business ethics

S1 2016MKT3002 Business Strategy in a Global Environment

Lecture 11 Strategy evaluation(Grant, Butler, Orr & Murray 2014 Chapter 12)

Dr Peng Zhou (Joe)School of Management & Enterprise

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

© 2016 by Dr Peng Zhou 1

Learning objectives (cont.)

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


Introduction

Let us consider two key questions: Why, in the same market environment, do some

companies prosper while others struggle to survive?

How does a company’s internal characteristics such as resources, capabilities and core competencies, enable it to create a competitive advantage?


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 (1998) 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?


Three forms of strategy evaluationIt is argued that strategy evaluation should take three forms at different stages of the strategic management process Performance evaluation and strategic appraisal : the first

step in developing a new strategy or in the fundamental reappraisal of existing strategy

Strategy evaluation and selection: the prospective appraisal of strategy options and the selection of a preferred strategy

Evaluation and control of strategy outcomes: this follows strategy implementation to ensure strategic goals are met


Other issues of 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

Moroney (2000) categorises three groups of evaluative tools as: 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 areas

KRAs can be used to prioritise objectives and the actions necessary to achieve them

Rouse’s ‘four goal structure’ is a useful framework


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

This tool enables companies to evaluate a given strategy under the range of possible futures that might develop


Testing the performance of strategies against scenarios


Criteria for using scenario planning in strategy evaluationThe evaluation of strategy within scenario planning process has to meet the following criteria: Transparency : the process of scenario planning should be

clear to all managers from various divisions of the company Ease of judgement: this can be achieved by judgement

performed in a number of simple steps familiar to the decision makers

Versatility: the evaluation should be able to incorporate both financial and nonfinancial objectives

Flexibility: changes in perspective can be accommodated


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

The difference between the value of a company’s output and the cost of its material inputs is its value added


Linkages between companies’ profit & 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 & 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


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 (cont.)The 7-S model describes the seven factors critical for effective strategy execution strategy structure systems staff skills style/culture shared values


The balanced scorecard (BSC) The balanced scorecard (BSC) 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 (cont.)The performance measures combine answers to four questions: How do we look to shareholders? The financial perspective is composed of

measures such as cash flow, sales and income growth, and return on equity How do customers see us? The customer perspective comprises measures

such as goals for new products, on-time delivery, and defect and failure levels

What must we excel at? The internal perspective relates to internal business processes such as productivity, employee skills, cycle time, yield rates, and quality and cost measures

Can we continue to improve and create value? The innovation and learning perspective includes measures related to new product development cycle times, technological leadership and rates for improvement


Balanced scorecard strategy gap


Linkage between the 7-S model & the balanced scorecard


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

This gives the company an integrated overview of various perspectives of the business


Key success factors (KSFs) 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 However, some authors argue that this concept is an

oversimplification of a highly complex situation because a host of factors influence a company’s performance


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


Classroom exercises Read Case Study 7: Not just a game on pages 462 to

469 of the textbook. Discuss the following question with your classmates if

you are an on-campus student or with your fellow students in the Lecture 10 online discussion forum if you are an external student.

How do stakeholders influence the strategic position of Australian football clubs? Provide examples in your answer.


Summary

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

Techniques of strategy evaluation

Scenario planning

Value creation

Balanced scorecard (BSC)

Key success factors (KSFs)


business ethics

Documents