EVALUATION OF STRATEGY

EVALUATION OF STRATEGY

 

Strategy evaluation is the last stage of the strategic management process and comes after strategy formulation and implementation as shown below :

  

STRATEGY           –– STRATEGY                 –– STRATEGY

FORMULATION         IMPLEMENTATION        EVALUATION

 

An organization can have one of the best formulated and implemented strategies but if the evaluation of these are not done, they become obsolete over a period of time. Therefore, it becomes important to have an effective evaluation system so as to help the organization to achieve its objectives.  
 

The evaluation process involves the control mechanism, which helps in taking corrective actions. we are going to discuss the qualitative aspects and the portfolio analysis so as to develop a complete understanding of evaluation and control.

 

PROCESS OF EVALUATION

 

The key to a successful strategy is the effective implementation and evaluation system. Any kind of error in the strategic decisions will harm the organization, which in the long-run may be highly dangerous. Therefore, it is very necessary for the management to have a continuous evaluation system based on which the corrective actions may be taken. Figure-1 shows the process of evaluation.

Figure-1:  Evaluation of Strategy

 

The first phase of this process consists of selecting the key success factors, developing measures and setting standards for the same, and collecting information about actual state (performance on these measures). The second phase consists of comparison with the standards laid down and initiating action to alter performance, wherever necessary. The follow up action could relate to people/business or both and could be tactical or strategic. For instance, if the business has not picked up as expected, it may be necessary to increase promotional efforts, or revise the product policy, or as a last resort, the firm may pull out of a particular business. 

 

It is necessary to maintain a distinction between the follow up action towards business/people and evaluation/control process. If major changes in environment have taken place and if major assumptions about environment have gone wrong, it may be improper to give credit or discredit to the people for the deviation in performance from standard set. At the same time good performance of a strategy may not be due to good performance of the people as there may be windfall gains due to changes in the environment not imagined at the time of setting the standards of performance or targets. 

 

From Figure-1 it can be realised that the process of evaluation is quite complex and there are several pitfalls in proper evaluation and control. The success of an organization is gauged by its effectiveness and efficiency. Effectiveness is measured by the degree to which the organization has achieved its objectives while efficiency refers to the manner of resource utilization for achieving the output. The two can thus be represented as below: 

 

 

It is easy to evaluate efficiency by comparing output/input of various organizations or organization units with one another. Inputs, by and large, are always quantifiable. An organization is more efficient than the other if it uses less resources (inputs) than another, the same output or if for the same input it gives more output. The latter case requires output to be measured in quantitative terms and hence is more difficult to assess. 
 

Measurement of effectiveness has both numerator and denominator which are comparatively more difficult to quantify. Hence assessment of effectiveness is more difficult than the assessment of efficiency of the organization. 

 

The success of corporate strategy should be evaluated both in terms of efficiency and effectiveness. It is, however, not common to find an efficient but ineffective organization or vice versa. 

 

In a profit oriented organization, profit becomes a surrogate measure for both efficiency as well as effectiveness. Profit is the difference between revenue and expense, and thus is a measure of efficiency. Being the objective itself, profit also becomes a measure of effectiveness. In organizations with multiple objectives, the situation is different if the surrogate measures like profit are not available/not sufficient for evaluating the strategy. In such cases the major problem in evaluating the strategy is to develop measures for evaluating the strategy. The problem is solved by identifying the key variables or key success factors which are measures of performance of certain key activities of the organization. 
 

CHARACTERISTICS OF AN EFFECTIVE EVALUATION STRATEGY 

There are certain basics which should be followed for making the strategic evaluation effective. These characteristics are as follows:  

1. The activities of evaluation must be economical.
2. The information should neither be too much nor too little.
3. The control should neither be too much nor too less. It should be balanced.
4. The evaluation activities should relate to the firm’s objectives.
5. It should be designed in such a manner so that a true picture is portrayed. 

There can be many more such requirements. Large organizations require a more elaborate system than the smaller ones.