STRATEGY METHODS

AND EVALUATION
CHAPTER 10
 LEARNING OUTCOMES
➔ Identify the methods by which strategies can be pursued: organic development,
mergers and acquisitions, and strategic alliances.

➔ Employ three success criteria for evaluating strategic options: suitability,

acceptability, and feasibility.

➔ Use a range of different techniques for evaluating strategic options.

INTRODUCTION
 METHODS OF PURSUING STRATEGIES
A strategic method is the means by which a strategy can be pursued

The methods are divided into three types;

1) organic development
2) mergers and acquisition
3) strategic alliances
 1. ORGANIC DEVELOPMENT
 Organic development (or internal development) is where strategies are developed by building on
and developing an organisation’s own capabilities.
For many organisations organic development has been the primary method of strategy
development.
There are some compelling reasons why organisation opt for organic development.
a. Highly technical products
This is in terms of design or method of manufacture lend themselves to organic development
since the process of development may be the best way of acquiring the necessary capabilities to
compete successfully.
 Cont.….
b. Knowledge and capability development may be enhanced by organic development.
For example, a business may feel that the direct involvement gained from having its own salesforce
rather than using sales agents gains greater market knowledge and therefore competitive advantage over
other rivals more distant from their customers.
c. Spreading investment over time.
 The final cost of developing new activities internally may be greater than that of acquiring other
companies.
 However, spreading these costs over time may be a more favourable option than major expenditure at a
point in time required for an acquisition.
 This is a strong motive for organic development in small companies or many public services that may
not have the resources for major one-off investments.
Cont.….
d. Minimising disruption.
 The slower rate of change of organic development may also minimise the disruption to other
activities and avoid the political and cultural problems of acquisition integration that can occur.
e. The nature of markets may dictate organic development.
 In many instances organisations breaking new ground may not be in a position to develop by
acquisition or joint development, since they are the only ones in the field. Or there may be few
opportunities for acquisitions.
 2. MERGERS AND ACQUISITION
An acquisition is where an organisation takes ownership of another organisation.
 A merger is a mutually agreed decision for joint ownership between organisations.
MOTIVES OF ACQUISITIONS AND MERGERS
1. Changing environment
Speed of entry. Products or markets may be changing so rapidly that acquisition becomes the only
way of successfully entering the market, since the process of internal development is too slow.
The competitive situation may influence a company to prefer acquisition. In static markets and
where market shares of companies are steady it can be difficult for a new company to enter the
market, since its presence may create excess capacity. If entry is by acquisition the risk of
competitive reaction may be reduced.
Cont.…
Consolidation opportunities. Where there are low levels of industry concentration, there may
be an opportunity for improving the balance between supply and demand by acquiring companies
and shutting down excess capacity.
Financial markets may provide conditions that motivate acquisitions. If the share value or
price/earnings (P/E) ratio of a company is high, it may see the opportunity to acquire a firm with a
low share value or P/E ratio.
Cont.….
2. Capability considerations
Exploitation of strategic capabilities can motivate acquisitions, for example through buying
companies overseas in order to leverage marketing or R&D skills internationally.
Cost efficiency is a commonly stated reason for acquisitions typically by merging units so as to
rationalise resources (for example, head office services or production facilities) or gain scale
advantages.
Obtaining new capabilities may also be achieved through acquisitions, or at least be a motive
for acquisition. For example, a company may be acquired for its R&D expertise, or its knowledge of
particular business processes or markets
Cont.….
3. Stakeholder expectations
Institutional shareholder expectations may be for continuing growth and acquisitions may be a
quick way to deliver this growth.
Managerial ambition may motivate acquisitions because they speed the growth of the company.
In turn, this might enhance managers’ self-importance, provide better career paths and greater
monetary rewards.
Speculative motives of some stakeholders may stimulate acquisitions that bring a short-term
boost to share value. Other stakeholders are usually wary of such speculation since their short-
term gain can destroy longer-term prospects.
 ACQUISITION AND FINANCIAL
PERFORMANCE
According to findings 70 per cent of acquisitions end up with lower returns to shareholders of
both organisations
There are some mistakes that occur during acquisition which may not help in improving financial
performance.
The most common mistake is in paying too much for a company – possibly through lack of
experience in acquisitions, or poor financial advice
In addition the managers of the acquiring company may be over-optimistic about the benefits of
the acquisition
Or it may be that the capabilities of the merging organisations are not compatible.
 MAKING ACQUISITION WORK
There are four frequently occurring issues that account for success or failure of an
acquisition/merger:
Adding value. The acquirer may find difficulty in adding value to the acquired business.
Gaining the commitment of middle managers responsible for the operations and customer
relations in the acquired business is important in order to avoid internal uncertainties and maintain
customer confidence.
Expected synergies may not be realised, either because they do not exist to the extent expected or
because it proves difficult to integrate the activities of the acquired business.
Problems of cultural fit. This can arise because the acquiring business finds that ‘everyday’ but
embedded aspects of culture differ in ways that prove difficult to overcome but are not readily
identifiable before the acquisition.
 3. STRATEGIC ALLIANCES
A strategic alliance is where two or more organisations share resources and activities to pursue a
strategy.
This kind of joint development of new strategies has become increasingly popular. This is
because organisations cannot always cope with increasingly complex environments or strategies
(such as globalisation) from internal resources and competences alone.
They may need to obtain materials, skills, innovation, finance or access to markets but recognise
that these may be as readily available through cooperation as through ownership.
 MOTIVES OF ALLIANCES
The need for critical mass, which alliances can achieve by forming partnerships with either
competitors or providers of complementary products. This can lead to cost reduction and
improved customer offering.
Co-specialisation – allowing each partner to concentrate on activities that best match its
capabilities: for example, to enter new geographical markets where an organisation needs local
knowledge and expertise in distribution, marketing and customer support.
Learning from partners and developing competences that may be more widely exploited
elsewhere
Organisations may also enter alliances as a means of experimentation since it allows them to
break out of a sole reliance on the exploitation of their own resources and capabilities.
 TYPES OF ALLIANCES
1. Joint ventures
These are relatively formalised alliances and may take different forms themselves.
Organisations remain independent but set up a newly created organisation jointly owned by the
parents.
Joint ventures are a favoured means of collaborative ventures in China, for example. Local firms
provide labour and entry to markets; Western companies provide technology, management
expertise and finance.
 2. CONSORTIA
Consortia may involve two or more organisations in a joint venture arrangement typically more
focused on a particular venture or project.
Examples include large civil engineering projects, or major aerospace undertakings, such as the
European Airbus.
 They might also exist between public sector organisations where services (such as public
transport) cross administrative boundaries.
 3. NETWORKS
Networks are less formal arrangements where organisations gain mutual advantage by working in
collaboration without relying on cross-ownership arrangements and formal contracts.
Carlos Jarillo suggests that characteristic of such network arrangements are a reliance on
coordination through mutual adaptation of working relationships, mutual trust and, typically, a
‘hub organisation’ that may have promoted the network and maintains a proactive attitude to it.
Such networked arrangements may exist between competitors in highly competitive industries
where some form of sharing is none the less beneficial.
Other alliance arrangements that exist usually of a
contractual nature and unlikely to involve ownership
Franchising involves the franchise holder undertaking specific activities such as manufacturing,
distribution or selling, whilst the franchiser is responsible for the brand name, marketing and
probably training. Perhaps the best known examples are Coca-Cola and McDonald’s.
Licensing is common in science-based industries where, for example, the right to manufacture a
patented product is granted for a fee.
With subcontracting, a company chooses to subcontract particular services or part of a
process: for example, increasingly in public services responsibility for waste removal, cleaning
and IT services may be subcontracted (or ‘outsourced’) to private companies
FACTORS THAT INFLUENCE TYPE OF
ALLIANCE
Speed of market change will require strategic moves to be made quickly. So less formal and
flexible network arrangements may be more appropriate than a joint venture, which could take too
long to establish.
The management of resources and capabilities. If a strategy requires separate, dedicated,
resources then a joint venture will be appropriate. In contrast, if the strategic purpose and
operations of the alliance can be supported by the current resources of the partners this favours a
looser contractual relationship or network.
The expectations and motives of alliance partners will play a part. For example, if alliance
partners see the alliance as a means of spreading their financial risk, this will favour more formal
arrangements such as joint ventures
TYPES OF STRATEGIC ALLIANCES VS
INFLUENCING FACTORS
INGREDIENTS FOR SUCCESSFUL
ALLIANCES
The success factors of alliances
•Strategic purpose. A clear strategic purpose is likely to be helpful at the outset of an alliance
•Alliance expectations and benefits. The expectations of alliance partners may vary, managing
those expectations as the alliance evolves is vital.
•Managing alliance relationships. Senior management support for an alliance is important since
alliances require a wider range of relationships to be built and sustained.
STRATEGY EVALUATION
 THREE SUCCESS FACTORS
The three key success criteria can be used to assess the viability of strategic options introduced
in part II of the book.
 THREE SUCCESS FACTORS
1. SUITABILITY
Suitability is concerned with whether a strategy addresses the key issues that have been
identified in understanding the strategic position of the organization.
In particular this requires an assessment of the extent to which any strategic option would fit with
key drivers and expected changes in the environment, exploit strategic capabilities, and be
appropriate in the context of stakeholder expectations and influence and cultural influences.
Evaluating the suitability of a strategy is extremely difficult unless these have been identified.
Cont.…
EVALUTION TOOLS FOR ASSESSING
SUITABILITY
The TOWS matrix-it can be used to provide an assessment of suitability by ‘justifying’ options in
terms of the extent to which they address the strengths, weaknesses, threats and opportunities
relating to the strategic position of the organisation.
The relative suitability of options that matters. There may be options ‘available’ to an
organisation that are more or less suitable than others. There are useful frameworks that can
assist in understanding better the relative suitability of different strategic options.
Ranking strategic options. Options are assessed against key factors relating to the strategic
position of the organisation and a score (or ranking) established for each option.
Cont.….
Decision trees can also be used to assess strategic options against a list of key factors. Here
options are ‘eliminated’ and preferred options emerge by progressively introducing requirements
which must be met (such as growth, investment or diversity)
Scenarios. Here strategic options are considered against a range of possible future situations.
This is especially useful where a high degree of uncertainty exists. Suitable options are ones that
are sensible in terms of the various scenarios so several need to be ‘kept open’, or perhaps in the
form of contingency plans. Or it could be that an option being considered is found to be suitable in
different scenarios.
2. ACCEPTABILITY
Acceptability is concerned with the expected performance outcomes of a strategy and the extent
to which these meet the expectations of stakeholders.
It is probably sensible to use more than one approach in assessing the acceptability of a strategy.
These can be of three types: return, risk and stakeholder reactions
 RETURN
Returns are the benefits which stakeholders are expected to receive from a strategy.
 Measures of return are a common way of assessing proposed new ventures or major projects by
managers within businesses.
So an assessment of financial and non-financial returns likely to accrue from specific strategic options
could be a key criterion of acceptability of a strategy – at least to some stakeholders
Financial analysis
•Forecasting the return on capital employed (ROCE) for a specific time period after a new strategy is in
place.
•Estimating the payback period. This is the length of time it takes before the cumulative cash flows for a
strategic option become positive.
•Calculating discounted cash flows (DCFs). This is a widely used investment appraisal technique.
RISK
Risk concerns the probability and consequences of the failure of a strategy.
 This risk can be high for organisations with major long-term programmes of innovation, where
high levels of uncertainty exist about key issues in the environment or where there are high levels
of public concern about new developments – such as genetically modified Crops.
 Formal risk assessments are often incorporated into business plans as well as the investment
appraisals of major projects.
 Importantly, risks other than ones with immediate financial impact are included such as ‘risk to
corporate or brand image’ or ‘risk of missing an opportunity’.
HOW TO ESTABLISH RISK ASSESSMENT
A. FINANCIAL RATIOS
The projection of how key financial ratios might change if a strategy were adopted can provide
useful insights into risk.
 At the broadest level, an assessment of how the capital structure of the company would
change is a good general measure of risk.
A consideration of the likely impact on an organisation’s liquidity (cash position) is also
important in assessing risk.
Cont.….
B. SENSITIVITY ANALYSIS
Sometimes referred to as ‘what if’ analysis, sensitivity analysis allows each of the important
assumptions underlying a particular strategy to be questioned and challenged.
 In particular, it tests how sensitive the predicted performance or outcome (for example, profit) is
to each of various assumptions.
Sensitivity analysis asks what would be the effect on performance (in this case, profitability) of
variations on various assumptions.
STAKEHOLDERS REACTION
Stakeholder mapping can be useful in understanding the likely reactions of stakeholders to new
strategies, the ability to manage these reactions, and hence the acceptability of a strategy.
There are many situations where stakeholder reactions could be crucial. For example:
•Financial restructuring. A new strategy might require the financial restructuring of a business, for
example an issue of new shares, which could be unacceptable to powerful groups of shareholders,
since it dilutes their voting power.
•An acquisition or merger could be unacceptable to unions, government or some customers.
• A new business model might cut out channels (such as retailers), hence running the risk of a
backlash, which could jeopardise the success of the strategy.
• Outsourcing is likely to result in job losses and could be opposed by unions.
 3.FEASIBILITY
Feasibility is concerned with whether an organisation has the resources and competences to
deliver a strategy.
A number of approaches can be used to understand feasibility.
I. Financial feasibility
A useful way of assessing financial feasibility is cash flow analysis and forecasting. This seeks
to identify the cash required for a strategy and the likely sources for obtaining that cash. These
sources are sometimes referred to as funding sources.
It should highlight whether a proposed strategy is likely to be feasible in terms of both cash
generation and the availability and timing of new funding requirements.
Financial feasibility can also be assessed through break-even analysis. This is a simple and
widely used approach for judging the feasibility of meeting financial targets such as the ROCE and
operating profit.
Cont.….
II. Resource deployment
A wider understanding of feasibility can be achieved by identifying the resources and competences
needed for a specific strategy.
The effectiveness of a strategy is likely to be dependent on whether such capabilities are available
or can be developed or obtained.
A resource deployment assessment can be used to judge
(i) the extent to which an organisation’s current capabilities need to change to reach or maintain the
threshold requirements for a strategy; and
(ii) if and how unique resources and/or core competences can be developed to sustain competitive
advantage.
The issue is whether these changes are feasible in terms of scale, quality of resource or time-scale
of change
EVALUATION CRITERIA: THREE
QUALIFICATIONS
Conflicting conclusions and management judgement.
•Conflicting conclusions can arise from the application of the criteria of suitability, acceptability,
and feasibility. A proposed strategy might look eminently suitable but not be acceptable to major
stakeholders.
•It is therefore important to remember that the criteria discussed here are useful in helping think
through strategic options but are not a replacement for management judgement.
• Managers faced with a strategy they see as suitable, but which key stakeholders object to, have to
rely on their own judgement on the best course of action, but this should be better informed
through the analysis and evaluation they have undertaken.
Cont.….
There needs to be consistency between the different elements of a strategy.
•The competitive strategy (such as low price or differentiation), strategy direction (such as product
development or diversification) and strategic method (internal, acquisition or alliances) need to be
consistent.
•They need to be considered as a whole and make sense as a whole because there are dangers if
they do not.
Cont.…
The implementation and development of strategies may throw up issues that might make
organisations reconsider whether particular strategic options are, in fact, feasible or uncover
factors that change views on the suitability or acceptability of a strategy.
•This may lead to a reshaping, or even abandonment, of strategic options.
• It therefore needs to be recognised that, in practice, strategy evaluation may take place through
implementation, or at least partial implementation. This is another reason why experimentation
and low-cost probes may make sense.