Internal rating tools in strategic controlling system

Strategic and Enterprise Planning

The paper contains the model of development of the internal rating system and its constituent tools to monitor and analyze achievement of a company’s strategic goals in a strategic controlling system. This model is applied when target values of key performance indicators (KPIs) in the system are set in qualitative form or in the form of intervals. This method of setting targets has recently become more often in strategic management because: (1) to achieve success in business the companies are more and more relying on their intangible assets which are difficult to quantify; and (2) under conditions of fast changes in the environment, the values of KPIs reflecting strategic goals can be set only by intervals. In such environment, traditional methods of a «plan-fact» analysis are becoming less and less efficient and new methods, such as internal rating systems, are required to solve the task of measuring and evaluation of variances of KPIs actual values.  Internal rating in strategic controlling is defined as a tool of complex evaluation of both (1) the variance of actual company’s performance from the strategic goal; and (2) the ability of company’s management to ensure the achievement of the strategic goal. The rating is called internal because it is evaluated by the company’s managers within an umbrella of a strategic controlling system and not by external agents such as, for example, consultants. The paper provides methodologies and examples of the main tool in the model – an internal rating scale. The examples of the scale are developed for the different methods of setting target values of KPIs.  The paper also provides the detailed flow-chart of the model which consists of several main steps. At the first step, the managers define KPIs target values and build a rating scale for complex evaluation of variances. At the second step, the managers perform a periodic monitoring of KPIs which includes the calculation and analysis of potential variances from their target values (including identifications of reasons and cause of the variances) and assignment of internal ratings to these variances. At the third step, identified variances and their internal ratings are communicated to the decision making system of a strategic controlling. In this system, the managers, based on the information coded into internal ratings, develop actions to reduce the consequences and impact of the variances. In addition to the flow chart, the paper contains the examples of developments of such tools in the model as target intervals and methods of coding the causes and the sources of the variances. The advantage of the model is the accurate and efficient identification of variances of actual values of KPI from those in the strategic plan, if the target values of KPIs are set in qualitative form or by intervals. Internal ratings, in comparison with other existing tools, allow creating a deep gradation of variances which is necessary for the efficient management. Due to materially thresholds which are embedded into the internal ratings scale, the managers are not reacting on insignificant variances or threads thus save the resources of the company. The model can also be used as a base for the motivation system for mangers as well as for development of other tools of control and analysis, such as a system of strategic benchmarking.