Strategic Audit: The Evaluation and Control of Organization Strategy
4 steps process of Control
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Helps you to ensure that appropriate goals are set, evaluated, and modified when
there is a discrepancy
combines financial measures that tell the results of actions already taken with
operational measures on customer satisfaction, internal processes and the
corporation's innovation and improvement activities—the drivers of future financial
performance.
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Establishing performance standards – helps to set clear goals and expectations
Measuring actual performance
Comparing Actual performance to the performance standards
Taking corrective action
Balanced Scorecard (4 Perspective)
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Financial performance
Customer knowledge
Internal business process
Learning and growth
A strategic audit is an examination and evaluation of areas affected by the operation of a
strategic management process within an organization.
 Performance indicators show that a strategy is not working or is producing negative
side effects.
 High-priority items in the strategic plan are not being accomplished
 A shift or change occurs in the external environment
 Management wishes: (1) to fine-tune a successful strategy and (2) to ensure that a
strategy that has worked in the past continues to be in tune with subtle internal or
external changes that may have occurred.
CONTROL
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Robert J. Mockler presented a more comprehensive definition of managerial control.
He defined it as a systematic effort by business management to compare performance
to predetermined standards, plans, or objectives to assess whether performance is in
line with these standards and presumably to take any remedial action required.
According to Mockler, the purpose of control is to ensure that human and other
corporate resources are being used in the most effective and efficient way possible in
achieving corporate objectives.
TYPES OF CONTROL
1. Feedforward control, sometimes called preliminary or preventive controls, attempt to
identify, and prevent deviations in the standards before they occur. Feedforward
controls focus on human, material, and financial resources within the organization.
These controls are evident in the selection and hiring of new employees. It is done at
the input level of production. It set off before the beginning of production or service
activity. The rationale of feed-forward control is to foresee potential problems and
prevent them from occurring.
2. Concurrent control is also known as steering control as it focuses on what arises during
the work process. Concurrent control can identify problems as they develop and take
immediate corrective action before results are attained.
3. Feedback control is the act of controlling takes place after a process is complete. It is
also known as Post Action Control. It attempts to measure the result of certain actions.
If problems exist, corrective action is undertaken. It involves reviewing information to
determine whether performance meets established standards.
4. Multiple Control
Managerial Approaches to Implementing Controls
1. Market Control - involves the use of price competition to evaluate output. It compares
profits and prices to determine the efficiency of their organization.
2. Bureaucratic Control - the use of rules, policies, hierarchy of authority, written
documentation, reward systems, and other formal mechanisms to influence employee
behavior and assess performance.
3. Clan Control - or cultural control refers to the values and beliefs of an organization that
operates more like a family than a company. It also represents cultural values almost
the opposite of bureaucratic control which organization require trust among their
employees. Clan control relies on value, beliefs, corporate culture, shared norms, and
informal relationships to regulate employee behaviors and facilitate the reaching of
organizational goals.
Primary Types of Control
1. Strategic control - the process of evaluating strategy, is practiced both after the
strategy is formulated and after it is implemented.
2. Management Control - focuses on the accomplishment of the objectives of the various
sub strategies comprising the master strategy and the accomplishment of the
objectives of the intermediate plans (for example, "are quality control objectives being
met?").
3. Operational Control - Concerned individual and group performance as compared with
the individual and group role prescriptions required by organizational plans (for
example, "are individual sales quotes being met?").
 Why do strategies fail? Because there is no strategic evaluation
 Why do we need a strategic evaluation? Because strategies become obsolete and
internal and external environments are dynamic
Strategic Evaluation
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Process of determining the effectiveness of the given strategy in achieving
organizational objectives and taking corrective actions wherever required.
3 BASIC ACTIVITIES
1. Examine
2. Actual vs. expected
3. Corrective actions
Rumelt’s Criteria
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Consistency – strategy should not present inconsistent goals and policies
Consonance – need for strategies to examine sets of trends, as well as individual trends
Feasibility – neither overtax resources nor create unsolvable subproblems
Advantage – creation or maintenance of competitive advantage
Difficulties in Working Strategic Evaluation
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Increase in environment's complexity
Difficulty predicting future with accuracy
Increasing number of variables
Rate of obsolescence of plans
Domestic and global events
Decreasing time span for planning certainty
The Framework
STEP 1: REVIEW OF UNDERLYING BASES OF STRATEGY
STEP 2: MEASURING ORGANIZATIONAL PERFORMANCE
This activity includes comparing expected to actual results, investigating deviations from
plans, evaluating individual performance, and examining progress being made toward
meeting stated objectives
STEP 3: TAKE CORRECTIVE ACTIONS
It requires making changes to competitively reposition a firm for the future. Taking corrective
actions is necessary to keep an organization on track toward achieving stated organization.
CHARACTERISTICS OF AN EFFECTIVE EVALUATION SYSTEM
1. Economical
2. Meaningful
3. Generates useful information
4. Timely information
5. Provide accurate picture of events
Contingency Planning – alternative plans that can be put into effect if certain key events do
not occur as expected
PURPOSE STRATEGIC EVALUATION
The purpose of strategic evaluation is to evaluate the effectiveness of strategy in achieving
organizational objectives.
In the absence of such mechanism, there would be no means for strategists to find out
whether the strategy is producing the desired effect
21ST CENTURY CHALLENGES IN STRATEGIC MANAGEMENT
1. Should the process be more an "art" or a "science"?
2. Should strategies be visible or hidden from stakeholders?
3. Should process be more top-down or bottom-up?
AUDITING
A systematic process of objectively obtaining and evaluating evidence regarding assertions
about economic actions and events to ascertain the degree of correspondence between these
assertions and established criteria, and communicating the results to interested users.
Robert Anthony's Hierarchy of Management Activity
Robert N. Anthony (1965) has described three levels of
management activities, which are operational control,
management control, and strategic planning.
Operational Control
This requires that directives , as set by the immediate
higher hierarchy, is followed and that specific task/s are
carried out effectively and efficiently. The decisions at
this level have very little impact on the organization. The
organization behaves in a routine nature where the
parameters of the decision-making process are well laid
and certain.
 Operational control is the process of ensuring that specific tasks are carried out
effectively and efficiently.
 The operational control activities are performed by the people at low level
management.
 Operational control helps in full utilization of the resources available without any
wastage.
 It requires proper handling of a machine with reduced cost and depreciation.
 It also helps in managing the workers involved in operations through proper
supervision to produce quality products in a desirable time.
Management Control/ Managerial Control
This requires that resources are acquired and used effectively and efficiently to attain the
objectives of the organization. This is a middle management role. Managers in this role take
guidance from the strategic planning hierarchy and control the activities of the organization
such that the goals set by the higher level are attained in an efficient and effective manner.
The impact of the decisions of the managers in this role is medium term and degree.
 Management control is the process by which managers ensure that the resources are
obtained and used effectively and efficiently in order to achieve the organizational
goals.
 Management control facilitates smooth operational activities in the organization.
 It is important for the management to keep a check on the operations and people
involved in operations to avoid any wastage of resources.
 It also helps in utilizing the resources efficiently and effectively.
Strategic Planning
This requires focusing on the objectives and goals of the organization, on changes in the
objectives, on the resource requirements to fulfill the objectives and on the guiding principles
and policies that will govern the acquisition, use and disposal of resources to attain the
objectives. In short, this role is the most important role in the management hierarchy and the
decisions taken by managers in this role have a far-reaching impact on the organization.
Managers in this role set the direction in which the organization will travel. In terms of
hierarchy, this lies at the top.
 Strategic planning is the process of deciding the objectives of the organization;
changes required in achieving these objectives; resources used to obtain these
objectives; the policies that are used in the acquisition, use, and disposition of these
resources.
 Top level needs strategic planning to define the objectives of the organization.
 Strategy consists of making choices among alternatives, action programs, and
commitment to specific product markets by the top level.
 Strategic planning facilitates smooth operational activities in the organization.
 It helps the organization to for-see its future in the long run and thus helps the
management to take necessary steps accordingly.
 It helps in policy formulation to clear the goals of the organization
 Middle-level management is benefited from strategic planning through smooth
application of the policies formulated by the top management.
Anthony’s idea of an organization’s hierarchy from the perspective of managerial activities. As
is clear, it is a three-level pyramid with very distinct levels. Each level has its own set of tasks
and decisions to take which have a varying impact on the organization as a whole.
Task control is distinguished from management control in the following ways:
 The management control system is basically similar throughout the organization. Each
type of task requires a different task control system.
 In management control, managers interact with other managers: in task control either
humans are not involved at all, or the interaction is between a manager and a no
manager.
 In management control the focus is on organizational units called responsibility
centers; in task control, the focus is on specific tasks.
 Management control relates to activities that are not specified; task control relates to
specified tasks.
 In management control the focus is equally on planning and on execution; in task
control, it is primarily on execution.
An essential characteristic of the process is that the "standard" against which actual
performance is measured is consistent with the organization’s strategies. The differences
among the three types of processes with respect to the nature of the problems that typically
are addressed in ear process and the types of decisions that is relevant for these problems.
Evaluation and Control Process
Appropriate Measures
Performance is the end result of an activity.
Steering controls measure variables that influence future profitability.
 Cost per passenger mile (airlines)
 Inventory turnover ratio (retail)
 Customer satisfaction
Types of Control
1. Output controls specify what is to be accomplished by focusing on the end result.
2. Behavior controls specify how something is done through policies, rules, standard
operating procedures, and orders from supervisors.
3. Input controls emphasize resources.
Activity-based costing (ABC) is a recently developed accounting method for allocating indirect
and fixed costs to individual products or product lines based on the value-added activities
going into that product. ABC accounting allows accountants to charge costs more accurately
than the traditional method because it allocates overhead far more precisely.
Enterprise Risk Management is the corporate-wide, integrated process for managing
uncertainties that could negatively or positively influence the achievement of objectives.
Traditional Finance Measures used measure of corporate performance (in terms of profits)
1. Return on Investment (ROI). It is simply the result of dividing net income before taxes
by the total amount invested in the company (typically measured by total assets).
2. Earnings per share (EPS), which involves dividing net earnings by the amount of
common stock.
3. Return on equity (ROE) involves dividing net income by total equity.
4. Operating cash flow is the amount of money generated by a company before the cost
of financing and taxes, which is a broad measure of a company’s funds.
 Free cash flow is the amount of money a new owner can take out of the firm
without harming the business
Non-Financial Measures
1. Stickiness – length of website visit
2. Eyeballs – number of people who visit a website
3. Mindshare – brand awareness
Shareholder Value is the present value of the anticipated future stream of cash flows from
the business plus the value of the company if liquidated
Economic value added (EVA) measures the difference between the pre- strategy and poststrategy values for the business. (Referred to economic profit)
EVA=After tax income-total annual cost of capital
Market Value Added (MVA)- measures the difference between the market value of a
corporation and the capital contributed by shareholders and lenders. Measures the stock
market’s estimate of the net present value of a firm’s past and expected capital investment
projects
Balanced scorecard – combines financial measures that tell the results of actions already
taken with operational measures on customer satisfaction, internal processes and the
corporation’s innovation and improvement activities
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Financial
Customer
Internal business perspective
Innovation and learning