net Part 4 Strategy evaluation 9 Source: Burmakin Andrey/123rf 278 www.net Strategy review, evaluation, and Control Learning oBjectives After studying this chapter, you should be able to do the following: 9-1. Discuss the strategy-evaluation process, criteria, and methods used. Discuss three activities that comprise strategy evaluation. Describe and develop a Balanced Scorecard.
Identify and describe published sources of strategy-evaluation information. Identify and describe six characteristics of an effective strategy-evaluation system. Discuss the nature and role of contingency planning in strategy evaluation. Explain the role of auditing in strategy evaluation.
Identify and discuss three twenty-first-century challenges in strategic management. Identify and describe 17 guidelines for effective strategic management. assurance of Learning exercises The following exercises are found at the end of this chapter: exercise 9a examine 100 Balanced Scorecards exercise 9B Prepare a Strategy-evaluation report for Hershey Company exercise 9c evaluate your university’s Strategies 279 www.net 280 Part 4 • Strategy evaluation t he best formulated and best 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 chapter presents a frame- work that can guide managers’ efforts to evaluate strategic-management activities, to make sure they are working, and to make timely changes. guidelines are presented for formulating, imple- menting, and evaluating strategies. nike is the exemplary company showcased because the firm continually evaluates its strategies and takes prompt corrective actions as needed, posting higher and higher revenues and profits every year. the Strategy-evaluation Process, Criteria, and Methods 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. therefore, most strategists agree 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. the strategy-evaluation process includes three basic activities: 1. examine the underlying bases of a firm’s strategy.
Compare expected results with actual results. take corrective actions to ensure that performance conforms to plans. Figure 9-1 illustrates the strategy-evaluation stage of the strategic-management process (see white shading). adequate and timely feedback is the cornerstone of effective strategy evaluation.
Strategy evaluation can be no better than the information on which it is based. too much pressure from top managers may result in lower managers contriving numbers they think will be satisfac- tory. Strategy evaluation can be a complex and sensitive undertaking. too much emphasis on evaluating strategies may be expensive and counterproductive.
no one likes to be evaluated too closely! the more managers attempt to evaluate the behavior of others, the less control they have. yet too little or no evaluation can create even worse problems. Strategy evaluation is essential to exemPLary comPany showcased nike, inc. (nKe) The sportswear clothing giant, Nike, is running away from rival firms the Field House with both sales and earnings increases.
Headquartered in Beaverton, with Dick’s Oregon, Nike’s first-quarter (Q1) 2015 revenues rose 25 percent Sporting Goods in western Europe, 12 percent in North America, and 20 percent in Store. Nike greater China. Analyst Laurent Vasilescu recently announced. “Nike is store variation eating Adidas’ lunch, especially in western Europe.” Nike is doing an strategies allow excellent job implementing its strategy to focus more on higher-margin for premium products, higher average prices, and direct-to-consumer sales (includes pricing.
In addition, Nike has factory stores that provide a premium prod- Nike stores and Nike website). The company is capitalizing on the trend uct to consumers shopping for value. These stores attract higher customer for people to wear gym clothes (called activewear) outside the gym. Nike recently secured the endorsement of NBA superstar Kevin Durant, Revenues for Nike’s 2015 Q2 rose 15 percent to $7.4 billion, while beating out rival Under Armour’s bid for that athlete.
the company’s earnings per share increased 25 percent to $0. Nike’s strategy evaluation activities have resulted in the company of- For that quarter, revenues for the Nike brand rose 17 percent to fering premium stores called NIKETOWNs, the largest Nike stores in the $7.0 billion, while the company’s Converse revenues rose 24 percent fleet. Each NIKETOWN store features six or seven NIKE brand categories, to $434 million. The company’s net income for the quarter increased providing the very best innovative product and services.
For example, the 23 percent to $655 million. NIKE Running Store in New York City caters to the complete needs of the runner, and Nike’s House of Hoops for Basketball with Foot Locker is Source: Based on elaine low, “nike Sales Surge on europe, internet,” available, as well as the NIKE Track Club for runners with Finish Line and Investor’s Business Daily, September 26, 2014, a2.net CHaPter 9 • Strategy review, evaluation, and Control 281 Chapter 10: Business Ethics/Social Responsibility/Environmental Sustainability Issues Perform External Audit Chapter 3 Implement Generate, Implement Strategies— Develop Vision Establish Measure Evaluate, Strategies— Marketing, and Mission Long-Term and Evaluate and Select Management Finance, Statements Objectives Performance Strategies Issues Accounting, R&D, Chapter 2 Chapter 5 Chapter 9 Chapter 6 Chapter 7 and MIS Issues Chapter 8 Perform Internal Audit Chapter 4 Chapter 11: Global/International Issues Strategy Strategy Strategy Formulation Implementation Evaluation Figure 9-1 A Comprehensive Strategic-Management Model Source: Fred r. David, “How Companies Define their Mission,” Long Range Planning 22, no. See also anik ratnaningsih, nadjadji anwar, Patdono Suwignjo, and Putu artama Wiguna, “Balance Scorecard of David’s Strategic Modeling at industrial Business for national Construction Contractor of indonesia,” Journal of Mathematics and Technology, no.
ensure that stated objectives are being achieved. Strategists need to create an organizational cul- ture where strategy evaluation is viewed as an opportunity to make the firm better, so the firm can compete better, so everyone in the firm can do better, sharing in the firm’s increased profitability. in many organizations, strategy evaluation is simply an appraisal of how well an organiza- tion has performed. Have the firm’s assets increased? Has there been an increase in profitabil- ity? Have sales increased? Have productivity levels increased? Have profit margin, return on investment, and earnings-per-share ratios increased? Some firms argue that their strategy must have been correct if the answers to these types of questions are affirmative.
Well, 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 is important because organizations face dynamic environments in which key external and internal factors often change quickly and dramatically. Success today is no guarantee of success tomorrow! Joseph Stalin was a ruthless leader (from 1928 on) and premier (from 1941 on) of the Soviet union until his death in 1953.
a famous quote from Stalin was: www.net 282 Part 4 • Strategy evaluation “History shows that there are no invincible armies.” this quote reveals that even the mightiest, most successful firms must continually evaluate their strategies and be wary of rival firms. an organization should never be lulled into complacency with success. Countless firms have thrived one year only to struggle for survival the following year. according to Peter Drucker, “unless strategy evaluation is performed seriously and systematically, and unless strategists are willing to act on the results, energy will be used up defending yesterday.” 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. richard rumelt offered four criteria that could be used to evaluate a strategy: consistency, consonance, feasibility, and advantage. Described in table 9-1, consonance and advantage are mostly based on a firm’s exter- nal assessment, whereas consistency and feasibility are largely based on an internal assessment. Demise can come quickly.
the internet financial news company 24/7 Wall Street annu- ally identifies the worst companies to work for in the united States, and recently reported the Table 9-1 Rumelt’s Criteria for Evaluating Strategies Consistency it is important to strive for consistency when setting goals and policies. organizational conflict and interdepartmental bickering are often symptoms of managerial disorder, but these problems may also be a sign of strategic inconsistency. three guidelines help determine if organizational problems are the result of inconsistencies in strategy: • if managerial problems continue despite changes in personnel and if they tend to be issue-based rather than people-based, then strategies may be inconsistent. • if success for one organizational department means, or is interpreted to mean, failure for another department, then strategies may be inconsistent.
• if policy problems and issues continue to be brought to the top for resolution, then strategies may be inconsistent. Consonance Consonance 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. one difficulty in matching a firm’s key internal and external factors in the formulation of strategy is that most trends are the result of interactions among other trends.
For example, the day care explosion came about as a combined result of many trends that included a rise in the average level of education, increased inflation, and an increase in women in the workforce. although single economic or demographic trends might appear steady for many years, there are waves of change going on at the interaction level. Feasibility a strategy must neither overtax available resources nor create unsolvable subproblems. 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? the financial resources of a business are the easiest to quantify and are normally the first limitation against which strategy is evaluated.
it is sometimes forgotten, however, that innovative approaches to financing are often possible. Devices, such as captive subsidiaries, sale-leaseback arrangements, and tying plant mortgages to long-term contracts, have all been used effectively to help win key positions in suddenly expanding industries. a less quantifiable, but actually more rigid, limitation on strategic choice is that imposed by individual and organizational capabilities. in evaluating a strategy, it is important to examine whether an organization has demonstrated in the past that it possesses the abilities, competencies, skills, and talents needed to carry out a given strategy.
Advantage a strategy must provide for the creation 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. the idea that the positioning of one’s resources can enhance their combined effectiveness is familiar to military theorists, chess players, and diplomats. Position can also play a crucial role in an organization’s strategy.
once gained, a good position is defensible—meaning that it is so costly to capture that rivals are deterred from full-scale attacks. Positional advantage tends to be self-sustaining so long as the key internal and environmental factors that underlie it remain stable. this is why entrenched firms can be almost impossible to unseat, even if their raw skill levels are only average. although not all positional advantages are associated with size, it is true that larger organizations tend to operate in markets and use procedures that turn their size into advantage, whereas smaller firms seek product or market positions that exploit other types of advantage.
the principal characteristic of good position is that it permits the firm to obtain advantage from policies that would not similarly benefit rivals without the same position. therefore, in evaluating strategy, organizations should examine the nature of positional advantages associated with a given strategy. Source: adapted from richard rumelt, “the evaluation of Business Strategy,” in W.), Business Policy and Strategic Management (new york: Mcgraw-Hill, 1980), 359–367. used with permission.net CHaPter 9 • Strategy review, evaluation, and Control 283 worst company to be Books-a-Million, followed by express Scripts, Frontier Communications, Jos.