How to Evaluate Strategy

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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 another might place primary reliance in modern machinery and an extensive distribution system. Neither strategy is "wrong" nor "right" in any absolute sense; both may be right or wrong for the firms in question. Strategy evaluation must, then, rest on a type of situational logic that does not focus on "one best way" but which can be tailored to each problem as it is faced. Strategy is centrally concerned with the selection of goals and objectives. Many people, including seasoned executives, find it much easier to set or try to achieve goals than to evaluate them. In part this is a consequence of training in problem solving rather than in problem structuring. It also arises out of a tendency to confuse *This paper is a revised and updated version of my paper "The Evaluation of Businss Strategy,"


which appeared in Glueck, William F. Strategic Management and Business Policy. New York: McGraw-Hill, 1980. An abridged version of that paper also appeared in Quinn, James Brian; Mintzberg, Henry; and Robert M. James. The Strategy Process. Englewood Cliffs, New Jersey, 1988.


values, which are fundamental expressions of human personality, with objectives, which are devices for lending coherence to action. Formal systems of strategic review, while appealing in principal, can create explosive conflict situations. Not only are there serious questions as to who is qualified to give an objective evaluation, the whole idea of strategy evaluation implies management by "much more than results" and runs counter to much of currently popular management philosophy. THE GENERAL PRINCIPLES OF STRATEGY EVALUATION The term "strategy" has been so widely used for different purposes that it has lost any clearly defined meaning. For our purposes a strategy is a set of objectives, policies, and plans that, taken together, define the scope of the enterprise and its approach to survival and success. Alternatively, we could say that the particular policies, plans, and objectives of a...
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