Acc_Feasibilitydyn_lec_8B[1]

Dynamics of strategy2009Lecture 8

ACCEPTABILTY AND FEASIBILITY

Source : Lynch, Mintzberg, Wheelen & David.

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Environment

Resources

Purpose Options

Options

Choice Implement

Options

Importance of strategic context – 1Importance of strategic context – 1

This session adds context to content and process

Context

Choosing between strategy options

Strategy content

Six selection criteria

Procedures and

techniques

Applying empirical

evidence and guidelines

Strategy process

The classic strategic planning process

‘What strategy will we select?

And what proposals does it

contain?’

‘Who makes the selection?

Where? And how?’

Words to capture image

Strategic ‘vision’

‘Insight’ into a problem

‘Culture’ expressed through metaphors, stories (‘sagas’)

Words to capture feel‘Gut feel’

To be ‘in touch’

‘Sensing’ an issue

Acceptability

• Are the expected outcomes acceptable?

• To whom?

– Stakeholder analysis important

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ACCEPTABILITY

• Is concerned with the expected performance outcome of a strategy. (Scholes)

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ACCEPTABILITY

•Return –are the benefits the stakeholders are expected to receive from a strategy

•Risk-financial,

•Stakeholder reactions

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ACCEPTABILITY CRITERIA

• Business Risk– Financial risk analysis

Cash FlowBreak evenCompany BorrowingExchange Rate

• Sensitivity AnalysisAssumptions behind strategy choice/optionWhat if?

• Attractiveness to Stakeholders?– Shareholders– Employees– Major Banks– Community

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ACCEPTABILITY (Scholes)

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Assessing the acceptability of strategies

Approach Used to Assess: Examples: Limitations

1. Profitabilityanalyses

Financial return ofinvestments

Return on capitalPay-back periodDicounted cash flow(DCF)

Apply to discreteprojectsOnly tangiblecost/benefits

2. Cost-benefitanalysis

Wider cost/benefit(includingintangibles)

Major infrastructureprojects

Difficulties ofquantification

3. ShareholderValue Analysis(SVA)

Impact of newstrategies onshareholder value

Mergers/takeovers Technical detailoften difficult

ANALYSING RETURN

Cash Flow

• Cash flow is the sum of profit before tax, interest paid, and depreciation. (Mills & Robertson 1996)

• What level of cash flow is expected from the business venture \ strategy \option chosen. Note that cash flow statement is different from the P&L statement.

• Statements of cash flow can be generated for your chosen option by projecting the level of flow. (see Eurofreeze case)

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Break even

• The point at which the total cost of undertaking a new strategy are equal to the total revenue from the strategy. (scholes)

Break-even point• The point at which income and expenditure are

equal, and so the company is neither making a loss, nor profit.(Thisismoney.co.uk)

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ASSESSING PROFITABILITY

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1 2 3

Time (years)

15

10

5

0

ROCE(%)

Some measures of profitability for strategy evaluation

a) Return on capital employed

ASSESSING PAYBACK

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1 2 3 4

+2 +5 +6 etc.

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10

5

0

-5

-10

Payback period = 3.5 years

Time (years)Net cash flow (£m)

Some measures of profitability for strategy evaluation

b) Payback period

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ASSESSING PAYBACK

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1 2 3 4 5 6 7

+2 (1.82) +5 (4.13) +6 (4.5) +6 (4.1) +5 (3.1) +2 (1.13)

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10

5

0

-5

-10

1. Total cash flow of venture = £16m2. Total discounted cash flow* = £8.78 m(net present value)

Net cash flow (£m)

Some measures of profitability for strategy evaluation

c) Discounted cash flow (DCF)

Time (years)

-10

* Using a discounting rate of 10%. Figures in brackets are discounted by 10% annually

RISK

• Risk concerns the probability and consequence of the failure of a strategy. (Scholes)

• Risk strategy evaluation criterion associated with a strategy that does not expose the organisation to unnecessary hazards or to an unnecessary degree of danger. Risk involves measurable inputs and outputs that are associated with known probability distributions of the outcomes of business actions. Nothing may be uncertain but the odds of a specific outcome are known. (lynch)

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Assessing the acceptability of strategies

ANALYSING RISK

Approach Used to Assess: Examples: Limitations

1. Financialratioprojections

Robustness ofstrategy

Break-even analysisImpact on gearingand liquidity

2. Sensitivityanalysis

Test assumptions/robustness

“What if” analysis Test factorsseparately

3. Simulationmodelling

Aggregate impact ofmany factors

ComprehensivemodelsRisk Analysis

Quality of dataon causalrelationships

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Staying in the business

Competing successfully

Do we lack any necessary resources? Are we performing below threshold on any activity?

Which unique resources already exist? Which core competences already exist? Could better performance create a core competence? What new resources or activities could be unique or

core competences?

Resource deployment analysis - some important questions

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APPROACH DOMINANT ELEMENTS OF GOOD DANGERSPROCESSES PRACTICE

Planning Analytical techniques Involve line managers No ownership Tested against objectives Analyse ‘holistic’ picture Fragmented analysis Quantified where possible Build in flexibility Rigidity - lost opportunities

Communication between Decision-makers disownanalysts and decision- analysismakers

Enforced choice Bend to environmental Assess risk ‘Victims of circumstances’ ‘pressure’ Prepare contingencies Evaluation not done

Learning from Reactive moves in separate Processes need credibility Fragmented/inefficient experience parts of organisation Avenues of challenge Pragmatism

Cultural/political context Promote inter-unit learning Risk of strategic drift important

Command Dominant stakeholder Inform/educate decision- Incomplete vision selects strategies maker Vision institutionalized

Need ‘completeness’ Challenge the paradigm

Processes for selecting strategies

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• Risk and reward are critical factors to consider.

• Return on Capital employed should move up.

• Time is important in this return.

• Getting the investment back within time, pay back period

Capitalisation

• The value of a company which is calculated by multiplying the share price by the number of shares on issue - it's market capitalisation.

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Sensitivity Analysis

Assumptions behind strategy choice/option

What if?24

What if it moves\changes?

What if it changes? Alice: I know who I was when I got up this morning, but I think I must have been changed (Lewis Carroll-Alice in Wonderland)

Sensitivity Analysis

Assumptions behind strategy choice/optionWhat if?

• Ask key questions about the strategy

• Eg: the assumption that consumption pattern will remain at the current levels

• What if this does not happen?

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Sensitivity Analysis

Assumptions behind strategy choice/optionWhat if?

• The economic climate will improve– Eg: Global auto sales will increase– Alcohol (beer) sales or health products consumption

will increase– The airline industry fall\growth– Green Fuel would not be affected by economic down

turn

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Sensitivity Analysis

• Would the strategy increase production cost• The financial impact on the other businesses or

SBU’s

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Attractiveness to Stakeholders- Means the strategy is sufficiently appealing to those people that the company needs to satisfy. Lynch pg. 379

• Shareholders- (Entrepreneurial strategy) would the strategy increase or improve the organisation wealth. Eg Goldman Sachs and Buffet,

• Are the core resources effectively utilised

• Employees- a chosen option may be attractive to the shareholders but not to the employees. Eg TSTT employee state.

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Attractiveness to Stakeholders-

continued:

• Major Banks would the providers of finance be happy with the direction. Eg, investing in waste management or extending the level of risk to the company, plant closure, expansion in a risky country

• Community- can the chosen option expose the community to additional risk. Eg, Gm strategy may include plant closure, Honda, Toyota closure of their British plant for 3 months

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Paradox of entrepreneurial strategy

• The very forces that create entrepreneurial strategy --

imagination, drive, persistence -- are the very forces that

prevent change from occurring.• Successful entrepreneurial strategies are often based

on creating momentum that boosts a firm to a new

position. This momentum often begins as a series of

choices, then develops into a pattern, and finally into a

position. However, the position is often sustained by a

perspective, and this perspective constrains the ability

of a firm to change.

FEASIBILITY !!!!!!!!!!

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STRATEGY EVALUATION CRITERIA

• Feasibility- is concerned with whether an organisation has the resources and competences to deliver a strategy. (Scholes)

• Feasibility – strategy evaluation criterion associated with the strategy being implemented. (Lynch)

• Can the strategy be made to work in practice?

• Focus on practicalities of resourcing

• Feasibility will depend on three main factors:– Constraints internal to the organisation such as

technical skills and finance– Constraints external to the organisation such as the

response of competitors– Commitment of management and employees

• Business risk also needs to be assessed because it may be unacceptable to the organisation

• Attractiveness to stakeholders: some options may be more appealing than others to shareholders, employees, etc.

Second three criteria (of six):

selection criteria for choosing between options

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FEASIBILITY CRITERIA

• Internal Constraints

– Does the business lack the necessary resources?

– Are we performing below threshold on any activity?

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FEASIBILITY CRITERIA

• Competing successfully

– Which unique resources already exist?

– Which core competencies already exist?

– Could better performance create a core competence?

– What new resources or activities could be unique or core competences?

External Constraints

• Borders and regulations

• Evaluation of the resources for funding the option: Feasibility in financial terms-

– What funding is required (amount)

– Accessibility of these resources

– Identification of the uses

– Are there shortfall in this resources38

Commitment from Managers and Employees

• Human Resource commitment

– Mergers and acquisitions

– Trade unions

– Resistance to change

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• Business risk also needs to be assessed because it may be unacceptable to the organisation

• Attractiveness to stakeholders: some options may be more appealing than others to shareholders, employees, etc.

selection criteria for choosing between options

• Strategy as a collective process

• Strategy =s a perspective

• Strategy =s a rare resource

• Strategy =s a rare resource emergent approach

Cultural issues

We’re here to cheer each pioneer

And also proudly boast

Of that ‘man of men’ our friend and guiding

hand.

The name of T.J. Watson means a courage

none can stem

And we feel honoured to be here to toast the

‘IBM’.

Eg: The IBM anthem

Attitudes- slogans

“Sell it to the sales staff” – Hewlett Packard

“Those who implement the plans must make the plans” –

Texas Instruments

“Forty-eight hour parts service anywhere in the world or

Cat pays” – Caterpillar

“Ten years’ trouble-free operation” – Maytag

“IBM means service” – IBM

“Profess is our most important product” – GE

“No surprizes” – Holiday Inns

“Never kill a new idea” – 3M

Definitions and features of culture

• Collective beliefs that shape behaviour

• Produce taken for granted assumptions

• Strongly linked to emotions, hence conspicuous

during change

• Defines and is subsequently defined by symbols

and rituals

• Produce “expressive social tissue”

Culture in strategy formation

Strategic Choices

Technology

Products

Markets

Personnel policies

Recruitment

Communicationpatterns

Culture

The impact of culture on strategy

• Culture acts as perceptual filter; it focuses and it

distorts.• Culture is a prism that can blind managers to

external conditions.• Culture is a powerful barrier to change.

The paradox of culture

• Organizations want to create strong culture.

•Top management does not want organizational

culture to constrain its freedom to change.

•Decisions that violate organizational culture will

undermine it.

•Change and strong culture are incompatible.

Resource-based theory of the firm

• An explanatory framework for diversification

•An explanatory framework for sustainable

advantage

Criteria of strategic resources

• Valuability

• Rarity

• Inimitability

• Substitutability

• What’s the relationship between a beautiful old Persian rug, organizational culture and a strategic resource?

Question?

Premises of the culture

• Strategy formation is based on shared beliefs/values.

• Strategy is “perspective” rooted in collective intentions.

• The intent expressed by strategy is based on

normative and ideological controls.

• Culture is ideally suited for perpetuating existing

strategy.

• Strategic change often requires culture change.

• A difficult, time consuming, above all, committed process.

Building an ideology

Destroying an ideology• Manage the bottom line (as if you make money by managing

money).

• Make a plan for every action (no spontaneity please, no learning).

• Move managers around so they can never get to know anything but management well, and kick the boss upstairs (better to manage a portfolio than a real business).

• Hire and fire employees the way you buy and sell machines.

• Do everything in five easy steps.

Procedures and techniques for selection

Embryonic

Growing

Mature Ageing

Clear leader

Strong

Favourable

Defensible

Weak

Invest in these boxes

Harvest/Withdraw in these boxes

ADL Matrix: helping make strategic decisions

See: Lynch Ch10.3

Comp-etitive position

Market status

Procedures and techniques for selection – 5

• Evaluation usually employs common and agreed criteria across the organisation, e.g. return on capital or contribution to value added

• The strengths and weaknesses of such criteria need to be understood: focus on the specific evaluation objectives usually means that other important strategic aspects are weakened or even ignored

Procedures and techniques for selection

• Shareholder Value Added approach takes a broader perspective on evaluation: seeks to determine the benefits to the whole business area, rather than just the strategy itself

• Cost/benefit analysis has been successfully employed in the public sector where benefits are broader and less easily quantifiable. Main difficulty is where to place limits on benefits and costs.

Some problems with the classic strategic planning process – 1

Environment:• assumed to be predictable• but numerous instances where this has proved to

be incorrectPlanning procedure:• assumed that major strategic decisions are

initiated by clear planning procedure• whereas strategic decisions in practice are often

complex, multi-layered and subject to management judgement

Some problems with the classic strategic planning process – 2

Top-down procedures:• assumed that such procedures from group HQ to individual

strategic business units represent the most efficient method for allocating funds and gaining management commitment

• whereas research evidence suggests that some managers find the process demotivating and unwieldy

Organisational culture:• assumed that organisational culture will allow the

prescriptive model to operate• whereas some company cultures are in practice more

suited to prescriptive approach than others: e.g. a strict strategic planning format may not be appropriate for a highly creative and experimental company

Some problems with the classic strategic planning process – 3

More general criticisms of the prescriptive approach include:

• Need for more dialogue in the development of strategy

• Innovation needs a greater flow of ideas and is ill-served by rigid reporting and information flows

• More adaptable organisation is essential where the environment is changing rapidly: emergent approaches are essential in these circumstances