Martin has 16 years experience in Human Resources Information Systems and has a PhD in Information Technology Management. He is an adjunct professor of computer science and computer programming.
Businesses need a well-defined strategy, or they will flounder. This lesson discusses how to evaluate a well-defined strategy by looking at suitability, feasibility, and acceptability.
Evaluating Business Strategy
Researchers Johnson, Scholes, and Whittington have proposed that a business strategy's potential success is based on looking at the following three criteria: suitability, feasibility, and acceptability.
Let's take a closer look at each of these criteria.
When assessing suitability, the question leaders must ask is: Does the strategy align with the external environment? There are several tools for analyzing this environment: competitors, customers, market conditions, and also political and environmental aspects.
Some of the tools used to evaluate the external landscape include:
Porter's Five Forces
Let's take a quick look at each of these:
SWOT stands for strengths, weaknesses, opportunities, and threats. For analysis of external forces, we focus on opportunities and threats. When conducting a SWOT analysis, it helps to create a table to input each of the items, like the one here for an auto parts chain:
Ordering system three versions behind
Rise in do-it-yourself demographic
Competitor landed major promotion deal
New stores in seven states
Training program is weak
Working on deal with Wagner brake company
Recycling fees on the rise
After performing a SWOT analysis, this auto parts chain has determined that while some of their strengths are huge sales and the fact that they have opened new stores in seven states, they also have some weaknesses, including a weak training program and an outdated ordering system. For the external forces of the SWOT analysis, they see opportunities in the deal that they are working on with a new supplier as well as the growth in the do-it-yourself demographic, while they recognize that some external threats to their well-being are that a competitor has landed a major promotion deal and their fees to recycle, which is important to their business, are increasing.
Sometimes businesses merge sections of the chart (e.g., threat-strength or opportunity-weakness) as they evaluate strategy. If the strategy addresses external factors that need to be reduced (threats) or increased (opportunities), it meets the suitability test.
Porter's Five Forces
Like SWOT, Porter's Five Forces focuses on external pressures on a business, with the main focus being on competition. Competitive rivalry can drive down prices if the competition is tough.
Let's say you are manufacturing a product with a very low profit margin. After using Porter's Five Forces to evaluate external forces, you realize that all factors are pushing competition to all-time highs. New entrants are arriving in the industry, suppliers are demanding higher prices, and buyers are demanding lower prices. You will need to re-think the suitability of your business strategy! A race to the bottom is not going to end well.
The PESTEL model also evaluates external forces and determines suitability by looking at political, economic, social, technological, environmental, and legal factors.
In some cases, each of these influencers can be considered a threat (from SWOT analysis). They are external pressures that need to be considered when evaluating the suitability of your strategic plan.
Take a look at this chart for some examples using our auto parts chain example:
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New laws that impact you; e.g., oil recycling regulations
Increased tax on brake pads
Huge influx of non-drivers into neighborhoods where you have auto parts stores
Advent of new thought-controlled brake pads
Along with recycling fees, demand from customers that all products be green
Regional laws requiring you to carry a specific number of generic or competitor brands, even at great cost to you
An example of a political factor that needs to be evaluated is new laws that can impact your business, while an economic factor could be an increased tax on items that you supply. A social factor may be that where your stores are located there are actually a lot of people who don't drive and thus may not need your products. In looking at the suitability of your strategic plan, you also need to consider technological factors, like the advent of a new thought-controlled brake pad, as well as environmental factors, such as going green. Finally the PESTEL model requires evaluating legal factors, such as laws governing the items that you carry, regardless of the financial impact it may have.
Now that we've examined the external forces at work and done some evaluation of our strategy's suitability, let's look at feasibility.
In assessing feasibility, the business wants to know, is the organization able to carry out the strategy with the resources that it has? Technically, anything is possible given the time and resources. However, businesses don't have limitless resources to carry out their strategic initiatives.
Let's say you are a director for an auto parts chain. After careful SWOT and Porter's Five Forces analysis, you determine the suitability of your strategy. You will continue down the path of opening new stores in new states. How feasible is this?
In order to answer this question, we can use the 6M Model, where the Ms of the model refer to money, machinery, manpower, markets, materials, and makeup. Let's take a look at some of the considerations under each component:
If you decide that the strategy is feasible, you next have to determine its acceptability.
The big questions here are: Is the business reaping the return expected for the risk invested, and how are stakeholders (i.e., shareholders) reacting to the strategic initiative? Tools exist to help us figure out financial returns of our strategy; cost-benefit analyses or shareholder value analyses can give you some solid numbers to asses.
Measuring stakeholder response is not a hard science. It may require interviews or focus groups; remind them of the risks, but also the potential rewards of the business strategy. Most of us are risk-averse and want to have a predictable investment. However, businesses don't grow without some risk. Analyzing acceptability can tell you where you're at with the financials and the stakeholders.
When assessing a business strategy, we can examine three major factors: suitability, feasibility, and acceptability. For assessing suitability, there are a few great models, including SWOT analysis (strengths, weaknesses, opportunities, and threats), Porter's Five Forces, and PESTEL.
Once suitability is determined, you can assess feasibility; one tool you can use to do this is the 6M model (money, machinery, manpower, markets, materials, and makeup). If resources and personnel are appropriate, the final assessment is acceptability. This is the real test: How do stakeholders react? Is the risk worth the investment?
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