Managing Strategic Performance
Strategic change is more frequently driven by the need to respond to external factors, rather than to internal issues. Although internally it may appear that strategic change is the consequence of a selected strategy, usually the macro factors that have influenced the selected strategy are not given much consideration when managing the strategic change.
Gradual change is due to a fairly stable and almost predictable rate of change in the organisation's external environment. The effects of gradual change are evident in the incremental improvement of an organisation's outputs. Continuous change takes place faster than gradual change, increasing at a pace which may increase as time progresses. Continuous strategic changes include cost cutting, reengineering, waste elimination and business process redesign. Discontinuous change is due to an abrupt and non-linear shift in the organisation's environment requiring a significant change in organisational strategies. Hamel (2000) suggests radical and innovative changes to the organisation to survive this kind of challenge, such as breakthrough changes in products, processes, systems or structures.
Lawless (1994) identified the following five effects of strategic change.
* Discontinuities. Discontinuities in the application of a competency or resource can result from changes in its application.
* Dominance. The best competitive advantage may not become the new standard for industry.
* Obsolescence. Existing competitive advantages be superseded by new strategies.
* Loss of incumbency. The entrenched position of large or old organisations may be threatened by changes in industry conditions.
* Technology-driven shakeouts. Major upsets within an industry can also result from technology developments, as well as an economic downturn.
An important aspect of change which influences the practice of strategic management is the rapid development of new products and services. Increasingly, no single organisation can keep pace with all developments in its area of expertise. As a result, successful organisations are beginning to realise that they need to be part of an 'industry cluster', supply chain or community of interest (group of cooperating organisations sharing and developing similar competencies, but different markets) if they wish to be able to compete effectively in the long term.
Resistance to change is a well-understood organisational phenomenon. At the strategic level, this can involve internal as well as external agents. Internal agents can resist change through a number of factors including: political pressure, indifference. interference. Effective strategic change management needs to target influential stakeholders who will support the planned changes.
1. Communicate the objectives—Build an understanding of the objectives among others who will be involved in the implementation process.
2. Create a belief in the objectives through early victories—Some demonstration is required to convince others that the objectives are realistic and achievable, thereby obtaining their rational acceptance.
3. Solidify emotional commitment to the goal—Gaining emotional commitment is more difficult and requires a variety of tactics.
One of the major constraints for strategic change is that, even while the strategy is being implemented, it is necessary to protect both the current competitive advantage of the organisation and maintain the new forms of advantage that have been created. Consequently, the change process is concerned both with the (new) strategic goals (e.g. growth) and the sustainability (or survival) of the business.
The primary effects of strategic change involve developing new bases for competitive advantage and maintaining an organisation's existing advantage in a changing environment. These changes can impact on an organisation gradually, continuously or discontinuously. Secondary effects result mainly from reactions by other entities, complex interrelationships, structural anomalies within the organisation, time delays between actions and their consequences, and human resource factors such as morale and perceptions.
* Growing too fast—rapid growth due to favourable opportunities may place very high demands on resources and cash flow. This may result in the organisation lacking the capacity to follow through on its strategy.
* Too much too soon—early initiatives by the organisation may be counteracted by actions from the competition, thereby resulting in lost investment and opportunities.
* Over-anticipation—initial successes as a result of a new strategy may mislead the organisation into expecting a certain growth curve, resulting in over-investment, high inventories and over-extending itself. When the initial trend flattens or reverses, surplus resources and staff may cause a problem.
* Fixes that fail—the solution intended by the strategy does not work because its implementation and execution may consume more resources than anticipated to solve the problem; or for other reasons.
* Unintended consequences—the new strategy unleashes totally unanticipated actions by competitors or by other entities within the organisation's external or internal environment, which counteract the intended benefit to the organisation.
When managing the execution of a strategy, managers often make a number of mistakes. One of most common pitfalls is overloading resources. The resources required to achieve strategic changes are often underestimated. Another fatal mistake is to make ad-hoc changes to strategy implementation plans in response to unsatisfactory performance or unanticipated outcomes. Local incentives or undue attention to some aspects of the change process at the expense of others will also distort outcomes and affect the implementation plan. Another problem frequently encountered is that changes to the organisation will often trigger problems downstream, in areas such as distribution networks or even with customers. Good strategic change is managed in a holistic manner. Changes in one part of the organisation often mandate changes in others to retain organisational effectiveness and stay focused on the strategic goals.
Examples of organisational functions that can be assessed include: marketing., engineering., manufacturing., distribution., finance and accounting human resources. Cross-functional areas that can be assessed include: technologies., competencies., capabilities., processes.
An effective strategy will be found to add value to the organisation and to its customers. However, growth may not always be an indication of strategic success. When growth in shareholder returns outpaces the growth in the organisation's market value (i.e. the share price is rising faster than the actual value of the organisation), it indicates that some financial engineering is taking place. Sell-offs, spin-offs, buybacks and de-mergers are not substitutes for innovation and value-adding activities.
Modern strategic performance measures relate to shareholder value. . Classic value-based metrics include economic value added (EVA), market value added (MVA), shareholder value added (SVA), market to book ratio (MBR), cash value added (CVA) and cash flow return on investment (CFROI). Other useful models are the balanced scorecard (Kaplan & Norton, 1995) and business excellence models. Business excellence models can be modified to incorporate items such as innovation, intellectual capital, business relationships and customer satisfaction.
The process of strategy evaluation and control is a fairly sequential component of the overall strategy process. Once the changes are underway and performance has been measured against criteria, it is necessary to control the change process to make sure that it occurs in line with the implementation plan. In practice, the strategy control process may result in small changes to implementation and minor revision of objectives as the actual cost and difficulty of maintaining the change is identified through the control process.
Tavakoli et al. (2001) suggest five factors that should be considered by any organisation that has to monitor intended and emerging strategies:
* Competitive advantage factors
* Strategic capabilities
* Industry key success factors
* Strategic objectives
* Planning premises
An area of strategic control often ignored by management is performance with respect to the expectations of stakeholders. An alternative approach is to align the controls with the organisation's mission to ensure that they can control the achievement of that mission. Some organisations are very careful to specify the risks associated with pursuing a given strategy. Scenario planning can be very useful here and will result in a form of contingency planning. Strategy control is then achieved by determining whether the risks have materialised and if countermeasures were applied. Both the immediate and long-term goals of the strategy should be assessed in terms of risk.
Another way of looking at strategic controls is on the basis of how they are allocated. From this perspective, we can identify three types of controls—steering, screening and output controls.
Steering controls tend to reflect the primary strategic change objectives (e.g. return on equity or growth rate) and they are usually set at the beginning of a strategy implementation. Screening controls represent hurdles that ensure the organisation does not proceed to the next step of strategy implementation until the previous stage has been adequately achieved or before performance is at appropriate levels. Output controls relate to overall strategy performance and reflect the contribution of the strategic change plan to overall performance.