ACCA Strategic Business Planning

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ACCA Strategic Business Planning Development

• Lecture 8
• Evaluating Options

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Learning Outcomes CHECK

• By the end of this lecture you will
• Understand the need for evaluation
• Have developed a framework for the evaluation and
  selection of strategies
• Be able to quantify decision making-techniques
  with use of decision matrices and sensitivity
  analysis
• Understand the reasons for considering
  stakeholders view in deciding strategies

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Evaluation Criteria

• Suitability
• does the strategy address the key issues
  identified in the strategic analysis?
• useful for screening choices (often qualitative)
• Feasibility
• can the strategy be made to work in practice?
• focus on practicalities of resourcing
• Acceptability
• are the expected outcomes acceptable? (To whom?)
• stakeholder analysis important

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Suitability

• Does it exploit strengths?
• Does it rectify weaknesses?
• Does it neutralise threats?
• Does it seize opportunities?
• Does it satisfy organisational goals?
• Does it fill any identified gaps?
• Does it generate/maintain competitive advantage?
• Does it involve an acceptable level of risk
• Does it suit the politics and corporate culture?

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STAGES OF INDUSTRY MATURITY
COMPETITIVE POSITION
Source Arthur D. Little
The Life Cycle/Portfolio Matrix
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Feasibility

• Can the strategy be implemented and does the
  organisation have adequate resources?
• Enough money
• The ability to deliver the goods/services
• The ability to deal with competitor responses
• Access to technology, materials and resources
• Enough time

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Acceptability

• Financial considerations
• ROI etc.
• Profitability analysis, e.g. NPV
• Customers
• Banks
• Government
• The public
• Risk

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Financial Evaluation

• Investment outflows up front and in the future
  (discounted)
• Revenue inflows (discounted)
• Compare with cost of capital, target ROI/ROCE
• Shareholders objectives, e.g. target EPS
• Closing the planning gap

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Ranking and Cost/Benefit Analysis

• Ranking and Scoring methods are a means of adding
  opinions to give weighted and importance to
  strategies
• Cost/benefit analysis, often intangible,
  unquantifiable
• Use DCF to obtain net benefits (NPV and IRR)
• Used in public sector for comparison purposes,
  e.g. large building projects

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Ranking and Scoring Methods

• (Imprecise, reflecting complexities of real
  decisions)

Growth inprofit by over 10
Reducedependenceon suppliers
Minimisecompetitivethreats
Objectives?
Score
Rank
Strategic Option
Do nothingCut costs bysubcontractingExpand
product rangeOffer discounts to customers for
fixedterm contract
X
X
X
-
X
X
4
3RD
X
9
1ST
X
X
5
2ND
ObjectiveWeighting
4
3
5
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Risk and Uncertainty

• Risk probabilities can be estimated, could use
  expected values and standard deviations
• Types of risk - physical, economic, financial,
  political, exchange, business, stakeholder
• Uncertainty outcomes cannot be predicted

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Activity

• List some of the risks you take in the course of
  your everyday lives
• How to you reduce these risks?

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Adjusting for Risk

• Changing the target return to reflect riskiness
  of project
• Adjusting the payback period
• Impose stricter financial controls

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Risk Appraisal

• Quantification of risk
• Rule of thumb
• Basic probability theory
• Spread of values
• Other techniques
• Decision trees
• Decision matrix

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Decision Trees

• Mutually exclusive choices
• Outcomes can be easily quantified
• Probabilities can be assigned to outcomes
• Expected values for a number of courses of action
  can be arrived at
• NB Expected value is only useful for comparison
  not a predicted outcome

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Decision Matrix

• A modelling technique which includes the
  attitude to risk of senior management
• Holds that the payoff for any given action will
  in part depend on the underlying circumstances
  (e.g. state of the economy)
• Managers can choose to maximise profits, but
  take a higher risk
• Or pursue a strategy which offers lower profits,
  but risks smaller losses

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Decision Matrix
Strategy
A
B
C
Boom
100
80
60
Circumstances in the economy
90
120
85
Stable
-20
10
40
Recession
100
120
85
Max Profit
-20
40
10
Min Profit
MAXIMAX B MAXIMIN C
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Sensitivity Analysis(What if?)

• Preferred method of assessing risk in strategic
  decision making
• Identify each factor in the calculation
• Assess the effect on the result
• Results in different scenarios for which options
  should be prepared
• (new controls for example)

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Stakeholder Theory

• Strong view each stakeholder in the business
  has a legitimate claim on management attention.
  Managements job is to balance stakeholder
  demands
• Weak view satisfying stakeholders such as
  customers is a good thing but only because it
  enables the business to satisfy its primary
  purpose, the long term growth in owner wealth

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Stakeholders Responses to Risk

• Managers/employees industrial action, refusal,
  resignation
• Shareholders sell shares
• Banks denial of credit, higher rates
• Suppliers refusal of credit, end supply
• Customers buy elsewhere, sue
• Government tax increases, regulation
• Pressure groups publicity, direct action

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Mendelows Stakeholder Classification
Level of Interest
Low
High
Low
A Minimal Effort
B Keep Informed
Power
C Keep Satisfied
D Key Players
High
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Stakeholder Choices

• Loyalty
• Exit
• Voice