Evaluation of strategies and performance measurement.pptx

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1. Evaluating and analysing performance and strategies

2. Strategic Planning Process Overview Vision, Mission and Values Internal Analysis Industry Analysis External Analysis Strategy Implementation Performance Tracking and Control Strategy Formulation, Strategic Goals, Resources, Action Plans Strategic Plans Critical Success Factors Key Performance Indicators (KPI) Where do we want to go? Where are we now? How will we get there? How do we track progress?

3. SFA model for evaluation of strategy The SFA model is a widely used framework for evaluating strategic options — helping organizations decide which strategies are most suitable to pursue. It stands for Suitability , Feasibility , and Acceptability . Suitability Purpose: To determine whether a strategy fits the organization’s context and strategic position. Key Question: Does the strategy make sense given the external environment and internal capabilities? Consider: Alignment with mission, vision, and objectives Fit with external opportunities and threats (PESTLE, Porter’s 5 Forces) Internal strengths and weaknesses (SWOT analysis) Long-term strategic goals Example criteria: Addresses key opportunities/threats Builds on core competencies Matches organizational culture

4. SFA model for evaluation of strategy Feasibility Purpose: To assess whether the organization has the resources and capabilities to implement the strategy. Key Question: Can the strategy be delivered successfully? Consider: Financial resources (investment, cash flow, ROI) Human resources (skills, leadership, capacity) Operational capability and technology Timeframe and risk Example criteria: Availability of funding and skills Operational systems support the change Implementation risks manageable

5. SFA model for evaluation of strategy Acceptability Purpose: To evaluate whether stakeholders will support the strategy. Key Question: Is the strategy acceptable to stakeholders? Consider: Expected returns and risk levels Stakeholder reactions (shareholders, employees, customers, regulators) Ethical, social, and environmental implications Example criteria: Acceptable risk/return balance Positive impact on key stakeholders Consistency with organizational values

6. SFA model for evaluation of strategy Practical Application List strategic options (e.g., market expansion, product diversification). Score each option on each SFA criterion (e.g., 1–5 scale). Weight the criteria according to importance. Calculate totals to identify the most viable strategy.

7. Steps in Setting Up Formal Strategic Control Systems Step 1: Review the Strategy Regularly check how well the strategy is progressing and whether it’s still relevant to current conditions. Step 2: Identify Key Milestones Define clear short-term goals that show progress toward the overall strategy. Include both quantitative (e.g., market share) and qualitative (e.g., innovation, customer satisfaction) goals. Milestones are based on the critical success factors . They help managers track both actions (e.g., launching a new product) and results (e.g., the product’s success).

8. Steps in Setting Up Formal Strategic Control Systems Step 3: Set Target Levels Decide what level of achievement counts as success. Targets can be numerical or descriptive , but should be clear and realistic. They should help guide decisions on strategies and tactics. Competitive benchmarks compare performance with key competitors. Step 4: Monitor Progress Formally track how the strategy is performing over time. Reporting is done periodically, but less often than financial reports. Step 5: Link to Rewards Although many firms don’t directly tie rewards to strategic objectives, some now include strategic performance in bonus or incentive systems .

9. Critical Success Factors Definition CSFs are the vital few things that must go right for a strategy or business to achieve its goals. They help focus management attention on the areas that have the greatest impact on performance and competitive success. Purpose Identify the core priorities that determine success. Help translate broad strategic goals into specific focus areas . Provide a foundation for setting Key Performance Indicators (KPIs) . Guide resource allocation and performance monitoring .

10. Types of Critical Success Factors Industry-related CSFs – arise from the nature of the industry (e.g., customer service in hospitality). Environmental CSFs – driven by external conditions such as technology or regulation. Strategic CSFs – based on the organization’s unique goals or competitive strategy. Temporal CSFs – short-term priorities that are critical at a particular stage of development (e.g., product launch success).

11. Examples of Critical Success factors The  Critical Success Factors  are captured in the mnemonic  PRIMO-F People – skills (hard and soft) and attitude Resources – People availability, equipment, IT infrastructure etc. Innovation – product and services Marketing – supplier relation, customer satisfaction, etc Operations – Supply chain, quality of product, Finance- cash flow, availability of finance etc

12. Emotional intelligence Self-Awareness Knowing your emotions and how they affect you Understanding your strengths and weaknesses Example: Realizing you’re nervous before a presentation and taking deep breaths to stay focused. Self-Regulation Managing your emotions and reactions Staying calm and adaptable under pressure Example: Staying polite and composed during an argument instead of shouting.

13. Emotional intelligence Motivation Being driven by inner goals, not just rewards Staying positive and persistent through challenges Example: Continuing to work hard on a project even when progress is slow because you enjoy learning. Empathy Understanding how others feel Responding with care and compassion Example: Noticing a friend seems upset and taking time to listen to them. Social Skills Building and maintaining good relationships Communicating clearly and resolving conflicts Example: Helping teammates cooperate better by encouraging open discussion.

14. Key Performance Indicators Key Performance Indicators (KPIs) Definition: KPIs are specific, measurable metrics used to track progress toward achieving the CSFs. Purpose: They provide quantitative evidence of performance — showing whether the organization is meeting its CSFs and strategic objectives. CSFs: Areas critical to achieving strategic goals. KPIs: Specific measures used to assess performance in those areas. Example: If quality is a CSF → KPIs might include product return rate or warranty costs

15. Key Performance Indicators Activity KPIs Marketing Sales volume, market share, gross margins Production Capacity utilization, quality standards Logistics Service levels, capacity utilization New product development % revenue from new products, patents registered Sales Contribution by region, new accounts, travel costs Advertising Brand awareness, cost levels Pricing Price vs. industry average, price elasticity Management information Report timeliness, data accuracy Typical KPIs by Function :

16. Balanced Scoreca rd Definition The Balanced Scorecard is a framework that measures organizational performance across four key perspectives : Financial, Customer, Internal Processes, and Learning & Growth. It was developed by Robert Kaplan and David Norton in the early 1990s as a response to the limitations of relying solely on financial indicators. Aspect Balanced Scorecard Summary Purpose To translate strategy into measurable performance indicators Importance Provides strategic alignment, balanced measurement, and continuous improvement Summary

17. Balanced scorecard Perspective Core outcome measures Financial How do we look to shareholders? Return on Capital Employed Return on Shareholders Equity Gross Profit / Operating Profit Margin Asset Turnover Ratio Net Profit Margin Revenue Growth / Revenue Mix Earnings per share Cash flow Increased Market Capitalisation Customer What is important to our customers and stakeholders? Customer satisfaction Market share Customer acquisition Customer retention Customer profitability On-time delivery Customer complaints Pric e premium

18. Balanced scorecard Perspective Core outcome measures Innovation and learning How can we continue to improve, create value and   innovate Employee satisfaction Employee retention (turnover ratio) Training hours versus man hours time to market versus competition. Time taken to develop new products % of revenue from new services Internal business processes What must we excel at? Cash conversion cycle Waste reduction Machine Utilization / Machine Efficiency Quality and rework rates Supplier performance Lead time reduction Manufacturing time reduction Logistics cost optimization Logistics process optimisation

19. Measuring performance • Performance measurement follows the setting of objectives, plans, and targets. • It is a key part of the strategic control process — comparing actual results with planned performance. • Enables corrective action and continuous improvement.

20. Financial Performance Focus: Assess financial strength and sustainability. Key Measures: • Growth (e.g., revenue, market share) • Profitability (ROI, ROCE, profit margin) • Liquidity (cash flow, current ratio) • Gearing (debt-equity balance)

21. Resource Utilization Focus: Evaluate how efficiently and effectively resources are used. Key Dimensions: • Effectiveness: Achieving desired outcomes • Efficiency: Maximizing output for given inputs • Economy: Minimizing costs without reducing quality

22. Competitive & Strategic Performance Focus: Measure how well strategy is executed and competitive position maintained. Key Tools: • Critical Success Factors (CSFs): Identify what must go right • Key Performance Indicators (KPIs): Measure how well those factors are achieved → Aligns performance metrics directly with strategic goals.

23. Conclusion • Combines financial, operational, and strategic perspectives. • Provides a balanced view of performance. • Supports decision-making, accountability, and long-term improvement.

24. Return on Capital Employed (ROCE) Definition: Return on Capital Employed (ROCE) measures how efficiently a business generates profit from its total capital invested. It shows how well management is using the company’s long-term funds (equity + debt) to produce operating profits. Formula: Where: Operating Profit (EBIT) = Earnings before interest and tax (profit from normal operations) Capital Employed = Total assets – current liabilities (or) Shareholders’ equity + long-term debt  

25. Return on Capital Employed (ROCE) Purpose: To assess profitability relative to capital investment To evaluate management efficiency in using available resources To compare performance across periods or against competitors Interpretation: Higher ROCE → Indicates efficient use of capital and strong financial performance Lower ROCE → Suggests underutilization of assets or declining profitability Should be higher than the company’s cost of capital to show real value creation Key Insights: ROCE combines profitability and efficiency , making it a comprehensive measure of performance. Often used by investors and analysts to compare companies with similar capital structures. It should be tracked over time to identify trends in operational performance.

26. Residual Income Definition: Residual Income (RI) is the net operating profit earned by a business after deducting a charge for the cost of capital employed . It shows the absolute amount of value created beyond the minimum required return expected by investors or lenders. Formula: Advantages of RI: Encourages managers to make investments that increase total profit even if ROCE % falls Considers the cost of capital , aligning decisions with shareholder value Suitable for divisional performance measurement Limitations of RI: Not easily comparable between divisions of different sizes (absolute measure) Relies on accurate estimation of the cost of capital Focuses on accounting profits, not cash flows  

27. Problems with ROCE/ROI and RI in Divisional Performance Evaluation 1. Short-Termism Based on annual profit figures , ignoring future earnings potential . May misrepresent divisions — e.g., Cash cows show high ROI, Stars show low ROI, → misleading about true long-term value (NPV of future earnings). 2. Discourages Investment in Assets Managers prefer old, fully depreciated assets to boost ROI/RI. Results in: Poor image or unsafe operations (e.g., shabby fittings , leaking vessels ). Over-reliance on outsourcing to avoid asset ownership. 3. Lack of Strategic Control Purely financial measures ignore coordination and synergy between divisions. Fails to support corporate strategy unless the group acts solely as a financial holding company . Limits ability to achieve group-wide integration and long-term competitiveness .

28. Environmental, Social and Governance (ESG) Reporting Overview Stakeholders (regulators, investors, customers, public) demand ESG monitoring and reporting . Investors seek financial returns and sustainable, ethical practices . Post COP 26 (2021) → heightened focus on climate-related reporting . From April 2022 , large UK companies must disclose climate-related financial information .

29. Environmental, Social and Governance (ESG) Reporting ESG Factor Purpose / Focus Example Performance Indicators Environmental Actions to protect the environment - Energy consumption - Water use - Carbon emissions - Waste and effluents produced Social Building and maintaining stakeholder relationships - Staff turnover - Employee health & safety - Fair pay and working conditions - Child labour - Supply chain sustainability Governance Leadership transparency and accountability - Board diversity - Board expertise - Risk identification & mitigation - Bribery and corruption controls ESG Performance Indicators