Case 5

Course structure

716

Identifying

problems

Analysing

customers

Analysing

context

Analysing

distribution

Analysing

resources

Strategy

develop

-

ment

Strategy

evaluation

Implement

-

ation

Introduc

-

tion

Today

Learning objectives

1.

Reviewing

strategic alternatives

2.

Identify techniques for evaluating

which strategies

are likely to work best

3.

Understand the reasons

for making a conscious

decision about strategy

5

Strategy Evaluation

•

Very important part of your report

–

please check the

rubric.

•

Before you evaluate a strategy, check if you have

described and defined it well?

•

Are both strategic alternatives directly addressing the

problem identified?

Quick recap

One problem

–

alternative solutions

Problem effect

Problem 1

Alternative 1

Alternative 2

Alternative 3

•

Address the problem that causes

most problem

•

Come up with

competing

alternatives

to address problem

One problem and strategies

•

W

hich

problem first?

•

Prioritise and select

•

Opportunity for your specialisation knowledge

•

Problem

–

strategy link?

•

Only a clear set of strategy alternatives can be

evaluated

–

using a set of criteria.

Strategy

versus

Tactics

A strategy

helps a firm to achieve its

goals

-

in a way that is consistent

with the firm’s vision and mission

-

deliver a unique (mix of) value.

Tactics are relatively smaller and

specific steps to achieve that

strategic goal

; they can occur in

different departments (with shorter

time frames), best practices, etc

.

So,

tactics form the core components of

a

strategy.

E.g., Differentiation Strategy Vs Tactics

Strategy: Assume a company wants to implement product differentiation strategy

Tactics: There could be many supporting tactics – (i) product ingredients, (ii) functionalities, (iii) product design, (iv) packaging, (iii) customer support, and (iv) sales strategies etc.

Note: Tactics could vary to achieve the main strategic goal of product differentiation.

Strategy description: Your description of strategic alternatives should cover both.

716 strategies types – broad categories

Promotion/Branding – promotion, advertisements, engagement, social media networks or collaborate with partners

Distribution – identifying channels, distributors – large retailers versus boutique, direct – online retailers or collaborate with partners

Product/value proposition – refining position, highlighting uniqueness, finding a niche in competition, aligning with the target market

These are just ideas – you will have to justify how they are relevant

Problem: “Get to Wellington”

Auckland

Wellington

Budget (financial resources)

Urgency (time resource)

Weight of luggage (other resources)

Other decision constraints

Tradeoffs

between alternatives:

Trade

-

offs between alternative strategies

STRATEGY

ADVANTAGE

DISADVANTAGE

Plane

Fast (3 hrs, incl. boarding)

Safe

Regular

schedule

Expensive

Limited luggage

Car

Take passengers at no extra cost

Carry up to 500kg

Transport in Wellington

Takes 9

-

hrs to drive

10

Tiring to drive

Dangerous

Train

See the countryside

Comfortable

Takes 12 hrs to get there

Moderate price

Bus

Low cost

See the countryside

Takes 12 hrs to get there

Uncomfortable

Cycle

Low cost

See the countryside

Adventure

Very

s

low (1 week?)

Dangerous

Tiring

, w

et & cold

Back to the problem

· You need a clear, one-sentence problem statement so you can check which strategy “solution” best solves it (but you need to give reasons justify it) [a couple of sentence is also fine – think of how to expand later]

· If your strategy does not solve the problem, you need a different strategy (or to modify your problem; then check the environment analysis)

Alignment between problem and strategy is a must

Problem Strategy Strategy definition formulation evaluation

Problem from environment analysis

Strategies that are clear can be evaluated objectively

Evaluation criteria

1.

Environmental consistency

:

makes sense in relation

to

context

and

external analysis

–

and expected

changes

2.

Consistent with available resources

:

VRIO

analysis;

aligned with

core competencies

and

capabilities

Evaluation criteria

continued

3.

Acceptable

degree of risk

:

ongoing value of resources;

investment length; size of commitment

a)

Internal

-

linked risks (preventable, if possible)

b)

External

-

linked risks (events outside firm’s control)

c)

Strategy risks

(

in order to generate high returns

)

Evaluation criteria

continued

4.

Appropriate

time (planning) horizon

Two years for the case

company

Evaluation criteria

continued

5.

Workable: practical

implementation;

performance

metrics

6

. Financial analysis of ‘

alternatives

’

•

FIRST: Need some sense of market / segment size and

growth

(

$$$s

)

•

Need some sense of

implementation costs

•

Present financial evidence

–

show sales revenue and costs

for two years

–

income statement

(

estimates only

)

•

Indicate one or more of the following

•

Return on investment (ROI)

•

Net present value (NPV) analysis

•

Breakeven analysis

•

Years to pay back investment (Payback period)

Estimating sales revenue and costs

•

Selling 1000 units of shampoo for US$20 = US$20,000

•

Is

it

per

month

or

year? (20,000 X 12 = US$240,000)

•

What is cost of sales?

How

many

revenue

streams?

Estimating sales revenue and costs

Month

-

wise figures can capture both growth, promotions and seasonal impacts

Estimating sales revenue

-

determinants

•

Sales

revenue:

•

Size of

the

target market

•

Price

that

you

would

recommend

•

Distribution channel that you would use

•

Margins

that

you

need

to

pay

to

the

channel

s

•

Area

–

whole

country

or one/two states

•

Any

other?

•

Cost of goods

sold:

•

Depends on how much you sell (the more you sell, more

the

cost)

•

Payment to advertising or partners

•

Promotion strategy/types

•

What are the fixed costs? Are they significant?

•

What are the variable costs? (production costs + shipping costs)

•

Any other?

Probability

-

based returns

-

example

•

Return on investment of alternative strategies weighted

by probability of outcome occurring:

•

Cashflow and probability “data” based on many, many

guesses

–

a very loose estimate only

Strategy

NPV of outcome

(

000)

$

Probability of

outcome

Risk

-

weighted

return

A

500

50

%

250

B

300

70

%

210

C

800

25

%

200

Problem

–

Strategy Development: A sequence

Strategy

formulation

Strategy

evaluation

Strategy

implementation

Performance

evaluation

Problem

definition

Choice

A

B

C

Now

make a decision

–

what is your

choice?

Example of Choice justification

•

Choice of strategy:

must be justified with both

numbers and arguments (5 marks in the final

report)

Strategy A

Strategy B

Why is a

choice

so important?

•

Must make a conscious

(

recorded) choice

, even if the

decision is to continue with the

current strategy

•

Otherwise you do not know

in a

year’s time

whether your

strategy was

successful

or

unsuccessful

•

Cannot learn

(

& so cannot

gain

experience)

This is what and how you are

learning now

Summary

•

Consider multiple alternative strategies

•

Evaluate which alternative “best” solves problem

(

importance of defining problem clearly

)

•

Strengths & weaknesses

•

Judged on a set of criteria

•

Must make a clear, conscious, recorded decision about

strategy choice (for future evaluations)