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Impletnentsltion

and Contrbl

3) Profit margin

4) Market share

5) Debt to equity

6) Earnings per share

7) Sales growth

8) Asset growth

These

ratios are used by different organizations to measuretheperfonnance oftl le

organization. Here, one thing is to be noted that the qualitative criteria a re related

more

to short-term objectives than tlle long-term ones. This is the reason why

qualita tive criteria are very importallt in evaluating strategies. Therefore, to evaluate

strategies certain qualitative questions sl~ouldalso be taken into consideration. These

questions can be:

Whether the strategy is inter~iallyconsistent or not?

. I Whether it is appropriate col~sideringthe available resources or not?

How is thefirm

balancing its investments between high-risk and low-risk

prospects?

This shows that answers to all these qualitative questions is important to evaluate and

control the strategy.

15.3 METHODSOFCONTROL

There are many methods/tecl~niq~~esused in strategic control systems. Every

organizatioil

has its own way of using a particulartechnique

according to the

requirement ofthe

organization. Mostofthe

methods related to the strategic

management are regarding the financial coni olsystems. Figure 16.2 s l ~ o w sone of theeffective

systems

of financialco~ltrol,

which is universally acceptedand

isused

by

many organizatio~lsh r o u g h o ~ ~ t

the world. This is system of financial control is known

as DuPont s system of financial control.

Return on Total Assets

Net Profit Margill

Net Income +,kq

Net Sales /-Non Opcrating

Surplus/Dedcil

ExpensesCash, Bank, Receivables

and Marketable

x , Total Asscts Turnover

Source: Adapted from Chandra, Prasanna (1 995),Fzlndamentals

o

Finai cial

Management.

'Tax Others

Figure 16.2: DuPont hart

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Implementation

nd ControlManagementByObjectives (MBO)

Tliis is one oftl le methods, which is used both in strategic planning and control. In

this the objectives are establislied for the orga~iizationas a wliole for f i~nctionalareas,

departments and finally individuals oftlie organization. 1thas three minimum

r e q i ~ i r e ~ n e ~ i t swhich are as follows:

1) Objectives for individuals.

2) Individuals a re evaluated and receive feed back on their performance.

3) Individuals are evaluated and rewarded on the basis oftheir performance.

This helps in keeping a check on working of employees in tlie orga~iizatio n nd helps

achieve the goals of tlie organization. Apart from these control methods, other

neth hods like: Management Inforniation Systems (MIS) and Decision Support Systems(DSS) also call be included undertlie co~itrolmethods.

Activity

Suppose you are a f i~la~lcialexpert working for a bank. Identify tlie key f i n a ~ ~ c i a l

ratios important to evaluate tlle strategy of tlie bank.

15.4 PERFORMANCESTANDARDS

Having identified the measures relevant for asessing the success of the strategy, t he

next important issue is to set the standards against which actual perfor~nanceis to be

measured. The standards of perfor~nancecould be any of the following three types.

a) Historical Standards

In this type of standards, co~nparisonof present performance is made with the past

performance. Though simplest, this type does not take into account the cliange s in

environmental condi tions between tlie two periods. Moreover, the prior-period

performance itself may not have been acceptable. It also could be misleadii~gin t h e

fonnative years w l ~ e nthe numerator (previous years figures) is small.

b) Industry Standards

In this type of standards, t l ~ ecoinparison of a firm's performance is made against

silnilar other firmsin

the industry. Tlle difficulty here is that all the firms may not beexactly the same for purposes of comparison.

c) Present.Standards

The goalsltargets are decided by the f i r~n ' smanagement to be achieved ina particular

period. Present standards convey the aspiration levels and take into account

environmental conditions, if properly derived. These are more realistic and alsoconsider the organizations' capaci to achieve them. These, however, require

tremendous analysis. Absence of such analysis may lead to shocking results. Howe ver,

for a colnpany developing a conscious strategy, present standards provide the bes t

alternative.

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lrnplement tion

nd Control

long period oftime because certain assumptions might have gone wrong and there was

no contingency plan to take care of such situations. Ifeven after reasonable period of

t ime the performance is not coming up to expectations, it lnay be due to serious

deficiencies in the business strategy. However, before changing the strategy, it wouldi

be advisable to check its i~npleinentationon the test of adequacy. It is qui te possible

that some of the Ss of the 7-S model may be grossly out of line with the strategy. And,

if corrected, the strategy may still be quite useful. However, there might have been

serious errors in assessing the external and internal environ~nentseven tliough the

evaluatio~lof implementation reveals 11 major mismatches.

Activity 3

How are the targets fixed for various divisions/departments in your organization?

Howand why

are the targets revised? Givecolnlnents

on the duration o f target fixingand revising.

15.6 PROBLEMS OF CONTROL SYSTEMS

'There are a large number of problems associated with control systems for strategy

evaluation.An efficient system may collect a lot of irrelevant data whereas a

sophisticated system might ignore crucial information. Some of the typical problelns

encountered in designing and managing control system are:

There inay not bea consensus on the criteria for ~neasuringthe effectiveness and

efficiency of the strategy.

The reporting data may be invalid.

The perfornlance norms may be based on outputs 011 which the relevant business

inay not have a control.

Often perfor~nancestandards may be set with inherent co~ltradictionsFor

example, an increase in market share inay be expected in conjunction with an

absolute decrease in marketing expenditure.

E~np loyeesinay consider the system to be unfair and therefore nlay not accept it.

Overemphasis on measuring short-term performance may make managers forget

aboyt the strategy which inherently has long connotations.

It is very difficult to set"good7', "average" and"poor" levels of performance in

situations where the outputs are not very tangible.

15.7 SUMMARY

An effective system ofevalu atio~lnd control is important for the success of corporate

strategy. It is also necessary for taking decisions on whether strategy s h o ~ ~ l dbe

continued or modified. The success of a strategy should be considered both in terms of

effectiveness and efficiency. While it is easy to measure efficiency, it is relatively more

difficult to measure effectiveness.

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he problem in evaluatio~iand control is that of developing appropriate measures. The

ey variables of the organizationmay

guide the duration ofmeasures

for evaluation

nd control. Structure also plays an i~nportantrole in evaluation and control of

rategy. Defective struc tures may lead to inadequate evaluation andc011tro1.

The

conomicperfornia~ice fan

organization unit mustbedistinguislied

fromtlie

erformance of people o f t h e unit fiom the viewpoint offollow-up action. Factors

hich are not undertlie

control of arespo~isibility

centremust

be excluded from the

ports in eval~iatingthe perform nce of the responsibility centre people. For

valuation of strategy or concrete action, all factors of cost and environment must be

On tlie basis ofevaluatio~l

tlie corrective action may betaken iftlie

erformance is not up tothe

planned levels. If it is foundthat tlie

performanceo f t h e

sponsibility centre is not improving or is ii~ilikelytoimprove, tlie targets lnay be

vised.

there are successive failures, tlie strategy may have to be abandoned. Before

bandoning tlie strategy, however, an examination should be made as to whether

mplementation has been adequate.

5.8 KEY WORDS

ontrol:To regulate.

erforniance Stantlards : Standards against which actual performance is to be

easured.

atio Analysis: The principal tool of financial statement analysis.

5.9 SELF-ASSESSMENT QUESTIONS

Compare and contrast different types of standards which call be used for co~i t ro lof strategy.

Discuss the strateg ic control process.

Briefly explainsonle

areas in which organizations establish quantitative

evaluation criteria.

What can be the character istics o f an effectiveco~itrol

system? Discuss.

5.10 REFERENCES ANDFURTH R

READINGS

Control

nthony, R.N., et al. ( 1 984).Management ControlSystem,Rechard D. Irwin :

omewoocl.

yars, Lloyd. (1 987). strateg ic Managenzent:Planning nd Inlplenzentation,

oncepts andCases, Harper Row, Publishers, New York.

Prasatina.

( 1995 .

Fundanzental of Financial Manageaent, Tata McGraw-

ll Publislii~igCompany Ltd.Ne w Delhi.

avid, Fred R. (1997). Concepts ofStrategic Management,Pre~i t icHall International

c.

WF.,

etal. (1 9 84). Busine,rsPolicy and Strategic Management,McGraw

ll : New York.

les,Seymonr. (1 963). 'HowoEvaluate Corporate Strategy",Harvard Business

eview, July-August, pp. 111-121.