Strategy and Implementation: Quantitative Evaluation of Strategic Performance with Application to Mutual Funds
46 Pages Posted: 25 Nov 2011 Last revised: 15 Dec 2011
Date Written: November 1, 2011
This paper applies specific quantitative methods to demonstrate a general theoretical model for measuring strategic performance. The theoretical concepts are universal and measurable for all types of strategic activity by applying the methodology through alternative quantitative analytical methods. The model distinguishes and quantifies three aspects of strategic performance: (i) strategy itself relative to its goals; (ii) individual executions relative to the strategy itself; and (iii) competing or alternative strategies. The methodology for quantifying strategic performance (i) estimates a strategy’s best potential from its actual best performances; (ii) evaluates individual executions by comparing their results to their strategies’ potentials; and (iii) compares different strategies per se based on their best potentials. Implementation of the method is illustrated by a two-stage data envelopment analysis and nonparametric two-way orthogonal contrast (Mann-Whitney) test applied to mutual fund investment strategies.
The conceptual framework and derived methods address two problems. First, they provide practicable means for evaluating the three aspects of strategic performance in practice, diagnosing the causes of strategic success and failure, and comparing competing strategies. Second, they overcome a fundamental theoretical weakness of both practitioner and academic studies which evaluate either execution performance or strategy performance without controlling for the simultaneous effects of the other. Application of this method to mutual funds found the same “paradoxical” return/risk relationship Bowman found for industrial firms.
Keywords: strategy, implementation, strategic performance, strategy evaluation, data envelopment analysis, mutual funds, risk
JEL Classification: C10, C14, C30, C44, C61, C67, D24, D80, D81, G11, G14, G23, L10, L20, L30
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