Slide of strategic management w12

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 Introduction • Let us consider two key questions: • Why, in the same market environment, 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 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 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 Scenario planning in strategy evaluation Fig 12.1 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 • strategy • structure • systems • staff • skills • style/culture • shared values 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 we look to shareholders? • how 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 Summary • 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 ... 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... 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... 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