MEASURING ORGANIZATIONAL PERFORMANCE 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. Truly 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 both on 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. Quantitative criteria commonly used to evaluate strategies are financial rations, 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 include the following: return on investment, return on equity, profit margin, market share, and debt to equity, earnings per share, sales growth, and asset growth. 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. Third, 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. Marketing, finance/accounting, R&D, or computer information systems factors can also cause financial problems. There are six qualitative questions that can be 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? Some additional key questions that reveal the need for qualitative or intuitive judgments in strategy evaluation are as follows: 1. How good is the firm's balance of investment between high-risk or low-risk projects? 2. How good is the firm's balance of investments between long-term and short-term projects? 3. How good is the firm's balance of investments between slow-growing markets and fast-growing markets? 4. How good is the firm's balance of investments among different divisions? 5. To what extent are the firm's alternative strategies socially responsible? 6. What are the relationships among the firm's key internal and external strategic factors? 7. How are major competitors likely to respond to particular strategies? |
Page#3
