Evaluation and selection of
strategies
Md. Rashidul Hasan
Professor
Department of Agribusiness and Marketing
Sher-e-Bangla Agricultural University
Dhaka
Learning objectives
After studying this chapter, students should be able to:
oDescribe the nature of strategic options;
oExplain the key areas that strategic decisions concern;
oDescribe the four criteria that are applied to strategic options
Learning objectives
oUnderstand the financial tools that can be used to evaluate strategic
options;
oUnderstand a number of other tools that can be used to evaluate
strategic options;
oExplain the limitations of an emergent approach to strategy when it
comes to strategic evaluation and selection
Selection of strategies
The ‘big questions’ that are considered in strategic selection usually
concern three major areas, all of which are discussed in detail :
1. Decisions on products and markets
2. Decisions on generic strategy and scope
3. Decisions on growth and development options
Selection of strategies
In most cases, a business will need to make continual decision on all of
these matters.
For organizations that exist in rapidly changing environments, decisions
on strategic options will be required on a continual basis, hence the
importance of ensuring we have a good grasp of the issues that are
discussed in this chapter
Product and market decisions
The questions over which products and which markets are extremely
important because they can determine not only the levels of
profitability, but also the survival of the business itself.
Product and market decisions
• Product and market categories
First, decisions must be made about the categories of products that
the business will offer.
❖goods and/or services;
❖consumer and/or industrial products;
❖convenience, shopping and speciality products
Product and market decisions
For markets, the business will have to reach decisions on geographic
coverage, international exposure and the benefits and risks that attend
such options.
Product and market decisions
oProduct features
Second, decisions must be made on the features that the product will
possess. The mix of product benefits that a product will possess will not
only strongly affect costs, but also the position that the product will
assume in the market.
Product and market decisions
• Product and market portfolios
Third, product and market decisions must include a consideration of
portfolio.
The extent to which the products and markets are focused or spread
can be very important.
A broad portfolio (presence in many product market sectors) offers the
advantages of the ability to withstand a downturn in one sector and to
exploit opportunities that arise in any of the areas in which the
business operates.
Product and market decisions
• Product and market portfolios
Conversely, a narrow portfolio enables the organization’s management
to be more focused and to develop expertise in its narrower field of
operation.
Product and market decisions
• Life cycle considerations
The final consideration to be made for products and markets concerns
their life cycle positions.
It is perhaps intuitively obvious to say that products or markets that are
approaching late maturity or are in decline should be of particular
concern, but there is also a need to produce new products or develop
new markets on an ongoing basis.
Generic strategy decisions
Decisions over the organization’s generic strategy are important not
only because they define the organization’s competitive position, but
also because they will determine the way that the internal value chain
activities are configured.
Generic strategy decisions
If the company elects to pursue a differentiation strategy, for example,
the implications of this will be felt in all parts of the organization.
The culture and structure will need to be configured in such a way that
they support the generic strategy and the product features and quality
will also reflect this.
Similarly, the way in which the organization configures its resource base
will need to support the strategy.
Generic strategy decisions
The same issues will be considered if a cost-driven strategy is chosen,
although the way in which the internal activities are configured will be
somewhat different.
Growth and development decisions
Unless the strategy choices include a ‘no change’ option, it is likely that
strategy will involve a change in the company’s size. This may be a
‘grow smaller’ element, such as when the company has a presence in a
declining market, but most growth strategies are ‘grow bigger’ in
nature.
Growth and development decisions
Ansoff’s generic growth strategies concern whether growth will involve
new or existing markets and products. The growth mechanisms can be
either internal or external. Each growth has its own benefits and risks
and the strategy evaluation and selection stage will usually involve a
full analysis of these.
Applying evaluation criteria
When considering which course of action to pursue, it is normally the
case that a number of options present themselves to an organization’s
top management. In order to ensure that each option is fairly and
equally assessed, a number of criteria are applied.
Applying evaluation criteria
For each option, four criteria are applied: questions to ask of each
option. In order to ‘pass’, the option must usually receive an affirmative
answer to each one. The four criteria are:
1. Is the strategic option suitable?
2. Is the strategic option feasible?
3. Is the strategic option acceptable?
4. Will the strategic option enable the organization to achieve
competitive advantage?
Suitability criteria
A strategic option is suitable if it will enable the organization to actually
achieve its strategic objectives. If it will in any way fall short of
achieving these objectives, there is no point in pursuing it and the
option should be discarded.
Suitability criteria
To give a simple example, the option of driving south out of Paris would
be an unsuitable one if my objective was to reach London. If, however,
one option was to drive north or even in a northerly direction, then we
could accept the option as being suitable.
Suitability criteria
Similarly, if an organization’s objective is to spread its market portfolio
by gaining a presence in foreign markets, then the option of increasing
the company’s investment in its domestic home would clearly be
unsuitable.
Feasibility criteria
A strategic option is feasible if it is possible. When evaluating options
using this criterion, it is likely that the options will be feasible to varying
degrees. Some will be completely unfeasible, others ‘might be’ feasible
and others are definitely so.
Feasibility criteria
The extent to which an option is suitable will depend in large part upon
the resource base that the organization has. A deficit in any of the key
resource areas (physical resources, financial, human and intellectual)
will present a problem at this stage of evaluation. If an option requires
capital that is unavailable, human skills that are difficult to buy in, land
or equipment that is equally difficult to obtain or a scarce intellectual
resource, then it is likely to fail the feasibility criteria.
Acceptability criteria
A strategic option is acceptable if those who must agree to the strategy
accept the option. This raises an obvious question: Who are those who
agree that the option is acceptable?
Acceptability criteria
The extent to which stakeholders can exert influence upon an
organization’s strategic decision-making rests upon the two variables,
power and interest. Stakeholders that have the highest combination of
both the ability to influence (power) and the willingness to influence
(interest) will have the most effective influence.
Acceptability criteria
Where two or more stakeholder groups have comparable influence, the
possibility of conflict over acceptability will be heightened. In most
cases, the board of directors will be the most influential stakeholder.
Competitive advantage criteria
One of the key objectives in strategy is to create competitive
advantage. This criterion asks a simple question of any strategic option:
What is the point of pursuing an option if it isn’t going to result in
superior performance (compared to competitors) or higher than
average profitability? In other words, a strategic option would fail this
test if it was likely only to result in the business being ‘ordinary’ or
average with regard to the industry norm.
Competitive advantage criteria
This is particularly important when considering product options. For
example, if a new product option is forecast to receive an uncertain
reception from the market, we might well ask what is the point of the
launch at all. It would be unlikely to result in competitive advantage for
the business.
Financial tools for evaluation
Accountants are usually very involved in strategic evaluation and
selection because of their expertise in understanding the financial
implications of the possible courses of action. There are two major
areas of financial analysis:
▪ cash-flow forecasting;
▪ investment appraisal
Cash-flow forecasting
One of the most straightforward financial tools is cash-flow analysis –
sometimes called funds-flow analysis. Essentially, it involves a forecast
of the expected income from an option, of the costs that will be
incurred and, from this, the forecast net cash inflows or outflows.
Cash-flow forecasting
For most options, the forecast will be broken down into monthly
‘chunks’ and a profit and loss statement will be constructed for each
month. If the same procedure is carried out for each option, the most
favourable can be identified.
Investment appraisal
An investment, at its simplest, is some money put up for a project in
the expectation that it will enable more money to be made in the
future. The questions surrounding investment appraisal concern how
much will the organization make against each investment option.
Investment appraisal
There is a strong time element to investment appraisal techniques
because the returns on the investment may remain for several years or
even decades. It is for this reason that a factor is often built into the
calculation to account for inflation.
Investment appraisal
The first and most obvious thing that accountants want to know about
any investment is the payback period. This is the time taken to repay
the investment – the shorter the better. If, for example, an investment
of £1000 is expected to increase profits by £100 a month, then the
payback period will be ten months.
Investment appraisal
In practice, payback periods are rarely this short and it is this fact that
makes investment appraisal calculations a bit more complicated.
When the effects of inflation are taken into account, the returns on an
investment can be eroded over time. Consequently, accountants
include a factor to account for the effects of inflation, usually on a
‘best-guess’ basis.
Important instruction
Try to related your answer with appropriate agribusiness
