Strategy Formation and Implementation

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Johnson, Whittington, Scholes, Angwin and Regnér, Exploring Strategy Powerpoints on the Web, 10th edition ©Pearson Education Limited 2014

Part III:
Strategy in Action

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Johnson, Whittington, Scholes, Angwin and Regnér, Exploring Strategy Powerpoints on the Web, 10th edition ©Pearson Education Limited 2014

Part III: Strategy in action

This part explains:

• Criteria and techniques that can be used to evaluate organisational performance and strategic options.
• How strategies develop in organisations; in particular, the processes that may give rise to intended strategies or to emergent strategies.
• The way in which organisational structures and systems of control are important in organising for strategic success.
• The leadership and management of strategic change.
• Who strategists are and what they do in practice.

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Johnson, Whittington, Scholes, Angwin and Regnér, Exploring Strategy Powerpoints on the Web, 10th edition ©Pearson Education Limited 2014

Strategy in Action
11: Evaluating Strategies

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Learning outcomes (1)

• Assess the performance outcomes of different strategies in terms of direct economic outcomes and overall organisational effectiveness.

• Assess performance and the need for new strategies using gap analysis.

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Johnson, Whittington, Scholes, Angwin and Regnér, Exploring Strategy Powerpoints on the Web, 10th edition ©Pearson Education Limited 2014

Learning outcomes (2)

• Employ three success criteria for evaluating strategic options (the SAFe criteria):

– Suitability: whether a strategy addresses the key issues relating to the opportunities and constraints an organisation faces.

– Acceptability: whether a strategy meets the expectations of stakeholders.

– Feasibility: whether a strategy could work in practice.

• Use for each of these a range of different techniques for evaluating strategic options, both financial and non-financial.

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Johnson, Whittington, Scholes, Angwin and Regnér, Exploring Strategy Powerpoints on the Web, 10th edition ©Pearson Education Limited 2014

Evaluating strategies

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Johnson, Whittington, Scholes, Angwin and Regnér, Exploring Strategy Powerpoints on the Web, 10th edition ©Pearson Education Limited 2014

Performance measures (1)

Economic performance refers to direct measures of success in terms of economic outcomes.

• There are three main dimensions:
• Performance in product markets (e.g. sales growth or market share)
• Accounting measures of profitability (e.g. profit margin or return on capital employed)
• Financial market measures (e.g. share price).
• These measures may seem objective but need to be carefully interpreted.

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Johnson, Whittington, Scholes, Angwin and Regnér, Exploring Strategy Powerpoints on the Web, 10th edition ©Pearson Education Limited 2014

Performance measures (2)

Effectiveness refers to a broader set of performance criteria reflecting internal operational efficiency or measures relevant to a wider range of stakeholders.

• A broad measure of effectiveness is provided by the balanced scorecard which considers four perspectives (i.e. the customer, internal business, innovation and learning and financial perspectives).
• The triple bottom line – has economic, social and environmental measures.

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Johnson, Whittington, Scholes, Angwin and Regnér, Exploring Strategy Powerpoints on the Web, 10th edition ©Pearson Education Limited 2014

Performance comparisons

Performance is measured in relation to:

• Organisational targets. Management will typically set targets for sales growth or profitability.
• Trends over time. Is performance improving or declining over a significant period of time (but be aware of cycles)?
• Comparator organisations. Typically firms can benchmark themselves against key competitors (but beware of high risk rivals).

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Johnson, Whittington, Scholes, Angwin and Regnér, Exploring Strategy Powerpoints on the Web, 10th edition ©Pearson Education Limited 2014

Gap analysis (1)

Gap analysis compares achieved or projected performance with desired performance.

• Helps to identify shortfalls in performance
• The size of the ‘gap’ provides a guide to the extent to which strategy needs to be changed – a very large gap may suggest transformational change is needed.

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Johnson, Whittington, Scholes, Angwin and Regnér, Exploring Strategy Powerpoints on the Web, 10th edition ©Pearson Education Limited 2014

Gap analysis (2)

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Complexities of performance analysis

• Performance measures can be contradictory, e.g. sales growth can be achieved by cutting profit margins.
• Organisations can manipulate outcomes in order to meet key performance criteria.
• Organisations can legitimately manage performance perceptions and expectations.
• The importance of particular measures can change over time.

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Johnson, Whittington, Scholes, Angwin and Regnér, Exploring Strategy Powerpoints on the Web, 10th edition ©Pearson Education Limited 2014

The SAFe criteria and techniques of evaluation

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Johnson, Whittington, Scholes, Angwin and Regnér, Exploring Strategy Powerpoints on the Web, 10th edition ©Pearson Education Limited 2014

Suitability

Suitability is concerned with assessing which proposed strategies address the key opportunities and threats an organisation faces.

It is concerned with the overall rationale of the strategy:

• Does it exploit the opportunities in the environment and avoid the threats?
• Does it capitalise on the organisation’s strengths and avoid or remedy the weaknesses?

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Johnson, Whittington, Scholes, Angwin and Regnér, Exploring Strategy Powerpoints on the Web, 10th edition ©Pearson Education Limited 2014

Suitability of strategic options in relation to strategic position (1)

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Johnson, Whittington, Scholes, Angwin and Regnér, Exploring Strategy Powerpoints on the Web, 10th edition ©Pearson Education Limited 2014

Suitability of strategic options in relation to strategic position (2)

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Johnson, Whittington, Scholes, Angwin and Regnér, Exploring Strategy Powerpoints on the Web, 10th edition ©Pearson Education Limited 2014

Some examples of suitability (1)

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Johnson, Whittington, Scholes, Angwin and Regnér, Exploring Strategy Powerpoints on the Web, 10th edition ©Pearson Education Limited 2014

Some examples of suitability (2)

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Johnson, Whittington, Scholes, Angwin and Regnér, Exploring Strategy Powerpoints on the Web, 10th edition ©Pearson Education Limited 2014

Suitability – screening techniques

There are several useful techniques:

• Ranking – see Illustration 11.2
• Screening through scenarios
• Screening for bases of competitive advantage – using the VRIO criteria
• Decision trees – see Illustration 11.3
• Life-cycle analysis – see Table 11.4.

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Johnson, Whittington, Scholes, Angwin and Regnér, Exploring Strategy Powerpoints on the Web, 10th edition ©Pearson Education Limited 2014

The industry life-cycle/portfolio matrix

Source: Adapted from Arthur D. Little.

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Johnson, Whittington, Scholes, Angwin and Regnér, Exploring Strategy Powerpoints on the Web, 10th edition ©Pearson Education Limited 2014

The life cycle/portfolio matrix – competitive position

Competitive position within an industry can be:

• A strong position where organisations can follow aggressive strategies throughout the life cycle. Early on they can grow rapidly and later they can drive out weaker rivals by pricing, innovation or acquisition strategies.
• A middling position where organisations need to follow a more defensive strategy – to strengthen their position or find a relatively protected niche. Later on they may consider selling out to a stronger firm with parenting advantages.
• A weak position where competitors are too small to survive independently in the long run. They need a rapid improvement in their position or retreat to a niche quickly.

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Johnson, Whittington, Scholes, Angwin and Regnér, Exploring Strategy Powerpoints on the Web, 10th edition ©Pearson Education Limited 2014

Acceptability

Acceptability is concerned with whether the expected performance outcomes of a proposed strategy meet the expectations of stakeholders.

There are three important aspects to acceptability:

• Risk
• Return
• Stakeholder reactions.

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Risk

Risk concerns the extent to which strategic outcomes are unpredictable, especially with regard to negative outcomes.

Risk can be assessed using:

Sensitivity analysis – see illustration 11.4

Financial risk – use ratios e.g. gearing and liquidity

Break-even analysis – see Illustration 11.5.

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Sensitivity analysis (1)

Illustration 11.4(a) Sensitivity of cash flow to changes in real production costs

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Sensitivity analysis (2)

Illustration 11.4(b) Sensitivity of cash flow to changes in plant utilisation

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Illustration 11.4(c) Sensitivity of cash flow to reductions in real price

Sensitivity analysis (3)

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Return

These are a measure of the financial effectiveness of a strategy.

Different approaches to assessing return:

Financial analysis – see Figure 11.3

Shareholder value analysis – see Table 11.5

Cost–benefit analysis – see Illustration 11.6

Real options – see Illustration 11.7.

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Johnson, Whittington, Scholes, Angwin and Regnér, Exploring Strategy Powerpoints on the Web, 10th edition ©Pearson Education Limited 2014

Assessing profitability (1)

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Johnson, Whittington, Scholes, Angwin and Regnér, Exploring Strategy Powerpoints on the Web, 10th edition ©Pearson Education Limited 2014

Assessing profitability (2)

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Johnson, Whittington, Scholes, Angwin and Regnér, Exploring Strategy Powerpoints on the Web, 10th edition ©Pearson Education Limited 2014

Assessing profitability (3)

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Johnson, Whittington, Scholes, Angwin and Regnér, Exploring Strategy Powerpoints on the Web, 10th edition ©Pearson Education Limited 2014

Measures of shareholder value

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Real options evaluation

Illustration 11.7 A real options approach to a brewery development

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Advantages of real options

There are four main benefits:

Bringing strategic and financial evaluation closer together

Valuing emerging options

Coping with uncertainty

Offsetting conservatism.

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Reaction of stakeholders

Stakeholder mapping (power/interest matrix) can be used to:

understand the political context of strategies

understand the political agenda

gauge the likely reaction of stakeholders to specific strategies.

If key stakeholders find a strategy to be unacceptable then it is likely to fail.

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Johnson, Whittington, Scholes, Angwin and Regnér, Exploring Strategy Powerpoints on the Web, 10th edition ©Pearson Education Limited 2014

Feasibility (1)

Feasibility is concerned with whether a strategy could work in practice, i.e. whether an organisation has the capabilities to deliver a strategy.

Two key questions:

• Do the resources and competences currently exist to implement the strategy effectively?
• If not, can they be obtained?

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Feasibility (2)

Need to consider:

Financial feasibility – funding and cash flow

People and skills – competences, knowledge and experience

Integrating resources – obtaining and integrating new resources.

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Financial strategy and the business life cycle

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People and skills (1)

Three questions arise:

• Do people in the organisation currently have the competences to deliver a proposed strategy?
• Are the systems to support those people fit for the strategy?
• If not, can the competences be obtained or developed?

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People and skills (2)

Critical issues that need to be considered:

Work organisation – will this need to change?

Rewards – are the incentives appropriate?

Relationships – will people interact differently?

Training and development – are current systems appropriate?

Recruitment and promotion – are the levels and skills of the staff appropriate?

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Integrating resources

The success of a strategy depends on the management of many resource areas, for example:

people

finance

physical resources

Information

technology

resources provided by suppliers and partners.

It is essential to integrate resources – inside the organisation and in the wider value system.

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Johnson, Whittington, Scholes, Angwin and Regnér, Exploring Strategy Powerpoints on the Web, 10th edition ©Pearson Education Limited 2014

Evaluation criteria

Four qualifications:

Be aware of conflicting conclusions and the need for management judgement.

Consistency between the different elements of a strategy is essential.

The implementation and development of strategies might reveal unanticipated problems.

Strategy development in practice isn’t always a logical or even rational process.

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Johnson, Whittington, Scholes, Angwin and Regnér, Exploring Strategy Powerpoints on the Web, 10th edition ©Pearson Education Limited 2014

Summary

• Performance can be assessed in terms of both economic performance and overall organisation effectiveness.
• Gap analysis indicates the extent to which achieved or projected performance diverges from desired performance and the scale of the strategic initiatives required to close the gap.
• Strategies can be evaluated according to the three SAFe criteria of suitability in view of organisational opportunities and threats, acceptability to key stakeholders and feasibility in terms of capacity for implementation.