14.1 Strategy Evaluation Frameworks and Techniques
4 min read•july 18, 2024
Strategy evaluation is a crucial process for assessing a company's performance and adapting to change. It involves reviewing current strategies, measuring performance, and taking corrective actions. This process helps businesses stay competitive and achieve their goals in dynamic environments.
Key components of strategy evaluation include internal factors like financial performance and organizational culture, as well as external factors such as industry trends and economic conditions. Various techniques, both quantitative and qualitative, are used to assess strategies and ensure alignment with the company's capabilities and market realities.
Strategy Evaluation Process and Techniques
Components of strategy evaluation
Top images from around the web for Components of strategy evaluation
Strategic Management | Boundless Management View original
Is this image relevant?
Stages and Types of Strategy | Principles of Management View original
Is this image relevant?
External Forces That Shape Business Activities | Introduction to Business View original
Is this image relevant?
Strategic Management | Boundless Management View original
Is this image relevant?
Stages and Types of Strategy | Principles of Management View original
Is this image relevant?
1 of 3
Top images from around the web for Components of strategy evaluation
Strategic Management | Boundless Management View original
Is this image relevant?
Stages and Types of Strategy | Principles of Management View original
Is this image relevant?
External Forces That Shape Business Activities | Introduction to Business View original
Is this image relevant?
Strategic Management | Boundless Management View original
Is this image relevant?
Stages and Types of Strategy | Principles of Management View original
Is this image relevant?
1 of 3
- Strategy evaluation process involves
- Reviewing current strategy assesses its effectiveness and relevance
- Measuring performance determines progress towards objectives
- Taking corrective actions addresses identified issues and gaps
- Key components of strategy evaluation include
- Internal factors
- Financial performance measures profitability, liquidity, and efficiency (, current ratio)
- Non-financial performance assesses customer satisfaction, employee engagement, and operational efficiency
- Organizational structure and culture impact strategy implementation and adaptability
- External factors
- Industry and competitive environment shape opportunities and threats (market trends, competitor actions)
- Macroeconomic factors influence demand, costs, and overall business conditions (inflation, GDP growth)
- Technological advancements disrupt industries and create new possibilities (digitalization, AI)
- Internal factors
- Steps in the strategy evaluation process include
- Establish performance metrics and targets aligned with strategic objectives
- Monitor and measure actual performance using quantitative and qualitative data
- Compare actual performance with desired performance to identify gaps
- Identify gaps and areas for improvement through root cause analysis
- Develop and implement corrective actions to address identified issues
- Reassess and adjust the strategy as needed based on evolving circumstances
Techniques for strategy assessment
- Quantitative techniques provide objective and measurable insights
- Financial ratio analysis evaluates
- Profitability ratios measure return on investments and equity (ROI, ROE, ROCE)
- Liquidity ratios assess ability to meet short-term obligations (current ratio, quick ratio)
- Efficiency ratios gauge resource utilization and productivity (inventory turnover, asset turnover)
- offers a holistic view of performance across four perspectives
- Financial perspective tracks financial outcomes and value creation
- Customer perspective measures customer satisfaction, loyalty, and market share
- Internal business process perspective assesses operational efficiency and innovation
- Learning and growth perspective evaluates employee skills, culture, and infrastructure
- (EVA) measures economic profit and value creation
- Calculating EVA:
- NOPAT is Net Operating Profit After Tax
- WACC is Weighted Average Cost of Capital
- Financial ratio analysis evaluates
- Qualitative techniques provide contextual and strategic insights
- assesses internal and external factors
- Strengths and weaknesses are internal factors (brand reputation, cost structure)
- Opportunities and threats are external factors (untapped markets, regulatory changes)
- examines macro-environmental factors
- Political factors include government policies, regulations, and political stability
- Economic factors cover economic growth, interest rates, and exchange rates
- Social factors encompass demographics, cultural trends, and consumer behavior
- Technological factors involve technological advancements, R&D, and innovation
- Environmental factors include climate change, sustainability, and resource scarcity
- Legal factors cover legal and regulatory frameworks, compliance, and liability risks
- analysis evaluates industry attractiveness and competitive dynamics
- Threat of new entrants is influenced by entry barriers and capital requirements
- Bargaining power of suppliers affects input costs and quality
- Bargaining power of buyers impacts pricing and profitability
- Threat of substitutes creates competitive pressure and reduces customer loyalty
- Industry rivalry intensifies competition and affects profitability
- assesses internal and external factors
Strategy alignment with environments
- Assessing strategic fit ensures strategy aligns with internal capabilities and external realities
- Alignment with organizational mission, vision, and values provides direction and purpose
- Consistency with organizational structure and culture facilitates effective implementation
- Compatibility with available resources and capabilities ensures feasibility and sustainability
- Evaluating external alignment ensures strategy responds to market dynamics and stakeholder expectations
- Responsiveness to industry trends and market conditions enables agility and competitiveness
- Adaptability to changing customer needs and preferences enhances customer satisfaction and loyalty
- Positioning relative to competitors differentiates the firm and creates
- Identifying misalignments and gaps reveals areas for improvement and potential risks
- Inconsistencies between strategy and internal factors lead to implementation challenges and underperformance
- Mismatches between strategy and external environment result in missed opportunities and strategic drift
- Potential sources of competitive disadvantage erode market position and financial performance
Strategy adjustments from evaluation
- Types of strategic adjustments address different growth and diversification opportunities
- Market penetration increases market share in existing markets through enhanced marketing and sales efforts
- Market development enters new markets with existing products (geographic expansion, new customer segments)
- Product development introduces new products in existing markets to meet evolving customer needs
- Diversification enters new markets with new products to spread risk and explore synergies
- Factors influencing strategic adjustments include internal and external changes
- Changes in the competitive landscape require repositioning and differentiation (mergers, new entrants)
- Shifts in customer preferences and market trends demand product and service innovations
- Emergence of new technologies or business models disrupts traditional industry dynamics (e-commerce, sharing economy)
- Identification of untapped opportunities or underserved segments presents growth potential
- Implementing strategic adjustments involves a systematic approach
- Developing a plan for implementing changes defines objectives, timelines, and responsibilities
- Allocating resources and aligning organizational structure supports strategy execution
- Communicating the revised strategy to stakeholders ensures buy-in and coordination
- Monitoring the effectiveness of the adjustments over time enables continuous improvement and adaptation
Key Terms to Review (20)
Ansoff Matrix: The Ansoff Matrix is a strategic planning tool used to determine a company's growth strategy by focusing on the relationships between its products and markets. It helps businesses assess risks associated with various strategies, including market penetration, market development, product development, and diversification. By categorizing these strategies, companies can make informed decisions about how to expand and grow in both existing and new markets.
Balanced Scorecard: The balanced scorecard is a strategic planning and management system that organizations use to align business activities to the vision and strategy of the organization, improve internal and external communications, and monitor organizational performance against strategic goals. It connects various levels of strategy by providing a framework that integrates financial and non-financial performance measures, ensuring a more comprehensive view of business success.
BCG Matrix: The BCG Matrix, developed by the Boston Consulting Group, is a strategic planning tool that helps organizations analyze their product lines or business units based on market growth and market share. It categorizes these entities into four quadrants: Stars, Question Marks, Cash Cows, and Dogs, which assists in resource allocation and strategic decision-making to enhance competitive positioning.
Change Management: Change management is a structured approach to transitioning individuals, teams, and organizations from a current state to a desired future state. It involves preparing, supporting, and helping people to adopt change in order to drive organizational success and efficiency. This process is crucial at various levels of strategy as it ensures that changes align with overall goals, supports effective leadership decision-making, and is assessed through relevant evaluation frameworks.
Competitive Advantage: Competitive advantage is the unique edge a company has over its competitors, allowing it to produce goods or services at a lower cost or deliver added benefits that justify higher prices. This concept is crucial as it shapes the company’s strategy, resource allocation, and overall market position in the industry.
Economic Value Added: Economic Value Added (EVA) is a financial performance measure that calculates the value a company generates from its invested capital, effectively showing how well it is generating profit above the required return of its shareholders. EVA connects closely with various strategy evaluation frameworks and techniques as it helps businesses assess their profitability and make informed decisions to enhance shareholder value. By focusing on the surplus generated over the cost of capital, EVA provides insights into operational efficiency and investment effectiveness.
Financial metrics: Financial metrics are quantitative measures used to assess a company's financial performance and health. These metrics provide essential insights into various aspects of a business, such as profitability, liquidity, efficiency, and solvency. By analyzing these numbers, stakeholders can evaluate the effectiveness of strategic initiatives and make informed decisions regarding future strategies.
KPIs: Key Performance Indicators (KPIs) are measurable values that demonstrate how effectively an organization is achieving key business objectives. They are critical for evaluating success and guiding strategic decision-making, allowing businesses to track progress and adjust strategies as needed. KPIs can be financial or non-financial metrics and vary across different industries and organizations, making them a versatile tool in strategy evaluation frameworks and techniques.
Learning organization: A learning organization is an entity that actively fosters a culture of continuous improvement, innovation, and knowledge sharing among its members. It encourages open communication and collaboration, allowing employees to learn from experiences and adapt to changes in their environment. This concept connects closely with innovation management by promoting experimentation and adaptability, and with strategy evaluation as it emphasizes the need for organizations to learn from their strategies to refine and improve them over time.
Market positioning: Market positioning refers to the process of establishing a brand or product in the minds of consumers relative to competitors. It involves defining how a company wants its target audience to perceive its offerings and differentiating them based on factors like quality, price, and benefits. This strategic approach is crucial for gaining competitive advantage and influences marketing efforts, product development, and overall business strategy.
NOPAT: NOPAT, or Net Operating Profit After Tax, measures a company's operating efficiency by calculating its profit from operations after accounting for taxes. This figure excludes the effects of financing and non-operating income, giving a clearer picture of how well a company generates profit from its core business activities. Understanding NOPAT is crucial for evaluating a company's operational performance, particularly when comparing it to others within the same industry.
PESTEL Analysis: PESTEL analysis is a strategic framework used to evaluate the external macro-environmental factors affecting an organization, focusing on Political, Economic, Social, Technological, Environmental, and Legal aspects. By assessing these factors, organizations can gain insights into the broader environment in which they operate, which helps in identifying opportunities and threats, as well as aligning their vision and mission with market realities.
Porter's Five Forces: Porter's Five Forces is a framework for analyzing the competitive forces within an industry, which influences its profitability and strategic position. By examining the intensity of competition and the various factors affecting it, businesses can better understand their market environment and make informed strategic decisions.
Resource-based view: The resource-based view (RBV) is a management theory that focuses on the internal resources and capabilities of a firm as the primary drivers of competitive advantage and performance. By identifying and leveraging unique resources, companies can create sustainable competitive advantages that are difficult for competitors to imitate, shaping their overall strategy at different levels.
Risk assessment: Risk assessment is the systematic process of identifying, analyzing, and evaluating potential risks that could negatively impact an organization's ability to achieve its objectives. It is a crucial part of strategy evaluation as it helps organizations understand uncertainties and make informed decisions about risk management strategies to minimize negative impacts on performance.
ROI: ROI, or Return on Investment, is a financial metric used to evaluate the efficiency and profitability of an investment. It calculates the gain or loss generated relative to the amount of money invested, typically expressed as a percentage. Understanding ROI is crucial when assessing various business strategies and resource allocation, especially in the context of portfolio management frameworks and strategy evaluation methods.
Scenario planning: Scenario planning is a strategic planning method used to create flexible long-term plans based on different possible future scenarios. This technique encourages organizations to think creatively about potential changes in their external environment and helps them prepare for uncertainties by analyzing how various factors, like economic conditions or technological advancements, might impact their strategies. It emphasizes adaptability and foresight, allowing businesses to identify opportunities and threats in a rapidly changing landscape.
Strategic Coherence: Strategic coherence refers to the alignment and integration of a company's strategies across various levels, ensuring that corporate, business, and functional strategies support one another effectively. This concept emphasizes that all strategic efforts should be mutually reinforcing and directed towards achieving the overarching goals of the organization, leading to enhanced operational efficiency and competitive advantage.
SWOT Analysis: SWOT analysis is a strategic planning tool used to identify and evaluate the Strengths, Weaknesses, Opportunities, and Threats related to a business or project. This framework helps organizations understand their internal capabilities and external market conditions, ultimately aiding in strategic decision-making.
WACC: WACC, or Weighted Average Cost of Capital, is a financial metric that calculates a firm's cost of capital from all sources, weighted according to the proportion of each source in the overall capital structure. This metric is essential for evaluating investment opportunities and understanding the minimum return required for a company to satisfy its investors. WACC reflects the risk associated with a firm's capital structure, combining the costs of equity and debt financing, and helps determine whether a firm can create value through its strategic investments.