Alternative Strategi es : Generating and e valuati ng strategic options

1. Alternative Strategies:Generating andevaluating strategic options

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

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 Generating options, Ansoff options, methods, SFA, Gap, SVA Action plan Execution Strategy implementation Feedback Monitoring

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 view

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

7. The same strategy across business units? E.g. easyjet, easybus, easycredit…in the low-cost Source of advantage Differentiation Low cost Broad low cost player Broad differentiator Broad Competitive scope Focused low cost player Focused differentiator Narrow

8. Product – market view: Directions in the Ansoff matrix Products New Existing Existing Markets New

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

10. Directions: probable riskincrease Risk Products Existing New Existing Markets New

11. Protect and built • Protect and strengthen position in current markets with current products • Retrenchment, turnaround • Rationalisation and restructuring, turnaround • E.g. cost cutting, eliminate unprofitable parts, divestiture • Consolidation (defendposition) • 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 existingmarkets • 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, possiblydominate 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 High Performance Low One dominant business Unrelated businesses Related, limited diversification

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

26. Motives for Mergers & Acquisitions

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. 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 Informationafter 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 What we discover after the acquisition

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

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

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 • Partnership agreements • Consortia • Licensing, franchising • Ownership • Joint ventures in a new company • Exchange of shares between partners

33. Types of Strategic Alliances: comparisons

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

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. 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 AcquisitionOR Alliance?

37. Evaluating Alternative Strategies

38. Evaluating Alternative Strategies • 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 stand alone investment or as part of the system /total company? • 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)

43. Methods to choose from SFA scores

44. Cash Flows: direct estimation (inflows-outflows)

45. Cash Flows : indirect method (gross margin in an area)

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) Objective New markets Sales growth New products Rationalization Do nothing prediction Years

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

49. Strategy Robustness: Expected profits (negative cash-flows in the first 2-3 rears, NPV for the long term)

50. ROE 25% ROE of best competitor (scenario Α) 20% Scen. Α 15% 10% Scen. Β 5% years 1 2 3 4 5 6 7 Robustness of proposed strategy: Assessing profitability under two scenarios