Chapter 13: Evaluating strategies Flashcards
Explain a way to evaluate possible strategic initiatives
the SAFE framework refers to a tool used for evaluating the strategic options of an organization. It helps to assess different strategies based on four key criteria: Suitability, Acceptability, Feasibility, and Evaluability.
What is a gap analysis?
A tool for assessing organisational performance.
It compares actual or projected performance with desired performance. It is useful for identifying performance shortfalls (gaps) and, when involving projections, can help in anticipating future problems. The size of the gap provides a guide to the extent to which strategy needs to be changed.
After the gap analysis, the result may expose organisational underperformance. To improve the situation, initiatives will be required. What method can be used to identify preferred strategic options?
The SAFE method
Describe the S in SAFE
Suitability:
does the proposed strategy address the key opportunities and threats an organization faces through an understanding of the strategic position of an organization? The overall rationale of the strategy? A suitability analysis is likely to draw extensively from the concepts and frameworks introduced in previous chapters. A suitability analysis involves assessing the extent to which a proposed strategy
- exploits the opportunities in the environment and avoids the threats and
- capitalises on the organisations strength or remedies the weakness
ranking & screening and decision trees
Describe the A in SAFE and its three Rs
Acceptability:
whether the expected performance outcomes of a proposed strategy meet the expectations of stakeholders. These can be of three types, the 3 Rs:
- Return
measures of the financial profitability and effectiveness of a strategy. In the private sector the investors and shareholders expect a financial return on their investment.
- financial analysis
- Return on capital employed (ROCE) calculated profitability in relation to capital for a specific time period after a new strategy is in place
- Return on invested capital (ROIC) as a method to determine the extent of a company’s competitive advantage
- Real options. benefits:
- Bringing strategic and financial evaluation closer together
- Valuing emerging options
- Coping with uncertainty
- Offsetting conservatism
- Real options
The strategy should be seen as a series of real options. A real option is the right to undertake certain business initiatives. There are four main benefits to this approach: - bringing strategic and financial evaluation closer together
- valuing emerging options
- coping with uncertainty
- offsetting conservatism
- Risk
The risk an organisation faces in pursuing a strategy. Risk concerns the extent to which strategic outcomes are unpredictable, especially with regard to possible negative outcomes. Risk is linked with outcome. The higher the risk the higher the outcome (risk-return tradeoff). Why? Because more time and effort are needed to obtain information and to monitor progress than for lower risk investments.
If an investment has a high risk and low return, its likely that investors would seek to leave that investment → driving up return.
Vice verse, if investment is with low risk and high return, more investors want to get involved → driving down return
A key issue is to establish the acceptable level of risk for the organisation.
- sensitivity analysis (what if analysis)
- financial risk (break eve analysis)
- Reaction from stakeholder
- owners
- bankers and other providers of interest-bearing loans
- government agencies and regulators
- employees and unions and local community
- customers
Reactions from stakeholders
Stakeholder mapping can be beneficial to consider the political agenda in an organisation
Describe the F in SAFE
whether a strategy could work in practice; does the organization have the capacity to deliver a strategy?
Do the resources and capabilities currently exist to implement a strategy effectively? If not, can they be obtained?
- Financial feasibility
- do we have the funding required for the strategy? Cash flow? which financial strategies might be needed for different phases of the life cycle ob a business?
- Startups are high risk
- Growth businesses may remain volatile and highly competitive market position
- Mature businesses
- Declining businesses find it difficult to attract equity finance
- People and skills
Describe the E in SAFE
Evaluation
the process of identifying strategies that pass all the criteria of SAF. Some strategies might appear excellent under one criteria but fail under another. There needs to be a synthesis of the strategies selected from the analysis of SAF so that the chosen strategy works for all. Often; the chosen strategy is less about what is best and more about what’s possible.
Four qualifications that need to be made about the evaluation process:
- management judgement
- consistency between different elements of a strategy
- the implementation and development of strategies
- strategy development in practice
What are the two broad categories of performance measures? Describe them both.
Economic and effectiveness measures.
- Economic
- performance in product markets
- accounting measures of profitability
- financial market measures such as movements in share price - Effectiveness
- the balanced scorecard
- the triple bottom line
What is the triple bottom line and what does it assess performance on? (3 dimensions)
Coined by Elkington.
It pays attention to CSR and the environment.
- Economic measures of performance
- Social measures
- Environmental measures
Why evaluate strategies?
To asses the performance outcomes of different strategies in terms of direct economic outcomes and overall organsiational effectiveness.
It can be done using different techniques.
First identify the need for new strategies using GAP.
Then employ SAFE to identify optimal strategic options
What is common metrics in the for profit sector and non profit sector for a gap analysis?
For profit: revenues, profits, patents
Non profit: clients served, service quality, waiting lists, fund raised
What is two types of performance measures for a gap analysis?
Economic measure and effectiveness measure.
- Economic
- performance in product markets
- profitability performance
- financial market measures - Effectiveness
- TPL (economic, social and environmental measures)
- Balanced scorecard which considers four perspectives: financial, customer, innovation and learning, internal business
What are the two broad categories of performance measures in a gap analysis?
Performance measures in a gap analysis relies on measures of organisational performance and it falls into two categories
- Economic performance measures (success in terms of economic outcomes), has three dimensions
- performance in product markets
- profitability
- financial market measures - Effectiveness measures (refers to a broader set of performance criteria than just economic)
- TBL
- balanced scorecard
What are the complexities of gap analysis?
- Performance measures can be contradictory, since, for example, sales growth can be achieved by cutting profit margins
- Organisations can manipulate outcomes in order to meet key performance criteria
Which are the three different performance measures? (gap analysis)
- Performance in product markets (sales growth or market share)
- Accounting measures of profitability ex by using the Du Pont Model
- Financial market measures such as movements in share price
