STRATEGY EVALUATION

INTRODUCTION

Reasons
for Strategy Evaluation

Evaluation of Business Strategy

(i)              
Are
the objectives of the business appropriate?

(ii)   
Are
the major policies and plans appropriate?

(iii)         
Do
the results obtained to date confirm or refute the critical assumptions
on which the strategy rests?

An implemented strategy must be monitored in order to determine the extent to which it is resulting in the achievement of its set objectives.

Strategic managers must be on the watch out for early signs of the responsiveness of the market place to their strategies. They must also provide the means for monitoring and controlling to ensure that their strategic plan is followed adequately, properly and correctly. The underlining and ultimate test of a strategy is its proven ability to achieve its ends, i.e., the actual annual objectives, long-term objectives and mission.

In the final analysis, a company is said to be successful if only its strategy achieves its objectives.

Approaches to Strategy Evaluation

Approaches to strategy evaluation at the corporate level vary with a fiim”s make up. In an enterprise with a broad-based diverse revenue base, the main analytical considerations are

(i) appraising the health of the firm”s portfolio;

(ii) diagnosing the relative long-term attractiveness of each business coordinatedin the portfolio;

(iii) choosing when and how to upgrade the performance of the total business portfolio. This should be through stronger co-ordination and management of the existing business, the addition of new business units to the firm”s makeup and/or divestiture of the weak performers and misfits.

In diversified firms, corporate managers do little more than review and approve line-of-business strategies. On some occasions, they may suggest broad business strategy direction. However, the specifics of business level and functional area strategies are typically delegated to subordinate managers with profit-and-loss responsibility for particular business units and product lines. Usually, creating a fit between corporate and business strategies is something that corporate managers and business unit managers often negotiate.

Internal consensus must be reached regarding whether and how related activities of the various business units will be co-ordinated. Corporate management has to be convinced that the chosen business-level strategy has an attractive corporate payoff and is willing to provide whatever corporate-level resources are needed for successful strategy implementation. It should be noted that business strategy must be responsive to corporate priorities and match up with both corporate resources and long-term direction. So, there is a two-way traffic between the analysis of corporate and business strategies.

The situation of the
single-business enterprise contrasts that of the diversified firms. In
single-business or dominant-business enterprises evaluating the strategy of the
core business is the centre of corporate headquarters” attention. After
this, diversification and other portfolio questions in relation with corporate
strategy could be addressed. In this type of a firm, corporate strategy and
business strategy analysis are not divorced for the following reasons:

a.                
Activities
outside the core business contribute minimally to the sales and the profits.

b.                
The
questions of where do we go from here hinges on the health and attractiveness
of the main business. So in dominant-business companies, corporate strategy
takes its clues from the business strategy instead of the reverse.

Whichever kind of
approach is adopted, sound strategy analysis starts with a probing of the
organisation’s present strategy and business makeup.

Techniques of
Portfolio Evaluation

The major techniques of
identifying and evaluating portfolio of business in any organisation are:

Boston Consulting Growth
(BCG) or growth share matrix.

The GE-a-cell directional
approach.

Hofer author d. little
product/market evolution matrix

The general electric
model.

But by far, the most
popular approach is the BCG approach or the growth share matrix.

Growth-Share Matrix for Evaluating Diversified Portfolios

The most popular
analytical technique for evaluating the overall makeup of a diversified growth
of business units involves the use of Boston Consulting Growth (BCG) or growth
share matrix. This involves the construction of a business portfolio matrix
which is a two-dimensional graphic portfolio of the comparative positions of
different businesses.

The revealing variables
in this approach have been industry growth rate, market share, long-term
industry attractiveness, competitive strength and stage of product or market
evaluation.

The use of
two-dimensional business portfolio matrix as a tool for corporate strategy
evaluation is based on relative simplicity of constructing them as well as the
clarity of the overall picture that they produce.

The first business
portfolio matrix to receive widespread usage was a four-square grip pioneered
by Boston Consulting Group (BCG). The matrix is found using industry growth
rate and relative market share as the axes. Each business unit in the corporate
portfolio appears as a “bubble” on the four-cell matrix with the size of each
“bubble” or circle scaled according to the percent of revenues it represents in
the overall corporate portfolio.

The BCG technique
arbitrarily place the dividing line between “high” and “low” industry growth
rates at around twice the real GND growth rate plus inflation.

Relative Market
Share

This is defined as the
ratio of a business’s market share to the market share held by the largest
rival firm in the industry. The market share is measured in terms of unit
volume and not in naira.

Example 1:  Assume business A has 15% share of
the industry’s total

volume and the share held
by the largest rival is 30%, then A”s relative market share is 0.5.

Example 2:  If business B has a market-leading
share of 40% and its largest rival has a 30%
share, then B”s relative market share is 1.33

The
implication of BCG relative market share matrix is that only business
units will have relative market share values greater than one.

The business units in the
portfolio that trails behind the rival firms in the market share will have
ratios below 1.0.

The most stringent BCG
standard calls for the border between “high” or “low” relative market shares
with the grid to be set at 1.0. A ratio of 0.10 indicates that the business has
a market share of only 1.10 of the market share of the largest firm in the
market while a ratio of 0.80 indicates a market share that is 4/5 or 80% as big
as the leading firm”s share. However, locating the dividing line between
“high” and “low” at about 0.75 (75%) or 0.8 (80%) is a reasonable compromise.

The
advantages of using relative market share include:

(i)             
It
is a better indicator of comparative market strength and competitive position.

(ii)           
It
is more likely a reflection of relative cost based on experience

in producing the product and economy of large-scale
production.

Question Marks
and Problem Children

Rapid market growth makes such business units to be
attractive. They have relatively low market share which raises the doubt on the
possibility of the profit potential associated with market growth being
realistically captured, hence the question mark designation.

Question mark businesses have financial needs because
of their low market share and thinner profit margins. The challenge to the
strategic decision maker is to decide whether it is worthwhile to use the
corporate money to support the question mark business. ? BCG recommends two
options for this group of businesses, namely,

^i.                
Aggressive grow-and-build strategy to capitalise on the high growth
opportunity.

^ii.              
Divestiture, in event that the grow-and-build strategy constitutes too
much of a financial risk.

Therefore, the strategy prescription for managing questions mark/problem children business is to divest those that
are weaker and less attractive and groom the attractive ones to become
tomorrow”s “stars”.

Stars

The “stars” are the businesses with high relative
market share position in high growth markets. They offer both excellent profit
and excellent growth opportunities. The business enterprises depend on them to
boost overall performance of the total portfolio.

Stars require large cash investments to support
expansion of production facilities and working capital needs. They often tend
to generate their own large internal cash flows because of low-cost advantage
resulting from economies of scale and production experience.

According to BCG, some stars are virtually
self-sustaining in terms of cash flow and make little demand on the corporate
purse. Yong stars however, require substantial investment capital beyond what
they can generate on their own and may thus be cash hogs.

Cash Cows

Dogs

The BCG Growth-Share Business Portfolio
Matrix

                                                            RELATIVE
MARKET SHARE POSITION

Dogs are
retained only as long as they can contribute positive cash flow and not tie up
assets and resources that could be more profitably redeployed.

There are
two disaster sequences in the BCG scheme: when
a star’s position in the matrix erodes over time to that of a problem child
then it falls to become a dog and when a cash cow loses a market leadership to
the point where it becomes a hog on the decline. Other strategic mistakes include over
investing in a safe cash cow; underinvesting in a question mark so that
instead of moving into the “star” category, it tumbles into a dog; and short
gunning resources thinly over many question marks rather than concentrating
them in the best question mark to boost their chances of becoming “stars” not
harvested but are maintained in a healthy status to sustain long-term cash
flow.