Strategy Review, Evaluation, and Control

CHAPTER SEVEN
STRATEGY REVIEW, EVALUATION, AND CONTROL

After studying this chapter, you should be able to do the following

• Discuss the basic characteristics of an Effective Evaluation System
• Describe the criteria’s of evaluating strategies.
• Explain why strategy evaluation is complex, sensitive, and yet essential for organizational
success.
• Explain the basic situations of evaluating and controlling of strategies
7.1. The Nature of Strategy Evaluation
The best formulated and best implemented strategies become obsolete as a firm’s external and
internal environments change. It is essential, therefore, that strategists systematically review,
evaluate, and control the execution of strategies.
Strategy evaluation includes three basic activities:
(1) Examining the underlying bases of a firm’s strategy,
(2) Comparing expected results with actual results, and
(3) Taking corrective actions to ensure that performance conforms to plans.
Adequate and timely feedback is the cornerstone of effective strategy evaluation.
Strategy evaluation can be a complex and sensitive undertaking. Too much emphasis on evaluating
strategies may be expensive and counterproductive. No one likes to be evaluated too closely! The
more managers attempt to evaluate the behavior of others, the less control they have. Yet too little
or no evaluation can create even worse problems. Strategy evaluation is essential to ensure that
stated objectives are being achieved.
7.2. Characteristics of an Effective Evaluation System
Strategy evaluation must meet several basic requirements to be effective.
• Strategy evaluation activities must be economical; too much information can be just as bad
as too little information; and too many controls can do more harm than good.
• Strategy-evaluation activities also should be meaningful; they should specifically relate to
a firm’s objectives. They should provide managers with useful information about tasks
over which they have control and influence.
• Strategy-evaluation activities should provide timely information; on occasion and in some
areas, managers may daily need information. The time dimension of control must coincide
with the time span of the event being measured.
• Strategy evaluation should be designed to provide a true picture of what is happening.
• Information derived from the strategy-evaluation process should facilitate action and
should be directed to those individuals in the organization who need to take action based
on it.
• The strategy-evaluation process should not dominate decisions; it should foster mutual
understanding, trust, and common sense.
• Strategy evaluations should be simple, not too cumbersome, and not too restrictive.

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Strategy Review, Evaluation, and Control

7.3. Criteria’s for Evaluating Strategies

According to Rumlet, the following are the criteria’s used to evaluate a strategy in a given
organization
1. Consistency- A 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. Three guidelines help determine if
organizational problems are due to inconsistencies in strategy:
✓ If managerial problems continue despite changes in personnel and if they tend to be
issue-based rather than people-based, then strategies may be inconsistent.
✓ If success for one organizational department means, or is interpreted to mean, failure
for another department, then strategies may be inconsistent.
✓ If policy problems and issues continue to be brought to the top for resolution, then
strategies may be inconsistent.
2. Consonance- Consonance refers to the need for strategists to examine sets of trends, as well
as individual trends, in evaluating strategies. A strategy must represent an adaptive response
to the external environment and to the critical changes occurring within it.
3. Feasibility- A 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? The financial resources
of a business are the easiest to quantify and are normally the first limitation against which
strategy is evaluated. It is sometimes forgotten, however, that innovative approaches to
financing are often possible. Devices, such as captive subsidiaries, sale-leaseback
arrangements, and tying plant mortgages to long-term contracts, have all been used effectively
to help win key positions in suddenly expanding industries.
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. The idea that the
positioning of one’s resources can enhance their combined effectiveness is familiar to military
theorists, chess players, and diplomats. Position can also play a crucial role in an organization’s
strategy. Once gained, a good position is defensible—meaning that it is so costly to capture
that rivals are deterred from full-scale attacks. Positional advantage tends to be self-sustaining
as long as the key internal and environmental factors that underlie it remain stable. This is why
entrenched firms can be almost impossible to unseat, even if their raw skill levels are only
average. Although not all positional advantages are associated with size, it is true that larger
organizations tend to operate in markets and use procedures that turn their size into advantage,
while smaller firms seek product/market positions that exploit other types of advantage. The
principal characteristic of good position is that it permits the firm to obtain advantage from
policies that would not similarly benefit rivals without the same position. Therefore, in
evaluating strategy, organizations should examine the nature of positional advantages
associated with a given strategy.

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Strategy Review, Evaluation, and Control

7.4. Evaluating an Implemented strategy

Here are some key questions to address in evaluating strategies:
1. Are our internal strengths still strengths?
2. Have we added other internal strengths? If so, what are they?
3. Are our internal weaknesses still weaknesses?
4. Do we now have other internal weaknesses? If so, what are they?
5. Are our external opportunities still opportunities?
6. Are there now other external opportunities? If so, what are they?
7. Are our external threats still threats?
8. Are there now other external threats? If so, what are they?
9. Are we vulnerable to a hostile takeover?

7.5. Measuring Organizational Performance

Strategy evaluation is based on both quantitative and qualitative criteria.
Selecting the exact set of criteria for evaluating strategies depends on a particular organization’s
size, industry, strategies, and management philosophy. An organization pursuing a retrenchment
strategy, for example, could have an entirely different set of evaluative criteria from an
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Strategy Review, Evaluation, and Control

organization pursuing a market-development strategy. 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.
• Some key financial ratios that are particularly useful as criteria for strategy evaluation are
as follows:
1. Return on investment (ROI)
2. Return on equity (ROE)
3. Profit margin
4. Market share
5. Debt to equity
6. Earnings per share
7. Sales growth
8. Asset growth
• But some potential problems are associated with using quantitative criteria for evaluating
strategies.
✓ Most quantitative criteria are geared to annual objectives rather than long-term
objectives.
✓ Different accounting methods can provide different results on many quantitative
criteria.
✓ Intuitive judgments are almost always involved in deriving quantitative criteria.
For these and other reasons, 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.
Some additional key questions that reveal the need for qualitative or intuitive judgments in strategy
evaluation are as follows:
1. How good is the firm’s balance of investments between high-risk and low-risk projects?
2. How good is the firm’s balance of investments between long-term and short-term projects?
3. How good is the firm’s balance of investments between slow-growing markets and fast-
growing markets?
4. How good is the firm’s balance of investments among different divisions?
5. To what extent are the firm’s alternative strategies socially responsible?
6. What are the relationships among the firm’s key internal and external strategic factors?
7. How are major competitors likely to respond to particular strategies?

7.8. Why strategy evaluation is more difficult today?

Strategy evaluation is becoming increasingly difficult with the passage of time, for many reasons.
The reasons why strategy evaluation is more difficult today include the following trends:
1. A dramatic increase in the environment’s complexity
2. The increasing difficulty of predicting the future with accuracy

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Strategy Review, Evaluation, and Control

3. The increasing number of variables

4. The rapid rate of obsolescence of even the best plans
5. The increase in the number of both domestic and world events affecting organizations
6. The decreasing time span for which planning can be done with any degree of certainty.
A fundamental problem facing managers today is how to control employees effectively in light of
modern organizational demands for greater flexibility, innovation, creativity, and initiative from
employees.

7.6. Evaluation and Control Process

Corrective Actions Possibly Needed to Correct Unfavorable Variances

1. Alter the firm’s structure
2. Replace one or more key individuals
3. Divest a division
4. Alter the firm’s vision and/or mission
5. Revise objectives
6. Alter strategies
7. Devise new policies
8. Install new performance incentives
9. Raise capital with stock or debt
10. Add or terminate salespersons, employees, or managers
11. Allocate resources differently
12. Outsource (or rein in) business functions
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