sm lecture seven - strategy evaluation
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Strategic Management BUSM 3200
These Lecture Slides summarize the key points covered in the respective chapters in your
recommended text; these slides do NOT substitute, at all, the required reading of the assigned
chapter from the text. These slides also may contain additional supplementary material extracted
from other texts and sources outside your text book.
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The focus of part 3: strategy in action
Criteria and techniques that can be used to evaluate possible strategic options.
How strategies develop in organisations; the processes that may give rise to intended strategies or to emergent strategies.
The way in which organisational structures and systems of control are important in organising for strategic success.
The leadership and management of strategic change.
Who strategists are and what they do in practice.
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Learning outcomes of Chapter 11
Employ three success criteria for evaluating strategic options:
– Suitability: whether a strategy addresses the key issues relating to the opportunities and constraints an organisation faces.
– Acceptability: whether a strategy meets the expectations of stakeholders.
– Feasibility: whether a strategy could work in practice.
For each of these use a range of different techniques for evaluating strategic options, both financial and non-financial.
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The SAFe criteria
Table 11.1 The SAFe criteria and techniques of evaluation
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Suitability
Suitability is concerned with assessing which proposed strategies address the key opportunities & constraints an organisation faces, through an understanding of the strategic position of an organisation.
It is concerned with the overall rationale of the strategy:
Does it exploit the opportunities in the environment and avoid the threats?
Does it capitalise on the organisation’s strengths and strategic capabilities and avoid or remedy the weaknesses?
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Importance of ‘linking back’
The next few pages from 364 – 365 reminds us of the importance of linking back this chapter’s concept of suitability to all the important models and frameworks we have covered in external and internal analysis as well as the different strategic options
Pay careful attention and read two tables – 11.1 and 11.2
You will begin to understand that the different models that we learnt help the planner evaluate the different strategic options
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Suitability of strategic options in relation to strategic position (1)
Table 11.2 Suitability of strategic options in relation to strategic position
It is a important that you REVISIT the above tables to better understand the value of the different models and frameworks in helping the manager evaluate the different strategic options
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Suitability of strategic options in relation to strategic position (2)
Table 11.2 Suitability of strategic options in relation to strategic position (Continued)
It is a important that you REVISIT the above tables to better understand the value of the different models and frameworks in helping the manager evaluate the different strategic options
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Some examples of suitability (1)
Table 11.3 Some examples of suitability
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Some examples of suitability (2)
Table 11.3 Some examples of suitability (Continued)
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Suitability – screening techniques
There are several useful techniques:
Ranking.
Using scenarios.
Screening for competitive advantage.
Decision trees.
Life cycle analysis.
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Ranking
Evaluating the options based on rating and ranking the different options
Strategic options are evaluated against specific criteria
Scores and given and the best option is selected
See Illustration 11.1 on page 366
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Ranking the options
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Scenarios
The strategy being evaluated can be screened by considering different possible outcomes in the future
What if questions
Best or worse case scenarios
Scenarios were discussed in Chapter 2 (external analysis)
See section 2.22 of that chapter and see Illustration 2.2
Managers evaluate which options would work best under different environmental contexts
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Screening for bases of competitive advantage
Chapters 3 and 6: the likely bases of competitive advantage reside in the strategic capabilities of the company
We screen the strategy in terms of the key strategic capabilities underpinning a proposed strategy
Evaluate the capabilities in terms of their ability to deliver either
Cost leadership strategy
Differentiation strategy
See Table 11.4
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Table 11.4
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VRIN
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Decision Trees
Evaluate the outcomes in terms of
Probabilities
Expected returns
See illustration 11.2 : strategic decision tree for a law firm
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Illustration 11.2
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Life cycle analysis
Different strategies are deemed to be appropriate at different stages of the industry life cycle
Matrix on table `11.15 has two dimensions
Industry maturity
Firm’s competitive position
Purpose of the matrix is to determine the appropriateness of the strategies in relation to the two dimensions
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The life cycle/portfolio matrix
Table 11.5 The industry life cycle/portfolio matrix Source: Arthur D. Little 7-20 BUSM 3200- Strategic Management (Jan 2013) GDS
Competitive position within an industry
Competitive position within an industry can be:
A dominant position which is rare in the private sector unless there is a quasi-monopoly position. In the public sector there can be a legalised monopoly status.
A strong position where organisations can follow strategies of their own choice without too much concern for competition.
A favourable position where no single competitor stands out, but leaders are better placed.
A tenable position can be maintained by specialisation or focus.
A weak position where competitors are too small to survive independently in the long run.
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Acceptability (1)
Acceptability is concerned with whether the expected performance outcomes of a proposed strategy meet the expectations of stakeholders.
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Acceptability (2)
There are three key aspects of acceptability - the ‘3 R’s’:
Risk.
Return.
Reactions (of stakeholders).
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Risk
Risk concerns the extent to which the outcomes of a strategy can be predicted.
Risk can be assessed using:
Sensitivity analysis.
Financial ratios – e.g. gearing and liquidity.
Break-even analysis.
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Sensitivity analysis (illustration 11.3)
Illustration 11.3 A
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Sensitivity analysis (Continued)
Illustration 11.3 B
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Sensitivity analysis (Continued)
Illustration 11.3 C
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Break even analysis
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Return
Returns are the financial benefits which stakeholders are expected to receive from a strategy.
Different approaches to assessing return:
Financial analysis.
Shareholder value analysis.
Cost–benefit analysis.
Real options.
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Financial analysis
Three commonly used bases of financial analysis are
1. Forecasting the return on capital employed (ROCE)
2. Estimating the payback period
3. Calculating the DCF
See Figure 11.1
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Assessing profitability (1)
Figure 11.1 Assessing profitability
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Assessing profitability (2)
Figure 11.1 Assessing profitability (Continued)
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Assessing profitability (3)
Figure 11.1 Assessing profitability (Continued)
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Shareholder value analysis (SVA)
Assess which of the proposed strategies would increase or decrease shareholder value
Shareholders are interested in the cash generating ability of the company
Ability to pay dividends
Reinvest funds for the future
See Table 11.6
Total shareholder returns (TSR)
Economic value added (EVA)
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Measures of shareholder value
Table 11.6 Measures of shareholder value
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Cost Benefit Analysis
Going beyond just the tangible financial benefits
Consider intangible benefits
Important in public infrastructure projects like airport construction ,roads, etc
See illustration 11.5 – sewerage construction project
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Illustration 11.5
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Real options
When using methods such as DCF, it is assumed there is a degree of clarity of outcomes
But in many projects the precise benefits of outcomes only become obvious as implementation proceeds
New outcomes may emerge
(recall from lecture 1) : concept of “emergent strategies”
New options are opened up after the implementation of a particular project
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Advantages of real options
There are four main benefits:
Bringing strategic and financial evaluation closer together.
Valuing emerging options.
Coping with uncertainty.
Offsetting conservatism.
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See page 381
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Real options evaluation (illustration 11.6)
Illustration 11.6
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New options and opportunities emerge after the implementation of the initial project – investment in a brewery
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Reaction of stakeholders
Stakeholder mapping and the power/interest matrix can be used to:
understand the political context of strategies.
understand the political agenda.
gauge the likely reaction of stakeholders to specific strategies.
• If key stakeholders find a strategy to be unacceptable then it is likely to fail
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Reaction of stakeholders
Owners have financial expectations
Regulators have decision making authority
Employees and unions may resist
The local community has specific concerns such as security of jobs and environment
Customers could also object to a strategy
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Feasibility
Feasibility is concerned with whether a strategy could work in practice i.e. whether an organisation has the capabilities to deliver a strategy
Two key questions:
Do the resources and competences currently exist to implement the strategy effectively?
If not, can they be obtained?
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Financial feasibility
Need to consider:
The funding required.
Cash flow analysis and forecasting.
Financial strategies needed for the different ‘phases’ of the life cycle of a business.
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Financial strategy and the business life cycle
Table 11.7 Financial strategy and the business life cycle
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People and skills (1)
Three questions arise:
1. Do people in the organisation currently have the competences to deliver a proposed strategy?
2. Are the systems to support those people fit for the strategy?
3. If not, can the competences be obtained or developed?
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People and skills (2)
Critical issues that need to be considered:
Work organisation – will this need to change?
Rewards – are the incentives appropriate?
Relationships – will people interact differently?
Training and development – are current systems appropriate?
Staffing – are the levels and skills of the staff appropriate?
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Integrating resources
The success of a strategy depends on the management of many resource areas, for example:
people,
finance,
physical resources,
information,
technology and
resources provided by suppliers and partners.
It is essential to integrate resources – inside the organisation and in the wider value network.
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Evaluation criteria: Four Qualifications
Read pages 386 and 389 carefully:
Conflicting conclusions and the need for management judgement.
Consistency between the different elements of a strategy is essential.
The implementation and development of strategies might reveal unanticipated problems.
Strategy development in practice – it isn’t always a logical or even rational process.
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Summary
Proposed strategies may be evaluated using the three SAFe criteria:
Suitability is concerned with assessing which proposed strategies address the key opportunities and constraints an organisation faces. It is about the rationale of a strategy.
The acceptability of a strategy relates to three issues: the level of risk of a strategy, the expected return from a strategy and the likely reaction of stakeholders.
Feasibility is concerned with whether an organisation has or can obtain the capabilities to deliver a strategy.
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