Ch.13 Evaluating strategies Flashcards
What is a Gap analysis?
Gap analysis is a tool that compares actual or projected performance with desired performance. This can
highlight areas of underperformance or future challenges.
Various metrics can be used
* revenues and profits for for-profit organizations
* service quality and funds raised for non-profits.
Gap size indicates how much the strategy needs to change. A widening gap suggests more significant strategic adjustments are needed.
What are Economic performance measures? Describe three of them and why it can be conflicting.
Economic Performance Measures: Direct measures of economic outcomes including:
- Performance in product markets
- Accounting measures of profitability
- Financial market measures
Explain the three Economic Performance Measures and include the Du Pont Model
- Performance in product markets:
(e.g., sales growth, market share). Variations in these figures may be seen as a lead indicator of a company’s competitiveness in its market. - Accounting measures of profitability (e.g., profit margin, ROCE (retur on capital employed). Useful technique for unpacking the drivers of company profitability: The Du Pont model dissects a company’s ROCE to identify value-
adding components, or components that subtract from the whole. Powerful in tracking changes over time and in comparison with competitor ratios. - Financial market measures:
(e.g., share price movements). Key indicator of market sentiment regarding the expected success of an organisation.
Why can Economic Performance Measures be conflicting?
May seem objective, but can be conflicting. Ex. Sales growth can be achieved by cutting prices, but this means less profit from each sale: consequently profit margin falls.
Measures - sales growth and profit margin may point different
directions - so economic performance is best evaluated by more than one measure.
What are Effectiveness measures and name the 2 main techniques?
Broader set of performance criteria than just economic measures and consider factors like operational efficiency or stakeholder relevance.
- Balanced Scorecard
- Triple Bottom Line
Both the balanced scorecard and the tripple bottom line share a view that overall effectiveness depends not only on economic performance, but on a range of factors that support the long-term prosperity of the organisation.
What is the Balanced Scorecard?
Considers 5 perspectives on performance simultaneously in order to prevent the dominance of a single perspective:
1. financial
2. customer
3. internal business
4. innovation and learning
5. sustainability
The performance measures of each perspective can be cascaded down through the organisation to
individual business units to allow overall alignment. By integrating overall financial goals with strategic and operational targets, the balanced scorecard ensures that the pursuit of short-run financial goals is not at the expense of the longer-term strategic positioning of the company.
What is the Tripple Bottom Line?
pays explicit attention to CSR and the environment. Assesses performance on 3 dimensions:
1) economic measures of performance (sales, profits, share price)
2) social measures (employee
training, health)
3) environmental measures (recycling). Used in techniques like KPMG’s ‘True Value’ assessment.
Explain three ways of evaluating performance
To evaluate performance, comparisons are essential. Performance relative to what? 3 main types are:
- Organizational targets:
(e.g., economic outcomes, vision, mission). Performance against organisational targets can be approached via gap analysis. - Trends over time:
(e.g., performance improvement or decline). → good or bad strategy?
3: Comparable organizations:
(e.g., competitors or equivalent entities). Benchmarking can be useful here.
What are some complexitities of performance analysis?
Performance measures can sometimes conflict. For instance, sales growth might be achieved at the cost of reduced profit margins.
Organizations liable to manipulate outcomes in order to meet KPIs. For example, to meet specific KPIs, companies might defer expenditures or book sales orders earlier than planned.
Perception management: CEOs may communicate with key stakeholders to ensure favorable interpretations of strategies and results.
Changing importance: Performance metrics that matter can evolve over time, influenced by external factors like market dynamics, financial crises, or evolving social responsibilities.
What is SAFE and what does it stand for?
SAFE is a methodology used to determine preferred strategic options, especially when addressing organizational underperformance. It stands for:
Suitability:
Does the strategy address the organization’s key opportunities and threats?
Evaluates if a proposed strategy addresses an organization’s main challenges and aligns with its strategic position.
Acceptability:
Will stakeholders approve of the strategy? Is the associated risk tolerable? Are potential returns
acceptable?
Feasibility:
Can the strategy be practically executed? Is funding available? Are required resources and skills obtainable?
Evaluation:
Which strategies are suitable, acceptable, and feasible, and which best meets these criteria? identifies strategies that meet the criteria of suitability, acceptability, and feasibility. It’s a synthesis
process that ensures the chosen strategy is comprehensive and works in all dimensions.
What concepts and frameworks can be used to determine suitability?
PESTEL: Helps identify major environmental changes, such as industry cycles or convergences.
Scenarios: Assists in determining the need for contingency plans based on the extent of uncertainty.
Five Forces: Aids in understanding industry attractiveness and competitive forces.
Strategic Groups: Helps in identifying the need to reposition to a more appealing group or strategic space.
Strategic Resources and Capabilities: Focuses on eliminating weaknesses and capitalizing on strengths.
Value Chain: Assesses opportunities for vertical integration or outsourcing.
What techniques can be used to analyse suitability?
Ranking and Screening: Strategies are ranked based on their alignment with key strategic factors. This can be further refined by assigning weightings to certain factors.
Scenario Analysis: Strategies are tested against different future scenarios to determine which are most suitable.
VRIO Analysis: Compares strategies against the VRIO criteria (Valuable, Rare, Inimitable, Organizationally-
supported) to determine potential competitive advantages.
Decision Trees: Uses a step-by-step process to eliminate strategies that don’t meet certain criteria, leading to the identification of the most suitable options.
What are the three types of expected performance outcomes of Acceptability?
Acceptability is concerned with whether the expected performance outcomes of a proposed strategy meet the expectations of stakeholders. These can be of three types: the ‘3 Rs’: Return, Risk, and stakeholder Reactions.
- Return:
Returns are measures of the financial profitability and effectiveness of a strategy.
In the private sector, stakeholders expect financial returns on investments. The public sector focuses on ‘value for money’ for services delivered. - Risk:
The extent to which strategic outcomes are unpredictable, especially with regard to possible negative outcomes.
Risk evaluates the unpredictability of strategic outcomes. - Reaction of Stakeholders:
Acceptability also considers how stakeholders might react to a proposed strategy.
Stakeholders, such as owners, bankers, government agencies, employees, and customers, will have varied responses based on their interests and concerns.
Name 2 ways of assessing feasibility
- Financial Feasibility:
Essential to forecast the cash flow implications of a strategy.
Managers need to understand various funding sources and their pros and cons.
The life-cycle stage of a business determines funding implications:
* Start-up businesses: High-risk, might seek funding from venture capitalists or ‘business angels’.
- Growth businesses: Might consider equity capital, possibly via public flotation.
- Mature businesses: Lower business risk and can generate regular surpluses, making both debt and equity financing viable.
- Declining businesses: Equity finance may be challenging, but borrowing against residual assets is
possible.
- People and skills:
The success of a strategy often hinges on the organization’s human resources.
What 4 qualifications
need to be made about the The evaluation process?
- Management Judgement:
While criteria help analyze strategic options, management’s judgment remains pivotal,
especially when faced with conflicting data. - Consistency between the different elements of strategy: Different elements of a strategy should work together
harmoniously. The strategy’s components, like competitive strategy, strategy direction, and methods of pursuing strategy, should be consistent. - The implementation and development of strategies (Ongoing Evaluation):
The strategy’s implementation may
reveal new insights or challenges, possibly leading to adjustments or even a strategy’s abandonment. - Strategy Development in Practice: Systematic evaluation isn’t always the norm. Strategies can evolve in various ways, and understanding the practical aspects of strategy development is crucial.
