Strategy Evaluation is a Waste of Organizational Resources - Essay Example

Strategy Evaluation 2009 The evaluation of a business strategy involves analyzing the company’s performance with respect to its internal resources and external environment. It is not just an analysis of the company’s performance but a broader evaluation of whether the company’s business objectives and plans are appropriate with respect to its competitive positioning, whether its current performance is in line with its initial strategy objectives and planning and also whether the strategies are flexible enough to adapt to the changing circumstances. It is possible to evaluate the financial performance of the company with respect to the competition in quantitative terms but much of the external environment and internal resources of the company may not be quantifiable hence difficult to evaluate. Besides, in the context of the changing business environment, structured strategy evaluation may be considered to be redundant as each company has its unique strengths and weaknesses hence a standardized strategy evaluation may not be appropriate. However, it may also be opined that strategy evaluation is necessary, particularly in the dynamic situation with changing business environment, to analyze whether the organization structure and culture is aligned with the strategic objectives and plans. As Thompson, Stickler and Gambler (2007) said, a winning strategy needs collaboration of the entire organization so that there is enthusiasm and commitment towards organizational success. A company decides on its business strategy only after the evaluation of alternatives available. For example, Dell Computers, in 1984, decided to adopt the build-to-order and direct selling strategies of production and selling, while the major competitors at the time, HP, IBM and Gateway were operating on the strategies of build-to-stock and retailer-driven selling. Dell’s strategy was essentially driven by the external environment that had already become highly competitive. The company needed to develop a competitive strategy rather than a generic strategy, the latter being related to a product that had its social value higher than the cost while the earlier strategy required the generation of some social value for garnering profits (Anderson School). Dell realized that in the face of stiff competition, the only competitive advantage that it could develop was in terms of prices. Towards this end, it developed the novel business strategy in which it did away with the retailer intermediaries, setting up direct contact with customers through the telephone, and more in the 1990s, through the Internet (Achtemeyer, 2002). The direct selling model, by which customers were offered choices of computer configurations, was supported by the build-to-order manufacturing process by which the supply chain was activated only after the customer put in the order and made the payment, either through credit card or cheque, thereafter the marketing executive putting in order with the vendor. On the other hand, the company paid the suppliers of components only after the final assembly, which was done at the company’s factories, and the product supplied to the customer. As a result, the company did not need to maintain any inventory of final products. The competitors, in contrary, stocked computers with retailers and received payment only after delivery. Dell could earn higher margins than its competitors, passing on some of the benefits to customers through lower prices, as a result of its low inventory and dealer costs. Within a very short period of time, Dell captured a major market share and became the leader in the computer hardware industry. The strategy worked for the desktop computer business till the 1990s. Most of the business that was generated through e-commerce was from the corporate clientele. The strategy, however, reached a saturation point thereafter. By the mid-2000s, the desktop computer industry became commoditized with little scope of product differentiation. Gradually, the main customer base for both desktop and laptop computers became individual buyers rather than corporate buyers. Individual buyers preferred to buy after a touch-and-feel evaluation of the product, which was readily available for retailer-driven competitors’ products. Dell began to lose out to competition from this segment. This has been particularly the case for laptop computers, the fastest growing segment in computer manufacturing. Besides, newer players began to emerge in the market, which had the additional advantage of being closer to the locations of the component production bases in Asia. The commoditization of the product meant that the early-mover advantage of the existing players began to diminish. Ways to reduce costs through strategic tie-ups with component manufacturers, availability of high-speed and flexible chips and so on, replaced the cost-cutting advantage of the direct selling model. On the other hand, Dell’s direct selling cum build-to-order model required an elaborate and extremely efficient supply chain that turned out to be more costly in the new circumstances. Hence, the company, in about two decades, found, on evaluation of its business strategy, that the external environment was no longer in alignment with its internal resources. As the company had so long focused on perfecting its supply chain, it had invested little in its research and development and product design capabilities. While, the existing competitors, HP the most important among them, and newer players like Lenovo and Acer, captured market share, particularly in the laptop market, by offering customer-centric products. Hence, Dell has now altered its strategy and has begun to make its physical presence felt through kiosks at retail outlets and discount stores without completely abandoning the direct selling model. However, this inadequate strategic evaluation has cost it with lost market share as Acer has overtaken it by becoming the second largest seller of laptop computers, after HP (Gilmore, 2008). In order to evaluate whether a company’s strategy is aligned with the external environment, Porter’s (1980) Five Forces model postulate that the company’s competitive advantage be analyzed against the following factors: 1) threat of entry of new players, 2) threat of substitutes, 3) bargaining power of suppliers and 4) bargaining power of buyers. Dell at present is faced with a very high competitive scenario as there is a strong threat of new entrants because of the commoditization of the product as well as the development of capabilities of component manufacturers who had earlier been suppliers. The threat of substitutes, too, is high as Dell’s advantage is in the desktop computer market, the demand for which is generated mostly from the corporate clientele, while there has been a shift towards laptop computers. The bargaining power of suppliers is also moderately high as Dell has few exclusive vendors and there is little customer switching costs for the dealers because of the standardization of the production process. Buyers, too, have high bargaining power because of little product differentiation and retailer-driven businesses have an advantage in such situations. For a strategy to succeed, it not only needs to be in consonance with the external and environment (which as we have seen in the case of Dell, was so initially but not any longer) but also needs to be consistent across the organization. Typically, high technology companies face the choice between high cost, customized products and low-cost, standardized products. If the strategic choice of the company is towards the former, it needs to embody a tacit coordination across the organization so that the external face of the company speaks in one voice. Organizational and interdepartmental conflicts would beat the purpose of the strategy (Anderson School, 1999). The strategy must be in consonance with the company’s resources. According to the VIRO (Valuable, Immitability, Rarity, Organization), developed by Barney (2005), Google Inc became the phenomenal search engine company in the 1990s through its unique business strategy. Like Dell, Google did not have any generic advantage in its product, the search engine that earned revenues through the “cost per click” (CPC) model. In the late 1990s, Yahoo was the market leader in the market for paid listings, which had overtaken that for advertisement banners on the Internet. Yet, Google became the leader of the paid listing market by 2003, by modifying the revenue model. It developed the weighted CPC model, which was the ratio between the ad’s real “click through ratio” (CTR) and the statistically derived CTR. By this method, the most clicked results would show on top of the search and the user would probably click on the most searched ads. The marketers whose ads appeared on top on the basis of CTR would have to pay higher as it gave them more visibility through the search engine. As a result of this unique revenue model, Google captured 75 percent of the market share by 2003. Over the years, however, strategic evaluation of the company shows that the business has hit a roadblock because of its organizational culture and lack of consonance between the strategic management and the lower hierarchies of the company. Despite being a listed company, the company had a very closely guarded management style. The company maintained a dual equity structure by which the Class B shareholders had 10 votes to one share while the Class A shareholders had one vote per share (Eisenmann and Herman, 2006). Through this mechanism, the details of which were not shared with the shareholders, allowed the company to manage its strategies closely with little information sharing even within the organization. On the other hand, its operations were fairly democratic, with employees being allowed to innovate products creatively. Many of its newer innovations, like the social networking site or Google News were developed not through any strategic intent but from a bottom-up process. However, increasing diversification has over the years resulted in a perception that the company has lost customer focus even though the company strategy has been avowedly been based on the 70-20-20 principle, in which 70 percent of engineering time is spent on its core product of search engines and ads, 20 percent on related products and 20 percent on newer products. The Balanced Scorecard is a tool to evaluate strategies and monitor performance against strategies of organizations. Developed by Kaplan and Norton (1996), this method provides a metrics to evaluate the company’s performance in terms of financial and non-financial parameters. In addition to financials, the other parameters that are studied are 1) learning and growth, 2) business process and 3) customer focus and satisfaction. Rather than a measurement tool, the Balanced Scorecard is an evaluation system that aims to align the organization with its strategic plans and objectives. However, it is difficult to estimate the qualitative parameters like learning and growth even if business process and customer orientation may still be evaluated on the basis of some desirable parameters. Organizational learning, or organizational knowledge, is comprised on “know what” in terms of data and information, “know how” in terms of procedures, “know why” in terms of understanding and wisdom and “know who” in term of the persons in whom the knowledge is embedded (Krohwinkel-Karlsson, 1999). While the explicit knowledge may be coded and managed, enabling evaluation of the learning process, tacit knowledge available within the organization may defy such codification. Tacit knowledge in a knowledge-based and knowledge-creating company would require substantial amount of socialization among the employees. It may not be possible to measure and evaluate such tacit knowledge within the organization. The idea of single-loop and double-loop learning, through which organizations initially develop problem-solving abilities and thereafter generative knowledge, was developed by Argyris and Schol (1996). In organizations that create such repetitive learning processes, strategy evaluation through the Balanced Scorecard method, which essentially incorporates the learning process becomes extremely difficult. In the Resource-Based-View, human capital in addition to the physical capital, then creates competitive advantage of firms by gearing the different capabilities of resources to be oriented towards the strategic intent. While Porter’s (1985) competitive advantage model was based on the firm’s strategic resources in terms of physical capital, knowledge capital has added more complexity in the evaluation of strategic achievements of firms. In such cases, simulation-based strategic evaluation mechanisms, in which qualitative parameters are attempted to be explained with the help of dummy variables are likely to have limited efficiency in practical purpose. Such stochastic models have the inherent risks of being akin to ad hoc evaluations in which the generative learning processes are not taken into account (Rochet and Rice, 2009). Organizational culture that incorporates learning into the hierarchy is crucial for the strategic success of a company. Take for instance Nokia, the Swedish mobile phone manufacturers, which has been able to upstage larger multinational companies in the electronics space, like Sony Erricson and Motorola, by modifying its strategy in time by focusing on different but growing markets while the competitors remained focused on the larger, but stagnant markets. In the mid 2000s, Nokia, seeing the market for high-value mobile handsets stagnating in Europe, targeted emerging markets like India and China. In these markets, the product development strategy was entirely different from that in the developed market, functionality and price competitiveness being more important than design and style (Woyke, 2008). Operating in a multicultural framework brought with it considerable challenge of adaptation to different cultures. Yet, at the end, Nokia was able to reap the benefits as recession resulted in stagnation of the developed markets more than the emerging markets. Thus, strategy evaluation, though is not a waste of time, cannot be a standardized system. Each company’s positioning, internal resources and external environment is unique and hence its strategy needs to be tailor-made according to its needs. The strategic evaluation should therefore be conducted in a dynamic framework in which the changes in strategy should be analyzed in the context of the changing business environment and internal resources that take into account physical and human capital that may not always be quantifiable. Works Cited Thompson, A., Strickland, A., Gamble, J (2007) Crafting and executing strategy: text and readings 15th ed. New York, NY: McGraw-Hill Irwin Achtmeyer, William, F. (2002), Dell Computer Corporation, Center for Global Leadership, Tuck School of Business, Dartmouth, available at http://mba.tuck.dartmouth.edu/pdf/2002-2-0014.pdf Gilmore, Dan (2008), The New Supply Chain Lessons from Dell, Supply Chain Digest, April 10, http://www.scdigest.com/assets/FirstThoughts/08-04-10.php?cid=1609&ctype=content Anderson School, UCLA (1999) Note on Strategic Evaluation, http://www.anderson.ucla.edu/faculty/dick.rumelt/Docs/Notes/StratEvaluation1999.pdf Eisenmann, T R and K Herman (2006), “ Google Inc.” Harvard Business School. 9-806-105 Rev. February 21 Kaplan, Robert S and David P Norton (1996), The balanced scorecard: Translating into Action, Harvard Business Press Argyris, C and Schon, D.A (1996). Organization learning II: Theory, Method and Practice. Reading, MA: Addison-Wesley Krohwinkel-Karlsson, Anna (2007). Knowledge and Learning in Aid Organizations. Swedish Agency for Development Evaluation. Working Paper 2007:1 Porter, M.F. (1980) "Competitive Strategy", The Free Press, New York, 1980 Porter, Michael (1985), Competitive Advantage: Creating and Sustaining Superior Performance, New York, Free Press Rochet, Marie-Joelle and Jake C Rise (2009), Simulation-based management strategy evaluation: ignorance disguised as mathematics?, CES Journal of Marine Science: Journal du Conseil Advance Access, February 19, 2009 Woyke, Elizabeth, Mobile Firms Fight For Third, Forbes, March 24, 2008, http://www.forbes.com/technology/2008/03/24/mobile-motorola-nokia-tech-wire-cx_ew_0324mobile.html Read More