Strategy Implementation

COMMUNICATION STRATEGY
In implementing a strategy, it is important to communicate effectively the strategy
to the whole company. Here are some lessons to help the management in communicating
easily and effectively:

Lesson #1: “Don’t rely on written communication alone.”

Present the strategic plan in many ways. Be creative with how you present your plan.

Your employees all absorb information differently. Case in point—be sure you
present your strategic plan in many ways. You should use a mix of video, audio, visual, and
written strategy communication to employees so everyone can learn about the plan in the
way that is best for them.

Lesson #2: “Make your message clear and relevant.”

Define your strategic terms. Use crystal-clear language.

Using industry-specific acronyms may seem “smarter” or “easier”—but it is just the

opposite. Use terms that can be easily understood by all the level management in the
company. Additionally, try to cut out any useless, jargon-laden phrases like “leveraging
talent” or “optimizing strategy.”

Lesson #3: “Keep communication flowing in both directions.”

Develop venues for bottom-up communication.

Do your employees know you want them to provide you with feedback? If you don’t
have any defined venues for this bottom-up strategic planning communication, they
probably don’t. Or, at the very least, they don’t know how to go about providing you with
that feedback. Consider the best avenue for constructive feedback based on your
organizational structure and put it into place as soon as possible.
Lesson #4: “Tap into the workforce’s vision.”
Be open to suggestions from the workforce. Be flexible.

If the leadership team can put themselves in the shoes of lower-level employees and
see the strategy at work from their perspective, the leadership will be more willing to
consider new and updated solutions to problems.

After you set your strategic plan, you need to be willing to adjust when necessary.
Be sure to stay in tune with what is and isn’t working properly, and realize that you may
need to step back and alter your strategic plan based on the feedback you’re getting.

These suggestions can be described in a word: transparency. If you make it easy for
your employees to both access the strategic plan information and provide you with
constructive feedback, you’re going to see far more strategic success.

STRATEGY AND STRUCTURE

An organization’s strategy is its plan for the whole business that sets out how the
organization will use its major resources. Similarly, it’s a plan of action aimed at reaching
specific goals and staying in good stead with clients and vendors.

Organization structure is a critical component of effective strategy implementation

process.

Success of a firm depends on how well a firm's business strategy is matched to its
organizational structure. Developing an organization structure that effectively supports the
firm's strategy is difficult.

Organization structure should have following characteristics:

1. Structural stability

This provides the firm a capacity to effectively manage its daily work routines.

2. Structural flexibility

This provides the firm an opportunity to explore competitive possibilities & then
allocate resources to activities that will shape the competitive advantages the firm
will need to be successful in future.
 Organization structure should provide adequate stability & flexibility that is
necessary for successful implementation of strategy.

Evolutionary pattern of organizational structure & strategy

1. Pre-bureaucratic structures

This is the simplest form of structure & is usually based on traditional or

charismatic dominance. Structure is totally centralized & lacks standardization of
tasks. This is useful in managing simple tasks.

2. Bureaucratic structures

It has certain degree of standardization & is useful in managing slightly more

complex & large-scale organizations.

3. Functional structures

Structure is more standardized & centralized. Organization is divided into separate

functional divisions & employees within a division perform specific functions.

4. Divisional structure

This is also called as product structure. Organization is divided into divisions & each
division has its own resources & functions.

5. Matrix structure

This structure combines the features of both functional & divisional structure.

ORGANIZATIONAL LEADERSHIP
Leadership is never easy. No matter how effortlessly some leaders appear to
manage, the path of a leader is one fraught with constant challenge and surprise. However,
the leader does not face the challenge alone. A leader has a group or organization working
to meet each challenge and achieve each goal. The leader's job is not to solve every problem
alone, but to inspire those he or she leads to solve the problems. Good leaders recognize
that they do not have all the answers and are constantly reeducating themselves on their
businesses and sharpening their leadership skills. Beyond personal qualities such as vision
and positive thought, a leader must also take careful steps to communicate with his or her
staff in the best way possible. Formerly rare processes such as goal-setting, constant
feedback, and a system of rewards are now the norm in most workplaces.
 Organizations need strong leadership for optimum effectiveness. Leadership, as we
know, is a trait which is both inbuilt and can be acquired also. Organizational leadership
deals with both human psychology as well as expert tactics. Organizational leadership
emphasizes on developing leadership skills and abilities that are relevant across the
organizations. It means the potential of the individuals to face the hard times in the
industry and still grow during those times. It clearly identifies and distinguishes the leaders
from the managers. The leader should have potential to control the group of individuals.

An ideal organizational leader should not dominate over others. He should guide the
individuals under him, give them a sense of direction to achieve organizational goals
successfully and should act responsibly. An organizational leader should not only lead
others individually but also manage the actions of the group. Organizational leaders clearly
communicate organizational mission, vision and policies; build employees morale, ensure
efficient business operations; help employees grow professionally and contribute
positively towards organizations mission.

Tips for Effective Organizational Leadership

1. A leader must lead himself, only then he can lead others. He must be committed on
personal and professional front, and must be responsible. He must be a role model for
others and set an example for them.

2. A leader must boost up the morale of the employees. He should motivate them well
so that they are committed to the organization. He should be well acquainted with them,
have concern for them and encourage them to take initiatives. This will result in more
efficient and effective employees and ensure organizational success.

3. A leader must work as a team. He should always support his team and respect them.
He should not hurt any employee. A true leader should not be too bossy and should not
consider him as the supreme authority. He should realize that he is part of the organization.

Organizational leadership involves all the processes and possible results that lead to
development and achievement of organizational goals. It includes employees’ involvement,
genuineness, effective listening and strategic communication.
8 Reasons Why Business Leadership Is Important

Business leadership involves the ability of the management of an organization to

achieve goals, act decisively, and beat its competitors while instilling the performance spirit
within the organization. Business leadership is important because it touches both the
internal and the external stakeholders within the industry and beyond.

Here are eight reasons why business leadership is important:

1. Ensuring the Business Maintains its Vision

2. Inspiring Morale

3. Guiding an Organization Towards Embracing Diversity

4. Communicating New Strategic Directions

5. Ensuring the Employees are Motivated

6. Availing Necessary Resources and Support

7. Encouraging Continuous Learning

8. Inspiring a Collective Identity

There a lot of ways to lead a team of people; but while not everyone might agree on
the most effective type, we can all agree that the performance of the team heavily relies on
its leader. So, what are the qualities of a good leader? On the most basic level, leadership
styles can be categorized as being manipulative, authoritative, or attractive. While these
styles might get the job done, can you guess which one is the most effective in the long-run?

Now that we got that out of the way, let’s define the characteristics and qualities of what
makes a good, attractive leader.

1. Trustworthy

2. Self-Aware and Insightful

3. Learn, Grow, Expand

4. High Self-Worth and Self-Esteem

5. Excited by Life

6. Fix Problems, Find Solutions, Don't Fix Blame

7. Refuse to Gossip
8. Grow Their People

9. Open Office

10. Engage and Energize

According to Techtalks the five key components of organizational leadership are:

1. Worldview

2. Strengths

3. Ethics

4. Communication

5. Leadership

Worldview

Organizational leadership requires developing an understanding of your own

worldview as well as the worldviews of others. Worldview is a composite image created
from the various lenses through which individuals view the world. It is not the same as
identity, political stance, or religious viewpoint, but does include these things. It
incorporates everything an individual believes about the world, combining the tangible and
the intangible. An individual’s worldview is defined by that individual’s attitudes, opinions,
beliefs, and the outside forces the individual allows to influence them. Worldview is the
“operating instructions” for how the individual interfaces with the world. One who does not
take into consideration how individuals interface with the world is in a much weaker
position to lead these individuals. Furthermore, organizational leadership requires an
understanding of the composite worldview of the organization, which consists of the many
diverse and sometimes conflicting worldviews of the individuals within that organization.

Strengths

Successful leadership requires capitalizing on strengths and managing around

weaknesses. Strength can be defined as consistent, near perfect performance in an activity.
An individual should perform an activity at around a 95% success rate to consider their
performance of that activity a strength. Strength is not necessarily the same as ability: an
ability is a strength only if you can fathom yourself doing it repeatedly, happily, and
successfully.
Ethics

Organizational leadership requires ethics. Ethics aids leaders in balancing truth and
loyalty, individuals and communities, short-term and long-term, and justice vs. mercy.
Ethics is not an inoculation or a compromise. It is a process and a lens by which leaders
approach a problem situation. Ethics call on us to be impartial, yet engaged. Effective
leaders utilize ethics to look for the “hidden alternative” in ethically questionable
situations. It is the compass by which leaders navigate not only right vs. wrong, but also
right vs. right.

Communication

Communication is a tool for individuals to interface with one another, with groups,
and with the rest of the world. It is not a text, email, phone call, or personal visit: these are
methods/mediums of communication. Effective communication requires an understanding
of the VABEs (Values, Assumptions, Beliefs, Expectations) of those whom with we
communicate. Understanding someone’s worldview and VABEs enables leaders to
acknowledge but look past differences, focus on areas of agreement, and to effectively
listen for and hear the messages of others. Leaders can move beyond communication
barriers (appearance, vocabulary, stutter, lisp, accent, etc.) and focus on the message of the
speaker.

Leadership

It is often the case that people don’t want to be leaders for fear of rejection. Leaders
can rise above this natural fear and lead by the example of adding value to an organization.
Managers and leaders are not the same. Leaders possess strategic thinking and not only an
understanding of the vision of an organization, but also the ability to effectively carry out
and communicate that vision. Anyone, anywhere, at any level can be a leader. The
cornerstones of leadership are:

• Truth telling

• Promise keeping

• Fairness

• Respect for the individual

These four cornerstones combined will determine how the individual leader is
perceived by others, and in the case of organizational leadership, perception is reality for
all effective purposes. A manager may have been delegated responsibility over many
individuals, but in failing to exhibit the cornerstones of leadership or not possessing the
requisite strength, ethics, communication, or grasp of worldviews, that manager is not a
leader. In fact, that manager may very well manage a leader who does possess leadership
traits.

Strategy and Motivational Systems

Strategic Motivation Systems – a Key Element of Strategic Management

It is obvious that for the development of a strategic plan to be efficient, →motivation

is required. But without motivation, the successful implementation of this plan is
impossible. The specifics of strategic planning largely determine the details of the systems
of motivation.

The motivation system functions according to the qualities and mechanisms of

motivation, which is developed during the stage of entry strategy preparation. First and
foremost, this system must → inspire employees involved in the process of strategy
development and implementation to orient their mindset toward a strategic way of
thinking.

Motivation Strategies

To some extent, a high level of employee motivation is derived from effective

management practices. To develop motivated employees, a manager must treat people as
individuals, empower workers, provide an effective reward system, redesign jobs, and
create a flexible workplace.

Empowering employees

Empowerment occurs when individuals in an organization are given autonomy,

authority, trust, and encouragement to accomplish a task. Empowerment is designed to
unshackle the worker and to make a job the worker's responsibility.

To empower and to change some of the old bureaucratic ideas, managers are
promoting corporate intrapreneurships. Intrapreneurship encourages employees to
pursue new ideas and gives them the authority to promote those ideas. Obviously,
intrapreneurship is not for the timid, because old structures and processes are turned
upside down.
Providing an effective reward system

Managers often use rewards to reinforce employee behavior that they want to
continue. A reward is a work outcome of positive value to the individual. Organizations are
rich in rewards for people whose performance accomplishments help meet organizational
objectives. People receive rewards in one of the following two ways:

• Extrinsic rewards are externally administered. They are valued outcomes given to
someone by another person, typically a supervisor or higher-level manager. Common
workplace examples are pay bonuses, promotions, time off, special assignments, office
fixtures, awards, verbal praise, and so on. In all cases, the motivational stimulus of extrinsic
rewards originates outside the individual.

• Intrinsic rewards are self‐administered. Think of the “natural high” a person may
experience after completing a job. That person feels good because she has a feeling of
competency, personal development, and self‐control over her work. In contrast to extrinsic
rewards, the motivational stimulus of intrinsic rewards is internal and doesn't depend on
the actions of other people.

To motivate behavior, the organization needs to provide an effective reward system. An

effective reward system has four elements:

• Rewards need to satisfy the basic needs of all employees.

• Rewards need to be included in the system and be comparable to ones offered by a

competitive organization in the same area.

• Rewards need to be available to people in the same positions and be distributed

fairly and equitably.

• The overall reward system needs to be multifaceted. Because all people are
different, managers must provide a range of rewards—pay, time off, recognition, or
promotion. In addition, managers should provide several different ways to earn these
rewards.

This last point is worth noting. With the widely developing trend toward
empowerment in American industry, many employees and employers are beginning to
view traditional pay systems as inadequate. In a traditional system, people are paid
according to the positions they hold, not the contributions they make. As organizations
adopt approaches built upon teams, customer satisfaction, and empowerment, workers
need to be paid differently. Many companies have already responded by designing
numerous pay plans, designed by employee design teams, which base rewards on skill
levels.
 Rewards demonstrate to employees that their behavior is appropriate and should
be repeated. If employees don't feel that their work is valued, their motivation will decline.

Redesigning jobs

Many people go to work every day and go through the same, unenthusiastic actions
to perform their jobs. These individuals often refer to this condition as burnout. But smart
managers can do something to improve this condition before an employee becomes bored
and loses motivation. The concept of job redesign, which requires a knowledge of and
concern for the human qualities people bring with them to the organization, applies
motivational theories to the structure of work for improving productivity and satisfaction

When redesigning jobs, managers look at both job scope and job depth. Redesign attempts
may include the following:

• Job enlargement. Often referred to as horizontal job loading, job enlargement

increases the variety of tasks a job includes. Although it doesn't increase the quality or the
challenge of those tasks, job enlargement may reduce some of the monotony, and as an
employee's boredom decreases, his or her work quality generally increases.

• Job rotation. This practice assigns people to different jobs or tasks to different
people on a temporary basis. The idea is to add variety and to expose people to the
dependence that one job has on other jobs. Job rotation can encourage higher levels of
contributions and renew interest and enthusiasm. The organization benefits from a cross‐
trained workforce.

• Job enrichment. Also called vertical job loading, this application includes not only an
increased variety of tasks, but also provides an employee with more responsibility and
authority. If the skills required to do the job are skills that match the jobholder's abilities,
job enrichment may improve morale and performance.
Creating flexibility

Today's employees value personal time. Because of family needs, a traditional nine‐
to‐five workday may not work for many people. Therefore, flextime, which permits
employees to set and control their own work hours, is one way that organizations are
accommodating their employees' needs. Here are some other options organizations are
trying as well:

• A compressed workweek is a form of flextime that allows a full‐time job to be

completed in less than the standard 40‐hour, five‐day workweek. Its most common form is
the 4/40 schedule, which gives employees three days off each week. This schedule benefits
the individual through more leisure time and lower commuting costs. The organization
should benefit through lower absenteeism and improved performance. Of course, the
danger in this type of scheduling is the possibility of increased fatigue.

• Job sharing, or twinning occurs when one full‐time job is split between two or more
persons. Job sharing often involves each person working one‐half day, but it can also be
done on weekly or monthly sharing arrangements. When jobs can be split and shared,
organizations can benefit by employing talented people who would otherwise be unable to
work full‐time. The qualified employee who is also a parent may not want to be in the office
for a full day but may be willing to work a half‐day. Although adjustment problems
sometimes occur, the arrangement can be good for all concerned.

• Telecommuting, sometimes called flexiplace, is a work arrangement that allows at

least a portion of scheduled work hours to be completed outside of the office, with work‐at‐
home as one of the options. Telecommuting frees the jobholder from needing to work fixed
hours, wearing special work attire, enduring the normal constraints of commuting, and
having direct contact with supervisors. Home workers often demonstrate increased
productivity, report fewer distractions, enjoy the freedom to be their own boss, and
appreciate the benefit of having more time for themselves.

• Of course, when there are positives, there are also negatives. Many home workers
feel that they work too much and are isolated from their family and friends. In addition to
the feelings of isolation, many employees feel that the lack of visibility at the office may
result in the loss of promotions.
Establishing Short-Term Objectives

Short-term objectives represent the goals an organization sets that are centered on
tasks that can be achieved within the next six months or, at the outset, within one year. An
example of a short-term goal might be to increase sales by 10 percent. (Peter Drucker
"Management by Objectives”, 1954)

Many people use the SMART acronym in defining how to set short-term goals.
(George T. Doran Management Review, 1981)and the letters stand for:

 Specific. What is it, exactly, that you want to accomplish in the short-term (usually
defined anywhere from now to six months from now)? Where are you going to
operate? What resources will you need? What are the obstacles you will have to
overcome?
 Measurable. How do you quantify success in meeting your short-term goals? For
most businesses, that is the bottom line: income after expenses. Other businesses
that require a longer incubation period may measure it in terms of number of
contacts or amount of web traffic.
 Attainable. Goals must be realistic to be of any use. Setting attainable goals requires
doing research to calculate costs, set prices, and ascertain the competition.
 Relevant. Short-term goals must be designed to lead to long-term goals. What do you
want to accomplish? How can you do that better than someone else? Is the time
right for your endeavor?
 Timely. Short-term goals must have a due date, a day of accounting, set at the
beginning in concrete. At this point, wherever the company is, you stop and look at
what has been accomplished. If it’s nowhere near the point you wanted the company
to be at this time, then the company’s practices, goals, or long-term vision has to be
altered.
DEVELOPING FUNCTIONAL STRATEGIES
 Functional strategy refers to the set of strategic initiatives taken in one part
of a business.
 A functional strategy is the short-term game plan for a key functional area
within a company
 Plans, or tactics, for carrying out the business strategy.
 Functional strategies must be developed in the following areas: finance,
marketing, production/operations, R&D, and personnel.

The primary role of a functional strategy is to support the company's overall

business strategy. Functional strategies help in implementation of grand strategy by
organizing and activating specific subunits of the company to pursue the business strategy
in daily activities.

Areas of Functional Strategies

• Marketing Strategies

Marketing consists of four strategic considerations: products/services, pricing,

channels of distribution / location of outlets, and promotion. In general, the mix of
these elements should be appropriate, and the plans for each of the elements must
also be appropriate. Marketing strategy is concerned with matching existing or
potential products or services with the needs of customers.

• Functional Strategies in Finance / Accounting

Financial management is primarily concerned with two functions. The first function,
acquiring funds to meet the organization's current and future needs. The second
function is recording, monitoring, and controlling the financial results of an
organization's operations. Financial strategies concern objectives, profitability,
liquidity and cash management, leverage and capital management, asset
management, investment ratios, and financial planning and control.

• Production / Operations Strategies

Production/operations management (POM) is the core function in the business firm.

This involves a process of converting labor, materials, etc., into the combination of
qualities that a selected group of customers wants.
 The major decisions in the production/operations strategy are concern the technical
core, quality, facilities, technology, and production planning and control. POM
operating strategies must be coordinated with marketing strategy if the firm is to
succeed.

• Human Resource / Personnel Strategies

Every activity a company undertakes requires human resources - people who are
qualified and motivated to perform specific tasks. Human resource strategies
concern human resource planning, recruitment and selection, training and
development, compensation and rewards, employment security, and labor relations.

• Research and Development Strategies

The need to develop or improve products and production processes is met by the
research and development (R&D) function. The most important research and
development strategy issue concerns the relationship of R&D to corporate strategy.
The more important innovation is to the strategy of the organization, the more
implementation will require consideration of strategic issue in R&D.

ROLE OF ACCOUNTING IN SELLING AND IMPLEMENTING

MANAGEMENT STUDY
Any person, corporation, or nation should know who or where they are, where they
want to be, and how to get there. The strategic-planning process utilizes analytical models
that provide a realistic picture of the individual, corporation, or nation at its “consciously
incompetent” level, creating the necessary motivation for the development of a strategic
plan. The process requires five distinct steps outlined below and the selected strategy must
be sufficiently robust to enable the firm to perform activities differently from its rivals or to
perform similar activities in a more efficient manner.

A good strategic plan includes metrics that translate the vision and mission into specific end
points. This is critical because strategic planning is ultimately about resource allocation and would
not be relevant if resources were unlimited. This article aims to explain how finance, financial goals,
and financial performance can play a more integral role in the strategic planning and decision-
making process, particularly in the implementation and monitoring stage.
The Strategic-Planning and Decision-Making Process

1. Vision Statement

The creation of a broad statement about the company’s values, purpose, and future
direction is the first step in the strategic-planning process. The vision statement must
express the company’s core ideologies—what it stands for and why it exists—and its vision
for the future, that is, what it aspires to be, achieve, or create.

2. Mission Statement

An effective mission statement conveys eight key components about the firm: target
customers and markets; main products and services; geographic domain; core technologies;
commitment to survival, growth, and profitability; philosophy; self-concept; and desired
public image. The finance component is represented by the company’s commitment to
survival, growth, and profitability the company’s long-term financial goals represent its
commitment to a strategy that is innovative, updated, unique, value-driven, and superior to
those of competitors.

3. Analysis

This third step is an analysis of the firm’s business trends, external opportunities, internal
resources, and core competencies. For external analysis, firms often utilize Porter’s five
forces model of industry competition, which identifies the company’s level of rivalry with
existing competitors, the threat of substitute products, the potential for new entrants, the
bargaining power of suppliers, and the bargaining power of customers.

For internal analysis, companies can apply the industry evolution model, which identifies
takeoff (technology, product quality, and product performance features), rapid growth
(driving costs down and pursuing product innovation), early maturity and slowing growth
(cost reduction, value services, and aggressive tactics to maintain or gain market share),
market saturation (elimination of marginal products and continuous improvement of value-
chain activities), and stagnation or decline (redirection to fastest-growing market segments
and efforts to be a low-cost industry leader).

Another method, value-chain analysis clarifies a firm’s value-creation process based on its
primary and secondary activities. This becomes a more insightful analytical tool when used
in conjunction with activity-based costing and benchmarking tools that help the firm
determine its major costs, resource strengths, and competencies, as well as identify areas
where productivity can be improved and where re-engineering may produce a greater
economic impact.

SWOT (strengths, weaknesses, opportunities, and threats) is a classic model of internal and
external analysis providing management information to set priorities and fully utilize the firm’s
competencies and capabilities to exploit external opportunities, determine the critical weaknesses
that need to be corrected, and counter existing threats.
4. Strategy Formulation

To formulate a long-term strategy, Porter’s generic strategies model is useful as it helps the
firm aim for one of the following competitive advantages: a) low-cost leadership (product is
a commodity, buyers are price-sensitive, and there are few opportunities for
differentiation); b) differentiation (buyers’ needs and preferences are diverse and there are
opportunities for product differentiation); c) best-cost provider (buyers expect superior
value at a lower price); d) focused low-cost (market niches with specific tastes and needs);
or e) focused differentiation (market niches with unique preferences and needs).

5. Strategy Implementation and Management

In the last ten years, the balanced scorecard (BSC) has become one of the most effective
management instruments for implementing and monitoring strategy execution as it helps to
align strategy with expected performance and it stresses the importance of establishing
financial goals for employees, functional areas, and business units. The BSC ensures that the
strategy is translated into objectives, operational actions, and financial goals and focuses on
four key dimensions: financial factors, employee learning and growth, customer
satisfaction, and internal business processes.

The Role of Finance

Financial metrics have long been the standard for assessing a firm’s performance. The BSC supports
the role of finance in establishing and monitoring specific and measurable financial strategic goals
on a coordinated, integrated basis, thus enabling the firm to operate efficiently and effectively.
Financial goals and metrics are established based on benchmarking the “best-in-industry” and
include:

1. Free Cash Flow

This is a measure of the firm’s financial soundness and shows how efficiently its financial resources
are being utilized to generate additional cash for future investments. It represents the net cash
available after deducting the investments and working capital increases from the firm’s operating
cash flow. Companies should utilize this metric when they anticipate substantial capital
expenditures soon or follow-through for implemented projects.

2. Economic Value-Added

This is the bottom-line contribution on a risk-adjusted basis and helps management to make
effective, timely decisions to expand businesses that increase the firm’s economic value and to
implement corrective actions in those that are destroying its value. It is determined by deducting
the operating capital cost from the net income. Companies set economic value-added goals to
effectively assess their businesses’ value contributions and improve the resource allocation
process.
3. Asset Management

This calls for the efficient management of current assets (cash, receivables, inventory) and
current liabilities (payables, accruals) turnovers and the enhanced management of its
working capital and cash conversion cycle. Companies must utilize this practice when their
operating performance falls behind industry benchmarks or benchmarked companies.

4. Financing Decisions and Capital Structure

Here, financing is limited to the optimal capital structure (debt ratio or leverage), which is
the level that minimizes the firm’s cost of capital. This optimal capital structure determines
the firm’s reserve borrowing capacity (short- and long-term) and the risk of potential
financial distress. Companies establish this structure when their cost of capital rises above
that of direct competitors and there is a lack of new investments.

5. Profitability Ratios

This is a measure of the operational efficiency of a firm. Profitability ratios also indicate
inefficient areas that require corrective actions by management; they measure profit
relationships with sales, total assets, and net worth. Companies must set profitability ratio
goals when they need to operate more effectively and pursue improvements in their value-
chain activities.

6. Growth Indices

Growth indices evaluate sales and market share growth and determine the acceptable
trade-off of growth with respect to reductions in cash flows, profit margins, and returns on
investment. Growth usually drains cash and reserve borrowing funds, and sometimes,
aggressive asset management is required to ensure sufficient cash and limited borrowing.
Companies must set growth index goals when growth rates have lagged the industry norms
or when they have high operating leverage.

7. Risk Assessment and Management

A firm must address its key uncertainties by identifying, measuring, and controlling its
existing risks in corporate governance and regulatory compliance, the likelihood of their
occurrence, and their economic impact. Then, a process must be implemented to mitigate
the causes and effects of those risks. Companies must make these assessments when they
anticipate greater uncertainty in their business or when there is a need to enhance their
risk culture.

8. Tax Optimization

Many functional areas and business units need to manage the level of tax liability
undertaken in conducting business and to understand that mitigating risk also reduces
expected taxes. Moreover, new initiatives, acquisitions, and product development projects
must be weighed against their tax implications and net after-tax contribution to the firm’s
value. In general, performance must, whenever possible, be measured on an after-tax basis.
Global companies must adopt this measure when operating in different tax environments,
where they are able to take advantage of inconsistencies in tax regulations.