Basis for assessing business strategy

1.        Strategy Evaluation

1.1       The basis for assessing business strategy

1.1.1    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?
1.1.2    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.
1.1.3    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!

1.2       Suitability of a strategy

1.2.1    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?

1.3       Feasibility of a strategy

1.3.1    The feasibility of a strategy is about whether an organization has the resources and competencies to deliver the strategy. A strategy is feasible if it can be implemented successfully. Assessing whether or not a strategy is feasible will require some judgement by management.
1.3.2    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?
1.3.3    If there are serious doubts about the feasibility of a strategy, it should not be selected.
1.3.4    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?

1.4       Acceptability of a strategy

1.4.1    The acceptability of a strategy is concerned with expected performance of a strategy in terms of return, risk and stakeholders reactions.
1.4.2    In most cases, management are likely to reject a strategy that will not be acceptable to a key stakeholder.
1.4.3    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.

2.       Strategy Selection

2.1       Introduction

2.1.1    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.

2.2       Formal evaluation

2.2.1    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.

2.3       Enforced choice

2.3.1    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.
2.3.2    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.

2.4       Learning and experience

2.4.1    A distinction can be made in strategy selection between experience and learning.
2.4.2    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.
2.4.3    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.

3.      Strategy Implementation

3.1       Strategy implementation

3.1.1    Strategy implementation is the conversion of the chosen strategy into detailed plans or objectives for operating units.
3.1.2    It requires the overall strategy to be broken down into functional strategies (HR, procurement and so on) and operational plans which set out what is expected of each area of the business.
3.1.3    The planning of implementation has several aspects. The strategic planning process is therefore multi-layered.
(a)        Resource planning (i.e. finance, human resources) involves assessing the key tasks that need to be carried out and determining the timing of them.
(b)        Operations planning looks at the systems may need to be changed.
(c)        Organization structure and control systems may need to be changed.

3.2       Strategic planning and budgets

3.2.1    It should also be noted that there is a strong relationship between strategic planning and capital budgeting. Often, capital budgets are viewed as concrete financial embodiments of strategic plans.
3.2.2    There are both similarities and differences between budgets and strategic plans. Budgets form part of the strategic plan yet:
(a)        Budgets usually involve one year (short term), whereas strategic plans cover three, five or ten years (long term).
(b)        The strategic plan contains relatively little financial data, whereas the master budget is financially based.
(c)        The strategic plan is normally structured by product/service whereas a budget is normally structured by responsibility centre.
(d)        Budgets can be used to compare performance and plan corrective action if deviations from budget (variances) occur. This enables the organisation to ensure performance is in line with strategy.