‘Strategy evaluation’ is the process through which the strategists know the extent to which a strategy is able to achieve its objectives. In the words of Professor William F. Glueck and Lawrence R. Jauch,
“Evaluation of strategy is that phase of strategic management process in which the top managers determine whether their strategic choice as implemented is meeting the objectives of the enterprise.”
Learn about:- 1. Meaning of Strategy Evaluation 2. Need of Strategy Evaluation 3. Requirements 4. Process 5. Criteria to Evaluate Strategy 6. Role of Organisational Systems in Evaluation 7. Critical Factors 8. Steps Involved in the Process of Strategy Evaluation 9. Difficulties.
Strategy Evaluation: Meaning, Process, Criteria, Steps, Factors, Need, Requirements, Difficulties and More…
Strategy Evaluation – Meaning
Strategy evaluation is that phase of the strategic management process in which manager tries to assure that the strategic choice is properly implemented and is meeting the objectives of the enterprise. When one talks of evaluation one cannot forget control aspect.
‘Strategy evaluation’ is the process through which the strategists know the extent to which a strategy is able to achieve its objectives. In the words of Professor William F. Glueck and Lawrence R. Jauch, “Evaluation of strategy is that phase of strategic management process in which the top managers determine whether their strategic choice as implemented is meeting the objectives of the enterprise.”
Therefore, when one says that he is talking of strategic evaluation, he is talking of strategic evaluation and control. Then, strategic evaluation and control stands for the process of determining the effectiveness of a given strategy in attaining the organisational objectives and taking corrective action if need there be.
Thus strategy evaluation and control deals with ensuring as to whether a particular strategy contributes to the organisational objectives or not.
In other words strategy evaluation and control is that phase of strategic management process which comprises of those activities that ensures that a given strategic choice is implemented in letter and spirit by the managers who are entrusted with the task of implementing a chosen strategy so as to meet the overall vision, mission, goals and objectives of the organisation.
Strategy Evaluation – Need
The need for evaluation of business strategy arises out of the fact that a strategy may fail during implementation and an early corrective action is to be taken based on the detailed evaluation report. Decision-makers are also interested in such evaluation reports for their rewards in case the strategic plans work well.
One may hardly meet with a manager who has never experienced any strategic failure in his life. Failures are inevitable. The most important thing for a manager is to learn from such failures. Those who analyze the cases of failure can learn more about how to avoid failures. They become more cautions, more systematic in carrying out EAD and more concerned about strategic implementation. In fact, unlucky executives are those who do not have any experience of failure in their corporate lives.
Business organizations may also fail if no evaluation is undertaken. There are organizations where the top man refuses to accept defeat and do not carry out adequate evaluation of the current business strategies. Their decision making process solely depends on current strategy of the firm. They refuse to deviate from the existing strategy because of which strategic evaluation takes a back seat for them. Results are mostly painful. They are forced to quit the organization and their successors take the divestment decision due to accumulated losses.
In case managers are rewarded based on the organizational performance, they will be motivated to carryout systematic evaluation to study the extent of realization of objectives. Unfortunately, only during the period of crisis such things happen. Managers, being the decision-makers, continue to enjoy increments and promotions even when the performance is not satisfactory.
A direct tie is very much needed to motivate the process of evaluation. For doing so, an effective management information system should be installed in the organization so that smooth, complete and correct information can reach the top executives about the results of the corporate strategy. Top executive usually dislike knowing about the negative results. But the information system should be designed in such a way that even the negative results can draw their attention without any unnecessary delay.
According to Rumelt (1980), evaluation of strategy is not the simple appraisal of the business growth rate and the rate of profit. The strategy evaluation should look beyond the short-term state of the organization and examine the fundamental factors that govern the business success.
In fact, one should examine the appropriateness of the business objectives and major policies and plans and should indicate whether the results obtained so far approve or disapprove the critical assumptions, based on which the strategies are made. Of course, giving answers to these questions do require high degree of situation-based knowledge.
Strategy Evaluation – Basic Requirements
Strategy evaluation system must meet several basic requirements to be effective.
1. Activities must be economical.
2. Should not provide too much information and provide required information at right time.
3. Should be done with average control and avoid too many controls.
4. Activities should specifically relate to a firm’s objectives.
5. Should be designed to provide a true picture of what is happening.
6. Process should not dominate strategic decisions, it should foster mutual understanding, trust and commonsense.
Process of Strategy Evaluation (With Steps)
The task of planning, reviewing and controlling is an integral part of the organization. However, in some organizations evaluation is an informal task. For some others, it is an integral part and is being carried out in periodic review sessions. Argyris and Schon (1978), in their study on organizational learning, introduced the concepts of single-loop and double-loop learning. Organizational learning, as observed by them, is normally based on feedback control system.
In other words, an organization examines the gap between the expected and actual performances and tries to install a problem solving mechanism to bring back the system under control. This is known as single-loop learning. In double-loop learning system, an organization not only detects the error in strategic choice but also redefines the very norms, which currently measure the effective performance of a business firm.
This need for double-loop learning system, suggested in Argyris and Schon (1978), is in conformity with the works of Ashby (1954) who presented an interesting study on the design of brain. Ashby pointed out that for all the feedback system multiple-loop error control is needed for stability so that system goals may undergo changes when the existing control system becomes outdated.
According to Argyris and Schon (1978), one cannot specify, in abstract terms, the ideal method for strategy evaluation. An organization’s approach towards strategy evaluation must vary with its own strategic posture, method of planning and control mechanism. It has also been suggested by them that the evaluation process should neither be a periodic nor be too frequent.
A periodic evaluation system is more formal and is destined to be more automatic. Periodicity may induce efficiency in collection and analysis of data but is bound to fix the question frame and inhibit broad-ranging reflection. In fact a good strategy should not require frequent reformulation. It should provide with an operational framework for problem solving. Strategy is not problem solving by itself. Strategy is the embodiment of past convictions and commitments. It is not a mere analytical exercise that vary frequently. The validity of the organization’s mission otherwise will be questioned.
It is also observed that frequent changes in strategy may send a message of weak image of the firm to its competitors and customers. One may have to impress others that its stand is right and fixed. Frequent internal debate about the policy also weakens the organizational harmony.
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.
A quantitative criterion includes 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 managers’ 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
After developing a number of strategic alternatives, they should be evaluated against the criteria, in order to select the best strategy. The process of evaluation is discussed below.
The steps in the process of strategic evaluation are:
(i) The first step is a strategic analysis in order to gain a clear understanding of the circumstances affecting the organisation’s strategic situation.
(ii) The second step is to produce a range of strategic options.
(iii) The third step is to develop a basis of comparison. This may be available from the strategic analysis or may need to be specially developed.
(iv) It is helpful to establish the underlying rationale for each strategy by explaining why the strategy might succeed. This is often done in qualitative terms and by using techniques like scenario building product portfolio analysis and the assessment of synergy.
(v) At this stage, the large number of strategic alternatives may be narrowed down, before a more detailed analysis is undertaken. Strategic alternatives may be ranked, based on their relative merits and demerits.
(vi) Suitability of each alternative should be tested. There are a number of techniques for testing. The specific choice of technique will depend upon the circumstances.
(vii) The next stage is assessing the feasibility and acceptability of strategies which appear reasonably suitable based on the analysis. The choice of the technique should be based on the circumstances of the company.
(viii) Finally, the company will need some system for selecting future strategies as a result of these evaluations.
Criteria Suggested by Richard Rumelt and Seymour Belt for Strategy Evaluation
Few popular criteria as suggested by Richard Rumelt are:
Strategic consistency lacks in different ways. The strategy present must not be inconsistent with the broad plans and policies of corporate strategy. For instance, the strategic, which are not formulated to its excel, may compromise between opposing power groups or, it may be manifested in the form of interdepartmental conflicts with the organisational conflict.
Operating problems are brought on the top to reformulate the policies for its effective implementation. Again the structure of objectives may be inconsistent. The success of one organisational objective is perceived as failure of another unit. The strategic inconsistency noticed between the organisational objectives and the values of managerial groups. Thus the evaluation requires constant checking on the consistency of goals and policies in the strategy.
The key to evaluate consonance is to understand the existence of business, how it is valued currently assumed to be and current pattern differs with earlier patterns. The business must match and be adapted to its environment to the critical changes occurring within it.
The analysis of economic relationship and the scope of business are related with economic and social conditions over time. Thus, the evaluator has to examine the basic pattern of economic relationship that characterises the business and determine the value created is sufficient to sustain the strategy or not.
There are two aspect of business mission in relation to the environment. One aspect is that the business must fit with the environment. Second aspect is that business must compete with other firms that are trying to adapt to the environment. Second aspects of business mission provide a competitive advantage among other firms than their common aspect.
The advantage of competitive strategy may be in creation or in maintenance to prove its superiority of resources, skill and resources, skills or position. Evaluation of strategy requires to analyse specific skills and resources relevant to the competitive areas. Some of the competitive areas are – positional advantages, successful trade names, ownership of sources, geographical location, leadership in service field, reliability, and quality of the product or service.
Feasibility is the test of strategy, assessing the firm’s ability to sustain the strategy or not. Whether a firm is capable to compete with other firm’s strategy, with the environment, or the organisation possess the high degree of coordinate and integrative skill to carry out the strategy. If the feasibility is found then that these are qualitative criteria, which can be profitably deployed after the implementation is complete.
Criteria suggested by Seymour Tiles:
Seymour Tiles suggests the following criteria to evaluate strategy soon after the implementation is over:
1. Internal Consistency:
The consistency of policy implementation of the strategy fits into the integrated pattern of the organisation should also be related to the other policies of the organisation, which has been established, and to the goals it is pursuing.
2. Consistency with the Environment:
Long-range planning implements the strategy that looks for long-run success. For long-run success, it is necessary for continuous assessment of high degree to which previously established policies are consistent with the environment and how current policies are accounted with future of the environment.
3. Appropriateness of the Strategy in the Light of Available Resources:
The implementation of strategy has to make use of the critical resources most effectively. The management should assess the available resource and identify the critical one, which is the most the company poses and which is the least it has. To evaluate competence in relation to strategy, the company must identify its strength whether it is good in marketing, in production or in R&D.
Another strategic importance is the physical availability of resources in relation to its environment or physical facilities relative to markets, source of labour or materials or the efficiency of facilities. The implementation of strategy should facilitate the economic use of scarce resources.
4. Acceptability of the Degree of Risk Involved in the Strategy:
In the given environment, attitude of the management is to eliminate risks involved in the strategy. This criteria does not imply that the strategy is the one with minimum risk. High returns often go with high degree of risk.
The degree of risk involved in the strategy is dependent on three factors:
(i) Uncertainty of available resources over the anticipated period may be caused by internal of external changes.
(ii) The risk is involved in the time period of available resources with the difficulty of predicting long-run environmental changes.
(iii) The proportion of resources is committed to a single venture.
Greater the magnitude of the above factors, greater is the degree of risk involved. Non-utilization of internal resources to the fullest may well be the riskiest strategy.
5. Appropriates of Time Horizon of the Strategy:
Strategic are not goal oriented but also time bounded. Introduction of new product, market or installation of a plant can be of strategic importance only if mission is accomplished within specified time. Realising the goals within the appropriateness of time horizon evaluates the strategy effectively and efficiently.
6. Workability of the Strategy:
If the evaluation of the strategy is result-oriented then the workability of the strategy is appraised. The workability amount of the strategy obviously explicit the implementation of strategy with skill and appropriateness. If the workability of strategy cannot be evaluated by results alone, Seymour Tiles suggests some other indicated that may be used for the purpose.
Role of Organisational Systems in Strategy Evaluation
The process of strategic evaluation and control does not operate in isolation; it works on the basis of the different organizational systems that are used to implement strategies. There are six organizational systems – information control, appraisal, motivation; development and planning.
There, the thrust of discussion is on understanding the role that these systems play in strategy implementation and how they have to be adapted to suit the requirements of changing strategies.
Here, we shall briefly review the role of organizational systems in evaluation.
Evaluation is done by comparing actual performance with standards. The measurement of performance is done on the basis of reports generated through the information system. In fact the purpose of information management system is to enable managers to keep track of performance through control reports.
Several of the techniques whether for strategic surveillance or financial analysis are based on the use of an information system to provide relevant and timely data to managers to allow them to evaluate performance and strategy, and ‘Initiate corrective action.
In fact, with the increasing sophistication of the information management systems and the use of it is possible to devise elaborate methods for evaluation. Techniques such as data warehousing and data mining enable organisations to delve deeper into their internal systems and come up with information that can be useful for evaluation and control purposes.
The control system, of course, is at the heart of any evaluation process, and is used for setting standards, measuring performance, analyzing variances, and taking corrective action.
The appraisal system actually evaluates performance and so is a part of the wider control system. However, its significant role in evaluation is yet to be acknowledged. When the performance of managers is appraised, it is their contribution to the organizational objectives which is sought to be measured.
In practice, it is difficult to differentiate strictly between the performance of individuals and that of the organizational units they belong to.
Thus, the achievement of a department or a profit centre is the sum total, or even more, synergistically, of the individual performance of managers and employees in that department or profit centre. The, evaluation process, through the appraisal system, measures the actual performance and provides the basis for the control system to work.
The central role of the motivation system is to induce strategically desirable behavior so that managers are encouraged to work towards the achievement of organisational objectives. Now, if we look at the way the evaluation process works, we will observe that its efficacy depends on the extent to which it is able to bring actual performance to the level of the standards.
In other words, the lesser the deviation of actual performance from standards, the higher is the efficacy of the evaluation process. The motivation system plays a significant role in ensuring that deviations do not occur, or if they do, then they are corrected by the means of rewards and penalties. Incentive systems are directly related to the amount of deviation. Performance checks, which are a feedback in the evaluation process, are done through the motivation system.
The development system prepares the managers for performing strategic and operational tasks. Among the several aims of development, the most important is to match person with the job to be performed.
Critical Factors that could Help in Evaluating a Strategy: Quantitative Factors and Qualitative Factors
The critical factors that could help in evaluating a strategy may broadly be classified into two categories:
1. Quantitative factors and
2. Qualitative factors.
1. Quantitative Factors:
Quantitative criteria commonly employed to evaluate strategies are financial ratios, which strategies use to make three important comparisons – (i) comparing the firm’s performance over different time periods (ii) comparing the firm’s performance to competitors’ and (iii) comparing the firm’s performance to industry averages.
Some key financial ratios that are particularly useful as criteria for strategy evaluation may be stated thus:
i. Return on investment
ii. Return on equity
iii. Z score
iv. Employee satisfaction index
v. Return on capital employed
vi. Profit margin
vii. Market share
viii. Debt to equity
ix. Earnings per share
x. Sales growth
xi. Asset growth
However, there are some potential problems associated with using quantitative criteria for evaluating strategies. First, most quantitative measures are tied to annual objectives rather than many quantitative measures. Second, dividing the quantitative measures for various purpose involves judgment. For these and other reasons, qualitative criteria are also to be taken into account while evaluating strategies.
Many managers feel that qualitative organizational measurement is best arrived at simply by answering a series of important questions aimed at revealing important facets of organizational operations. The following list of questions, suggested by Milton Lauenstein could be useful to the practicing manager.
Seymour Tiles identified six qualitative that are useful in evaluating strategies way back in 1963 thus –
i. Is the strategy internally consistent?
ii. Is the strategy consistent with the environment?
iii. Is the strategy appropriate in view of available resources?
iv. Does the strategy involve an acceptable degree of risk?
v. Does the strategy have an appropriate time framework?
vi. Is the strategy workable?
Some additional key questions that reveal the need for qualitative or intuitive judgment in strategy evaluation may be listed thus –
i. How good is the firm’s balance of investments between high-risk and low-risk projects?
ii. How good is the firm’s balance of investments between long term and short-term projects?
iii. How good is the firm’s balance of investments between slow-growing markets and fast-growing markets?
iv. How good is the firm’s balance of investments among different divisions?
v. To what extent are the firm’s alternative strategies socially responsible?
vi. What are the relationships among the firm’s key internal and external strategic factors?
vii. How are major competitors likely to respond to particular strategies?
Major Difficulties that may Arise During Strategy Evaluation
The major difficulties that may arise during the stage of evaluation are the followings:
1. No Best Way:
There is no clear-cut concept of right or wrong strategy. In fact for each business the choice of strategy is different as it depends on the situational logic. One has to tailor-made the strategy according to the solution need of the business problem. As a result, one cannot talk in terms of the best way of evaluating a strategy.
2. Lack of Focus for Evaluation:
Executives find it easier to talk in terms of goals and objectives. They are much eager to decide about goals and objectives rather than to evaluate objectives against achievements. The main reason behind such indifference towards evaluation can be traced back to their lack of training in problem structuring. Differences also arise out of the fact that objectives are devices for ensuring coherence in action but are mostly treated as values.
3. Selection of Evaluator:
Confusion arises about who should undertake the evaluation work in an objective way. Strategy being a comprehensive plan of actions, one has to evaluate its performance at the top management level. But strategists themselves cannot evaluate the performance of their strategies in an unbiased way, as they will remain emotionally attached with their strategic choice. Many of the strategic failures are due to evaluation of strategies by their planners.
Evaluation of a strategy at the next lower level invites problem, as the evaluators will have divisional and or functional inclinations. Further, organizational hierarchy may not ensure full freedom to them as evaluators. These difficulties might be absent for external evaluators. But they will have limited idea about the past conditions of the firm due to leadership implementation, structural modifications and adoption of different sets of functional policies.