Strategic Evaluation

What is Strategic Evaluation ?

Strategy Evaluation in Strategic Management :

The last part of the strategic management process is concerned with the evaluation of the strategy for its effectiveness. At this stage, the organisation evaluates whether the implemented strategy has been successful in meeting the desired goals and objectives of the organisation or not. In other words, strategic evaluation can be defined as a process of measuring. if the implemented strategy has successfully met the objectives of the organisation and what kind of remedial actions need to be taken by the organisation to address any shortcomings.

The role of strategists in an organisation is to design a strategy that will help the organisation to achieve its stated goals and objectives. There needs to be a mechanism of checking if the strategy is successful in meeting the objectives laid down by the organisation. This is done by strategic evaluation. Strategic evaluation thus plays a very critical role in the organisation. In the absence of strategic evaluation, the organisation will be totally clueless in evaluating the effectiveness of the implemented strategy.

Strategic evaluation tends to overlook short-term factors which may impact the operational effectiveness of the organisation but rather focuses on trends which will determine the success or failure of the organisation. The process of strategic evaluation needs a great deal of co-ordination between managers, groups and departments in an organisation. Strategic evaluation is important because it can be the basis for the future strategy definition, framing of reward and incentive systems, the whole strategic management exercise, etc., in the organization.

Nature / Framework of Strategic Evaluation

Effective evaluation systems tend to have certain qualities in common, which are as follows:  

1) Suitable : 
The strategic evaluation needs to be tailored to the needs of the organisation. 
Strategic Evaluation Example, the evaluation process needs to be different for the marketing and the HR functions in the organisation.

2) Simple : 
The strategic evaluation process needs to be simple to understand and follow. It should be easy to execute. If the strategic evaluation process is complex then people will not be able to understand the process. This will cause frustration and
conflict in the organisation and people will make errors in the implementation of the process. On the other hand, when the process is well-defined and understood by all the employees, the level of motivation in the organisation is very high and employees are able to execute the evaluation system.

3) Selective : 
The evaluation process cannot be all encompassing. It needs to be selective in its approach. It needs to select the key and critical factors in the organisation which are absolutely essential for the survival of the organisation. By doing so, the time of the managers is optimally spent and they can focus on the core activities of the organisation.

4) Flexible : 
An organisation needs to constantly examine its strategies and plans in the face of changes in the external activities. These changes can be political, technological, competition and other factors. Therefore the strategic evaluation process cannot make the mistake of being rigid. It needs to change according to the demands of the environment and and take advantage of opportunities that are on offer.

5) Forward-Looking : 
The strategic evaluation process should take the future into account and have the capability of predicting events before they become problematic for the organisation. It is only then that they can be helpful to the organisation. It needs to be able to point out deviations to the managers so that they can take the necessary corrective action.

6) Reasonable : 
According to Robbins, strategic evaluation processes should be reasonable. They need to be fair to the employees. If they set unrealistic goals then they will end up de-motivating employees. On the other hand, they should also not be too easy and give the employees no challenge. The strategic evaluation process therefore needs to be reasonable. They should involve the right amount of stretch so that employees are challenged and at the same time should not be daunting.

7) Objective : 
There can be no room for vagueness in the strategic evaluation control systems. They should be seen as being objective by the employees. It should apply equally to all. This will help in getting employees to accept the evaluation parameters. On the other hand, if the standards are vague and arbitrary then it will cause mistrust in the eyes of the employees and they will not have faith in the evaluation and control process.

8) Responsibility for Failures : 
The strategic evaluation process must fix responsibility for failures. It is not enough, just to know about deviation in the organisation but also the reasons for its occurrence. The strategic control system needs to point out the remedial action that the organisation needs to take to overtake the weaknesses that have been identified.

9) Acceptable : 
It is very important that the strategic evaluation and control system has the cooperation and the trust of the employees. It must be accepted by all. This is only possible if the standards are well-defined, objective, free from bias and reasonable.

Measures for Strategic Evaluation

The most critical aspect of strategic evaluation process is to measure the output of the organisation in terms of the set goals. These comprise both quantitative as well as qualitative criteria. The strategists need to know the various methods of exercising control so that they are able to choose the most suitable set of criteria for the organisation. These techniques of control are a mix of traditional techniques as well as techniques (Strategy evaluation tools) which have been developed recently. These can be divided into two types : 

1) Quantitative Factors : 
These contain the following criteria :

i) Return on Investment : 
This measures the return as a percentage of the investment done. These can be used to compare various products or businesses in the organisation. A major drawback of the ROI method is that it relies very heavily on accounting data which are staggered, not accurate and do not help the management in decision-making. A control based on the ROI method makes the organisation too cautious and averse to risk-taking

ii) Return on Equity (ROE) : 
ROE expresses the return as a percentage of the equity of the organisation. The ROE measures the amount of profit generated from the equity investment of the shareholders.

iii) Profit Margin : 
The profit margin as criteria evaluates the financial well being of the organisation. It is the ratio of the profits generated to the sales of the organisation. It is the profit which gets generated for each unit of sales revenue of the organisation. It can also be considered as a measure of efficiency as it examines the conversion of the revenue of the organisation to profits. Obviously organisations which have a greater cost structure will have a lesser profitability margin for the same sales revenue.

iv) Market Share : 
It is the percentage of the industry's sales that is done by the company's products and services. It is computed for a period and is the ratio of the total sales of the company and the total sales of the industry. It gives an idea of the size of the company in the industry.

v) Debt-to-Equity : 
The debt to equity measures the relative contribution of the creditors and the shareholders of the company. It is computed by dividing the total debt of the company by the total equity.

vi) Earnings per Share : 
It is the ratio of the total earnings of the company and the total number of outstanding shares. The higher the EPS the greater is the profitability of the company.

2) Qualitative Factors : 
Rumelt mentions the following qualitative factors which can be considered in strategic evaluation:

i) Consistency : 
The strategy that the organisation chooses has to be consistent with the goals and the policies of the organisation. The role of strategy is to provide a guideline or a framework for the functioning of the organisation. Rumelt gives the example of high technology companies. These companies face a strategic dilemma between designing customized high technology products and low technology mass products which can have a huge sales volume. The management has to be very clear in what it wants to do and decide a strategy that is consistent with it. Otherwise there will be a lot of conflict in the organisation between the various functions like sales, marketing, operations, etc.

ii) Consonance : 
The strategy has to be flexible in nature and ready to adapt to changes which occur in the external and internal environments of the organisation. Rumelt has developed a test of consonance which measures the adaptability of the organisation to internal and external environment and also how the organisation fares vis a vis other organisations in the industry. The difficulty in measuring this is that the majority of the challenges that the organisation faces, is in the external environment which affect all organisations equally. Managers typically are late in recognizing external threats and react when the bulk of impact has already taken place. Forecasting techniques are also not proactive in predicting the critical events which impact the organisation.

iii) Advantage : 
The strategy adopted by the company must be either a source of competitive advantage for the company or maintain an existing one. Competitive strategy aims at creating competencies in the organisation that are unique, stand the test of time and difficult to copy by competitors. Rumelt mentions that strategy should result in the creation of competitive advantage from three sources - superior skills, superior resources and a superior position.

iv) Feasibility : 
The strategy should not lead to an over exertion in the resources of the organisation or create fresh problems for the organisation. Rumelt has given one more test of feasibility. This measures the feasibility of the strategy. In other words, this test determines if the organisation has the resources and the competencies to deliver the strategy that has been formulated. In order to do this effectively, the organisation needs to check the following :
  • a) Does the organisation possess the problem resolution skills and the skills required to execute the strategy ?
  • b) Can the organisation achieve an integration of the various activities involved in executing the strategy ?
  • c) What will be the likely actions of the competitors and what will be the organisation's response ?

Importance of Strategic Evaluation

Strategic evaluation helps the organisation to find the flaws in the current implementation and to make suitable changes where necessary. Following points determine the importance of strategic evaluation :

1) Performance Measurement : 
The strategic evaluation process provides the organisation a set of both qualitative and quantitative criteria against which the performance of both individuals as well as the organisation can be measured. The qualitative criteria contain soft factors like skills, competencies and flexibility whereas the quantitative criteria contain more hard factors like the return on equity, ROI, profitability, etc.

2) Helps in Analysis : 
The basic premise of strategic evaluation is that the environment of the organisation is dynamic. Some amount of variability between the performance and the standard is natural and expected. Regular exercise of 'strategic evaluation helps the organisation to gauge the success of the adopted strategy and to incorporate any changes where required. A positive difference between the performance and the standard will show that the strategy is working and the organisation needs to carry on what it is doing whereas a negative difference will mean that there is a shortcoming in the strategy and that changes need to be made.

3) Corrective Actions : 
The organisation can take remedial action on the points which are identified weak areas by strategic evaluation. For example, if it emerges that the lack of skills of the employees is a major hurdle behind the failure of the strategy to meet objectives, then a massive training program can be initiated by the organisation. Similarly, if it is found that the organisation has set unrealistic sales targets, then course correction can be attempted. 

4) Reassessing Goals : 
The evaluation of the performance of the organisation could also lead to a questioning of the goals and objectives of the organisation. For example, the under performance of a team to implement the strategy could be due to factors like lack of team support, change in market dynamics or faulty strategy definition.

5) Alerts from Threat : 
Strategic evaluation also makes the organisation future ready. It identifies issues and problems in the initial stage so that the organisation can take steps to tackle the same in the first step itself before they become too big to conquer. Strategists need to combine the virtues of patience and rapid action.

Symptoms of Malfunctioning of Strategy

The following are some signs that the strategy of the organization is not working :
  1. Company is not performing as well as other companies or the industry.
  2. The company is repeatedly not meeting the objectives like Return on Investment (ROI), profitability, market share, etc.
  3. Corporate culture is not in sync with strategy.
  4. The strategy is not being implemented properly.
  5. There is a lot of infighting and organisational conflicts in the organisation.
  6. The management of the organisation is a chronic under performer despite changes being made.
  7. All departments in the organisation are not meeting their goals. While some are performing others are failing.
  8. The top management of the organisation is regularly involved in issue resolution and policy problems.
  9. The resources of the organisation are being overtaxed.
  10. The organisation is taking very high levels of risk for lesser rewards.
  11. Strategy is not in sync with changing environment.
  12. The strategy implementation has been done with no consideration to the time horizon and generates the risk of being obsolete.