Chapter 8 Alternative directions and methods of development

LEARNING OBJECTIVES 1.      Explain the concept of strategic direction. 2.      Assess how internal development, mergers, acquisitions, strategic alliances, and franchising can be used as different methods of pursuing a chosen strategic direction. 3.      Assess the suitability of different strategic options to an organization. 4.      Assess the feasibility of different strategic options to an organization. 5.      Describe the process of strategic selection.

 

1.       Strategic Directions

1.1       Strategic choices must be made about the direction that the entity should take. For companies, strategic direction is often expressed in terms of:
(a)        the products or services that the company wants to sell
(b)        the markets or market segments it wants to sell them in, and
(c)        how to move into these product areas and market areas, if the entity is not there already.
1.2       To achieve growth in the business, an entity must:
(a)        sell more in its existing markets (try to make its existing markets bigger)
(b)        sell new products in its existing markets
(c)        sell existing products in new markets or new market segments (for example in other countries)
(d)        sell new products in new markets.

2.       Strategic Direction: Ansoff’s Growth Matrix

2.1       Growth vector analysis: Ansoff

2.1.1    Ansoff (1957) argued that when a firm is planning its growth strategies, there should be a link between its current products and markets and its future products and markets. This link is necessary so that outsiders (for example, investors) can see in which direction the entity is moving. It also provides guidance to the entity’s own management.
2.1.2    The strategic direction a company can take is to move into new markets for its products or to develop new products.
2.1.3    Ansoff summarised the potential strategies for product-market development with a 2 × 2 matrix. It sometimes referred to as Ansoff’s growth vector matrix or product mission matrix.

2.2       Market penetration strategy

2.2.1    A market penetration strategy is sometimes called a ‘protect and build’ strategy.
2.2.2    With a market penetration strategy, an entity seeks to sell more of its current products in its existing markets. This strategy is a sensible choice in a market that is growing fast. With fast growth, all the companies competing in the same market can expect to benefit from the rising sales demand.
2.2.3    A market penetration strategy is more difficult to implement when the market has reached maturity, or is growing only slowly.
2.2.4    Kotler suggested that market penetration calls for aggressive marketing, and that there are three ways in which this strategy might be successful:
(a)        Persuade existing customers to use more of the product or service, and so buy more. This is a strategy based on trying to increase total market sales demand.
(b)        Persuade individuals who have not bought the product in the past to start buying and using the product. Marketing tactics for attracting new users might include advertising or special promotional offers. This is another strategy based on trying to increase total market sales demand.
(c)        Persuade individuals to switch from buying the products of competitors. This is a competitive strategy based on winning a bigger market share. This strategy has the obvious risk, however, that competitors will retaliate with their own marketing initiatives to win customers.

 

 

 

2.2.5

Example 1

A manufacturer of shower gel might decide on a market penetration strategy, by trying to persuade existing customers to take showers more often. One way of encouraging a change in the rate of usage would be to have a special promotional offer for a short period of time, such as ‘Buy one, get one free’. However, offers such as ‘buy one, get one free’ can only be short-term marketing initiatives. If this tactic were turned into a longer-term strategy, the effect would be to reduce the selling price by 50% and the company would be pursuing a low price strategy. To succeed with this strategy it would need to become the least-cost producer in the market. A market penetration strategy is a low-risk product-market strategy for growth, because unless the market is growing fast, it should require the least amount of new investment. However, there are some risks with this strategy. If the company fails to increase sales, its business will have no strategic direction, and will suffer from ‘strategic drift’. A strategic choice of ‘doing nothing new’ is a high-risk choice, because competitors are likely to be much more innovative and competitive. The strategies selected by major competitors might be a threat, particularly if there is a ‘war’ to win customers from each other.

 

2.3       Market development strategy

2.3.1    Market development involves opening up new markets for existing products. Kotler suggested that there are two ways of pursuing this strategy:
(a)        The entity can start to sell its products in new geographical markets (through regional, national or international expansion).
(b)        The entity can try to attract customers in new market segments, by offering slightly differentiated versions of its existing products, or by making them available through different distribution channels.

 

 

 

2.3.2

Example 2

Case 1 A business entity specialising in making and selling a branded type of chocolate bar might develop its markets by offering the same product in new sizes: a small size, to attract purchases by diet-conscious customers a large size, to attract customers who might buy a chocolate bar as their lunch. In this example, the target new market segments are segments differentiated by the ‘life style’ of the customer. Case 2 Many farmers in the US who grow corn are starting to sell their produce to energy companies, which are making bio-fuels out of the corn to fuel motor engines. The energy market is a new market segment for these farmers, who also continue to sell corn to food product manufacturers.

2.4       Product development strategy

2.4.1    Product development is a strategy of producing new products for an existing market. There are several reasons for choosing this strategy.
(a)        The business entity might have a strong brand name for its products, and it can extend the goodwill of the brand name to new products.
(b)        The entity might have a strong research and development department or a strong product design team.
(c)        The entity has to react to new technological developments by producing a new range of products or product designs.
(d)        The market has growth potential provided that new products are developed.
(e)        The entity wants to respond to a strategic initiative by a major competitor, when the competitor has developed a new product.
(f)        Customer needs might be changing, so that new product development is essential for the survival of the business.
2.4.2    Disadvantages of a product development strategy are that:
(a)        developing new products can be expensive
(b)        a large proportion of new products are unsuccessful.

 

2.4.3

Example 3

Case 1 Many food and drinks companies have adopted a strategy in recent years of developing ‘healthy foods’ and ‘diet’ drinks or ‘health drinks’. They have often been able to use the strength of their existing brand name to persuade customers to buy their new products. Case 2 In the UK, Tesco is the leading supermarket company. Its successful growth in the UK has been based partly on a product penetration strategy. The company has extended the range of goods it sells in its stores to include items such as clothing and domestic electrical equipment.

2.5       Diversification strategy

2.5.1    Diversification is a strategy of selling new products in new markets. A distinction can be made between:
(a)        concentric diversification (also called related or horizontal diversification), which means that the new product-market area is related in some way to the entity’s existing products and markets
(b)        conglomerate diversification, which means that the new product-market area is not related in any way to the entity’s existing products and markets.
2.5.2    Both forms of diversification are normally achieved in practice by means of an acquisition strategy (in other words, buying companies that already operate in the new product-market areas).

(a)        Concentric diversification

2.5.3    The aim of concentric diversification might be to use the entity’s existing technological know-how and experience is a related but different product-market area.

 

 

 

2.5.4

Example 4

A manufacturer of vacuum cleaners (e.g. Dyson in the UK) might diversify into the manufacture of washing machines. An airline company might acquire an international chain of hotels. There could be obvious benefits from co-operation in providing good services to passengers and from cross marketing. Both are in the people/travel business so many corporate values could be shared and the brand strengthened. A company selling men’s clothes by mail order might diversify into selling women’s clothes. A company that provides driving lessons for learner drivers might expand into the market for providing driving lessons for advanced drivers.

(b)       Conglomerate diversification

2.5.5    The aim of conglomerate diversification is to build a portfolio of different businesses.
2.5.6    The reasoning behind this strategy might be as follows.
(a)        Diversification reduces risk. Some businesses might perform badly, but others will perform well. Taking the businesses as a diversified portfolio, the overall risk should be less than if the entity focused on just one business. However, this view is rejected by some business analysts, who argue that shareholders can themselves reduce risk if they want to, by spreading their investments in shares over different companies in different industry sectors. For a company in car manufacturing, diversifying into supermarkets is unlikely to be popular with shareholders who have carefully constructed a portfolio that suits their needs.
(b)        Diversification will save costs and generate ‘synergy’. (Synergy is the idea that 2 + 2 = 5.) But synergy can only occur if costs can be saved (for example by economies of scale) or there is some other beneficial linkage between the companies. However, if the companies are truly unrelated then it is not easy to see how synergy can be created. Purchases, manufacturing, customers and management will all be radically different.
(c)        An entrepreneurial management team should be able to succeed in any markets, and the entity therefore seizes different business opportunities whenever and wherever they arise. This is the only potentially valid argument for unrelated diversification, but it is only valid if the company taken over is not being managed well, or it holds undervalued assets that could be sold at a profit. If it is already well-managed, holds no under-valued assets and is taken over at a fair price, it is not clear where shareholder value can be added. All too often, new owners destroy value by meddling with an already successful business

2.5.7

Example 5

Management must select a strategy that they believe is best suited to the needs of the entity. The strategy they choose might differ from the strategy of close competitors. When two rival companies select different strategies, it will not necessarily be clear whose strategy is the most successful, particularly over the longer term. An interesting example is the product-market strategy of PepsiCo compared with Coca-Cola. In 1996, Pepsico was struggling in its competition with Coca-Cola. Since then, PepsiCo has turned round its business and is currently larger than Coca-Cola. Coca-Cola remains predominantly a drinks business. Its strategy in recent years has been to expand its range of products for existing markets, and to develop more geographical markets. Coca-Cola has stronger markets outside the US than Pepsi for its carbonated drinks products. In contrast, PepsiCo pursued a strategy of concentric diversification, in addition to product and market development within its existing drinks business. It successfully developed its existing snack foods business (Frito-Lay) and also purchased two businesses with strong nutritional food ranges – Quaker Oats and Tropicana juices.

2.6       Gap analysis

2.6.1    Gap analysis is a technique that might be used in strategic planning.
2.6.2    A gap is the difference between:
(a)        the position a business entity wants to be in by the end of the planning period, in order to meet its overall objectives, and
(b)        the position the entity is likely to be in if it does not have any new strategy or change in strategy.
2.6.3    The strategies selected for the planning period should be sufficient to close this strategic gap.
2.6.4    In the following diagram, the forecast of where the entity will be without any new strategies might be estimated by statistical forecasting methods, such as regression analysis. For simplicity, the forecast is a forecast of annual profit.
2.6.5    The corporate objectives are expressed in the same terms (in this example, profit). The strategic gap might be closed by a combination of product-market strategies.

2.6.6

Example 6

Fine China is a manufacturer of high-quality dinner services (plates, saucers, bowls, cups, saucers etc) and has a dominant position at the high-quality end of its national market. The market is in a slow decline. Management is considering its strategies for the future. The aim is to achieve a 5% average annual growth in the entity’s share price over the next five years. Required: Suggest briefly a strategy that the entity might adopt if its strategic direction is: market penetration product development market development diversification. Answer:   Market penetration Aim to win more share of the existing market, possibly by means of a takeover (acquisition of a competitor’s business). Product development Aim to develop new products for the same market. This might be achieved by developing lower-quality and lower-priced products, under a new brand name, for sale through the same outlets as the existing products. Market development Try to sell the company’s existing products in new geographical markets – in selected other countries. Diversification The company might be able to diversify into related products and markets (concentric diversification) by developing household ornaments made from china.

 

2.7       Withdrawal strategy

2.7.1    As the name suggests, a withdrawal strategy is a strategy for withdrawing from a particular product-market area. This might be appropriate, for example, when:
(a)        the entity can no longer compete effectively, or
(b)        the entity wishes to use its limited funds and resources in a different product market area.
2.7.2    A withdrawal strategy might be adopted as a deliberate policy by deciding to:
(a)        reduce the range of products offered to the market
(b)        reduce the number of markets or market segments (for example, pulling out of a market in one or more regions of the world)
(c)        withdrawing entirely from the market, and no longer operating in the market.
2.7.3    The reasons leading to a withdrawal from a product-market area might be any of the following:
(a)        A decline in the size of the market or market segment, for example because the product is becoming obsolete. (For example, due to technological change, videotape and music cassettes are becoming obsolete).
(b)        More effective and successful competition from rival firms.
(c)        Poor financial results; for example, the product might be loss-making.
(d)        A decision by the entity that the product is no longer a ‘core product’ and the entity therefore does not intend to continue making and selling it.

 

2.8       Consolidation and corrective strategies

2.8.1    A business entity might decide that it does not need to grow. A consolidation strategy is a strategy for maintaining market share, but not increasing it.
2.8.2    There are several reasons why a entity might choose a non-growth strategy.
(a)        The entity might be managed by their owner, who does not want the business to get any larger.
(b)        Management might take the view that if the entity gets any bigger, there will be serious problems in managing the enlarged entity. They might prefer to avoid the problems by remaining the same size.
2.8.3    However, a strategy of non-growth does not mean a strategy of doing nothing. Business entities must continue to innovate even to ‘stand still’. If a business entity does not have clear strategies for its products and markets, it will lose its market share to competitors.
2.8.4    A corrective strategy is a strategy for making corrections and adjustments to current strategy, to counter threats from competitors or to respond to changes in customer needs.
2.8.5    Corrective strategies might be necessary as a part of a consolidation strategy.

2.8.6

Example 7

In the UK, the British Broadcasting Corporation (BBC) does not have a growth strategy, and is not particularly looking for more viewers or listeners for its television and radio programmes. However, it recognises the significance of digital broadcasting. A corrective strategy in recent years has therefore been to develop digital television and radio broadcasting. The BBC launched several digital television and radio channels, designed to attract existing customers to the new technology. Business entities in a competitive market should seek to obtain an advantage over their competitors. Competitive advantage means doing something better than competitors, and offering customers better value. Competitive advantage is essential; otherwise there is no reason why customers should buy the entity’s products instead of the products of a competitor.

3.       Methods of Strategic Development

3.1       Introduction

3.1.1    Whatever product-market strategies are selected, an entity must also decide how to develop the chosen strategies.
3.1.2    There are three main approaches to developing a product-market strategy for growth:
(a)        internal growth
(b)        growth through acquisitions or mergers
(c)        joint ventures and strategic alliances: these were discussed in the previous chapter.

3.2       Growth through internal development

3.2.1    An entity might grow its business with its own resources, seeking to increase sales and profits each year.
3.2.2    There are several advantages of internal development over other forms of strategy for growth:
(a)        Management can control the rate of growth more easily, and ensure that the entity has sufficient resources to grow successfully. The entity might not have sufficient resources to meet the growing sales demand. However, it will only make and sell as much as it can, efficiently and effectively, with the resources at its disposal.
(b)        The entity should be able to focus on its core competencies, and develop these in order to grow successfully. If the entity finds that it is short of a key labour skill, it can buy the labour skills it needs by recruiting new staff.
3.2.3    There are some disadvantages with growth through internal development.
(a)        The biggest disadvantage is probably that there is a limit to the rate of growth a business entity can achieve with its internal resources. Rival firms might be able to grow much more quickly by means of mergers, acquisitions and joint ventures.
(b)        In order to expand a business beyond the limits of its current capacity, it is necessary to invest in new capacity. For a production company, this means investing in new production facilities. The lead time between taking a decision to invest and the opening date for the new production facilities (possibly in another country) can be long. Until the new production facilities are opened, the entity may be unable to meet customer demand, and it might therefore lose business to competitors. After the new production facilities are opened, production capacity will probably exceed demand, and for a time (until demand grows further) there will be some unused capacity and idle resources.
(c)        If there is an element of diversification, then internal growth presents some risks because the organisation will have to learn new skills. Mistakes are almost inevitable.
(d)        Another disadvantage is that even with internal growth, the entity will eventually need to change its organisation and management structures, in order to handle the growth in its business. Unless an organisation does change, it will become inefficient. Unfortunately, introducing change to the organization structure and management style is by no means simple and easy to accomplish.

3.3       Mergers and acquisitions

3.3.1    An entity can grow quickly by means of mergers or acquisitions. Both mergers and acquisitions involve the creation of a single entity from two separate entities.
(a)        With a merger, the two entities that come together are approximately the same size.
(b)        With an acquisition, one entity is usually larger than the other and acquires ownership (control) by purchasing a majority of the equity shares.
3.3.2    Acquisitions are more common than mergers, but large mergers are possibly more significant, because they can create market leaders in their industry. Examples of large mergers have been:
(a)        pharmaceuticals firms SmithKline Beecham and Glaxo to form Glaxo SmithKline.
(b)        the merger of media giant Time Warner with AOL
(c)        the merger of consumer products manufacturers Proctor & Gamble with Gillette.
3.3.3    Advantages of acquisitions and mergers
(a)        Growth by acquisition or merger is much faster than growth through internal development.
(b)        An acquisition can give the buyer immediate ownership of new products, new markets and new customers, that would be difficult to obtain through internal development.
(c)        An acquisition enables an entity to enter new market where the barriers to entry are high, so that it would be very difficult to set up a new business in competition.
(d)        An acquisition prevents a competitor from making the acquisition instead.
(e)        It might result in cost savings and higher profits (‘synergy’). This point is discussed in more detail later.
3.3.4    Disadvantages of acquisitions and mergers
(a)        An acquisition might be expensive. The bid price has to be high enough to make the shareholders of the target company willing to sell their shares. The return on investment for the entity making the acquisition might therefore be very low.
(b)        A merger or acquisition can result in a loss of proportional ownership of the entity. For example, if two entities with an equal total value are merged together, a shareholder who held say 10% of one of the companies before the merger might only own 5% of the merged company. (The actual change in proportional ownership will depend on the structure of the merger or acquisition, and how it is financed.)
(c)        The two entities will have different organisation structures, different management styles, different cultures, different systems of salaries and wages. Bringing them together into a single entity will be extremely difficult. Naturally, many employees will feel threatened, as often takeovers are followed by the company seeking cost efficiencies (including redundancies). Many good employees could leave. Generally, the period of disruption following a takeover or merger will last around a year.
(d)        When individuals from different ‘cultures’ are brought together into a single organisation, there will probably be a ‘clash of cultures’, and it may be difficult for individuals from the different cultures to work together easily. They will have a different outlook on business, and will have different ideas about the way that work should get done. The problems of a clash of cultures are particularly severe when companies merge, or when one company takes over another. There have been several well-publicised examples of a clash of cultures in the banking industry, when a commercial bank (a traditional ‘lending bank’) merges with an investment bank.
3.3.5    Mergers and acquisitions: will there be synergy?
Synergy is often a key reason for a merger or acquisition. Synergy will occur when, as a result of a merger or acquisition, there are operational or financial benefits.
(a)        There might be over-capacity of equipment and property, so that the surplus assets can be sold off.
(b)        It might be possible to make operational changes to save resources In particular, an acquisition often results in redundancies for large numbers of employees. Running costs are reduced.
(c)        Two Research and Development departments can be combined into just one, and savings in running costs should be possible.

However, it has been found in practice that a very large proportion of acquisitions and mergers fail to achieve the expected synergy.

The difficulties with bringing together two different organisations, management styles, management structures and cultures mean that there is often a high risk of a loss in efficiency and higher operating costs.
3.3.6    Acquisitions: the need for financial strength
A successful strategy of growth through acquisition requires financial strength. A company needs one or more of the following.
(a)        A large amount of cash that is available for long-term investment. Some acquisitive companies have a ‘war chest’ of cash that they use to buy target companies.
(b)        Access to additional funding, in the form of new equity (from new share issues) or borrowing (bond issues or loans).
(c)        Highly-regarded shares. Many acquisitions are negotiated as a share-for-share exchange, with shareholders in the target company agreeing to accept shares in the acquiring company as payment for their shares. To succeed with acquisitions financed by a share-for-share exchange, a company’s shares must be well regarded by investors, so that shareholders in a target company are willing to accept shares as payment.

3.4       Diversification and integration

(a)       Diversification and risk

3.4.1    Diversification has already been described as a strategy for growth. Entities that grow by diversification usually do so by means of merger or acquisitions.
3.4.2    It has also been stated that diversification is a high-risk growth strategy, because the entity is moving into both new product areas and new markets at the same time, and it does not have experience in either.
3.4.3    Conglomerate diversification is a greater risk than concentric diversification, because with concentric diversification, the entity is moving into related product-market areas, where it might be able to use its experience and core competencies more effectively.

 

(b)       Integration

3.4.4    Integration is a term that means extending a business. There are two main types of integration:
(a)        horizontal integration
(b)        vertical integration.
3.4.5    Horizontal integration. With horizontal integration, an entity extends its business by obtaining a larger share of its existing product markets. Typically, an entity might acquire one or more of its competitors.
3.4.6    Vertical integration. With vertical integration, an entity extends its business by acquiring (or merging with) another entity at a different stage in the supply chain. A strategy of vertical integration is usually a form of concentric diversification.

3.5       Vertical integration: forward and backward integration

3.5.1    With forward vertical integration, also called ‘downstream’ integration, an entity enters the product markets of its customers. For example:
(a)        a manufacturer of tyres might go into the production of motor cars or motor cycles
(b)        a wholesaler (selling goods for resale to retailers) might go into the business of retailing itself
(c)        an entity specialising in oil and gas exploration might move into the market for oil and gas extraction.
3.5.2    With backward vertical integration, also called ‘upstream’ integration an entity enters the product markets of its suppliers. For example:
(a)        an entity specialising in oil and gas extraction might move into the market for oil and gas exploration
(b)        an entity operating a chain of cinemas might go into the market for film production
(c)        a shoe manufacturer might enter the market for leather production.
3.5.3    Arguments for vertical integration
(a)        Backward integration gives an entity control over its source of supply.
(b)        Forward integration can give an entity control over its channels of distribution.
(c)       Vertical integration allows an entity to extend its expertise and skills into related product markets.
(d)        Vertical integration makes it easier to find ways of reducing costs in the supply chain, and adding value.
(e)        Vertical integration can help to differentiate the product. Backwards integration could aid designing and making unique components; forwards integration could help to sell products in a unique environment.
3.5.4    Arguments against vertical integration
(a)        Avoiding the discipline of the market. A cosy, relaxed relationship is likely to grow between, say, an in-house component manufacturer and producer of the finished product. The component manufacturer knows that the group company will almost certainly buy its components, and so there is little pressure for cost efficiency and innovation.
(b)        Other companies might turn out to be more successful than the one bought in by the group. For example, a rival component manufacturer makes a technical breakthrough so that their components are better and cheaper. It might be better on each purchasing occasion to have the pick of all manufacturers so that the best and most suitable cost effective components can be bought.
(c)        Different managements skills. If a manufacturer takes over a distribution chain, the skills needed to manage that will be quite different, and the company could easily mess things up.
(d)        Core business. The company should examine its value chain and distinctive competences. These must be protected, and buying another company can mean that management pays less attention to the areas of its business that really matter.
(e)        Use of capital. Is buying, or setting up, a supplier or distributor really the best way for a company to use its capital?

3.5.5

Example 8

Several companies that manufacture high-quality goods have adopted a strategy of acquiring their own retail outlets to sell their products and to project a sophisticated brand image. These companies include Louis Vuitton (luggage) and Apple (computers). Another example is Nespresso, a subsidiary of Nestlé. This company originally (1986) sold coffee capsules for espresso machines, and then expanded its business into selling coffee machines that were manufactured by other companies but sold under the Nespresso brand name. More recently, the company has opened a small number of ‘coffee boutiques’ in prestigious locations such as Madison Avenue in New York and Beauchamp Place in London, selling high-priced coffee in luxurious surroundings. The aim of this strategic development, however, is not to sell more Nespresso coffee or become an upmarket chain of coffee shops. The concept is to make customers more aware of Nespresso coffee machines and to persuade more customers to buy the machines.

4.       Assessment of Business Strategies

4.1       The basis for assessing business strategy

4.1.1    Before deciding whether or not to choose a particular business strategy, an assessment should be carried out to judge whether the strategy is acceptable. Johnson and Scholes suggested that when judging the strengths or weaknesses of a proposed strategy, the strategy should be evaluated for its:
(a)        suitability: does it address the strategic requirements, given the circumstances and the situation?
(b)        acceptability: does it address the strategic requirements in a way that will be acceptable to significant stakeholders?
(c)        feasibility: is it practical?
4.1.2    Included within an assessment of acceptability or feasibility should be a financial analysis of the proposed strategy. Strategies might be suitable, and they might succeed in achieving their business objectives. However, if the expected financial return is too low, or if the strategy could only be implemented at a loss, it should not be undertaken.
4.1.3    An assessment of strategy must always consider the financial aspects you’re your examination, you should bear this in mind. If you are given a case study and asked to recommend a business strategy, you should not recommend anything that is financially unacceptable!

4.2       Suitability of a strategy

4.2.1    A strategy is suitable if it would achieve the strategic objective for which it is intended.
(a)        If the purpose of the strategy is to gain competitive advantage, it is necessary to assess how the strategy might do this, and how effective the strategy might be. Will the strategy succeed in reducing costs, if this is its purpose? Will the strategy succeed in adding value, if adding value is the purpose?
(b)        If the purpose of the strategy is market development, how successful might the strategy be?
(c)        Similarly, how suitable are the chosen strategies for market development, product development or diversification?
(d)        Is the business risk in the strategy acceptable, or might the risk be too high?

4.3       Feasibility of a strategy

4.3.1    The feasibility of a strategy is concerned with whether it will work. A strategy is feasible if it can be implemented successfully. Assessing whether or not a strategy is feasible will require some judgement by management.
4.3.2    Some of the questions to consider are as follows:
(a)        Is there sufficient finance for the strategy? Can we afford it?
(b)        Can we achieve the necessary level of quality that the strategy will require?
(c)        Do we have the marketing skills to reach the market position that the strategy will expect us to achieve?
(d)        Do we have enough employees with the necessary skills to implement this strategy successfully?
(e)        Can we obtain the raw materials that will be needed to implement this strategy?
(f)        Will our technology be sufficient to implement the strategy successfully? For example, will our IT systems be good enough?
4.3.3    If there are serious doubts about the feasibility of a strategy, it should not be selected.
4.3.4    An important aspect of strategy evaluation is the financial assessment.
(a)        Will the strategy provide a satisfactory return on investment?
(b)        Is the risk acceptable for the level of expected return?
(c)        What will be the expected costs and benefits of the strategy? How will it affect profitability?
(d)        What effect is the strategy likely to have on the share price?

4.4       Acceptability of a strategy

4.4.1    The acceptability of a strategy is concerned with whether it will be acceptable to key stakeholders. If it is not acceptable to a key stakeholder, the stakeholder will oppose the strategy. Management should then consider whether a strategy that is not acceptable to a key stakeholder should be undertaken or not.
4.4.2    In most cases, management are likely to reject a strategy that will not be acceptable to a key stakeholder.
4.4.3    There are several aspects of ‘acceptability’.
(a)        Management will not regard a strategy as acceptable if the expected returns on investment are too low, or if the risk is too high in relation to the expected return.
(b)        Investors might regard a strategy as unacceptable if they will be expected to provide a large amount of additional investment finance.
(c)        Employees and investors might consider a strategy unacceptable if they regard it as unethical.

5.       Strategy Selection

5.1       The process of strategy evaluation provides an assessment of the suitability, feasibility and acceptability of different strategies. Strategy proposals that are not suitable, not feasible or not acceptable can be rejected. This might still leave several different alternative strategies to consider. If so, the preferred strategies must be selected from the strategy options that are available.

(a)       Formal evaluation

5.2       Where there is a free choice from several available strategies, the selection might be based on a formal financial evaluation and strategic evaluation of the expected returns and the risks, over the long term as well as the short term.

(b)       Enforced choice

5.3       In some cases, management might take the view that they have no real choice, and that they are ‘forced’ to adopt a particular strategy. The reasons for having to select an enforced strategy might be that:
(a)        a key stakeholder, such as a major shareholder, is insisting on a particular strategy, or
(b)        every competitor is doing the same thing.
5.4       However, it is probably a sign of weak management that a strategy is considered necessary or unavoidable. Strategy selection should be positive. Management should be looking for the strategies that are most likely to achieve the corporate objectives.

(c)        Learning and experience

5.5       A distinction can be made in strategy selection between experience and learning.
5.6       Experience is acquired over time. With experience, an entity should develop skills and competencies. Strategic opportunities should arise that enable the entity to use its skills and experience to develop its businesses. Using acquired skills to develop and grow is consistent with the logical incremental model of strategic management.
5.7       Learning is the acquisition of new ideas. An entity might select a strategy that forces it to learn something new. This might require a significant change in behaviour as well as skills. Although the learning process can be rapid, strategies based on new learning are likely to introduce change more suddenly. This type of strategy might therefore be fairly risky.