many issues of strategy formulation and evaluation including:

• Techniques of strategy evaluation

• Key success factors

• Scenario planning

• Value creation

• Frameworks of implementation