Business Analysis Project

Transcription

1 Business Analysis Project Session 6 Evaluating Strategies Andre Samuel

2 This Session Success Criteria for evaluating Strategic Options: Suitability Acceptability Feasibility

3 Evaluating your Strategic Options Logic and evidence are paramount in choosing between possible options Rational and fact based analysis of the options will deliver the strategy most likely to be successful Therefore the content of strategy options needs to be evaluated for their contribution to the organization This evaluation must be done using defined Success Criteria

4 Suitability, Acceptability, Feasibility (SAF)

5 Suitability Suitability is concerned with assessing which proposed strategies address the key opportunities and threats an organisation faces, through an understanding of the strategic position of an organisation. 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 strategic capabilities and avoid or remedy the weaknesses?

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

7 Suitability of strategic options in relation to strategic position

8 Some examples of suitability

9 Some examples of suitability

10 Suitability screening techniques There are several useful techniques: Ranking Using scenarios Screening for competitive advantage Decision trees Life cycle analysis

11 Decision Trees Assess strategic options against a list of key factors Options are eliminated and the preferred option emerges Method of prioritizing options Provide structured view of different options and investigate possible outcomes of choosing each option They take into account estimated risks and rewards associated with each possible course of action

12 Decision Trees Draw the tree with all possible alternative decisions and outcomes. Insert a payoff at the end of each branch the monetary consequences (sales revenues). Insert a probability (uncertainty) at each branch of a chance node. Roll back (combine the first three steps by simple arithmetic) in order to calculate EMVs (expected monetary values) Summarise the optimal path by determining the best alternative and then consider the non monetary aspects of the problem

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16 The life cycle/portfolio matrix Source: Arthur D. Little

17 Acceptability Acceptability is concerned with whether the expected performance outcomes of a proposed strategy meet the expectations of stakeholders There are three key aspects of acceptability the 3 R s : Risk. Return. Reactions (of stakeholders).

18 Risk Risk concerns the extent to which the outcomes of a strategy can be predicted. Risk can be assessed using: Sensitivity analysis. Financial ratios gearing ratios and liquidity ratios

19 Sensitivity Analysis Sometimes referred to as What IF analysis It allows each of the important assumptions underlying a particular strategy to questioned and challenged It will test HOW sensitive the predicted outcome (e.g. profit) is to each of these assumptions

20 For example assumptions may be market demand will grow by 5% per year and/or new product will achieve a given sales level Sensitivity analysis asks WHAT would be the effect on performance i.e. profitability of variations on these assumptions So if market demand grew by 5% or by as much as 10% would either of these extremes alter the decision to pursue that strategy?

21 Example from Lab Session Effect on Performance Assumptions: 1. Sales increase by 2% 2000, 4% 2001 and 5% Cost of Sales increase by 2% each year

22 Return Returns are the financial benefits which stakeholders are expected to receive from a strategy. Different approaches to assessing return: Financial analysis ROCE, Payback Period, Discounted Cash flow, Net Present Value (NPV) Shareholder value analysis Total shareholder return, Economic Value Added Cost benefit analysis. see CBA Template

23 Payback Period Simplest financial measure Divide the initial costs by the net cash flow per year It is the length of time required to recover the project s initial capital charges and expenses The longer the payback period the riskier the project Does not account for factors of time value of money

24 YEAR NET CASH INFLOW/(OUTFLOW) CUMULATIVE FLOW BALANCE 0 (53,627.00) (53,627.00) 1 42, , ( ) 2 15, , , , , , , ,974.00

25 Assessing profitability Payback Period The payback period occurs in year 2 If cash flows evenly throughout year 2 Payback period is 1 years 9 months

26 Discounting Uses a discounted cash flow to alleviate the problem of taking into account the time value of money Discount Factor 1 (1 + i)^n Where i is the interest rate used

27 What is Present Value If $ is received today and invested for an annual net return of 10%, that $ should be worth $ after one year Put another way, $ received in one year s time is equivalent to receiving only $ TODAY Effectively discounting future cash flows back to TODAY S value

28 Present Value Table

29 Net Present Value Think of an abandoned suitcase containing money. If the amount of cash is positive you will pick it up If the suitcase contains negative cash which would diminish your wealth you will leave it alone NPV simply states how much money is in the suitcase and whether it is positive or negative NPV technique involves estimating the cash flows associated with an investment, discounting those cash flows received or paid in the future and deducting the cost of the initial investment

30 Assessing profitability Discounted Cash Flows

31 Measures of shareholder value Table 11.6 Measures of shareholder value

32 Reaction of stakeholders Stakeholder mapping and the 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

33 Summary Criteria for Acceptability

34 Feasibility 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?

35 Financial feasibility Need to consider: The funding required. Cash flow analysis and forecasting. Financial strategies needed for the different phases of the life cycle of a business.

36 Financial strategy and the business life cycle

37 People and skills 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?

38 People and skills 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? Staffing are the levels and skills of the staff appropriate?

39 Integrating resources The success of a strategy depends on the management of many resource areas, for example: people, finance, physical resources, information, technology and resources provided by suppliers and partners. It is essential to integrate resources inside the organisation and in the wider value network.