Strategic Management BUSM 3200                   These Lecture Slides summarize the key points covered in the respective c...
The focus of part 3:                                                  strategy in action        Criteria and techniques t...
Learning outcomes of Chapter 11        Employ three success criteria for evaluating         strategic options:         – ...
The SAFe criteria      Table 11.1     The SAFe criteria and techniques of evaluationBUSM 3200- Strategic Management (Jan 2...
Suitability       Suitability is concerned with assessing which proposed       strategies address the key opportunities & ...
Importance of ‘linking back’        The next few pages from 364 – 365 reminds us of         the importance of linking bac...
Suitability of strategic options in              Table 11.2                        relation to strategic position (1)     ...
Suitability of strategic options in relation to                         strategic position (2)          Table 11.2     Sui...
Some examples of suitability (1)      Table 11.3     Some examples of suitabilityBUSM 3200- Strategic Management (Jan 2013...
Some examples of suitability (2)      Table 11.3     Some examples of suitability (Continued)BUSM 3200- Strategic Manageme...
Suitability – screening techniques         There are several useful techniques:          Ranking.          Using scenari...
Ranking        Evaluating the options based on         rating and ranking the different         options        Strategic...
Ranking the optionsBUSM 3200- Strategic Management (Jan 2013) GDS                         7-13
Scenarios        The strategy being evaluated can be screened by         considering different possible outcomes in the  ...
Screening for bases of competitive advantage        Chapters 3 and 6: the likely bases of competitive         advantage r...
Table 11.4                                                       VRINBUSM 3200- Strategic Management (Jan 2013) GDS       ...
Decision Trees        Evaluate the outcomes in terms of          Probabilities          Expected returns        See il...
Illustration 11.2BUSM 3200- Strategic Management (Jan 2013) GDS                       7-18
Life cycle analysis        Different strategies are deemed to be appropriate         at different stages of the industry ...
The life cycle/portfolio matrix      Table 11.5 The industry life cycle/portfolio matrix Source: Arthur D. LittleBUSM 3200...
Competitive position within an industry          Competitive position within an industry can be:           A dominant pos...
Acceptability (1)           Acceptability is concerned with           whether the expected performance           outcomes ...
Acceptability (2)         There are three key aspects of         acceptability - the ‘3 R’s’:          Risk.          Re...
Risk        Risk concerns the extent to which the         outcomes of a strategy can be         predicted.        Risk c...
Sensitivity analysis (illustration 11.3)     Illustration 11.3 ABUSM 3200- Strategic Management (Jan 2013) GDS            ...
Sensitivity analysis (Continued)Illustration 11.3 B  BUSM 3200- Strategic                              7-26
Sensitivity analysis (Continued)Illustration 11.3 C                                                    7-27  BUSM 3200- St...
Break even analysisBUSM 3200- Strategic                         7-28
Return         Returns are the financial benefits which          stakeholders are expected to receive from a          str...
Financial analysis        Three commonly used bases of financial analysis         are        1. Forecasting the return on...
Assessing profitability (1)      Figure 11.1     Assessing profitabilityBUSM 3200- Strategic Management (Jan 2013) GDS    ...
Assessing profitability (2)      Figure 11.1     Assessing profitability (Continued)BUSM 3200- Strategic Management (Jan 2...
Assessing profitability (3)      Figure 11.1     Assessing profitability (Continued)BUSM 3200- Strategic Management (Jan 2...
Shareholder value analysis (SVA)        Assess which of the proposed strategies would         increase or decrease shareh...
Measures of shareholder value      Table 11.6     Measures of shareholder valueBUSM 3200- Strategic Management (Jan 2013) ...
Cost Benefit Analysis        Going beyond just the tangible financial         benefits        Consider intangible benefi...
Illustration 11.5BUSM 3200- Strategic Management (Jan 2013) GDS                       7-37
Real options        When using methods such as DCF, it is assumed         there is a degree of clarity of outcomes       ...
Advantages of real options         There are four main benefits:            Bringing strategic and financial             ...
Real options evaluation (illustration 11.6)                   New options and opportunities emerge after the implementatio...
Reaction of stakeholders    Stakeholder mapping and the power/interest      matrix can be used to:       understand the ...
Reaction of stakeholders        Owners have financial expectations        Regulators have decision making authority     ...
Feasibility         Feasibility is concerned with whether a         strategy could work in practice i.e. whether an       ...
Financial feasibility         Need to consider:           The funding required.           Cash flow analysis and forecas...
Financial strategy and the business life                             cycle      Table 11.7     Financial strategy and the ...
People and skills (1)         Three questions arise:         1. Do people in the organisation            currently have th...
People and skills (2)         Critical issues that need to be considered:          Work organisation – will this need to ...
Integrating resources        The success of a strategy depends on the         management of many resource areas, for     ...
Evaluation criteria: Four Qualifications         Read pages 386 and 389 carefully:          Conflicting conclusions and t...
Summary        Proposed strategies may be evaluated using the three          SAFe criteria:         Suitability is conce...
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SM Lecture Seven - Strategy Evaluation

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SM Lecture Seven - Strategy Evaluation

  1. 1. Strategic Management BUSM 3200 These Lecture Slides summarize the key points covered in the respective chapters in your recommended text; these slides do NOT substitute, at all, the required reading of the assigned chapter from the text. These slides also may contain additional supplementary material extracted from other texts and sources outside your text book.BUSM 3200- Strategic Management (Jan 2013) GDS 7-1
  2. 2. The focus of part 3: strategy in action Criteria and techniques that can be used to evaluate possible strategic options. How strategies develop in organisations; the processes that may give rise to intended strategies or to emergent strategies. The way in which organisational structures and systems of control are important in organising for strategic success. The leadership and management of strategic change. Who strategists are and what they do in practice.BUSM 3200- Strategic Management (Jan 2013) GDS 7-2
  3. 3. Learning outcomes of Chapter 11 Employ three success criteria for evaluating strategic options: – Suitability: whether a strategy addresses the key issues relating to the opportunities and constraints an organisation faces. – Acceptability: whether a strategy meets the expectations of stakeholders. – Feasibility: whether a strategy could work in practice. For each of these use a range of different techniques for evaluating strategic options, both financial and non-financial.BUSM 3200- Strategic Management (Jan 2013) GDS 7-3
  4. 4. The SAFe criteria Table 11.1 The SAFe criteria and techniques of evaluationBUSM 3200- Strategic Management (Jan 2013) GDS 7-4
  5. 5. Suitability Suitability is concerned with assessing which proposed strategies address the key opportunities & constraints an organisation faces, through an understanding of the strategic position of an organisation. It is concerned with the overall rationale of the strategy:  Does it exploit the opportunities in the environment and avoid the threats?  Does it capitalise on the organisation’s strengths and strategic capabilities and avoid or remedy the weaknesses?BUSM 3200- Strategic Management (Jan 2013) GDS 7-5
  6. 6. Importance of ‘linking back’ The next few pages from 364 – 365 reminds us of the importance of linking back this chapter’s concept of suitability to all the important models and frameworks we have covered in external and internal analysis as well as the different strategic options Pay careful attention and read two tables – 11.1 and 11.2 You will begin to understand that the different models that we learnt help the planner evaluate the different strategic optionsBUSM 3200- Strategic Management (Jan 2013) GDS 7-6
  7. 7. Suitability of strategic options in Table 11.2 relation to strategic position (1) Suitability of strategic options in relation to strategic position It is a important that you REVISIT the above tables to better understand the value of the different models and frameworks in helping the manager evaluate the different strategic optionsBUSM 3200- Strategic Management (Jan 2013) GDS 7-7
  8. 8. Suitability of strategic options in relation to strategic position (2) Table 11.2 Suitability of strategic options in relation to strategic position (Continued) It is a important that you REVISIT the above tables to better understand the value of the different models and frameworks in helping the manager evaluate the different strategic optionsBUSM 3200- Strategic Management (Jan 2013) GDS 7-8
  9. 9. Some examples of suitability (1) Table 11.3 Some examples of suitabilityBUSM 3200- Strategic Management (Jan 2013) GDS 7-9
  10. 10. Some examples of suitability (2) Table 11.3 Some examples of suitability (Continued)BUSM 3200- Strategic Management (Jan 2013) GDS 7-10
  11. 11. Suitability – screening techniques There are several useful techniques:  Ranking.  Using scenarios.  Screening for competitive advantage.  Decision trees.  Life cycle analysis.BUSM 3200- Strategic Management (Jan 2013) GDS 7-11
  12. 12. Ranking Evaluating the options based on rating and ranking the different options Strategic options are evaluated against specific criteria Scores and given and the best option is selected See Illustration 11.1 on page 366BUSM 3200- Strategic Management (Jan 2013) GDS 7-12
  13. 13. Ranking the optionsBUSM 3200- Strategic Management (Jan 2013) GDS 7-13
  14. 14. Scenarios The strategy being evaluated can be screened by considering different possible outcomes in the future What if questions Best or worse case scenarios Scenarios were discussed in Chapter 2 (external analysis) See section 2.22 of that chapter and see Illustration 2.2 Managers evaluate which options would work best under different environmental contextsBUSM 3200- Strategic Management (Jan 2013) GDS 7-14
  15. 15. Screening for bases of competitive advantage Chapters 3 and 6: the likely bases of competitive advantage reside in the strategic capabilities of the company We screen the strategy in terms of the key strategic capabilities underpinning a proposed strategy Evaluate the capabilities in terms of their ability to deliver either  Cost leadership strategy  Differentiation strategy See Table 11.4BUSM 3200- Strategic Management (Jan 2013) GDS 7-15
  16. 16. Table 11.4 VRINBUSM 3200- Strategic Management (Jan 2013) GDS 7-16
  17. 17. Decision Trees Evaluate the outcomes in terms of  Probabilities  Expected returns See illustration 11.2 : strategic decision tree for a law firmBUSM 3200- Strategic Management (Jan 2013) GDS 7-17
  18. 18. Illustration 11.2BUSM 3200- Strategic Management (Jan 2013) GDS 7-18
  19. 19. Life cycle analysis Different strategies are deemed to be appropriate at different stages of the industry life cycle Matrix on table `11.15 has two dimensions  Industry maturity  Firm’s competitive position Purpose of the matrix is to determine the appropriateness of the strategies in relation to the two dimensionsBUSM 3200- Strategic Management (Jan 2013) GDS 7-19
  20. 20. The life cycle/portfolio matrix Table 11.5 The industry life cycle/portfolio matrix Source: Arthur D. LittleBUSM 3200- Strategic Management (Jan 2013) GDS 7-20
  21. 21. Competitive position within an industry Competitive position within an industry can be:  A dominant position which is rare in the private sector unless there is a quasi-monopoly position. In the public sector there can be a legalised monopoly status.  A strong position where organisations can follow strategies of their own choice without too much concern for competition.  A favourable position where no single competitor stands out, but leaders are better placed.  A tenable position can be maintained by specialisation or focus.  A weak position where competitors are too small to survive independently in the long run.BUSM 3200- Strategic Management (Jan 2013) GDS 7-21
  22. 22. Acceptability (1) Acceptability is concerned with whether the expected performance outcomes of a proposed strategy meet the expectations of stakeholders.BUSM 3200- Strategic Management (Jan 2013) GDS 7-22
  23. 23. Acceptability (2) There are three key aspects of acceptability - the ‘3 R’s’:  Risk.  Return.  Reactions (of stakeholders).BUSM 3200- Strategic Management (Jan 2013) GDS 7-23
  24. 24. Risk Risk concerns the extent to which the outcomes of a strategy can be predicted. Risk can be assessed using:  Sensitivity analysis.  Financial ratios – e.g. gearing and liquidity.  Break-even analysis.BUSM 3200- Strategic Management (Jan 2013) GDS 7-24
  25. 25. Sensitivity analysis (illustration 11.3) Illustration 11.3 ABUSM 3200- Strategic Management (Jan 2013) GDS 7-25
  26. 26. Sensitivity analysis (Continued)Illustration 11.3 B BUSM 3200- Strategic 7-26
  27. 27. Sensitivity analysis (Continued)Illustration 11.3 C 7-27 BUSM 3200- Strategic
  28. 28. Break even analysisBUSM 3200- Strategic 7-28
  29. 29. Return Returns are the financial benefits which stakeholders are expected to receive from a strategy. Different approaches to assessing return:  Financial analysis.  Shareholder value analysis.  Cost–benefit analysis.  Real options.BUSM 3200- Strategic Management (Jan 2013) GDS 7-29
  30. 30. Financial analysis Three commonly used bases of financial analysis are 1. Forecasting the return on capital employed (ROCE) 2. Estimating the payback period 3. Calculating the DCF See Figure 11.1BUSM 3200- Strategic Management (Jan 2013) GDS 7-30
  31. 31. Assessing profitability (1) Figure 11.1 Assessing profitabilityBUSM 3200- Strategic Management (Jan 2013) GDS 7-31
  32. 32. Assessing profitability (2) Figure 11.1 Assessing profitability (Continued)BUSM 3200- Strategic Management (Jan 2013) GDS 7-32
  33. 33. Assessing profitability (3) Figure 11.1 Assessing profitability (Continued)BUSM 3200- Strategic Management (Jan 2013) GDS 7-33
  34. 34. Shareholder value analysis (SVA) Assess which of the proposed strategies would increase or decrease shareholder value Shareholders are interested in the cash generating ability of the company  Ability to pay dividends  Reinvest funds for the future See Table 11.6  Total shareholder returns (TSR)  Economic value added (EVA)BUSM 3200- Strategic Management (Jan 2013) GDS 7-34
  35. 35. Measures of shareholder value Table 11.6 Measures of shareholder valueBUSM 3200- Strategic Management (Jan 2013) GDS 7-35
  36. 36. Cost Benefit Analysis Going beyond just the tangible financial benefits Consider intangible benefits Important in public infrastructure projects like airport construction ,roads, etc See illustration 11.5 – sewerage construction projectBUSM 3200- Strategic Management (Jan 2013) GDS 7-36
  37. 37. Illustration 11.5BUSM 3200- Strategic Management (Jan 2013) GDS 7-37
  38. 38. Real options When using methods such as DCF, it is assumed there is a degree of clarity of outcomes But in many projects the precise benefits of outcomes only become obvious as implementation proceeds New outcomes may emerge (recall from lecture 1) : concept of “emergent strategies”  New options are opened up after the implementation of a particular projectBUSM 3200- Strategic Management (Jan 2013) GDS 7-38
  39. 39. Advantages of real options There are four main benefits:  Bringing strategic and financial evaluation closer together.  Valuing emerging options.  Coping with uncertainty.  Offsetting conservatism. See page 381BUSM 3200- Strategic Management (Jan 2013) GDS 7-39
  40. 40. Real options evaluation (illustration 11.6) New options and opportunities emerge after the implementation of the initial project – investment in a brewery Illustration 11.6BUSM 3200- Strategic Management (Jan 2013) GDS 7-40
  41. 41. Reaction of stakeholders Stakeholder mapping and the power/interest matrix can be used to:  understand the political context of strategies.  understand the political agenda.  gauge the likely reaction of stakeholders to specific strategies. • If key stakeholders find a strategy to be unacceptable then it is likely to failBUSM 3200- Strategic Management (Jan 2013) GDS 7-41
  42. 42. Reaction of stakeholders Owners have financial expectations Regulators have decision making authority Employees and unions may resist The local community has specific concerns such as security of jobs and environment Customers could also object to a strategyBUSM 3200- Strategic Management (Jan 2013) GDS 7-42
  43. 43. Feasibility Feasibility is concerned with whether a strategy could work in practice i.e. whether an organisation has the capabilities to deliver a strategy Two key questions:  Do the resources and competences currently exist to implement the strategy effectively?  If not, can they be obtained?BUSM 3200- Strategic Management (Jan 2013) GDS 7-43
  44. 44. Financial feasibility Need to consider:  The funding required.  Cash flow analysis and forecasting.  Financial strategies needed for the different ‘phases’ of the life cycle of a business.BUSM 3200- Strategic Management (Jan 2013) GDS 7-44
  45. 45. Financial strategy and the business life cycle Table 11.7 Financial strategy and the business life cycleBUSM 3200- Strategic Management (Jan 2013) GDS 7-45
  46. 46. People and skills (1) Three questions arise: 1. Do people in the organisation currently have the competences to deliver a proposed strategy? 2. Are the systems to support those people fit for the strategy? 3. If not, can the competences be obtained or developed?BUSM 3200- Strategic Management (Jan 2013) GDS 7-46
  47. 47. People and skills (2) Critical issues that need to be considered:  Work organisation – will this need to change?  Rewards – are the incentives appropriate?  Relationships – will people interact differently?  Training and development – are current systems appropriate?  Staffing – are the levels and skills of the staff appropriate?BUSM 3200- Strategic Management (Jan 2013) GDS 7-47
  48. 48. Integrating resources The success of a strategy depends on the management of many resource areas, for example:  people,  finance,  physical resources,  information,  technology and  resources provided by suppliers and partners. It is essential to integrate resources – inside the organisation and in the wider value network.BUSM 3200- Strategic Management (Jan 2013) GDS 7-48
  49. 49. Evaluation criteria: Four Qualifications Read pages 386 and 389 carefully:  Conflicting conclusions and the need for management judgement.  Consistency between the different elements of a strategy is essential.  The implementation and development of strategies might reveal unanticipated problems.  Strategy development in practice – it isn’t always a logical or even rational process.BUSM 3200- Strategic Management (Jan 2013) GDS 7-49
  50. 50. Summary Proposed strategies may be evaluated using the three SAFe criteria:  Suitability is concerned with assessing which proposed strategies address the key opportunities and constraints an organisation faces. It is about the rationale of a strategy.  The acceptability of a strategy relates to three issues: the level of risk of a strategy, the expected return from a strategy and the likely reaction of stakeholders.  Feasibility is concerned with whether an organisation has or can obtain the capabilities to deliver a strategy.BUSM 3200- Strategic Management (Jan 2013) GDS 7-50
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