CH9: STRATEGY REVIEW, EVALUATION AND CONTROL 4.

Rate of obsolescence of plans

5. Domestic and global events

NATURE OF STRATEGY EVALUATION 6. Decreasing time span for planning certainty

 Most strategists agree, therefore, that strategy evaluation is vital to

an organization’s well-being; timely evaluations can alert
management to problems or potential problems before a Process of Evaluating Strategies
situation becomes critical.
 Strategy Evaluation Should –
 Strategy evaluation includes three basic activities:
1. Initiate managerial questioning of expectations and
1. examining the underlying bases of a firm’s strategy, assumptions

2. comparing expected results with actual results, 2. Trigger a review of objectives & values

3. taking corrective actions to ensure that performance conforms 3. Stimulate creativity in generating alternatives and
to plans. formulating criteria for evaluation

 Strategy evaluation can be no better than the information on which  Strategy-evaluation activities should be performed on a
it is based. continuing basis, rather than at the end of specified periods of
time or just after problems occur.
 Strategy evaluation can be a complex and sensitive undertaking.

 The more managers attempt to evaluate the behavior of others, the

less control they have. STRATEGY-EVALUATION FRAMEWORK

 Strategy evaluation is essential to ensure that stated objectives are  Review of Underlying Bases of Strategy –
being achieved.
1. Develop revised IFE Matrix - A revised should focus
 Strategy evaluation is simply an appraisal of how well an on changes in the organization’s management,
organization has performed. marketing, finance/accounting, production/operations,
R&D, and management information systems strengths
 Strategy evaluation is important because organizations face and weaknesses.
dynamic environments in which key external and internal factors
often change quickly and dramatically. 2. Develop revised EFE Matrix- A revised should indicate
how effective a firm’s strategies have been in response
 Richard Rumelt offered four criteria that could be used to to key opportunities and threats.
evaluate a strategy: consistency, consonance, feasibility, and
advantage.  Review Effectiveness of Strategy –

1. Consistency - A strategy should not present inconsistent 1. Competitors’ reaction to strategy

goals and policies. Organizational conflict and
2. Competitors’ change in strategy
interdepartmental bickering are often symptoms of managerial
disorder, but these problems may also be a sign of strategic 3. Competitors’ changes in strengths & weaknesses
inconsistency.
4. Reasons for competitors’ strategic change
2. Consonance - refers to the need for strategists to examine
sets of trends, as well as individual trends, in evaluating 5. Reasons for competitors’ successful strategies
strategies. A strategy must represent an adaptive response to
6. Competitors’ satisfaction with present market positions
the external environment and to the critical changes occurring
& profitability
within it.
7. Potential for competitor retaliation
3. Feasibility - A strategy must neither overtax available
resources nor create unsolvable sub problems. 8. Potential for cooperation with competitors
4. Advantage - A strategy must provide for the creation and/or  Numerous external and internal factors can prevent firms
maintenance of a competitive advantage in a selected area of from achieving long-term and annual objectives.
activity. Competitive advantages normally are the result of
superiority in one of three areas: (1) resources, (2) skills, or (3)  Externally, actions by competitors, changes in demand,
position. changes in technology, economic changes, demographic
shifts, and governmental actions may prevent objectives from
 Difficulties in Strategy Evaluation being accomplished.
1. Increase in environment’s complexity  Internally, ineffective strategies may have been chosen or
implementation activities may have been poor.
2. Difficulty predicting future with accuracy
 Here are some key questions to address in
3. Increasing number of variables
evaluating strategies:
 1. Are strengths still strengths?  Key Financial Ratios

2. Have we added additional strengths? 1. Return on investment (ROI)

3. Are weaknesses still weaknesses? 2. Return on equity (ROE)

4. Have we developed other weaknesses? 3. Profit margin

5. Are opportunities still opportunities? 4. Market share

6. Other opportunities develop? 5. Debt to equity

7. Are threats still threats? 6. Earnings per share

8. Other threats emerged? 7. Sales growth

9. Are we vulnerable to hostile takeover? 8. Asset growth

 Potential problems are associated with using

quantitative criteria for evaluating strategies.
A Strategy-Evaluation Framework
1. Most quantitative criteria are geared to annual
objectives rather than long-term objectives.

2. Different accounting methods can provide different

results on many quantitative criteria.

3. Intuitive judgments are almost always involved in

deriving quantitative criteria.

 Qualitative Evaluation of Strategy

1. Human Resource Factors - can be underlying causes of

declining performance

2. Marketing

3. Finance/Accounting

4. R&D

5. Management Information Systems

(2,3,4,5) can cause financial problems

Measuring Organizational Performance Taking Corrective Actions

1. Compare expected to actual results  Requires making changes to competitively reposition a firm
2. Investigate deviations from plan for the future.

3. Evaluate individual performance  Other changes could include establishing or revising

objectives, devising new policies, issuing stock to raise
4. Examine progress toward stated objectives capital, adding additional salespersons, differently allocating
resources, or developing new performance incentives.
 Both long-term and annual objectives are commonly used
in this process.  Taking corrective actions does not necessarily mean that
existing strategies will be abandoned or even that new
 Criteria for evaluating strategies should be measurable and easily strategies must be formulated.
verifiable.

 Criteria that predict results may be more important than those that
reveal what already has happened.

 Quantitative Criteria for Strategy Evaluation: Financial Ratios

1. Compare performance over different periods

2. Compare performance to competitors’

3. Compare performance to industry averages

 3. Operations/Processes

4. Community/Social Responsibility

5. Business Ethics/Natural Environment

6. Financial.

CHARACTERISTICS OF AN EFFECTIVE EVAL. SYSTEM

1. Economical - too much information can be just as bad

as too little information; and too many controls can do
more harm than good.

2. Meaningful - they should specifically relate to a firm’s

objectives.

3. Generates useful information - should provide

managers with useful information about tasks over
which they have control and influence

4. Timely information - on occasion and in some areas,

managers may daily need information.

5. Provides accurate picture of events

 Information derived from the strategy-evaluation process

 Taking corrective actions is necessary to keep an organization on should facilitate action and should be directed to those
track toward achieving stated objectives. individuals in the organization who need to take action based
on it.
 Taking corrective actions raises employees’ and
managers’ anxieties.  The strategy-evaluation process should not dominate
decisions; it should foster mutual understanding, trust,
 Corrective actions should place an organization in a better position
and common sense.
to capitalize upon internal strengths; to take advantage of key
external opportunities; to avoid, reduce, or mitigate external threats;  The unique characteristics of an organization, including its
and to improve internal weaknesses. size, management style, purpose, problems, and strengths,
can determine a strategy-evaluation and control
 Corrective actions should have a proper time horizon and an
system’s final design.
appropriate amount of risk.

CONTINGENCY PLANNING

 A basic premise of good strategic management is

that firms plan ways to deal with unfavorable and
favorable events before they occur.

BALANCED SCORECARD  Too many organizations prepare contingency plans just for
unfavorable events; this is a mistake, because both
 It is a process that allows firms to evaluate strategies from four minimizing threats and capitalizing on opportunities can
perspectives: financial performance, customer knowledge, internal improve a firm’s competitive position.
business processes,and learning and growth.
 Some contingency plans commonly established by firms
 Evaluate strategies from 4 perspectives: include the following:

1. Financial performance 1. If a major competitor withdraws from particular markets

as intelligence reports indicate, what actions should our
2. Customer knowledge firm take?
3. Internal business processes 2. If our sales objectives are not reached, what actions
should our firm take to avoid profit losses?
4. Learning & growth
3. If demand for our new product exceeds plans, what
 Six key issues in evaluating its strategies:
actions should our firm take to meet the higher
1. Customers demand?

2. Managers/Employees
 4. If certain disasters occur—such as loss of computer  Proponents of the top-down approach contend that top
capabilities; a hostile take over attempt; loss of patent executives are the only persons in the firm with the collective
protection; or destruction of manufacturing facilities because experience, acumen, and fiduciary responsibility to make key
of earthquakes, tornadoes or hurricanes—what actions should strategy decisions.
our firm take?
 In contrast, bottom-up advocates argue that lower- and
5. If a new technological advancement makes our new product middle-level managers and employees who will be
obsolete sooner than expected, what actions should our firm implementing the strategies need to be actively involved in
take? the process of formulating the strategies to ensure their
support and commitment.

 When strategy-evaluation activities reveal the need for a major

change quickly, an appropriate contingency plan can be executed in
a timely way.

 Contingency plans can pro-mote a strategist’s ability to respond

quickly to key changes in the internal and external bases of an
organization’s current strategy.

AUDITING

 frequently used tool in strategy evaluation

 defined by the American Accounting Association (AAA) as

“a systematic process of objectively obtaining and evaluating evidence

regarding assertions about economic actions and events to ascertain the
degree of correspondence between these assertions and established
criteria,and communicating the results to interested users.”

 Auditors examine the financial statement of firms to determine

whether they have been prepared according to generally accepted
accounting principles (GAAP) and whether they fairly represent the
activities of the firm.

 Independent auditors use a set of standards called generally

accepted auditing standards(GAAS).

21ST CENTURY CHALLENGES IN STRAMA

1. Deciding whether the process should be more an art or a science,

2. Deciding whether strategies should be visible or hidden from

stakeholders

3. Deciding whether the process should be more top-down or

bottom-up in their firm.

The Visible or Hidden Issue

 An interesting aspect of any competitive analysis discussion is

whether strategies them-selves should be secret or open within
firms.

 Keeping strategies secret from employees and stakeholders at

large could severely inhibit employee and stakeholder
communication,understanding, and commitment and also forgo
valuable input that these persons could have regarding formulation
and/or implementation of that strategy.

The Top-Down or Bottom-Up Approach