MA in Management Strategic Analysis Module

Evaluating Strategies
Blank Page
A. INTRODUCTION TO SESSION
Within all organisations there will come times where a proposed course of action, or more
likely a number of courses, need to be evaluated. In Session 1, discussion about the nature
of strategic management suggested that a strictly sequential model of analysis-choice-
implementation stood at one end of a spectrum of descriptions of the strategy process, with
most organisations following a more incremental model of strategy development. ever the
less, the evaluation o strategic o!tions is an important part of the strategy process,
whether largely incremental and implicit or an e!plicit stage within a formal planning system.
"owever conducted the focus of attention is on the future of the organisation rather than
assessing past performance.
In Session 1 it was also argued the strategic analysis #tool kit$ could be applied to assist all
aspects of strategic management. %he primary purpose of this Session is to e!amine how
many of the tools, models and frameworks e!plored throughout this &odule can be used in
the assessment and selection of strategic options. %his process can also be assisted by
applying some of the tools e!plored in other modules of the course, so where appropriate
these are mentioned below.
"our O#$ectives
'y the end of this session you should be able to(
)utline the range of criteria that can be applied in the evaluation of strategic options.
*pply relevant tools, models and frameworks to assist in the assessment and selection
of appropriate strategic options for organisations.
Reading
+ ,ohnson - . Scholes, Exploring Corporate Strategy /h. 0
% ,acobs, , Shepherd - + ,ohnson, Strengths, weaknesses, opportunities and threats
(SWOT) analysis$ in 1 *mbrosini et al., Exploring Techniques o !nalysis and E"aluation in
Strategic #anage$ent
2 2umelt, #The E"aluation o %usiness Strategy$ in ' 3e Wit - 2 &eyer, Strategy &
'rocess, Content, Context, 4
nd
ed. International %hompson 5ublishing 1660
/var/www/apps/conversion/tmp/scratch_6/240939677.doc
%. E&A'UATIN( STRATE(IES A )RAME*OR+
In his article The E"aluation o %usiness Strategy, 2ichard 2umelt identified the key criteria
against which strategic options need to be evaluated as being consistency, consonance,
advantage and easi#ility. Similarly, in Exploring Corporate Strategy, +erry ,ohnson and
.evan Scholes identified suita#ility, easi#ility and acce!ta#ility as the broad tests to be
used. Whilst not identical, there are many similarities between the approaches in terms of
the questions that they pose about particular strategic options, as indicated in 7igure 6(1.
,o-nson . Sc-oles/ Criteria Rumelt/s Criteria
Suita#ility
(oes the strategy address the
circu$stances in which the organisation
is operating)
*s the strategy "ia+le)
(oes the strategy exploit core
co$petences)
Consonance
(oes the strategy address the external
en"iron$ent)
Advantage
(oes the strategy create,$aintain
co$petiti"e ad"antage in the selected
area o acti"ity)
Acce!ta#ility
What are the expected peror$ance
outco$es and are they consistent with
stakeholder expectations)
Consistency
!re goals and policies $utually
consistent)
)easi#ility
-as the organisation got the resources
and capa+ilities to deli"er the strategy)
)easi#ility
Can the strategy +e atte$pted within the
physical, hu$an and inancial resources
a"aila+le)
)igure 012 Com!aring Tests or Evaluating Strategic O!tions
%o the criteria identified above can also be added the following questions(
Attractiveness 8 does the strategy look attractive in terms of financial returns and the
timescale required for delivery9
&ulnera#ility 8 what are the risks involved in following the strategy and how significant
are they9
&alidity 8 are the assumptions made about the strategy reasonable and :ustifiable given
the conte!t9
Ac-ieva#ility 8 what is the likelihood of success for the strategy given conditions within
the e!ternal environment9
/var/www/apps/conversion/tmp/scratch_6/240939677.doc
*ll these questions can be combined under the three broad criteria of suitability, acceptability
and feasibility, but to find answers to the questions involved in assessing and selecting
particular options requires the application of relevant tools, models and frameworks. In
7igure 6(4, a revised list of the questions implied by each of the broad sets of criteria are
linked to relevant tools e!plored in previous Sessions, as well as drawing on some
techniques e!plored in the other &odules of this course.
Criteria . 3uestions Tools4 Models . Tec-ni5ues
Suita#ility
(oes the strategy address the external
en"iron$ent)
*s the strategy "ia+le and achie"a+le
gi"en conditions within the en"iron$ent)
(oes the strategy +uild upon or exploit
the strategic capa+ilities o the
organisation)
(oes the strategy create,exploit synergy
across the organisation)
(oes the strategy it with the current
corporate culture o the organisation)
(oes the strategy create,$aintain
co$petiti"e ad"antage)
SW)% analysis
5;S% analysis
7ive forces framework
Strategic group analysis
&arket segmentation analysis
2esource analysis
1alue chain analysis
/ore competences analysis
*ctivity mapping
/ultural web mapping
+eneric strategy identification
Synergy analysis 8 portfolio< linkages< core
competences< management styles
Sources of competitive advantage appraisal
Acce!ta#ility
What are the expected outco$es o the
strategy and are they consistent with
stakeholder expectations)
(oes the strategy look attracti"e in ter$s
o inancial returns and the ti$escale
required or deli"ery)
What are the risks in"ol"ed in ollowing
the strategy and how signiicant are
they)
Stakeholder mapping
5rofitability analyses 8 return on capital
employed< payback period - net present
value of discounted cash flows
2isk analyses 8 financial ratio pro:ections<
sensitivity analysis - simulations
)easi#ility
-as the organisation got the resources
and capa+ilities to deli"er the strategy)
What gaps in resources and capa+ilities
need addressing in order to ensure
success)
2esource analysis
1alue chain analysis
/ore competences analysis
*ctivity mapping
2esource and capability gap identification
/ultural web re-mapping
Stakeholder re-mapping
)igure 016 A )rame7or8 or Evaluating Strategies 3uestions and Tools
Some of the tools and techniques identified in 7igure 6(4 can be used to provide input into
addressing the questions under more that one set of criteria. %his does imply that the
analyses need to be undertaken repeatedly, :ust that their results have application in more
than one area. %he following sections e!plore each of the criteria in more detail, reviewing
the questions and how the tools, models and techniques can be applied.
/var/www/apps/conversion/tmp/scratch_6/240939677.doc
C. SUITA%I'IT"
%he assessment of the suita#ility of a particular strategy is concerned with the logic or
rationale on which it is based - how the proposed strategy creates and=or maintains
com!etitive advantage. %his can be broken down further to assess the e!tent to which the
strategy addresses the challenges of the e9ternal environment, is based upon or enhances
the resources and ca!a#ilities of the organisation, builds or e!ploits synergies and is
consistent with its cor!orate culture.
It is not unusual for discussions about suitability to stress the importance of it between the
elements outlined above. "owever, the more important point is that the assessment needs
to ask if the strategy ma8es sense and to identify were there are ga!s that need to be
confronted 8 which links into the assessment of easi#ility.
>sing these elements a range of criteria can be articulated as implied by the questions
outlined in 7igure 6(?. In some cases a simple #yes=no$ test will be sufficient, but if a range
of options are under consideration then an assessment of the e!tent to which each criterion
is met or surpassed might be required.
%he assessment of the suita#ility of a strategy depends upon answers to these questions(
(oes the strategy address the external en"iron$ent)
*s the strategy "ia+le and achie"a+le gi"en conditions within the en"iron$ent)
(oes the strategy +uild upon or exploit the strategic capa+ilities o the organisation)
(oes the strategy create,exploit synergy across the organisation)
(oes the strategy it with the current corporate culture o the organisation)
(oes the strategy create,$aintain co$petiti"e ad"antage)
)igure 01: Assessing t-e Suita#ility o a Strategy
*n environmental analysis is the starting point for assessing whether suggested strategies
meet the criteria related to the e!ternal environment. %he tools and frameworks outlined in
Session ?, like ;EST analysis, the ive orces rame7or8, strategic grou! analysis and
mar8et segmentation analysis may be employed, as appropriate, to identify the main
e!ternal pressures. %hen each strategic option can be assessed by addressing the first two
questions in outlined in 7igure 6(?.
Resource and ca!a#ilities analysis underpins the evaluation of the criterion related to
capabilities. %he tools and frameworks covered in Session @, including resource audit,
value c-ain analysis, core com!etences analysis and activity ma!!ing may all provide
useful insights into the e!tent to which any strategic option meets the test indicated.
In many organisations, any new strategic option needs to be evaluated within a multi-
business conte!t. *s was described in Sessions A and B, the creation and management of
synergy can provide a ma:or contribution to the organisation as a whole and underpins the
fourth question in 7igure 6(?. %he range of frameworks and models that may prove useful in
/var/www/apps/conversion/tmp/scratch_6/240939677.doc
this assessment include !ortolio matrices, lin8ages and core com!etences analysis,
the identification of management styles and the !arenting matri9. %he use of some or all
of these tools can help assess the e!tent to which any new strategy Can acquisition for
e!ampleD is consistent with, relies upon or can en-ance e!isting synergies within the
organisation.
*ny test of suitability of a particular strategic option needs to consider the e!tent to which it
is consistent with the e!isting corporate culture of the organisation. &apping the cultural
7e# allows for a more e!plicit assessment of how the proposed option may be interpreted
and possibly resisted by those within the organisation. "owever, this need not be a passive
assessment 8 the new strategy may well aim to change key aspects of the cultural web, as
was discussed in Session 0.
%he evaluation of suitability of a new strategy also needs to identify and appraise the
sources o advantage on which it is based, in terms of cost efficiency and added value.
%his can be done by considering its classification within the generic strategies rame7or8
and=or assessing the sustaina#ility of the sources of advantage and a!!ro!ria#ility of
returns, as discussed in Session E.
S*OT Analysis
S*OT analysis was introduced in Session 1 as a means of summarising how an
organisationFs capabilities Cstrengths - weaknessesD matched with the challenges of the
e!ternal environment Copportunities - threatsD. *s applied to the Churchill Ta+leware
illustration this was a simple framework for listing the key points of a largely intuitive
analysis. "owever, the technique can be e!tended to provide a more rigorous analysis o
t-e current strategy of an organisation and to evaluate t-e suita#ility o a range o
strategic o!tions.
In their article Strengths, weaknesses, opportunities and threats (SWOT) analysis %ony
,acobs, ,ill Shepherd and +erry ,ohnson show how a simple scoring scheme can be used
to assess the impact of each environmental change upon the e!isting strengths and
weaknesses of an organisation. %his can provide an evaluation of the current strategy and
highlight areas for action in terms of building on strengths or rectifying weaknesses.
%hey then go further to e!tend their scoring technique to the screening of strategic options.
Within the conte!t of the assessment of the suitability of a range of strategic options, this
adaptation of the technique can provides a useful way of bringing together and
summarising the outcomes from the many analyses outlined above.
%his approach works by systematically evaluating the impact of each environmental change
as identified from the environmental analysis on the range of possible alternative strategic
options. %he other analyses can be used to identify the strengths and weaknesses and
assess the effects of each option upon them. >sing a simple scoring system Csuch as G? to
8?D to indicate the intensity of the impact, scores can be attributed to each element for each
strategic option. 7inally, the results from the assessment of each strategic option can be
summarised on a combined matri!. 'y aggregating the scores the organisation will be able
to see(
Which strategies capitalise on environmental changes, build on strengths and
overcome weaknesses, and which do not.
Which strategy or strategies, in relation to others, are likely to offer the best way
forward.
/var/www/apps/conversion/tmp/scratch_6/240939677.doc
*n e!ample of this more approach as it could apply to a pharmaceutical company is
illustrated in 7igure 6(@.
Strategy A Im!act analysis o orming alliances 7it- #iotec- com!anies
Environmental
C-anges
<O!!ortunities .
t-reats=
Increasing
industry
globalisation
;ntrance of
new
technologies
"ealth care
rationing
ew
diseases -
resistance to
antibiotics
Total
>Strengt- or
*ea8ness
<?@>=
Strengt-s
Harge sales force I G1 G1 I G4
Heading research
facilities I G4 -4 G4 G4
+lobal recognition
of main product I -1 G1 G1 G1
*ea8nesses
o competences in
biotech or genetics
G? G1 -1 G4 GE
o new products in
line G1 G1 -1 -1 I
)ver-reliance on
main product I G1 G1 I G4
Environmental
Im!act Scores G@ GE -1 G@
Suita#ility o all strategic o!tions identiied in im!act analyses
Strategy E9ternal C-anges Strengt-s *ea8nesses Sum
Increased
global-
isation
;ntry
of new
tech-
nology
"ealth
care
rationing
ew
diseases
-
antibiotic
resistance
Harge
sales
force
Heading
research
facilities
+lobal
recog-
nition
of main
product
o
comps.
in
biotech
or
genetics
o new
products
in line
)ver-
reliance
on main
product
)ption *
*lliances
G@ GE -1 G@ G4 G4 G1 GE I G4 G4@
)ption '
+lobal
2esearch
G? G4 G1 G1 I G4 G? -1 G4 -? G1I
)ption /
)wn
'iotech.
/apability
I G? G4 G4 -1 G4 I -1 G? -1 G6
)ption 3
Improve
on past
strengths
I -1 G? -? I G1 G1 I I I G1
)igure 01A S*OT Analysis1 Analysing Suita#ility o Strategic O!tions
Source( adapted from * ,acobs, , Shepherd - + ,ohnson, #SWOT !nalysis$ in 1 *mbrosini et al. E"aluating
Techniques o !nalysis and E"aluation in Strategic #anage$ent, 5rentice "all, 1660
/var/www/apps/conversion/tmp/scratch_6/240939677.doc
* point of caution( whilst the approach uses scores, they are arrived at by a process
qualitative :udgements so spurious accuracy should not be attributed to the outcomes, the
main purpose is to present an assessment about the suitability of each option.
Illustration
EASYJET ORDERS UP TO 30 BOEINGS
Low-cost airline lans to increase !leet !i"e!ol# in atte$t to re-e$t co$etitors
Easy.et, the /01+ased low1cost carrier, is to increase the si2e o its %oeing leet i"eold in
an atte$pt to pre1e$pt co$petition ro$ ri"als such as 3yanair and 4o, the %ritish !irways
oshoot5
Easy.et will announce today that it has placed ir$ orders or 67 new generation %oeing
89818::s and has taken out options on a urther 675 The orders are in addition to 6; older
generation %oeing 89819::s that Easy.et ordered last year5 The airline also plans to start
using a urther %oeing leased +y a Swiss co$pany in which it has taken a stake5 This will
increase its leet ro$ se"en aircrat to 97 o"er the next i"e years5
Easy.et<s latest order or up to 9: aircrat has a list price o a+out =65;+n (>8;:$) although
the airline will ha"e a discount on that5 The pri"ately1owned co$pany is understood to ha"e
inanced the deposits on the aircrat ro$ cashlow5 ?ull pay$ent on the irst orders will +e
inanced +y +ank loans5 *n the longer ter$, Easy.et $ay issue enhanced equip$ent trust
certiicates 1 +onds secured +y the aircrat5 Easy.et has no i$$ediate plans or a lotation5
Stelios -a@i1*oannou, the heir to a 4reek shipping ortune, ounded Easy.et in 6AA7 to take
ad"antage o the li+eralisation o the European /nion a"iation $arket, co$pleted last year5
%ased at Bondon<s Buton airport, Easy.et +egan lying to Scotland +eore extending its
network to continental Europe including !$sterda$, %arcelona, Cice and !thens5 *t has
since esta+lished a second hu+ at Bi"erpool airport, with lights to !$sterda$ and Cice5
Easy.et is expected to use the new aircrat to start ser"ices to Spain, ?rance, the
Cetherlands, Swit2erland or 4reece5 #r -a@i1*oannou is understood to +e keen to pre1e$pt
3yanair and 4o +y lying to routes they do not ser"e5 The three airlines ha"e largely a"oided
direct co$petition with one another5
Easy.et has $ade proposals to 4ene"a airport to esta+lish a third hu+5 *t has acquired a D:
per cent stake in TE! Swit2erland, a charter carrier, which it wants to use to set up a
4ene"a1+ased low1cost ailiate5 Easy.et can acquire the re$ainder o TE! i Swit2erland
concludes an Eopen skiesE agree$ent with the E/5
TE! has i"e leased %oeing 898s5 Easy.et is using one and plans to take on a second5 *t will
return the other three to *nternational Bease ?inance Corporation o Bos !ngeles5
#r -a@i1*oannou is in"ol"ed in two legal +attles5 *n the /0, he won the right this year to
challenge %!<s support or 4o, although he ailed to win an in@unction to pre"ent 4o ro$
operating5 *n 4reece, #r -a@i1*oannou is +eing sued +y tra"el agents o+@ecting to his reusal
to use their ser"ices5
SourceF # Skapinker, ?inancial Ti$es, ;G .uly 6AAG
/var/www/apps/conversion/tmp/scratch_6/240939677.doc
SAA 2
2ead the illustration Easy.et Orders up to 9: %oeings and use relevant tools and techniques
to comment upon the suita#ility of the strategy outlined for the company.
What additional information would you require to improve upon this assessment9
Cote( not all the tools and techniques outlined above can be applied in this case, select
those that seem appropriate.D
/var/www/apps/conversion/tmp/scratch_6/240939677.doc
C. ACCE;TA%I'IT"
%he assessment of the acceptability of a strategy involves consideration of the anticipated
re7ards relative to the goals of the organisation. %he goals of the organisation are likely to
be a reflection of the e9!ectations of its key sta8e-older grou!s. *nticipated rewards
reflect the possible returns of the strategy relative to the ris8s incurred. In defining the
criteria for acceptability consideration should be given to the questions outlined in 7igure 6(E.
%he assessment of the acce!ta#ility of a strategy depends upon answers to these
questions(
What are the expected outco$es o the strategy and are they consistent with
stakeholder expectations)
(oes the strategy look attracti"e in ter$s o inancial returns and the ti$escale required
or deli"ery)
What are the risks in"ol"ed in ollowing the strategy and how signiicant are they)
)igure 01B Assessing t-e Acce!ta#ility o a Strategy
In assessing stakeholder e!pectations and their likely reaction to any particular strategy,
sta8e-older ma!!ing can be of considerable assistance. %his technique, outlined in
Session 0, allows for an assessment of the relative importance of different stakeholder
groups and implicitly their e!pectations. %he framework can highlight the alignment of
different stakeholders in response to a particular strategy, so providing an assessment of its
likely acceptability. "owever, it can also be used to proactively manage the relationships
with stakeholders to improve the acceptability of such a strategy.
%he assessment of the acceptability of the returns from a particular strategy is frequently
defined in terms of financial measures and the timescale needed to achieve them.
)rganisations often set #hurdle rates$ for the return on ca!ital em!loyed of potential
strategic options, re:ecting those where the pro:ections fail to :ump the hurdle.
*nother measure used is the !ay#ac8 !eriod which provides an assessment of the
timescale required to recover any investment 8 comparing this with other options under
consideration and=or a general timescale limit Ce.g. less than two yearsD applied across the
organisation.
&ore sophisticated assessment of the returns can be made using discounted cas- lo7
techniques, particularly the net !resent value of the optionCsD under consideration. )nly
options with positive net present values after using a suitable discount rate Cnormally linked
to the organisationFs cost of capitalD will meet the criteria for acceptability. et present
values can also be used to rank and ad:udicate between a range of possible options.
*s well as assessing the returns from particular strategies, the risks inherent in the strategy
need to be considered for acceptability. *gain, a range of financial measures can be used.
%rea8>even analysis assesses the volume of business needed to ensure that the particular
option covers its investment and acceptability will be based on an assessment of the
likelihood of this volume being met and the consequences of falling short. %he
consequences of adopting a particular strategy upon pro:ections for the li5uidity Cshort-term
/var/www/apps/conversion/tmp/scratch_6/240939677.doc
financial solvencyD and gearing Clong-term capital structureD ratios of the organisation also
provide measures of the riskiness of a strategy.
*ll these financial analysis techniques are reviewed in more detail in the 'usiness *nalysis
module.J
%he acceptability of risk can also be assessed through sensitivity analysis, which allows for
the evaluation of #what if$ questions about the key assumptions underpinning the pro:ections
for a particular strategy. Simulation modelling also allows for similar quantitative
assessment of strategic options. %he 3ecision &aking module e!plores such techniques in
greater detail.J
SAA 6
2eturn to the illustration Easy.et Orders up to 9: %oeings and use relevant tools and
techniques to comment upon the acce!ta#ility of the strategy outlined for the company.
What additional information would you require to improve upon this assessment9
Cote( not all the tools and techniques outlined above can be applied in this case, select
those that seem appropriate.D
/var/www/apps/conversion/tmp/scratch_6/240939677.doc
E. )EASI%I'IT"
*ssessing the easi#ility of strategic options involves considering whether the organisation
has the resources and ca!a#ilities to successfully implement the strategy. 7requently this
leads to an analysis of the tangible resources of the organisation, finance in particular, but a
wider consideration of all resources and capabilities should not be ignored.
*s well as assessing the feasibility of current resources and capabilities to meet the needs of
particular strategies, the ga!s need to be identified and an assessment made of the ability of
the organisation to address these issues. %hese criteria are highlighted by the questions in
7igure 6(A.
%he assessment of the easi#ility of a strategy depends upon answers to these questions(
-as the organisation got the resources and capa+ilities to deli"er the strategy)
What gaps in resources and capa+ilities need addressing in order to ensure success)
)igure 01C Assessing t-e )easi#ility o a Strategy
*n assessment of the financial feasibility of a particular strategy can be made using unds
lo7 analysis. "owever, the discussion in Session @ of this module should have made it
clear that a broader assessment, particularly of strategic ca!a#ilities built on core
com!etences and uni5ue resources is important.
%he tools and techniques of resource and ca!a#ility analysis discussed above, such as
resource audit, value c-ain analysis, core com!etence analysis and activity ma!!ing,
can all contribute to this broader assessment of feasibility.
2ichard 2umelt points to several questions that can provide a critical focus in this area(
"as the organisation demonstrated that it possesses the problem solving abilities and=or
special capabilities required by the strategy9
"as the organisation demonstrated the degree of co-ordination and integration
necessary to carry out the strategy9
3oes the strategy challenge and motivate key personnel and is it acceptable to those
who must lend their support9
%he third of these questions highlights the importance of those within the organisation to the
feasibility of pursuing particular strategies. %heir impact may be e!perienced through both
the cultural and political conte!ts of the organisation. /onsequently, the use o cultural 7e#
re>ma!!ing and sta8e-older re>ma!!ing may offer insights into the feasibility of a
particular strategy, by pointing to the e!tent of change required.
7inally, all these analyses may lead to the identification of resource and ca!a#ility ga!s
Cas mentioned in Session ED. *ny assessment of feasibility will need to assess the ability of
particular strategies to bridge these gaps.
/var/www/apps/conversion/tmp/scratch_6/240939677.doc
SAA :
2eturn to the illustration Easy.et Orders up to 9: %oeings and use relevant tools and
techniques to comment upon the easi#ility of the strategy outlined for the company.
What additional information would you require to improve upon this assessment9
Cote( not all the tools and techniques outlined above can be applied in this case, select
those that seem appropriate.D
/var/www/apps/conversion/tmp/scratch_6/240939677.doc
). SUMMAR"
%his Session has e!plored the criteria available to evaluate !otential strategic o!tions
developed within an organisation. Whilst there are a range of possible criteria that can be
identified, many can be consolidated into three broad categories(
Suita#ility 8 an assessment of the underlying rationale or logic of the potential strategy.
Acce!ta#ility 8 an assessment of risks and returns of a potential strategy relative to the
goals of the organisation.
)easi#ility 8 an assessment of the resources and capabilities needed to achieve the
potential strategy.
2eferences were made to many of the tools, models and frameworks outlined in the other
Sessions of this &odule that can be used to conduct analyses in order to provide the data
necessary to undertake the assessments.
/var/www/apps/conversion/tmp/scratch_6/240939677.doc