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MA in Management Strategic Analysis Module - D

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SWOT analysis was introduced in Session 1 as a means of summarising how an Figure 9:4 ? SWOT Analysis: Analysing Suitability of Strategic Options

MA in Management Strategic Analysis Module

    Evaluating Strategies

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.

Your Objectives

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.

Reading

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

    Strategic Management

    R Rumelt, “The Evaluation of Business Strategy” in B De Wit & R Meyer, Strategy Process, ndContent, Context, 2 ed. International Thompson Publishing 1998

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    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 operating?

     ? Is the strategy viable?

    ? Does the strategy exploit core

    competences?

    Advantage

    ? 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?

    stakeholder expectations?

    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

    available?

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

    are they?

? Validity are the assumptions made about the strategy reasonable and justifiable given

    the context?

? Achievability what is the likelihood of success for the strategy given conditions within

    the external environment?

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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

    Suitability

    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

    Acceptability

    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

    they?

    Feasibility

    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

    Stakeholder 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.

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C. SUITABILITY

    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

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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

    options.

    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

    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.

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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

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    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.

Illustration

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

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SAA 1

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.)

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C. ACCEPTABILITY

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

    stakeholder expectations?

? Does the strategy look attractive in terms of financial returns and the timescale required

    for delivery?

? 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

    organisation.

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

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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

    module.]

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

    greater detail.]

SAA 2

    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.)

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