EVALUATION AND EVALUATION AND SELECTIONSELECTION

Chapter 6Chapter 6

ObjectivesObjectives

Upon completion of this chapter, you should be Upon completion of this chapter, you should be able to:able to:

• Critically understand the process of strategy Critically understand the process of strategy evaluation.evaluation.

• Identify criteria to evaluate strategic optionsIdentify criteria to evaluate strategic options• Evaluate your organisations strategy using Evaluate your organisations strategy using

different criterions.different criterions.• Perform gap analysisPerform gap analysis• Explain how strategic decision making is Explain how strategic decision making is

concluded in your organisation.concluded in your organisation.• Optimise your preferred strategic option and plan Optimise your preferred strategic option and plan

how to make a case in support of your option.how to make a case in support of your option.

IntroductionIntroduction

Strategy can neither be formulated nor Strategy can neither be formulated nor adjusted to changing circumstances adjusted to changing circumstances without a process of strategy without a process of strategy evaluation an selection. Whether evaluation an selection. Whether performed by an individual or as part of performed by an individual or as part of an organisation review procedures, an organisation review procedures, strategy evaluation and selection forms strategy evaluation and selection forms an essential step in the process of an essential step in the process of guiding an enterprise.guiding an enterprise.

Strategy EvaluationStrategy Evaluation

• It is an attempt to look beyond the It is an attempt to look beyond the obvious facts regarding the short-obvious facts regarding the short-term health of a business and term health of a business and appraise instead those more appraise instead those more fundamental factors and trends that fundamental factors and trends that govern success in the chosen field of govern success in the chosen field of endeavor.endeavor.

The Challenge of EvaluationThe Challenge of Evaluation• It is accomplished, the products of a It is accomplished, the products of a

business strategy evaluation are answers business strategy evaluation are answers to these three questions:to these three questions:– Are the objectives of the business appropriate?Are the objectives of the business appropriate?– Are the major policies and plans appropriate?Are the major policies and plans appropriate?– Do the results obtained to date confirm or Do the results obtained to date confirm or

refute critical assumptions on which the refute critical assumptions on which the strategy rests?strategy rests?

• Devising answers to these questions is Devising answers to these questions is neither simple nor straightforward. It neither simple nor straightforward. It requires reasonable store of situation-requires reasonable store of situation-based knowledge and more than the usual based knowledge and more than the usual degree of insight.degree of insight.

• The major issues which make The major issues which make evaluation difficult and with which evaluation difficult and with which the analyst must come to grips are:the analyst must come to grips are:– Each business strategy is unique. Each business strategy is unique.

Strategy evaluation must rest on the Strategy evaluation must rest on the type of situational logic that does not type of situational logic that does not focus on “one best way” but which can focus on “one best way” but which can be tailored to each problem as it is be tailored to each problem as it is faced.faced.

– Strategy is centrally concerned with the Strategy is centrally concerned with the selection of goals and objectives. Many selection of goals and objectives. Many people including seasoned executives people including seasoned executives find it much easier to set or try to find it much easier to set or try to achieve goals than to evaluate them.achieve goals than to evaluate them.

• Formal systems of strategic review, Formal systems of strategic review, while appealing in principal can while appealing in principal can create explosive conflict situations. create explosive conflict situations. Not only are there serious questions Not only are there serious questions as to who is qualified to give an as to who is qualified to give an objective evaluation, the whole idea objective evaluation, the whole idea of strategy evaluation implies of strategy evaluation implies management by “much more than management by “much more than results” and runs counter to much of results” and runs counter to much of currently popular management currently popular management philosophy.philosophy.

Criteria for EvaluationCriteria for Evaluation(Refer to page 195)(Refer to page 195)Johnson & Scholes – identified 6 broad criteria Johnson & Scholes – identified 6 broad criteria

against which to evaluate options:against which to evaluate options:1.1.ConsistencyConsistency with the purpose of the with the purpose of the

organisation: a prime test for evaluation and organisation: a prime test for evaluation and selecting strategies.selecting strategies.

2.2.SuitabilitySuitability of the strategy for the environment of the strategy for the environment within which the organisation operates.within which the organisation operates.

3.3.ValidityValidity of the projections and data used in of the projections and data used in developing the option must be tested.developing the option must be tested.

4.4.Feasibility Feasibility 5.5.Business riskBusiness risk also needs to be assessed also needs to be assessed

because it may be unacceptable to the because it may be unacceptable to the organisation.organisation.

6.6.Attractiveness to stakeholders:Attractiveness to stakeholders: some options some options maybe more appealing than others to maybe more appealing than others to shareholders, employees, government etcshareholders, employees, government etc

Gap AnalysisGap Analysis• It is a business assessment tool enabling a It is a business assessment tool enabling a

company to compare its actual company to compare its actual performance with its potential performance with its potential performance.performance.

• Provides the company with insight to areas Provides the company with insight to areas which have room for improvementwhich have room for improvement

• Process involves determining, documenting Process involves determining, documenting and approving the variance between and approving the variance between business requirements and current business requirements and current capabilities.capabilities.

• Gap analysis naturally flows from Gap analysis naturally flows from benchmarking or other assessments.benchmarking or other assessments.

• Once the general expectation of Once the general expectation of performance in the industry is performance in the industry is understood then it is possible to understood then it is possible to compare that expectation with the level compare that expectation with the level of performance at which the company of performance at which the company currently functions.currently functions.

• This comparison becomes gap analysis. This comparison becomes gap analysis. Such analysis can be performed at the Such analysis can be performed at the strategic or operational level of an strategic or operational level of an organisation.organisation.

• At some point a gap will have emerged At some point a gap will have emerged between what the existing products offer between what the existing products offer the consumer and what the consumer the consumer and what the consumer demands. That gap has to be filled if the demands. That gap has to be filled if the organisation is to surivive and grow.organisation is to surivive and grow.

Strategic investment decision Strategic investment decision makingmaking• This involves the process of identifying, This involves the process of identifying,

evaluating and selecting among projects that evaluating and selecting among projects that are likely to have a significant impact on the are likely to have a significant impact on the organisation’s competitive advantage.organisation’s competitive advantage.

• More specifically the decision will influence More specifically the decision will influence what the organisation does, where it does what the organisation does, where it does and/or how it does it.and/or how it does it.

• Strategic investment decision making Strategic investment decision making process is arguably one of senior process is arguably one of senior management’s greatest challenges. There is management’s greatest challenges. There is a critical need to get these decisions right.a critical need to get these decisions right.

• It has all the elements of a cost-benefit It has all the elements of a cost-benefit analysis.analysis.

Making a caseMaking a case• Effective communication has 6 main Effective communication has 6 main

characteristics:characteristics:– RelevanceRelevance– ReliabilityReliability– UnderstandabilityUnderstandability– SignificanceSignificance– SufficiencySufficiency– practicalitypracticality

• The way you make a case for your The way you make a case for your strategic option will depend on your strategic option will depend on your organisation’s procedures and organisation’s procedures and expectations.expectations.

• The following checklist can be used The following checklist can be used as a guide (page 207) :as a guide (page 207) :– Define the strategy proposedDefine the strategy proposed– Suitability of the proposalSuitability of the proposal– AcceptabilityAcceptability– FeasibilityFeasibility– TimingsTimings– Gaining supportGaining support