Surveys of the causes of small-business failure reveal that a most frequent cause of bankruptcy is inadequate resources to weather either the early period of establishment or unforeseen downturns in business conditions. This decision is closely related to two other criteria for the evaluation of strategy: risk and timing. I shall now discuss these.
Strategy and resources, taken together, determine the degree of risk which the company is undertaking. This is a critical managerial choice. For example, when the old Underwood Corporation decided to enter the computer field, it was making what might have been an extremely astute strategic choice. However, the fact that it ran out of money before it could accomplish anything in that field turned its pursuit of opportunity into the prelude to disaster.
Had it been successful, the payoff would have been lush. The fact that it was a stupendous failure instead does not mean that it was senseless to take the gamble. Each company must decide for itself how much risk it wants to live with. In attempting to assess the degree of risk associated with a particular strategy, management may use a variety of techniques. For example, mathematicians have developed an elegant set of techniques for choosing among a variety of strategies where you are willing to estimate the payoffs and the probabilities associated with them.
However, our concern here is not with these quantitative aspects but with the identification of some qualitative factors which may serve as a rough basis for evaluating the degree of risk inherent in a strategy. These factors are:. The amount of resources on which the strategy is based whose continued existence or value is not assured. Since a strategy is based on resources, any resource which may disappear before the payoff has been obtained may constitute a danger to the organization.
Resources may disappear for various reasons. For example, they may lose their value. This frequently happens to such resources as physical facilities and product features. Again, they may be accidentally destroyed. The most vulnerable resource here is competence. In fact, one of the critical attributes of highly centralized organizations is that the more centralized they are, the more speculative they are. The disappearance of the top executive, or the disruption of communication with him, may wreak havoc at subordinate levels.
However, for many companies, the possibility that critical resources may lose their value stems not so much from internal developments as from shifts in the environment. Take specialized production know-how, for example.
4.2 Corporate Strategy
It has value only because of demand for the product by customers—and customers may change their minds. This is cause for acute concern among the increasing number of companies whose futures depend so heavily on their ability to participate in defense contracts. A familiar case is the plight of the airframe industry following World War II. Some of the companies succeeded in making the shift from aircraft to missiles, but this has only resulted in their being faced with the same problem on a larger scale.
Financial analysts often look at the ratio of fixed assets to current assets in order to assess the extent to which resources are committed to long-term programs. This may or may not give a satisfactory answer. How important are the assets? When will they be paid for? The reasons for the risk increasing as the time for payoff increases is, of course, the inherent uncertainty in any venture.
Resources committed over long time spans make the company vulnerable to changes in the environment. Since the difficulty of predicting such changes increases as the time span increases, long-term projects are basically more risky than are short ones. This is especially true of companies whose environments are unstable. And today, either because of technological, political, or economic shifts, most companies are decidedly in the category of those that face major upheaval in their corporate environments.
The company building its future around technological equipment, the company selling primarily to the government, the company investing in underdeveloped nations, the company selling to the Common Market, the company with a plant in the South—all these have this prospect in common. The harsh dilemma of modern management is that the time span of decision is increasing at the same time as the corporate environment is becoming increasingly unstable.
Much has been written about his role as a commander and administrator. But it is no less important that he be a strategist. The more of its resources a company commits to a particular strategy, the more pronounced the consequences.
Great Recent Examples of Competitive Strategy Successes
If the strategy is successful, the payoff will be great—both to managers and investors. If the strategy fails, the consequences will be dire—both to managers and investors. Thus, a critical decision for the executive group is: What proportion of available resources should be committed to a particular course of action?
This decision may be handled in a variety of ways. For example, faced with a project that requires more of its resources than it is willing to commit, a company either may choose to refrain from undertaking the project or, alternatively, may seek to reduce the total resources required by undertaking a joint venture or by going the route of merger or acquisition in order to broaden the resource base.
How to Evaluate Corporate Strategy
Thus, those companies which entered the small-computer field in the past few years are now faced with the penetration into this area of the data-processing giants. High payoffs are frequently associated with high-risk strategies. Moreover, it is a frequent but dangerous assumption to think that inaction, or lack of change, is a low-risk strategy. Failure to exploit its resources to the fullest may well be the riskiest strategy of all that an organization may pursue, as Montgomery Ward and other companies have amply demonstrated.
A significant part of every strategy is the time horizon on which it is based. A viable strategy not only reveals what goals are to be accomplished; it says something about when the aims are to be achieved. Goals, like resources, have time-based utility. A new product developed, a plant put on stream, a degree of market penetration, become significant strategic objectives only if accomplished by a certain time.
Delay may deprive them of all strategic significance. A perfect example of this in the military sphere is the Sinai campaign of The strategic objective of the Israelis was not only to conquer the entire Sinai peninsula; it also was to do it in seven days. By contrast, the lethargic movement of the British troops made the operation a futile one for both England and France. In choosing an appropriate time horizon, we must pay careful attention to the goals being pursued, and to the particular organization involved. Goals must be established far enough in advance to allow the organization to adjust to them.
It is no mere managerial whim that the major contributions to long-range planning have emerged from the larger organizations—especially those large organizations such as Lockheed, North American Aviation, and RCA that traditionally have had to deal with highly unstable environments. The observation that large corporations plan far ahead while small ones can get away without doing so has frequently been made. However, the significance of planning for the small but growing company has frequently been overlooked.
As a company gets bigger, it must not only change the way it operates; it must also steadily push ahead its time horizon—and this is a difficult thing to do. In many cases, even if the executive were inclined to take a longer range view of events, the formal reward system seriously militates against doing so. In most companies the system of management rewards is closely related to currently reported profits. But if we seriously accept the thesis that the essence of managerial responsibility is the extended time lapse between decision and result, currently reported profits are hardly a reasonable basis on which to compensate top executives.
Such a basis simply serves to shorten the time horizon with which the executive is concerned. The importance of an extended time horizon derives not only from the fact that an organization changes slowly and needs time to work through basic modifications in its strategy; it derives also from the fact that there is a considerable advantage in a certain consistency of strategy maintained over long periods of time.
The great danger to companies which do not carefully formulate strategies well in advance is that they are prone to fling themselves toward chaos by drastic changes in policy—and in personnel—at frequent intervals. A parade of presidents is a clear indication of a board that has not really decided what its strategy should be.
It is a common harbinger of serious corporate difficulty as well. The time horizon is also important because of its impact on the selection of policies. The greater the time horizon, the greater the range in choice of tactics. If, for instance, the goals desired must be achieved in a relatively short time, steps like acquisition and merger may become virtually mandatory. An interesting illustration is the decision of National Cash Register to enter the market for electronic data-processing equipment. As reported in Forbes :. To buy talent and experience in it acquired Computer Research Corp.
At first glance, it would seem that the simplest way to evaluate a corporate strategy is the completely pragmatic one of asking: Does it work? However, further reflection should reveal that if we try to answer that question, we are immediately faced with a quest for criteria. Quantitative indices of performance are a good start, but they really measure the influence of two critical factors combined: the strategy selected and the skill with which it is being executed.
Faced with the failure to achieve anticipated results, both of these influences must be critically examined. One interesting illustration of this is a recent survey of the Chrysler Corporation after it suffered a period of serious loss:.
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The corporation needs some good top executives. By contrast, when Olivetti acquired the Underwood Corporation, it was able to reduce the cost of producing typewriters by one-third. And it did it without changing any of the top people in the production group. However, it did introduce a drastically revised set of policies.
If a strategy cannot be evaluated by results alone, there are some other indications that may be used to assess its contribution to corporate progress:.