1. Alternative Strategies: Generating and evaluating strategic options

2. A Framework for Strategic Analysis
Stakeholders
analysis
Strategy formulation
Analysis
of R&C
Strategy
congruence
Environmental
Analysis
Alternative
Strategies
Action plan
Execution
Strategy implementation
Monitoring
Feedback

3. Tools for Analyzing Strategic Position
Strategy formulation
Stakeholders map,
Interest - power
Unique R&C,
Distinctive cap. (Kay),
From differences,
Str. Import. - Strength,
SW(OT)
PESTEL,
5 forces, str. groups, competitors analysis,
Segment., Scenarios,
(SW)OT
Strategy diagnosis,
Inferred strategy,
fit /E-R-V congruence
Generating options,
Ansoff options, methods,
SFA, Gap, SVA
Action plan
Execution
Strategy implementation
Monitoring
Feedback

4. Alternative Strategies: Outline
Directions for strategy development
Penetration, consolidation, retrenchment
Product, Market development
Diversification
Methods of strategy development
Internal (organic), acquisition, alliance
Evaluating strategic choices
Qualitative, financial

5. Alternative Strategies: choices
To develop in what way?
Which markets to address and with what products?
Product – market view
What method to use: to develop in house, acquire other firm, or collaborate?
What type of partnerships to choose
On what basis to compete, across business units?
Generic strategies view

6. Alternative Strategies: framework
Strategic Choices
Generic Strategy
Cost Leadership
Differentiation
Focus
Hybrid
Alternative Directions
Protect and built
Consolidation
Market penetration
Product development
Market development
Diversification
Related
Unrelated
Alternative Methods
Internal development
Acquisition
Joint development
Alliances
partnerships

7. The same strategy across business units. E. g
The same strategy across business units? E.g. easyjet, easybus, easycredit…in the low-cost
Source of advantage
Low cost
Differentiation
Broad
Broad low cost player
Broad differentiator
Competitive
scope
Focused low cost player
Focused differentiator
Narrow

8. Product – market view: Directions in the Ansoff matrix
Products
Existing
New A
Protect and built
Consolidation
Market penetration B
Product development
New products C
Market development
New markets
New territories
New uses D
Diversification
Related
Unrelated
Existing
Markets
New

9. Directions: Rate of growth likely
Products
Existing
New + --
+ +
Existing
Markets
+ +
+ + +
New 8

10. Directions: probable risk increase
Products
Existing
New
Existing
Markets
New 8

11. Protect and built
Protect and strengthen position in current markets with current products
Retrenchment, turnaround
Rationalisation and restructuring, turnaround
E.g. cost cutting, eliminate unprofitable parts, divestiture
Consolidation (defend position)
Market penetration
Persuade customers to buy more (increase buys per client, cross selling, repeat buying)
Attract new users
Gain customers from rivals
Usually cause reactions / retaliation be competitors

12. Product Development Deliver new products to existing markets
Follow changing customer needs
Complete product range
Introduce innovations
Can be expensive and risky, potentially unprofitable
Dilemma: stick with the “old” or provide new?
The consequences of not developing new products may be unacceptable

13. Market Development Offer existing products in new markets Dilemmas
New market segments
New geographic markets
New uses for existing products
Dilemmas
Engage in some product development and capability development for new segments?
Product homogeneity across segments?

14. Diversification
A strategy that takes the organisation away from both its current markets and products
Related diversification:
Within the capabilities of the organisation
Unrelated diversification:
Weak or no similarities with current capabilities

15. Vertical & Horizontal Diversification
Vertical integration
Backward integration into input activities
Forward integration into output activities
Horizontal integration
Develop into activities complementary to existing ones
E.g. to exploit strategic capabilities in new markets

16. Reasons for Diversification: (1)
Create value from synergies
Sharing activities (e.g. Rail in Telecom: fiber on the track)
Transferring skills & competences between businesses
Applying corporate managerial capabilities to new business activities
Economies of scope from applying existing resources to new products / markets

17. Reasons for Diversification: (2)
Increase market power
Command a diverse and wider range of business activities, and resources
Control markets / prices, possibly dominate in the long-run
Portfolio benefits
To spread risk across a range of businesses

18. Reasons for Diversification: (3)
To exploit perceived opportunities, or avoid threats
To increase or defend existing value
To meet the expectations of powerful stakeholders
Pressure from financial analysts to produce constant growth
From managers or owners who desire “empire building”

19. Relatedness in diversification
Better be viewed in terms of Resources & Capabilities
E.g. different products but with similar product development capabilities
Knowledge relatedness, e.g. utilizing same customer knowledge, different businesses meet in same customers
In term of Products?... Beware, apparently similar products may require totally different capabilities (unrelated)
E.g. backward integrated production of fiber from wool or silk may be unrelated – Why?

20. Problems of Related Diversification
Overestimating synergies
Underestimating new capabilities required
Pressure on the time and capabilities of top managers
Complexity, coordination problems
Difficulties for business units to share resources and adapt policies

21. Unrelated Diversification
Development of products/services beyond the current capabilities or value network
Often in the name of synergies
Can succeed in some cases
E.g. exploit dominant logic (e.g. easy group recipe), use name and reputation ti introduce other products
but value from synergies is usually illusive
economies of scope are not easy to come

22. Does diversification add value?
Cost of headquarters?
They may consume value
Why not leave the businesses apart and act as investor?
Let the market apply the discipline
Can investors diversify more effectively?
E.g. buying shares from stock exchange rather than building holdings

23. Diversification and Performance on average
High
Performance
Low
One dominant business
Unrelated businesses
Related, limited diversification

24. Methods of Development
Internal Development
Based on the organisation’s own R & C
“Organic” growth
Mergers and Acquisitions
Take over ownership of another organisation
Strategic Alliances
Two or more organisations share resources and activities

25. Motives for Internal Development
Environment
Capabilities
Expectations
Lack of choice – the only way to break new ground
Develop highly technical products in-house to create core competence
Avoid culture clash with other forms e.g. acquisition
There are no suitable companies to acquire
Develop new markets – direct involvement to increase understanding & create core competence
Avoid potential incompatibility
Spread cost over time

26. Motives for Mergers & Acquisitions
Environment
Capabilities
Expectations
Speed in fast-moving product/market
Exploit core competences in new arena
Institutional shareholders want continuing growth
Improve competitive position, scope
Get managers / competences
Ambitions of senior managers
Privatization provides units ripe for acquisition
Cost efficiency
Speculative to boost short-term share value
Financial – opportunistic acquisition of firm with low share value
Learning

27. Issues in Making Acquisitions Work
In many cases acquisitions fail to add value
Acquirers usually overpay
Inability to integrate the new company
Difficult to identify which knowledge to transfer for organisational learning
Problems of cultural fit, especially for cross country acquisitions
Failures may be high: 75%

28. What we discover after the acquisition
Information before
Financial data
Products, markets
Corporate image
Scope of activities,
offices, factories
Organization chart
Info about senior management – less
about middle
Remuneration of executives
Information after
Internal philosophy & culture
Real quality of managers
Systems and rewards
Real decision making processes
Internal relations, hidden tensions
Real goals pursued by executives
Hidden costs

29. The critical issue in acquisitions: homogenization of diverse cultures

30. Planning for culture integration after acquisition
Diagnosis of culture
differences,
values
Acquisition, aims
Mixing people,
Common
management
Training,
Human
development
Transparency,
communication

31. Motives for Strategic Alliances
To obtain critical mass
Sharing costs of development
Improving customer offering
Seek supplementary R&C
Each partner concentrates on using own capabilities
For learning
Helps to develop future competences

32. Types of strategic alliances
Loose
Networks for specific projects
Technological agreements, joint R&D programs
Purchasing unions
Contractual
Partnership agreements
Consortia
Licensing, franchising
Ownership
Joint ventures in a new company
Exchange of shares between partners

33. Types of Strategic Alliances: comparisons
Loose (Market)
Networks
Opportunistic Alliances
Contractual
Partnerships
Consortia
Licensing, franchising
Ownership
Joint ventures
Exchange of shares
Speed of development
Governance
Fast
Loose
Slower
Tight
Alliance assets
Risk of losing assets to partner
Draws on parent’s assets.
Managed separately by each partner
High
Dedicated assets for alliance. Managed together
Low
Risk spreading
Integration
Risk maintained in the company
Risk transferred to joint venture

34. Searching for alliances & partnerships
Substitutes
Diversification
alliances
Up stream
alliances
Down stream
alliances
Strategic core
Clients
Suppliers
External
alliances
Competitors

35. Ingredients of Successful Alliances
Clear strategic purpose with senior management support
Compatibility at operational level
Strong interpersonal relationships
Transcend culture differences
Defining and meeting performance expectations
Clear goals and governance of the alliance
Flexible, allowed to evolve and change
Trusti is the most important factor for success
Competence based
Character based

36. Acquisition OR Alliance?
Acquisitions
Fast
Stable, permanent
Higher cost
Get market share
Obtain know how
Spread risks - portfolio
Obtain brand names
Obtain talents
But higher risk
Integration difficulty
Alliances
Usually slow
Can easily be dissolved
Cheaper
More flexible
Difficulties in technology transfer – suspicious partners
Lower risk
Easier to integrate
Weak commitment

37. Evaluating Alternative Strategies

38. Evaluating Alternative Strategies
Evaluation in two or three stages
Prescreening on general perception of fit, or on the basis of a critical criterion
E.g. keep the same generic strategy, e.g. easygroup
Qualitative evaluation of alternatives that passed the prescreening
based on SFA criteria
Financial evaluation of selected alternatives or sets
E.g. an aggressive set vs a conservative set of options

39. Financial evaluation: What alternatives to evaluate?
It is not necessary to subject all single alternatives to financial evaluation
only if they are important
have to select between opposite options
e.g. developing a new product in house (organic) or through acquisition
Evaluate selected set of options in total, because of synergies
E.g. an aggressive expansion strategy (with many alternatives for growth included)
vs a cautious strategy (few alternatives given the limits of R&C and market conditions)

40. Financial Evaluation: methods
Treat the option to be evaluated as an “investment project”
Estimate net cash flows generated by the project: inflows minus outflows
NPV gives the value of the specific option
Value to the company shareholders: Shareholder value analysis (SVA = NPV- loans)
As stand alone investment or as part of the system /total company?
As part of the total system: Net cash flows generated “with” the alternative minus “without”
Risk / return calculations
Sensitivities, scenarios.

41. Criteria for Qualitative Evaluation: SFA
Suitability
How far does the proposed alternative strategy fits the specific situation the organisation faces (strategic logic)
Does it fit the culture
Feasibility
Do we have the resources to implement it; can we secure them?
Do we have the skills and competences required; can we obtain them?
Acceptability
Does it meet the expectations of key stakeholders
Are the expected outcomes acceptable in terms of return and risk.

42. SFA evaluation of alternatives (illustrative)
Suitability
Feasibility
Acceptability S1 S2 F1 F2 A1 A2
Penetration * **
Product Development
Product X
***
Product Z
Market Development
Related diversification
Area A
Area B
Unrelated Diversification

43. Methods to choose from SFA scores
Ranking
Alternatives that have scores above a level in all criteria are selected
Alternatives that have high scores is selected key SFA factors
Use the average score for ranking alternatives
Sets
Use average scores for alternative sets of options and choose the one with the max average score
Scenarios
Options are matched to different future scenarios

44. Cash Flows: direct estimation (inflows-outflows)
2016
2017
2018
2019
Inflows from extra sales
Inflows from interest & dividends
_- Payments to suppliers
- Payments to employees
- Payments of interest and taxes
Net cash flows from operations
Inflows from loans, assets, etc
- Outflows for new investment
- replacement investments & increase in working capital
Net investment flows
Inflows from equity and short term financing
- payments for short term loans and dividends
Free cash flows
NET PRESENT VALUE

45. Cash Flows : indirect method (gross margin in an area)
2016
2017
2018
2019
Sales
Profit before tax (gross margin X sales)
- Tax
Profit after tax
+ depreciation
Cash flows from operations
- New investments
- Replacement investments
- Increase in working capital
Free cash flows
NET PRESENT VALUE

46. Cash Flow ‘Drivers’ Sales Growth Rate (SGR)
Operating Profit Margin (OPR)
Tax Rate (TR)
Fixed Capital Investment (Replacement and Incremental) (RFCI, IFCI)
Incremental Working Capital Investment (IWCI)
Cost of Capital (WACC – Weighted Average))
Planning Period (PP)

47. Gap Analysis: meeting the growth expectations (of e.g owners)
Objective
New markets
Sales growth
New products
Rationalization
Do nothing prediction
Years

48. Gap Analysis: meeting the profitability expectations (of e.g owners)
ROE
New markets 7%
New products
Rationalization
Do nothing forecast
Years

49. Strategy Robustness: Expected profits (negative cash-flows in the first 2-3 rears, NPV for the long term)
Scenario A
(Trends)
Scenario B
(Contradictions)
Strategy Set 1
+++
NPV++
Cash-flows?
Strategy Set 2
NPV+
Cash-flows???
NPV ??
Cash-flows?????

50. Robustness of proposed strategy: Assessing profitability under two scenarios1 2 3 4 5 6 7
10%
15% 5%
20%
25%
ROE of best competitor (scenario Α)
Scen. Α
Scen. Β
ROE
years

51. Key Points (1) Three elements of strategic choice
Competitive strategy
Direction of development
Method of development
Four categories of development directions
Protect and consolidate
Product development
Market development
Diversification

52. Key Points (2) Three methods of strategy development
Internal development
Mergers and acquisitions
Strategic alliances
Three success criteria for strategic options
Suitability
Acceptability
Feasibility
Financial evaluation based on free cash flows of selected options or sets of options