Information on Strategic Evaluation.

    What is Strategic Evaluation?

    What is Outcomes Theory?

The Strategic Evaluation site has been designed to provide information and resources about  the
Strategic Evaluation Approach.

What is Strategic Evaluation ?

Strategic Evaluation is an evaluation approach which emphasises a shift in evaluation thinking. 
Evaluation is currently attempting to respond to a variety of societal, governmental, political and
conceptual trends.  The Strategic Evaluation Approach is being advanced as a way of
conceptualising evaluation’s response to these demands.  Consistent with contemporary
evaluation thinking it claims the following as the key current priorities for evaluation.  These
points are advanced as the basis for ongoing discussion:

 Evaluation should be reconceptualised as being about meeting the evaluation

knowledge needs of a sector not about individual programme evaluations, through:

o developing frameworks, methods and tools which support the reconceptualisation

of evaluation as meeting sector knowledge needs.

 Priority sector evaluation knowledge needs should be identified through:

o developing an effective infrastructure for a rich informed dialogue between stakeholders

about evaluation priorities
o quality knowledge management systems to enable aggregation of current evaluation
findings, combining these with sector intelligence and making this information available in
a usable form to assist stakeholders to undertake such dialogue
o developing stakeholder understanding of what is feasible and affordable in evaluation and
the relationship between evaluation and accountability systems.

 Vertical and horizontal programme integration (Joined-up Government and

Joined-up Outcomes) should be addressed through:

o high-level integrated strategic evaluation planning across programmes

o developing and disseminating Outcomes Theory (see below) which theorises how
outcome sets / hierarchies / intervention logics / programme theories relate to each other in
terms of structure, measurement, attributability and accountability
 o developing a new role of the evaluation / performance management / monitoring architect
who has input into high-level evaluation and performance management systems design
o developing evaluation models that can accommodate the centralist versus local autonomy
tension in outcome and strategy selection.

 The evaluation knowledge / policy development / programme implementation

interface should be tightened through:

o a theory of evidence-informed practice which accepts the need for results aggregation but
confronts the fact that intervention types differ in the ease with which they can be
evaluated
o institutionalising effective formative evaluation approaches at the policy making as well
as programme level
o developing appropriate evaluation capability at all levels.

 Sector evaluation knowledge management should be improved through:

o establishing effective strategies for the flow of evaluation findings within and between
institutions and stakeholders
o developing "ontologies" categorising intervention types and contexts
o using novel data collection and data visualisation methods to provide real time cross-
sector data flows for evaluation purposes

Strategy evaluation
 Measuring the effectiveness of the organizational strategy, it's extremely important to conduct a
SWOT analysis to figure out the strengths, weaknesses, opportunities and threats (both internal
and external) of the entity in question. This may require to take certain precautionary measures
or even to change the entire strategy.

In corporate strategy, Johnson, Scholes and Whittington present a model in which strategic
options are evaluated against three key success criteria:[3]

 Suitability (would it work?)

 Feasibility (can it be made to work?)
 Acceptability (will they work it?)

[edit] Suitability

Suitability deals with the overall rationale of the strategy. The key point to consider is whether
the strategy would address the key strategic issues underlined by the organisation's strategic
position.

 Does it make economic sense?

  Would the organization obtain economies of scale, economies of scope, or experience
economy?
 Would it be suitable in terms of environment and capabilities?

Tools that can be used to evaluate suitability include:

 Ranking strategic options

 Decision trees

[edit] Feasibility

Feasibility is concerned with whether the resources required to implement the strategy are
available, can be developed or obtained. Resources include funding, people, time and
information.

Tools that can be used to evaluate feasibility include:

 cash flow analysis and forecasting

 break-even analysis
 resource deployment analysis

[edit] Acceptability

Acceptability is concerned with the expectations of the identified stakeholders (mainly

shareholders, employees and customers) with the expected performance outcomes, which can be
return, risk and stakeholder reactions.

 Return deals with the benefits expected by the stakeholders (financial and non-financial). For
example, shareholders would expect the increase of their wealth, employees would expect
improvement in their careers and customers would expect better value for money.
 Risk deals with the probability and consequences of failure of a strategy (financial and non-
financial).
 Stakeholder reactions deals with anticipating the likely reaction of stakeholders. Shareholders
could oppose the issuing of new shares, employees and unions could oppose outsourcing for
fear of losing their jobs, customers could have concerns over a merger with regards to quality
and support.

Tools that can be used to evaluate acceptability include:

 what-if analysis
 stakeholder mapping

The purpose of this article is to discuss the major elements of the strategic management process.
Included will be discussion of each major step in the process, along with insights, issues that
need to be addressed, and
 o  questions that need to be asked.

The strategic management process is made up of four elements: situation analysis, strategy
formulation, strategy implementation, and strategy evaluation. These elements are steps
that are performed, in order, when developing a new strategic management plan. Existing
businesses that have already developed a strategic management plan will revisit these steps
as the need arises, in order to make necessary changes and improvements.

Situation Analysis

Situation analysis is the first step in the strategic management process. The situation
analysis provides the information necessary to create a company mission statement.
Situation analysis involves "scanning and evaluating the organizational context, the
external environment, and the organizational environment" (Coulter, 2005, p. 6). This
analysis can be performed using several techniques. Observation and communication are
two very effective methods.

To begin this process, organizations should observe the internal company environment.
This includes employee interaction with other employees, employee interaction with
management, manager interaction with other managers, and management interaction with
shareholders. In addition, discussions, interviews, and surveys can be used to analyze the
internal environment.

Organizations also need to analyze the external environment. This would include
customers, suppliers, creditors, and competitors. Several questions can be asked which
may help analyze the external environment. What is the relationship between the company
and its customers? What is the relationship between the company and its suppliers? Does
the company have a good rapport with its creditors? Is the company actively trying to
increase the value of the business for its shareholders? Who is the competition? What
advantages do competitors have over the company?

Strategy formation

Strategic formation is a combination of three main processes which are as follows:

 Performing a situation analysis, self-evaluation and competitor analysis: both internal and
external; both micro-environmental and macro-environmental.
 Concurrent with this assessment, objectives are set. These objectives should be parallel to a
time-line; some are in the short-term and others on the long-term. This involves crafting vision
statements (long term view of a possible future), mission statements (the role that the
organization gives itself in society), overall corporate objectives (both financial and strategic),
strategic business unit objectives (both financial and strategic), and tactical objectives.
 These objectives should, in the light of the situation analysis, suggest a strategic plan. The plan
provides the details of how to achieve these objectives.
2. Strategy evaluation

 Measuring the effectiveness of the organizational strategy, it's extremely important to conduct a
SWOT analysis to figure out the strengths, weaknesses, opportunities and threats (both internal
and external) of the entity in question. This may require to take certain precautionary measures
or even to change the entire strategy.

In corporate strategy, Johnson, Scholes and Whittington present a model in which strategic
options are evaluated against three key success criteria: [3]

 Suitability (would it work?)

 Feasibility (can it be made to work?)
 Acceptability (will they work it?)

Strategy Evaluation Process and its

Significance
Strategy Evaluation is as significant as strategy formulation because it throws light on the
efficiency and effectiveness of the comprehensive plans in achieving the desired results. The
managers can also assess the appropriateness of the current strategy in todays dynamic world
with socio-economic, political and technological innovations. Strategic Evaluation is the final
phase of strategic management.

The significance of strategy evaluation lies in its capacity to co-ordinate the task
performed by managers, groups, departments etc, through control of performance.
Strategic Evaluation is significant because of various factors such as - developing inputs for
new strategic planning, the urge for feedback, appraisal and reward, development of the
strategic management process, judging the validity of strategic choice etc.

The process of Strategy Evaluation consists of following steps-

1. Fixing benchmark of performance - While fixing the benchmark, strategists encounter questions
such as - what benchmarks to set, how to set them and how to express them. In order to
determine the benchmark performance to be set, it is essential to discover the special
requirements for performing the main task. The performance indicator that best identify and
express the special requirements might then be determined to be used for evaluation. The
organization can use both quantitative and qualitative criteria for comprehensive assessment of
performance. Quantitative criteria includes determination of net profit, ROI, earning per share,
cost of production, rate of employee turnover etc. Among the Qualitative factors are subjective
evaluation of factors such as - skills and competencies, risk taking potential, flexibility etc.
2. Measurement of performance - The standard performance is a bench mark with which the
actual performance is to be compared. The reporting and communication system help in
measuring the performance. If appropriate means are available for measuring the performance
and if the standards are set in the right manner, strategy evaluation becomes easier. But various
 factors such as managers contribution are difficult to measure. Similarly divisional performance
is sometimes difficult to measure as compared to individual performance. Thus, variable
objectives must be created against which measurement of performance can be done. The
measurement must be done at right time else evaluation will not meet its purpose. For
measuring the performance, financial statements like - balance sheet, profit and loss account
must be prepared on an annual basis.
3. Analyzing Variance - While measuring the actual performance and comparing it with standard
performance there may be variances which must be analyzed. The strategists must mention the
degree of tolerance limits between which the variance between actual and standard
performance may be accepted. The positive deviation indicates a better performance but it is
quite unusual exceeding the target always. The negative deviation is an issue of concern
because it indicates a shortfall in performance. Thus in this case the strategists must discover
the causes of deviation and must take corrective action to overcome it.
4. Taking Corrective Action - Once the deviation in performance is identified, it is essential to plan
for a corrective action. If the performance is consistently less than the desired performance, the
strategists must carry a detailed analysis of the factors responsible for such performance. If the
strategists discover that the organizational potential does not match with the performance
requirements, then the standards must be lowered. Another rare and drastic corrective action is
reformulating the strategy which requires going back to the process of strategic management,
reframing of plans according to new resource allocation trend and consequent means going to
the beginning point of strategic management process.

-How to Evaluate Business Strategies

By Evangeline Marzec, eHow Contributor

updated: May 5, 2010

Strategy: the key to success.

One of the most important and challenging parts of an executive's job is evaluating and
determining the company's strategy. The process can be intensive and often requires the expertise
of internal subject matter experts as well as outside consultants. Even in small businesses, this
process can take significant amounts of time and resources from the owner. However, if done
well, it can be the defining factor in the company's ultimate success.

Difficulty: Challenging

Instructions
1. 1

Analyze the company's industry and competitors. Describe the properties of the industry
in terms of its maturity, growth rate and fragmentation (whether there are a few major
players or hundreds of tiny competitors). List each of the major competitors and what
role they plan in the industry; for example, the low-cost leader, aspiration brand or up-
and-coming startup. Describe the customers available in the industry, such as small
businesses, government branches, middle-class consumers and so on.

2. 2

Evaluate the capabilities of the business or its founders. Perform a SWOT (strengths,
weaknesses, opportunities, threats) analysis that lists the organization's internal strengths
and weaknesses, and its external opportunities and threats. Prioritize a list of the
company's strengths in order from strongest to weakest, and its weaknesses in order of
most to least crippling.

3. 3

Assess the business's current strategic approach and how well it is implementing that
approach. If the business has positioned itself as the low-cost leader, examine whether it
has achieved that position. Some businesses may have not defined a strategy yet; in that
case, determine what role it has been playing in the industry and how well it is
performing financially in comparison to its competitors.

4. 4

Perform a gap analysis between the company's competencies and opportunities within the
marketplace or industry. Make a list of each market need that has not been completely
fulfilled, such as underserved customers, operational approaches that haven't been tried or
a lack of competition in one of the traditional roles, such as aspirational brand. Then
compare that list to the business's strengths and weaknesses. If the business has not
performed as well as its competitors nor reached its targets, the company may be trying to
compete in an area that is crowded or be relying on skills in which it is weak.
Read more: How to Evaluate Business Strategies | eHow.com
http://www.ehow.com/how_6022589_evaluate-business-strategies.html#ixzz12dIlZNL8

Strategy evaluation is the final stage in strategic management. Managers desperately need to
know when particular strategies are not working well; strategy evaluation is the primary means
for obtaining this information. All strategies are subject to future modification because external
and internal factors are constantly changing. Three fundamental strategy-evaluation activities
are (1) reviewing external and internal factors that are the bases for current strategies, (2)
measuring performance, and (3) taking corrective actions. Strategy evaluation is needed
because success today is no guarantee of success tomorrow! Success always creates new and
different problems; complacent organizations experience demise.

Process of  Strategy Evaluation

Strategy formulation, implementation, and evaluation activities occur at three hierarchical levels
in a large organization, corporate, divisional, or strategic business unit, and functional. By
fostering communication and interaction among managers and employees across hierarchical
levels, strategic management helps a firm function as a competitive team. Most small business
and some large businesses do not have divisions or strategic business units; they have only the
corporate and functional levels. Nevertheless, managers and employees at these two levels
should be actively involved in strategic-management activities.

Related Posts:

Strategy dynamics
From Wikipedia, the free encyclopedia

Jump to: navigation, search

The word ‘dynamics’ appears frequently in discussions and writing about strategy, and is used in
two distinct, though equally important senses.

The dynamics of strategy and performance concerns the ‘content’ of strategy – initiatives,
choices, policies and decisions adopted in an attempt to improve performance, and the results
that arise from these managerial behaviors.

The dynamic model of the strategy process is a way of understanding how strategic actions
occur. It recognizes that strategic planning is dynamic, that is, strategy-making involves a
complex pattern of actions and reactions. It is partially planned and partially unplanned.

A literature search shows the first of these senses to be both the earliest and most widely used
meaning of ‘strategy dynamics’, though that is not to diminish the importance of the dynamic
view of the strategy process.
Contents
[hide]

 1 Static Models of Strategy and Performance

 2 The need for a Dynamic Model of Strategy and Performance
 3 A Possible Dynamic Model of Strategy and Performance
 4 The Static Model of the Strategy Process
 5 The Dynamic Model of the Strategy Process
 6 Criticisms of Dynamic Strategy Process Models
 7 See also
 8 References

[edit] Static Models of Strategy and Performance

The static assessment of strategy and performance, and its tools and frameworks dominate
research, textbooks and practice in the field. They stem from a presumption dating back to before
the 1980s that market and industry conditions determine how firms in a sector perform on
average, and the scope for any firm to do better or worse than that average. E.g. the airline
industry is notoriously unprofitable, but some firms are spectacularly profitable exceptions.

The ‘industry forces’ paradigm was established most firmly by Michael Porter, (1980) in his
seminal book ‘Competitive Strategy’, the ideas of which still form the basis of strategy analysis
in many consulting firms and investment companies. Richard Rumelt (1991) was amongst the
first to challenge this presumption of the power of ‘industry forces’, and it has since become
well-understood that business factors are more important drivers of performance than are
industry factors – in essence, this means you can do well in difficult industries, and struggle in
industries where others do well. Although the relative importance of industry factors and firm-
specific factors continues to be researched, the debate is now essentially over – management of
strategy matters.

The increasing interest in how some businesses in an industry perform better than others led to
the emergence of the ‘resource based view’ (RBV) of strategy (Wernerfelt, 1984; Barney, 1991,
Grant 1991), which seeks to discover the firm-specific sources of superior performance – an
interest that has increasingly come to dominate research.

[edit] The need for a Dynamic Model of Strategy and

Performance
The debate about the relative influence of industry and business factors on performance, and the
RBV-based explanations for superior performance both, however, pass over a more serious
problem. This concerns exactly what the ‘performance’ is that management seeks to improve.
Would you prefer, for example, (A) to make $15m per year indefinitely, or (B) $12m this year,
increasing by 20% a year, starting with the same resources?

Nearly half a century ago, Edith Penrose (1959) pointed out that superior profitability (e.g. return
on sales or return on assets) was neither interesting to investors – who value the prospect of
increasing future cash flows – nor sustainable over time. Profitability is not entirely unimportant
– it does after all provide the investment in new resources to enable growth to occur. More
recently, Rugman and Verbeke (2002) have reviewed the implications of this observation for
research in strategy. Richard Rumelt (2007) has again raised the importance of making progress
with the issue of strategy dynamics, describing it as still ‘the next frontier … underresearched,
underwritten about, and underunderstood’.

The essential problem is that tools explaining why firm A performs better than firm B at a point
in time are unlikely to explain why firm B is growing its performance more rapidly than firm A.

This is not just of theoretical concern, but matters to executives too – efforts by the management
of firm B to match A’s profitability could well destroy its ability to grow profits, for example. A
further practical problem is that many of the static frameworks do not provide sufficiently fine-
grained guidance on strategy to help raise performance. For example, an investigation that
identifies an attractive opportunity to serve a specific market segment with specific products or
services, delivered in a particular way is unlikely to yield fundamentally different answers from
one year to the next. Yet strategic management has much to do from month to month to ensure
the business system develops strongly so as to take that opportunity quickly and safely. What is
needed, is a set of tools that explain how performance changes over time, and how to improve its
future trajectory – i.e. a dynamic model of strategy and performance.

Rumelt's Criteria

Richard Rumelt developed four criteria for evaluating strategies:

Consistency

    Are the external strategies consistent with (supported by) the various internal aspects
of the organization? You must examine all the various functional and internal
management strategies employed by the organization and compare them with the
external business strategy.

Consonance

    Are the strategies in agreement with the various external trends (and sets of trends)
in the environment? To answer this questions, you need to look at all the major trends
that impact the selected strategy - both positively and negatively.

Feasibility

    Is the strategy reasonable in terms of the organization's resources?

 Money and capital

 Management, professional, and technical resources

 Time span

Advantage

    Does the strategy create and/or maintain a competitive advantage?

 Resources

 Skills

 Position

STRATEGY REVIEW, EVALUATION, AND CONTROL

OUTLINE

¨ The Nature of Strategy Evaluation

¨ A Strategy-Evaluation Framework

¨ Published Sources of Strategy-Evaluation Information

¨ Characteristics of an Effective Evaluation System

¨ Contingency Planning
¨ Auditing

¨ Using Computers to Evaluate Strategies

OBJECTIVES

After studying this paper, you should be able to do the following:

1. Describe a practical framework for evaluating strategies.

2. Explain why strategy evaluation is complex, sensitive, and yet essential for organizational
success.

3. Discuss the importance of contingency planning in strategy evaluation.

4. Discuss the role of auditing in strategy evaluation.

5. Explain how computers can aid in evaluating strategies.

OVERVIEW

The best formulated and implemented strategies become obsolete as a firm’s external and internal
environments change. It is essential, therefore, that strategists systematically review, evaluate, and
control the execution of strategies. This Paper presents a framework that can guide managers’ efforts
to evaluate strategic-management activities, to make sure they are working, and to make timely
changes. Computer information systems being used to evaluate strategies are discussed. Guidelines
are presented for formulating, implementing, and evaluating strategies.

EXTENDED PAPER OUTLINE WITH TIPS

VTN (Visit the Net): www.mindtools.com/plevplan.html gives excellent information about evaluating
strategies including analytical tools.
I. THE NATURE OF STRATEGY EVALUATION

A. Importance of Strategy Evaluation

1. The strategic-management process results in decisions that can have significant,

long-lasting consequences. Erroneous strategic decisions can inflict severe penalties
and can be exceedingly difficult, if not impossible, to reverse.

2. Most strategists agree, therefore, that strategy evaluation is vital to an organization’s

well-being; timely evaluations can alert management to problems or potential
problems before a situation becomes critical.

3. Strategy evaluation includes three basic activities:

a. Examining the underlying bases of a firm’s strategy.

b. Comparing expected results with actual results.

c. Taking corrective actions to ensure that performance conforms to plans.

4. The strategy-evaluation stage of the strategic-management process.

5. Strategy evaluation can be a complex and sensitive undertaking. Too much emphasis
on evaluating strategies may be expensive and counterproductive. Yet, too little or
no evaluation can create even worse problems. Strategy evaluation is essential to
ensure that stated objectives are being achieved.

6. It is impossible to demonstrate conclusively that a particular strategy is optimal, but it

can be evaluated for critical flaws. Here are four criteria to use in evaluating a
strategy:

a. consistency
b. consonance
c. feasibility
d. advantage
 7. These trends make strategy evaluation difficult:

a. dramatic increase in environmental complexity

b. difficult in predicting future
c. increasing number of variables
d. rapid rate of obsolescence
e. increase in the number of world events affecting organization
f. decreasing time spans for planning

VTN (Visit the Net): www.csuchico.edu/mgmt/strategy/module1/sld046.htm describes the how and

why of strategy evaluation.

VTN (Visit the Net): www.csuchico.edu/mgmt/strategy/module1/sld047.htm elaborates on “taking

corrective actions.”

B. The Process of Evaluating Strategies

1. Strategy evaluation is necessary for all sizes and kinds of organizations.

a. Strategy evaluation should initiate managerial questioning of expectations and

assumptions, trigger a review of objectives and values, and stimulate creativity in
generating alternatives and formulating criteria of evaluation.

2. Evaluating strategies on a continuous rather than a periodic basis allows benchmarks

of progress to be established and more effectively monitored.

3. Managers and employees of the firm should continually be aware of progress being
made toward achieving the firm’s objectives. As critical success factors change,
organizational members should be involved in determining appropriate corrective
actions.
VTN (Visit the Net): www.agnr.umd.edu/users/NERA/newplan.html#strategies provides the strategic
plan of Northeastern Regional Association of State Agricultural Experiment Station Directors for the
years 1996 to 2000 including its measures of success.

II. A STRATEGY-EVALUATION FRAMEWORK

The strategy-evaluation activities in terms of key questions that should be addressed,

alternative answers to those questions, and appropriate actions for an organization to take.

A. Reviewing Bases of Strategy

1. By developing a revised EFE Matrix and IFE Matrix, the underlying bases of an
organization’s strategy can be approached and reviewed.

a. A revised IFE Matrix should focus on changes in the organization’s management,

marketing, finance/accounting, production/operations, R&D, and MIS strengths
and weaknesses.

b. A revised EFE Matrix should indicate how effectively a firm’s strategies have been
in response to key opportunities and threats.

VTN (Visit the Net): www.sba.gov/starting/businessplan.html provides a business plan outline.

B. Measuring Organizational Performance

1. 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.
 2. Failure to make satisfactory progress toward accomplishing long-term or annual
objectives signals a need for corrective action.

3. Quantitative criteria commonly used to evaluate strategies are financial ratios, which
strategists use to make three critical comparisons:

a. comparing the firm’s performance over different time periods,

b. comparing the firm’s performance to competitors, and
c. comparing the firm’s performance to industry averages.

4. Key financial ratios for measuring organizational performance:

a. return on investment
b. return on equity
c. profit margin
d. market share
e. debt to equity
f. earnings per share
g. sales growth
h. asset growth

C. Taking Corrective Action

1. The final strategy-evaluation activity, taking corrective action, requires making

changes to reposition a firm competitively for the future.

2. Examples of changes that may be needed are altering an organization’s structure,

replacing one or more key individuals, selling a division, or revising a business
mission.

3. Taking corrective action raises employees’ and managers’ anxieties. Research

suggests that participation in strategy-evaluation activities is one of the best ways to
overcome individuals’ resistance to change.

VTN (Visit the Net): www.opm.state.ct.us/mgmt/busguide/50states/guides.htm provides strategic

management handbooks with detailed instructions for planning in certain states.
VTN (Visit the Net): www.customs.treas.gov/about/strat/index.htm provides the strategic plan for
the US Customs Office.

III. PUBLISHED SOURCES OF STRATEGY-EVALUATION INFORMATION

A. Examples of Helpful Publications

1. A number of publications are helpful in evaluating a firm’s strategies. For example,

Fortune annually identifies and evaluates the Fortune 1,000 (the largest
manufacturers) and the Fortune 50 (the largest retailers, transportation companies,
utilities, banks, insurance companies, and diversified financial corporations in the
United States).

2. Another excellent evaluation of corporations in America, “The Annual Report on

American Industry,” is published annually in the January issue of Forbes. Business
Week, Industry Week, and Dun’s Business Month also periodically publish detailed
evaluations of American businesses and industries.

Tip: The following are the website addresses of publications that frequently report on the strategies
of American firms.

 Business 2.0 {http://www.business2.com/}

 Business Week {http://www.businessweek.com/}

 Fast Company {http://www.fastcompany.com/homepage/}

 Fortune {http://www.fortune.com/fortune/}

 Forbes {http://www.forbes.com/}

 Industry Week {http://www.industryweek.com/}

 Red Herring {http://www.herring.com/}

IV. CHARACTERISTICS OF AN EFFECTIVE EVALUATION SYSTEM

A. Strategy evaluation must meet several basic requirements to be effective.

1. Strategy-evaluation activities must be economical; too much information can be just

as bad as too little information.

2. Strategy-evaluation activities should also be meaningful; they should specifically

relate to a firm’s objectives.

3. Strategy-evaluation activities should provide timely information; on occasion and in

some areas, managers may need information daily.

4. Strategy evaluation should be designed to provide a true picture of what is happening.

B. There is more than 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.

V. CONTINGENCY PLANNING

A. Essence of Contingency Planning

1. A basic premise of good strategic management is that firms plan ways to deal with
unfavorable and favorable events before they occur.

2. Contingency plans can be defined as alternative plans that can be put into effect if
certain key events do not occur as expected.

B. Effective Contingency Planning Involves These Steps:

1. Identify both beneficial and unfavorable events that could possibly derail the strategy
or strategies.
 2. Specify trigger points. Estimate when contingent events are likely to occur.

3. Assess the impact of each contingent event. Estimate the potential benefit or harm
of each contingent event.

4. Develop contingency plans. Be sure that the contingency plans are compatible with
current strategy and financially feasible.

5. Assess the counterimpact of each contingency plan. That is, estimate how much each
contingency plan will capitalize on or cancel out its associated contingent event.

6. Determine early warning signals for key contingent events. Monitor the early
warning signals.

7. Develop advanced action plans to take advantage of the available lead time.

VI. AUDITING

A. Auditing is defined by the American Accounting Association (AAA) as “a systematic

process of objectively obtaining and evaluating evidence regarding assertions about
economic actions and events to ascertain the degree of correspondence between those
assertions and established criteria, and communicating the results to interested users.”

1. People who perform audits can be divided into three groups: independent auditors,
government auditors, and internal auditors.

2. Two government agencies, the General Accounting Office (GAO) and the Internal
Revenue Service (IRS), employ government auditors responsible for making sure that
organizations comply with federal laws, statutes, and policies.

B. The Environmental Audit

1. For an increasing number of firms, overseeing environmental affairs is no longer a

technical function performed by specialists; rather, it has become an important
strategic-management concern. It should be as rigorous as a financial audit.
 2. It should include training workshops in which staff help design and implement the
policy. It should be budgeted and have funds allocated to ensure its viability.

3. A Statement of Environmental Policy should be published periodically.

VII. USING COMPUTERS TO EVALUATE STRATEGIES

When properly designed, installed, and operated, a computer network can efficiently acquire
information promptly and accurately. Networks can allow diverse strategy-evaluation
reports to be generated for, and responded by different levels and types of managers.

ISSUES FOR REVIEW AND DISCUSSION

1. Why has strategy evaluation become so important in business today?

Answer: Strategy evaluation is critically important today because internal and external factors
often change quickly and dramatically. Key factors need to be monitored during strategy-
evaluation activities. For example, technology is shortening the product life cycle in nearly all
industries. The low value of the dollar is opening up many foreign markets to American exports
and is fostering foreign acquisition of U.S. assets and companies.

2. BellSouth Services is considering putting divisional EFE and IFE matrices online for
continual updating. How would this affect strategy evaluation?

Answer: Putting divisional EFE and IFE matrices online would greatly facilitate strategy
evaluation. Analysts expect this trend to become a common practice at many large and small,
profit and nonprofit organizations alike.
3. What types of quantitative and qualitative criteria do you think David Glass, CEO of Wal-
Mart, uses to evaluate the company’s strategy?

Answer: Mr. Glass no doubt follows the example set by Sam Walton, who was claimed to be the
richest person in America. He used financial ratios as quantitative criteria to evaluate Wal-Mart’s
market development strategy. Mr. Walton also used Rumelt’s qualitative criteria for evaluating
strategies. Mr. Walton continually monitored internal and external factors as part of Wal-Mart’s
strategy-evaluation process, because significant changes in underlying factors can necessitate a
change in corporate strategy before those factors negatively impact earnings and revenues.

4. As owner of a local, independent supermarket explain how you would evaluate the firm’s
strategy.

Answer: For small businesses such as a local supermarket, strategy evaluation is less formal than
in large organizations. However, both qualitative and quantitative criteria should be used to
evaluate the small supermarket’s strategies, because large supermarket stores that offer one-
stop shopping for virtually everything are proliferating across the country.

5. Under what conditions are corrective actions not required in the strategy-evaluation
process?

Answer: The only time corrective actions would not be required in strategy evaluation is when
major changes have not occurred in the firm’s internal or external strategic position and the firm
is progressing satisfactorily towards achieving its stated objectives.

6. Identify the types of organizations that may need to evaluate strategy more frequently than
others. Justify your choices.

Answer: Organizations that compete in more turbulent industries may need to evaluate
strategies more often than others. Several examples of turbulent industries are the computer
industry, the communications industry, and the aerospace industry.

7. As executive director of the state forestry commission, in what way and how frequently
would you evaluate the organization’s strategies?
 Answer: Strategy evaluation should be an ongoing, continuous process rather than conducted at
the end of a specified period of time, such as at the end of each year or at the end of every three
years. The need exists to continually re-evaluate the forestry commission’s strategies as
legislative actions evolve and as constituency groups align for or against important issues facing
the state.

8. Identify some key financial ratios that would be important in evaluating a bank’s strategy.

Answer: In a bank, two key financial items are demand deposits (checking accounts) and time
deposits (savings accounts). Other important items are commercial loans and consumer loans.
The ratio of these items to total bank assets and total bank profits could be particularly
important in evaluating the strategies of a bank.

9. As owner of a chain of hardware stores, describe how you would approach contingency
planning.

Answer: Effective contingency planning involves these steps:

 Identify both beneficial and unfavorable events that could possibly derail the strategy or
strategies.
 Specify trigger points. Estimate when contingent events are likely to occur.
 Assess the impact of each contingent event. Estimate the potential benefit or harm of each
contingent event.
 Develop contingency plans. Be sure that contingency plans are compatible with current strategy
and financially feasible.
 Assess the counterimpact of each contingency plan. That is, estimate how much each
contingency plan will capitalize on or cancel out its associated contingent event.
 Determine early warning signals for key contingent events. Monitor the early warning signals.
 Develop advanced action plans to take advantage of the available lead time.

10. Strategy evaluation allows an organization to take a proactive stance toward shaping its
own future. Discuss the meaning of this statement.

Answer: Proactive means the firm tries to initiate and influence. Reactive means the firm just
reacts to events and trends. When a firm pursues strategy evaluation it is attempting to
anticipate issues that will be important and represent a proactive approach.
Does a framework for evaluation exist?
In 1999, the Center for Disease Control and Prevention published a document for evaluation, Framework
for Program
Evaluation in Public Health. It includes six steps and four sets of standards for conducting good
evaluations of public
health strategies or programs. These steps and standards are integrated throughout the Guidebook. A
pictorial version
of the framework is below; with arrows that signify the iterative process of evaluation. Data informs plan
development;
implementation and ongoing process evaluation inform plan revisions.
Steps of Evaluation
Step 1: Determine who your key stakeholders are and
get their involvement in the evaluation process.
Step 2: Describe the strategy you want to evaluate.
Step 3: Design your evaluation plan and develop an
action plan to carry it out.
Step 4: Obtain the data you need to answer your
evaluation questions.
Step 5: Analyze your data and report your findings.
Standards
Utility: Who needs the evaluation results? Will the
evaluation provide relevant information in a
timely manner for them?
Feasibility: Are the planned evaluation activities
realistic given the time, resources, and expertise at
hand?
Propriety: Does the evaluation protect the rights of
individuals and protect the welfare of those
involved? Does it engage those most directly
affected by the program, such as participants or
the surrounding community?
Accuracy: Will the evaluation produce findings that are
valid and reliable, given the needs of those who
will use the results?
Reproduced from CDC, 2005.9
Evaluation Framework
Balanced Scorecard Basics

The balanced scorecard is a strategic planning and

management system that is used extensively in business
and industry, government, and nonprofit organizations
worldwide to align business activities to the vision and
strategy of the organization, improve internal and external
communications, and monitor organization performance
against strategic goals. It was originated by Drs. Robert
Kaplan (Harvard Business School) and David Norton as a Why Implement a Balanced
performance measurement framework that added Scorecard?
strategic non-financial performance measures to
traditional financial metrics to give managers and
 Increase focus on
executives a more 'balanced' view of organizational
strategy and results
performance.  While the phrase balanced scorecard was
  Improve organizational
coined in the early 1990s, the roots of the this type of performance by
approach are deep, and include the pioneering work of measuring what matters
General Electric on performance measurement reporting in  Align organization
the 1950’s and the work of French process engineers (who strategy with the work
created the Tableau de Bord – literally, a "dashboard" of people do on a day-to-
performance measures) in the early part of the 20th day basis
century.  Focus on the drivers of
future performance
The balanced scorecard has evolved from its early use as  Improve communication
a simple performance measurement framework to a full of the organization’s
strategic planning and management system. The “new” Vision and Strategy
balanced scorecard transforms an organization’s strategic  Prioritize Projects /
plan from an attractive but passive document into the Initiatives
"marching orders" for the organization on a daily basis. It
provides a framework that not only provides performance  
measurements, but helps planners identify what should be
done and measured. It enables executives to truly execute
their strategies.

This new approach to strategic management was first

detailed in a series of articles and books by Drs. Kaplan
and Norton. Recognizing some of the weaknesses and
vagueness of previous management approaches, the
balanced scorecard approach provides a clear prescription
as to what companies should measure in order to 'balance'
the financial perspective. The balanced scorecard is a  
management system (not only a measurement system)
that enables organizations to clarify their vision and
 
strategy and translate them into action. It provides
feedback around both the internal business processes and
What are the Primary
external outcomes in order to continuously improve
Implementation Success Factors?
strategic performance and results. When fully deployed,
Click Here to Find Out
the balanced scorecard transforms strategic planning from
an academic exercise into the nerve center of an
enterprise.  

Kaplan and Norton describe the innovation of the balanced Want to learn more? 
scorecard as follows: Please visit the Institute's Public
Workshop Schedule or contact the
"The balanced scorecard retains traditional financial Institute about on-site training or
measures. But financial measures tell the story of past consulting services.  Or schedule a live,
customized webinar with an Institute
events, an adequate story for industrial age companies for
consultant, or try the Institute's new E-
which investments in long-term capabilities and customer
Learning program.
relationships were not critical for success. These financial
measures are inadequate, however, for guiding and
evaluating the journey that information age companies  
must make to create future value through investment in
customers, suppliers, employees, processes, technology,  
and innovation."
 Other Resources:

Definitions of Balanced
Scorecard Strategic
Planning & Management
Terms

 
  
Definitions of General
Management Terms
 
 
Using the Balanced Scorecard
to Align Your Organization 
by Howard Rohm
Balanced Scorecards, when developed as
strategic planning and management
systems, can help align an organization
behind a shared vision of success.
Adapted from Robert S. Kaplan and David P. Norton, “Using the Balanced Read More >> 
Scorecard as a Strategic Management System,” Harvard Business Review
(January-February 1996): 76.

The Balanced Scorecard -- Not

Perspectives Just Another Project  
by Paul Arveson
The balanced scorecard suggests that we view the The balanced scorecard management
system is not just another project. It is
organization from four perspectives, and to develop fundamentally different from project
metrics, collect data and analyze it relative to each of management in several respects.
these perspectives: Read More >>
 
The Learning & Growth Perspective
Web 2.0 and the Automated Balanced
This perspective includes employee training and corporate Scorecard
cultural attitudes related to both individual and corporate by David Wilsey
self-improvement. In a knowledge-worker organization, Improve Your Performance "News"
Read More >>
people -- the only repository of knowledge -- are the main
resource. In the current climate of rapid technological
 
change, it is becoming necessary for knowledge workers
to be in a continuous learning mode. Metrics can be put
into place to guide managers in focusing training funds Improve Government
where they can help the most. In any case, learning and Performance
growth constitute the essential foundation for success of Read More>>
any knowledge-worker organization.
 

Kaplan and Norton emphasize that 'learning' is more than

'training'; it also includes things like mentors and tutors What is a Balanced
within the organization, as well as that ease of Scorecard?
communication among workers that allows them to readily Need more information?  Sign up for a
webinar or our e-learning program for
get help on a problem when it is needed. It also includes
more.
technological tools; what the Baldrige criteria call "high
performance work systems."  

 
The Business Process Perspective
This perspective refers to internal business processes.
 
Metrics based on this perspective allow the managers to
know how well their business is running, and whether its  
products and services conform to customer requirements
(the mission). These metrics have to be carefully designed  
by those who know these processes most intimately; with
our unique missions these are not something that can be  
developed by outside consultants.
 
The Customer Perspective
Recent management philosophy has shown an increasing Professional Certification
realization of the importance of customer focus and
customer satisfaction in any business. These are leading
indicators: if customers are not satisfied, they will Did you know that
eventually find other suppliers that will meet their needs. the Institute's
Poor performance from this perspective is thus a leading Professional
indicator of future decline, even though the current Certification
financial picture may look good. Program is offered
in association with
In developing metrics for satisfaction, customers should GWU?
be analyzed in terms of kinds of customers and the kinds Read More >>
of processes for which we are providing a product or View Schedule >>
service to those customer groups.  

The Financial Perspective

Kaplan and Norton do not disregard the traditional need
for financial data. Timely and accurate funding data will
always be a priority, and managers will do whatever
necessary to provide it. In fact, often there is more than
enough handling and processing of financial data. With the
implementation of a corporate database, it is hoped that
more of the processing can be centralized and automated.
But the point is that the current emphasis on financials
leads to the "unbalanced" situation with regard to other
perspectives.  There is perhaps a need to include
additional financial-related data, such as risk assessment
and cost-benefit data, in this category.

Strategy Mapping

Strategy maps are communication tools used to tell a

story of how value is created for the organization.  They
show a logical, step-by-step connection between strategic
objectives (shown as ovals on the map) in the form of a
cause-and-effect chain.  Generally speaking, improving
performance in the objectives found in the Learning &
Growth perspective (the bottom row) enables the
organization to improve its Internal Process perspective
Objectives (the next row up), which in turn enables the
organization to create desirable results in the Customer
and Financial perspectives (the top two rows).

Balanced Scorecard Software

The balanced scorecard is not a piece of software. 

Unfortunately, many people believe that implementing
software amounts to implementing a balanced
scorecard. Once a scorecard has been developed and
implemented, however, performance management
software can be used to get the right performance
information to the right people at the right time.
Automation adds structure and discipline to implementing
the Balanced Scorecard system, helps transform disparate
corporate data into information and knowledge, and helps
communicate performance information. The Balanced
Scorecard Institute formally recommends the QuickScore
Performance Information SystemTM developed by Spider
Strategies and co-marketed by the Institute.
More about Software >>
 

he four perspectives
The 1st Generation design method proposed by Kaplan & Norton was based on the use of three
non-financial topic areas as prompts to aid the identification of non-financial measures in
addition to one looking at Financial. The four "perspectives" proposed were[20]:

 Financial: encourages the identification of a few relevant high-level financial measures. In

particular, designers were encouraged to choose measures that helped inform the answer to
the question "How do we look to shareholders?"
 Customer: encourages the identification of measures that answer the question "How do
customers see us?"
 Internal Business Processes: encourages the identification of measures that answer the
question "What must we excel at?"
 Learning and Growth: encourages the identification of measures that answer the question "Can
we continue to improve and create value?".

These 'prompt questions' illustrate that Kaplan & Norton were thinking about the needs of small
to medium sized commercial organisations in the USA (the target demographic for the Harvard
Business Review) when choosing these topic areas. They are not very helpful to other kinds of
organizations, and much of what has been written on Balanced Scorecard since has, in one way
or another, focused on the identification of alternative headings more suited to a broader range of
organizations.
 Options Strategy Evaluation Tool

Options Strategy Evaluation

View feature highlights

Run on-line guided tour (8.5 minutes)

If you don't have the right information to make informed decisions when trading
options then you probably won't be trading options for very much longer.  To do well
-- in fact to survive -- access to options analysis software to evaluate various trading
strategies -- including the evaluation of follow-up strategies when things haven't quite
gone your way --  is essential. 

The Options Strategy Evaluation Tool (OSET) enables you to construct and evaluate
various strategies made up of combinations of trades in puts and calls plus trades in
the underlying asset. Four types of options are handled: equity, currency, index and
futures. See FAQ for details.

OSET  will price all options using either the Black-Scholes model or the Cox, Ross
and Rubinstein binomial model.  Options can be declared as being of American or
European-style exercise. Dividends paid on the underlying asset can be specified as
being discrete (up to four individual payments, each consisting of an amount and an
ex-dividend date) or as continuous (yield pa). 

You then use the tool to show, graphically using a pay-off diagram or in tabular form,
the impact on your profit potential of changes in stock price and time.  OSET is free
to download and use.
 

Pay-off Diagrams: Impact of Underlying Price & Time

This picture is an example of a pay-off diagram from the Options Strategy Evaluation
Tool.
The pay-off diagram makes it easy to see how time decay impacts your strategies by
letting you decrease the time from deal date to expiration to the point where, at
expiration, the time line (bottom line in the example above) merges with the pay-off
line.  You can vary the time to expiration by selecting a specific date, or by changing
the time remaining a day at a time.  You can also get OSET to automatically cycle
though the days to expiration thus producing an animated picture of the effects of
time decay. 

Payoff diagrams can also be viewed in 3D to simultaneously show profit/loss by

underlying price and time to expiry as per the above example of a short butterfly
strategy.  To enable better viewing of complex 'surfaces' the diagrams can be
dynamically rotated both horizontally and vertically using spin buttons (on the right
of the above picture).  The "Greeks" can be shown in the same way.

3D payoff diagrams are a premium feature, requiring version 10.0h of the Finance
Add-in for Excel or above to be installed.
 
Model time and volatility

The profit if the strategy is closed prior to expiry can optionally be displayed for five
dates (time slices) simultaneously on the payoff diagram.

The impact of volatility changes after the deal has been entered into but prior to
expiry can then be dynamically modelled by clicking a spin button. The results are
shown graphically, as above, and also in table form. 

In the tables the original strategy, the adjusted strategy, and the difference between
them (ie the volatility impact) are shown next to each other for each of the five
discrete dates to expiry. Negative impacts are shown in red thereby making it easy to
see the impacts of changes in volatility on volatility-sensitive strategies such as
calendar spreads and strangles.

A breakeven analysis is produced for each of the five time-slices showing all
breakeven points and the probabilities of falling within the breakeven bands. The
impact of future changes in volatility on the breakeven points can be dynamically
modelled. In the example pictured above - which has two breakeven points -  the
analysis would show the probability of falling below the lower point, the probability
of being between the lower and the upper point, and the probability of being above
the upper point, for each of the six time slices between now and expiry.

Time and volatility modelling and breakeven analysis are premium features, requiring
version 9.9u of the Finance Add-in for Excel or above to be installed.
 

Compare Alternative Strategies

OSET enables you to perform "what if" scenario analyses by comparing two
strategies, displayed in different colours, on the same pay-off diagram, like in the
following example:

The strategies compared can be for the same or different underlying assets. If the
underlying assets, and hence the underlying asset prices are not related to each other,
the tool will still let you compare the two strategies in a meaningful way by
representing the underlying asset price as percent change from current price. 

The impact of using different calculation models (Black-Scholes or Binomial) and

different exercise styles (American or European) can also be observed by displaying
two versions of the same strategy, but with different calculation models and exercise
styles, on the same pay-off diagram. A slider-bar "control panel" lets you dynamically
vary volatility, spot, strikes, time to expiration etc. while simultaneously observing
the effect on strategy payoffs.
 

View "Greeks" for Individual Trades and for Net Strategy Position

For each strategy (which may consist of multiple option and share trades) OSET will
calculate the hedge parameters, or  "Greeks",  (delta, gamma, vega, theta and rho) for
each individual strategy trade, and for the entire strategy (ie for the net strategy
position).  The "position Greeks" provide essential information for traders who, for
example, want to maintain a delta neutral position to hedge an entire portfolio. 

The Greeks can be viewed in tabular form or graphically for any range of underlying
stock prices.  
You can view the impact of time decay on the "Greeks" by changing the time to
expiration a day at a time, by specifying a specific date, or by getting the tool to
automatically cycle through the time to expiration.

With the premium version of OSET Greeks can be also be produced as 3D charts,
which show position Greeks simultaneously by underlying price and time to expiry as
per the example above of theta for a bear spread.  As for the 3D payoff diagrams, the
3D Greek diagrams can also be dynamically rotated with spin buttons using the
controls you see on the right if the picture..

Position "Greeks", or hedge parameters, can optionally be superimposed on the pay-

off diagram. For example the delta of the entire position  -- the equivalent stock
position, or ESP -- can be displayed on the pay-off diagram along with the profit
data.  Traders wishing to hedge their positions can then see the number of shares they
would have to buy/short to achieve neutrality  -- for the range of underlying asset
prices shown on the pay-off diagram, and for all dates to expiration -- in the context
of the profit information.  Similarly for the other "Greeks".

The yellow line in the diagram above (which uses the right-hand axis)  illustrates the
combining of the Greeks with strategy pay-off information. (the other two lines show
profit at expiration and at "time now".)
 

Automatic Position Hedging

As well as clearly revealing the sensitivity of your strategies to changes in the

underlying price, volatility, time and interest rates, (as described above)  the Options
Strategy Evaluation Tool lets you interactively adjust strategies to remove your
exposure to one or both of the two most important of these risk factors: underlying
price and volatility.

A pop-up control panel lets you adjust your holdings in the underlying or in one or
more options trades to achieve neutrality with respect to delta, delta and gamma,
vega, delta and vega, or delta, gamma and vega simultaneously.

You simply select the type of hedging required (delta, vega, delta-gamma....) and the
trades to be adjusted, and the Options Strategy Evaluation Tool will make the
adjustments automatically.  In effect it enables you to take "standard" strategies like
bull spreads, butterflies and strangles, and to turn them into strategies tailored to your
specific risk objectives and your view of the market.

For instance if you believe, because of an impending major company announcement,

that volatility is likely to sharply increase but the underlying stock could go either
way depending on whether the news is good or bad then using this technique you
could ensure that current positions are adjusted to be delta and gamma neutral thereby
removing the stock price risk and allowing you to profit from the expected volatility
increase.

The pop-up control panel lets you dynamically examine various alternatives to
achieving the same neutral outcome, something which is virtually impossible to do
manually. As adjustments are made they are instantly reflected on the payoff diagram
so you can see the impact on profitability.   Once alternatives have been explored you
can then either revert to the original strategy or retain the newly hedged position.

View demo on automatic position hedging.

Automatic position hedging is a premium feature which requires the full version of
the  Hoadley Finance Add-in for Excel to be installed on your PC.
 

Backtesting

OSET allows you to backtest any past a strategy by stepping through the strategy
from deal date to expiry using actual market data.  The profit or loss if the strategy
had been closed out at any point in time is calculated so you can see see the
effectiveness of  various follow up actions in certain market conditions, such as
closing early vs closing later vs holding to expiry etc.

Data requirements for backtesting are very flexible:  Backtesting can either use
underlying asset price history data only or it can use option history data for some or
all of the past dates if available.  If underlying data only is used OSET will calculate
option values at each step using the underlying asset price at that step.  If option
values are provided it will use these instead.

Underlying price data can be automatically retrieved from Yahoo Finance, imported
from a simple text file (both underlying and option data), or simply pasted into the
data sheet. 

Backtesting can be conducted "one step at a time" or automatically where it will go

through all dates from deal date to expiry and save the results on a worksheet for later
analysis.  At each backtesting step all tables and charts are dynamically updated to
reflect profit realized to date.

View demo on Backtesting.

Backtesting is a premium feature which requires the full version of the  Hoadley
Finance Add-in for Excel version 10.1r or above to be installed on your PC.
 

Standard Strategies plus Build Your Own

OSET contains most of the standard strategies: covered call write, straddle, strangle,
ratio spread, butterfly spread, bull and bear spreads, calendar spread, etc. These act as
templates for evaluating common strategies. 

However the tool is not in any way limited to these standard strategies and you can
construct, and save, any strategy out of the basic building blocks of buying and
selling puts and calls, and buying or selling the underlying stock.
 

Risk Management: Probability of Deal Success (or Failure)

What is the probability of maximum loss with your call?  What is the chance of not
ending up between the two breakeven points of your strangle at expiry?  How likely
is it that the underlying spot price of your covered call will rise 15% at any time
between now and option expiry, possibly triggering early exercise? Is the probability
of maximum profit larger or smaller than the probability of maximum loss with your
bull spread?

The answers to the above types of questions are of fundamental importance in

managing risk. To help you understand your exposures and the likelihood of strategy
success the Options Strategy Evaluation Tool provides a detailed analysis of "end of
period" and "at any time during the period" underlying asset probabilities for each
strategy. The analysis can be viewed in tabular form, and graphically.

In graphical form the probabilities for a range of underlying asset prices are
superimposed on the payoff diagram for the strategy. This makes it easy for the
probability of hitting key targets, such as breakeven and maximum profit/loss to be
read directly from the payoff diagram.  Slider controls for "what if" analysis let you
dynamically view the impact of making changes to key variables, such as volatility,
underlying asset price, and interest rate on all probabilities.

An integrated probability calculator can be used to estimate probabilities involving

target ranges -- such as the probability of moving outside the breakeven points for a
straddle at any time prior to expiration of the deal (particularly relevant for options
with American exercise). Discrete dividends paid during the life of the option, which
can greatly affect probabilities, are taken into account.

Finally, probability cones showing in visual form the most probable range of future
asset prices at various maturities are produced for both "at end (expiry)"  and "any
time (touching)"  probabilities. Changes in key variables (volatility, dividend yields
etc.) can easily be modelled.  Probability cones provide an effective way of
understanding the complex relationships between maturity, volatility, interest rates
and dividend yields and their impact on breakeven points, and as such are an
important tool for strategy selection.

Probability/risk management is a premium feature which requires the full version of

the Hoadley Finance Add-in for Excel to be installed on your PC.
 

Financial Analysis

Maximum profit, maximum loss, and "static" returns (ie assuming spot remains
unchanged) are calculated by strategy. For each category (eg maximum profit), the
type of profit or loss (capped, unlimited), the dollar value and, where there is an
initial net debit, the percentage return for the period and the annualized ROI  are
shown.  In addition these numbers can also be calculated for any user-selected target
price at expiry.

In the case of strategies involving holding or shorting the underlying asset, dividends
received or paid are included in returns and the ROI calculations take account of the
timing of dividend cash flows.

You can therefore see at a glance the real returns you would get from, say, writing a
covered call on a dividend-paying stock for the following situations:  where the stock
price remains unchanged at expiry; where the call is exercised and the stock is called
away; and where the stock price drops or rises to any user-specified target level.
 

Volatility: Implied & Historic

The Options Strategy Evaluation Tool lets you specify one volatility covering all
options for a particular underlying asset.  This is often sufficient for strategy
evaluation purposes. 

However, to handle "volatility smiles" (when the implied distribution of the

underlying asset is not lognormal and the implied volatility depends on the strike
price) and the different volatilities implied by bid/ask spreads with a greater degree of
precision you can also specify an implied volatility for each options trade in the
strategy.  These volatilities are saved along with each strategy.

To help you estimate volatility, OSET includes two tools:

Implied volatility calculator: The calculator takes account of the calculation model used
(Black-Scholes, Binomial American...) and any dividends paid during the life of the option.
 

Historic volatility calculator: which automatically extracts historical price data from
Yahoo finance (most stock exchanges are supported) and plots historic and forecast
volatility using GARCH -- the most advanced volatility model available. The historic
volatility calculator also lets you 'model' the volatility smile for each underlying asset so
implied volatility can be more closely calibrated to observed market prices. 

To use the historic volatility features the full version of the Hoadley Finance Add-in for
Excel needs to be installed on your PC.

See volatility: implied or historical? for more information on the importance of

volatility  and the tools available.
 

Optimal Early Exercise Thresholds

For American options, which can be exercised at any time prior to maturity, the tool
will produce a report listing, for each option trade in a strategy, the underlying asset
prices and dates at which early exercise could be optimal. The probability of reaching
each early exercise threshold is also shown.

The report can be used to highlight the risks for option writers and the opportunities
for option holders of early exercise.
 

Sources of Data

Data for option trades can be entered manually.  However the Options Strategy
Evaluation Tool will also retrieve on-line option chains from a number of data
sources and options can be selected from the list of available options by a simple
point and click. A "suggest" button will automatically map a generic strategy (eg a
strangle) to actual option trades available in the option chain. This greatly speeds up
the process of trade selection and comparison of multiple strategies compared with
manual data entry.  Take the on-line tutorial for more details. 

The prices of all options, and the underlying asset, in a strategy can be updated from
on-line data at any time by one click of the mouse.

Option chain data may be either free and delayed for US, European (LIFFE and
Eurex), UK, Indian, and Australian markets;  free real-time for OptionsXpress
customers (US markets), TD AMERITRADE customers (US markets), Interactive
Brokers customers (US and some international markets);  or real-time subscription
using the Marketfeed quotes service (US markets), or eSignal  (US and international
markets), Stockwatch (Canadian and US markets), or WebLink's BullSignal for
Australian markets.  Option chains can also be imported from a simple comma
delimited text file if you have access to data from providers not explicitly handled by
the software.

See data providers for more information.

As well as providing a simple way of selecting options, the option chain facility also
lets you compare, for a given option, spread or combination, the impact on profit and
loss of increasing or deceasing strikes for a given expiry date, moving to different
expiry dates for a given set of strikes, or both. One button click moves the current
strategy to the next or previous strike combination or expiry date.

On-line option chains are also used to produce a number of "sentiment indicators":
put/call ratios (open interest and current volume) , and "open interest configuration"
charts, showing the open interest for puts and calls by strike.

On-line access to option chains is a premium feature, requiring the full version of the
Hoadley Finance Add-in for Excel.

For more information on the exchanges and data sources supported, see On-Line
Data.
 

Software Environment

The Options Strategy Evaluation Tool (OSET) runs under Microsoft Windows XP or
above, including including Windows 7, 32-bit and 64 bit editions, and requires
Microsoft Excel for Windows 2002 (Office XP) or above (32-bit) to be installed on
your PC. No other versions of Windows or Excel are supported.
 

Additional Information

View feature highlights for a summary of key features.

FAQ page for how to use the software and other aspects of its operation.

On-line demos & tutorials which will take you through the all the main features of the
software.

Once the software application has been installed on your hard drive you can
construct, and save, your own strategies without limit. 

To help you learn how to use OSET there is a brief "how to use the tool" section in
the FAQs and on-line demos and tutorials which provide a general overview of the
main functions plus some detailed guidance for using some of the more advanced
features of the tool.
 

Versions of OSET, & Download

Basic version:  The Options Strategy Evaluation Tool (OSET) is free to download. 
If you don't also have the Hoadley Finance Add-in for Excel on your PC then the
basic version of OSET is what you will get.

Premium version:    If you also install the full version of the Hoadley Finance Add-
in for Excel on your PC (either before or after installing OSET), the premium features
in the Options Strategy Evaluation Tool will be automatically enabled.  There is no
need to download OSET again -- your basic version of OSET will be automatically
converted to the premium version as soon as it detects that the Finance Add-in for
Excel has been installed on your PC.

The premium version of OSET is a major step up from the basic version in terms of
power and ease of use. See premium features for details.

The Hoadley Finance Add-in for Excel also includes these options applications and
portfolio analysis and design applications.

Hoadley Finance Add-in for Excel: Cost and on-line purchase.

Options Strategy Evaluation Tool: Download.

Copyright © 2010 Peter Hoadley | Terms of Use  |  W3C HTML 4.01

alse MicrosoftInternetExplorer4 /* Style Definitions */ table.MsoNormalTable {mso-style-name:"Table

Normal"; mso-tstyle-rowband-size:0; mso-tstyle-colband-size:0; mso-style-noshow:yes; mso-style-
parent:""; mso-padding-alt:0in 5.4pt 0in 5.4pt; mso-para-margin:0in; mso-para-margin-bottom:.0001pt;
mso-pagination:widow-orphan; font-size:10.0pt; font-family:"Times New Roman"; mso-ansi-
language:#0400; mso-fareast-language:#0400; mso-bidi-language:#0400;}

            Measuring the efficiency of the organizational strategy is extremely important to conduct
a SWOT analysis to figure out the points of strength, weakness, opportunities and both internal
and external threats of the entity in question. This requires taking certain precautions or even to
replace the entire strategy.

In corporate strategy, Johnson and Scholes present a model where strategic options are evaluated
according to three key success criteria:

•           Suitability (would it work?)

•           Feasibility (can it be made to work?)

•           Acceptability (will they work it?)

Suitability

Suitability deals with the overall logic of the strategy. The key question to consider is “does the
strategy address the key strategic issues underlined by the organization’s strategic position?”

•           Is it economically rational?

•           Would the organization get economies of scale, economies of scope or experience
economy?

•           Would it be suitable for environment and available capabilities?

Tools of evaluating suitability include:

•           Ranking strategic options.

•           Decision trees.

•           What-if analysis.

Feasibility

Feasibility asks questions regarding the resources required to implement the strategy are they
available? Can they be developed or obtained? Resources include funding, people, time and
information.

Tools of evaluating feasibility include:

•           Cash flow analysis and forecasting

•           Break-even analysis

•           Resource deployment analysis

Acceptability

Acceptability is concerned with the estimation of the identified stakeholders (mainly

shareholders, employees and customers) with the estimated performance outcomes, which can be
return, risk and stakeholder reactions.

•           Return deals with the profits expected by the stakeholders (financial and non-financial).
For example, shareholders would expect wealth Flourishing, employees would expect career
development and customers would expect better value for money.

•           Risk deals with the probability and consequences of failure of a strategy (financial and
non-financial).

•           Stakeholder reactions deals with anticipating the expected reaction of stakeholders.
Shareholders could oppose the issuing of new shares, employees and unions could oppose
outsourcing for fear of losing their jobs, customers could have worries about a merger with
regards to quality and support.

Tools that can be used to evaluate acceptability include:

•           what-if analysis

•           stakeholder mapping

General approaches

In general terms, there are two main approaches, which are opposite but complementary in some
ways, to strategic management:

Article Tags: Would Expect