Slide of strategic management w3

Bma799 Strategic management Lecture Three: • Goals, Values and Performance Learning Objectives • Explain why modern organisations frequently possess multiple strategic goals • Explain the differences in the roles of goals, values and ethical positions in setting • • strategies Describe how strategic goals, values and ethical positions are developed Describe the role of the triple bottom line as an organisational value Learning Objectives • Differentiate between organisational values and value creation • Understand how the performance of an organisation is measure • Differentiate between historical and predictive financial performance measures • Describe the application of the balanced score card to performance measurement Organisational Goals • What is an organisational goal? • How is it linked with ‘values’ and ‘performance? • Is profitability as a goal an adequate indicator of organisational performance? • Why is ‘ethical position’ important to an organisation? Combining Goals, Values and Ethical Position Fig 3.1 Combining Goals, Values and Ethical Position • Goals represent the targets that the organisational strategy intends to achieve • Values represent the characteristics of the actions that the organisation takes to • achieve the goals Ethical position assists organisations in deciding which methods will be acceptable for achieving the goals Strategic Goals and Value • Organisations are expected to select goals that also create value for its stakeholders • There is some debate whether value should be only for stakeholders or simply • • shareholders It seems there is a global divide on the issue of shareholder versus stakeholder emphasis Continental European organisations prefer the stakeholder approach compared to their English speaking UK, Australia and North American counterparts Shareholder Versus Stakeholders • It is important from a Strategic Management perspective that organisations are clear as • to who should benefit from their value-creating-goals Two key contributors (among others) to this debate are: • • Milton Friedman C Handy • There is growing evidence that value creation for broader stakeholders tends to have a positive impact on the organisations economic performance Profitability Goals • Despite the move towards stakeholder driven goals, profitability continues be a key • driver of many organisations – particularly the commercial organisations Functions of profitability goals include: • Survival • Corporate control • Convergence of stakeholder interest • Ease and simplicity Part B Values and Social Responsibility Financial Performance Measures • There are two types of financial measures: • Historical measures: These measures represent the accrued cash value of aspects • of operations such as revenue, profits and inventory, levels usually over the previous financial year Predictive measures: These measures represent the future potential value of aspects of the operations based on assumptions such as the cost of capital Measuring Growth and Profit • Most organisations (including charitable) include measurements of sales, profit and growth in their evaluations of performance • In the case of not-for-profit organisations, surplus is calculated instead of profit as there are usually no shareholders or owners to collect profits Non-Financial Performance Measures • Organisational performance can also be measured through other measures of value • creation Some of the commonly used measure include: • • • Customer satisfaction levels Independent quality assessment Rate of innovation • It is advisable to compare non financial measures against an industry benchmark of best practice The Balanced Scorecard • Developed by Kaplan and Norton, this methodology provides an extended framework of assessing organisational performance • It helps organisations to seek answer to four questions: • How we look to shareholders? • How customers see us? • What must we excel at? • Can we continue to improve and create value? Historical Financial Performance Measures • Historical financial performance measures are also known as Accounting Ratios • They are determined only after a predefined period of operation • Despite the limitations to assist in changing strategic direction, these measures continue to be used by many organisations Profitability Ratios Table 3.1 Disaggregating Return on Capital Employed Fig 3.3 Part D Predictive Performance Measurement Predictive Financial Performance Measures • Predictive financial performance measures that can be used to identify the increase in business value include: – economic value added (EVA) – market value added (MVA) – shareholder value added (SVA) – market to book ratio (MBR) – cash value added (CVA) – cash flow return on investment (CFROI) Shareholder Value Analysis • Shareholder value analysis (SVA) measures business performance from the perspective of the shareholders • SVA can be calculated for various periods into the future as shown in the next slide Shareholder Value Analysis Economic Value Added • Economic value added (EVA) is measured as net operating profit after tax (NOPAT) less the cost of capital • In recent times this approach has gained wider acceptance Performance Analysis in Practice • It is important to recognise that all performance measures share many common • • features In order to decide which ones to use and how to use them for a particular organisation, it is important to have a clear understanding of the relative strengths and weakness of each performance measure The selected measures must reflect the strategic objectives of the organisation and the macro environment in which the organisation exists Summary • In this chapter we have explored the development of goals, values and performance measurement as an integral part of the strategic management process • It is important to acknowledge that strategy is ultimately a quest to create the maximum value for stakeholders • The value statements of an organisation are very important in unifying the activities and contributions of employees and are much more motivational than profit performance objectives Summary • In recent times it has become increasingly important for organisation to focus on pluralistic objectives that contribute to society as well as owners or shareholders and measuring these using the approaches such as the balanced scorecard • Organisations should consider using both forward and backward looking measure of performance ... their evaluations of performance • In the case of not-for-profit organisations, surplus is calculated instead of profit as there are usually no shareholders or owners to collect profits Non-Financial... of aspects of the operations based on assumptions such as the cost of capital Measuring Growth and Profit • Most organisations (including charitable) include measurements of sales, profit and... performance is essential for all types of organisations – commercial • • and non-for -profit etc Measurement of financial performance in particular is a critical part of overall performance assessment