Strategy Evaluation

Strategy Evaluation Session 8 19 November 2011 Civil Service College Dhaka Presentation by Dr. Muhammad G. Sarwar Email: sarwar_mg@yahoo.com Cell: 01821443741

Strategic Management: course outline

Contents of 8th Session • Defining strategy evaluation • Nature of strategy evaluation • Process of strategy evaluation • Strategy Evaluation Framework • Contingency planning • A critique of strategic management

Defining strategy evaluation • Strategy evaluation is a systematic review of the formulated strategies at the execution stages to take corrective actions and to control the execution process. • Strategic evaluation is a critical necessity for timely interventions as the organization’s external and internal strategic positions change rapidly • Three basic activities: • Examining the underlying basis of strategy, • Comparing expected results with actual results, and • Taking corrective actions to ensure that performance conforms to plans.

Nature of strategy evaluation • Strategy evaluation is a complex undertaking. It must have both a long-term and short-term focus. • Richard Rumelt’s four criteria to evaluate strategy: • Consistency, • Consonance, • Feasibility, and • Advantage.

Rumelt’s four criteria to evaluate strategy • Consistency: Organizational conflicts and inter-departmental bickering may be a sign of strategic inconsistency. A strategy must not present inconsistent goals and policies. • Consonance: Consonance refers to examine sets of trends, as well as individual trends, in evaluating strategies. • Feasibility: The final broad test of strategy is its feasibility, that is, whether the strategy can be attained within the limits of physical, human and financial resources of the organization. • Advantage: In evaluating strategy, organizations may examine the nature of positional advantages associated with the strategy. Competitive advantages normally are the result of superiority in one of the three areas: • Resources, • Skills, and • Position.

Process of strategy evaluation • Like strategy formulation and execution, strategy evaluation should also involve managers and employees of all level as much as possible. • Strategy evaluation should be performed on a continuing basis, rather than at the end of specified period of time or just after problems occur.

Strategy Evaluation Framework

Strategy Evaluation Assessment Matrix

Reviewing Underlying Bases of Strategy Reviewing underlying bases of organizational strategy is approached by: • Developing revised EFE Matrix; and • Developing revised IFE Matrix. • Revised EFE Matrix should focus on how effective the organization’s strategies to have been in response to key opportunities and threats. • Revised IFE Matrix should focus on changes in the organization’s management, marketing, finance, production operation, R&D and IMS strengths and weaknesses.

Measuring Organizational Performance • Measuring organizational performance involves comparing expected results to actual results, investigating deviations from plans, evaluating individual performance, and examining progress being made toward attaining stated objectives. • Strategy evaluation is based on both quantitative and qualitative criteria. • Selecting exact set of criteria for evaluating strategies depends on particular organization’s size, industry environment, strategies, and management philosophy.

Measuring Organizational Performance(cont.) • Quantitative criteria commonly used to evaluate strategies are financial ratios that are used to make three critical comparisons: • Comparing organization’s performance over different time periods; • Comparing organization’s performance to competitors; and • Comparing organization’s performance to industry average.

Measuring Organizational Performance (cont.) Key financial ratios that are particularly useful as criteria for strategy evaluation are: • Return on investment • Return on equity • Profit margin • Market share • Debt to equity • Earnings per share • Sales growth • Asset growth.

Measuring Organizational Performance (cont.) Potential problems associated with quantitative Criteria for evaluation of strategies are: • 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.

Measuring Organizational Performance(cont.) Qualitative criteria are also important in evaluating strategies. Underlying declining performance may be due to: • Employee absenteeism • Employee turnover rate • Low employee satisfaction • Low employee productivity.

Measuring Organizational Performance (cont.) Seymour Tilles’s six qualitative questions that are useful in evaluating strategies: • Is the strategy internally consistent? • Is the strategy consistent with the industry environment? • Is the strategy appropriate in view of available resources? • Is the strategy workable? • Does the strategy have an appropriate time frame? • Does the strategy formulated on acceptable degree of risk?

Taking Corrective Actions • Corrective actions requires making changes to reposition a organization competitive path. Examples of changes are: • Altering organization’s structure, • Replacing key individuals, • revising a business mission, • Revising organizational objectives, • Devising new policies, • Reallocating resources, etc • Corrective actions should place an organization in a better position to capitalize upon internal strengths and external opportunities. • Continuous strategy evaluation keeps strategies of an organization on right path towards an effective strategic management.

Contingency Planning • Regardless of how carefully strategies are formulated, unforeseen events like natural disasters, war, inflation, entry of foreign competitors, etc may upset the strategy. • To minimize the negative impact of these unforeseen events, organizations develop contingency plans. • Contingency plan is defined as alternative plans that can be put into effect if unexpected events occur that upset the organizational strategy.

Limitation of Strategic Management • Strategies are fine if used as a sense of direction, otherwise it can stifle creativity, especially if it is rigidly enforced. • Strategies can also cause an organization to define too narrowly, and may lead to marketing myopia. • Many theories of strategic management are either too narrow in focus to build a complete corporate strategy or too general to be applicable for specific situations. • Strategic theories suggest that the element of strategic management i) reaching consensus on corporate objectives, ii) developing a plan to attain those objectives, and iii) allocating resources to execute the plan, can be approached sequentially. But in real world these three elements are interdependent, thus, should occur simultaneously rather then sequentially.

Limitation of Strategic Management (contd.) • Strategies are built on assumptions that, in the absence of perfect knowledge, are never perfectly correct. Thus, strategic management is necessarily a repetitive learning cycle, rather than a linear progression towards a clearly defined destination. • Strategic management will add little value, indeed may harm as well, if strategies are designed to be used as a detail blue print for managers. • Strategic managers require to think simultaneously about organization’s desired objectives, best approach for attaining them and resource requirement for the chosen approach. It requires a frame of mind that admits no boundary between means and ends.

Recapitulation: Strategic Management • What is Strategic Management? • Strategic Management is an art and science of formulating, implementing and evaluating cross-functional decisions that enable an organization to achieve its objectives (Fred R. David, 2008). • Strategic Management is the approaches to grow, attract and please clients, compete successfully and achieve targeted levels of organizational performance (Arther A. Thompson, 2010)

Recapitulation: Strategic Management (contd.) • In ultimate analysis Strategic Management is the Quest for Competitive Advantage. • 4 most frequently used strategic approaches: • Striving to be the industry’s low-cost provider • Outperforming rivals based on quality, diversity, style, technology, value –added services etc • Focusing on a narrow market niche • Developing capability that rivals can’t easily imitate.

Recapitulation: Strategic Management Model

Recapitulation: Strategy as a Blend of Proactive Initiatives and Reactive Adjustments

Strategic Management 8th Session: references • Fred R. David (2008), Strategic Management: Concepts and Cases, 11th Edition, Prentice Hall (Chapter 9) • Arthur A. Thompson, Jr. (2010) Crafting and Executing Strategy: the quest for comparative,16th Edition, McGraw Hill (Chapter 11, 12 & 13)

Thanks

Strategy Evaluation