Module 5

Strategic Evaluation and Control

MGT 131

STRATEGIC MANAGEMENT

RONALD REAGAN T. ALONZO

Assistant Professor II

LEARNING MODULE

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 Module 5
Strategic Evaluation and Control

MODULE 5
STRATEGIC EVALUATION AND CONTROL
Introduction

This module introduces students to the concept of strategic evaluation visa vie
operations control. It will focus on barriers in strategic evaluation and the role of
organizational systems in strategic evaluation. Finally the unit will look at the
control process and the techniques of strategic evaluation and control.

Upon completion of this module you will be able to:

 To understand the concept of strategic evaluation and control.

 To distinguish strategic control from operational control
 To understand the barriers in strategic evaluation and control
 To understand the role of strategic evaluation and control

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Module 5: Strategic Evaluation and Control

THE CONCEPT OF STRATEGIC EVALUATION AND CONTROL

Strategic evaluation and control is related to that aspect of strategic management

through which an organization ensures whether it is achieving its objectives
Contemplated in the strategic action. If not, what corrective actions are required
for strategic effectiveness? Some scholars have defined strategic evaluation as
follows: “Evaluation of strategy is that phase of the strategic management
process in which the top managers determine whether their strategic choice as
implemented is meeting the objectives of the enterprise. There are two aspects in
this phase of strategic management:

 evaluation which emphasizes measurement of results of a strategic action

 And control which emphasizes on taking necessary actions in the light of
gap that exists between intended results and actual results in the strategic
action.

However, because of on-going nature of strategic evaluation and control process

both these are intertwined. In practice, the term control is used in a broad sense
which includes evaluative aspect too because unless the results of an action are
known, control actions cannot be taken.

Strategic and Operational Control: A Comparison

Strategic control is the processes of taking into account the changing

assumptions both external and internal to the organization on which a strategy is
based, continually evaluating the strategy as it is being implemented and taking
corrective actions to adjust strategy according to changing conditions or taking
necessary actions to realign strategy implementation. For strategic evaluation
and control following questions are relevant:

 Are the premises made during the strategy formulation process proving to
be correct?
 Is the strategy being implemented properly?
 Is there any need for change in the strategy? If yes, what is the type of
change required to ensure strategic effectiveness?

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Module 5: Strategic Evaluation and Control

Operational control focuses on the results of strategic action and is aimed at

evaluating the performance of the organization as a while, different SBUs and
other units. The relevant questions for operational control are:

 How is the organization performing?

 Are the organizational resources being utilized properly?
 What are the actions required to ensure the proper utilization of resources
in order to meet organizational objectives?

Operational control is used by almost every organization in some form or the

other. There are two types of operational control post-action and steering to
evaluate the outcome of a strategy. In post-action control, which measures,
results after an action is completed for example, measurement of organizational
performance in terms of return on investment.

Second is the steering control, which is designed to detect deviations from

standards and to permit corrective actions before an operation is fully,
completed, for example, quality control. Both these are used in the organization
tem different purposes and at different levels. For example, post-action control is
mostly used by the top management so as to identify the total results of a
strategy, while second type of control is exercised by functional and tower level
managers to affect periodic control so that the results are achieved.

Difference between Strategic and Operational Control

Strategic control and operational control both differ from each other in terms of
their aim main concern focus time horizon, and techniques used. Differences
between the two are presented below.

Table: Difference between strategic and operational control

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Module 5: Strategic Evaluation and Control

Barriers in Strategic Evaluation and Control

Strategic evaluation and control being an appraisal process for the organization
as a whole and people who are involved in strategic management process either
at the stage of strategy formulation or strategy implementation or both, is not free
from certain barriers and problems. These barriers and problems center around
two factors: motivational and operational. Let us see what these problems are
and how these problems may be overcome.

Motivational Problems

The first problem in strategic evaluation is the motivation of managers

(strategists) to valuate whether they have chosen correct strategy after its results
are available. Often two problems are involved in motivation to evaluate the
strategy: psychological problem and lack of direct relationship between
performance and rewards.

 Psychological Barriers. Managers are seldom motivated to evaluate their

strategies because of the psychological barriers of accepting their
mistakes. Top management formulates the strategy, which is very
conscious about its sense of achievement.
 Lack of Direct Relationship between Performance and Rewards. Another
problem in motivation to review strategy is’ the lack of direct relationship
between performance achievement and incentives. It is true that
performance achievement itself is a source of motivation but this cannot

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always happen. Such a situation hardly motivates the managers to review

their strategy correctly. This happens more in the case of family-managed
businesses where professional managers are treated as outsiders and top
positions, particularly at the board level, are reserved for insiders.

Operational Problems

Even if managers agree to evaluate the strategy, the problem of strategic

evaluation is not over, though a beginning has been made. This is so because
strategic evaluation is a nebulous process; many factors are not as clear as the
managers would like these to be. These factors are in the areas of determination
of evaluative criteria, performance measurement, and taking suitable corrective
actions. All these are involved in strategic evaluation and control.

Role of Strategic Evaluation and Control

Strategic evaluation and control, though very important phase of strategic

management, is often overlooked by strategists on the premise that once they
have formulated a strategy and implemented, their role in strategic management
is over. They remain mired with daily control reports, which can be taken even at
lower levels. This approach may be all right when there is not high stake involved
in a strategy but fatal when the stake is high. Without strategic evaluation and
control, strategists have no means to measure whether the chosen strategy is
working properly or not. When strategic evaluation and control is undertaken
properly, it contributes in three specific areas:

 Measurement of organizational progress,

 Feedback for future actions, and
 Linking performance and rewards.

Participants in Strategic Evaluation and Control

Since strategic evaluation and control is a part of strategic management process,

all those persons who participate in strategy formulation and implementation
should also participate in strategic evaluation except those who act in advisory
capacity Board of directors, chief executive, other managers, corporate, planning
staff, consultants participate in strategic management process. Out of these
corporate planning staff and consultants act either advisors or facilitators Thus,

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three groups of personnel are actively involved in strategic evaluation and control
though their areas of evaluation and control differ.

In some cases, outside agencies like financial institutions or government, mostly

to the case of public sector enterprises also participate in strategic evaluation
and control either through their participation in board of directors or having power
to interfere with management practices. However, the role of financial institutions
in strategic evaluation and control is quite limited excel through their nominee’s
on board of directors. In the case of public sector enterprises, the role of
government in strategic evaluation is perform’ through nomination of board
members and through controlling ministries of particular enterprises. In some
specific situations, authorities may be constituted at above the board level to
evaluate the performance of group companies.
.

Role of Board of Directors

Board of directors of a company, being the trustee of shareholders’ property, is

directly answerable to-them. Thus, board should be directly involved in strategic
evaluation and control. However, since board does not participate in day-to-day
management process, it evaluates the performance of the company concerned
after certain intervals in its meetings. Therefore, the role of board of directors is
limited to evaluating and controlling those aspects of the organizational
functioning, which have long-term implications.

Role of Chief Executive

The chief executive of an organization is responsible for overall performance.

Therefore, his role is quite crucial in strategic evaluation and control. Though he
is not involved in evaluation of routine performance, which is left to other
managers, he focuses his attention on critical variations between planned and
actual. Generally, he applies the principle of management by exception, which is
a system of identification and communication of that signal which is critical and
needs the attention of a high-level manager. Depending on the size of the
organization, the chief executive’s role varies in the context of evaluation and
control on day-to-day basis.

Role of Other Managers

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Besides board of directors and chief executive, other managers are also
involved in strategic evaluation and control. These are finance managers, SBU
managers, and middle-level managers. Their role in strategic evaluation and
control is as follows:
 Finance managers are primarily concerned with finding out deviations
between planned and actual performance expressed in monetary terms.
These are done through financial analysis, budgeting, etc.
 SBU managers are responsible for overall evaluation and control of their
respective strategic business units. In fact, they are the chief executives of
their own SBUs except that they report to the chief executive of the
organization from whom they seek directions.
 Middle-level managers, mostly functional managers and subunit managers
are responsible for evaluation and control of their respective functions and
sub-units. These managers are more concerned with day-to-day
operational control and prepare reports to be used by higher-level
managers. For example - a production manager is more interested in
controlling production volume, production cost, product quality, etc.

Role of Organizational Systems in Evaluation

Strategic evaluation operates in the context of various organizational systems.

An organization develops various systems which help in integrating various parts
of the - organization. The major organizational systems are: information system,
planning system, motivation system, appraisal system, and development system.
All these systems play their role in strategic evaluation and control some of these
systems are closely and directly related and some are indirectly related to
evaluation and control.

Development System

Development system is concerned with developing personnel to perform better in

their present positions and likely future positions that they are expected to
occupy. Thus, development system aims at increasing organizational capability
through people to achieve better results. These results, then, become the basic
for evaluation and control.

Stages of Control
Depending on the stages at which control is exercised, it may be of three types:

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1. Feed Forward Control. Feed forward control involves evolution of inputs

and taking corrective action before a particular sequence of operation
completed. Thus, it attempts to remove the limitations of time lag in taking
corrective action. Feed forward control monitors inputs into a process
determine whether the inputs are as planned. If inputs are not as planned
corrective action is taken to adjust the inputs according to the plan so that
the desired results are achieved within the planned inputs. It is just like
hunting a duck. A hunter will always aim ahead of a duck’s flight
compensate for the time lag between a shot and a hoped for hit. To be
effective, feed forward control should meet the following requirements:
 Thorough and careful analysis of the planning and control system
must be made, and the more important input variables identified.
 A model of the system should be developed.
 The model should be reviewed regularly to see whether the input
variables identified and their relationship still represent realities.
 Data on input variables must be regularly collected and put into the
system.
 The variations of actual input data from planned inputs must be
regularly assessed, and their impact on expected results is
evaluated
 Action must be taken to show people problems and the measure
required to solve them.

2. Concurrent Control. Concurrent control is exercised during the operation of

a program. It provides measures for taking corrective action or making
adjustments while the program is still in operation and before any ma damage
is done. In the organizational context, many control activities are based on
this type of control, for example, quality control during the operation, or safety
check in a factory, here, the focus is on the process itself. Data provided by
this control system is used to adjust the process. Many strategic controls fall
in this category.

3. Feedback Control. Feedback control is based on the measurement of the

results of an action. Based on this measurement, if any deviation is found
between performance standards and actual performance, the corrective
action is undertaken. The control aims at future action of the similar nature so
that there is conformity between standards and actual. This is required
because, sometimes, feed forward or concurrent control is not possible to

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apply, for example, many personal characteristics of an individual which go

into behavioral processes are not measurable, and hence feed forward
control is difficult to apply. In the business organizations, top management
control is mostly based on feedback. To Intake feedback control effective, it is
essential that corrective action is taken as soon-as possible.

Control Process

Control, particularly, a process consisting of four major steps. In order to exercise

control, managers have to take four steps outlined below:

 Setting performance standards

 Measuring actual performance
 Analyzing variance
 Taking corrective actions.

Techniques for strategic evaluation and control

Financial Performance Control

Financial performance control, or simply referred to as financial control, is

relevant for those aspects of business operations whose outcomes are
expressed in monetary terms. Financial control is exercised at operative level as
well as at overall organization level though techniques involved are different.
Financial control techniques are grouped into three categories from strategic
management point of view:

1. Budgetary control,
2. Financial ratio analysis, and
3. Return on investment.

Budgetary Control

Budgetary control is derived from the concept and use of budgets. A budget is
the financial expression of various organizational operations and the way in
which budgets are prepared as tools for planning. Thus, budgetary control is a
system which uses budgets as a means for planning and controlling entire
aspects of organizational activities or parts thereof. Some scholars have defined

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budgetary control as follows: “Budgetary control is a process of comparing the

actual results with the corresponding budget data in order to approve
accomplishments or to remedy differences by either adjusting the budget
estimates or correcting the cause of the difference.” Some people treat budgetary
control only as a technique of cost control. However, the scope of budgetary
control extends beyond cost control with the introduction of several types of
budgeting.

Financial Ratio Analysis

Financial ratio analysis identifies the relationship between two financial variables
in order to derive meaningful conclusion about their behaviour. Most of the
scholars have defined financial ratio analysis as “a process of evaluating
relationship between component parts of financial statements to obtain a better
understanding of a firm’s position and performance. The type of relationship to be
investigated depends on the objective and purpose of evaluation. In the case of
measurement of overall performance, generally, four groups of ratios are
considered: liquidity ratios, activity ratios, leverage ratios, and profitability ratios.
A brief description of these ratios is presented here.

1. Liquidity Ratios Liquidity ratios indicate the organization’s ability to pay its
short term debts. These ratios are generally expressed in two forms:
current ratio and quick ratio. Current ratio shows the relationship between
current assets and current liabilities. This indicates the extent to which
current assets are adequate to pay current liabilities. Quick ratio indicates
the relationship between liquid assets (cash in hand and with bank and
short-term debtors) and current liabilities. It helps in identifying the
organization’s ability to pay its current liabilities without considering
inventory in hand.
2. Activity Ratios Activity ratios show how funds of the organization are being
used. These ratios are in the form of inventory turnover ratio, receivable
turnover ratio, and assets turnover ratio. Inventory turnover ratio indicates
the number of times inventory is replaced during the year and shows how
effectively inventory has been managed. Receivable turnover ratio shows
how promptly the organization is able to collect dues from its debtors.
Assets turnover ratio indicates how effectively assets have been used to
generate sales.
3. Leverage Ratios Leverage ratios indicate the relative amount of funds in
the business supplied by credits/financiers and shareholders/ owners.

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These ratios are in the form of debt-equity ratio, debt total capital ratio,
and interest coverage ratio. Debt-equity ratio indicates the proportion of
debt in relation to equity and indicates the financial strength of the
organization. Debt-total capital ratio shows the proportion of debt to total
capital employed. This also indicates the financial strength. Interest
coverage ratio shows the interest burden being borne by the organization
in relation to its profit.
4. Profitability Ratios Profitability ratios show the ability of an organization to
earn profit in relation to its sales and/ or investment. Profitability ratios are
expressed in terms of profit margin as well as return on investment. Profit
margin, net profit or gross profit, is expressed in the form of relationship
between profit and sales and indicates the degree of profitability of the
business. Return on investment is measured by relating profit to
investment. Return on investment is the most comprehensive technique
for controlling overall performance. Therefore, somewhat more elaborate
discussion is presented.

Social Performance Control

Social responsibility is a part of overall business objectives of an organization.

Most of the organizations set their social objectives either explicitly or implicitly
depending on organizational practices. Social performance control deals with
assessing the extent to which an organization is achieving its social objectives.
This requires defining the basis on which social performance should be
evaluated and identifying the degree to which social performance is effective.
Thus, social performance control involves two aspects:

1. Approaches for measuring social performance and

2. Social audit.

Approaches for Measuring Social Performance

Measurement of social performance is quite fluid because of its qualitative

nature. In order to overcome the problem of fluidity, a separate branch of
accounting, known as social accounting, has been developed. Robert Elliot has
defined social accounting as “systematic assessment and reporting on those
parts of a company’s activities that have a social impact-the impact of corporate
decisions on environmental pollution, consumption of non-renewable resources,

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and ecological factors; the rights of individuals and groups; maintenance of public
services; health, safety, education and many other social concerns.

Social Audit

When an organization undertakes social activities, it must also evaluate the

extent to which these activities are performed effectively. Social audit is primarily
aimed to measure the effectiveness of these activities. Scholars have defined
social audit as follows: “Social audit is a commitment to a systematic assessment
of and reporting on some meaningful, definable domain of the company’s
activities that have social impact.”

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