STRATEGY REVIEW, EVALUATION, AND CONTROL

OUTLINE

♦ The Nature of Strategy Evaluation

♦ A Strategy-Evaluation Framework
♦ Published Sources of Strategy-Evaluation Information
♦ Characteristics of an Effective Evaluation System
♦ Contingency Planning
♦ Auditing
♦ Using Computers to Evaluate Strategies

OBJECTIVES

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

1. Describe a practical framework for evaluating strategies.

2. Explain why strategy evaluation is complex, sensitive, and yet essential for organizational
success.
3. Discuss the importance of contingency planning in strategy evaluation.
4. Discuss the role of auditing in strategy evaluation.
5. Explain how computers can aid in evaluating strategies.

OVERVIEW

The best formulated and 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. This Paper presents a framework that can guide managers’ efforts
to evaluate strategic-management activities, to make sure they are working, and to make timely
changes. Computer information systems being used to evaluate strategies are discussed. Guidelines
are presented for formulating, implementing, and evaluating strategies.

EXTENDED PAPER OUTLINE WITH TIPS

VTN (Visit the Net): www.mindtools.com/plevplan.html gives excellent information about evaluating
strategies including analytical tools.

I. THE NATURE OF STRATEGY EVALUATION

A. Importance of Strategy Evaluation
1. The strategic-management process results in decisions that can have significant, long-
lasting consequences. Erroneous strategic decisions can inflict severe penalties and
can be exceedingly difficult, if not impossible, to reverse.
2. Most strategists agree, therefore, that strategy evaluation is vital to an organization’s
well-being; timely evaluations can alert management to problems or potential
problems before a situation becomes critical.

119
120 Paper 9: Strategy Review, Evaluation, and Control

3. Strategy evaluation includes three basic activities:

a. Examining the underlying bases of a firm’s strategy.
b. Comparing expected results with actual results.
c. Taking corrective actions to ensure that performance conforms to plans.
4. The strategy-evaluation stage of the strategic-management process.
5. Strategy evaluation can be a complex and sensitive undertaking. Too much emphasis
on evaluating strategies may be expensive and counterproductive. Yet, too little or no
evaluation can create even worse problems. Strategy evaluation is essential to ensure
that stated objectives are being achieved.

6. It is impossible to demonstrate conclusively that a particular strategy is optimal, but it

can be evaluated for critical flaws. Here are four criteria to use in evaluating a
strategy:

a. consistency
b. consonance
c. feasibility
d. advantage

7. These trends make strategy evaluation difficult:

a. dramatic increase in environmental complexity

b. difficult in predicting future
c. increasing number of variables
d. rapid rate of obsolescence
e. increase in the number of world events affecting organization
f. decreasing time spans for planning
VTN (Visit the Net): www.csuchico.edu/mgmt/strategy/module1/sld046.htm describes the how and
why of strategy evaluation.

VTN (Visit the Net): www.csuchico.edu/mgmt/strategy/module1/sld047.htm elaborates on “taking

corrective actions.”

B. The Process of Evaluating Strategies

1. Strategy evaluation is necessary for all sizes and kinds of organizations.
a. Strategy evaluation should initiate managerial questioning of expectations and
assumptions, trigger a review of objectives and values, and stimulate creativity in
generating alternatives and formulating criteria of evaluation.
2. Evaluating strategies on a continuous rather than a periodic basis allows benchmarks
of progress to be established and more effectively monitored.
3. Managers and employees of the firm should continually be 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.
Paper 9: Strategy Review, Evaluation, and Control 121

VTN (Visit the Net): www.agnr.umd.edu/users/NERA/newplan.html#strategies provides the strategic

plan of Northeastern Regional Association of State Agricultural Experiment Station Directors for the
years 1996 to 2000 including its measures of success.
II. A STRATEGY-EVALUATION FRAMEWORK

The strategy-evaluation activities in terms of key questions that should be addressed,

alternative answers to those questions, and appropriate actions for an organization to take.
A. Reviewing Bases of Strategy
1. By developing a revised EFE Matrix and IFE Matrix, the underlying bases of an
organization’s strategy can be approached and reviewed.
a. A revised IFE Matrix should focus on changes in the organization’s management,
marketing, finance/accounting, production/operations, R&D, and MIS strengths
and weaknesses.
b. A revised EFE Matrix should indicate how effectively a firm’s strategies have
been in response to key opportunities and threats.
VTN (Visit the Net): www.sba.gov/starting/businessplan.html provides a business plan outline.

B. Measuring Organizational Performance

1. 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.
2. Failure to make satisfactory progress toward accomplishing long-term or annual
objectives signals a need for corrective action.

3. Quantitative criteria commonly used to evaluate strategies are financial ratios, which
strategists use to make three critical comparisons:

a. comparing the firm’s performance over different time periods,

b. comparing the firm’s performance to competitors, and
c. comparing the firm’s performance to industry averages.

4. Key financial ratios for measuring organizational performance:

a. return on investment
b. return on equity
c. profit margin
d. market share
e. debt to equity
f. earnings per share
g. sales growth
h. asset growth
122 Paper 9: Strategy Review, Evaluation, and Control

C. Taking Corrective Action

1. The final strategy-evaluation activity, taking corrective action, requires making
changes to reposition a firm competitively for the future.
2. Examples of changes that may be needed are altering an organization’s structure,
replacing one or more key individuals, selling a division, or revising a business
mission.
3. Taking corrective action raises employees’ and managers’ anxieties. Research
suggests that participation in strategy-evaluation activities is one of the best ways to
overcome individuals’ resistance to change.

VTN (Visit the Net): www.opm.state.ct.us/mgmt/busguide/50states/guides.htm provides strategic

management handbooks with detailed instructions for planning in certain states.

VTN (Visit the Net): www.customs.treas.gov/about/strat/index.htm provides the strategic plan for the
US Customs Office.

III. PUBLISHED SOURCES OF STRATEGY-EVALUATION INFORMATION

A. Examples of Helpful Publications
1. A number of publications are helpful in evaluating a firm’s strategies. For example,
Fortune annually identifies and evaluates the Fortune 1,000 (the largest
manufacturers) and the Fortune 50 (the largest retailers, transportation companies,
utilities, banks, insurance companies, and diversified financial corporations in the
United States).
2. Another excellent evaluation of corporations in America, “The Annual Report on
American Industry,” is published annually in the January issue of Forbes. Business
Week, Industry Week, and Dun’s Business Month also periodically publish detailed
evaluations of American businesses and industries.

Tip: The following are the website addresses of publications that frequently report on the strategies of
American firms.
• Business 2.0 {http://www.business2.com/}
• Business Week {http://www.businessweek.com/}
• Fast Company {http://www.fastcompany.com/homepage/}
• Fortune {http://www.fortune.com/fortune/}
• Forbes {http://www.forbes.com/}
• Industry Week {http://www.industryweek.com/}
• Red Herring {http://www.herring.com/}

IV. CHARACTERISTICS OF AN EFFECTIVE EVALUATION SYSTEM

A. Strategy evaluation must meet several basic requirements to be effective.
1. Strategy-evaluation activities must be economical; too much information can be
just as bad as too little information.
Paper 9: Strategy Review, Evaluation, and Control 123

2. Strategy-evaluation activities should also be meaningful; they should specifically

relate to a firm’s objectives.

3. Strategy-evaluation activities should provide timely information; on occasion and

in some areas, managers may need information daily.

4. Strategy evaluation should be designed to provide a true picture of what is

happening.
B. There is more than one ideal strategy-evaluation system. 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.

V. CONTINGENCY PLANNING
A. Essence of Contingency Planning
1. A basic premise of good strategic management is that firms plan ways to deal with
unfavorable and favorable events before they occur.
2. Contingency plans can be defined as alternative plans that can be put into effect if
certain key events do not occur as expected.

B. Effective Contingency Planning Involves These Steps:

1. Identify both beneficial and unfavorable events that could possibly derail the strategy
or strategies.

2. Specify trigger points. Estimate when contingent events are likely to occur.

3. Assess the impact of each contingent event. Estimate the potential benefit or harm of
each contingent event.

4. Develop contingency plans. Be sure that the contingency plans are compatible with
current strategy and financially feasible.

5. Assess the counterimpact of each contingency plan. That is, estimate how much each
contingency plan will capitalize on or cancel out its associated contingent event.

6. Determine early warning signals for key contingent events. Monitor the early warning
signals.

7. Develop advanced action plans to take advantage of the available lead time.

VI. AUDITING
A. Auditing is defined by the American Accounting Association (AAA) as “a systematic
process of objectively obtaining and evaluating evidence regarding assertions about
economic actions and events to ascertain the degree of correspondence between those
assertions and established criteria, and communicating the results to interested users.”
124 Paper 9: Strategy Review, Evaluation, and Control

1. People who perform audits can be divided into three groups: independent auditors,
government auditors, and internal auditors.

2. Two government agencies, the General Accounting Office (GAO) and the
Internal Revenue Service (IRS), employ government auditors responsible for
making sure that organizations comply with federal laws, statutes, and policies.
B. The Environmental Audit
1. For an increasing number of firms, overseeing environmental affairs is no longer a
technical function performed by specialists; rather, it has become an important
strategic-management concern. It should be as rigorous as a financial audit.

2. It should include training workshops in which staff help design and implement the
policy. It should be budgeted and have funds allocated to ensure its viability.

3. A Statement of Environmental Policy should be published periodically.

VII. USING COMPUTERS TO EVALUATE STRATEGIES

When properly designed, installed, and operated, a computer network can efficiently acquire
information promptly and accurately. Networks can allow diverse strategy-evaluation reports
to be generated for, and responded by different levels and types of managers.

ISSUES FOR REVIEW AND DISCUSSION

1. Why has strategy evaluation become so important in business today?

Answer: Strategy evaluation is critically important today because internal and external factors
often change quickly and dramatically. Key factors need to be monitored during strategy-
evaluation activities. For example, technology is shortening the product life cycle in nearly all
industries. The low value of the dollar is opening up many foreign markets to American exports
and is fostering foreign acquisition of U.S. assets and companies.

2. BellSouth Services is considering putting divisional EFE and IFE matrices online for
continual updating. How would this affect strategy evaluation?
Answer: Putting divisional EFE and IFE matrices online would greatly facilitate strategy
evaluation. Analysts expect this trend to become a common practice at many large and small,
profit and nonprofit organizations alike.

3. What types of quantitative and qualitative criteria do you think David Glass, CEO of Wal-
Mart, uses to evaluate the company’s strategy?
Answer: Mr. Glass no doubt follows the example set by Sam Walton, who was claimed to be the
richest person in America. He used financial ratios as quantitative criteria to evaluate Wal-Mart’s
market development strategy. Mr. Walton also used Rumelt’s qualitative criteria for evaluating
Paper 9: Strategy Review, Evaluation, and Control 125

strategies. Mr. Walton continually monitored internal and external factors as part of Wal-Mart’s
strategy-evaluation process, because significant changes in underlying factors can necessitate a
change in corporate strategy before those factors negatively impact earnings and revenues.

4. As owner of a local, independent supermarket explain how you would evaluate the firm’s
strategy.
Answer: For small businesses such as a local supermarket, strategy evaluation is less formal than
in large organizations. However, both qualitative and quantitative criteria should be used to
evaluate the small supermarket’s strategies, because large supermarket stores that offer one-stop
shopping for virtually everything are proliferating across the country.

5. Under what conditions are corrective actions not required in the strategy-evaluation
process?
Answer: The only time corrective actions would not be required in strategy evaluation is when
major changes have not occurred in the firm’s internal or external strategic position and the firm
is progressing satisfactorily towards achieving its stated objectives.

6. Identify the types of organizations that may need to evaluate strategy more frequently than
others. Justify your choices.
Answer: Organizations that compete in more turbulent industries may need to evaluate strategies
more often than others. Several examples of turbulent industries are the computer industry, the
communications industry, and the aerospace industry.

7. As executive director of the state forestry commission, in what way and how frequently
would you evaluate the organization’s strategies?
Answer: Strategy evaluation should be an ongoing, continuous process rather than conducted at
the end of a specified period of time, such as at the end of each year or at the end of every three
years. The need exists to continually re-evaluate the forestry commission’s strategies as
legislative actions evolve and as constituency groups align for or against important issues facing
the state.

8. Identify some key financial ratios that would be important in evaluating a bank’s strategy.
Answer: In a bank, two key financial items are demand deposits (checking accounts) and time
deposits (savings accounts). Other important items are commercial loans and consumer loans.
The ratio of these items to total bank assets and total bank profits could be particularly important
in evaluating the strategies of a bank.

9. As owner of a chain of hardware stores, describe how you would approach contingency
planning.
Answer: Effective contingency planning involves these steps:

∗ Identify both beneficial and unfavorable events that could possibly derail the strategy or strategies.
∗ Specify trigger points. Estimate when contingent events are likely to occur.
∗ Assess the impact of each contingent event. Estimate the potential benefit or harm of each
contingent event.
126 Paper 9: Strategy Review, Evaluation, and Control

∗ Develop contingency plans. Be sure that contingency plans are compatible with current strategy
and financially feasible.
∗ Assess the counterimpact of each contingency plan. That is, estimate how much each contingency
plan will capitalize on or cancel out its associated contingent event.
∗ Determine early warning signals for key contingent events. Monitor the early warning signals.
∗ Develop advanced action plans to take advantage of the available lead time.

10. Strategy evaluation allows an organization to take a proactive stance toward shaping its
own future. Discuss the meaning of this statement.
Answer: Proactive means the firm tries to initiate and influence. Reactive means the firm just
reacts to events and trends. When a firm pursues strategy evaluation it is attempting to anticipate
issues that will be important and represent a proactive approach.