Richards Rumelt: The evaluation of Business Strategy

Professor Richard Rumelt is a leading thinker on corporate diversification strategy and the sources of sustainable advantages to business strategies. Here we review Rumelt’s landmark article The Evaluation of Business Strategy, where he proposed four key tests of business strategy.

According to Rimelt, strategy should not be implemented before a proper evaluation has taken place. Strategy evaluation is a  key part of the strategy process, which attempts to look beyond the obvious fact regarding the short-term health of a business to the more fundamental factors and trends that govern organizational success. Rumelt defines strategy as:

                  ….a set objectives, policies and plan that, taken together, define the

                                    scope of the enterprise and its approach to survival and success

The challenge of evaluation

Rumelt states that no matter how it is carried out, the result of a business strategy evaluation should provide answers to these three questions:

·       Are the business objectives appropriate?

·       Are the major policies/plans appropriate?

·       Do the results confirm or refute critical assumptions on which the strategy rests?

However, answering these questions is not always straightforward, as there are some issues that will always make evaluation difficult:

·       Each business strategy is unique – strategy evaluation must lie, therefore, on a kind of ‘situation logic’ that looks at the circumstance of each problems 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 principle 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 cities the examples of high- technology organisations 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 organisation’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 critical changes occurring within it.

Rumelt’s test of consonance focuses on the organisation’s ability to match and at the same time adapt to it environment, while competing with other organisations that are also trying to adopt 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 organisationsin that industry. Strategic decision- makers may be so absorbed on how to achieve competitive advantage over their rivals that the threats is only recognized after the damage is done. Rumelt also points out that forecasting techniques such as trends analysis do not normally expose potentially critical changes that come about as result of interaction between trends.

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 advanyage arising from one or more of the 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 feasiblility, 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?

·       Does the organization have the ability to integrate the activities involved in implementing the strategy?

·       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 organisation’s planning, review and control processes. Some organisationns carry out strategy evaluation informally and infrequently while other 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 organistion’s capacity for self- appraisal and learning than by the analytic technique employed.

In most organisations, 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 this 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 fixed and unshakeable.

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 factor, which underpin success or failure in the chosen industry. The result of strategy evaluation is the rejection, modification or authorization 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 the test cannot be guaranteed to succeed but is undeniably better placed for success than one that is shown to be flawed.