CHAPTER 7

Strategy Evaluation and Control

 Objectives

 Define strategy evaluation

 Understanding the nature of strategy evaluation
 Understanding the components/main activities
of strategy evaluation
 Understanding the process activities of strategy
evaluation
 Identify the characteristics of effective strategy
evaluation
 The nature of strategy evaluation
• Strategy Evaluation and Control is the process of
determining the effectiveness of a given strategy
in achieving the organizational objectives and
taking corrective actions whenever required.
 Cont…
• All strategies are subject to future modification
because external and internal factors are
constantly changing.
• Three fundamental strategy-evaluation activities
are
• (1) reviewing external and internal factors that
are the bases for current strategies
• (2) measuring performance
• (3) taking corrective actions.
 Process of Evaluating Strategies
• Strategy evaluation is necessary for all sizes and
kinds of organizations.
• Strategy evaluation should initiate managerial
questioning of expectations and assumptions,
• should trigger a review of objectives and values, and
• should stimulate creativity in generating alternatives
and formulating criteria of evaluation.
• Strategy-evaluation activities should be performed
on a continuing basis, rather than at the end of
specified periods of time or just after problems
occur. Waiting until the end of the year, for example,
could result in a firm closing the barn door after the
horses have already escaped.
 Cont…
• Successful strategies combine patience with a willingness
to promptly take corrective actions when necessary.
• Managers and employees of the firm should be
continually aware of progress being made toward
achieving the firm’s objectives.
• As critical success factors change, organizational members
should be involved in determining appropriate corrective
actions.
• If assumptions and expectations deviate significantly from
forecasts, then the firm should renew strategy-formulation
activities, perhaps sooner than planned.
• In strategy evaluation, like strategy formulation and
strategy implementation, people make the difference.
 Review underlying Bases
Evaluation Framework

Differences? Yes III.

Take
No corrective
Action
II. Measure Firm performance

Differences? Yes

No

Continue present course

Fig. 8.2 Strategy-Evaluation Framework
 Measuring Organizational Performance
• Another important strategy-evaluation activity is measuring
organizational performance.
• This 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.
• Criteria that predict results may be more important than those that
reveal what already has happened. For example, rather than simply
being informed that sales last quarter were 20 percent under what
was expected, strategists need to know that sales next quarter may
be 20 percent below standard unless some action is taken to counter
the trend.
• Really effective control requires accurate forecasting.
 Cont…
• Failure to make satisfactory progress toward
accomplishing long-term or annual objectives
signals a need for corrective actions.
• Many factors, such as unreasonable policies,
unexpected turns in the economy, unreliable
suppliers or distributors, or ineffective
strategies, can result in unsatisfactory progress
toward meeting objectives.
• Problems can result from ineffectiveness (not
doing the right things) or inefficiency (doing the
right things poorly).
 Cont…
• Determining which objectives are most important in
the evaluation of strategies can be difficult.
• 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 organization pursuing a
market-development strategy.
 Cont…
• 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
• (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:
• Return on investment Debt to equity
• Profit margin Return on equity
• Earnings per share Sales growth…etc
 Cont…
• But there are some potential problems associated with
using quantitative criteria for evaluating strategies.
• First, most quantitative criteria are geared to annual
objectives rather than long-term objectives. Also, different
accounting methods can provide different results on many
quantitative criteria.
• Second, 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.
 Characteristics of an effective
evaluation system
• Strategy evaluation must meet several basic requirements to
be effective.
• First, 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.
 Cont….
• 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.
• Managers commonly ignore evaluative reports
that are provided only for informational
purposes; not all managers need to receive all
reports.
• Controls need to be action-oriented rather than
information-oriented.
 Cont…
• The strategy-evaluation process should not dominate
decisions; it should foster mutual understanding,
trust, and common sense.
• No department should fail to cooperate with another
in evaluating strategies.
• Strategy evaluations should be simple, not too
cumbersome, and not too restrictive.
• Complex strategy-evaluation systems often confuse
people and accomplish little.
• The test of an effective evaluation system is its
usefulness, not its complexity.
 Cont….
• The unique characteristics of an organization,
including its size, management style, purpose,
problems, and strengths, can determine a
strategy-evaluation and control system’s final
design.