Lesson 1, Topic 1
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9.4 Measuring Organizational Performance

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Another important strategy-evaluation activity is measuring organizational performance. This activity includes comparing expected results to actual results, investigating deviations from plans, evaluating individual performance, and examining progress being made toward meeting stated objectives. Both long-term and annual objectives are commonly used in this process. Criteria for evaluating strategies should be measurable and easily verifiable. Criteria that predict results may be more important than those that reveal what already has happened. For example, rather than simply being informed that sales last quarter were 20 percent under what was expected, strategists need to know that sales next quarter may be 20 percent below standard unless some action is taken to counter the trend. Really effective control requires accurate forecasting.

Failure to make satisfactory progress toward accomplishing long-term or annual objectives signals a need for corrective actions.

 Many factors, such as unreasonable policies, unexpected turns in the economy, unreliable suppliers or distributors, or ineffective strategies, can result in unsatisfactory progress toward meeting objectives. Problems can result from ineffectiveness (not doing the right things) or inefficiency (doing the right things poorly).

Determining which objectives are most important in the evaluation of strategies can be difficult. Strategy evaluation is based on both quantitative and qualitative criteria. Selecting the exact set of criteria for evaluating strategies depends on a particular organization’s size, industry, strategies, and management philosophy. An organization pursuing a retrenchment strategy, for example, could have an entirely different set of evaluative criteria from an organization pursuing a market-development strategy. Quantitative criteria commonly used to evaluate strategies are financial ratios, which strategists use to make three critical comparisons:

(1) comparing the firm’s performance over different time periods,

(2) comparing the firm’s performance to competitors’, and

(3) comparing the firm’s performance to industry averages.

Some key financial ratios that are particularly useful as criteria for strategy evaluation are as follows:

Return on investmentDebt to equityProfit margin
Return on equityEarnings per shareSales growth…etc

But there are some potential problems associated with using quantitative criteria for evaluating strategies.

First, most quantitative criteria are geared to annual objectives rather than long-term objectives. Also, different accounting methods can provide different results on many quantitative criteria. Second, intuitive judgments are almost always involved in deriving quantitative criteria. For these and other reasons, qualitative criteria are also important in evaluating strategies. Human factors such as high absenteeism and turnover rates, poor production quality and quantity rates, or low employee satisfaction can be underlying causes of declining performance.

Seymour Tilles identified six qualitative questions that are useful in evaluating strategies:

  1. Is the strategy internally consistent?
  2. Is the strategy consistent with the environment?
  3. Is the strategy appropriate in view of available resources?
  4. Does the strategy involve an acceptable degree of risk?
  5. Does the strategy have an appropriate time framework?
  6. Is the strategy workable?

Characteristics of An effective evaluation system

Strategy evaluation must meet several basic requirements to be effective.

  • First, strategy evaluation activities must be economical; too much information can be just as bad as too little information; and too many controls can do more harm than good.
  • Strategy-evaluation activities also should be meaningful; they should specifically relate to a firm’s objectives.
  • They should provide managers with useful information about tasks over which they have control and influence.
  •  Strategy-evaluation activities should provide timely information; on occasion and in some areas, managers may daily need information.

Strategy evaluation should be designed to provide a true picture of what is happening. For example, in a severe economic downturn, productivity and profitability ratios may drop alarmingly, although employees and managers are actually working harder.

The strategy-evaluation process should not dominate decisions; it should foster mutual understanding Strategy evaluations should fairly portray this type of situation. Information derived from the strategy-evaluation process should facilitate action and should be directed to those individuals in the organization who need to take action based on it. Managers commonly ignore evaluative reports that are provided only for informational purposes; not all managers need to receive all reports.

Controls need to be action-oriented rather than information-oriented, trust, and common sense. No department should fail to cooperate with another in evaluating strategies. Strategy evaluations should be simple, not too cumbersome, and not too restrictive. Complex strategy-evaluation systems often confuse people and accomplish little. The test of an effective evaluation system is its usefulness, not its complexity.

Large organizations require a more elaborate and detailed strategy-evaluation system because it is more difficult to coordinate efforts among different divisions and functional areas. Managers in small companies often communicate daily with each other and their employees and do not need extensive evaluative reporting systems.

Familiarity with local environments usually makes gathering and evaluating information much easier for small organizations than for large businesses. But the key to an effective strategy-evaluation system may be the ability to convince participants that failure to accomplish certain objectives within a prescribed time is not necessarily a reflection of their performance.

There is no one ideal strategy-evaluation system. The unique characteristics of an organization, including its size, management style, purpose, problems, and strengths, can determine a strategy-evaluation and control system’s final design.

Self-Check Activity

  1. List the three activities of strategy evaluation.
  2. Explain the characteristics of an effective evaluation system.
  3. Discuss the best way to measuring organizational performance.