1. 1 Bruce Bowhill University of Portsmouth ISBN: 978-0-470-06177-0 © 2008 John Wiley & Sons Ltd. www.wileyeurope.com/college/bowhill

2. Chapter 18 Evaluating Strategies and Writing the Business Plan © 2008 John Wiley & Sons Ltd. www.wileyeurope.com/college/bowhill

3. 3 Evaluating of options taking account of risk –Sensitivity analysis –Expected value –Decision tree analysis –Simulation Dealing with uncertainty –Maximin and maximax criteria Acceptability of strategic options to stakeholders Feasibility – availability of resources and competencies © 2008 John Wiley & Sons Ltd. www.wileyeurope.com/college/bowhill

4. 4 Taking account of risk and uncertainty Assume an example of assessing a new route for an airline –Sensitivity analysis Percentage Contribution p.a. Payback occupancy from the route years on flights €’000 72 1,440 6.9 80 2,040 4.9 88 2,640 3.8 Sensitivity analysis can be used on all key variables © 2008 John Wiley & Sons Ltd. www.wileyeurope.com/college/bowhill

5. 5 Expected value OutcomeContribution Prob.of outcome Payoff (occupancy) (exp. value) 75% €138,75040% €55,500 80% €170,00040% €68,000 85% €201,25020% €40,250 €163,750 © 2008 John Wiley & Sons Ltd. www.wileyeurope.com/college/bowhill

6. 6 Decision tree analysis Given an airline starts a new route there is a 60% chance that no other airline will decide to compete on the same route. Assuming no other airline does compete, there is a 40% chance that flight occupancy will be 75%, a 40% chance that it will be 80% and a 20% chance that it will be 85% occupancy. There is however a 40% chance that another airline will start a new service on the same route. If so, then there is a 30% chance that flight occupancy will be 60%, a 40% chance that it will be 70% and a 30% chance that it will be 75%. © 2008 John Wiley & Sons Ltd. www.wileyeurope.com/college/bowhill

7. 7 © 2008 John Wiley & Sons Ltd. www.wileyeurope.com/college/bowhill

8. 8 The expected value of launching a service for each of the 6 branches and in total can be calculated Contribution ProbabilityExpected € value € If no competitor Occupancy 75%138,7500.2433,300 80%170,5000.2440,800 85%201,2500.1224,150 If competitor 60% 45,0000.12 5,400 70%107,5000.1617,200 75%138,7500.1216,650 137,500 © 2008 John Wiley & Sons Ltd. www.wileyeurope.com/college/bowhill

9. 9 Simulation Flight occupancy Revenue Probability Identification number 75% €468,750 40% 1 - 40 80% €500,000 40% 41 - 80 85% € 531,250 20% 81 - 100 Cost Probability Identification number € 280,000 30% 1 - 30 €300,000 50% 31 - 80 €350,000 20% 81 – 100 © 2008 John Wiley & Sons Ltd. www.wileyeurope.com/college/bowhill

10. 10 Iteration 1 Random number Value € 45 Revenue 500,000 60 Operating costs 300,000 Contribution 200,000 Iteration 2 The random numbers chosen are 20 and 29 Random number Value € 20 Revenue 468,750 29 Operating costs 280,000 Contribution 188,750 Average after 2 simulations = 200,000 + 188,750 2 = € 194,375 © 2008 John Wiley & Sons Ltd. www.wileyeurope.com/college/bowhill

11. 11 Dealing with uncertainty Maximin criterion choose Type 2 Maximax criterion choose Type 1 Net present value given different competitive response Competitor reduces prices €’000 Competitor leave prices at current level €’000 Competitor withdraws from the market €’000 Type 1 aircraft - €3,100 €1,500€4,100 Type 2 aircraft - €1,000€550 €1,480 © 2008 John Wiley & Sons Ltd. www.wileyeurope.com/college/bowhill

12. 12 Preparing a business plan Why? Contents and structure of a plan –Title page –Contents page –Executive summary –Business background –Business aims and objectives –Internal appraisal of products and services –Appraisal of the market and competitive environment –Marketing –The financial plan © 2008 John Wiley & Sons Ltd. www.wileyeurope.com/college/bowhill