Richard Rumelt: The Evaluation of Business Strategy

• Each business strategy is unique – strategy evaluation must lie, therefore, on a kind of ‘situational logic’ that looks at the circumstances of each problem and tailors the strategy accordingly.
• Strategy is centrally concerned with the selection of goals and objectives.
• Formal systems of strategic review, while appealing in principle, can create explosive conflict situations, between managers and employees who may be unreceptive to the idea of change.

It is impossible to test a strategy absolutely but it can be tested for critical flaws. Rumelt proposes the following broad criteria or principles of strategy evaluation as a basis for testing these flaws:

1. Consistency: The strategy must not present mutually inconsistent goals and policies.

Rumelt argues that inconsistency in strategy is not merely a flaw in logic. One of the main purposes of strategy is to provide a sensible framework for organizational action, which fits organizational objectives and values. Rumelt cites the example of high-technology organizations facing a strategic choice between offering customized high-cost products with high custom-engineering content and standardized lower-cost products that are sold at higher volume. If senior management does not clearly spell out a consistent view of the organization’s position on these issues, there will always be conflict between the sales, design, engineering, and manufacturing functions.

2. Consonance: The strategy must represent an adaptive response to the external environment and to the critical changes occurring within it.

Rumelt’s test of consonance focuses on the organization’s ability to match and at the same time adapt to its environment, while competing with other organizations that are also trying to adapt and prosper. However, he argues, the main difficulty in evaluating consonance is that most of the critical threats to an organization come from the external environment, and so threaten all organizations in that industry.

Strategic decision-makers may be so absorbed in how to achieve competitive advantage over their rivals that the threat is only recognized after the damage is done.

Rumelt also points out that forecasting techniques such as trend analysis do not normally expose potentially critical changes that come about as a result of interaction between trends. He uses supermarkets as an example to illustrate his point. Supermarkets developed when home refrigeration and an increase in car ownership enabled shoppers to buy in bulk. In turn, the rise of the supermarket, car ownership, and the growth in suburban homes led to the development of out-of-town retail parks.

Rumelt states that the key to the test of consonance is to first of all understand why the organization exists (i.e. the basic economic foundation that supports and defines the organization), and then to study the consequences of key changes.

3. Advantage: The strategy must provide for the creation and/or maintenance of a competitive advantage in the selected area of activity.

The test of competitive advantage is to see whether the strategy will allow the organization to capture the value it creates. Competitive strategy is the art of creating and exploiting those advantages that are most telling, enduring and difficult to imitate. Therefore, Rumelt says, the strategy must provide for the creation and/or maintenance of a competitive advantage arising from one or more of three roots: superior skills, superior resources, and superior position.

4. Feasibility: The strategy must neither overtax available resources nor create unsolvable sub-problems.

Rumelt’s final test of evaluation is feasibility, which looks at how well the strategy would work in practice and how difficult it might be to achieve. In other words, does the organization have the physical, human and financial resources available to effectively implement the strategy? In order to establish this, it is useful to consider the following:

• Does the organization have the problem-solving abilities and special competences required by the strategy? If not, are these easily attainable and affordable?
• Does the organization have the ability to integrate the activities involved in implementing the strategy?
• Does the strategy challenge and motivate key stakeholders i.e. is it acceptable to them?
• How will the competition react and how will the organization cope with that reaction?

The Process of Strategy Evaluation

Rumelt states that the process of strategy evaluation can happen as an abstract, analytical task (sometimes performed by consultants). But more often than not, it is a fundamental element of an organization’s planning, review and control processes.

Some organizations carry out strategy evaluation informally and infrequently while others have formal, detailed strategy review procedures that they carry out on a regular basis. Either way, the quality of strategy evaluation and organizational performance will be determined more by the organization’s capacity for self-appraisal and learning than by the analytic technique employed.

In most organizations, comprehensive strategy review is sporadic, and is usually triggered by a change in leadership or financial performance. Rumelt argues that this is a good thing – he claims that if strategy review was a regular event, the evaluative questions would become automatic and thus inhibit thorough reflection. He also maintains that if a strategy is good in the first place, it does not need constant redevelopment. Another reason for not reviewing the validity of a strategy too frequently is the need to convince competitors that the organization stands firm by its strategy, which is fixed and unshakeable.

Conclusion

Strategy evaluation is the appraisal of plans and their results, which affect the principal mission of an organization. Its focus is the separation between obvious current operating outcomes and the basic factors that underpin success or failure in the chosen industry. The result of strategy evaluation is the rejection, modification or authorisation of strategic plans. It is impossible to demonstrate conclusively that a particular strategy is optimal or that it will work.

However, Rumelt’s four tests of consistency, consonance, advantage, and feasibility provide a basis for effective evaluation. A strategy that fails one or more of these tests has some fairly serious flaws. A strategy that passes all of the tests cannot be guaranteed to succeed but is undeniably better placed for success than one that is shown to be flawed.