Process of Strategy Evaluation – Steps, Performance Measurement & Corrective Action

 Evaluation of Strategy

Strategy evaluation is as significant as strategy formulation because it provides insight into the efficiency and effectiveness of strategic plans in achieving desired results. It enables managers to assess whether the existing strategy remains appropriate in a dynamic business environment characterized by continuous socio-economic, political, technological, and competitive changes.

Strategic evaluation is the final phase of the strategic management process. Its significance lies in its ability to coordinate the efforts of managers, groups, departments, and other organizational units through systematic performance measurement and control. It also helps management identify deviations from planned objectives and take appropriate corrective actions.

The importance of strategy evaluation can be attributed to several factors, including:

• Providing inputs for future strategic planning.
• Creating an effective mechanism for feedback and performance appraisal.
• Supporting appropriate rewards and recognition for managerial performance.
• Facilitating the continuous development and improvement of the strategic management process.
• Assessing the validity and relevance of strategic choices in changing business conditions.
• Identifying areas where corrective or preventive actions are required.

Executives generally consider the following factors to be critical to the successful implementation and performance of a company's strategy:

• Quality of top management.
• Development of future managers and leadership talent.
• Managerial interaction, commitment, and drive to achieve profitable growth.
• Improvement of long-range strategic planning systems.
• Enhancement of judgment, creativity, and imagination at the top-management level.
• Continuous improvement in customer service.
• Ensuring a competitive financial return to investors.
• Maximizing shareholder value and the long-term value of shareholders' investments.

Thus, strategy evaluation is not merely a mechanism for measuring past performance; it is an essential managerial process that helps an organization remain strategically aligned, respond effectively to environmental changes, and achieve sustainable long-term performance.

Process of Strategy Evaluation

The process of strategy evaluation consists of the following four major steps:

1. Fixing Performance Benchmarks

While establishing performance benchmarks, strategists need to consider questions such as what benchmarks should be established, how they should be determined, and how they should be expressed. To determine appropriate benchmarks, it is essential to identify the specific requirements necessary for performing the organization's key activities effectively. The performance indicators that best reflect these requirements can then be selected for evaluation.

An organization can use both quantitative and qualitative criteria for a comprehensive assessment of performance.

Quantitative criteria may include:

• Net profit
• Return on Investment (ROI)
• Earnings per share (EPS)
• Cost of production
• Employee turnover rate
• Sales growth and market share

Qualitative criteria involve the subjective assessment of factors such as:

• Managerial skills and competencies
• Risk-taking ability
• Flexibility and adaptability
• Leadership capability
• Employee morale and commitment

A combination of quantitative and qualitative benchmarks provides a more balanced and comprehensive basis for evaluating strategy.

2. Measurement of Performance

The established performance standard serves as a benchmark against which actual performance is compared. Effective reporting and communication systems play an important role in measuring performance. When appropriate measurement methods are available and performance standards are properly established, strategy evaluation becomes more effective and meaningful.

However, certain aspects of performance are difficult to measure objectively. For example, the individual contribution of a manager may be difficult to quantify. Similarly, divisional or departmental performance may be more difficult to assess than individual performance because it is influenced by several factors.

Therefore, appropriate and clearly defined objectives should be established against which actual performance can be measured. Performance measurement should also be carried out at the right time and at regular intervals; otherwise, evaluation may fail to serve its intended purpose.

Financial statements such as the Balance Sheet, Statement of Profit and Loss, and Cash Flow Statement should be prepared and reviewed periodically, including on an annual basis, to assess the organization's financial performance.

3. Analyzing Variance

After measuring actual performance and comparing it with the established standards, there may be variations or deviations between actual and expected performance. These variances need to be carefully analyzed.

Strategists should establish an appropriate tolerance limit within which deviations from the standard may be considered acceptable. A positive deviation indicates performance that is better than the established standard or target. However, consistently exceeding targets may also require examination to determine whether the standards were set appropriately.

A negative deviation is generally a matter of concern because it indicates a shortfall in performance. In such cases, strategists must identify the underlying causes of the deviation and determine the appropriate corrective measures.

The analysis should therefore focus not only on the extent of the variance but also on the reasons behind it.

4. Taking Corrective Action

Once deviations in performance have been identified and their causes analyzed, it becomes necessary to take appropriate corrective action.

If actual performance consistently falls below the desired level, strategists should conduct a detailed analysis of the factors responsible for the shortfall. These may include inadequate resources, ineffective processes, changing market conditions, poor implementation, unrealistic targets, or weaknesses in the existing strategy.

If the analysis indicates that the organization's capabilities and resources do not match the performance requirements, management may need to revise the established standards or objectives. However, standards should not be lowered merely to accommodate poor performance; such a decision should be based on a careful assessment of organizational capabilities and external conditions.

In exceptional circumstances, management may need to undertake the more significant step of reformulating the strategy. This requires returning to the strategic management process, reassessing the organization's internal and external environment, revising strategic plans, and reallocating resources in accordance with the revised strategy. In effect, strategy reformulation may require the organization to revisit the earlier stages of the strategic management process.

Thus, the strategy evaluation process is a continuous cycle of setting standards, measuring performance, analyzing deviations, and taking corrective action, enabling an organization to remain aligned with its strategic objectives and changing business environment.