1. Alternative Strategies : Generating and evaluating strategic options

2. A Framework for Strategic Analysis Strategy formulation Stakeholders analysis Analysis of R&C Environmental Analysis Strategy congruence Alternative Strategies Action plan Monitoring Feedback Execution Strategy implementation

3. Tools for Analyzing Strategic Position Strategy formulation Stakeholders map, Interest - power Unique R&C, Distinctive cap. (Kay), From differences, Str. Import. - Strength, SW(OT) PESTEL, 5 forces, str. groups, competitors analysis, Segment., Scenarios, (SW)OT Strategy diagnosis, Inferred strategy, fit /E-R-V congruence fit /E-R-V congruence Generating options, Ansoff options, methods, SFA, Gap, SVA Action plan Monitoring Feedback Execution Strategy implementation

4. Alternative Strategies: Outline  Directions for strategy development  Penetration, consolidation, retrenchment  Product, Market development  Diversification  Methods of strategy development  Internal (organic), acquisition, alliance  Evaluating strategic choices  Qualitative, financial

5. Alternative Strategies: choices  To develop in what way?  Which markets to address and with what products?  Product – market view  What method to use: to develop in house, acquire other firm, or collaborate?  What type of partnerships to choose  On what basis to compete, across business units?  Generic strategies

6. Alternative Directions  Protect and built  Consolidation  Market penetration  Product development  Market development  Diversification Related Unrelated Business Strategy  Cost Leadership  Differentiation  Focus  Hybrid Alternative Methods  Internal development  Acquisition  Joint development Strategic Choices Alternative Strategies: framework

7. Focused low cost player Focused differentiator Broad differentiator Broad low cost player Narrow Broad Competitive scope Low cost Differentiation Source of advantage Keep the same generic strategy across business units? E.g. easygroup

8. Product – market directions : (Ansoff matrix) A Protect and built Consolidation Market penetration B Product development New products C Market development New markets New territories New uses D Diversification Related Unrelated Products Existing New Existing New Markets

9. Products Markets Directions: Rate of growth likely Rate of growth +0-- + + + + + + + ExistingNew Existing New

10. Products Markets Risk ExistingNew Existing New Directions: probable risk increase

11. Protect and built  Protect and strengthen position in current markets with current products  Retrenchment  Rationalisation and restructuring, turnaround  E.g. cost cutting, eliminate unprofitable parts, divestiture  Consolidation (defend position)  Market penetration  Persuade customers to buy more (increase buys per client, cross selling, repeat buying)  Attract new users  Gain customers from rivals  Usually cause reactions / retaliation be competitors

12. Product Development  Deliver new products to existing markets  Follow changing customer needs  Complete product range  Introduce innovations  Can be expensive and risky, potentially unprofitable  Dilemma: stick with the “old” or provide new?  The consequences of not developing new products may be unacceptable

13. Market Development  Offer existing products in new markets  New market segments  New geographic markets  New uses for existing products  Dilemmas  Engage in some product development and capability development for new segments?  Product homogeneity across segments?

14. Diversification  A strategy that takes the organisation away from both its current markets and products  Related diversification:  Within the capabilities of the organisation  Unrelated diversification:  Weak or no similarities with current capabilities

15. Vertical & Horizontal Diversification  Vertical integration  Backward integration into input activities  Forward integration into output activities  Horizontal integration  Develop into activities complementary to existing ones  E.g. to exploit strategic capabilities in new markets

16. Reasons for Diversification: (1)  Create value from synergies  Sharing activities (e.g. Rail in Telecom: fiber on the track))  Transferring skills & competences between businesses  Applying corporate managerial capabilities to new business activities  Economies of scope from applying existing resources to new products / markets

17. Reasons for Diversification: (2)  Increase market power  Command a diverse and wider range of business activities, and resources  Control markets / prices, possibly dominate in the long-run  Portfolio benefits  To spread risk across a range of businesses

18. Reasons for Diversification: (3)  To exploit perceived opportunities, or avoid threats  To increase or defend existing value  To meet the expectations of powerful stakeholders  Pressure from financial analysts to produce constant growth  From managers or owners who desire “empire building”

19. Relatedness in diversification  Better be viewed in terms of Resources & Capabilities  E.g. different products but with similar product development capabilities  Knowledge relatedness, e.g. utilizing same customer knowledge, different businesses meet in same customers  In term of Products?... Beware, apparently similar products may require totally different capabilities (unrelated)  E.g. backward integrated production of fiber from wool or silk may be unrelated – Why?

20. Problems of Related Diversification  Overestimating synergies  Underestimating new capabilities required  Pressure on the time and capabilities of top managers  Complexity, coordination problems  Difficulties for business units to share resources and adapt policies

21. Unrelated Diversification  Development of products/services beyond the current capabilities or value network  Often in the name of synergies  Can succeed in some cases  E.g. exploit dominant logic (e.g. easy group recipe), use name and reputation ti introduce other products  but value from synergies is usually illusive  economies of scope are not easy to come

22. Does diversification add value?  Cost of headquarters?  They may consume value  Why not leave the businesses apart and act as investor?  Let the market apply the discipline  Can investors diversify more effectively?  E.g. buying shares from stock exchange rather than building holdings

23. Diversification and Performance on average One dominant business Performance Related, limited diversification Unrelated businesses High Low

24. Methods of Development  Internal Development  Based on the organisation’s own R & C  “Organic” growth  Mergers and Acquisitions  Take over ownership of another organisation  Strategic Alliances  Two or more organisations share resources and activities

25. Motives for Internal Development EnvironmentCapabilitiesExpectations Lack of choice – the only way to break new ground Develop highly technical products in-house to create core competence Avoid culture clash with other forms e.g. acquisition There are no suitable companies to acquire Develop new markets – direct involvement to increase understanding & create core competence Avoid potential incompatibility Spread cost over time

26. Motives for Mergers & Acquisitions EnvironmentCapabilitiesExpectations Speed in fast-moving product/market Exploit core competences in new arena Institutional shareholders want continuing growth Improve competitive position, scope Get managers / competences Ambitions of senior managers Privatization provides units ripe for acquisition Cost efficiencySpeculative to boost short-term share value Financial – opportunistic acquisition of firm with low share value Learning

27. Issues in Making Acquisitions Work  In many cases acquisitions fail to add value  Acquirers usually overpay  Inability to integrate the new company  Difficult to identify which knowledge to transfer for organisational learning  Problems of cultural fit, especially for cross country acquisitions  Failures may be high: 75%

28. What we discover after the acquisition Information before  Financial data  Products, markets  Corporate image  Scope of activities, offices, factories  Organization chart  Info about senior management – less about middle  Remuneration of executives Information after  Internal philosophy & culture  Real quality of managers  Systems and rewards  Real decision making processes  Internal relations, hidden tensions  Real goals pursued by executives  Hidden costs

29. The critical issue in acquisitions: homogenization of diverse cultures

30. Planning for culture integration after acquisition Diagnosis of culture differences, values Diagnosis of culture differences, values Acquisition, aims Mixing people, Common management Mixing people, Common management Training, Human development Training, Human development Transparency, communication Transparency, communication

31. Motives for Strategic Alliances  To obtain critical mass  Sharing costs of development  Improving customer offering  Seek supplementary R&C  Each partner concentrates on using own capabilities  For learning  Helps to develop future competences

32. Types of strategic alliances  Loose  Networks for specific projects  Technological agreements, joint R&D programs  Purchasing unions  Contractual  Licencing  Franchising  Subcontacting  Ownership  Joint ventures, consortia  Exchange shares

33. Types of Strategic Alliances: comparisons Loose (Market)  Networks  Opportunistic Alliances Contractual  Licensing  Franchising  Subcontracting Ownership  Consortia  Joint ventures Speed of development Governance Fast Loose Slower Tight Alliance assets Risk of losing assets to partner Draws on parent’s assets. Managed separately by each partner High Dedicated assets for alliance. Managed together Low Risk spreading Integration Risk maintained in the company Low Risk transferred to joint venture High

34. Searching for alliances & partnerships Substitutes Diversification alliances Suppliers Up stream alliances Down stream alliances Clients Competitors External alliances Strategic core

35. Ingredients of Successful Alliances  Clear strategic purpose with senior management support  Compatibility at operational level  Strong interpersonal relationships  Transcend culture differences  Defining and meeting performance expectations  Clear goals and governance of the alliance  Flexible, allowed to evolve and change  Trusti is the most important factor for success  Competence based  Character based

36. Acquisition OR Alliance? Acquisitions  Fast  Stable, permanent  Higher cost  Get market share  Obtain know how  Spread risks - portfolio  Obtain brand names  Obtain talents  But higher risk  Integration difficulty Alliances  Usually slow  Can easily be dissolved  Cheaper  More flexible  Difficulties in technology transfer – suspicious partners  Lower risk  Easier to integrate  Weak commitment

37. Evaluating Alternative Strategies

38.  Evaluation in two or three stages  Prescreening on general perception of fit, or on the basis of a critical criterion  E.g. keep the same generic strategy, e.g. easygroup  Qualitative evaluation of alternatives that passed the prescreening  based on SFA criteria  Financial evaluation of selected alternatives or sets  E.g. an aggressive set vs a conservative set of options

39. Financial evaluation: What alternatives to evaluate?  It is not necessary to subject all single alternatives to financial evaluation  only if they are important  have to select between opposite options  e.g. developing a new product in house (organic) or through acquisition  Evaluate selected set of options in total, because of synergies  E.g. an aggressive expansion strategy (with many alternatives for growth included)  vs a cautious strategy (few alternatives given the limits of R&C and market conditions)

40. Financial Evaluation: methods  Treat the option to be evaluated as an “investment project”  Estimate net cash flows generated by the project: inflows minus outflows  NPV gives the value of the specific option  Value to the company shareholders: Shareholder value analysis (SVA = NPV- loans)  As part of the system /total company?  Evaluate as stand alone project, or  As part of the total system: Net cash flows generated “with” the alternative minus “without”  Risk / return calculations  Sensitivities, scenarios.

41. Criteria for Qualitative Evaluation: SFA  Suitability  How far does the proposed alternative strategy fits the specific situation the organisation faces (strategic logic)  Does it fit the culture  Feasibility  Do we have the resources to implement it; can we secure them?  Do we have the skills and competences required; can we obtain them?  Acceptability  Does it meet the expectations of key stakeholders  Are the expected outcomes acceptable in terms of return and risk.

42. SFA evaluation of alternatives (illustrative) SuitabilityFeasibilityAcceptability S1 S2 F1 F2 A1 A2 Penetration* * * *** * Product Development Product X******** Product Z*** * ***** Market Development *** Related diversification Area A ** *** Area B*** *** Unrelated Diversification *******

43. Methods to choose from SFA scores Method Ranking  Alternatives that have scores above a level in all criteria are selected  Alternatives that have high scores is selected key SFA factors  Use the average score for ranking alternatives Sets  Use average scores for alternative sets of options and choose the one with the max average score Scenarios  Options are matched to different future scenarios

44. Cash Flows: direct estimation 2015201620172018 Inflows from extra sales Inflows from interest & dividends _- Payments to suppliers - Payments to employees - Payments of interest and taxes Net cash flows from operations Inflows from loans, assets, etc - Outflows for new investment - replacement investments & increase in working capital Net investment flows Inflows from equity and short term financing - payments for short term loans and dividends Free cash flows NET PRESENT VALUE

45. Cash Flows : indirect method 2015201620172018 Sales Profit before tax - Tax Profit after tax + depreciation Cash flows from operations - New investments - Replacement investments - Increase in working capital Free cash flows NET PRESENT VALUE

46. Cash Flow ‘Drivers’  Sales Growth Rate (SGR)  Operating Profit Margin (OPR)  Tax Rate (TR)  Fixed Capital Investment (Replacement and Incremental) (RFCI, IFCI)  Incremental Working Capital Investment (IWCI)  Cost of Capital (WACC – Weighted Average))  Planning Period (PP)

47. Gap Analysis: meeting the growth expectations (of e.g owners) Sales growth Do nothing prediction Rationalization New products New markets Objective Years

48. Gap Analysis: meeting the profitability expectations (of e.g owners) ROE Do nothing forecast Rationalization New products New markets Expectations Years GAP 7%

49. Strategy Robustness: Profits for next 2-3 years (value creation) Scenario A (Trends) Scenario B (Contradictions) Strategy Set 1 **** Strategy Set 2 *??

50. Robustness of proposed strategy: Assessing profitability under two scenarios 1 23456 7 10% 15% 5% 20% 25% ROE of best competitor (scenario Α) Scen. Α Scen. Β ROE years

51. Key Points (1)  Three elements of strategic choice  Competitive strategy  Direction of development  Method of development  Four categories of development directions  Protect and consolidate  Product development  Market development  Diversification

52. Key Points (2)  Three methods of strategy development  Internal development  Mergers and acquisitions  Strategic alliances  Three success criteria for strategic options  Suitability  Acceptability  Feasibility  Financial evaluation based on free cash flows of selected options or sets of options