STRATEGIC MANAGEMENT(KMBN301)

UNIT V
STRATEGY EVALUATION AND CONTROL
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 today’s
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.

IMPORTANCE OF STRATEGY EVALUATION

1. Check on the validity of strategic choice

2. Congruence between decisions and intended strategy
3. Need for feedback
4. Successful culmination of the strategic management process
5. Creating inputs for new strategic planning

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 include 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 manager’s
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.

Four basic types of strategic controls:

1) Premise control Premise Control Every organization creates a strategy based on
certain assumptions, or premises. As such, premise control is designed to
continually and systematically verify whether those assumptions, which are
foundational to organisations strategy, are still true. These are typically
environmental (e.g. economic or political shifts) or industry-specific (e.g. new
competitors) variables.The sooner we discover a false premise, the sooner we can
adjust the aspects of our strategy that it affects. In reality, we can’t review every
single strategic premise, so focus on those most likely to change or have a major
impact on our strategy

2) Implementation control This type of control is a step-by-step assessment of

implementation activities. It focuses on the incremental actions and phases of
strategic implementation, and monitors events and results as they unfold. Is each
action or project happening as planned? Are the proper resources and funds being
allocated for each step? This process continually questions the basic direction of
your strategy to ensure it’s the right one. There are two subcategories of
implementation control:
Monitoring Strategic Thrusts or Projects This is the assessment of specific
projects or thrusts that have been created to drive the larger strategy. This early
feedback will help to decide whether to continue onward with the strategy as is or
pause to make adjustments. Management can predetermine which thrusts are critical
to the achievement of organisations goals and continually assess them. Or,
management can decide which measurements are most meaningful for their thrusts
or projects (such as timeframes, costs, etc.) and use that data as an indicator of
whether a thrust is on track or not, and how that may subsequently affect the
strategy.

Reviewing Milestones During strategic planning, management likely identified

important points in the implementation process. When these milestones are reached,
the organization will reassess the strategy and its relevance. Milestones could be
based on timeframes, such as the end of a quarter, or on significant actions, such as
large budget or resource allocations. Implementation control can also take place via
operational control systems, like budgets, schedules, and key performance
indicators.

3) Special Alert Control When something unexpected happens, a special alert control
is mobilized. This is a reactive process, designed to execute a fast and thorough
strategy assessment in the wake of an extreme event that impacts an organization.
The event could be anything from a natural disaster or product recall to a
competitor acquisition. In some cases, a special alert control calls for the formation
of a crisis team—usually comprising members of the strategic planning and
leadership teams—and in others, it merely means activating a predetermined
contingency plan.

4) Strategic surveillance Strategic surveillance is a broader information scan. Its

purpose is to identify overlooked factors both inside and outside the company that
might impact your strategy. This process ideally covers any “ground” that might be
missed by the more focused tactics of premise and implementation control. A firm’s
 surveillance could encompass industry publications, online or social mentions,
industry trends, conference activities, etc.

Principles of Strategy Evaluation

1. Consistency has to do with whether the way the business operates matches the
objectives the business strives for. When a business sets objectives or goals, they
can evaluate their daily operations to see if it has met these goals.
2. Consonance refers to how well the business reacts to the change of surroundings.
If consumers' preferences change, or a competitive business is built next door, a
business needs to be able to adapt and still be successful.
3. Advantage has to do with whether the business is competitive. If a consumer
purchases products at their business instead of at another store, the business can
remain competitive.
4. Feasibility is concerned with whether the business has the resources and tools to
function. As times change and technology grows, a company needs to have the
resources to still remain successful.

The significance of strategic control and evaluation

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.

 They provide direction. They enable management to make sure that the
organization is heading in the right direction and that corrective action is taken
where needed

 They provide guidance to everybody. Everyone within the organization, both

managers and workers alike, learn what is happening, how their performance
compares with what is expected, and what needs to be done to keep up the good
work or improve performance.

 They inspire confidence. Information about good performance inspires confidence

in everybody.

 Those within the organization are likely to be more motivated to maintain and
achieve better performance in order to keep up their track record. Those outside –
customers, government authorities, shareholders – are likely to be impressed with
the good performance.

 Controls do not just guard the money: they also provide data for decision-making.
  Provide constant feedback on the extent to which the strategies are achieving their
goals.
 Identify potential problems at an early stage and propose possible solutions.
 Monitor the accessibility of the strategies to all sectors of the target population.
 Monitor the efficiency with which the different components of the
project are being implemented and suggest improvements.

 Influence sector assistance strategy. Relevant analysis from project and policy
evaluation can highlight the outcomes of previous interventions, and the strengths
and weaknesses of their implementation.

 Improve project design. Use of project design tools such as the log-frame (logical
framework) results in systematic selection of indicators for monitoring project
performance. The process of selecting indicators for monitoring is a test of the
soundness of project objectives and can lead to improvements in project design.

 Incorporate views of stakeholders. Awareness is growing that

participation by project beneficiaries in design and implementation brings
greater “ownership” of project objectives and encourages the sustainability of
project benefits. Ownership brings accountability. Objectives should be set and
indicators selected in consultation with stakeholders, so that objectives and targets
are jointly “owned”. The emergence of recorded benefits early on helps reinforce
ownership, and early warning of emerging problems allows action to be taken
before costs rise.

 Evaluate the extent to which the strategy is able to achieve its general objectives.

 Provide guidelines for the planning of future projects.

DIFFERENCES
Strategy Formulation Strategy Implementation

Strategy Formulation includes planning and Strategy Implementation involves all those
decision-making involved in developing means related to executing the strategic
organization’s strategic goals and plans. plans.

In short, Strategy Formulation is placing In short, Strategy Implementation

the Forces before the action. is managing forces during the action.

Strategy Formulation is an Entrepreneurial Strategic Implementation is mainly

Activity based on strategic decision- an Administrative Task based on strategic
making. and operational decisions.
Strategy Formulation emphasizes Strategy Implementation emphasizes
on effectiveness. on efficiency.

Strategy Formulation is a rational process. Strategy Implementation is basically

an operational process.

Strategy Formulation requires co-ordination Strategy Implementation requires co-

among few individuals. ordination among many individuals.

Strategy Formulation requires a great deal Strategy Implementation requires

of initiative and logical skills. specific motivational and leadership
traits.

Strategic Formulation precedes Strategy Strategy Implementation follows Strategy

Implementation. Formulation.

Techniques of strategic evaluation and control. Extra

ACTIVITY-BASED COSTING
Cooper and Kaplan, ABC systems calculate the costs of individual activities and
assign costs to cost objects such as products and services on the basis of activities
undertaken to produce each product or service. In this system overhead costs are
assigned to activities or grouped into cost pools before they are charged to cost objects
(i.e., products or services).

CIMA, London defines ABC as “cost attribution to cost units on the basis of benefits
received from indirect activities e.g., ordering, setting up, assuring quality.”
STEPS IN ACTIVITY-BASED COSTING

(i) Identification of the main activities:

The first stage is to identify the functional areas or major activities involved in the
production. In ABC system an organisation is viewed as a collection of activities.

All the major activities in the organisation are grouped under two categories, viz.,
volume-related activities (e.g., machine-related activities, labour-related activities) and
non-volume-related or support activities like material ordering, material receiving,
material handling, machine set-up, production scheduling, packing, dispatch etc.

Both these categories are performed to design, produce, sell and distribute to individual
products or services of the organisation. These activities convert input resources acquired
from suppliers to output intended for customers. The number of activities in an
organisation should neither be too large or too small. Total cost involved in the activity
should be significant enough to justify to give an activity a separate entity.

(ii) Creation of cost pool:

The next step in activity-based costing is the creation of a cost pool for each major
activity. Cost pool is like a cost centre or activity centre around which costs are
accumulated. For example, the total of machine set-up might constitute are cost pool for
all set-up related costs.

(iii) Determination of the activity cost driver:

The next step in the application of activity-based costing is the ascertainment of the
factors that influence the cost of each major activity. The factors or the forces that cause
costs are known as cost drivers. A cost driver not merely causes cost but also explains its
behaviour.
Thus a cost driver is a factor which causes a change in the cost of an activity. Examples
of cost drivers are number of machine set-ups, number of purchase orders, number of
customer orders placed etc.
(iv) Calculation of the activity cost driver rate:
After cost pool is defined and cost drivers identified, the cost per unit of the cost driver is
computed for that pool. This is called the pool rate. The pool rate links costs and cost
drivers with the resource use.
A cost driver rate is calculated as follows:

(v) Charging the costs of activities to products:

This is the last step in application of activity-based Costing. Here, the costs of activities
are traced to products on the basis of demand by products. The cost drivers are used to
measure product demand of activities. For example, if the total costs of purchasing
materials were Rs. 1,00,000 and there were 1,000 purchase orders (the chosen cost
driver) during the period.

The rate per purchase order is Rs. 1,00,000 + 1,000 = Rs. 100. If a particular product
needs 2 purchase orders, charge to that product will be Rs. 100 x Rs. 2 = Rs. 200. If 10
units of the product are produced, cost per unit will be Rs. 200 + 10 units = Rs. 20. In this
way cost of other activities will be charged to product.

ADVANTAGES OF ACTIVITY-BASED COSTING

(i) Determination of product/service cost:

ABC is a modern tool of charging overhead costs in which costs are first identified with
activities and then allocated to products or services based on appropriate cost drivers.
Cost drivers reflect the cause and effect relationship between activity consumption and
cost incurrence. As a result, it gives more accurate cost information for determination of
product/service cost.
(ii) Supplies cost information:
It provides more accurate and reliable cost information about production and support
activities and product costs so that the management can focus its attention on the products
and processes with the most effective manner for increasing profit.
(iii) Better pricing decisions:
By switching over from volume-base to activity-base, ABC helps in overcoming the
problem of over-costing and under-costing as result of which management is able to
make judicious pricing decisions in a more competitive business environment.
(iv) Realistic:
Under ABC distribution of overhead costs is done on the basis of activities which is
considered to be more realistic. It is said to be an objective approach. The traditional
costing uses more arbitrary bases for apportionment of overhead costs and is a subjective
approach.
(v) Control of cost:
ABC gives better understanding of cost behaviour and a more rational approach to fixed
and variable costs. It enables management to control many fixed overheads by exercising
more control over those activities which cause these fixed overheads. This is possible
since behaviour of many fixed overhead costs in relation to activities now become more
visible and clear.
(vi) Better performance measurement and cost reduction:
Pooling of resource costs and use of suitable cost drivers highlights the problem areas
leading to better performance measurement and cost reduction. Regrouping costs from
traditional cost centres to activity cost pools focuses attention to inefficient operations
where costs can be reduced.
(vii) Improvement of cost objects:
Manager’s do not manage cost, they manage activities causes cost. Changes in activities
lead to changes in cost. Therefore, if the activities are managed well, costs will fall and
resulting products will be more competitive.
(viii) Greater cost efficiency:
ABC helps to identify unnecessary or non-value-added activities so that these may be
weeded out and thus achieving greater cost efficiency.
(ix) Better decision-making:
It helps management in taking better decisions about product design, pricing, process
technology, marketing product-mix and encouraging continual operating environments.
ABC which is now being called Activity-Based Management (ABM) used cost
information generated by ABC about an activity for controlling the activity itself rather
than just using cost information of the final product.

PROBLEMS WITH THE ABC APPROACH

i) ABC fails to obtain support at all levels of management about changing in work
processes to make business more competitive.
(ii) Selection of multiple cost drivers to assign overhead costs to products or services is a
difficult task. It involves trade-offs between accuracy and cost, as well as the difficulties
of operating a more complex costing system.
(iii) Wrong selection of cost drivers would nullify the benefits of ABC.
(iv)Cost of change will be high as everything will have to be worked out from the
scratch.
(v) It rejects marginal cost analysis and the benefits thereof.
(vi) It takes no account of opportunity cost in decision-making.
(vii) The system will require a change due to changes associated with new products and
new technology. This will put strain on the costing system,
(viii) It fails to capture the complexity of actual operations and took too long time to
implement.
(ix) The system encourages allocation of non-product costs such as research and
development to products while committed product costs such as factory depreciation are
not allocated to products.
KINDS OF RISK

Hazard Risk: Natural disasters, liability damages, Property damages due to fire, tornado
etc, injury or illness to its employees.

Financial Risk: Risks like foreign exchange risk, commodity risk, pricing risk, asset risk,
liquidity risk.

Operational Risk: labor relations, customer satisfaction, product failure etc.

Strategic Risk: Competition, fluctuation in demand and market price, regulatory and

political trends, social trend, capital availability.

RISK RESPONSE STRATEGIES FOR ENTERPRISE RISK MANAGEMENT

1. Risk avoidance: The elimination of risks or activities that can negatively impact
the organization’s assets. For example, the cancellation or halt of a proposed
production or product line.
2. Risk reduction: The mitigation or limitation of the severity of losses. For
example, management can plan frequent visits to their major suppliers to identify
potential problems early.
 3. Alternative actions: The consideration of other possible ways to reduce risks.
4. Share or insure: The actions of transferring risks to third parties, like insurance
agencies. For example, buying an insurance policy that could cover any
unexpected loss for the business.
5. Risk acceptance: The acknowledgment of the identified risks and the willingness
to accept their consequences. Typically, any loss from a risk not covered or
avoided is an example of risk acceptance.

CORE ELEMENTS OF AN ENTERPRISE RISK MANAGEMENT PROCESS

1. Strategy/Objective setting: Understand the strategies and associated risks of the
business.
2. Risk identification: Provide a clear profile of major risks that can negatively
impact the company’s overall financials.
3. Risk assessment: Identified risks are strictly analyzed to determine both their
likelihood and potential.
4. Risk response: Consider various risk response strategies and select appropriate
actionable paths to align identified risks with management’s risk tolerances.
5. Communication and monitoring: Relevant information and data need to be
constantly monitored and communicated across all departmental levels.

BALANCE SCORECARD
The balance scorecard is used as a strategic planning and a management technique. This
is widely used in many organizations, regardless of their scale, to align the
organization's performance to its vision and objectives.
The scorecard is also used as a tool, which improves the communication and feedback
process between the employees and management and to monitor performance of the
organizational objectives.
As the name depicts, the balanced scorecard concept was developed not only to evaluate
the financial performance of a business organization, but also to address customer
concerns, business process optimization, and enhancement of learning tools and
mechanisms.

The Basics of Balanced Scorecard

The four boxes represent the main areas of consideration under balanced scorecard. All
four main areas of consideration are bound by the business organization's vision and
strategy.
The balanced scorecard is divided into four main areas and a successful organization is
one that finds the right balance between these areas.
Each area (perspective) represents a different aspect of the business organization in
order to operate at optimal capacity.
1. Learning and growth are analysed through the investigation of training and
knowledge resources. This first leg handles how well information is captured and how
effectively employees use the information to convert it to a competitive advantage over
the industry.
2. Business processes are evaluated by investigating how well products are
manufactured. Operational management is analysed to track any gaps, delays,
bottlenecks, shortages, or waste.
3. Customer perspectives are collected to gauge customer satisfaction with quality,
price, and availability of products or services. Customers provide feedback about their
satisfaction with current products.
4. Financial data, such as sales, expenditures, and income are used to understand
financial performance. These financial metrics may include financial ratios, budget
variances, or income targets
The four perspectives are interrelated. Therefore, they do not function independently. In
real-world situations, organizations need one or more perspectives combined together to
achieve its business objectives.
For example, Customer Perspective is needed to determine the Financial Perspective,
which in turn can be used to improve the Learning and Growth Perspective.

Features of Balanced Scorecard

When it comes to defining and assessing the four perspectives, following factors are
used:
  Objectives - This reflects the organization's objectives such as profitability or
market share.
 Measures - Based on the objectives, measures will be put in place to gauge the
progress of achieving objectives.
 Targets - This could be department based or overall as a company. There will be
specific targets that have been set to achieve the measures.
 Initiatives - These could be classified as actions that are taken to meet the
objectives.

A Tool of Strategic Management

The objective of the balanced scorecard was to create a system, which could measure the
performance of an organization and to improve any back lags that occur.
The popularity of the balanced scorecard increased over time due to its logical process
and methods. Hence, it became a management strategy, which could be used across
various functions within an organization.
The balanced scorecard helped the management to understand its objectives and roles in
the bigger picture. It also helps management team to measure the performance in terms
of quantity.
The balanced scorecard also plays a vital role when it comes to communication of
strategic objectives.
One of the main reasons for many organizations to be unsuccessful is that they fail to
understand and adhere to the objectives that have been set for the organization.
The balanced scorecard provides a solution for this by breaking down objectives and
making it easier for management and employees to understand.
Planning, setting targets and aligning strategy are two of the key areas where the
balanced scorecard can contribute. Targets are set out for each of the four perspectives
in terms of long-term objectives.
However, these targets are mostly achievable even in the short run. Measures are taken
in align with achieving the targets.
Strategic feedback and learning is the next area, where the balanced scorecard plays a
role. In strategic feedback and learning, the management gets up-to-date reviews
regarding the success of the plan and the performance of the strategy.

The Need for a Balanced Scorecard

Following are some of the points that describe the need for implementing a balanced
scorecard:
 Increases the focus on the business strategy and its outcomes.
 Leads to improvised organizational performance through measurements.
 Align the workforce to meet the organization's strategy on a day-to-day basis.
 Targeting the key determinants or drivers of future performance.
  Improves the level of communication in relation to the organization's strategy and
vision.
 Helps to prioritize projects according to the timeframe and other priority factors.

Conclusion
As the name denotes, balanced scorecard creates a right balance between the
components of organization's objectives and vision.
It's a mechanism that helps the management to track down the performance of the
organization and can be used as a management strategy.
It provides an extensive overview of a company's objectives rather than limiting itself
only to financial values.
This creates a strong brand name amongst its existing and potential customers and a
reputation amongst the organization's workforce.

RESPONSIBILITY ACCOUNTING

Robert Anthony
"Responsibility accounting is that type of management accounting which collect and
reports both planned and actual accounting information in terms of responsibility
centers".

Charles T. Horongrent
"Responsibility Accounting or profitability accounting or activity accounting which
means the same thing, is a system that recognizes various decision or responsibility
centers throughout the organisation and traces costs (and revenue, assets and liabilities) to
the individual managers who are primarily responsibility for making decisions about the
costs in question."

A responsibility center is an operational unit or entity within an organization, that is

responsible for all the activities and tasks structured for that unit. These centers have their
own goal, staffs, objectives, policies and procedures, and financial reports. And are used
to balance responsibilities related to expenses incurred, revenue generated, and funds
invested to an individual.
In a multinational or large corporation, the organization tasks are divided into a subtask,
and each task is given to various small division or groups. In this context, all groups in
that organization are responsibility centers.
ADVANTAGES OF RESPONSIBILITY ACCOUNTING

1) Easy Identification
It enables the identification of individual managers responsible for satisfactory or
unsatisfactory performance.
2) Motivational Benefits
If a system of responsibility accounting is implemented, considerable motivational
benefits are assured.

3) Data Availability
A mechanism for presenting performance data is provided. A framework of managerial
performance appraisal system can be established on that basis, besides motivating
managers to act in the best interests of the enterprise.

4) Ready-hand Information
Relevant and up to the minutes information is made available which can be used to
estimate future costs and or revenues and to fix up standards for departmental budgets.

5) Planning and Decision Making

Responsibility accounting helps not only in control but in planning and decision making
too.

6) Delegation and Control

The twin objectives of management are delegating responsibility while retaining control
are achieved by adoption of responsibility accounting system.

7) Help in Training Future Management

Responsibility accounting helps for training future management of an organisation.

TYPES OF RESPONSIBILITY CENTRE:

 Cost Centre- A Cost Centre is a department or a unit which supervises, allocates,

segregates, and eliminates all sorts of the cost related to a company. The cost
center prime work is to check the cost of an organization and to limit the
unwanted expenditure the company may acquire. The cost can be the
determination of both person and location. In multinational companies, the cost
center is authorized to decrease and manage the cost.
 Revenue Centre- This center is accountable for initiating and monitoring
revenue. The management does not have any control over the cost or investment
but can monitor a few of the expenses in the marketing section. The production of
the revenue center is calculated by analyzing the budgeted revenue with actual
revenue and actual marketing expenses with budgeted marketing expenses.
 Profit Centre-It is a division or department of a company which operates for the
calculation of profit. In an organization, different profit centers are managed by
the managers, who identifies profits on the basis of costs and incomes. Profit
Centre is accountable for all the actions associated with the sales of goods and
production.
 Investment Centre- This center is responsible for both investments and revenue.
The investment manager can control expenses, income, the fund invested in
assets, etc. He also has the authority to form a credit policy, which has an
immediate impact on debt collection.
 BENCHMARKING

Benchmark:A “benchmark” is a reference or measurement standard used for

comparison. 
Benchmarking: benchmarking is an approach of setting goals and measuring
productivity based on best industry practices.

Benchmarking is defined “as the continuous, systematic process of measuring ones

output and/or work processes against the toughest competitors or those recognized best in
the industry.”

“Benchmarking” is the continuous activity of identifying, understanding and adapting

best practice and processes that will lead to superior performance.

Example – A customer support engineer of LG (a television manufacturing company)

attends a call within forty-eight hours. If the industry norm is that all calls are attended
within twenty-four hours, then the twenty-four hours can be a benchmark.
Benchmarking is the process of identifying “best practice” in relation to both products
(including) and the processes by which those products are created and delivered.

NEED OF BENCHMARKING:
1. Benchmarking helps organizations focus on the external environment and improve
process efficiency.
2. Benchmarking promotes a climate for change by allowing employees to gain an
understanding of their performance what they are achieving now and how they compare
to others in order that they become aware of what they could achieve.

BENCHMARKING - MERITS AND DEMERITS

Merits:
(a) It increases customer satisfaction.
(b) It leads to significant cost savings and improvements in products and services.
(c) It helps in improving strategic planning by providing assessment of strengths and
weaknesses of current process.
(d) It reduces waste and costs of poor quality.
(e) It helps in increased organizational performance by initiating continuous
improvements in processes and quality.
(f) It reduces overheads through business simplification.
(g) It helps in creating a culture that values a sense of continuous improvement which has
a positive bearing on the functioning of organization.
(h) It is a transmission of best practice between divisions.
(i) It can assist in overcoming complacency and drive organizational change.
(j) It helps in sharing the best practices between different companies.
(k) It provides a way to monitor the conduct of competitive strategy.
(l) It leads to greater involvement and motivation of staff.
(m) It provides advance warning of deteriorating competitive position.
(n) It helps in learning from others and builds greater confidence in developing and
applying new approaches.
(o) It improves management understanding of value adding processes of their business.

Demerits:
(a) It may reduce managerial motivation if they are compared with a better resourced
rival.
(b) There is damage that confidentiality of data will be compromised.
(c) It increases the diversity of information which must be monitored by management.
This increases the potential for information overload.
(d) Successful benchmarking firms may find that they are later overloaded with requests
for information from much less able firms from whom they can learn little.
(e) In encourages management to focus on increasing the efficiency of their existing
business instead of developing new lines of business.

BENCHMARKING – 5 KEY REASONS

1. Defining Customer Requirements:

It is not based on history or gut feeling, perception and low fit but on the basis of market
reality, objective evaluation and high conformance.

2. Establishing Effective Goals and Objectives:

It is not on the basis of lacking external focus, reactive response, and lagging industry but
on the basis of credibility, inarguable, proactive and leading industry goals and
objectives.

3. Developing True Measures of Productivity:

Without benchmarking this may be done by pursuing pet projects, strengths and
weaknesses not understood on-route of least resistance. But with benchmarking this is
carried out by solving real problems and understanding outputs of each decision based on
the best industry practices.

4.Becoming Competitive:
This is not carried out on internally focused, evolutionary change, and low commitment.
But it is done on the basis of concrete understanding of competition, new ideas of proven
practices, technology and high commitment.

5. Industry Best Practices to be Achieved:

This is also not done on methods not invented here, few solutions, average of industry
progress and frantic catch up activity. But it is done on the basis of proactive search for
change, many options, business practice breakthrough and superior performance.

PHASES

The process of benchmarking involves the following four phases:

1. Planning:
(a) Identification of the factor to be benchmarked
(b) Identification of the critical performance indicators
(c) Identification of the entity that is the standard for benchmarking
(d) Identification of the modalities for collection of dat
2. Analysis:
(a) Collection and collation of data to detect gaps
(b) Measurement of gaps in performance and practices
(c) Setting up of metric targets.
3. Integration:
(a) Corroboration of the modalities of analysis and targets set among peers
(b) Development of implementation programs.

4. Action:
(a) Preparation and ‘sensitization’ of target audience for implementation
(b) Deployment of monitoring and measuring mechanism for deviations
(c) Final assessment of success of benchmarking both quantitatively and qualitatively.
During the pursuit of functional/operational excellence, approaches are to be especially
defined so that the benchmarking process can be executed successfully.

STRATEGIC AUDIT