Expert answer:What is the purpose and the process of evaluating
Expert answer:Write an essay answering the following question:What is the purpose and the process of evaluating business strategy? Use the attached article as one of your references. Make sure to visitonline Library to gather additional information.Your paper needs to have four pages, double space, margins one inch all around:Page 1: Cover including name of the class, date, name of the school, and your full name. DO NOT put your name in pages 2, 3, and 4.Page 2 and Page 3 need to be used to answer the above questions. Make sure to include quotations, citations, etc. to strengthen your arguments.Page 4: References should include the bibliography you have used presented in APA format style. At least three references are needed. For your references use textbooks, articles, and/or reports.
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EVALUATING BUSINESS STRATEGY*
Richard P. Rumelt
November 28, 1993
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trategy can neither be formulated nor adjusted to changing circumstances without a
process of strategy evaluation. Whether performed by an individual or as part of an organizational review procedure, strategy evaluation forms an essential step in the process of guiding an enterprise.
For many executives strategy evaluation is simply an appraisal of how well a business
performs. Has it grown? Is the profit rate normal or better? If the answers to these questions
are affirmative, it is argued that the firm’s strategy must be sound. Despite its unassailable
simplicity, this line of reasoning misses the whole point of strategy—that the critical factors
determining the quality of long-term results are often not directly observable or simply measured, and that by the time strategic opportunities or threats do directly affect operating results,
it may well be too late for an effective response. Thus, strategy evaluation is an attempt to
look beyond the obvious facts regarding the short-term health of a business and appraise
instead those more fundamental factors and trends that govern success in the chosen field of
endeavor.
THE CHALLENGE OF EVALUATION
However it is accomplished, the products of a business strategy evaluation are answers to
these three questions:
•
Are the objectives of the business appropriate?
•
Are the major policies and plans appropriate?
•
Do the results obtained to date confirm or refute critical assumptions on which the
strategy rests?
Devising adequate answers to these questions is neither simple nor straightforward. It requires a reasonable store of situation-based knowledge and more than the usual degree of
insight. In particular, the major issues which make evaluation difficult and with which the
analyst must come to grips are these:
•
Each business strategy is unique. For example, one paper manufacturer might rely in
its vast timber holdings to weather almost any storm while another might place
primary reliance in modern machinery and an extensive distribution system. Neither
strategy is “wrong” nor “right” in any absolute sense; both may be right or wrong for
the firms in question. Strategy evaluation must, then, rest on a type of situational
logic that does not focus on “one best way” but which can be tailored to each problem
as it is faced.
•
Strategy is centrally concerned with the selection of goals and objectives. Many
people, including seasoned executives, find it much easier to set or try to achieve
goals than to evaluate them. In part this is a consequence of training in problem solving rather than in problem structuring. It also arises out of a tendency to confuse
*This paper is a revised and updated version of my paper “The Evaluation of Businss Strategy,”
which appeared in Glueck, William F. Strategic Management and Business Policy. New York:
McGraw-Hill, 1980. An abridged version of that paper also appeared in Quinn, James Brian;
Mintzberg, Henry; and Robert M. James. The Strategy Process. Englewood Cliffs, New Jersey, 1988.
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values, which are fundamental expressions of human personality, with objectives,
which are devices for lending coherence to action.
•
Formal systems of strategic review, while appealing in principal, can create explosive
conflict situations. Not only are there serious questions as to who is qualified to give
an objective evaluation, the whole idea of strategy evaluation implies management by
“much more than results” and runs counter to much of currently popular management
philosophy.
THE GENERAL PRINCIPLES OF STRATEGY EVALUATION
The term “strategy” has been so widely used for different purposes that it has lost any
clearly defined meaning. For our purposes a strategy is a set of objectives, policies, and plans
that, taken together, define the scope of the enterprise and its approach to survival and
success. Alternatively, we could say that the particular policies, plans, and objectives of a
business express its strategy for coping with a complex competitive environment.
One of the fundamental tenets of science is that a theory can never be proven to be
absolutely true. A theory can, however, be declared absolutely false if it falls to stand up to
testing. Similarly, it is impossible to demonstrate conclusively that a particular business
strategy is optimal or even to guarantee that it will work. One can, nevertheless, test it for
critical flaws. Of the many tests which could be justifiably applied to a business strategy,
most will fit within one of these broad criteria:
•
Consistency: The strategy must not present mutually inconsistent goals and policies.
•
Consonance: The strategy must represent an adaptive response to the external
environment and to the critical changes occurring within it.
•
Advantage: The strategy. must provide for the creation and/or maintenance of a
competitive advantage in the selected area of activity.
•
Feasibility: The strategy must neither overtax available resources nor create
unsolvable sub problems.
A strategy that fails to meet one or more of these criteria is strongly suspect. It fails to
perform at least one of the key functions that are necessary for the survival of the business.
Experience within a particular industry or other setting will permit the analyst to sharpen
these criteria and add others that are appropriate to the situation at hand.
Consistency
Gross inconsistency within a strategy seems unlikely until it is realized that many
strategies have not been explicitly formulated but have evolved over time in an ad hoc
fashion. Even strategies that are the result of formal procedures may easily contain
compromise arrangements between opposing power groups.
Inconsistency in strategy is not simply a flaw in logic. A key function of strategy is to
provide coherence to organizational action. A clear and explicit concept of strategy can foster
a climate of tacit coordination that is more efficient than most administrative mechanisms.
Many high-technology firms, for example, face a basic strategic choice between offering
high-cost products with high custom-engineering content and lower-cost products that are
more standardized and sold at higher volume. If senior management does not enunciate a
clear consistent sense of where the corporation stands on these issues, there will be continuing
conflict between sales, design, engineering, and manufacturing people. A clear consistent
strategy, by contrast, allows a sales engineer to negotiate a contract with a minimum of
coordination-the trade-offs are an explicit part of the firm’s posture.
Organizational conflict and interdepartmental bickering are often symptoms of a
managerial disorder but may also indicate problems of strategic inconsistency. Here are some
indicators that can help sort out these two different problems:
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•
If problems in coordination and planning continue despite changes in personnel and
tend to be issue- rather than people-based, they are probably due to inconsistencies in
strategy.
•
If success for one organizational department means, or is interpreted to mean, failure
for another department, either the basic objective structure is inconsistent or the
organizational structure is wastefully duplicative.
•
If, despite attempts to delegate authority, operating problems continue to be brought
to the top for the resolution of policy issues, the basic strategy is probably inconsistent.
A final type of consistency that must be sought in strategy is between organizational
objectives and the values of the management group. Inconsistency in this area is more of a
problem in strategy formulation than in the evaluation of a strategy that has already been
implemented. It can still arise, however, if the future direction of the business requires
changes that conflict with managerial values. The most frequent source of such conflict is
growth. As a business expands beyond the scale that allows an easy informal method of
operation, many executives experience a sharp sense of loss. While growth can of course be
curtailed, it often will require special attention to a firm’s competitive position if survival
without growth is desired. The same basic issues arise when other types of personal or social
values come into conflict with existing or apparently necessary policies: the resolution of the
conflict will normally require an adjustment in the competitive strategy.
Consonance
The way in which a business relates to its environment has two aspects: the business must
both match and be adapted to its environment and it must at the same time compete with other
firms that are also trying to adapt. This dual character of the relationship between the firm
and its environment has its analog in two different aspects of strategic choice and two
different methods of strategy evaluation.
The first aspect of fit deals with the basic mission or scope of the business and the
second with its special competitive position or “edge.” Analysis of the first is normally
done by looking at changing economic and social conditions over time. Analysis of the
second, by contrast, typically focuses on the differences across firms at a given time. We call
the first the generic aspect of strategy and the second competitive strategy. Generic strategy
deals with the creation of social value—with the question of whether the products and services
being created are worth more than their cost. Competitive strategy, by contrast, deals with the
firm’s need to capture some of the social value as profit. Exhibit 1 summarizes the differences
between these concepts.
The notion of consonance, or matching, therefore, invites a focus on generic strategy.
The role of the evaluator in this case is to examine the basic pattern of economic relationships
that characterize the business and determine whether or not sufficient value is being created to
sustain the strategy. Most macroanalysis of changing economic conditions is oriented toward
the formulation or evaluation of generic strategies. For example, a planning department
forecasts that within six years flat-panel liquid crystal displays will replace CRT-based video
displays in computers. The basic message here to makers of CRT-based video displays is
that their generic strategies are becoming obsolete. Note that the threat in this case is not to a
particular firm, competitive position, or individual approach to the marketplace but to the
basic generic mission.
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EXHIBIT 1
GENERIC VERSUS COMPETRITIVE STRATEGY
Generic Strategy
Competitive Strategy
Value Issue
Social Value
Corporate Value
Value Constraint
Customer Value > Cost
Price > Cost
Success Indicator
Sales Growth
Increased Corporate Worth
Basic Strategic Task
Adapting to Change
Innovating, impeding
imitation, detering rivals
How Strategy is Expressed
Product-market definition
Advantage, position, and
policies supporting them
Basic Approach to Analysis
Study of an industry over
time
Comparison across rivals
One major difficulty in evaluating consonance is that most of the critical threats to a
business are those which come from without, threatening an entire group of firms.
Management, however, is often so engrossed in competitive thinking that such threats are
only recognized after the damage has reached considerable proportions.
Another difficulty in appraising the fit between a firm’s mission and the environment is
that trend analysis does not normally reveal the most critical changes—they are the result of
interactions among trends. The supermarket, for example, comes into being only when home
refrigeration and the widespread use of automobiles allow shoppers to buy in significantly
larger volumes. The supermarket, the automobile, and the move to suburbia together form the
nexus which gives rise to shopping centers. These, in turn, change the nature of retailing and,
together with the decline of urban centers, create new forms of enterprise, such as the
suburban film theater with four screens. Thus, while gross economic or demographic trends
might appear steady for many years, there are waves of change going on at the institutional
level.
The key to evaluating consonance is an understanding of why the business, as it currently
stands, exists at all and how it assumed its current pattern. Once the analyst obtains a good
grasp of the basic economic foundation that supports and defines the business, it is possible to
study the consequences of key trends and changes. Without such an understanding, there is
no good way of deciding what kinds of changes are most crucial and the analyst can be
quickly overwhelmed with data.
Advantage
It is no exaggeration to say that competitive strategy is the art of creating or exploiting
those advantages that are most telling, enduring, and most difficult to duplicate.
Competitive strategy, in contrast with generic strategy, focuses on the differences among
firms rather than their common missions. The problem it addresses is not so much “how can
this function be performed” but “how can we perform it either better than, or at least instead
of, our rivals?” The chain supermarket, for example, represents a successful generic strategy.
As a way of doing business, of organizing economic transactions, it has replaced almost all
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the smaller owner-managed food shops of an earlier era. Yet a potential or actual participant
in the retail food business must go beyond this generic strategy and find a way of competing
in this business. As another illustration, IBM’s early success in the PC industry was generic—
other firms soon copied the basic product concept. Once this happened, IBM had to try to
either forge a strong competitive strategy in this area or seek a different type of competitive
arena.
Competitive advantages can normally be traced to one of three roots:
•
Superior skills
•
Superior resources
•
Superior position
In examining a potential advantage, the critical question is “what sustains this advantage,
keeping competitors from imitating or replicating it?” A firm’s skills can be a source of advantage if they are based on its own history of learning-by-doing and if they are rooted in the
coordinated behavior of many people. By contrast, skills that are based on generally
understood scientific principles, on training that can be purchased by competitors, or which
can be analyzed and replicated by others are not sources of sustained advantage.
The skills which compose advantages are usually organizational, rather than individual,
skills. They involve the adept coordination or collaboration of individual specialists and are
built through the interplay of investment, work, and learning. Unlike physical assets, skills
are enhanced by their use. Skills that are not continually used and improved will atrophy.
Resources include patents, trade-mark rights, specialized physical assets, and the firm’s
working relationships with suppliers and distribution channels. In addition, a firm’s
reputation with its employees, suppliers, and customers is a resource. Resources that
constitute advantages are specialized to the firm, are built up slowly over time through the
accumulated exercise of superior skills, or are obtained through being an insightful first
mover, or by just plain luck. For example, Nucor’s special skills in mini-mill construction are
embodied in superior physical plants. Goldman Sachs reputation as the premier U.S.
investment banking house has been built up over many years and is now a major resource in
its own right.
A firm’s position consists of the products or services it provides, the market segments it
sells to, and the degree to which it is isolated from direct competition. In general, the best
positions involve supplying very uniquely valuable products to price insensitive buyers,
whereas poor positions involve being one of many firms supplying marginally valuable
products to very well informed price sensitive buyers.
Positional advantage can be gained by foresight, superior skill and/or resources, or just
plain luck. Once gained, a good position is defensible. This means that it (1) returns enough
value to warrant its continued maintenance and (2) would be so costly to capture that rivals
are deterred from full-scale attacks on the core of the business. Position, it must be noted,
tends to be self-sustaining as long as the basic environmental factors that underlie it remain
stable. Thus, entrenched firms can be almost impossible to unseat, even if their raw skill
levels are only average. And when a shifting environment allows position to be gained by a
new entrant or innovator, the results can be spectacular.
Positional advantages are of two types: (1) first mover advantages and (2) reinforcers.
The most basic first mover advantage occurs when the minimum scale to be efficient requires
a large (sunk) investment relative to the market. Thus, the first firm to open a large discount
retail store in a rural area precludes, through its relative scale, close followers. More subtle
first mover advantages occur when standardization effects “lock-in” customers to the firstmover’s product (e.g., Lotus 123). Buyer learning and related phenomena can increase the
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buyer’s switching costs, protecting an incumbent’s customer base from attack. Frequent flyer
programs are aimed in this direction. First movers may also gain advantages in building
distribution channels, in tying up specialized suppliers, or in gaining the attention of
customers. The first product of a class to engage in mass advertising, for example, tends to
impress itself more deeply in people’s minds than the second, third, or fourth. In a careful
study of frequently-purchased consumer products, Urban et al. [1986] found that (other things
being equal) the first entrant will have a market share that is n times as large as that of the
nth entrant.
Reinforcers are policies or practices acting to strengthen or preserve a strong market
position and which are easier to carry out because of the position. The idea that certain
arrangements of one’s resources can enhance their combined effectiveness, and perhaps even
put rival forces in a state of disarray, is at the heart of the traditional notion of strategy. It is
reinforcers which provide positional advantage the strategic quality familiar to military
theorists, chess players, and diplomats.
A firm with a larger market share, due to being an early mover or to having a
technological lead, can typically build a more efficient production and distribution system.
Competitors with less demand simply cannot cover the fixed costs of the larger more efficient
facilities, so for them larger facilities are not an economic choice. In this case, scale
economies are a reinforcer of market position, not the cause of market position. The firm that
has a strong brand can use it as a reinforcer in the introduction of related brands. A company
that sells a specialty coating to a broader variety of users may have better data on how to
adapt the coating to special conditions than a competitor with more limited sales—properly
used, this information is a reinforcer. A famous brand will appear on TV and in films because
it is famous, another reinforcer. An example given by Porter [1985: 145], is that of Steinway
and Sons, the premier U.S. maker of fine pianos. Steinway maintains a dispersed inventory of
grand pianos that approved pianists are permitted to use for concerts at very low rental rates.
The policy is less expensive for a leader than for a follower and helps maintain leadership.
The positive feedback provided by reinforcers is the source of the power of positionbased advantages—the policies that act to enhance position may not require unusual skills;
they simply work most effectively for those who are already in the position in the first place.
While it is not true that larger businesses always have the advantag …
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