Haberberg and Rieple: Strategic

Management
Chapter Eleven:
Assessing Organizational Performance
and Setting Strategic Priorities
Evaluating an organization’s performance

•Qualitative
– Do the firm’s current strategies ‘feel’ right?
– Do they fit in with strategies that have succeeded or failed
for other organizations in similar circumstances?
– Are they the kinds of choices that theory would recommend
for this kind of industry?
•Quantitative
– Is the organization achieving its purpose?
– What an organization measures indicates what its strategy
really is
Helps to identify major strategic issues and subsequently
develop strategic options
 Assessing strategic performance
• What do we observe?
– financial performance
– meeting stakeholder requirements
– operational performance
• Is the organization / unit performing as well as
it ought to
• What conclusions can be drawn?
 Measures of performance:
• Financial
– Absolute trends (turnover, volume, profits)
– Ratios
• Non-financial measures e.g.
– reputation
– market share
– output/employee
 Strategic financial performance
measures
• Measures of size and rate of growth/decline
– turnover (sales)
– unit sales, no of customers
– no of outlets, etc.
• Measures of effectiveness
• Profits (normally before interest and tax)

But note - well-chosen ratios often generate

more useful information than raw numbers
 Strategic financial performance
measures contd.
• Return on capital employed [ROCE]
– Profit before interest & tax/capital employed (sometimes
known as equity, net worth or net assets = total assets less
current liabilities)
– Useful for most businesses with a fixed asset base
• Return on equity (ROE)
– Profit after interest & tax/shareholders’ equity (= total assets
minus total liabilities)
– Useful for publicly-owned businesses where financial
management is a core activity
• Profit/employee
– for low fixed asset, “people businesses”
 Strategic financial performance
measures contd.
• Cash flow
– Cash burn
• EBITDA
– Earnings before interest, tax, depreciation and
amortization
 Measures of financial strength /
sustainability
• Gearing
– Debt/capital employed (or equity or net assets)
• High = danger signal
• Low = unused borrowing capacity
• Interest cover
– Profit before interest & tax/interest charge
• High figure may compensate for high gearing
• Liquidity:
– Current Ratio = current assets/current liabilities
– Acid Test = current assets - stock/ current liabilities
 Stakeholder requirements
• Stock market measures (use with caution!)
– Share price / shareholder value
– Earnings per share (EPS)
– Economic value added (EVA)
• Other stakeholder needs, e.g.:
– Cash flow (for private firm)
– Progress towards stated aims (for charity or public sector
organisation)
 Standard operating performance
measures
• Asset usage measures:
– sales/fixed assets
– sales per square foot [metre]
– sales per employee
– Revenue per passenger kilometre (RPK)
• Profit margin [return on sales, ROS]
– gross profit
• before interest + tax/turnover
– operating profit
• Unit sales value
• Indicators of management effectiveness
– stock turnover
– debtor turnover
 Tailored Performance Measures

• Give precise insights into nature of competitive

advantage
• Show if organisation is really doing what it says
• Show what the strategy really is
What an organisation measures and does often show its
true strategy better than declared goals do
 Strategic goal: to be a leader on
innovation
Measures of success against this objective:
Input measures
• Proportion of turnover spent on R&D
Outcome measures
• No of product innovations in past year
• No of patents
Balanced appraisal looks at inputs + outcomes
 Making comparisons
– External comparators
• competitors
• benchmarks from other industries
– are international data comparable?
– Internal comparators
• business units
• past performance
– Issues about length of period to use
» Need to eliminate one-off events in long-term
trends
 Drawing conclusions
• Numerical data typically open to many
interpretations
• More data => more questions!
• Combine qualitative and quantitative data

Best you can do is to reach a reasoned

assessment that fits the data
Summary of measures used in assessing
strategic performance
Type of measure Examples

Overall measures of financial performance ROCE, ROA, ROE, Profit/employee

Measures of stakeholder satisfaction (specific to organisation)

Measures of profit margin Operating profit/sales

Measures of asset utilisation Sales/ square metre, staff utilisation

Measures of unit sales value Turnover/units sold

Operational measures Debtor turnover, output/employee

Measures of financial strength Gearing, interest cover

Tailored measures of strategy achievement Input and outcome measures

 Strategic issues and priorities
• Key issues and priorities are the basis for
future strategies
– Successful or unsuccessful organization?
• Sources of distinctiveness
• Sources of sustainable performance
• Competitive stance
– Is performance improving or getting worse
• Reasons for past performance
• Expectations about future conditions
 Scenario planning
• Development of creative and imaginative
strategies to cope with unknown future events
– Overlaps with contingency planning
• Idea generation
• Data gathering
• Stories and what-ifs developed
• Implications assessed
• Indicators identified
• Plans developed
 Strategic issues
• Questions to which the organization must find answers
– May be Internal or external
– Positive or negative impact
e.g.
• How should it react to the emergence of new technologies?
• What should it do about emerging or disappearing markets?
• How should it deal with newly emerging competitors or respond
to changes in strategy by existing competitors?
• How can it utilize its strategic resources to consolidate its lead
over its existing competitors, or to expand?
• What should it do with business units that do not fit well with its
parenting skills?
 Issues relating to
• The environment
• Competitive stance
• Scope, scale, and diversity
• Value chain
• Resources
• Architecture and culture
• Management of complex organizations
• Innovation, learning, and change
 Strategic priorities
1. Survival factors and threshold resources that the
organization will no longer possess.
2. Strategic advantages that are missing, being eroded by
environmental change, imitated/substituted by
competitors, or dissipated through internal problems.
3. Time-constrained issues.
4. Proven resources, value chain attributes and parenting
skills that can be made strategic and/or leveraged into
other businesses or markets.
5. Speculative opportunities: new markets and products with
long-term potential, undeveloped or unproved resources.
6. Spare resources.