Evaluating Business Strategy: Process and Criteria
Basic Activities of Strategy Evaluation
Strategy evaluation involves three basic activities:
- Examining the underlying bases of a firm’s strategy
- Comparing expected to actual results
- Taking corrective actions to ensure performance conforms to plans
Key Steps in Strategy Evaluation
Fixing Performance Benchmarks
While fixing benchmarks, strategists encounter questions such as: what benchmarks to set, how to set them, and how to express them. In order to determine the benchmark performance to be set, it is essential to discover the special requirements for performing the main task. The performance indicators that best identify and express these special requirements might then be determined for use in evaluation. The organization can use both quantitative and qualitative criteria for comprehensive assessment of performance.
Quantitative criteria include determination of net profit, ROI, earning per share, cost of production, rate of employee turnover, etc. Qualitative factors include subjective evaluation of factors such as skills and competencies, risk-taking potential, flexibility, etc.
Measuring Performance
Standard performance serves as a benchmark against which actual performance is compared. The reporting and communication system helps in measuring performance. If appropriate means are available for measuring performance and if standards are set correctly, strategy evaluation becomes easier. However, various factors, such as managers’ contributions, are difficult to measure. Similarly, divisional performance is sometimes difficult to measure compared to individual performance. Thus, variable objectives must be created against which performance measurement can be done. Measurement must be done at the right time, otherwise evaluation will not meet its purpose. For measuring performance, financial statements like the balance sheet and profit and loss account must be prepared on an annual basis.
Analyzing Performance Variance
While measuring actual performance and comparing it with standard performance, there may be variances which must be analyzed. Strategists must define the degree of tolerance limits within which the variance between actual and standard performance may be accepted. A positive deviation indicates better performance, but consistently exceeding the target is quite unusual. A negative deviation is an issue of concern because it indicates a shortfall in performance. Thus, in this case, strategists must discover the causes of deviation and take corrective action to overcome it.
Taking Corrective Actions
Once a deviation in performance is identified, it is essential to plan for corrective action. If performance is consistently less than desired, strategists must conduct a detailed analysis of the factors responsible. If strategists discover that the organizational potential does not match the performance requirements, then the standards must be lowered. Another rare and drastic corrective action is reformulating the strategy, which requires returning to the strategic management process, reframing plans according to new resource allocation trends, and consequently returning to the beginning point of the strategic management process.
Four Criteria for Evaluating Strategy
Strategy evaluation can also be assessed based on four key criteria:
- Consistency: Are the external strategies consistent with (supported by) the various internal aspects of the organization? You must examine all the various functional and internal management strategies employed by the organization and compare them with the external business strategy.
- Consonance: Are the strategies in agreement with the various external trends (and sets of trends) in the environment? To answer this question, you need to look at all the major trends that impact the selected strategy – both positively and negatively.
- Feasibility: Is the strategy reasonable in terms of the organization’s resources? This includes:
- Money and capital
- Management, professional, and technical resources
- Time span
- Advantage: Does the strategy create and/or maintain a competitive advantage? This relates to:
- Resources
- Skills
- Position
Challenges in Strategy Evaluation
Several factors can make strategy evaluation difficult:
- Increase in the environment’s complexity
- Difficulty predicting the future with accuracy
- Increasing number of variables
- Rate of obsolescence of plans
- Domestic and global events
- Decreasing time span for planning certainty