Strategic MGT U-8

U-8
Strategy Evaluation
 strategy evaluation is keeping track of current performance
and anticipating changes.
 Managers usually make evaluation to find new opportunities
or avoid threats, keep performance in line with
management’s expectations, and/or solve specific problems.
 Strategy evaluation aims at unfolding any constraints in the
process of strategy implementation and/or identifying
deviations.
 When strategy is formulated, it is not obviously possible to
foresee all the problems and events that might arise in the
future when strategy would be executed.
Meaning and Nature of Strategy Evaluation
 Strategy evaluation is one kind of follow-through on strategy.
 Once the prerequisites for implementation of strategy have been fulfilled,
the next thing to be done by the organization is the evaluation of strategy.
 Evaluation of strategy is that phase of the strategic management process in
which managers try to assure that the strategic choice is properly
implemented and is meeting the objectives of the enterprise
(organization).
 Strategy evaluation requires an effective computerized information system
for providing managers with timely feedback in order to enable them to
promptly act on the data.
 Adequate and timely feedback is the cornerstone of effective strategy
evaluation.
 Strategy evaluation alerts management to potential or actual problems in a
timely fashion.
 It is complex and sensitive undertaking
Overemphasis can be costly and counterproductive
Cont.…
 In practice, strategy evaluation during (and/or after)
implementation requires a control system – both are
integral parts of the monitoring system of the organization.
 Both the systems help the managers monitor the progress of
a strategic plan.
 Strategy evaluation and control systems help managers to
find out:
 whether the implementers of strategy are making decisions
consistent with the organizational policies
 adequate resources have been allocated and they are being used
wisely
 the events in the external environment are occurring as anticipated
 the long-term and short-term goals are being met
 the strategy-implementers are on the right track.
Criteria for Evaluating Strategies
 Strategy evaluation is important because organizations face
dynamic environments in which key external and internal factors
often change quickly and dramatically.
 Success today is no guarantee of success tomorrow!
 Richard Rumelt offered four criteria that could be used to evaluate
a strategy:
 consistency,
 consonance,
 feasibility, and
 Advantage
 consonance and advantage are mostly based on a firm’s external

assessment, whereas consistency and feasibility are largely
Cont.…
1. Consistency:
 strategy should not present inconsistent goals
and policies.
 Organizational conflict and interdepartmental
bickering are often symptoms of managerial
disorder, but these problems may also be a
sign of strategic inconsistency.
Cont.…
2. Consonance: (alignment)
• Consonance refers to the need for strategists to examine sets of
trends, as well as individual trends, in evaluating strategies.
• Adaptive response to external environment
• Trends are results of interactions among other trends
• A strategy must represent an adaptive response to the external
environment and to the critical changes occurring within it.
• One difficulty in matching a firm’s key internal and external
factors in the formulation of strategy is that most trends are the
result of interactions among other trends.
Cont.…
3. feasibility:
• strategy must neither overtax available
resources nor create unsolvable sub problems.
• The final broad test of strategy is its
feasibility; that is, can the strategy be
attempted within the physical, human, and
financial resources of the enterprise?
• Organizations must demonstrate the abilities,
competencies, skills and talents to carry out a
given strategy
Cont.…
4. Advantage:
• A strategy must provide for the creation and/or
maintenance of a competitive advantage in a
selected area of activity.
• Competitive advantages normally are the
result of superiority in one of three areas:
(1)resources,
(2)skills, or
(3)position
Characteristics/Requirements of an Effective
Strategy Evaluation System
 A strategy-evaluation system in order to be effective and successful must
meet certain requirements. These requirements are the basic
characteristics of an effective evaluation system.
 We discuss below the major requirements of an ideal strategy-evaluation
system:
Economical: The activities related to evaluation of strategy must be
economical. If they are not cost-effective, wastage would creep up. A
balance needs to be maintained in obtaining information –not too much or
not too little. Very often, too much data and too many controls do more
harm than good.
Meaningful: The strategy-evaluation activities must be meaningful in the
sense that they have to be related specifically to the objectives against
which strategy has been adopted.
Providing useful information: The information collected through
evaluation must be useful. Redundant information is useless to managers in
decision-making.
Cont.…
Providing timely information: The strategy-evaluation system should
be established in such a way that it can provide information to relevant
managers on time.
Untimely delivery of information may mean ‘no information’ as
because they cannot be used whenever they were needed.
Providing a true picture of events: The strategy-evaluation activities
should be able to provide true picture of what is happening in the
organization regarding the implementation of strategy.
Being directed towards right persons: The strategy-evaluation
system should be directed to the right persons who really matter in
taking actions based on data. Thus, it should try to facilitate rather than
simply providing information for information’s sake.
Being elaborate and detailed: In large organizations, strategy
evaluation system should be elaborate and detailed. This is needed
because existence of many departments/divisions require effective
coordination
Components of an Effective Evaluation
System/Strategy-Evaluation Framework
• There are three major components/basic

activities of an ideal strategy-evaluation
system:
Reviewing underlying bases of strategy
Measuring organizational performance
Taking corrective actions
Cont.…
1. Reviewing underlying bases of strategy
 Internal strengths and weaknesses as well as external
opportunities and threats form the bases for a strategy.
 The opportunities, threats, strengths and weaknesses are
not likely to remain valid for long time.
 So, when implementation of a strategy takes a long time
(some strategies may even take several years for full
implementation), these bases of strategy should be
reviewed.
 A review of the bases of strategy enables the managers
to identify the real reasons for unsatisfactory results.
Cont.…
 A review would reveal many issues like the
following:
 How competitors have reacted to the firm’s strategies;
 How competitors have changed their strategies in
response of (our) company’s strategies;
 Whether strengths and weaknesses have changed;
 Whether new opportunities by now have emerged or
new threats have surfaced; and
 Above all, whether the already-identified
opportunities, threats, strengths and weaknesses are
still as they were at the time of SWOT analysis.
Cont.…
2. Measuring organizational performance:
 The second component or activity of the strategy-
evaluation framework is the measurement of
organizational performance.
 Managers need to compare the planned activities against
the actual progress toward achieving stated objectives.
That is, actual results are compared with the planned
results.
 Then, deviations are detected, if there is any. Evaluation
is also made of individual performance.
 Progress toward achieving original objectives is
evaluated.
Cont.…
 measuring organizational performance activity includes:
 comparing expected results to actual results,
 Investigating deviations from plans,
 evaluating individual performance, and
 examining progress being made toward meeting stated
objectives.
 Both long-term and annual objectives are commonly used
in this process.
 Criteria for evaluating strategies should be measurable
and easily verifiable.
Cont.…
 Strategy evaluation is based on both quantitative and

qualitative criteria.
 Quantitative criteria commonly used to evaluate
strategies are financial ratios, which strategists use to
make three critical comparisons:
1. comparing the firm’s performance over different
time periods,
2. comparing the firm’s performance to competitors,
and
3. comparing the firm’s performance to industry
averages.
Cont.…
 Some key financial ratios that are particularly useful as criteria
for strategy evaluation are as follows:
 Return on investment (ROI)
 Return on equity (ROE)
 Profit margin
 Market share
 Debt to equity
 Earnings per share
 Sales growth
 Asset growth
Cont.…
 qualitative criteria are also important in

evaluating strategies.
 Human factors such as high absenteeism and
turnover rates, poor production quality and
quantity rates, or low employee satisfaction can
be underlying causes of declining performance.
 Marketing, finance/accounting, R&D, or
management information systems factors can
also cause financial problems.
Cont.…
3. Taking corrective actions:
 Corrective actions are not necessary if there are no significant
differences between the planned results and the actual results.
 In such a situation, managers will continue the present course
of action.
 Mangers take corrective actions only when significant
deviations exist.
 Actions need to be undertaken on the basis of the nature of
deviations and the causes of such deviations,
 It may be necessary to make corrections in objectives, strategy
itself, organization structure, human resources deployed for
strategy implementation, policies, resource allocation, reward
systems, etc.
Purpose of strategy evaluation
 It includes:
Strategy evaluation is vital to the organization’s well-
being
Alert management to potential or actual problems in a
timely fashion
Erroneous strategic decisions can have severe
negative impact on organizations
The Balanced Scorecard
 the Balanced Scorecard is an important strategy-

evaluation tool.
 It is a process that allows firms to evaluate strategies
from four perspectives: financial performance,
customer knowledge, internal business processes,
and learning and growth.
 The Balanced Scorecard approach to strategy
evaluation aims
 to balance long-term with short-term concerns,
 to balance financial with nonfinancial concerns, and
 to balance internal with external concerns.
Cont.…
 Notice that the firm examines six key issues in
evaluating its strategies:
Customers,
 Managers/Employees,
Operations/Processes,
Community/Social Responsibility,
Business Ethics/Natural Environment, and
Financial.
Policies are basically formulated by the top management or the general
management for guiding, directing and facilitating the thinking and acting
process of the various functional executives, to ensure the best contribution
towards the corporate objectives and goals. Policy can either is formal or
informal, which
can be applied, implied or imposed.
The End

Strategic MGT U-8

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U-8

 consonance and advantage are mostly based on a firm’s external

• There are three major components/basic

 Strategy evaluation is based on both quantitative and

 qualitative criteria are also important in

 the Balanced Scorecard is an important strategy-

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