How to Evaluate Strategy
EVALUATING BUSINESS STRATEGY*
Richard P. Rumelt November 28, 1993
trategy can neither be formulated nor adjusted to changing circumstances without a process of strategy evaluation. Whether performed by an individual or as part of an organizational review procedure, strategy evaluation forms an essential step in the process of guiding an enterprise. For many executives strategy evaluation is simply an appraisal of how well a business performs. Has it grown? Is the profit rate normal or better? If the answers to these questions are affirmative, it is argued that the firm 's strategy must be sound. Despite its unassailable simplicity, this line of reasoning misses the whole point of strategy—that the critical factors determining the quality of long-term results are often not directly observable or simply measured, and that by the time strategic opportunities or threats do directly affect operating results, it may well be too late for an effective response. Thus, strategy evaluation is an attempt to look beyond the obvious facts regarding the short-term health of a business and appraise instead those more fundamental factors and trends that govern success in the chosen field of endeavor. THE CHALLENGE OF EVALUATION However it is accomplished, the products of a business strategy evaluation are answers to these three questions: Are the objectives of the business appropriate? Are the major policies and plans appropriate? Do the results obtained to date confirm or refute critical assumptions on which the strategy rests? Devising adequate answers to these questions is neither simple nor straightforward. It requires a reasonable store of situation-based knowledge and more than the usual degree of insight. In particular, the major issues which make evaluation difficult and with which the analyst must come to grips are these: Each business strategy is unique. For example, one paper manufacturer might rely in its vast timber holdings to weather almost any storm while
Richard P. Rumelt November 28, 1993
trategy can neither be formulated nor adjusted to changing circumstances without a process of strategy evaluation. Whether performed by an individual or as part of an organizational review procedure, strategy evaluation forms an essential step in the process of guiding an enterprise. For many executives strategy evaluation is simply an appraisal of how well a business performs. Has it grown? Is the profit rate normal or better? If the answers to these questions are affirmative, it is argued that the firm 's strategy must be sound. Despite its unassailable simplicity, this line of reasoning misses the whole point of strategy—that the critical factors determining the quality of long-term results are often not directly observable or simply measured, and that by the time strategic opportunities or threats do directly affect operating results, it may well be too late for an effective response. Thus, strategy evaluation is an attempt to look beyond the obvious facts regarding the short-term health of a business and appraise instead those more fundamental factors and trends that govern success in the chosen field of endeavor. THE CHALLENGE OF EVALUATION However it is accomplished, the products of a business strategy evaluation are answers to these three questions: Are the objectives of the business appropriate? Are the major policies and plans appropriate? Do the results obtained to date confirm or refute critical assumptions on which the strategy rests? Devising adequate answers to these questions is neither simple nor straightforward. It requires a reasonable store of situation-based knowledge and more than the usual degree of insight. In particular, the major issues which make evaluation difficult and with which the analyst must come to grips are these: Each business strategy is unique. For example, one paper manufacturer might rely in its vast timber holdings to weather almost any storm while
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