Evaluating and Choosing Strategic Alternatives Chapter 11 Evaluating and Choosing Strategic Alternatives

Objectives understand why strategy evaluation (prior to implementation) is of critical importance, even in cases where the required strategic direction is apparently self-evident describe and implement a range of general evaluative criteria use a range of common corporate strategy evaluation models, apply the principles of strategy evaluation to alternatives facing any given organisation. self explanatory Strategic Management 4e., Viljoen & Dann © 2002 Pearson Education Australia

Strategy evaluation criteria consistency and compatibility value-adding activities support The most successful strategies are those that consistently add value and are supported throughout the organisation. The strategy needs to be consistent with the organisation’s mission and compatible with both the internal and external environment. Value adding activities consists of those operations that are consistent with the organisation’s value chain. For example improvements in competitive advantage have an acceptable risk factor, are flexible enough to cope with turbulence and are able to be measured. The strategy needs to have the support of the organisation and its members to ensure its success. Gaining support for a strategy is often dependent on the level of resource availability and support from key managers. In order to gain this support it is important that the strategies are explicit and communicated throughout the organisation. Once this has been achieved it is important to provide motivation for its success. Strategies that are extreme at either level of the continuum are not likely to be supported. Another important issue is that of ensuring that employee belief systems are compatible with strategies. Strategic Management 4e., Viljoen & Dann © 2002 Pearson Education Australia

Evaluating Corporate Strategy Alternatives Attractive market Quadrant 1 Strategies 1. Consolidation 2. Vertical integration 3. Related diversification 4. Do nothing Quadrant 2 Strategies 1. Consolidation 2. Horizontal diversification 3. Divestment 4. Liquidation Strong competitive position Weak competitive position This figure summarises the major corporate level strategic options available to organisations, the strategies are listed in probable order of attractiveness. Analysing strategic alternatives using the two criteria of market attractiveness and competitive position shows clearly that there is no clear ‘best alternatives’ for all organisations. The figure is self explanatory. Quadrant 3 Strategies 1. Related diversification 2. Unrelated diversification 3. Joint venture 4. International Quadrant 4 Strategies 1. Withdrawal 2. Diversification 3. Divestment 4. Liquidation Unattractive market Strategic Management 4e., Viljoen & Dann © 2002 Pearson Education Australia

Strategies for Public Sector Organisations Increasing long term public need Use strong position to negotiate for increased funding. Maintain or build service capability. Build skills, systems, structures and culture to improve client service. Strong service capability Weak service capability Lobby strongly for increased funding on the the basis of the high quality of services provided to clients and increase client base. Look for new activities which will attract greater funding and provide more opportunity for staff development and motivation Public sector organisations are unable to use all of the methods available in the private sector. They can, however, adapt this strategy by changing the axis for example changing ‘market attractiveness’ to ‘long-term public need’. The quadrants on this figure are self explantory. Decreasing long term public need Strategic Management 4e., Viljoen & Dann © 2002 Pearson Education Australia

Corporate strategy evaluation models 1 Boston Consulting Group (BCG) product portfolio matrix balancing the BCG portfolio matrix General Electric Business Screen Over the past twenty years a number of models have been developed to assist in evaluating alternative corporate strategies. The major strategies are listed here, all of which attempt to evaluate strategy on the nexus between external environmental characteristics and internal skills and resources. Strategic Management 4e., Viljoen & Dann © 2002 Pearson Education Australia

BCG product portfolio matrix Relative Market Share Stars ? Marks Market Growth Rate Cash Cows Dogs BCG Matrix shows where your products stand relative to the competition Horizontal axis - relative market share Vertical axis - rate of market growth Four cells stars - those products in a high growth market and for which the organisation has a high relative market share and competitive dominance cash cows - those products in a low growth market but which the organisation dominates question marks - products in a high growth market but for which the organisation has a low market share dogs - products with a low market share in a low growth market Strategic Management 4e., Viljoen & Dann © 2002 Pearson Education Australia

Balancing the BCG portfolio matrix Relative Market Share Stars ? Marks Market Growth Rate Cash Cows Dogs Cash movement Product Movement Strategic Management 4e., Viljoen & Dann © 2002 Pearson Education Australia

General Electric Business Screen Competitive strength Market attractiveness High Medium Low Strong Weak High overall attractiveness Medium overall attractiveness Low overall attractiveness General Electric Business Screen 9 cell matrix based on market or industry attractiveness (high, moderate, low) on one side and business strength (strong, moderate, weak) on the other place products in the relevant square, and based on location, make the following decisions: 1. expand (green squares) - those products that fall into the areas strong business strength / high industry attractiveness, strong business strength / moderate industry attractiveness or moderate business strength / high industry attractiveness. 2. expand with caution (blue squares) - those products that fall into the areas strong business strength / low industry attractiveness, moderate business strength / moderate industry attractiveness or weak business strength / high industry attractiveness. 3. divest (red squares) - those products which fall in the areas moderate business strength / low industry attractiveness, weak business strength / moderate industry attractiveness or weak business strength / low industry attractiveness. Strategic Management 4e., Viljoen & Dann © 2002 Pearson Education Australia

Corporate Strategy Evaluation Models 2 A.D. Little business profile matrix directional policy matrix alternative method for allocating priority to strategies self explanatory Strategic Management 4e., Viljoen & Dann © 2002 Pearson Education Australia

A.D. Little Business Profile Matrix Competitive position Stage of industry maturity Embryonic Growth Maturity Ageing Dominant Strong Favourable Tentative Weak This approach to the management of complex product and market portfolios is based on the dimensions of market position and industry maturity as shown in the figure. The fours stages are synonymous with product lifecycle stages. Resource allocation priorities decrease along the diagonal from an embryonic industry/dominant competive position to ageing industry/weak competitive position. Strategic Management 4e., Viljoen & Dann © 2002 Pearson Education Australia

Directional Policy Matrix Prospects for sector profitability Unattractive Average Attractive Weak Disinvest Phased withdrawal Double or quit Withdrawal Custodial growth Try harder Strong generation Growth Leader Company’s competitive capabilities Market segment profitability is the basis for this matrix. The directional matrix allows management to select factors which it considers important in determining sector profitability and the organisation's competitive capabilities. This is not particularly useful as a comparison tool because organisations tend to define their profitability etc in different ways. Cash Strategic Management 4e., Viljoen & Dann © 2002 Pearson Education Australia

Alternative method for allocating priority to strategies Strategies that are important to our stakeholders Strategies that are less important to our stakeholders Strategies that we will be able to implement well Strategies that we will not be able to implement well Priority 1 Priority 2 Stakeholders can have a significant impact on the choice of strategies within organisations. Therefore, it is important to reconsider the impact of these groups on strategic options. All stakeholder groups should be considered during strategy evaluation and choice. However, if this impacts on returns to shareholder groups this needs to be recognised and dealt with at the outset rather than waiting until a crisis evolves. Priority 3 Priority 4 Strategic Management 4e., Viljoen & Dann © 2002 Pearson Education Australia