28 Strategic Evaluation

1.       Learning Outcomes

2.       Introduction

3.       Concept of strategic evaluation

4.       Nature of strategic evaluation

5.       Benefits of strategic evaluation

6.       Strategic evaluation process

7.       Choosing the right evaluation approach

8.       A strategic evaluation framework

9.       Models for strategic evaluation

10.    Strategic evaluation getting more difficult

11.    Characteristics of effective strategic evaluation

12.    When strategy fails, lessons from strategic evaluation

1.    Learning Outcome:

After completing this module the students will be able to understand:

• Concept and nature of strategic evaluation
•   Process of strategic evaluation
• Benefits of strategic evaluation
• Framework of strategic evaluation
• Models of strategic evaluation Characteristics of effective strategic evaluation
• Lessons learned on strategic evaluation from failed strategies

2.    Introduction

“Organizations are most vulnerable, when they are at the peak of their success”- R. T. Lenz

One of the most influential quotes on “Change” is that “Change is the only constant”. In case we analyse the current business environment, we could easily reach the conclusion that even the rate of change is not constant. Rate of change of business environment is increasing, resulting in shorter products lifecycle and need for constant innovations to deal with the dynamism and cut-throat-competition consequently.

An organisation has to formulate innovative strategies to combat this ongoing competition battle, but formulating and implementing a well-thought strategy doesn’t guarantee success in the real world. An effective strategy is one that is formulated and implemented in such a way that it takes full advantage of the environment of the organisation and help shine and utilise the strengths of the organisation, while making its weaknesses obsolete. As we have already discussed that the environment changes very fast, a strategy could become ineffective in a new environment. Therefore, a strategy must be evaluated times and again to see whether the strategy still proves to be best from the perspective of the changed environment.

Managers must consistently review, evaluate and control the strategies of the organisation to render those effective in the changing business environment.

As discussed above, Strategic Evaluation is vital to an organisation wellbeing. Timely evaluations can alert the management to problems and potential problems before the situation becomes critical. Strategic evaluation includes three basic activities:

(1)  Examining the underlying bases of a firm’s strategy,

(2)  Comparing expected results with actual results,

(3)  Taking corrective actions to ensure that performance conforms to plans (though this is done in control process, but many authors club control process with evaluation process).

Timely and adequate feedback is the cornerstone of effective strategic evaluation. A manager must keep it into mind that the strategic evaluation is no better than the information it is based upon. Preconceived notions of the managers that are not based upon solid research may lead to ineffective strategy evaluation.

Strategy evaluation either ensures that the stated goals are achieved or signifies the deviation between stated objectives and actual status. Both the results help in increasing the productivity of an organisation by setting in the requisite controlling process to take care of the deviations.

Managers use performance indicators of the organisation using different parameters. They look for the increase in variables like revenues, profits, return on investment, earnings per share ratio, etc. Results of such analysis help organisations align their efforts for desired goals. However, managers must not take such analysis as the ultimate criterion because strategies are implemented to strike a balance between short-term profits and long-term growth and the aforementioned parameters might not gauge the success of the strategy in practical terms, or might give misleading results even, resulting in prompting inappropriate actions.

3. Nature of Strategic Evaluation

Strategic evaluation should initiate managerial questioning of expectations and assumptions, should trigger a review of objectives and values, and Evaluating strategies on a continuous basis allows an organisation to establish benchmarks of progress and to monitor more effectively. Some strategies take a long time i.e. years to implement; consequently, results thereof may not become visible for years. Successful strategies combine patience with a willingness to promptly take corrective actions when necessary.

Managers of the firm should be continually aware of progress made toward achieving the firm’s objectives. As critical success factors for the organisation change, managers should involve themselves in determining appropriate corrective actions. If assumptions and expectations deviate significantly from forecasts, then the organisation should renew strategy-formulation activities. In strategy evaluation,like strategy formulation and implementation, people make a real difference.Through the active involvement in the process of evaluating strategies, managers and employees become committed to keep the organisation achieve its defined objectives.

4. Benefits of Strategic Evaluation

Following are the major benefits of Strategic Evaluation Process:

Information about the performance as per the standards inspires confidence in the management and employees. Those within the organisation are likely to be more motivated to achieve better performance in order to improve their track record. Those external to the organisation- customers, suppliers, government, shareholders, etc. are likely put more credence to the performance and potential success of the organisation.

5.      Strategic Evaluation Process

As discussed earlier, evaluation plays a cardinal role in strategic management. Its role is to critically assess how well or bad things are going at every phase of the strategic management process; so that the necessary actions may be taken to improve the performance of the organisation.

The terms ‘evaluation’ and ‘control’, although almost always used together, are not necessarily the same thing. Figure above shows the related and yet different roles played by Evaluation and Control in the strategic management process.

From the figure above, it is clearly evident that the Strategy evaluation means to find out what is going on. It encompasses collecting and analysing information about how well the formulated strategies have been implemented. After getting the evaluation results, we must decide for the appropriate action (s) to be taken. If, everything is as per the planning, then we have no problem; all we need to do is to continue doing what we are currently doing (or try to do even better on the same lines). However, if results show that some things aren’t going well or as per the plan, then we have to eliminate these trouble spots.

If our formulated goals and/or implemented plans are so ambitious that they cannot be achieved, then we should be more realistic and should make them feasible and viable. If our human resources are not competent or prepared to follow the implementation process, then we should impart training. Evaluation is an inseparable part of overall Evaluation and Control Process. An organisation might end up taking a wrong decision, if the Evaluation Process is not conducted well.

6. Choosing the right evaluation approach

Ultimately the types of questions you ask, and the criteria you set will depend on the evaluation approach you follow.

Approach 1-Approach 1 is shown in Figure below.

This approach zeroes in right away on the targets (usually the goals or objectives as stated in the strategic plan) and assesses everything from that basis. It focuses on questions such as: Are the objectives appropriate under current circumstances? If not, what has changed the internal or external environment? Should the objectives be changed in view of any identified environmental changes? As these questions indicate, approach 1 does a lot of backtracking, constantly checking to see if targets remain in consonance with present or anticipated conditions.

Approach 2– Shown in Figure below, this approach casts a wider net right from the word go. Instead of going directly to the targets, it starts off with a review of the basis of the whole strategic plan. This means seeking to validate every major aspect of both, the strategic plan and the way it is implemented.

The difference between the two approaches is that the first assumes the strategic plan is valid and focuses on areas that require attention: the second first examines whether the plan is valid and then proceeds from there. This second approach is more comprehensive, but is time consuming and therefore, more expensive).

Your choice of approach will depend on the evaluation requirements of the organisation and on the resources you have for conducting evaluation and control. Both the approaches, however, raise the question of how in-depth a review should be.

Experience shows that many organisations get bogged down in details. The type of review you choose depends on two factors: the relative importance of the issue/problem and the strategic health of the area being evaluated:

-Large-scale reviews are clearly for those areas facing a major problem, or where a potential opportunity may make a significant impact.

-Medium-scale reviews are for areas that may be meeting their targets but have a few important issues ahead that may require a slightly modified change.

-Small-scale reviews are for areas where there are no real problems or dangers lurking on the horizon, and all that is needed is to monitor the situation.

Assessing the type of review or evaluation you require before you actually start is indeed a good way of making efficient use of time and money and of focusing on the most essential issues. Remember the 80/20 rule: concentrate on those areas that will produce the majority of results.

7.  A strategic evaluation framework

The evaluation process is followed by the control process and corrective actions are almost always needed except in the following two situations:

1)Internal and external factors have not significantly been changed.

(2)  The firm is moving satisfactorily and steadily toward the achievement of stated objectives. Therefore, the arguably one of the most important task of the evaluation process is to measure the performance of the organisation in terms of the parameters that could portray whether the organisation is moving in the desired direction. Let’s focus on this aspect below.

This activity includes comparing actual results to expected results, investigating deviations from what was planned, evaluating individual performance, and examining progress being made toward predefined objectives. Both long-term and annual objectives are commonly used. Criteria for evaluating strategies should be quantitatively measurable and verifiable. Effective control requires accurate forecasting. Failure to make desired progress toward accomplishing long-term and 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.

Many variables can and should be included in measuring organizational performance.

A favourable or unfavourable variance is recorded at short intervals, and resultant actions needed are then determined.

Determining the most important objectives in the evaluation of strategies can be quite difficult. Strategy evaluation should be based both on quantitative and qualitative criteria. However, selecting the set of criteria for evaluating strategies depends on a particular organization’s size, industry, strategies, and management philosophy.

Financial ratios are the most commonly used quantitative criteria to make three critical comparisons: (1) Comparing the organisation’s performance over different time durations,

(2)  Comparing the organisation’s performance to that of competitors’, and (3) comparing the organisation’s performance to industry benchmarks and averages. Some key financial ratios useful as in 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

However, some potential problems are associated with aforementioned financial ratios as quantitative criteria for evaluating strategies. First, most quantitative criteria serve for annual objectives rather than long-term objectives. Also, different accounting norms and thus methods provide different results on many quantitative criteria. For these and such other reasons, qualitative criteria are also considered in evaluating strategies. Human factors such as high absenteeism and attrition rates, poor productivity quality and quantity, or low employee satisfaction and commitment can be major causes of declining performance. Marketing, finance/accounting, R&D, or management information systems factors too can contribute to financial problems.

Some additional key questions that reveal the need for qualitative criteria 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?

8.  Models for Strategy Evaluation

It is literally impossible to demonstrate that a particular strategy will prove to be optimal or to guarantee that it will even work. At best, we can critically analyse a strategy on some fundamental points.

9.1. Richard Rumelt Model

One such model is prescribed by Richard Rumelt wherein he suggests four criteria i.e. consistency, consonance, feasibility and advantage. Consistency and feasibility are mostly based on internal assessment, whereas Consonance and advantage are largely based on external assessment of the firm. These four criteria are described below.

Consistency: The goals and the policies of an organisation must be synchronised with the organisational philosophy, and its mission,

vision and values. Strategy inconsistencies may result in the following symptoms:

a). Managerial problems persist even after changing the problem personnel. The problems prove to be issue based rather than personnel based.

b). Interdepartmental rivalry reach the extent that the success of one department is seen or interpreted as the failure of the other.

c). If policies remain the bone of contention and issue related thereto and put to top management on a regular basis.

Consonance: Consonance refers to the measure of responsiveness of a strategy of an organisation for the individual trends and set of trends. We are well aware that an organisation operates in a complex environment and there lie many controllable as well as uncontrollable variables there in the environment. Business environment keeps on changing regularly and new trends emerge with the ebb of old ones. The new trends sometimes culminate from seemingly unrelated and sometimes more than one trends emerging in the society. Big malls emerged at suburban areas and highways relatively away from the residential areas only after the emergence of automobile industry that made it possible for the customers to do shopping in bulk and transport it home easily on their personal vehicles.

Feasibility: Literally no organisation operates in Eden Garden and scarcity is the rule of the game. Any organisation has limited human and financial resources and specific capabilities. Therefore, a strategy must be framed keeping in mind the resources and the capabilities of the organisation. A strategy that takes away more financial resources than it should have may wheedle away company’s profits and destroy the balance of long-term growth and short-term profits. JP group is an archetype of a wrong strategy leading to large infrastructure projects undertaken by the organisation with the help of assuming debts. Now JP group is a debt ridden company having its shares in single digits.

Advantage: A strategy must thrive on the strengths of the organisation, making its weaknesses negligible. It must take advantage of the opportunities lying in the environment and must get the threats out of the way. Such a strategy if provides appropriate positioning to the organisation, culminates into competitive advantage. Reliance Industries being so large a global company with its proven credibility gets a competitive advantage by getting cheapest capital being exposed to global reach. Though most of the companies having such competitive advantage are large in size, some small companies too are able to get a competitive advantage through making a successful niche for themselves.

9.2. Tilles Model

A ‘classic’ approach by Tilles (1963) has a different modus operandi. He offers the following key questions that must be considered when evaluating a strategy:

1 Is the strategy consistent internally?

2 Is the strategy consistent with the environment?

3 Is the strategy appropriate in view of available resources?

4 Does the strategy involve an acceptable degree of risk?

5 Does the strategy have an appropriate time frame?

6 Is the strategy workable?

To this list, other authors have added three more questions:

7 What is the position of our competitors in comparison to ours, and what is its implication on our strategic approach?

8 How are/might the competitors react to our strategy?

9 How competent is the strategist who put the strategic plan together?

Many of the assessment models overlook the last question. However it is very important to assess the competencies of the managers who put the strategy together.

From the discussion above, it can easily be surmised that success today is no guarantee of success tomorrow. The business environment changes so drastically that the competitive advantage may vanish completely with the passage of time with changed situations.

NOKIA, which was ones thought to be the paragon of success, got literally wiped out. NOKIA maintained the largest share in the mobile phone industry for years,

two gross mistakes strategically. First, it could not grab the large emerging

market of duel-SIM mobile phones and let Samsung and other new companies put their strong foot hold in this segment. Second, it couldn’t see the advantage of adopting Android platform with its better avenues and continued with Symbian, its old love.

9.      Strategic Evaluation, getting more difficult

The strategic evaluation is getting more and more difficult with the passage of time thanks to the following major reasons.

Economies are becoming more and more global making the environment complex with

zillions of variables connoting interdependence of economies on each other.

The world was relatively more stable, but it is becoming more and more dynamic

resulting in small product lifecycles.

Technology  transfer  is  getting  easier  and  companies  constantly  develop  new

competencies to keep surviving and thriving in this cut throat competition.

Competitors were few in number due to closed economies earlier. Now companies are

becoming global and competing in foreign markets. Because of the above reasons, planning and predicting future are becoming very difficult making strategy evaluation a tedious task.

10.  Characteristics of an effective strategic evaluation

Strategic evaluation must meet the following basic requirements to be effective:

1.      Evaluation must be economical. Too much information could be as bad as too little information.

2.      Strategic evaluation should provide timely and executable information to facilitate corrective actions.

3.      Strategic evaluation should be designed to provide a true picture on what actually is happening in the organisation.

4.      Strategic evaluation process must foster mutual understanding, trust and cooperation from different parts of the organisation.

5.      Strategic evaluation process must be simple, not complex or restrictive.

6.      There is no fit-to-all evaluation process and every organisation must design it taking into consideration zillions of variables affecting it.

When strategy fails: Lessons from Strategy Evaluation

There is perhaps no better way of stressing the importance of evaluation than by stating some lessons on failure.

The review of literature suggests that it is very much likely that if a proper evaluation system is set in place, problems could be detected earlier, and perhaps resolved before they could have done a serious damage.

The following are the major reasons that contribute to the failure of the well planned strategy by an organisation.

Expecting results too fast.

Lack of commitment of the top management throughout

the entire process, or at some important stage. Too much complexity.

Loss of momentum.

Not educating people about strategic management. Inadequate line management involvement.

Telling senior management what they want to hear. Too much form, very little substance.

Isolation from the competitive environment. Extrapolation from the past

Failure to differentiate.

Inexperience in strategic management.

Underestimating the nature and extent of disruption that can happen as a result of changes

Summary

Evaluation mechanism is put in place to review every stage of the strategic management process to enable us carry on the success mantras and to learn from our mistakes. It is a means to collect information we might need to compare plans against actual performance, to ensure that things are working fine, and to anticipate, or correct, any faults or weaknesses in the system.

Effective evaluation can tell us what we are doing well and what we aren’t. It not only reviews the implementation of the strategies, but serves to assess the validity of the strategic plans. It may not sometimes save an organisation from ruin, but may serve as the case history for other organisations on what to do and what not to do to be successful.