Strategy Formulation-Strategic Choice

8/3/2019 Strategy Formulation-Strategic Choice

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Strategy FormulationStrategy Formulation

Strategic ChoiceStrategic Choice

Prof. Rushen ChahalProf. Rushen Chahal


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Strategic Choice

Selection of the Best Strategy

Ability ofthe proposed strategyto

deal with strategic factors developedearlierin SWOT analysis.

Ability of each alternative to satisfy

agreed-on objectives with the least

resources and the fewest negativeside affects.


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Develop a new

employee benefits

package

=Strong union

activity (threat)+

Poor employee morale

(weakness)

Develop new products for

older adults

=Decreasing numbers of

young adults (threat)

+Strong R&D (strength)

Pursue horizontal integrationbybuying competitor's

facilities

=Exit oftwo major foreigncompetitors form the

industry (opportunity)

+Insufficientcapacity

(weakness)

Acquire Cellfone, Inc.=

20% annual growth in

the cell phone industry

(opportunity)

+Excess working capacity

(strength)

Key Internal Factor Key External Factor

Matching Key Factors to Formulate Alternative Strategies

Resultant Strategy


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Corporate Scenarios

are pro forma balance sheets and

income statements that forecast each

alternative strategy and its various

programs will likely have on division

and corporate ROI

In survey of Fortune 500 firms, 84% reported usingcomputer simulation models in strategic planning.


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Constructing Corporate Scenarios

3 steps:

Use industry scenarios to develop a set of assumptions

aboutthe task environment.

Develop common-size financial statements forthe

companys orbusiness units previous years.

Construct detailed pro forma financial statements for

each strategic alternative


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Industry Scenarios

Examine possible shifts in the societal variables globally. Identify uncertainties in each ofthe six forces ofthe task

environment.

Make a range of plausible assumptions about future trends.

Combine assumptions aboutindividual trends into internally

consistent scenarios. Analyze the industry situation that would prevail under each

scenario.

Determine the sources ofcompetitive advantage under each

scenario.

Predictcompetitors behavior under each scenario. Selectthe scenario that are either most likelyto occur or

most likelyto have a strong impact on the future ofthe

company.


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Common-size financial statements

Use the historical common-size percentages toestimate the levels of revenues, expenses.

Develop for each strategic alternative a set of

optimistic, pessimistic, and most likely assumptions.

Forecastthree sets of sales and cost of goods sold

figures for at least five years. Analyze historical data and make adjustments based

on environmental assumptions listed earlier.

Assume for other figures thatthey will continue in their

historical relationship to sales or otherkey factor.

Consider not only historical trends, but also programs

that mightbe needed to implement each alternative

strategy.


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Common-size financial statements

Harley-Davidson income statement (fragment)

2004 2002 1999 1996

Net revenue 5 015 190 4 090 970 2 452 939 1 350 466

Cost of goods sold 3 115 655 62,1% 2 673 129 65,3% 1 617 253 65,9% 939 067 69,5%

Selling,administrative and

engineering

expense 726 644 14,5% 639 366 15,6% 447 512 18,2% 234 223 17,3%

Netincome 889 766 17,7% 580 217 14,2% 267 201 10,9% 112 480 8,3%


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Z-Value

Altmans Bankruptcy Formula to calculate Z-value:

Z= 1.2x1+1.4x2+3.3x3+0.6x4+1.0x5

x1 = Working capital/Total assets(%)

x2 = Retained earnings/Total assets(%)

x3 = Earnings before interest and taxes/Total assets(%)

x4 = Market value of equity/Total liabilities(%)

x5 = Sales/Total assets (number oftimes)

A score bellow 1.81 indicates significantcredit problems

A score above 3.0 healthy firm


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Index of Sustainable Growth

The index indicates how much of the growth rate of

sales can be sustained by internally generated funds:

g*= [P-(1-D)(1+L)]/[T-P(1-D)(1+L)]

P= (Net profitbefore tax/Net sales) x 100

D= Target dividends/Profit aftertax

L= Total liabilities/Net worth

T = (Total assets/Net sales) x 100

If planned growth rate is higher g*, external funds will be

needed


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Constructing Corporate Scenarios

The actual decision will probably be influenced by

several subjective factors:

Managements attitude toward risk

Pressures from stakeholders

Pressure from the corporate culture

Needs and desires ofkey managers


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Managements attitude toward risk

Risk is composed of:

Probabilitythat strategy will be effective

Amount of assets the corporation must allocate to thatstrategy

Length oftime the assets will be unavailable for other

users

The small firms managed by entrepreneuris willing to

accept greater riskthan would a large firm of diversified

ownership run by professional managers


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Pressures from stakeholders

Main questions:

How will this decision affect each stakeholder?

How much of what each stakeholder wants are they

likelyto get underthis alternative? What are they likelyto do ifthey dont get whatthey

want?

Whatis the probabilitythatthey will do it?

Strategy makers should be betterto choose strategic

alternatives that minimize external pressures and

maximize the probability of gaining stakeholder support


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Stakeholder Priority Matrix


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Pressure from the corporate culture

If there is little fit of the strategy and corporate

culture, management must decide if it should:

Take a chance on ignoring the culture

Manage around the culture and change the

implementation plan

Tryto change the culture to fitthe strategy

Change the strategy to fitthe culture.


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Needs and desires ofkey managers

Even the most attractive alternative might not be

selected if it is contrary to the needs and desires of

top managers as:

A persons ego maybe tied to a particular proposal to

the extentthat all other alternatives lobbied against.

Industry and cultural backgrounds affect strategic

choice.

Tendencyto maintain status quo, which means thatdecision makers continue with existing goals and plans

beyond the point when an objective observer would

recommend a change in course.


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Process of Strategic Choice

Strategic choice is evaluation of alternative

strategies and selection ofthe best

alternative.

The best strategic decisions are not arrived at

through consensus. They actuallyinvolve a

certain amount of heated disagreement and

even conflict.


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Techniques to avoid consensus trap:

Devils Advocate is assigned to identify potential pitfalls andproblems with a proposed alternative strategy.

Dialectical Inquiry requires two proposals using differentassumptions be generated for each alternative strategy.After

advocates of each position present and debate the merits oftheir

arguments either one ofthe alternatives or a new compromise

alternative is selected.

Strategy shadow committee consists of employees at least2-3 echelons bellow executive-level strategycommittee


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Each resulting alternative must be evaluated dueto four criteria:

Mutual Exclusivity:Doing any one would preclude

doing any other.

Success:It mustbe doable and have a goodprobability of success.

Completeness: It musttake into account all the key

strategicissues.

Internal Consistency:It must make sense on its ownas a strategic decision forthe entire firm and not

contradictkey goals, policies, and strategies currently

being pursued bythe firm orits units.


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Development of Policies

After selection ofthe best alternative the organization mustnow engage in developing policies.

Policies define the board guidelines forimplementation.

Policies tend to be rather long lived even outlastthe

particular strategythatcreated them.

The general policies can become part ofcorporate culture

and make the implementation of specific strategies easierbutcan restrict managements strategic options in future.

Achange in strategy should be followed quicklyby a

change in policies.

Strategy Formulation-Strategic Choice

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