How to Evaluate Business Strategies

Without a business strategy, success is just a happy accident. A strategy that hasn't been evaluated isn't much better than having no strategy at all. As circumstances shift, strategy evaluation is an essential part of keeping a business on its correct course.

Evaluation isn't easy, but there are many tools available to help make the process go more smoothly. Many times, the only way a business owner evaluates a strategy is to determine whether or not the business is profitable and if revenue has increased compared to previous quarters. However, merely examining short-term progress and a company's current health comes far short from an effective evaluation.

A business strategy is much like a scientific theory in that it proposes a specific result from a series of activities. Evaluating the theory won't necessarily prove that it's correct, but it can prove that it is false. A business strategy that passes evaluation is much more likely to succeed than a strategy that doesn't pass, even if it may later prove unsuccessful in practice.

You could, for example, be planning to send a probe to Mars. If your plans incorrectly input Newton's formula for gravity, the launch is practically guaranteed to be a failure. Once the formula is corrected, an evaluation of the plans may deem them feasible. The launch is now much more likely to succeed even though success is still not guaranteed.

Richard Rumelt, a professor at UCLA Anderson School of Management, which is a graduate school of business and management, says that a business strategy evaluation should examine three key criteria:

1. The strategy should have consistent goals and policies.
   
   
2. The strategy should create or maintain a competitive advantage.
   
   
3. The strategy should be feasible, neither overtaxing resources nor creating unsolvable problems.

The beauty of these criteria is that they focus on the specifics of a strategy without placing limits on what makes any one strategy unique and beneficial. As Rumelt points out, two companies in the same industry may have completely different strategies, yet they may both be successful with their different approaches.

One business may focus on referrals for gaining new customers, while a competitor may focus on online marketing, yet both can still be successful in their different approaches if their strategies satisfy each of these three questions.

A business strategy should be consistent and bring coherence to different parts of an organization. Inconsistency in a business strategy isn't always apparent at first. It often arises from compromises that have been made between different departments. Senior management must provide the organization with clear goals and strategies so that every department works together toward the same end.

Symptoms of an inconsistent strategy include:

• Coordination problems despite changes in personnel
• Success for one department means failure for another
• Constant requests for senior management to resolve policy issues

Consonance is a company's ability to adapt to the external environment, including new threats and opportunities it is facing. A business needs to adapt to its environment while at the same time competing with other firms that are also adapting to the same environment.

So, the strategy should be analyzed in how it addresses changing economic and social conditions while also comparing it to what the competition is doing in order to determine if the strategy offers sufficient value.

Too often, a company may be so focused on its competition that it doesn't take into account social or economic shifts in the market. A good way to evaluate this is to consider why the business exists in the first place. Consider the railway and steamship companies during the advent of commercial airplanes. If they had seen themselves as being in the transportation business rather than in the railway or shipping businesses, they could have adopted to the changing market.

A good competitive strategy should create or exploit advantages over the competition that are the most pronounced, longest lasting and most difficult to duplicate. Competitive advantages normally have one of three roots: better resources, better skills or better positioning.

When analyzing competitive strategy, the question to ask is which skills and resources represent advantages in which areas. Being competitive in the early phase of an industry life cycle is one thing, but performing well in later stages can be more difficult. Combining an advantage in resources and building skills can result in a superior positioning.

As an example, look at the evolution of smartphones in the past decade or so. BlackBerry had a dominant position in the smartphone market until the emergence of the Apple iPhone. One of the resources Apple had that Blackberry did not was Gorilla Glass, invented by Corning. Soon after, however, Samsung was able to leverage immense global resources and distribution systems to surpass Apple in overall unit sales. Both Apple and Samsung have since left BlackBerry in the dust.

Finally, a company must have the necessary resources in order to make a strategy successful. Financial resources are often the easiest to measure. Simply put, if you don't have the money required, it's not going to happen. However, it should be noted that there are often creative approaches a company can take to generate the capital required. Not having the financial resources today doesn't mean they can't be acquired, but this would have to be addressed in the strategy

The second area of feasibility to evaluate is whether or not the company has demonstrated that it has the abilities required to adopt it. If managers or different departments haven't demonstrated in the past that they can work together effectively, it's unlikely that a common strategy will succeed until this has been addressed.

The third area of feasibility that needs to be evaluated is the human element. Does the strategy motivate and challenge the organization? If key people within the organization aren't excited by the goals or its methods of achieving them, the strategy is unlikely to work.

A SWOT analysis is one of the most popular methods of analyzing a business strategy. It shows you all of the important factors affecting your company both internally and externally by reviewing strengths, weaknesses, opportunities and threats. Some sample questions to ask yourself include:

Strengths

• What is the best thing about your company?
• In what do you excel, such as sales, marketing or management?
• What brings in the most money?
  
• What are your core competencies?
• What makes you stand out from the competition?
• What do your customers like best about your company?

Weaknesses

• What areas need work, such as customer service, planning or marketing?
• Where are you losing money?
• What can you do better than you are now?
• What expertise do you lack?
• Where do your competitors do better than you?

Opportunities

• How have customer needs with which you can help evolved?
• What are the markets adjacent to yours into which you could move?
• What niches have your competitors forgotten?
• Which trends in the economy benefit your company?
• What technology is emerging that you could use?

Threats

• What do you do that your competitors can easily copy?
• Where is your most vulnerable point?
• Which economic trends could hurt your sales? 
• Which competitors are moving into your market?
• What technology is emerging that could hurt your business?

Write down the answers to these questions and any other questions they may provoke and then examine your current business strategy to ensure they have been addressed. For the small business owner, it is very important that you be as objective as possible. If you're in denial about your strengths and weaknesses, the SWOT analysis won't do you any good.

There are a variety of tools you can use to evaluate a business strategy. Though SWOT is by far the most widely used, there are many others that can be used, often in conjunction with a SWOT analysis. Five popular analysis tools include:

• VMOST (vision, mission, objectives, strategy, tactics): This analysis tool helps to ensure that everything is connected and aligned from the top (company vision) to the bottom (strategy and tactics). 
  
  
• PEST (political, economic, social and technology): This analysis is often used in conjunction with SWOT analysis, which emphasizes external factors that can affect the success of a business strategy.
  
  
• SOAR (strengths, opportunities, aspirations and results): This is especially useful when a company is facing external changes in its market. 

• Maturity models: This helps to determine where your company stands in its evolution as well as specific components of your business, including staffing and technology.
  
  
• Porter's five forces: This helps you to examine your company's competitiveness and future positioning by analyzing the bargaining power of suppliers and customers as well as threats posed by current competitors and new arrivals in your market. 

• Root cause analysis: Especially useful for digging deeper into one or more specific problems, this allows you to analyze the root causes of those problems and to select the best corrective action.

• Boston matrix: This is used to analyze your product and service portfolio to determine which are the most profitable and whether or not some are costing you more money than they generate. 

Large corporations have a wealth of resources at their disposal to evaluate business plans, including experienced board members, executives, lawyers and accountants. If you're a small business owner and especially if you're just starting your business, you'll need to ensure you look at your plans objectively – something that's difficult to do when you've put your heart and soul into your company.

The best way to gain some objectivity about your business is to talk to your customers frequently. Ask customers for their feedback, specifically what they like and don't like about their experiences with you. Your suppliers and employees will also have a perspective that is different than yours. Market surveys and industry reports are available online, usually for modest fees, and can give you insights on your competitors.

No one can be an expert in everything, and no one can do very much alone. Having a good accountant and a lawyer who is experienced in your industry will give you a fresh pair of eyes to help you to ensure your business plan is as strong as possible. If you're just starting your business, consider connecting with someone who has experience in areas where you do not or even hire a business consultant who can help evaluate your plans before you put them into action.