14 – Strategic Evaluation and Control

Introduction

The ultimate stage of strategic management is strategic evaluation and control. Its primary goal is to guarantee that the strategy achieves its goals and objectives. It compares performance to the desired results and provides management with the feedback needed to take corrective action.

Strategy evaluation, according to Fred R. David, consists of three main activities:

1) Examining the underlying bases of a firm’s strategy
2) Comparing expected results with actual results
3) Taking corrective action to ensure that performance conforms
to plans.

Even the best-laid plans might become obsolete as a company’s external and internal circumstances evolve. Managers should, therefore, establish key milestones and create strategic thresholds to help them understand changes in a strategy’s underlying assumptions and, if necessary, revise the core strategic direction. As a result, the evaluation process serves as an early warning system for the organisation.

Strategic evaluation is often conducted at two levels: strategic and operational. At the strategic level, managers attempt to analyse the compatibility of strategy with the environment. At the operational level, the emphasis is on determining how an organisation effectively pursues a specific strategy. Various control systems are utilised for this goal at the strategic and operational levels.

14.1 Nature of Strategic Evaluation and
Control

Strategic assessment and control are described as the process of determining the success of a given strategy in accomplishing organizational goals and implementing corrective action as needed. According to Pearce and Robinson, strategic control is concerned with tracking a strategy as it is implemented, detecting problems or changes in its underlying premises, and making necessary adjustments. Strategic control, as opposed to post-action control, aims to manage the action on behalf of strategies while it takes place, and the end outcome is still several years away.

Strategic control in an organisation is analogous to “steering control” in a ship. Steering, for example, keeps a ship stable on its course. Similarly, strategic control systems detect the extent to which strategies successfully achieve goals and objectives, and this information is given to decision-makers for remedial action to be taken promptly. Strategic managers can lead the organisation by implementing incremental changes or by making more drastic changes, such as changing the strategic direction entirely. Thus, strategic control systems provide a framework for tracking, analysing, and reorienting the operation of the firm’s strategy.

14.1.1 Types of General Control Systems

There are three kinds of general control systems:

1. Output control (i.e. control on actual performance results)
2. Behaviour control (i.e. control on activities that generate
the performance)
3. Input control (i.e. control on resources that are used in
performance)

1. Output Control:

Output controls focus on the outcome and indicate what is to be accomplished. This is achieved by establishing objectives, targets, or milestones for each division, department, unit, and executive and measuring actual performance. These controls are applicable when precise output measures have not been agreed upon. Rewards and incentives are frequently tied to performance goals.

Output controls include, for example, sales quotas, precise cost reduction or profit targets, milestones, or deadlines for project completion.

2. Behaviour Control:

Behaviour controls define how something should be done. This is accomplished using regulations, rules, standard operating procedures, and directives from superiors. When performance results are challenging to measure, these controls are the most appropriate. Rules standardise behaviour and make results predictable. When employees obey the rules, actions are taken, and choices are made the same way every time. As a result, predictability and precision are achieved, which is the goal of all control systems. The following are the primary mechanisms of behaviour control:

1. Operating budgets
2. Standard operating practices
3. Rules and procedures

Example: The ISO 9000 Standards Series on quality management and assurance, developed by the International Standards Association in Geneva, Switzerland, is one example of an increasingly common behaviour control. The ISO 9000 series is a method of recording that closely adheres to a company’s quality procedures. Many corporations worldwide see ISO 9000 accreditation as proof that the company delivers high-quality products.

3. Input control:

Input controls indicate how much of an employee’s knowledge, skills, and abilities will be employed in performance. These controls are especially useful when measuring output is challenging.

14.1.2 Basic Characteristics of Effective
Evaluation and Control System

Effective strategy evaluation systems must meet several fundamental needs. They have to be:

a. Simple:

Strategy evaluation should be simple, thorough, and not overly limiting. Complex systems frequently confuse people and achieve nothing. An efficient evaluation system’s simplicity, not the complexity, is the litmus test.

b. Economical:

Strategy evaluation efforts must be cost-effective. Excessive regulations can cause more harm than good.

c. Meaningful:

Strategy evaluation activities should be relevant, directly related to the company’s goals, and useful to managers about tasks over which they have control and influence.

d. Timely:

Strategy evaluation activities should provide information promptly. For example, if a company has diversified into a new business by acquiring another company, evaluative data may be required at regular intervals. The control’s time dimension must correspond with the period of the event being measured.

e. Turthful:

Strategy evaluation should be structured to show what is going on accurately. Information should be used to facilitate action and directed to those who need to act on it.

f. Selective:

Control systems should concentrate on chosen criteria, such as key aspects that are critical to performance. They do not need to concentrate on insignificant deviations.

g. Flexible:

They must be adaptable to deal with changing conditions.

h. Suitable:

Control systems should be appropriate for the demands of the organisation. They must be appropriate for the nature and requirements of the job and the region to be controlled.

i. Reasonable:

Control standards must be reasonable. Frequent measurements and prompt reporting may make control more difficult.

j. Objective:

A control system will only be effective if it is objective and impersonal. It should not be arbitrary or subjective. People may become resentful if they do not.

k. Acceptable:

Controls will not work unless the people who use them find them acceptable.

l. Foster Understanding and Trust:

Control systems shouldn’t be in charge of making decisions. They should instead promote mutual understanding, trust, and common sense. No department should fail to collaborate with another regarding strategy evaluation and control.

m. Fix Responsibility for Failure:

To be effective, a control system must establish responsibility for failure. Detecting deviations is pointless unless one knows where they occur and who is to blame. The control system should also identify which corrective measures are required.

There is no such thing as an optimal strategy evaluation and control system. An organization’s size, management style, purpose, problems, and strengths all affect its final design.

14.2 Strategic Control

A sort of “steering control” is strategic control. We must monitor the approach as it is implemented, identify any faults or changes in the projections, and make any necessary revisions. This is especially significant because the implementation process takes a long time to see benefits. Strategic controls are thus required to guide the firm through these developments.

14.2.1 Types of Strategic Control

Strategic controls are classified into four types:

1. Premise Control:

Premise Control Strategy is based on various assumptions or forecasts known as planning premises. Premise control examines if the assumptions on which the strategy is built are still true systematically and continuously. If a critical premise is no longer valid, the approach may need to be revised. The earlier these incorrect assumptions are identified and rejected, the higher the odds of modifying the strategy. The premise control considers two types of factors:

a. Environmental Factors:

Changes in environmental factors such as the rate of inflation, changes in technology, government regulations, demographic and social changes, and so on impact a firm’s performance. Although the firm has little or no control over environmental factors, they significantly impact strategy success because strategies are generally based on key assumptions about them. For example, a company may anticipate a substantial increase in demand and embark on an expansion strategy. If a sudden recession and demand for the firm’s products fall, it may have to modify its strategic direction.

b. Industry Variables:

Industry factors have an impact on a company’s performance. Some industry aspects about which assumptions are made are competitors, suppliers, buyers, substitutes, new entrants, etc. If any of these assumptions prove incorrect, the strategy may need to be modified.

2. Strategic Surveillance:

Strategic surveillance is a broad-based vigilance activity encompassing all everyday operations inside and outside the organisation. Such surveillance can track incidents likely to jeopardise a firm’s strategy. Some information sources for strategic surveillance include business periodicals, trade conferences, chats, observations, etc.

3. Special Alerts Control:

Unexpected events can radically alter the path of a company’s plan. Such circumstances necessitate an immediate and intense rethinking of the firm’s strategy.

For example, the sad events of September 11, 2001, wreaked havoc on many US businesses, particularly those in the aviation and hotel industries. A sudden acquisition of a strong competitor or an unanticipated product difficulty (such as Firestone’s defective tyres) might shatter a firm’s plan and necessitate a speedy rethink of the strategy. Firms typically build contingency plans and crisis teams to deal with such rapid, unexpected incidents.

4. Implementation Control:

Strategy implementation occurs over a long time as a succession of phases, programmes, investments, and changes. Resources are allocated, key personnel are hired, special programmes are launched, and functional groups begin strategy-related activities. Implementation control aims to determine whether or not the plans, programmes, and policies steer the organisation toward the specified goals. Implementation control determines if the overall strategy should be changed based on the performance of specific units and individuals involved in strategy implementation. There are two main ways to achieve implementation control:

a. Monitoring Strategic Thrusts:

Strategic thrusts are minor key tasks that must be completed for the overall strategy to be successful. They are crucial to the success of the strategy. One technique is to agree early in the planning process on which thrusts are crucial to the strategy’s success. Managers in charge of these implementation controls will separate them from other activities and monitor them regularly. Another option is to employ stop/go evaluations related to a succession of these criteria (time, costs, success, and so on) associated with a particular push.

b. Milestone Reviews:

Milestones are significant events that must occur during plan execution. These milestones could be established based on.

(a) Critical events
(b) Major resource allocations
(c) Time frames, etc.

Milestone reviews are instances of network controls such as PERT/CPM for project implementation. Following a milestone review, managers frequently reassess the strategy to determine whether the firm’s plan should be continued or refocused.

Implementation control is also carried out via operational control systems such as budgets, schedules, key success criteria, etc.

The primary characteristics of the four types of strategic control discussed above are summarised in the figure.

Strategic controls are thus intended to systematically and continually evaluate strategy execution over lengthy periods to determine whether the strategic direction should be adjusted in light of unfolding events. However, operational controls are required for post-action review and control over short periods.

14.2.2 Approaches to Strategic Control Notes

According to Dess, Lumpkin, and Taylor, there are two techniques for strategic control.

a. Traditional Approach:

1. Strategies are formulated, and top management sets goals
2. Strategies are implemented
3. Performance is measured against goals
4. Corrective measures are taken if there are deviations.

If there are deviations, corrective steps are implemented.

The control system is built on a feedback loop that extends from performance measurement to strategy formulation. Long time lags generally characterise this procedure and is frequently linked to a company’s annual planning cycle. This reactive tactic is insufficient to keep a strategy under control. As previously stated, this is due to the lengthy time it takes to implement and achieve outcomes from a plan. The unpredictability of the future necessitates regular examination of the planning premises and strategy implementation. There is a more modern approach to strategic control.

b. Contemporary Approach:

Adapting to and predicting both internal and external environmental change is an essential component of strategic control under this method.

This method covers the assumptions and premises that serve as the strategy’s foundation. The essential concern here is whether the organization’s goals and strategy still make sense in the present climate.

This entails two significant steps:

-Managers must constantly scan and monitor both the external and internal environments.

-Managers must constantly update and examine the underlying assumptions of the plan.

This may need modifications in the firm’s strategic orientation.

While strategic control necessitates a modern approach, operational control is typically carried out traditionally.

14.3 Operational Control

Over short time intervals, operational control enables post-action review and control.

They entail a systematic assessment of performance against predetermined goals.

To be effective, operational control systems must follow four processes that are shared by all post-action controls:

Establish performance benchmarks

Assess real performance

Identify departures from established standards

Take corrective action

14.3.1 Setting of Standards

Setting standards is the first step in the control process. Standards are the targets against which actual performance will be judged. They are divided into two categories: quantitative standards and qualitative standards.

Quantitative

These are expressed in physical or monetary terms regarding production, marketing, and finance, among other things. They could be related to:

1. Time standards
2. Cost standards
3. Productivity standards
4. Revenue standards

Qualitative

Setting standards requires the use of qualitative criteria as well. Human issues such as high absenteeism and turnover rates, poor production quality, or low employee satisfaction can all be root causes of poor performance. As a result, qualitative standards must also be set to quantify performance.

14.3.2 Measurement of Performance

The measuring of actual performance is the second phase in operational control. In this case, real performance is compared to predetermined norms. Performance standards serve as a standard against which actual performance is measured. However, it is critical to understand how performance is measured in practice. Accounting, reporting, and communication systems are used to measure operations. This is accomplished through several evaluation approaches discussed in the next section. Other critical areas of measurement include:

Difficulties in Measurement

It is challenging to define standards and quantify success for a variety of activities.

For example, a worker’s performance can be easily quantified using units generated in a day, week, or month. On the other hand, measuring a manager’s contribution or assessing departmental performance is difficult. The approach is to create verifiable objectives in quantitative and qualitative terms against which performance can be measured.

Timing of Measurement

The time at which measurement should take place is referred to as timing. Delays in measurement or measuring ahead of time might undermine the aim of measurement. As a result, measurement should occur at crucial periods in a task schedule, such as the end of a definable activity or the completion of a job.

For example, in a project implementation timeline, there could be multiple important points where measurement would occur.

Periodicity in Measurement

Another critical problem in measurement is “how frequently to measure.” Every year, financial statements such as budgets, balance sheets, and profit and loss accounts are prepared. However, certain reports, such as production reports and sales reports, are completed on a daily, weekly, and monthly basis.

14.3.3 Identifying Deviations

Identifying deviations is the third step in the control process.

The degree of deviation or variation between objective performance and the standard is determined by measuring actual performance and comparing it to performance standards. In general, the following three scenarios may occur:

-The actual performance corresponds to the standards

-Actual performance exceeds expectations

-Actual performance falls short of expectations

The first scenario is desirable, but it is not always feasible. Generally, a range of tolerance limits is defined within which the results can be accepted adequately, and deviations from it are deemed variance.

The second circumstance indicates higher performance. If exceeding the standards is deemed odd, a verification must be performed to ensure the validity of the tests and the measurement system.

The third sort of situation, which shows a performance shortfall, should be regarded seriously. Strategists should identify the areas where performance is below par and investigate the causes of departure.

The variance analysis is typically presented as a ‘variance chart’ and sent to upper management for review. After identifying the deviations, it is required to determine the causes of the deviations, which can be accomplished by asking the following questions (Thomas)

1. Is the cause of deviation internal or external?
2. Is the cause random or expected?
3. Is the deviation temporary or permanent?

14.3.4 Taking Corrective Action

Remediation is the operational control process’s final and most important phase. Management initiates corrective measures to address the performance deficiency.

If performance is persistently poor, strategists must do an in-depth analysis and diagnosis to pinpoint the elements behind such poor performance and implement suitable corrective steps.

Corrective intervention can take one of three forms:

–Performance evaluation

Various variables can hurt performance, including insufficient resource allocation, ineffective structure or systems, incorrect programmes, policies, motivational schemes, inefficient leadership styles, and so on. Corrective actions may thus include changes in strategy, processes, structure, compensation practises, training programmes, job redesign, people replacement, re-establishment of standards, budgets, and so on.

-Standardization

When nothing is wrong with performance, the strategist must double-check the standards. When the standards set are unreasonably low or high, a manager should not be afraid to revise them. Higher expectations produce dissatisfaction and frustration. Employees who are not held to high standards are unproductive. As a result, standards checks may be lowered if it is determined that organisational capabilities do not match performance needs. It may also increase standards if the conditions have improved to allow for higher performance. Better equipment, enhanced systems, upgraded abilities, and so on necessitate changes to existing standards.

-Rethinking methods, plans, and goals

Reformulating strategies, goals, and objectives is a more drastic and infrequent remedial measure. Strategic control, as opposed to operational control, generally results in changes in strategic direction, which returns the strategist to the process of strategy creation and selection.

Total quality management (TQM) and the ISO 9000 standards series are examples of excellent control techniques.

14.4 Techniques of Strategic Control

For strategic control, organisations employ a variety of approaches or procedures. Among the essential mechanisms are:

1. Management information systems:

Management information systems function as an effective control mechanism. They allow management to learn about the most recent performance in critical areas and implement suitable corrective measures.

2. Benchmarking:

Benchmarking is a comparative method in which a firm identifies the best practices in a given area and then strives to improve its performance compared to the best practice. Best practices are the benchmarks that a company should use to exercise operational control. This strategy allows continuous performance evaluation until it reaches the best practice level. To excel, a company must outperform the competition. In this way, benchmarking gives organisations a practical way to measure performance.

3. Balanced scorecard:

This strategy identifies four essential performance measures: the customer perspective, the internal business perspective, the innovation and learning perspective, and the financial perspective. This method provides a balanced approach to performance measurement because it evaluates a variety of financial and non-financial characteristics.

2. Key factor rating:

This method considers key elements in numerous areas and then attempts to measure performance based on these. This strategy is comprehensive because it takes a holistic perspective of an organization’s performance areas.

3. Responsibility Centers:

Control systems can be set up to track specific functions, projects, or divisions. Responsibility centres isolate a unit so that it can be examined independently of the rest of the company. The five basic categories of responsibility centres are cost centres, revenue centres, expense centres, profit centres, and investment centres. Each responsibility centre has its budget and is evaluated based on its results.

4. Network approaches:

Network techniques such as the Programme Evaluation and Review Technique (PERT), and the Critical Path Method (CPM), and their variants are widely used in project operations to control scheduling and resource allocation. When adapted as a cost accounting system, network approaches transform into adequate operational controls for project costs and performance.

5. Management by Objectives (MBO):

This is a Drucker-proposed approach based on a regular appraisal of performance against objectives jointly agreed upon by the superior and the subordinate. Goal-setting leads to forming a control system based on commitment and self-discipline through the consultation process. As a result, the scope of MBO as an operational control is pretty broad.

6. Memorandum of Understanding:

This is an agreement between a PSU and a government administrative ministry outlining each party’s commitments and responsibilities. The system functions as an adequate control over the PSU’s performance.

14.5 The Evaluation Role of Organizational Systems

Evaluation involves six different types of organisational systems.

1. Information System:

Organizations assess performance by comparing it to standards. The goal of an information management system is to allow managers to keep track of performance via control reports. For example, strategic surveillance and financial analysis rely on information systems to supply managers with relevant and timely data that allows them to evaluate performance and strategy and initiate remedial action.

2. Control System:

The control system is at the heart of every assessment process, and it is used to set standards, measure performance, analyse variances, and take remedial action.

3. Appraisal System:

This is the system that assesses performance. Managers’ contributions to organisational goals are sought to be measured while measuring their performance. The evaluation process, via the appraisal system, measures actual performance and allows the control system to function.

4. Motivation System:

The fundamental function of the motivation system is to instil strategically desired behaviour in managers so that they are motivated to strive toward achieving organisational goals. This system is critical in ensuring that performance deviations from standards are minimised. The motivation process includes performance checks, which serve as feedback in the evaluation phase.

5. Development System:

The management development system prepares managers to accomplish strategic and operational duties. The most fundamental goal of development is to fit a person with the job that has to be done. In other words, this is comparing actual performance to standards. This matching is possible if it is recognised what a manager is expected to perform and what is lacking in knowledge, abilities, and attitude. The appraisal system detects such a shortcoming. The development system’s purpose in evaluation is to assist strategists in initiating and implementing remedial action.

6. Planning System:

The evaluation process also gives input to planning systems, allowing them to reformulate strategies, goals, and objectives. As a result, the planning system is constantly in close contact with the evaluation process.