Evaluation and selection of strategies- Basic Notes

1. The nature of strategic options 2. Evaluation criteria 3. Tools for evaluating options
After identifying the options available, classical prescriptive strategy has always argued that the next strategy task is that of selection. In evaluating strategic options, it is useful to distinguish between the content of the option (what strategy will we select?) and the process by which the selection will be undertaken (how will we undertake the selection task?).

1. The nature of strategic options Strategic decisions involve: a. decisions on products and markets; b. decisions on generic strategy; c. decisions on growth and development options. This could be explained by discussing: a. Product - market decisions. Key considerations: product life cycle (and phasing of); product and market portfolio; product mix. b. Generic strategy decisions Questions on the emphasis between cost and distinctiveness (i.e. differentiation) and questions of market scope. This, in turn, will determine the way that value chain activities are configured. c. Growth and development decisions Decisions on the directions and mechanisms of growth, for example: increase or decrease in size; Ansoffian directions; the use of internal or external growth mechanisms. If decrease in size is appropriate, methods are a bit more complex (e.g. demerger, divestment, MBO, equity carve-outs, etc) 2. Evaluation criteria What are they? Suitability; Feasibility; Acceptability; Advantage Suitability Does the strategy promise to achieve strategic objectives? Does the proposed strategy capitalise on strengths? Does it promise to address and overcome or avoid weaknesses? Is it responsive to environmental threats and opportunities? Feasibility Is the strategy possible? Can the proposed strategy be resourced? (i.e. are human, financial, etc. resources available) Can the organisation perform and compete at the required level? Will the technology, materials and services be sufficiently available? Acceptability Will the strategy be accepted? Is the proposed strategy acceptable to the most influential stakeholders? What will the effects of the strategy be on the stakeholders, financial structure, etc.? Advantage Will the strategy enable to company to achieve a competitive advantage? return higher than average profitability? nullify or offset the strengths of competitors? position itself to advantage in its micro-environment? 3. Tools for evaluating of options Two types: financial tools and non financial tools. Financial tools: Cash-flow forecasting; Investment analysis techniques.

Cash flow forecasting. involves prognosticating income and costs associated with each option over a period of time. Purpose is to assess the medium to long term profit performance of each option. Investment appraisals. Purpose is to assess the return on capital associated with each option. Two types of IA tools: Those that ignore inflation (OK for short-term investments) - payback period calculations; Those that take inflation into account (discounted cash flow calculations). Limitations of financial tools: The problem of inflation. For paybacks forecast at one or two years - no problem. Problem: few investments payback in this time scale. Forecasting inflation over an economic cycle can be fraught with error. Non financial tools. Cost-benefit calculation; Impact analysis; What if? and sensitivity analysis Cost benefit analysis Every decision in business (and in life) involves costs and consequent benefits. If both can be quantified in numerical or financial terms - no problem. However, few actually are. An option is viable if benefits exceed costs. The most viable is that option which results in the highest differential. Impact analysis For some organisations, the impact of the strategic options upon its various stakeholders is important. Impacts can be either favourable or adverse. The preferable option is usually that which contains minimum adverse and maximum favourable. What if? analysis Especially useful for longer time period projections.Enables decision-makers to see what would happen to the outcome if assumptions do not hold.Examples, what if...inflation is not as forecast; legislation changes during the term of the option; incomes or costs are outside of assumed limits. Prescriptive considers all options- emergent more restrictive as impacted by strategy and structure!! Companies that use prescriptive are more likely to use tools and criteria described above, whilst those using emergent model are less likely to do so explicitly. Less likely all options are evaluated and therefore not certain that best option is taken and therefore is more risky. Still needs judgement !!!

More Detailed SAF-After identifying the options available, classical prescriptive strategy has always argued that the next strategy task is that of selection. In evaluating strategic options, it is useful to distinguish between the content of the option (what strategy will we select?) and the process by which the selection will be undertaken (how will we undertake the selection task?).

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. 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. 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. Accepability 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? 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 organisations 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. 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.

FEASIBILITY
Assessing the feasibility of strategic options involves considering whether the organisation has the resources and capabilities to successfully implement the strategy. Frequently 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.As well as assessing the feasibility of current resources and capabilities to meet the needs of particular strategies, the gaps need to be identified and an assessment made of the ability of the organisation to address these issues. The assessment of the feasibility of a strategy depends upon answers to these questions: Has the organisation got the resources and capabilities to deliver the strategy? What gaps in resources and capabilities need addressing in order to ensure success? An assessment of the financial feasibility of a particular strategy can be made using funds flow analysis. However, the discussion in Session 4 of this module should have made it clear that a broader assessment, particularly of strategic capabilities built on core competences and unique resources is important.The tools and techniques of resource and capability analysis discussed above, such as resource audit, value chain analysis, core competence analysis and activity mapping, can all contribute to this broader assessment of feasibility.

Further Evaluative Notes Argue and justify the case that strategic choice should be a blend between the outcomes of analytical concepts and frameworks and management judgement. perhaps the role of concepts and frameworks should be to raise the level of debate when judgements are being made. More specifically, . the following points to be covered: Perhaps an important shortcoming of the strategic choice process in many organisations is that it is ill-informed. So more use of concepts and frameworks, in general, should be helpful to the decision process. The danger is that concepts and frameworks are allowed to take over the decision process by being presented as analytical techniques and managers have unrealistic expectations of these techniques producing the right answer. Another concern is that frameworks concentrate on those factors that lend themselves to analysis and ignore the softer factors. This is the classic problem of allowing financial analyses (as illustrated in the chapter) to dominate the decision process. Students should be reminded that there are frameworks to assist with the softer factors stakeholder mapping would be an example. Management judgement is likely to remain a key element of good strategic decision making. Suitability links strategic choices to the major factors in an organisations strategic position First, there are clearly different emphases in the business environment for public sector organisations that students should be able to identify. For example, the heightened importance of the political environment. In turn, this leads to a different spread of power between stakeholders. Both of these factors would tend to mean that suitability needs to be measured more pluralistically in the public sector. Acceptabilityis all about stakeholders. Again, the main difference is the wider set of stakeholders with direct influence on strategy and the wider criteria of success in the public sector. Feasibility is about capability. Here, the sector differences may not be as great as many students imagine. Lack of resources and low levels of competence will make strategy delivery difficult in any organisation. These problems exist in both the private and public sectors.