Tel: +44 0844 800 0085. Investors and investors advocates, impatient with the sporadic nature and rate of change, have proposed legal, regulatory, and structural improvements in the relationships among shareholders, boards of directors, and CEOs. It takes sensitivity and diplomacy to raise such issues constructively, but sensitivity and diplomacy are attributes not all board members possess. The process of conducting a strategic audit can be summarised into the following stages: The resource audit identifies the resources available to a business. It is rare for a business to undertake all primary and support activities. The most common is the retirement of the incumbent chief executive, even though the retiring CEO frequently nominates his or her successor. So CPCs turnaround was dramatic and positive, but the costs of lost time and opportunities were high. Quite possibly, if the board had had a formal strategic-review process in place. A period of sustained success can lull the board into the belief that success is forever and that the company can do very nicely on automatic pilot. Such a scenario was common in the 1980s, the heyday of corporate raiders, and so weakened incumbent chief executives that there was often an opportunity for boards to seize the initiative. Equally important to a calm and thoughtful exchange of views are meetings in which the only people present are the outside board members and the chief executive. Chief executives and boards of directors need a formal and visible review process to demonstrate to shareholders their shared commitment to orderly and effective governance. The significant restructuring that followed was directed at downsizing the corporate overhead acquired in years of high profit and accelerated growth, shedding peripheral activities with low profitability and marginal corporate synergy, and refocusing on core competence and long-term competitive advantage. Risk of failure gets lower by the help of, The reports of the auditors are subjective as they, Username is too similar to your e-mail address, What are the pros and cons of using the strategic audit as a framework for case analysis. Apply to become a tutor on Studypool! Even though potential overlap between responsibility and oversight occurs throughout the entire management structure, it is a particularly delicate issue at this level. Our verified tutors can answer all questions, from basicmathto advanced rocket science! Senior management cannot focus on all activities of a business and the competencies required to undertake them. The database maintenance function could become an ongoing contractual arrangement. Efforts to reform the governance process have also intensified. For those board members who were disposed to cut back or terminate corn wet-milling, the downturn in the consumer foods business and the highly visible decline in corporate return on equity would have been a golden opportunity to bring the issue to a head. CPC saw a dramatic and immediate gain in ROI in 1987, with continued improvement in asset turnover and use of leverage. Standard financial indicators facilitate discussion in terms all parties can understand.

However, in the end, a given strategy must deliver a competitive return on shareholder investment. Although professional managers might find this dictum hard to accept, it is nevertheless the reality of the public capital markets in which they operate. It is rare for a public corporation to maintain such consistency and even more unusual for it to keep reporting the drivers of equity value over such a turbulent period in its history. The mechanism is a formal strategic-review processa strategic auditwhich imposes its own discipline on both the board and management, much as the financial audit process does. . check the compliance of the company operations according to the company goals. Could this outside intervention have been avoided? I suggest that the outside directors select three of their own members to form the committee. In our introduction to business strategy we emphasised the role of the business environment in shaping strategic thinking and decision-making. The most important requirement for the data used in the strategic review process is that they be objective. Insiders may consider the presentation meaningful, or at least well intentioned; but outsiders may feel confused and end up misinformed. But despite the facts of past performance, management was persistently optimistic about long-term improvement. When multiplied together, these ratios transform profit margin into return on equity. They should also allow a comparison of the promise of future returns with the reality of past performance. Strategic Audit:Strategic audit is the very essential and useful tool to evaluate the internal controls and to However, to be in a position to exploit opportunities or respond to threats, a business needs to have the right resources and capabilities in place. Outside board members are now much more willing to stake out independent positions in boardroom discussions and, at times, even openly oppose the chief executive when they believe the vital interests of the corporation are at stake. Therefore, the regular board meeting is an unsuitable, even hostile, environment for revealing serious reservations about the underlying strategic assumptions. An important objective of a strategic audit is to ensure that the business portfolio is strong and that business units requiring investment and management attention are highlighted. And it would signal to the investing public that both the board and management accept the boards authority and responsibility for active, ongoing strategic oversight. Reduced leverage and the declining turnover of assets exaggerated the erosion in return on owners investment (ROI). This solution has some obvious practical problems, however. human resource management). In 1983, the board of CPC was no doubt well aware of the persistently poor performance of corn wet-milling and of its drag on equity values and corporate return on equity. Resource like human resources is. Board members, seeing the number of stockholder lawsuits and the escalating cost of directors and officers liability insurance, are feeling pressure from their increased risk as well. For example, although both growth and diversification may at times erode equity value, these objectives have traditionally been the means of attracting and retaining the best professional and management talent. Absent such unique personal prerogatives, board members are expected to serve as supportive critics of the strategy in place. Our tutors are highly qualified and vetted. The management challenge here would be to provide a consultant from the outside with enough information and context about the company that he or she could ask intelligent questions about the database design and data collection effort. Stuck on a homework question? CPCs board passed up good opportunities. Although the actual disparity in performance between corn refining and consumer products was difficult to observe early on, it was impossible to conceal during the period from 1983 to 1985, when there was a short-term decline in the profitability of the consumer foods line. A better solution is for an outside consultant to design the database and gather the data the board chooses to monitor. If the board has an outside director who is the lead or liaison, he or she would be a natural choice to chair the strategic audit committee as well.

Questions are posted anonymously and can be made 100% private. Through 1985, lower margins in corn wet-milling contributed to a declining corporate profit margin. These data should help the board determine whether the companys chosen strategyor a particular decisionwill contribute to a long-term return of shareholder investment equal or superior to other investment alternatives of comparable risk. In addition, the criteria should be familiar, well-understood, and accepted measures of financial performance. CPC saw a dramatic and immediate gain in ROI in 1987, with continued improvement in asset turnover and use of leverage. In addition, the typical board meeting is an inappropriate forum for raising serious concerns about a companys strategic direction. Disadvantages includes high cost, time consuming etc. It highlights those periods in which, in comparison with alternative investment opportunities, the companys performance has led to the creationor destructionof economic value. As a result, outside board members seeking a change in strategy or, perhaps, leadership are wary, and examples of spontaneous intervention are relatively few and far between. Although it is standard procedure for managers to brief directors on the evolving strategy and structure at the annual meeting dedicated to that purpose, it has always been understood that the ownership of the current strategy remains firmly in the hands of the chief executive and his or her management team. Probably the best known example is John Smales 1992 move on behalf of the GM board to replace chairman and CEO Robert Stempel. (See the exhibit The Strategic Audit Report Card for CPC 19771989.) Capital market analysts and the financial press began to suggest that CPC should divest all or part of the milling business and release the full market value of the Best Foods product line to investors. By nature, the typical board of directors is poorly designed and ill equipped to provide hands-on product and market leadership. Unfortunately, these openings for board intervention were preempted by Ronald Perelmans takeover attempt. These data reveal evidence of investors reaction to published information on company performance and are a measure of confidence. In order to be effective, every organization requires not only a clear and unambiguous strategic mission but also the confidence that its top management has the authority and ability to carry it out.

component assembly), Support Activities, which whilst they are not directly involved in production, may increase effectiveness or efficiency (e.g. Pursued in a spirit of mutual respect, the process facilitates ongoing, constructive dialogue. Board oversight requires a broad perspective, and any strategic consequence that affects the ability of the organization to reach and sustain its full, long-term competitive potential will demand board attention. Studypool matches you to the best tutor to help you with your question. On the other hand, a regular, formal review process dedicated to the discussion of strategic performance with the CEO reduces the likelihood of an adversarial atmosphere. In strategic audit the, auditor examines the each and every segment/function of business in order to chec, whether it is working in such a manner so through it the company could achieve their, targets. This is important - a business should always consider which markets are most attractive and which business units have the potential to achieve advantage in the most attractive markets. The credibility of the boards review process depends on the integrity and consistency of the statistics by which progress is measured. Objective data consistently presented and reinforced by the cumulative evidence of past performance can strengthen the power and credibility of the boards opinion. The strategic audit committee is not meant to share in the leadership of the ongoing business strategy or be a backseat driver. After 1985, and subsequent to restructuring, corporate margins improved, largely because of the increased emphasis on higher-margin, branded consumer products. An effective strategic-oversight process requires that the board take control not only of the criteria of performance but also of the database in which the criteria are maintained. This particular set of measurements has two weaknesses, however. Such concerns should be reserved for the periodic review meetings between the outside board members and the CEOmeetings triggered by the strategic audit committee. They are an essential supplement to any measurement based primarily on company-specific data. Moreover, the boards normal oversight process must not imply that the CEO is on a short leash or that the leadership is constantly up for grabs. VAT reg no 816865400. One problem I see with many of the reform initiatives is that they are concerned only with the broad principles of governance and offer little practical guidance. Portfolio Analysis analyses the overall balance of the strategic business units of a business. More important, these proposals do not directly address the fundamental issue at the heart of investors concernnamely, the capacity of the board to intervene in the face of an unsuccessful or ailing business strategy. Like the three triggers I describe, such an approach is an unreliable mechanism of board oversight and seems unnecessarily disruptive. In the early fall, the tone and content of the speculation changed as investor discontent grew, and word on the street was that CPC was being considered for a takeover by Con-Agra, Revlon, or an inside management group. 214 High Street, My preferred solution, one consistent with the model of the financial audit, is to involve the companys public auditors.

It shows profit per unit of sales (profit margin), sales per unit of capital employed (asset turnover), and capital employed per unit of equity invested (leverage). It should ensure the integrity and continuity of the ongoing data collection and reporting efforts, identify issues for discussion with the CEO, keep the full board abreast of the evidence, and schedule both regular and special meetings. The committee should select the criteria for review of strategic performance, oversee the design of the database, and establish a review process. Shouldnt review be a joint effort with management? The majority of its members usually lack the industry-specific experience, the company-specific knowledge, and, most important, the time necessary to turn broad strategic vision into operational reality. The auditor reports could be used by the management to evaluate their existence, state and what it should be, as in his report the auditor grades the business function, according to their performance and their level of alignment with the business goals, so, this also an important positive aspect of strategic audit. It increases the possibility that a shared understanding will lead to evolutionary change in strategic direction, serving the best interests of all concerned. Although I think that financial criteria should be the central focus of board oversight, I do not think such a focus prevents the board from considering other kinds of progress. West Yorkshire, But the threat of one or all of these events is insufficient to guarantee vigilant oversight. In the event of a difference of opinion over strategy between the chief executive and outside board members, having the liaison director chair the committee will reduce the possibility that the leadership of the outside board members will be divided. Indeed, Michael C. Jensen (Eclipse of the Public Corporation, HBR SeptemberOctober 1989) predicted that in such industries as banking and food processing the public corporation will decline, to be replaced by new forms of organization, such as the LBO partnership. Normally, the committee would be a low-key operation that would add to managements credibility. A strategy may go sour long before the normal retirement date of the CEO responsible for choosing it. Meetings should not be so frequent that strategic review is confused with an operating review or that the minor changes in key indicators are incorrectly interpreted as significant trends. The external environment in which a business operates can create opportunities which a business can exploit, as well as threats which could damage a business. The strategic audit, therefore, must be directed by independent board members rather than by management insiders. Conflict of interest could arise for an employee working with potentially sensitive data. And to the outside observer, a company employee acting as the independent liaison to the board is a contradiction in terms. Board members give their undivided attention at most once a month for six or eight hours at a time. This obligation implies evaluating performance in financial terms. What happens instead is that one board member impulsively steps forward to assume leadership and to provoke other independent members into unified action. Unlike the other three measures mentioned, TSR has the advantage of reflecting value in hand rather than value in prospect. Isnt management best qualified to select the appropriate criteria to evaluate the companys progress within its industry? An important part of business strategy is concerned with ensuring that these resources and competencies are understood and evaluated - a process that is often known as a "Strategic Audit". The underlying components of the corporate income stream need to be broken out, and comparable data on companies inside and outside the industry gathered. If a Strategic Audit Process Had Been in Place Before 1985, CPC s Board Might Have Preempted the 1986 Takeover Attempt. SWOT analysis is an important tool for auditing the overall strategic position of a business and its environment. This attention has had an impact on the nations public corporations and has brought about a change in boardroom behavior that is significant, if often imperceptible to outsiders. Certainly issues of divided loyalties will come up if the employee uncovers data that could cause a problem for an in-house boss or for the company. All who have served as board members know that attending a board meeting is rather like entering the on-ramp of an expressway at rush hour: You spend half the time getting up to speed and the other half trying to insert yourself into the bumper-to-bumper boardroom traffic, only to find that it is time to exit and try again a month later.

Beginning around 1980, the profitability of corn refining underwent serious, steady erosion because of overcapacity in the industry, and a widening gap developed between the performance of the corn byproducts and that of consumer foods. Strategic audit, requires huge amount of resource as it is an in-depth review of whole company, operations, so this cost company huge amounts and much time. Managers are charged with turning strategic vision into operational reality. A second circumstance is a sudden, precipitous decline in profitability or asset value, as in the case of Morrison Knudsen. Evidence that a strategy is failing is more commonly seen in gradual or erratic erosion of profitability than in dramatic collapse. Because investment or funding proposals, large and small, come in a steady stream, the board cannot be constantly attaching reservations or qualifications to its approval. The worst characteristic of the three triggers is that the transforming event comes from outside the governance process and forces both management and board into a reactive mode. Even more important is the pressure from holders of large blocks of stock (pension and mutual funds), from judicial and regulatory authorities, and from the financial pressall of whom are calling for boards to be more active. Differences of opinion can be kept private until they are amicably resolved or, if they cant be kept private, their public consequences can be thoroughly considered. It should certainly weigh all objectiveor even subjectiveevidence of strategic progress demonstrating long-term competitive superiority. This is historical analysis, How do the resources and capabilities of the business compare with others in the industry? desired objectives. Management would not have to be involved in establishing the relationship or in acting as a go-between. As we have already established, there is no existing mechanism in most governance processes for formal strategic oversight. So the goal is for management to focus attention on competencies that really affect competitive advantage.Read more about the concept of Core Competencies. LS23 6AD Board involvement in formulating and implementing corporate strategy has always been a sensitive issue. Establishing a formal process will help directors review a companys strategy without undermining the CEO. There are two reasons why. It has the special merit of approximating actual flows of investable funds and is therefore well suited to rate-of-return comparisons with alternative investment opportunities. They also permit objective comparisons among the companys separable income streams and with alternative investments in other companies inside or outside the industry. Some proposals call for radical changes in the rules governing the election of directors at public corporations. The board would also need to be very familiar with details of the database design and reporting activities in order to ensure continuity if the consulting arrangement changes over time. If managers equivocate, they default on their obligations to employees and shareholders alike, eroding much-needed morale and commitment. In addition, it doesnt provide an external standard of comparison. Corporate Restructuring: Managing the Change Process from Within. Recently, directors independence led to the ouster of the incumbent chairman or the CEO at Morrison Knudsen, W.R. Grace, and Kmart. Some chief executives will see a potential for mischief in the formation of a formal strategic-audit process plus a further burden on their already overburdened schedule. Under normal circumstances, it should be a low-key, behind-the-scenes operation designed to lend additional credibility to managements leadership and authority. Standard financial indicators facilitate discussion in terms all parties can understand. deductions story

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