Lesson 11: Strategy Evaluation Flashcards
Why is it not sufficient to evaluate the strategy by looking at the income created by the company?
1) What are the reasons for income creation?
Markets, operation efficiency, other things
2) When in time does the company create income?
Normally a new strategy involves big investments op front whereas the surplus come later on
3) On which criteria do we ought to evaluate?
What happens when the stakeholders have different goals?
As a consequence we need to recognise that evaluation of a strategy is a complex activity which involves different dimensions of evaluation.
How can we evaluate strategy?
1) Suitability = overall rationale of strategy
Does the strategy address the strategic problem/situation? Eg. Record music industry = invest money to become nr. 1.
2) Acceptability
Does the strategy live up to the expectations of our stakeholders?
3) Feasibility
Can the strategy be implemented = test the strategy, see if it’s feasible, use our analyses.
What is suitability?
Does a proposed strategy address the key opportunities and constraints an organsation faces?
Does the strategy fit with the environment, the resources and the competences?
A general evaluation of the quality of the strategy (a test of the rationale of the strategy)
A priorisation of strategies
Models: PESTEL, Scenarios, Five Forces, Strategic Groups, Resources & Capabilities, value chain and cultural web
Do the strategies fit with the environment?
1) PESTEL
Helps with understanding key environmental drivers, changes in industry structure.
Eg. Industry cycles, industry convergence, major environmental changes
2) Scenarios
Helps with understanding: extent of uncertainty/risk, extent to which strategic options are mutually exclusive.
Eg. Need for contingency plans or low-cost probes
3) Five Forces: industry attractiveness, competitive forces.
Eg. Reducing competitive intensity, development of barriers to new entrants.
4) Strategic groups: Attractiveness of groups, mobility barriers, strategic spaces.
EG. Need to reposition to a more attractive group or to an available strategic space.
How can you compare and prioritisate the developed strategies?
Benchmark strategies with each other and with the existing unchanged strategy.
Ranging of strategies form specific criteria
Applying decision trees to rank the strategies
Make use of scenarios as a basis for ranking of the strategies
What is acceptability?
Does it meet expectations of shareholders?
A test of risk and return on investment of the strategy
Is the strategy political, ethical and cultural acceptable for the stakeholders of the organisation
3 R’s: Risk, Return, Stakeholders’ Reaction
How do we evaluate risk with acceptability?
Capital structure: solvency and liquidity ratios
Analysis of Break-even point
Cash flow analysis
Sensitivity and variation analyses
How can we evaluate of profit by acceptability?
Strategies must be broken down into budgets and streams of cash flows.
Analysis of key accounting ratios such as contribution margins, profit margins and return on investment
Financial analysis: NPV, Cost/Benefit, EVA, etc.
What are the other ways of checking acceptability?
1) Evaluation of capital employed in the strategy
Return on capital employed
2) Evaluation of the payback time of the strategy: payback period
3) Evaluation of the discounted cash flow of the strategy
4) Evaluation of stakeholder spport:
How do different stakeholder group position themselves toward the different strategies?
How much power and interest do the different stakeholders have?
How can sceptical stakeholders be convinced?
Can reluctant stakeholders be outmanoeuvred
What is feasibility?
Can the strategy be implemented in practise
Does the organsation have or can it acquire the necessary resources and competences
Very often capital, managerial skills/experience and professional knowledge make up the limitations
Is the necessary capital at hand?
Compose a capital budget for the strategies
Compose a cash flow budget for the new strategies
Consider the relation between the business strategy and the financial strategy.
How do we check if we have the necessary resources and competences with feasibility?
What resources are present and what types of amount of resources does the new strategies require?
What are the core competences of the organsation and which new must be created to implement the strategy?
Is it possible and realistic to acquire the necessary new resources and competences?
What is consistency?
Strategies for competition, innovation, growth, corporate rationale and globalisation must be bundled into a few overall constistent strategies for the whole corporation
The strategies must not be in conflict but ought to support each other.
The two to three overall corporate / business strategies must be tested against the development of the environment and the company’s internal operations, resources and skills.
In addition, they must also be tested towards the cultural (value-based) and political contexts.
The overall strategy package that has the best fit is selected.
