strategy and selection techniues

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Chapter 9

Strategy Evaluation andSelection Techniques

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Strategy EvaluationandSelection Techniques

What is strategy about?

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Selecting Strategies

Developing sound corporate strategy has become both more important and more

difficult as managing a company in todays uncertain and confusing business

environment has brought in new equations and new requirements .

With the world economy becoming increasingly integrated and geopolitical tensions

continuing to rise, the challenge of crafting and implementing strategies successfully

grows ever more daunting.

This lesson will discuss how strategic options can be evaluated and the processes bywhich most organizations select their strategies.

Notwithstanding the complexity of the process of strategic choice, the organization

cannot live in a vacuum; it has to choose its strategies so that it can survive in the

marketplace.

Once, strategy formulation is undertaken and the strategies are identified by the

organization, it needs to evaluate the strategic options it can exercise.In assessing strategies there are three types of evaluation criteria that are used:

Suitability and Screening

Acceptability, and

Feasibility

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Assessing the suitability of strategic options is the starting point of the selectionprocess.

On the basis of the results of the exercise, a more detailed analysis concerning the

acceptability and feasibility of these options can be undertaken.

Suitability addresses the concern that:

(a) under the circumstances of the organization, and

(b) its strategic intent,Does the strategy bring the results that the organization is looking for?

Assessing Suitability

Business Profile

Will it lead to goodfinancial performance?

Suitability

Is this a

goodstrategy?

Value Chain Analysis

Does it improve value for money?

Does it exploit core competencies?

Positioning

Is the positioning viable?Life Cycle Analysis

Does it fit the stage we will be in?

Portfolio Analysis

Does it strengthen thebalance of activities?

There are a number of analytic techniques that can be used to bring in clarity.

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Life Cycle Analysis:The Product Life Cycle refers to the succession of stages a product goes through. The

life cycle is useful as a description, but not as a predictor.

The important point is that in many, if not most, markets the product or brand life cycle is

significantly longer than the planning cycle of the organizations involved.

Therefore, it offers a useful 'model' for managers to keep at the back of their mind.

Based on the life stage of the product the organization can decide the type of strategy itwould like to follow for the product.

The product life cycle model, however, in combination with other parameters, can be

good indicator of the market is a representation of life stage of a product.

One tool that combines the product life cycle with its competitive positioning is the Life

Cycle Portfolio matrix.

The market status is defined by its competitive position. This has been broken upinto five categories ranging from dominant to weak.

The product development stage has been classified as embryonic, growth, matures

and aging.

The matrix shows, the likely or suitable strategies that can be used in relation to the two

dimensions and appropriateness of particular strategies.

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STAGES OF INDUSTRY MATURITY

Embryonic

Growth Mature Ageing

DominantFast Grow

Start-up

Fast Grow

Cost Leadership

Renew

Defend Position

Defend Position

Cost Leadership

Renew

Fast Grow

Defend Position

Focus

Renew

Grow

Strong DifferentiateFast Grow

Start-up

Fast Grow

Catch-up

Differentiate

Cost Leadership

Cost Leadership

Renew, Focus

Differentiate

Grow

Find Niche

Hold Niche

Grow

Harvest

Favorable DifferentiateFast Grow

Focus

Start-up

Catch-up

Differentiate

Focus

Grow

Harvest; Hang-in;

Find Niche; Hold Niche;

Renew; Turn around;

Focus; Differentiate; Grow

Retrench

Turnaround

Tenable FocusStart-upGrow

Harvest; Hang-inFind Niche; Hold

Niche; Catch-up

Turn around; Focus

Differentiate; Grow

HarvestFind Niche

Turn around

Retrench

DivestRetrench

Weak Find NicheTurn around, Grow

Turn around

Retrench

Withdraw

Divest

Withdraw

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The position of the product within the life cycle is normally determined by eight externalfactors;

market growth rate;

growth potential;

breadth of product lines;

number of competitors;

spread of market share between these competitors;

customer loyalty,

entry barriers, and

technology.

The competitive position of the organization within its industry can also be establishedby looking at the characteristics of each category. Few organizations are in a dominantposition in an industry.

Strong organizations are those who are in a position to follow strategies without feelingthreatened by competition.

An organization is in a favorable position where no single competitor stands out, but thecompany is better placed than most.

Tenable and weak competitive position indicates either the organization is maintained byspecialization or will find it difficult to survive independently in the long run.

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Positioning:

Positioning is the technique by which strategists try to create an image or identity in

the minds of their target market for its product, brand, or organization.

It is the 'relative competitive comparison' their product occupies in a given market as

perceived by the target market. Positioning is something (perception) that is done in

the minds ofthe target market.

A product's position is how potential buyers see the product. Positioning is expressedrelative to the position of competitors.

In strategic Management, positioning was a basic proposition promoted by Michael

Porter in determining the generic strategies for competitive advantage.

So assessing whether the existing and future positioning are viable can be done by

asking whether demand is likely to grow or decline.

For example, the quality of the resources and the uniqueness of the competences arethe basic features that determine the ability and suitability of a positioning the product

or service using a strategy of differentiation.

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A B1 B2 C

Resources &Competenciesunderpinning Strategy

Which of these Resources/Competencies is likely to create

Which will be sustainable/ difficult toImitate

CostReduction

Added Value in termsof Needs perceived byCustomers

Valued Rare Complex Tacit

The extent to which the organization is capable of supporting a particular positioning can

be determined by using this format.

The Resources & Competencies underpinning the strategy are scored against two

important competencies, costreduction and valueadded on a scale of 1 to 5.

The analysis requires reexamining each of the resources and competencies to establish

whether it is sustainable and/ or difficult to imitate.

The criteria used to judge the competitive advantage through the resources and

competencies include:

whether it is valued by the consumers;

whether it is rare;

is it complex to replicate; and

whether it is embedded in the tacit knowledge of the organization.

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Value Chain Analysis:The value chain categorizes the generic value-adding activities of an organization.

The "primary activities" include:

inbound logistics,

operations (production),

outbound logistics,

sales and marketing, and

service (maintenance).

The "support activities" include: administrative infrastructure management, human

resources management, R&D, and procurement.

Its ultimate goal is to maximize value creation while minimizing costs. The costs and value

drivers are identified for each value activity.

The set of activities performed by the business unit provides a very effective way to

analyze the position of the business against its major competitors:

The way in which the value system of the organization is configured,

The linkages between value activities, and

The competence in separate activities.

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Value stream mapping is used to visualize the chain of events that leads to thegeneration of a throughput. It is different from Process mapping since a value stream is

a chain of processes.

Mapping the Value Stream does not only help visualize the sequence of operations but it

also makes it easy to assess the process capabilities and performance.

A company has as many value streams as it has products, so the first step in Value

Stream Mapping should consist in separating the products before examining the chain of

processes that lead to their production.

Once the mapping of the value chain is available, we can use the value chain to

determine the degree to which the strategy provides synergy.

The format shown below shows how much extra benefit can be created by reconfiguring

the value chain.

Degree of Synergy with

present Activities

Weightage Strategy 1 Strategy 2

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The objective of this type of analysis is to identify the impact of each strategy on theidentified activity.

The degree of synergy can be scored on a scale of 1 to 5.

The degree of synergy should be multiplied with the weightage factor of the activity and

the total put in column for the particular strategy.

Synergy can arise through many different types of links or interrelationships; from

exploiting the brand name, sharing distribution channels, advertising and promotion etc.Synergy is often used to enter into new products, new markets.

Many decisions on mergers, acquisitions and diversification are based on the synergy

the organization derives from such a strategy.

Though the value chain framework has made its way to the forefront of management

thought as a powerful analysis tool for strategic planning, but its applicability to many

services organizations requires careful thought and analysis.

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Business Profile:

The business profile is represented by a number of key drivers. These drivers include:

Relative Share,

Relative Quality,

Capital Intensity,

Capital Mix,

Capacity Utilization,

Productivity,

Real Market Growth,

New Products,

Marketing Intensity,

Bargaining Power, and

Logistics.

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BAD GOODRelative Share Weak

Strong

Relative Quality Inferior Superior

Capital Intensity High Low

Capital Mix Fixed Liquid

Capacity Utilization Low High

Productivity Below Par Above Par

Real Market Growth Decline Growth

New Products Many Some

Marketing Intensity High Low

Bargaining Power Weak Strong

Logistics Complex Simple

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Business Profile Analysis is a structured methodology that is focused onunderstanding the organization's strengths and weaknesses, identifying how best tomeet strategic requirements.

Business Profile Analysis also helps the organization to improve the way in which itconducts its functions and activities in order to reduce overall costs, provide moreefficient use of scarce resources, and better support its customers.

It concentrates on and rethinking end-to-end activities that create value for customers, in

deciding upon the business strategy.Gap Analysis:

If strategies are assessed in absolute terms or against industry norms, they often do notaddress the central issue - the need to change from the present strategy to a newstrategy.

Gap analysis is a useful technique that can be used to identify the extent to which theexisting strategies will fail to meet the performance objectives in the future.

It tries to find out the difference between the projected and actual performance. Itfocuses on:

what a firm is trying to achieve;

whether it is achieving it or not; and

how it can achieve it.

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T1 TIME T2

PERF

ORMA

NCE

Desired Performance

Performance Gap

Present

Performance

Gap analysis can also be used to focus on a future state and then work backwards tosee whether it is reaching that future.

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The analysis comprises four steps:

Decide on the key performance criteria. It may be market share, ROI,

profitability etc.

Agree on the required performance level, on a year to year basis, into the future

for at least the next five years.

Forecast the likely performance if there are no change of strategies

Finally, establish the gap between the forecasted and required performancelevels.

In case there is a small gap, it can be filled in by more efficient use of existing resources.

However, if the gap is significant, there is need to reassess the strategies of the

organization and find ways and means to make up for the gap.

There is need to select the performance criteria with care. There are some areas of

performance that are easily quantifiable, however, some areas may be very important butless easily quantifiable e.g. quality, service etc.

Gap analysis alone however is not adequate for all problem situations as goals may

evolve and emerge during the course of problem solving, "what ought to be" can be a

highly variable target.

Also, some problems have many alternative solutions, in which case backward-chaining

search strategies will have little practical use.

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Screening Options

Many organizations also go through a screening option. Screening options basically areconcerned with the relative merits between different strategies.There are basically four methods that are conventionally used to screen options.

Ranking

Decision Trees

Simulation Modeling

Scenario Planning

Ranking:Options are assessed against:

key factors in the environment,

Resources, and

stake holders expectations.

A ranking or score is established for each option. It is also possible to incorporate

weightages for each of the key factors recognizing that some will be more important than

others.

The extent to which specific options fit these criteria determines their position.

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Ranking is a systematic way of analyzing specific options. With this or any other suchanalytical tool, ranking strategies has a subjective element involving guesswork about

the future.

However, the major advantages of ranking systems is that it forces the analyst to apply

his mind and think through the companys present position and the implications of

various strategic options.

The overall goal of this ranking is to help corporate analysts gain perspective from the

analysis to allow them to plan with confidence.

Decision Trees:

Decision trees are a good tool for strategy formulation, but are more commonly used in

operational decision making. In decision trees the final option is reached by eliminating

the other options.

This elimination process is achieved by identifying key elements of the objectives of theorganizationand examining each option to see if it measures up.

These key elements may include factors like growth, diversification, profitability etc.

Options are progressively eliminated by introducing further criteria.

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You start a Decision Tree with a

decision that you need to make.

Draw a small square to represent

this towards the left of a large

piece of paper.

From this box draw out lines

towards the right for each possible

solution, and write that solutionalong the line.

At the end of each line, consider

the results. If the result of taking

that decision is uncertain, draw a

small circle.

If the result is another decision thatyou need to make, draw another

square.

Squares represent decisions, and

circles represent uncertain

outcomes. Write the decision

above the square or circle.

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You can quantitatively

evaluate the options presented

in a decision tree.

Start by assigning a cash

value or score to each

possible outcome. Estimate

how much you think it wouldbe worth to you if that outcome

came about.

Next look at each circle and

estimate the probability of

each outcome. You use either

percentages or fractions.If you use percentages, the

total must come to 100% at

each circle. However, if you

use fractions, these must add

up to 1.

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The effectiveness of this technique depends on the ability of the analyst to break upoptions to high levels of differentiation. Data on past events you may be able to makerigorous estimates of the probabilities.

Where adequate data is not available there are techniques that use your best guess toevaluate options.

The higher the level of differentiation at progressive stages the more meaningful is thedecision tree, even though it tends to be simplistic in its approach.

Simulation modelingSimulation modeling can be used for many man-made systems. These systems can bemodeled using computers to analyze the data.

Key issues in simulation include:

acquisition of valid source information about the options,

selection of key characteristics and behaviors,

the use of simplifying approximations and assumptions within the simulation,and

fidelity and validity of the simulation outcomes.

The heuristic search technique is probably most commonly used in optimizing responseoptions.

Simulation modeling provides an expected value of how the system would behave in reallife.

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By changing the values of the variables, one can derive a number of scenarios that couldprovide a good approximation of what can the future hold.

One of the limitations on the use of strategic modeling is the need for large amounts ofhigh-quality data concerning the relationship between environmental factors andcompany performance.

In general, the use of modeling in strategy evaluation is limited to well-structuredproblems.

In real life, some key data, such as competitor reactions, are difficult to assess and/orincorporate directly in the model. However, using analysis to identify the different optionsand then assign a probability to the different options can be used as input data to provideinsights to the strategic options under different conditions.

There are some simulation-based techniques that utilize the current information forestimating performance function for several scenarios without any additional simulationruns.

Simulation continues to be the primary method by which system analysts obtaininformation about analysis of complex stochastic systems.

In almost all simulation models, an expected value can express the system'sperformance.

In discrete event systems, Monte Carlo simulation estimates performance measures forchanges in the input parameters.

The results can be obtained by using multiple settings for the simulation to provide valuesthat can be used for examining strategic options.

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The overriding danger with models of these types is that they do not provide insight formanagers/ decision-makers, as they hide the analysis and only provide the solutions.

Managers might find it difficult to follow how the results were arrived at without

knowledge of the mathematics used.

These models create a level of detail which can conceal important strategic

questions and issues. Sometimes, it is safer to use simpler models that one can

understand so that we get a better insight into the critical issues.

Scenario Planning:

Scenario Planning is a technique where options are matched to different future

scenarios. This technique has great importance in conditions of high uncertainty.

The purpose of scenario planning is not to pinpoint future events but to highlight large-

scale forces that push the future in different directions.

Scenarios are a way of understanding the dynamics shaping the future. It makesvisible these forces, so that if they do happen, the analyst will at least recognize them.

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There are four categories of primary "driving forces:

Social dynamics Quantitative and Demographic Issues: For example, how

influential will youth be in 10 years; softer issues of Values or Lifestyle.

Economic issues - Macroeconomic Trends, forces shaping the economy as a

whole. Microeconomic Dynamics: For example, how might the very structure of

the industry change with outsourcing?; and Forces at Work, on or within the

company itself, etc.

Political issues Electoral: legislative for example, if the NDA cannot form thegovernment in the Center will tax policies be changed; Regulatory: will there be

lifting of the ban on drugs in India.

Technological issues - Direct: For example, how will high-bandwidth wireless

affect land-line telephony; Enabling: For example, will the development of smaller

and faster chips result in changes in the modes and systems of communication;

and Indirect: For example, will biotech allow easy "body hacking" and thuscompete with more traditional forms of entertainment?

All real issues entail a bit of all four forces. After we identify the predetermined elements

from the list of driving forces, we should be left with a number of uncertainties.

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At first, all uncertainties seem unique. But by stepping back, we can reduce bundles ofuncertainties that have some commonality to a single spectrum, an axis of uncertainty.

If we can simplify our entire list of related uncertainties into two orthogonal axes, then

we can define a matrix that allows us to define four very different, but plausible,

quadrants of uncertainty.

Each of these far corners is, in essence, a logical future that we can explore.

The output would be number of options under different possible future scenarios. Theorganization will have to keep scanning the environment and identify which of the

scenarios is relevant at any one time to its strategic options.

The thinking process in scenario planning cannot be combined with a strong rationalist

approach to strategic decision making. It fits in a different thinking paradigm, which

defines strategy making not as a one-time decision, but as an ongoing process.

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Selecting Strategies

To preserve and maintain the wealth-producing assets of the business, its return on

equity must be competitive with other investment options available to stockholders andinvestors.

Unless there are emotional or indirect financial incentives, this expected rate of return is

based on the investors perceived risk associated with the investment opportunity.

The acceptability of a strategy will depend on:

the return on equity from the different options,

the perceived risk by the organization, and

the acceptability of the option by the stakeholders.

Any criteria must provide, at least, a means of distinguishing between acceptable and

unacceptable projects. It must also solve the problem of choosing techniques.

If there are two acceptable ways of doing something, it must choose between them. If

possible, it should also provide a ranking of projects in order of their desirability.

In reaching decisions, any suitable criteria must respect the following two fundamental

principles:

The bigger the better principle: Other things being equal, bigger benefits

are preferable to smaller ones, and

The bird in hand principle: Other things being equal, early benefits are

preferable to later benefits.

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If the investments being considered are similar in terms of size and life, the time shape of the earnings stream should be deciding factor in the selection of the project.

Finally, the criteria must have the capability to be applicable to any conceivable

investment project.

There are some simple tools that are often used by businesses to evaluate projects

and measure the return of the different options and assess the risk in the projects.

These are:

Payback Period analysis,

Discounted Cash Flow, and

Cost-Benefit analysis Stakeholder/Shareholder financial parameters, and

Sensitivity Analysis.

Analyzing Acceptability

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Payback Period Analysis

Payback period analysis has been used where a significant capital injection is needed

to support a new venture. It is the simplest way of looking at one or more major project

ideas. It is a very easy way to decide whether or not one should analyze the project

further as a viable investment decision.

It tells us how long it will take to earn back the money we spend on the project. The

formula is:Cost of Project / Annual Cash Inflow = Payback Period

Thus, if a project cost Rs. 150 million and was expected to return Rs.30 million

annually, the payback period would be 150 30, or 3 years.

If the return from the project is expected to vary from year to year, you can simply add

up the expected returns for each succeeding year, until you arrive at the total cost of theproject.

For example, to make the calculations simpler, the project costs Rs.100,000 and the

expected returns were as follows:

Year 1 Rs.18,059 Year 3 Rs.27,951 Year 5 Rs.40,072

Year 2 Rs.25,513 Year 4 Rs.32,021

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The project would be completely paid for about 10 1/2 months into the fourth year,

because Rs.100,000 (cost of project) is equal to all of the first three years' revenues,plus Rs.28,477 of the fourth year's revenues.

Projects with shorter payback periods rank higher than those with longer paybacks.

The theory is that projects with shorter paybacks are more liquid and thus less risky

they allow you to recoup your investment sooner, so we can reinvest the money

elsewhere.

Moreover, with any project the risk increases with time. With a shorter payback period,there's less of a chance that market conditions, interest rates, the economy, or other

factors affecting your project will drastically change.

The acceptable payback period will vary from one industry to another. Major public

sector ventures such as bridge building may well be assessed on a payback period of up

to 60 years.

Is payback a reliable index of profitability?The answer unfortunately must be, in general, No:

Payback analysis ignores any benefits that occur after the payback period, so a project

that returns Rs.1 million after a six-year payback period is ranked lower than a project

that returns zero after a five-year payback.

But probably the major criticism is that a straight payback method ignores the time value

of money, i.e. it ignores the bird in hand principle.

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Payback may become important, not so much as a measure of profitability, but for two

reasons,

(a) it is the most popularly used method in industry, and

(b) as a means of establishing an upper bound on the acceptable degree of risk

where one can appraise the near future with some confidence.

Discounted Cash Flow Analysis (DCF)

If I were to give you a thousand rupees today, would it be the same as giving you athousand rupees after 5 years.

Obviously, the answer is that it is not.

Even if you were put a thousand rupees that you got today in a bank on a compoundinterest of 10 percent, you would get about two thousand rupees after 5 years.

Money looses value due to time

It also looses value due to risk and many other factors.

To get around the problem regarding the value of time, the payback period analysis canbe extended using discounted cash flow analysis.

Once the net annual cash flows have been assessed they are discounted progressively

at a predetermined rate, usually the cost of capital.

The net present value (NPV) of the venture is then calculated by adding all the

discounted annual cash flows (after taxation) over the anticipated life of the project.

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DCF analysis is the most widely used investment appraisal technique. It is particularlyuseful for comparing the financial merits of strategies which have very different

patterns of expenditure and return.

Benefit-cost Ratios

A benefit cost ratio is as the name implies, simply a ratio between the sum of the

benefits, measured in some manner, and the costs of the project.

There are two versions of the benefit-cost ratio analysis. There is the: undiscounted benefit-cost ratio analysis, and

the discounted benefit-cost ratio analysis.

Undiscounted benefit-cost ratio again has two versions, which we may label:

gross, and

net

In gross, benefits are calculated without deducting depreciation, then added and the

sum divided by the investment cost.

In the net version, depreciation is deducted in computing the benefits.

In the undiscounted version, the benefits are taken at face value, while in the

discounted versions calculations are based on a discount factor.

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A discounted benefit-cost ratio is a somewhat more sophisticated tool. It is the ratio ofthe present value of the future benefits, at a specified rate of discount, to the present

value of the present and future investment outlays and other costs, at the same rate.

The cost of capital is of crucial importance in this technique, since rankings will be

dependent of the value of the cost of capital chosen.

Consider the following two projects:

A costs Rs.100.00 and returns Rs.106.00 in year.

B costs Rs. 100.00 and returns Rs. 112.36 in two years time.

Let us calculate using discounted benefit-cost ratios at 5 percent, 6 percent and 7

percent respectively.

The yield is exactly 6 percent. Therefore:

If the discount rate is 5 percent, project B is better.

However, if it is 7 percent project A is better.

If the required rate of return is 6 percent, we can be indifferent whether we accept

either or both.

If it is 5 percent, both are profitable, while if it is 7 percent neither is.

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The introduction of compound interest into the calculation effectively gives more weight

to early receipts than to late ones.

Judged on the two basic principles, the biggerthe better principle and the bird in the

hand principle, both versions of Benefit Cost Analysis comply with the bigger the

better principle. The discounted version complies with both.

BenefitCost Analysis is a very useful technique and this method is especially of great

use in giving accept-reject decisions.Other Financial Criteria:

We have covered financial analysis earlier in discussing the financial capability of the

organization.

The analysis is carried out in two steps.

Financial analysis is carried out on new investments.

Then the data on the new investment is added to the organizations existing

financial data and an analysis of the combined data carried out.

The combined values should be higher than the value of the stand-alone project.

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Additionally, from the stakeholders point of view, data crucial to determining the

acceptability of the project are: Return on assets

Cash Flow, and

Economic Value added.

Some other important financial ratios that drive shareholders are:

Expected return for shareholders:

The Return on Equity Dividend Policy

Concept Description Remarks

Return onAssets (ROA)

The ROA is a fundamental measure of the

efficiency with which a firm manages its assets.

ROA is an Economic profitability. It answers the

question:

How much profit the firm is generating from the

use of its assets?

"EBIT, earnings before interest and taxes, is the

income earned by the company without regard to

how it is financed; so EBIT (1 - t) is income after

tax where t is the corporate tax rate.

ROA = [EBIT.(1-t)/ Assets] x 100

ROA can be improved

either byimproving the Profit margin; through Cost

Control

or

Revenue increases, or by improving the Asset

turnover through a better capacity utilization

or a more efficient WCR management

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Cash flow

The Operating cash flow (Cash flow provided by operations) is

a central and crucial concept for financial management. It

measures the ability of the firm to generate, through its day-to-

day operations, a flow of cash, and therefore evaluates its

capacity for survival and for long term growth

The OCF is the basic and fundamental source of cash for the

investment and financing policies of the company.The higher it

is, the better it is, the more freedom and flexibility it gives to the

firm to build its LT strategy without constraint and interference

from finance.

Operating cash flow (OCF) =

Net profit after taxes (PAT) +

Depreciation

= Internally generated funds

(IGF)/ increase in WCR or

+ Decrease in WCR

EconomicValueAdded(EVA)

EVA says that a company or division creates value for owners

only when its operating income exceeds the cost of capital

employed.

The weighted average cost of capital (WACC) is also a basis to

judge an investment project by using the company WACC to

discount the Free Cash Flows on all new projects. Ideally,

however, each project should be evaluated at its own

Opportunity Cost of Capital (OCC). The true OCC depends on

the use of capital.

Condition :

ROA > WACC - or- IRR >

WACC

Stockholders want to make

their shares as valuable aspossible. Investing in a project

is worthwhile if its NPV is

positive. In this case, we

create value for shareholders.

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ExpectedReturn for

Shareholders

The CAPM models the risk expected and expected return trade-off

in the capital market. It looks at the company in the market. The

CAPM is a forecasting model which allows the calculation of

expected profitability using anticipations of risk. To use it correctly,

one should use a forecasted rather than an historic .

The calculations above are based on the following:

the risk premium from the market portfolio (e.g. S &P500) is stable

in time and for the future.If Risk free rate is not stable over time, it is better to use the current

Rf at the time of evaluation.

The main critique concerning is its instability over time. It

synthesizes a large amount of information in a single value, and

this strength equally represents its main weakness.

The Capital Asset Pricing

Model [CAPM]

CAPM = Return on stock

(Rs) = Rf + .(Rm - Rf)

Where:

Rf: Risk free rate

Rm: Expected marketprofitability rate.

(bta): is the measure

of risk used for a single

share.

Return onEquity (ROE)

ROE is a basic measure of the efficiency with which the firm

employs the owners' capital and estimates the earnings per Rs.

100 of invested equity capital.It incorporates the consequences of the financing policy of the firm

that is the way the assets are financed. This is called the "financial

leverage".

ROE = (Profit/Sales) x (Sales/ Assets) x (Assets/Equity)

This decomposition shows the 3 levels for managerial control of

ROE. It also demonstrates that two companies may have the same

ROE, but resulting from very different cocktails or strategies.

ROE = Profit/ Equity =

ROA +{[ ROA - i].D/E}Where

i is interest rate;

D is Debt; and

E is Equity

or

ROE = ROA + Leverage

factor

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DividendPolicy

The condition for equilibrium on well-functioning capital markets

is that at each point in time all securities in an equivalent risk

class are priced to offer the same expected "r".

We can express today's price as the present value of a

perpetual stream of dividend.

Po =Div1/r

r = {[Div1 + P1] Po}/ Po

Po : Current price

P1 : expected price at the end

of the year

Div1 : Expected dividend on

share

r is return to Stockholder

Shareholder Value Analysis (SVA)

During the 1980s, attempts were made to address many of the limitations and criticisms

of traditional financial analyses including looking at how corporate development

strategies were, or were not, generating shareholder value. These misgivings

generated SVA.

SVA establishes value creation by looking at the present value of operating cash flows

within the planning horizon, the present value of operating cash flows after the planning

horizon, the current value of marketable securities and other non-operating

investments, and the corporate debt.

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It identifies and evaluates the key cash generators of the business, which are called

value drivers.

Though value drivers are subjective and their interdependencies are complex,

managements focus on value drivers in making strategic decisions and in

implementation and control makes this an important addition to strategy evaluation.

SVA recognizes the complex interdependencies between the strategic business unit

and the investment decision. Therefore, it evaluates strategies at the SBU level and not

just separate projects.

The overall concept is that money comes in from one or more sources and money goes

out as well. The goal is to identify net cash flows by year.

Businesses compute the shareholder value for short listed strategies and compare

these in terms of their impact on shareholder value and then with the current sale value

of the business.

shareholder value evaluates the difference between the value of the business (basedon its chosen strategy) and the current sale value of the business.

In practice, shareholder value often brings in the results could be surprising.

Business units with the greatest revenue are not always the most valuable in terms of

shareholder value. In fact, a business unit can even have a negative value.

Can you tell, why?

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Sensitivity Analysis

Sensitivity analysis (SA) is a useful technique for assessing the extent to which the

success of a preferred strategy is dependent on the key assumptions.

SA is used to increase the confidence in the strategy by providing an understanding of

how the strategy variables respond to changes in the inputs and how sensitive to

predicted performance or outcome is to each of these assumptions.

For example, the key assumptions might be that market demand will grow by 7 per

cent p.a. Sensitivity analysis asks: what would be the effect on performance if the

market growth is only 5 percent.

How would this impact the strategic decision?

How important is the market growth in the decision process?

This process helps develop a clearer picture of the risks and the level of confidence in

a given decision.

It allows each of the important assumptions underlying a particular strategy to be

questioned and changed.

Sensitivity Analysis is a mathematical technique that is defined by a series of

equations, input factors, parameters, and variables aimed to characterize the strategy

being investigated.

Screening Assumptions

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The techniques are used to characterize the uncertainty associated with a strategy

and to determine:

the quality of strategy definition,

factors that mostly contribute to the variability of the results

the range in which the strategy variation is maximum

interactions between the different environmental factors.

There are several possible procedures to perform sensitivity analysis. The choice of

which SA method depends on the problem the organization is trying to address, on

the characteristics of the strategy under study, and also on the computational cost

that the organization can afford.

The most common sensitivity analysis is sampling-based. A sampling-based

sensitivity is used when the variables or input factors are subject to many sources ofuncertainty. The model repeats calculations for combinations of values sampled

thereby increasing the level of confidence in the results.

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SA models help in providing insights of:

possible outcomes of financial investments,

the choice of strategy,

analysis of options,

the assessment of environmental impacts, etc.

The accuracy of the models depends upon:

the information fed into them,

upon their structure, and

upon the framing assumptions made to build them.

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Analyzing Feasibility

Assessing the feasibility of options is concerned with determining if the organizationhas the resources and competencies to deliver a strategy. A number of analytical

approaches can be used to assess feasibility.

Funds flow Analysis

Break-even Analysis

Resource Deployment Analysis

Risk AnalysisFunds Flow Analysis:

The funds flow analysis classifies into orderly presentation the sources and uses of

funds over a period of time.

Broadly, the term funds includes all financial capital or resources.

The funds flow analysis is essentially an analysis on the change of permanent capital

and the assets in which the permanent capital is invested over a designated time

interval.

Any use of funds must have its counterpart in one or more sources and any source

must have one or more offsetting uses.

As a tool for planning, the funds flow analysis, is an essential device in planning the

amount, timing, and character of new financing.

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Estimated uses for funds are made for each of several years in the future for:

new fixed assets,

working capital,

dividends, and

for repayment of debt.

Estimates are made of the funds:

to be provided by operations and the difference, if any, from borrowings (increasing long term debt), or

from sale of stock (thus increasing the capital stock account).

If the indicated amount and timing of the new funds is greater than management thinks is

feasible to raise; then the strategy needs to be re-examined.

To the extent to which this is a forecasting technique, it is subject to the difficulties and

errors of any method of forecasting.

Nevertheless, it is a good measure of financial feasibility. It will identify whether or not the

organization has the funds to use at the time that they are required for the strategy and

where the funds will come from.

Unlike many financial statements, the funds flow analysis provides a dynamic picture to

management.

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Break-Even Method of Investment Analysis:

Break-even analysis is a useful tool to study the relationship between fixed costs,

variable costs and returns.

A break-even point defines when an investment will generate a positive return and can

be determined graphically or mathematically.

Break-even analysis computes the volume of production at a given price necessary to

cover all costs. It computes the price necessary at a given level of production to cover

all costs.

Costs are of two types:

"Variable costs," which

increase directly in

proportion to the level of

sales in money terms orunits sold.

"Fixed costs," which remain

the same regardless of our

level of sales.

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Mathematical Relationship: The graphic method of analysis helps understand the

concept of the break-even point. However, the breakeven point can be determined by

using the following formulas:

Sales Price per Unit Variable Costs per Unit = Contribution Margin per Unit.

Contribution Margin per Unit divided by Sales Price per Unit = Contribution Margin

Ratio.

Breakeven Sales Volume = Fixed Costs divided by Contribution Margin Ratio.

Appraisal of Break-even Analysis:The main advantage of break-even analysis is that it

points out the relationship between cost, production volume and returns.

It can be extended to show how changes in fixed cost-variable cost relationships, in

commodity prices, or in revenues, will affect profit levels and break-even points.

Limitations of break-even analysis include:

It is best suited to the analysis of one product at a time;

It may be difficult to classify a cost as all variable or all fixed; and

There may be a tendency to continue to use a break-even analysis after the cost

and income functions have changed.

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There is a large increase in profits as a result of relatively modest increases in sales

over the breakeven point, as well as the large increase in losses as a result of modestsales declines below the breakeven point.

The extent to which a business uses fixed costs in its operations is referred to as

"operating leverage." The greater the operating leverage, the larger the increase in

profits as sales rise and the larger the loss as sales fall.

A business often can choose between a high level of fixed assets and a lower level of

fixed assets.

The major benefit to using break-even analysis is that it indicates the lowest amount of

business activity necessary to prevent losses.

Resource Deployment Analysis:

Assessment of feasibility on parameters other than financial is called a resource

deployment analysis. It makes a wider assessment of the resources and competencesof the organization in relation to specific strategies.

Various strategic options are compared against the current resources and competences

of the organization in order to judge two things:

the extent to which there is sufficiency of current resources and competences, and

the extent to which these need change to succeed and pursue the strategy.

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Alternative strategies by and large require different key resources and competencies.

Even if the should require similar resources and competencies they require them in

different measures.

Often, resource deployment analysis results in organizations choosing strategies which

most closely fit the configuration of their present resources and competences.

The real benefit is the identification of those changes that are feasible in terms of scale,

quality of resource or timescale of change to propel the organization towards its visionthe capability to stretch and to leverage.

Analyzing Risk

Analyzing risk is essential to be able to build a project plan that maximizes the

probability of project success. To the firm, risk is in the possibility of unforeseen

fluctuations or deviations in its expected cash flows.

Identification of risks is generally done as part of a feasibility study and at each newphase of a large project.

Risk exposure is defined as the product of the likelihood that the risk will occur and the

magnitude of the consequences of its occurrence. The process of identification is

assisted by use of risk factor tables that capture indicators of commonly encountered

risks.

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Risk exists because we are unable to make perfect forecasts and corporate risk does

not necessarily vary directly with project risk and may, in fact, vary inversely with it.

When we combine any two operations, each of which generates income and there is a

negative correlation between the income stream of the project and the existing

operations or the projects outcomes are sufficiently uncorrelated, the project is

preferable from the point of view of reducing the risk of the organization, though riskier

when taken separately.

Analyze Risks: The identified risks are analyzed to establish the project exposure foreach risk and to determine which risk items are the most important ones to address.

Risk exposure is defined as the product of the likelihood that the risk will occur and the

magnitude of the consequences of its occurrence.

Plan Risk Handling Actions: Risks may be handled a number of different ways.

Alternatives include:

Accept the risk Transfer the risk to someone else

Fund and staff the efforts to reduce the probability of that risk and reduce the loss

associated with the risk

For significant risks that cannot be mitigated contingency plans, normally budgeted and

approved, are established and then executed if the risk becomes a problem.

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Track and Control Risks: Throughout the project, the project team tracks progress

handling the risks, to ensure that:

actions which should reduce the probability of occurrence are effective

actions which should reduce the loss associated with the risk are effective

when risks for which there is no possible mitigation action have reached a trigger

point for the contingency plan, that contingency plan is performed

Verification Activities: While risk management is being done, verification activitiesincluding risk management status among the items are regularly reviewed.

Exit Criteria: Risk exposures for the risks to the project are at or above the level

acceptable for the project.

Bankers and other providers of funds to the organization are also interested with the risk

attached to the borrowings and the competence with which the borrowings are

managed. Therefore, managing risks becomes an important aspect of the acceptabilityof the organizations strategy.

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Creativity & Innovation

The unrelenting pace of change has created challenges, ranging from direct threats like

increased competition or technical substitution.It also has opened up new opportunities through contemporary technologies or thedevelopment of new markets.

Many organizations are not able to keep up with these changes, even those who arebracketed with the best.

In this dynamic market, anyone can win the game. Survival often takes the form of a warthat requires the right strategy to be successfully implemented.

Strategic advantage comes when an organization makes a commitment to deliver new,large-scale and overwhelming customer benefits.

Organizations with staying power mobilize a set of internal and external competenciesand resources that make it difficult for others to match its performance and results in thelong run.

By filling performance gaps and building on strengths, even vulnerable organizations can

accelerate their momentum against the leaders in their industries.The most powerful force to fill performance gaps and build on strengths is the ability of itspeople to work together. When people work together they develop the innovativecapability of the organization also.

However, as organizations grow bigger, employees get to be more specialized. As aresult the number of people who understand how the organization as a whole functionsdwindles. This setback often acts as a challenge to corporate survival.

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This can be corrected when organizations become more innovative and creative.

The accelerating rates of growth of knowledge and technological discontinuities alsohave important implications.

Organizations that have to maintain or improve their position in the marketplace have to

become creative and innovative. It has to develop structures, culture and systems that

will make it a strategic organization.

Despite the changing nature of competition and the intensification of competition,

innovation and creativity are the major influencing factors in enhancing growth and

profits.

A commitment to innovate and focus on providing value in products and services is a

basic requirement. Whoever can provide the value will prevail.

If companies have to improve their position in the marketplace, they require leadership

that understands how the industry works.

Companies have to ensure improvements in productivity, efficiency and control. This is

only possible if serious efforts are made to encourage creativity.Creativity is the ability tosee the same thing as everybody else but thinkof something

different from the others, the ability of problem solving.

In todays business world of discontinuities, organisations have to reach out to persons

who are creative and encourage and develop creativity not only for strategic thinking but

also to use this creativity to develop the innovative capability of the firm.

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The object should be to drive the organisation in ways that innovativeness is built into

the system.

The nature of knowledge and competition in todays world is such that if the

organization does not exploit it first, someone else might use the knowledge and

replace the organization in the marketplace.

Innovation within all enterprises, both large and small, whether public or private, is the

key to the future wealth and stability for industries with different levels of complexities

and uncertainty.

Innovation or innovative thinking has made a significant impact in the development of

strategic thought. Well thought out strategies and strategic thinking will play an

increasingly important role in the future.

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Creativity Techniques

There are a number of tools are used as techniques for developing creativity and problem

solving abilities in people.These solutions are being used today by a number of business organisations.

Strengths of Creativity techniques:

Creativity tools can generate radical and innovative solutions

Lots of fun, and

Can help with team building

Weaknesses of Creativity tools: Radical ideas are often not developed after the session and policy makers fall

back on "safe options"

Learning to be creative can take time. Often, after the excitement of a creativity session,

there is a lot of optimism, and this slowly is lost.

At some you start feeling pessimistic about your abilities. However, as you get out of your

pessimism, you find that you have been able to bring out your creativity.You may start with some changes that are small. As you manage to implement changes -

organizational changes for instance it is a good start.

Most of innovation comes through incremental improvements, small changes that finally

can have more effect than you can imagine.

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THE PATH OF INNOVATION

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Bra ins torming:

A.F. Osborn developed the brainstorming procedure in 1953. The basis of Brainstorming

is generating ideas in a group situation based on the principle of suspending judgment.

When faced with a problem, we automatically start exploring the things we know for a

solution. But radical solutions are never going to be found within the problem area.

We have to force our brains to jump out of the existing framework into another one.

Brainstorming techniques are a way to do this.

Brainstorming sessions are great for generating hundreds of ideas and building up

energy and motivation within a team.

There are many variants of Brainstorming, although the basic rules are the same.

Classic Brainstorming;

Rawlinson Brainstorming; and

Trigger Sessions; etc.

Brainstorming has two phases to it,

the idea generation stage, and

the judgment phase.

The generation phase of ideas is separate from the judgment phase of thinking.

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Classic Brainstorming - In this, a panel (typically 4-8 people) is constituted with aleader. The panel is closeted in a room and a brainstorming topic or problem is

announced and explained.

The ground rules of the discussions are:

no criticizing of ideas;

ideas should be of a problem solving nature;

avoid generalisations and abstractions;

all ideas are as valid as each other;

no censoring of any ideas;

Listen to other ideas, and try to piggy back on them to generate other ideas.

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The idea is to encourage the generation of ideas. The members are encouraged to

provide lots & lots of ideas. Free-wheeling is allowed. No idea is discussed, they are

simply recorded.

After the ideas are generated, these ideas are classified or grouped for further

discussion. The potential of the idea may be decided by the leader, or put to vote.

Ideas that are identical can be combined, all others should be kept. It is useful to get a

consensus of which ideas should be looked at further or what the next action andtimescale is.

Similar techniques are the Rawlinson Brainstorming and Trigger sessions. The judgment

phase of brainstorming is similar in all the variations of this technique.

During a brainstorming session people drop their defensiveness and instead of

competing for power and status, they compete for excellence and creativity of their

ideas.

Brainstorming reinforces a sense of participation, increases commitment to implement

the chosen course of action, and the self-confidence of the participants.

Brainstorming is a powerful tool that can easily be used to develop ideas and enhance

the creativity of the participants.

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Attr ibute List ing:

Attribute listing is a technique which takes an existing product or system, breaks it intoparts, identifies various ways of achieving each part, and then recombines these toidentify new forms of the product or system.

It has many variants, such as Morphological Analysis and Value Engineering.

This technique is based on the premise that creativity arises from adding attributes fromone object to another. For example, casters used in skating when grafted to bags, makethem easier to transport. These are creative acts and create new designs for products.Attribute listing attempts to do this.

Procedure:

The participants are asked to make a list of the basic but modifiable attributes,

properties or specifications of a particular object or activity. Then an attempt is made to

generate alternatives to the current attributes. Asking questions does this.

For example, the development of the gas turbine required material resistant to creep

deformation and rupture at temperatures up to 10000 C; resistant to hot gaseous

corrosion and accidental shocks; and capable of being formed.

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The questions to be asked:

Are there materials with such attributes?

What are the alloys that have some of these attributes? Which alloying materials

give these properties to these alloys?

This type of questions can identify alternative options. Say, Nickel- chromium-iron

alloys were identified as an option.

In attribute listing, the next stage is that we need to examine how these qualities can

be grafted on to these existing alloys.

How can additional attributes be incorporated into these alloys?

What are the characteristics of Chromium?

What are the characteristics of Nickel?

Which are the attributes of chromium and nickel that impart these qualities?

Can we use the same alloying materials in increasing quantities or differentproportions?

Can we use alloying materials of superior quality based on the periodic table?

Asking what function a current attribute serves, and then looking for alternate ways of

meeting the function or enhancing the qualities of the function, is the way determining

the properties or attributes required for problem solving.

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A more mechanical and less intuitive way of using attribute listing is to generate

provocative combinations by working through each attribute in turn and picking one of theways of achieving that attribute at random (e.g. with dice).

You can then use this to trigger more ideas or you can attempt a form of constructive

evaluation by identifying what would be good about it, and what problems it would create.

This process of generating random combinations and then using them to stimulate ideas

can be repeated ad lib. Like brainstorming, attribute listing helps develop anexperimental, innovative bent of mind. It also provides possible new applications of ideas.

Principles:

The principles of attribute listing as follows:

Creation is not inspiration alone it is largely adaptation and experimentation.

Creation is not just mechanically combining different products and ideas. It is useful

modification of an attribute, or assimilation of the attributes of other things. In trying to modify the current attributes of an object, it is desirable to search for

concrete alternatives. For instance, if one is seeking to change hard railway seats,

one should not just think of soft seats, but seats with the softness of a pillow or vinyl

or foam.

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Creativity can be systematised by first looking at closely related substitutes of the

current attributes and then progressively going in for more and more far-outalternatives.

Creation is not just stealing of ideas. It is a continuing stream of modifications

suggested by ideas in use, which result over time into greatly changed products or

objects.

The more specific the object or activity one wishes to change, the better will be the

results.

The solution also helps in fixing priorities of attributes and encouraging one to look for

alternate ways of satisfying the functional requirements by asking:

What functions the attributes perform?

How critical are the attributes?

Synect ics:This technique developed in 1961 by William J.J. Gordon is based on the theory that

the mind has several layers. Each layer, though connected to the others, has a

distinctive mode of functioning.

The deepest layer, the unconscious mind, has the vital functions of self-

preservation and reproduction.

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The pre-conscious mind is responsible for fantasies and imagination. The

structure of fantasy has at its core, wish fulfilment. This wish fulfilment is achievedby giving the imagination free rein and by dropping real life constraints that impede

wish fulfilment.

Finally, there is the conscious mind that is orderly, logical, evaluative, and

analytical and ascendant in the wakeful state.

Synectics is based on access to the pre-conscience mind. They have developed

heuristic methods to imitate the incubation phase (incubation is the phase of problemsolving of the pre-conscious mind) and harnessing it.

The pre-conscience mind does not think logically, it thinks analogically, associatively

and visually. Synectics uses analogies for fantasising.

There are four types of analogies, used in this procedure:

direct analogy,

personal analogy,

fantasy analogy, and

symbolic analogy.

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Direct analogy involves seeking a direct comparison of the phenomenon underdiscussion with some other phenomenon that is similar.

In the Personal analogy, the person is asked to retain his individual human sensibility

but is simultaneously asked to transpose himself as the object and react on the events

and circumstances prescribed.

In the Fantasy analogy, group members are urged to fantasise some perfect solution

even if it contradicts common sense and scientific knowledge.

Symbolic analogy uses of metaphors or key words that contain a paradox.

Procedure:

An Expert explains the problem to the group. He selects a word or topic then asks the

group to describe the topic, either in small group discussions or by individually writing a

paragraph; e.g., MUSIC.

He selects another word or topic then asks the group to generate a list that would have

the same characteristics. Say the word is BIAS. How are MUSIC and BIAS alike? Ask

them to generate mental images.

Selecting the direct analogies, the group creates personal, fantasy and symbolic

analogies, at appropriate stages. When responses show potential, an exploration takes

place.

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The general steps used in this technique are:

Analysis and definition of the problem

Spontaneous solutions

Reformulation of the problem

Creation of direct analogies

Personal analogies (identification)

Symbolic analogies (contradictions)

Direct analogies

Analysis of the direct analogies

Application to the problem

Development of possible solutionsThe conduct of the session is largely determined by the Expert who co-ordinates the

session. Using this method, Synectics, attempts to identify promising approaches andviewpoints that could possibly lead to novel solutions.

As in brainstorming, no evaluation is carried out of the ideas generated during thesessions.This is a powerful technique for training people to become more flexible and original. Itworks better if the group members are diverse. It has been used by large multinationalcorporations for generating workable approaches to difficult problems.

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Random Links:

This is a very interesting and easy to play creativity enhancement technique. You pick uptwo random quantities, one is an item and the other is a stimulus, which is normally the

problem. There are 2 rules:

(a) the random item must be truly random; and

(b) you must find a connection.

The random item can be physical: for example, a torch, a tennis ball, tandoori, etc. Or it

can be a word picked at random from a book or a list of words. Then you can think aboutthe characteristics of the random stimulus.

Now combine the two, and applying the random stimuli back to your random item or vici

versa.

Example: You are looking at the problem of young adults' education; your random object is rasagulla,

a popular sweet. The sort of connections you may start to make might include:

Rasagullas are treats - divide courses into very short sessions, about a day, with a reward for eachday completed.

Rasagullas are full of sugar, which gives you energy - emphasize how energy makes you more

interested in learning more.

There are thousands of other connections that can be made. Ideas need to be built upon,

encouraged, and support built up around them.

This is the technique that feels most creative - and it is also the easiest to do and is very effective.

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Revolut ion

This creativity technique is designed to be provocative. It deliberately challenges rulesand assumptions. Very often, our ability to come up with innovative ideas is limited by the

rules of our own framework. Revolution breaks those rules.

Here are 5 questions that may get you started:

What if we did nothing?

What if everything cost half of what it is today?

What if demand was twice as high?

What if food was farmed from the sea floor?

What if children were asked to teach adults?

Now try to find as many answers that you can to each of the questions. The limit is your

imagination.

Mind Mapping

Mind mapping also called spiderdiagrams represents ideas, notes, information, etc. infar-reaching tree-diagrams.

A Mind Map is a powerful graphic learning tool which is designed to add clarity to the

relationship between different factors in developing objectives.

It uses word, image, number, logic, rhythm, color and spatial awareness skills in a single,

uniquely powerful manner. In so doing, it gives you the freedom to roam the infinite

expanses of your brain.

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To draw a mind-map:

Layout a large sheet of paper and write a concise heading for the overall theme in

the centre of the page.

For each major sub-topic or cluster of material, start a new major branch from the

central theme, and label it.

Each sub-sub-topic or sub-cluster forms a subordinate branch to the appropriate

main branch

Carry on in this way for ever finer sub-branches.

It may be appropriate to put an item in more than one place, cross-link it to several other

items or show relationships between items on different branches. Coding the color, type

of writing etc can do this.

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Business ObjectivesMind Map

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The Mind Map can be applied to many different problems where improved learning and

clearer thinking will enhance performance. Similar to a road map, a Mind Map will: Give you an overview of a large subject/area.

Enable you to plan routes/make choices and let you know where you are going

and where you have been.

Gather and hold large amounts of data for you.

Encourage problem solving by showing you new creative pathways.

Enable you to be extremely efficient. Be enjoyable to look at, read, muse over and remember.

Attract and hold your eye/brain.

Let you see the whole picture andthe details at the same time.

Mind Maps are now used by many people around the world from the very young to

the very old whenever they wish to use their minds more effectively.

Radical tree diagrams,

Hierarchical tree diagrams,

Clustering methods,

These use the same hierarchical logic. However, they have different optical impacts,

and dissimilar abilities to characterize derived connections such as over-lapping, cross-

linking etc.

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KJ-Method:

The Basic Cycle, of the KJ Method is similar to mind-mapping, except it uses nested

clusters rather than a tree structure. It uses values of Buddhism intended as structured

meditation.

The steps are:

Card making:The coordinator of the session prepares a number of cards. Each

card has an idea and all relevant facts and information are written on individualcards.

Generally the ideas come from the participants and are collated by the

coordinator. In the group-work version, this step could be adapted to use

Brainstorming or Constrained Brain writing, to generate a supply of ideas on

cards.

Grouping and naming:The cards are shuffled, spread out and read carefully.

Cards that look as though they belong together should be grouped, ignoring anyoddities. For each group write an apt title and place it on top of its group of

cards. Repeat the group making, using new titles and any oddities to create

higher-level groups. If you have more than about 10 groups, repeat this iterative

process at yet higher levels.

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Redistribution:At this stage in the group-work version, the cards are collected and

reallocated in order than no one is given their own cards. One card is read out,and all contributors look through the cards in their own hand of cards, and find

any that seem to go with the one read out, so building a group. A name is

selected for the set that clearly portrays the contents of the cards in the set, but is

neither too broad nor a simple aggregation of the cards in the group

Chart making:Now that you have less than 10 groups, some of which may contain

sub-groups, sub-sub-groups, etc arrange them carefully on a large sheet of paperin a spatial pattern that helps you to appreciate the overall picture.

Explanation:Now try to express what the chart means to you, writing notes as you

go and being careful to differentiate personal interpretations from the facts

contained in the chart. Ideas for the solution are often developed whilst explaining

the structure of the problem.

The procedure used in the basic cycle repeated, but with a difference. For example, asimple two-cycle version will in the first cycle work out the problem definition and in the

second cycle wok towards problem solution.

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The KJ Method is often used in a more complex six cycle version. The different cycles

have different objectives. A sample of what the objectives of each of the six cycles c

strategy and selection techniues

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