Strategy Evaluation and Control

Evaluation and Control in Strategic Management

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.

Thus, these strategic decisions must be evaluated and controlled properly. Successful strategies combine patience with a willingness to promptly take corrective actions when necessary. There always comes a time when corrective actions are needed in an organization.

Strategy evaluation and control are essential to ensure that stated business objectives are being achieved. It is vital to an organization’s well-being.

In many organizations, strategy evaluation is simply an appraisal of how well an organization has performed. Timely evaluation and control can alert management to problems or potential problems before a situation becomes critical.

Strategy evaluation and control are important because organizations face dynamic environments in which key external and internal factors often change quickly and dramatically.

An organization should never be lulled into complacency with success. Countless firms have thrived one year only to struggle for survival the following year.

If not careful, strategy evaluation and control can provide no better result than the information on which it is based. Strategy evaluation can be a complex and sensitive undertaking and is becoming increasingly difficult with the passage of time. The reasons are as follows.

First, domestic and world economies were more stable in years past, product life cycles were longer, product development cycles were longer, technological advancement was slower, changes occurred less frequently, there were fewer competitors, foreign companies were weak, and there were more regulated industries.

Second, strategy evaluation and control are more difficult today because of the following trends: (1) A dramatic increase in the environment’s complexity; (2) The increasing difficulty of predicting the future with accuracy; (3) The increasing number of variables; (4) The rapid rate of obsolescence of even the best plans; (5) The increase in the number of both domestic and world events affecting organizations; and (6) The decreasing time span for which planning can be done with any degree of certainty.

Evaluation and control in strategic management consist of performance data and activity reports.

If undesired performance results because the strategic management processes are inappropriately used, operation management must know about it so that they can correct the employee activity whereas top management would not have to involve.

If undesired performance results from the processes themselves, top management must know about it so they can develop new implementation programs or procedures.

Adequate and timely feedback is the cornerstone of effective strategy evaluation. However, too much emphasis on evaluating strategies may be expensive and counterproductive.

Too much pressure from top managers may result in lower managers contriving numbers they think will be satisfactory. The more managers attempt to evaluate the behavior of others, the less control they have.

Yet too little or no evaluation and control can create even worse problems.

It is impossible to demonstrate conclusively that a particular strategy is optimal or even to guarantee that it will work.

One can, however, evaluate it for critical flaws. There are four criteria that could be used to evaluate a strategy: consistency, consonance, feasibility, and advantage.

Consonance and advantage are mostly based on a firm’s external assessment, whereas consistency and feasibility are largely based on an internal assessment.

One of the obstacles to effective control is the difficulty in developing appropriate measures of important activities and outputs.

The Process of Strategy Evaluation and Control

Strategy evaluation and control are necessary for all sizes and kinds of organizations.

Strategy evaluation and control process should (1) initiate managerial questioning of expectations and assumptions, (2) trigger a review of objectives and values, and (3) stimulate creativity in generating alternatives and formulating criteria of evaluation.

If assumptions and expectations deviate significantly from forecasts, then the firm should renew strategy formulation activities, perhaps sooner than planned.

During the implementation of strategy evaluation and control, firms look to answer certain questions.

Have the firm’s assets increased? Has there been an increase in profitability? Have sales increased? Have productivity levels increased? Have profit margin, return on investment, and earnings-per-share ratios increased?

Even when the answers to these types of questions are affirmative, there is no guarantee that these strategies are correct.

The strategy or strategies may have been correct, but this type of reasoning can be misleading because strategy evaluation must have both a long-run and short-run focus. Strategies often do not affect short-term operating results until it is too late to make needed changes.

Strategy evaluation activities should be performed on a continuing basis, rather than at the end of specified periods of time or just after problems occur.

Evaluating strategies on a continuous rather than on a periodic basis allows benchmarks of progress to be established and more effectively monitored.

Some strategies take years to implement; consequently, associated results may not become apparent for years.

In strategy evaluation and control processes, like strategy formulation and strategy implementation, people make a difference.

As critical success factors change, organizational members should be involved in determining appropriate corrective actions.

Regardless of the size of the organization, a certain amount of management by wandering around at all levels is essential to effective strategy evaluation.

Through involvement in the process of evaluating strategies, managers and employees become committed to keeping the firm moving steadily toward achieving objectives.

Managers and employees of the firm should be continually aware of progress being made toward achieving the firm’s objectives.

Characteristics of an Effective Evaluation System

Strategy evaluation and control must meet several basic requirements to be effective.

There is no 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.

Strategy evaluation and control activities must be economical.

Too much information can be just as bad as too little information; and too many controls can do more harm than good.

Strategy evaluation and control activities also should be meaningful.

They should specifically relate to a firm’s objectives. They should provide managers with useful information about tasks over which they have control and influence.

Strategy evaluation and control activities should provide timely information.

On occasion and in some areas, managers may daily need information. Approximate information that is timely is generally more desirable as a basis for strategy evaluation than accurate information that does not depict the present. Frequent measurement and rapid reporting may frustrate control rather than give better control. The time dimension of control must coincide with the time span of the event being measured.

Strategy evaluation and control should be designed to provide a true picture of what is happening.

Information derived from the strategy evaluation process should facilitate action and should be directed to those individuals in the organization who need to take action based on it. Controls need to be action-oriented rather than information-oriented.

Strategy evaluation and control process should not dominate decisions.

It should foster mutual understanding, trust, and common sense. No department should fail to cooperate with another in evaluating strategies. Strategy evaluations should be simple, not too cumbersome, and not too restrictive. Complex strategy evaluation systems often confuse people and accomplish little. The test of an effective evaluation system is its usefulness, not its complexity.

Large organizations require a more elaborate and detailed strategy evaluation system because it is more difficult to coordinate efforts among different divisions and functional areas. Managers in small companies often communicate daily with each other and their employees and do not need extensive evaluative reporting systems.

Familiarity with local environments usually makes gathering and evaluating information much easier for small organizations than for large businesses. But the key to an effective strategy evaluation system may be the ability to convince participants that failure to accomplish certain objectives within a prescribed time is not necessarily a reflection of their performance.

A Strategy Evaluation and Control Framework

Strategy evaluation and control include 3 basic activities.

They are: (1) examining the underlying bases of a firm’s strategy, (2) comparing expected results with actual results, and (3) taking corrective actions to ensure that performance conforms to plans.

Activity 1: Reviewing Bases of Strategy

Reviewing the underlying bases of an organization’s strategy could be approached by developing a revised (1) EFE Matrix and (2) IFE Matrix.

Numerous external and internal factors can prevent firms from achieving long-term and annual objectives.

A revised EFE Matrix should indicate how effective a firm’s strategies have been in response to key opportunities and threats.

This analysis could also address such questions as the following: (1) How have competitors reacted to our strategies? (2) How have competitors’ strategies changed? (3) Have major competitors’ strengths and weaknesses changed? (4) Why are competitors making certain strategic changes? (5) Why are some competitors’ strategies more successful than others? (6) How satisfied are our competitors with their present market positions and profitability? (7) How far can our major competitors be pushed before retaliating? and (8) How could we more effectively cooperate with our competitors?

Externally, actions by competitors, changes in demand, changes in technology, economic changes, demographic shifts, and governmental actions may prevent objectives from being accomplished.

A revised IFE Matrix should focus on changes in the organization’s management, marketing, finance/accounting, production/operations, R&D, and management information systems strengths and weaknesses.

Internally, ineffective strategies may have been chosen or implementation activities may have been poor.

Business objectives may have been too optimistic.

Thus, failure to achieve objectives may not be the result of unsatisfactory work by managers and employees. All organizational members need to know this to encourage their support for strategy evaluation activities.

Organizations desperately need to know as soon as possible when their strategies are not effective. Sometimes managers and employees on the front lines discover this well before strategists.

External opportunities and threats and internal strengths and weaknesses that represent the bases of current strategies should continually be monitored for change.

It is not really a question of whether these factors will change but rather when they will change and in what ways.

Here are some key questions to address in evaluating and controlling 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? and (9) Are we vulnerable to a hostile takeover?

Activity 2: Measuring Organizational Performance

Another important strategy evaluation and control 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.

Criteria for evaluating and controlling strategies should be measurable and easily verifiable. Criteria that predict results may be more important than those that reveal what already has happened.

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

Determining which objectives are most important in the evaluation of strategies can be difficult.

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. Problems can result from ineffectiveness (not doing the right things) or inefficiency (poorly doing the right things).

Strategy evaluation is based on both quantitative and qualitative criteria. Selecting the exact set of criteria for evaluating strategies depends on a particular organization’s size, industry, strategies, and management philosophy.

Quantitative criteria are commonly used to evaluate strategies.

They are financial ratios, which management uses to make three critical comparisons: (1) comparing the firm’s performance over different time periods, (2) comparing the firm’s performance to competitors, and (3) comparing the firm’s performance to industry averages.

But some potential problems are associated with using quantitative criteria for evaluating strategies: (1) most quantitative criteria are geared to annual objectives rather than long-term objectives; (2) different accounting methods can provide different results on many quantitative criteria; and (3) intuitive judgments are almost always involved in deriving quantitative criteria.

Qualitative criteria are also important in evaluating strategies.

Human factors such as high absenteeism and turnover rates, poor production quality and quantity rates, or low employee satisfaction can be underlying causes of declining performance. Marketing, finance/accounting, R&D, or management information systems factors can also cause financial problems.

Some additional key questions that reveal the need for qualitative or intuitive judgments 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? and (7) How are major competitors likely to respond to particular strategies?

Activity 3: Taking Corrective Actions

The final strategy evaluation activity, taking corrective actions, requires making changes to competitively reposition a firm for the future.

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.

Other changes could include establishing or revising objectives, devising new policies, issuing stock to raise capital, adding additional salespersons, differently allocating resources, or developing new performance incentives.

Taking corrective actions does not necessarily mean that existing strategies will be abandoned or even that new strategies must be formulated.

The probabilities and possibilities for incorrect or inappropriate actions increase geometrically with an arithmetic increase in personnel. Any person directing an overall undertaking must check on the actions of the participants as well as the results that they have achieved. If either the actions or results do not comply with preconceived or planned achievements, then corrective actions are needed.

Taking corrective actions is necessary to keep an organization on track toward achieving stated objectives.

Strategy evaluation enhances an organization’s ability to adapt successfully to changing circumstances.

Taking corrective actions raises employees’ and managers’ anxieties.

Participation in strategy evaluation activities is one of the best ways to overcome individuals’ resistance to change. Individuals accept change best when they have a cognitive understanding of the changes, a sense of control over the situation, and an awareness that necessary actions are going to be taken to implement the changes.

Strategy evaluation can lead to strategy formulation changes, strategy implementation changes, both formulation, and implementation changes, or no changes at all. Management cannot escape having to revise strategies and implementation approaches sooner or later.

Resistance to change is often emotionally based and not easily overcome by rational argument. Resistance may be based on such feelings as loss of status, implied criticism of present competence, fear of failure in the new situation, annoyance at not being consulted, lack of understanding of the need for change, or insecurity in changing from well-known and fixed methods. It is necessary, therefore, to overcome such resistance by creating situations of participation and full explanation when changes are envisaged.

Corrective actions should place an organization in a better position to capitalize upon internal strengths; take advantage of key external opportunities; avoid, reduce, or mitigate external threats; and improve internal weaknesses.

Corrective actions should have a proper time horizon and an appropriate amount of risk. They should be internally consistent and socially responsible.

Corrective actions strengthen an organization’s competitive position in its basic industry.

Continuous strategy evaluation keeps management close to the pulse of an organization and provides information needed for an effective strategic management system.

Contingency Plan in Strategy Evaluation and Control

A basic premise of good strategic management is that firms plan ways to deal with unfavorable and favorable events before they occur.

Too many organizations prepare contingency plans just for unfavorable events. This is a mistake because both minimizing threats and capitalizing on opportunities can improve a firm’s competitive position.

Regardless of how carefully strategies are formulated, implemented, and evaluated, unforeseen events, such as strikes, boycotts, natural disasters, the arrival of foreign competitors, and government actions, can make a strategy obsolete.

To minimize the impact of potential threats, organizations should develop contingency plans as part of their strategy evaluation process.

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. Management cannot and should not try to cover all bases by planning for all possible contingencies. But in any case, contingency plans should be as simple as possible.

Some contingency plans are commonly established by firms.

They are: (1) If a major competitor withdraws from particular markets as intelligence reports indicate, what actions should our firm take? (2) If our sales objectives are not reached, what actions should our firm take to avoid profit losses? (3) If demand for our new product exceeds plans, what actions should our firm take to meet the higher demand? (4) If certain disasters occur such as loss of computer capabilities; a hostile takeover attempt; loss of patent protection; or destruction of manufacturing facilities because of earthquakes, tornadoes or hurricanes, then what actions should our firm take? and (5) If a new technological advancement makes our new product obsolete sooner than expected, what actions should our firm take?

Alternative strategies not selected for implementation can serve as contingency plans in case the strategy or strategies selected do not work.

Too many organizations discard alternative strategies not selected for implementation although the work devoted to analyzing these options would render valuable information.

When strategy evaluation activities reveal the need for a major change quickly, an appropriate contingency plan can be executed in a timely way. Contingency plans can promote a management’s ability to respond quickly to key changes in the internal and external bases of an organization’s current strategy.

In some cases, external or internal conditions present unexpected opportunities. When such opportunities occur, contingency plans could allow an organization to quickly capitalize on them.

Contingency planning gave users 3 major benefits.

They are: (1) It permitted quick response to change, (2) it prevented panic in crisis situations, and (3) it made managers more adaptable by encouraging them to appreciate just how variable the future can be.

The effective contingency planning process involves 7 steps.

They are: (1) Identify both beneficial and unfavorable events that could possibly derail the strategy or strategies; (2) Specify trigger points. Calculate 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 contingency plans are compatible with the current strategy and are economically feasible; (5) Assess the counter-impact of each contingency plan. That is, estimate how much each contingency plan will capitalize on or cancel out its associated contingent event. Doing this will quantify the potential value of each contingency plan; (6) Determine early warning signals for key contingent events. Monitor the early warning signals; and (7) For contingent events with reliable early warning signals, develop advance action plans to take advantage of the available lead time.

Resources

Even More Reading

Related Concepts

References

Hitt, M. A., Ireland, D. R., & Hoskisson, R. E. (2019). Strategic Management: Concepts and Cases: Competitiveness and Globalization (MindTap Course List) (13th ed.). Cengage Learning.
Hill, C. W. L., & Jones, G. R. (2011). Essentials of Strategic Management (Available Titles CourseMate) (3rd ed.). Cengage Learning.
Mastering Strategic Management. (2016, January 18). Open Textbooks for Hong Kong.

Evaluation and Control in Strategic Management (adsbygoogle = window.adsbygoogle || []).push({});

The Process of Strategy Evaluation and Control (adsbygoogle = window.adsbygoogle || []).push({});

Characteristics of an Effective Evaluation System (adsbygoogle = window.adsbygoogle || []).push({});

A Strategy Evaluation and Control Framework (adsbygoogle = window.adsbygoogle || []).push({});