Student Learning Notes
MCR008 – Corporate Strategy
Student Learning Notes
Topic 11: Strategy Evaluation
(Chapter 12 – Strategy Evaluation)
1. Explain why companies have to use strategy evaluation to formulate and adjust their strategies.
What are the stages of the strategic management process at which companies evaluate
strategies?
Many strategy scholars distinguish several steps in the strategic management process. At the start,
companies make decisions about their mission and the objectives of their strategy. The next step is the
strategy formulation and implementation process is an analysis of the external environment of the
companies, which allows managers to identify opportunities and threats. This is followed by an analysis
of the internal environment to determine the strengths and weaknesses the companies possess to
respond to the opportunities and threats presented in the external environment. By matching the
external opportunities and threats with the internal strengths and weaknesses, managers make
strategic choices by selecting from the range of strategy alternatives. Top managers compare and
evaluate the strategy alternatives to determine their appropriateness for achieving the mission and
objectives of the company. As a result of their strategic choices, managers select the strategy
alternative that is the most appropriate to the company’s mission and goals. This choice is the strategy
that will be implemented by the company.
Strategy evaluation is an important part of strategy. Strategy that is formulated and any adjustment to
changing circumstances require the evaluation of such strategy. Strategy has a deliberated pattern,
which shows the direction and the performance of the company – this would certainly not possible
without strategy evaluation. Strategy evaluation includes the appraisal of plans and the results of plans
that centrally concern or affect the basic mission of the enterprise.
2. What is scenario planning and how does it assist companies in making informed strategic choice
while assessing alternatives?
Scenario planning is the structural use of management judgement to construct multiple script-like
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characterisations of possible futures or developments of the situation. It can be used to avoid the
pitfalls of more traditional methods. The US Army developed scenario planning and war gaming in the
1950s. These characteristics focus on the dynamics of how a particular future might unfold by studying
causal relationships, dominating trends, the behaviour of key players and internal consistency. The
resulting multiple scenarios attempt to bind the uncertainties that are seen to be inherent in the future.
This tool enables companies to evaluate a given strategy under the range of possible futures that might
develop. Most commonly, scenario planning is used in the evaluation of proposed strategies and the
strategic choice of the most appropriate strategic alternative. The process of evaluation may identify
and include new ideas and, therefore, lead to the formulation of new strategies.
The evaluation of strategy within the scenario planning process has to meet the following criteria:
 Transparency — the presentation of results needs to be understood and trusted. The process of
scenario planning should be clear to all managers from various divisions of the company. The
decision makers can share common knowledge and enhance communication among them.
 Ease of judgement — less chance of errors in the process of questioning and reasoning. This can be
achieved by judgement performed in a number of simple steps familiar to the decision makers. The
simplicity of the judgement process and the limits placed on its duration will also avoid boredom
and fatigue among the decision makers.
 Versatility — the evaluation should be able to incorporate both financial and nonfinancial
objectives. It is important to avoid focusing only on the more easily measured financial outcomes
but this must also include a broader range of attributes such as risk, interest rates, currency
exchange and government warranties to certain businesses.
 Flexibility — changes in perspective can be accommodated as insights and understanding increase,
and alternative perspectives of the different participants in the decision making process can be
modelled and compared.
Scenario planning should be primarily used as a preliminary phase in the decision-making process. This
will enable decision makers to clarify their ideas before moving on to a formal decision analysis method
that has been designed to support decision making under conditions of uncertainty.
3. How do companies quantify their value? Is there a difference between shareholder and company
value? Why?
Value can be created in two ways: by production and by commerce. Production creates value by
physically transforming products that are less valued by customers into products that are more valued
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by customers; for example, turning clay into coffee mugs. Commerce, on the other hand, create value
not by physically transforming products, but by repositioning them in space and time. Trade involves
transferring products from individuals and places where they are less valued to individuals and locations
where they are more valued. Similarly, speculation involves transferring products from a point in time
where the product is valued less to a point in time where it is valued more. Thus, the essence of
commerce is creating value through arbitrage across time and space. Here the term ‘value’ has the
meaning of economic value, which is worth as measured in monetary units. The difference between the
value of a company’s output and the cost of its material inputs is its value added. Value added is equal
to the sum of all the income paid to the suppliers of factors of production. Thus:
Value added = Sales revenue from output less Cost of material inputs
= Wages/Salaries + Interest + Rent + Royalties/Licence fees
+ Taxes + Dividends + Retained profit
For public-listed companies, the discounted cash flow value of the company is equal to the market value
of the company’s securities (plus any other financial claims such as debt and pension fund deficits).
Thus, shareholder value is calculated by subtracting the debt (and other non-equity financial claims)
from the discounted cash flow value of the company. So long as full information about a company’s
prospects reaches the share market and this information is efficiently reflected in stock prices — the
company value less debt is roughly equalled to the share market value of a company’s equity. However,
the stock market’s performance is dependent on a lot of factors – and is subject to bubbles, fads, and
crashes./ In the case of the technology bubble of the late 1990s, share prices of technology, media, and
telecommunications companies were inflated by over-optimistic expectations of their future earnings –
leading to the ‘collapse’ of some of these companies’ share prices.
4. What are the factors of successful performance of companies according to the McKinsey 7-S
model?
The 7-s McKinsey model describes the seven factors critical for effective strategy execution:
1. Strategy. The positioning and actions taken by an enterprise in response to or anticipation of
changes in the external environment, intended to achieve competitive advantage.
2. Structure. The way in which tasks and people are specialised and divided, and authority is
distributed; how activities and reporting relationships are grouped; and how the mechanisms by
which activities in the organisation are coordinated.
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3. Systems. The formal and informal procedures used to manage the organisation, including
management control systems, performance measurement and reward systems, planning, budgeting
and resource allocation systems, and management information systems.
4. Staff. The people, their backgrounds and competencies; how the organization recruits, selects,
trains, socializes, manages the careers, and promotes employees.
5. Skills. The distinctive competencies of the organization; what it does best along dimensions such as
people, management practices, processes, systems, technology, and customer relationships.
6. Style/culture. The leadership style of managers — how they spend their time, what they focus their
attention on, what questions they ask of employees, how they make decisions; it also reflects the
organisational culture (the dominant values and beliefs, the norms, the conscious and unconscious
symbolic acts taken by leaders (job titles, dress codes, executive dining rooms, corporate jets,
informal meetings with employees).
7. Shared values. The core or fundamental set of values that are widely shared in the organisation and
serve as guiding principles of what is important; vision, mission, and values statements that provide
a broad sense of purpose for all employees.
5. What are key success factors that lead to successful performance of companies? How can
company managers identify these factors?
Key success factors are the factors that consistently lead to the success of a strategy. These factors have
also been called critical success factors or just success factors. Evaluation of success
and failure depends on the perceptions of managers who judge the performances of strategies. These
judgements may vary from generation to generation. Further, what may be perceived as a failure in the
short term (e.g. a strategy to provide additional services to customers at no extra cost to the customer
that has led to increased operational costs), in the long term may be assessed as success (additional
services to customers have changed the market positioning of the company — instead of being
perceived as a middle-marker player, the company has gradually moved to the upmarket segment).
Increased costs on R&D may be evaluated as a failure from a financial perspective in the short term, but
such investment may have led the company to achieve market leadership in innovation and have
increased profitability in the long run.
It is common for companies to be able to identify the main internal factors influencing their
performance, for example, building a new business, divesting an asset or downsizing. The challenge is to
identify external factors that represent threats and opportunities, such as the shifts in demand,
customer behaviour, industry structure, regulation and the macroeconomic environment. The best
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approach for managers to identify those factors is to bring the company’s managers together on a
regular basis so that they can collectively identify emergent issues. ‘Each manager should provide a
rationale for why any issue raised is critical.’ A small team of senior executives should review all such
issues, designating some as critical and highlighting others for continued tracking.
6. ‘Formulating strategy used to be a one-off task, but nowadays it is an ongoing and continuous
process’. Do you agree with this statement? Explain your reasoning.
Yes, most people would agree with this statement. Strategy formulation and implementation is not a
static process – it is so dynamic because of the fast-moving market environment and market complexity
that organisations increasingly face. There are many players in the market – the company, the
competitors, suppliers, customers and also governments play an increasing role in strategy formulation
and implementation. Business models need to be reassessed all the time. Businesses must continually
look for opportunities and foresee any threats presented in the external environment. Organisational
goals continuously change because the environment has changed. Organisations need to be flexible,
resilient and adaptable to changes. Managers need to adjust their companies to the fast changing,
unpredictable and uncertain environment. A successful organisation will therefore not be able to
maintain its success by formulating strategy as a one-off task – it must be seen as an ongoing and
continuous process which can affect and is affected by changes in the environment.
7. ‘In the dynamic market environment with high-speed change, there is no need for planned
strategies; instead, companies should develop and implement emergent strategies.’ Do you agree
with this statement? Why or why not?
Partly disagree with this statement because planned strategies allow companies to be protected from
chaos. Moreover, in times of uncertainty, strong commitment to discipline and plan helps firms to be
better protected from risks. Scenario planning can be used to prepare companies for possible futures.
Partly agree with this statement because companies should be agile in their response to the
environment by reconfiguring their resources and developing dynamic capabilities. The role of an
emergent strategy is to assist managers to adjust their companies to the fast changing, unpredictable
and uncertain environment. The environment also changes organisational goals. As a result, managers
have to evaluate their strategies against the changed goals rather than their original goals. Managers
should adopt ‘decision making under uncertainty’ techniques such as scenario planning and decision (or
management) science.
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8. ‘The company value is more important than the shareholders’ value.’ Do you agree with this
statement? Why or why not?
I agree with this statement. The maximisation of company value is more important than the
maximisation of shareholder value because focusing on the value of the company as a whole assists in
identifying the fundamental drivers of company value. In addition, when the company achieves its
value, shareholder value is ultimately the outcome of such process. However, top level executives could
sometimes be more concerned with returning value for the shareholders rather than building the
company value over the long term. A company that defies such logic is Apple – for years, Apple has not
given any dividends for its shareholders (minimal shareholders’ value) but the stock price has climbed
tremendously and the company has huge cash reserves. The company value is ultimately important and
Apple’s shareholders are happy in the long run even though they are not earning dividends in the shorttime period.
9. ‘A company growing at an annual rate of 40 per cent is likely to double its size within two years. A
company growing at a 20 per cent rate might be able to double in size in four years, whereas one
growing by 15 per cent is likely to achieve this within seven years. Sustainable long-term growth
can be achieved at steady rates’. Do you agree with this statement? Why? What are the
challenges of rapid growth? Use real-life examples to discuss rapid growth.
Sustainable long-term growth can be achieved but it would probably not happen in such a linear way.
There are a lot of factors that come into play when we are talking about growth, right from the national
level to the lowest denominator of divisions/departments within organisations. We are still reeling from
the effects of the Global Financial Crisis – some companies that were successful 10 years ago have
dropped from the list, other companies that were operating in a smaller scale 10 years ago have also
grown. Sustainable long-term growth for some companies does not happen because of such crisis in the
external environment. Government policy needs to be framed to maintain growth over the next 10
years or even 50 years. Structural reforms need to happen and fast-growing emerging countries must be
supported.
It is difficult to support the statement because it depends on the home country of the organisation, the
host country in which the organisation intends to expand, the general environment (demographic,
socio-economic, technological, and other segments), the industry environment, and the competitive
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environment. It also very much depends on the internal environment of the organisation as to whether
it has the right resources, capabilities and core competencies to compete now as well as sustain the
growth over the long-term.
10. Do you think speed of organisational response to market changes is the most critical factor for
company performance? Explain your position.
The speed of a response is important because in a time of a rapid, fundamental, and universally
perceptible change, expanding roles of governments, re-evaluation of imbalances in global trade and
capital markets, and pervasive uncertainty, companies have to continuously reassess their business
models to unlock unexpected opportunities. It is imperative that companies engage in uncertainty and
use scenario planning in order to become resilient and flexible to contend with any factors of the
environment. The dynamic environment makes it critically important for the company to make decisions
when the time is right. Companies have to develop and sharpen their skills of truly ‘dynamic
management’. If companies delay their decisions, the costs of opportunities may rise, the costs of
investments may escalate, and losses can accumulate. At the same time, decisions made too early can
lead to bad choices or excessive exposure to risks.
11. ‘In uncertain macroeconomic conditions, scrutiny of the relationship between business and
society is higher and companies focus their corporate social responsibility efforts to boost their
impact in a resource-constrained environment.’ Discuss this statement.
Companies’ efforts of building their relationships with business and society enable them to articulate
their commitment towards social responsibility to a broader community. Such efforts also allow
companies to develop socially complex resources. Social complexity of a company’s resources means
that it is beyond the company’s ability to systematically manage and influence these resources. A wide
variety of resources may be socially complex, for example, the interpersonal relationships among
managers in a company, a company’s culture, and its reputation among customers and suppliers. Often
it is clear how these socially complex relations add value to the company, with hopefully is little or no
causal ambiguity about the link between the resources and competitive advantage. At the same time,
such understanding does not necessarily lead companies without these socially complex resources to
process their creation.