Chapter 13 - Evaluating strategy

Question 1

Gap analysis

Answer 1

a tool for assessing how much the performance deviates from desired levels, indicates the scale of the strategic initiatives needed to close the gap.

Question 2

SAFE

Answer 2

Suitability, Acceptability, Feasibility, Evaluation - framework to evaluate strategic initiatives

Question 3

Suitability

Answer 3

is concerned with assessing which proposed strategies address the key opportunities and threats an organisation faces

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 organisation’s strengths and avoids or corrects the weaknesses.

Question 4

Acceptability

Answer 4

is concerned with whether the expected performance outcomes of a proposed strategy meet the expectations of stakeholders.
Three types, the “3 Rs”:
* Return - measures of the financial profitability and effectiveness of a strategy.
* Risk - concerns the extent to which strategic outcomes are unpredictable, especially with regard to possible negative outcomes.
* Reactions of stakeholders - Stakeholder mapping can be used to consider the likely reactions of stakeholders to new strategies and thus evaluate the acceptability of a strategy.

Question 5

Performance measures

Answer 5

Gap analysis relies in measures of performance. Two categories of measures:
Economic performance measures refer to direct measures of success of economic outcomes. Three main dimensions:
* Performance in product markets: for example, sales growth or market share.
* Accounting measures of profitability, such as profit margin or return on capital employed (ROCE). The DuPont model is useful for dissecting a company’s ROCE
* Financial market measures such as movements in share price.

Effectiveness measures refer to a broader set of performance criteria than just economic.
Ex. measures for internal operational efficiency or relevant to stakeholders such as employees and external communities. Two broad techniques are:
* The balanced scorecard
* The tripple bottom line

Question 6

Balanced scorecard

Answer 6

considers five perspectives on performance simultaneously in order to prevent the dominance of a single perspective. Considers:
1. The financial perspective, focusing on increasing shareholder value.
2. The customer perspective, defines how a company differentiates itself from competitors in the market.
3. The internal business perspective, focus on alignment between organisational processes and financial and customer perspectives.
4. The innovation and learning perspective, assesses employee capabilities and skills and corporate climate needed to support a strategy
5. The sustainability perspective, assesses social and environmental measures of performance.

Question 7

The tripple bottom line

Answer 7

Pays explicit attention to corporate social responsibility and the environment. Assesses performance on three dimensions:
1. Economic measures of performance suh as sales, profits and share price.
2. Social measures, such as employee training, health and safety and contributions to the local community
3. Environmental measures such as pollution, recycling and wastage targets

Question 8

Return in capital employed (ROCE)

Financial analysis

Answer 8

calculates profitability in relation to capital for a specific time period after a new strategy is in place.
* The ROCE (profit before interest and tax – PBIT – divided by capital employed) is a measure of the earning power of the capital resources used in implementing a particular strategic option.

Question 9

Payback period

Financial analysis

Answer 9

The payback period assesses the length of time it takes before the cumulative cash flows for a strategic option become positive.

This measure is very simple and is used where the difficulty of forecasting is high and therefore risk is high.

Question 10

Discounted cash flow (DCF)

Financial Analysis

Answer 10

widely used investment appraisal technique using common cash-flow forecasting techniques. Earnings are discounted the further into the future they are, this to reflect future risk and the time value of money (money today is more valuable than money tomorrow).
* Applying the discount rate to future cashflows results in the net present value (NPV) of the project.
* The project with the best NPV should be selected.

Question 11

Shareholder value analysis (SVA)

Financial analysis

Answer 11

variation on DCF analysis in that it values the whole business, not a specific project.

Focuses on creation of value for shareholders as measured by share price performance and flow of funds.

Question 12

Risk analysis

Answer 12

concerns the extent to which strategic outcomes are unpredictable, especially with regard to possible negative outcomes.

Question 13

Financial risk

Answer 13

Refers to the possibility that the organisation may not meet the key financial obligations necessary for survival. Managers need to ensure that strategies meet acceptable levels of financial risk. Two key measures:
* Level of gearing (leverage)
* Organisation’s liquidity

Question 14

Break-even analysis

Answer 14

Allows variations in assumptions about key variables in a strategy to be examined. It demonstrates how much in terms of revenue the business will recover its fixed and variable costs and therefore break even.

Question 15

Reaction of stakeholders

Answer 15

Stakeholder mapping can be used to consider the likely reactions of stakeholders to new strategies and thus evaluate the acceptability of a strategy. Different stakeholders evaluate strategy differently:
* **Owners **(e.g., shareholders, private individuals, investment funds, venture capitalists, private equity, family owners, the state
* Bankers providers of interest-bearing loans are concerned about the risk attached to their loans and the competence with which this is managed.
* Government agencies and regulators - important stakeholders in industries such as telecommunications, financial services, pharmaceuticals and power.
* Employees, unions and local community
* Customers may switch their business to a competitor.

Question 17

Feasibility

Answer 17

is concerned with whether a strategy could work in practice.
If an organisation has the capacity to deliver a strategy

An assesment of feasibility involves two key questions:
1. Do the resources and capabilities currently exist to implement a strategy effectively?
2. If not, can they be obtained?

Focus on three areas:
* Finance
* People
* Resource integration

Question 18

Financial feasibility

Answer 18

Central issue in considering a proposed strategy is the funding required for it.
→ Important to forecast the cash flow implications of the strategy.

You need to identify:
* The cash required for a strategy
* The cash generated following the strategy
* The timing of any new funding requirements

This then informs consideration of the likely sources for obtaining funds.

Question 19

People and skills

Answer 19

Sustainable competitive advantage stem from resources and capabilities that are embedded in the skills, knowledge and experience of people in that organisation.

Question 20

Evaluation

Answer 20

is the process of identifying strategies that pass all the criteria of suitability, acceptability and feasibility.

May be conflicting conclusions, needs to be a synthesis of the strategies selected from the analysis of suitability, acceptability and feasibility, so that the chosen strategy works for all.

The chosen strategy is less about what is ‘best’, and more about what is possible

Question 21

Four qualifications that need to be made about the evaluation process:

Answer 21

1. Management judgement. Conflicting conclusions can arise from the application of the criteria of suitability, acceptability and feasibility → these are not a replacement for management judgement.
2. ** Consistency between the different elements of a strategy.** There are several elements of a strategy → important question is whether the component parts work together as a ‘package’.
3. The implementation and development of strategies may throw up issues that might make organisations reconsider whether particular strategic options are feasible or uncover factors that change views on the suitability or acceptability of a strategy.
4. Strategy development in practice. Careful and systematic evaluation of strategy is not the norm in organisations.