MA in Management – Strategic Analysis Module
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. Never the
less, the evaluation of strategic options is an important part of the strategy process,
whether largely incremental and implicit or an explicit stage within a formal planning system.
However 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. The primary purpose of this Session is to examine how
many of the tools, models and frameworks explored throughout this Module can be used in
the assessment and selection of strategic options. This process can also be assisted by
applying some of the tools explored in other modules of the course, so where appropriate
these are mentioned below.
By the end of this session you should be able to:
• Outline the range of criteria that can be applied in the evaluation of strategic options.
• Apply relevant tools, models and frameworks to assist in the assessment and selection
of appropriate strategic options for organisations.
G Johnson & K Scholes, Exploring Corporate Strategy Ch. 8
T Jacobs, J Shepherd & G Johnson, “Strengths, weaknesses, opportunities and threats
(SWOT) analysis” in V Ambrosini et al., Exploring Techniques of Analysis and Evaluation in
R Rumelt, “The Evaluation of Business Strategy” in B De Wit & R Meyer, Strategy – Process, ndContent, Context, 2 ed. International Thompson Publishing 1998
B. EVALUATING STRATEGIES – A FRAMEWORK
In his article The Evaluation of Business Strategy, Richard Rumelt identified the key criteria against which strategic options need to be evaluated as being consistency, consonance,
advantage and feasibility. Similarly, in Exploring Corporate Strategy, Gerry Johnson and Kevan Scholes identified suitability, feasibility and acceptability 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 Figure 9:1.
Johnson & Scholes’ Criteria Rumelt’s Criteria Suitability Consonance ? Does the strategy address the ? Does the strategy address the external
circumstances in which the organisation environment?
? Is the strategy viable?
? Does the strategy exploit core
? Does the strategy create/maintain
competitive advantage in the selected
area of activity?
Acceptability Consistency ? What are the expected performance ? Are goals and policies mutually
outcomes and are they consistent with consistent?
Feasibility Feasibility ? Has the organisation got the resources ? Can the strategy be attempted within the
and capabilities to deliver the strategy? physical, human and financial resources
Figure 9:1 – Comparing Tests for Evaluating Strategic Options
To the criteria identified above can also be added the following questions:
? Attractiveness – does the strategy look attractive in terms of financial returns and the
timescale required for delivery?
? Vulnerability – what are the risks involved in following the strategy and how significant
? Validity – are the assumptions made about the strategy reasonable and justifiable given
? Achievability – what is the likelihood of success for the strategy given conditions within
the external environment?
All 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
Figure 9:2, a revised list of the questions implied by each of the broad sets of criteria are
linked to relevant tools explored in previous Sessions, as well as drawing on some
techniques explored in the other Modules of this course.
Criteria & Questions Tools, Models & Techniques
SWOT analysis ? Does the strategy address the external
PEST analysis environment?
Five forces framework ? Is the strategy viable and achievable
Strategic group analysis given conditions within the environment?
Market segmentation analysis ? Does the strategy build upon or exploit
Resource analysis the strategic capabilities of the
Value chain analysis organisation?
Core competences analysis ? Does the strategy create/exploit synergy Activity mapping across the organisation? Cultural web mapping ? Does the strategy fit with the current Generic strategy identification corporate culture of the organisation? Synergy analysis – portfolio; linkages; core ? Does the strategy create/maintain competences; management styles competitive advantage? Sources of competitive advantage appraisal
Stakeholder mapping ? What are the expected outcomes of the
Profitability analyses – return on capital strategy and are they consistent with
employed; payback period & net present stakeholder expectations?
value of discounted cash flows ? Does the strategy look attractive in terms
Risk analyses – financial ratio projections; of financial returns and the timescale
sensitivity analysis & simulations required for delivery?
? What are the risks involved in following
the strategy and how significant are
Resource analysis ? Has the organisation got the resources
Value chain analysis and capabilities to deliver the strategy?
Core competences analysis ? What gaps in resources and capabilities
Activity mapping need addressing in order to ensure
Resource and capability gap identification success?
Cultural web re-mapping
Figure 9:2 – A Framework for Evaluating Strategies – Questions and Tools
Some of the tools and techniques identified in Figure 9:2 can be used to provide input into
addressing the questions under more that one set of criteria. This does imply that the
analyses need to be undertaken repeatedly, just that their results have application in more
than one area. The following sections explore each of the criteria in more detail, reviewing
the questions and how the tools, models and techniques can be applied.
The assessment of the suitability of a particular strategy is concerned with the logic or rationale on which it is based - how the proposed strategy creates and/or maintains
competitive advantage. This can be broken down further to assess the extent to which the
strategy addresses the challenges of the external environment, is based upon or enhances the resources and capabilities of the organisation, builds or exploits synergies and is consistent with its corporate culture.
It is not unusual for discussions about suitability to stress the importance of fit between the elements outlined above. However, the more important point is that the assessment needs
to ask if the strategy makes sense and to identify were there are gaps that need to be confronted – which links into the assessment of feasibility.
Using these elements a range of criteria can be articulated as implied by the questions
outlined in Figure 9:3. 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 extent to which each criterion
is met or surpassed might be required.
The assessment of the suitability of a strategy depends upon answers to these questions:
? Does the strategy address the external environment?
? Is the strategy viable and achievable given conditions within the environment?
? Does the strategy build upon or exploit the strategic capabilities of the organisation?
? Does the strategy create/exploit synergy across the organisation?
? Does the strategy fit with the current corporate culture of the organisation?
? Does the strategy create/maintain competitive advantage?
Figure 9:3 – Assessing the Suitability of a Strategy
An environmental analysis is the starting point for assessing whether suggested strategies
meet the criteria related to the external environment. The tools and frameworks outlined in
Session 3, like PEST analysis, the five forces framework, strategic group analysis and market segmentation analysis may be employed, as appropriate, to identify the main
external pressures. Then each strategic option can be assessed by addressing the first two
questions in outlined in Figure 9:3.
Resource and capabilities analysis underpins the evaluation of the criterion related to
capabilities. The tools and frameworks covered in Session 4, including resource audit, value chain analysis, core competences analysis and activity mapping may all provide useful insights into the extent to which any strategic option meets the test indicated.
In many organisations, any new strategic option needs to be evaluated within a multi-
business context. As was described in Sessions 6 and 7, the creation and management of
synergy can provide a major contribution to the organisation as a whole and underpins the
fourth question in Figure 9:3. The range of frameworks and models that may prove useful in
this assessment include portfolio matrices, linkages and core competences analysis,
the identification of management styles and the parenting matrix. The use of some or all of these tools can help assess the extent to which any new strategy (an acquisition for
example) is consistent with, relies upon or can enhance existing synergies within the organisation.
Any test of suitability of a particular strategic option needs to consider the extent to which it
is consistent with the existing corporate culture of the organisation. Mapping the cultural web allows for a more explicit assessment of how the proposed option may be interpreted
and possibly resisted by those within the organisation. However, this need not be a passive
assessment – the new strategy may well aim to change key aspects of the cultural web, as
was discussed in Session 8.
The evaluation of suitability of a new strategy also needs to identify and appraise the
sources of advantage on which it is based, in terms of cost efficiency and added value.
This can be done by considering its classification within the generic strategies framework
and/or assessing the sustainability of the sources of advantage and appropriability of
returns, as discussed in Session 5.
? SWOT Analysis
SWOT analysis was introduced in Session 1 as a means of summarising how an
organisation’s capabilities (strengths & weaknesses) matched with the challenges of the
external environment (opportunities & threats). As applied to the Churchill Tableware
illustration this was a simple framework for listing the key points of a largely intuitive analysis.
However, the technique can be extended to provide a more rigorous analysis of the current strategy of an organisation and to evaluate the suitability of a range of strategic
In their article Strengths, weaknesses, opportunities and threats (SWOT) analysis Tony Jacobs, Jill Shepherd and Gerry Johnson show how a simple scoring scheme can be used
to assess the impact of each environmental change upon the existing strengths and
weaknesses of an organisation. This can provide an evaluation of the current strategy and highlight areas for action in terms of building on strengths or rectifying weaknesses.
They then go further to extend their scoring technique to the screening of strategic options. Within the context 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.
This 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. The other analyses can be used to identify the strengths and weaknesses and
assess the effects of each option upon them. Using a simple scoring system (such as +3 to
–3) to indicate the intensity of the impact, scores can be attributed to each element for each
strategic option. Finally, the results from the assessment of each strategic option can be
summarised on a combined matrix. By aggregating the scores the organisation will be able
? 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
An example of this more approach as it could apply to a pharmaceutical company is
illustrated in Figure 9:4.
Strategy A – Impact analysis of forming alliances with biotech companies Environmental Increasing Entrance of Health care New Total -Changes industry new rationing diseases & Strength or (Opportunities & globalisation technologies resistance to Weakness threats) antibiotics (+/-) Strengths Large sales force 0 +1 +1 0 +2 Leading research facilities 0 +2 -2 +2 +2 Global recognition of main product 0 -1 +1 +1 +1 Weaknesses No competences in biotech or genetics +3 +1 -1 +2 +5 No new products in line +1 +1 -1 -1 0 Over-reliance on main product 0 +1 +1 0 +2 Environmental Impact Scores +4 +5 -1 +4
Suitability of all strategic options identified in impact analyses Strategy External Changes Strengths Weaknesses Sum Increased Entry Health New Large Leading Global No No new Over- global-of new care diseases sales research recog-comps. products reliance isation tech-rationing & force facilities nition in in line on main nology antibiotic of main biotech product resistance product or genetics Option A Alliances +4 +5 -1 +4 +2 +2 +1 +5 0 +2 +24
Option B +3 +2 +1 +1 0 +2 +3 -1 +2 -3 +10 Global Research
Option C 0 +3 +2 +2 -1 +2 0 -1 +3 -1 +9 Own Biotech. Capability
Option D 0 -1 +3 -3 0 +1 +1 0 0 0 +1 Improve on past strengths
Figure 9:4 – SWOT Analysis: Analysing Suitability of Strategic Options
Source: adapted from A Jacobs, J Shepherd & G Johnson, “SWOT Analysis” in V Ambrosini et al. Evaluating Techniques of Analysis and Evaluation in Strategic Management, Prentice Hall, 1998
A point of caution: whilst the approach uses scores, they are arrived at by a process qualitative judgements so spurious accuracy should not be attributed to the outcomes, the main purpose is to present an assessment about the suitability of each option.
EASYJET ORDERS UP TO 30 BOEINGS
Low-cost airline plans to increase fleet fivefold in attempt to pre-empt competitors
EasyJet, the UK-based low-cost carrier, is to increase the size of its Boeing fleet fivefold in an attempt to pre-empt competition from rivals such as Ryanair and Go, the British Airways offshoot.
EasyJet will announce today that it has placed firm orders for 15 new generation Boeing 737-700s and has taken out options on a further 15. The orders are in addition to 12 older generation Boeing 737-300s that EasyJet ordered last year. The airline also plans to start using a further Boeing leased by a Swiss company in which it has taken a stake. This will increase its fleet from seven aircraft to 35 over the next five years.
EasyJet's latest order for up to 30 aircraft has a list price of about $1.2bn (?720m) although the airline will have a discount on that. The privately-owned company is understood to have financed the deposits on the aircraft from cashflow. Full payment on the first orders will be financed by bank loans. In the longer term, EasyJet may issue enhanced equipment trust certificates - bonds secured by the aircraft. EasyJet has no immediate plans for a flotation.
Stelios Haji-Ioannou, the heir to a Greek shipping fortune, founded EasyJet in 1995 to take advantage of the liberalisation of the European Union aviation market, completed last year. Based at London's Luton airport, EasyJet began flying to Scotland before extending its network to continental Europe including Amsterdam, Barcelona, Nice and Athens. It has since established a second hub at Liverpool airport, with flights to Amsterdam and Nice.
EasyJet is expected to use the new aircraft to start services to Spain, France, the Netherlands, Switzerland or Greece. Mr Haji-Ioannou is understood to be keen to pre-empt Ryanair and Go by flying to routes they do not serve. The three airlines have largely avoided direct competition with one another.
EasyJet has made proposals to Geneva airport to establish a third hub. It has acquired a 40 per cent stake in TEA Switzerland, a charter carrier, which it wants to use to set up a Geneva-based low-cost affiliate. EasyJet can acquire the remainder of TEA if Switzerland concludes an "open skies" agreement with the EU.
TEA has five leased Boeing 737s. EasyJet is using one and plans to take on a second. It will return the other three to International Lease Finance Corporation of Los Angeles.
Mr Haji-Ioannou is involved in two legal battles. In the UK, he won the right this year to challenge BA's support for Go, although he failed to win an injunction to prevent Go from operating. In Greece, Mr Haji-Ioannou is being sued by travel agents objecting to his refusal to use their services.
Source: M Skapinker, Financial Times, 28 July 1998
Read the illustration EasyJet Orders up to 30 Boeings and use relevant tools and techniques
to comment upon the suitability of the strategy outlined for the company.
What additional information would you require to improve upon this assessment?
(Note: not all the tools and techniques outlined above can be applied in this case, select
those that seem appropriate.)
The assessment of the acceptability of a strategy involves consideration of the anticipated
rewards relative to the goals of the organisation. The goals of the organisation are likely to
be a reflection of the expectations of its key stakeholder groups. Anticipated rewards
reflect the possible returns of the strategy relative to the risks incurred. In defining the
criteria for acceptability consideration should be given to the questions outlined in Figure 9:5.
The assessment of the acceptability of a strategy depends upon answers to these questions:
? What are the expected outcomes of the strategy and are they consistent with
? Does the strategy look attractive in terms of financial returns and the timescale required
? What are the risks involved in following the strategy and how significant are they?
Figure 9:5 – Assessing the Acceptability of a Strategy
In assessing stakeholder expectations and their likely reaction to any particular strategy,
stakeholder mapping can be of considerable assistance. This technique, outlined in
Session 8, allows for an assessment of the relative importance of different stakeholder
groups and implicitly their expectations. The framework can highlight the alignment of
different stakeholders in response to a particular strategy, so providing an assessment of its
likely acceptability. However, it can also be used to proactively manage the relationships
with stakeholders to improve the acceptability of such a strategy.
The 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.
Organisations often set “hurdle rates” for the return on capital employed of potential
strategic options, rejecting those where the projections fail to jump the hurdle.
Another measure used is the payback period which provides an assessment of the timescale required to recover any investment – comparing this with other options under consideration and/or a general timescale limit (e.g. less than two years) applied across the
More sophisticated assessment of the returns can be made using discounted cash flow
techniques, particularly the net present value of the option(s) under consideration. Only options with positive net present values after using a suitable discount rate (normally linked
to the organisation’s cost of capital) will meet the criteria for acceptability. Net present
values can also be used to rank and adjudicate between a range of possible options.
As well as assessing the returns from particular strategies, the risks inherent in the strategy
need to be considered for acceptability. Again, a range of financial measures can be used.
Break-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. The
consequences of adopting a particular strategy upon projections for the liquidity (short-term
financial solvency) and gearing (long-term capital structure) ratios of the organisation also
provide measures of the riskiness of a strategy.
All these financial analysis techniques are reviewed in more detail in the Business Analysis
The 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 projections
for a particular strategy. Simulation modelling also allows for similar quantitative assessment of strategic options. The Decision Making module explores such techniques in
Return to the illustration EasyJet Orders up to 30 Boeings and use relevant tools and techniques to comment upon the acceptability of the strategy outlined for the company.
What additional information would you require to improve upon this assessment?
(Note: not all the tools and techniques outlined above can be applied in this case, select
those that seem appropriate.)