Chapter 7

Strategy Evaluation
6.1. The Nature of Strategy Evaluation
Strategy 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
Rumelt’s Criteria for Evaluating Strategies
 Consonance and advantage are mostly based
on a firm’s external assessment
 Consistency and feasibility are largely based
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on an internal assessment
 CONSISTENCY: A strategy should not present
inconsistent goals and policies.
Three guidelines help to determine if organizational
problems are due to inconsistencies in strategy:
1. If managerial problems continue despite
changes in personnel and if they tend to be
issue-based rather than people-based
2. If success for one organizational department
means, or is interpreted to mean, failure for
another department
3. If policy problems and issues continue to be
brought to the top for resolution

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 CONSONANCE
 It refers to the need for strategists to examine
sets of trends, as well as individual trends, in
evaluating strategies.
 A strategy must represent an adaptive
response to the external environment and to
the critical changes occurring within it.
 FEASIBILITY
 A strategy must neither overtax available
resources nor create unsolvable sub-problems.
 The final broad test of strategy is its
feasibility; that is, can the strategy be
attempted within the physical, human, and
financial resources of the enterprise?
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 ADVANTAGE
 A strategy must provide for the creation
and/or maintenance of a competitive
advantage in a selected area of activity.
 Competitive advantages normally are the
result of superiority in one of three areas: (1)
resources, (2) skills, or (3) position.

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 6.2. The Process of Evaluating Strategies
Strategy evaluation should:
 Initiate managerial questioning of
expectations and assumptions
 Trigger a review of objectives and values
 Stimulate creativity in generating alternatives
and formulating criteria of evaluation
 Be a continuous rather than on a periodic
basis
 Combine patience with a willingness to
promptly take corrective actions when
necessary

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 A Strategy-Evaluation Framework

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9-6
 Activity 1: Reviewing Bases of Strategy
 Reviewing the underlying bases of an
organization's strategy could be approached by
developing a revised EFE Matrix and IFE Matrix.
 How have competitors reacted to our strategies?
 How have competitors’ strategies changed?
 Have major competitors’ strengths and weaknesses
changed?
 Why are competitors making certain strategic
changes?
 Why are some competitors’ strategies more
successful than others?
 How satisfied are our competitors with their present
market positions and profitability?
 How far can our major competitors be pushed before
retaliating?
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 Key Questions to Address in Evaluating
Strategies
1. Are our internal strengths still strengths?
2. Have we added other internal strengths? If so,
what are they?
3. Are our internal weaknesses still weaknesses?
4. Do we now have other internal weaknesses? If
so, what are they?
5. Are our external opportunities still
opportunities?
6. Are there now other external opportunities? If
so, what are they?
7. Are our external threats still threats?
8. Are there now other external threats? If so,
what are they?
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 Activity 2: Measuring Organizational
Performance
 It includes
 Comparing expected results to actual results,
 Investigating deviations from plans,
 Evaluating individual performance, and
 Examining progress being made toward meeting stated objectives .
 Strategists use quantitative criteria commonly to evaluate strategies
are financial ratios, which strategists use to make three critical
comparisons:
 Comparing the firm’s performance over different time periods
 Comparing the firm’s performance to competitors’
 Comparing the firm’s performance to industry averages
Problems with Quantitative Criteria
 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
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quantitative criteria
 Additional Key Questions
 How good is the firm’s balance of
investments between high-risk and low-risk
projects?
 How good is the firm’s balance of
investments between long-term and short-
term projects?
 How good is the firm’s balance of
investments between slow-growing markets
and fast-growing markets?
 How good is the firm’s balance of
investments among different divisions?
 How are major competitors likely to respond
to particular strategies?
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 Activity 3: Taking Corrective Actions

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Characteristics of an Effective Evaluation System
 Strategy evaluation activities must be economical,
too much information can be just as bad as
too little information
too many controls can do more harm than
good
 Activities should be meaningful, should
specifically relate to a firm’s objectives
 Activities should provide timely information
 Activities should be designed to provide a true
picture of what is happening
 Activities should not dominate decisions,
 should foster mutual understanding, trust,
and common sense
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 6.3 Contingency Planning
 Contingency plans can be defined as
alternative plans that can be put into effect if
certain key events do not occur as expected.
 Only high-priority areas require the insurance of
contingency plans.
 If a major competitor withdraws from particular
markets as intelligence reports indicate, what
actions should our firm take?
 If our sales objectives are not reached, what
actions should our firm take to avoid profit losses?
 If demand for our new product exceeds plans,
what actions should our firm take to meet the
higher demand?
 If certain disasters occur, what actions should our
firm take?
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Effective contingency planning involves a seven-
step process as follows:
1. Identify both beneficial and unfavorable events that
could possibly derail the strategy or strategies.
2. Specify trigger points. Calculate about when contingent
events are likely to occur.
3. Assess the impact (benefit or harm) of each contingent
event.
4. Develop contingency plans.
5. Assess the counter impact of each contingency plan.
i.e, 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.
7. For contingent events with reliable early warning
signals, develop advance action plans to Ch7take
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advantage of the available lead time.
 6.4. The Balanced Scorecard (BSC)
 Balanced Scorecard is an important strategy-
evaluation tool.
 It is a process that allows firms to evaluate
strategies from four perspectives: financial
performance, customer knowledge, internal
business processes, and learning and growth.
1. How well is the firm continually improving and
creating value along measures such as
innovation, technological leadership, product
quality, operational process efficiencies, and so
on?
2. How well is the firm sustaining and even
improving upon its core competencies and
competitive advantages?
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How satisfied are the firm’s customers? Ch7-15
The Balanced Scorecard approach to
strategy evaluation aims to balance
long-term with short-term
concerns, to balance financial with
nonfinancial concerns, and to balance
internal with external concerns.

01/04/2025 By: Semu B. (PhD) 16