Introduction
Strategy evaluation and control is the final piece of the strategic management puzzle. This phase ensures that a company's strategy is on course, with its intended objectives, by employing various measurement and assessment tools. Here, we'll delve into financial measures, the Balanced Scorecard, and how top management can evaluate and ensure proper controls.
Traditional Financial Measures
Return on Investment (ROI)
Calculation: (Net Profit / Cost of Investment) x 100
Benefits: Measures the efficiency of an investment.
Disadvantages: May not account for long-term benefits or intangible assets.
Earnings Per Share (EPS)
Calculation: (Net Income - Dividends on Preferred Stock) / Average Outstanding Shares
Benefits: Demonstrates the profitability on a per-share basis; useful for shareholders.
Disadvantages: Can be manipulated with share buybacks.
Return on Equity (ROE)
Calculation: Net Income / Shareholder's Equity
Benefits: Shows the return on shareholders’ investment.
Disadvantages: High ROE might indicate high debt.
Operating Cash Flow
Calculation: Operating Income + Depreciation - Taxes + Change in Working Capital
Benefits: Indicates the cash generated from core business operations.
Disadvantages: Doesn't account for investments or financing activities.
Balanced Scorecard Approach
This approach provides a more holistic view of organizational performance:
Financial Health: Measures like ROI, liquidity ratios, and profitability.
Customer Satisfaction: Customer retention rates, net promoter scores, and customer satisfaction surveys.
Internal Business Processes: Efficiency ratios, waste reduction, and process optimization.
Innovation and Learning: Employee training programs, R&D spending, and patent registrations.
Key Performance Indicators (KPIs) need to be allocated for each area to track and measure success effectively.
Top Management Evaluations
Top management, responsible for guiding the firm's direction and shareholder value, is vital. Their performance can be evaluated via feedback instruments, such as:
Sample Questionnaire Table:
Management Audits
CSR Audits: Evaluate the company's social responsibility initiatives.
Sample Question: "Has the company met its stated CSR goals for the year?"
Strategic Audits: Review the suitability and effectiveness of strategic initiatives.
Sample Question: "How aligned are our strategies with our mission and vision?"
Benchmarks: Compare company performance metrics against industry standards or competitors.
Sample Question: "How does our ROI compare to the industry average?"
Guidelines for Management Control
Effective control mechanisms ensure the strategy is aligned with its goals.
Control Table for Top Management:
Conclusion
Strategy evaluation and control aren't merely about assessing numbers; it's about ensuring alignment, anticipating future challenges, and making requisite adjustments. With the right tools and controls, companies can ensure that their strategies stay on course, yielding the desired results.
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