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I. The Evaluation of Business Strategy (Rumelt) An important step in the formulation and execution of strategy is strategy evaluation. Strategy Evaluation Testing and probing the strategy for critical flaws. • Are the objectives appropriate? • Are major policies and plans appropriate? • Do results to date confirm or refute critical assumptions underpinning the strategy? (This procedure is in contrast to …) Performance Evaluation Has the business been creating or destroying wealth for its owners? • Economic profitability (returns in excess of cost of capital?). • Accounting measures of performance (e.g., ROS, ROA). • Market measures of performance (e.g., sales growth, market share). II. Principles of Strategy Evaluation Tests for a Sound Strategy • Consistency – Goals and policies are mutually consistent. • Consonance – Adaptive to changes in the environment. • Advantage – Provides a competitive advantage. • Feasibility – It is possible with available resources. II. A. Consistency The strategy must not entail mutually inconsistent goals and policies. To evaluate the consistency of a strategy, you should ask … • Are the business’s internal operations (e.g., purchasing, operations, marketing and sales, service) and resource allocation processes consistent with each other? • Are the business’s internal operations consistent with business objectives and market economics? II. B. Consonance The strategy must match and adapt the business to its environment (both its market and the broader non-market environment). To evaluate the current consonance of a strategy with its market environment, you should ask … • Why does the business exist in its current form? • Who and where are our customers and potential customers? How many customers are there? • Are the boundaries of the business appropriate? • What are the fundamental economic forces at work in our market? • How does the business unit create economic value, i.e., what is its value-creation proposition? • What are the drivers of consumer willingness to pay (benefit drivers)? • What are the drivers of costs (cost drivers)? • What are the different customer segments we serve and what are the benefit and cost drivers within each segment? • Which activities make money for the business? To assess whether consonance with the market environment is likely to persist into the future you should ask … • What are likely trends in demand and technology that might affect the viability of our value-creation proposition? • Are we vulnerable to “discontinuities?” Can we exploit “discontinuities?” – Significant redefinition of the served market. – “Outside-the-box” value-creation propositions. Consonance is critical, but often overlooked because companies typically focus on their key competitors. Threats to an established way of doing business often come from outside the business’s immediate circle of rivals. II. C. Advantage A good strategy must provide for the creation and sustainability of a competitive advantage. A firm with a competitive advantage will always capture some of the economic value it creates. To assess whether a business’s strategy leads to a competitive advantage, you should ask … • Does the business create more economic value than its competitors in its served markets? – Cost position relative to rivals. – Differentiation position relative to rivals.