Testing Strategic Options

The evaluation of consonance or suitability of a strategy rests on the logic or rationale on which it is based - how the strategy creates and/or maintains competitive advantage. This can be broken down further to assess the extent to which the strategy addresses the challenges of the external environment, is based upon or enhances the resources and capabilities of the organization, builds or exploits synergies and is consistent with its corporate culture. Assessment of suitability will show whether or not the strategy makes sense and will identify the gaps that need to be addressed (which links into the assessment of feasibility). The following questions will help evaluate the suitability or consonance of a strategy:

• Does the strategy address the challenges presented by the external environment?
• Is the strategy viable and achievable given conditions within the internal and external environment?
• Does the strategy build upon or exploit the strategic capabilities of the organization?
• Does the strategy create or exploit synergy across the organization?
• Does the strategy fit with the current corporate culture of the organization?
• Does the strategy create or maintain competitive advantage?

How to Assess Consonance/Suitability

Environmental analysis is the starting point for assessing whether strategic options fully address challenges presented by the external environment and are viable and achievable in those conditions. Tools such as PEST analysis, Porter’s Five Forces Framework and market segmentation analysis can be used to identify and assess these external pressures. In many organizations, strategic options must be evaluated from a multi-business perspective. Therefore the issue of whether the strategy is consistent with, relies upon or can enhance synergy between these businesses is very important. Useful tools for assessing synergy include portfolio matrices, core competence analysis, management styles analysis and the parenting matrix. [3] All tests of consonance or suitability must consider how well they fit with the existing culture of the organization. Mapping the cultural web of an organization can help show how the option may be accepted or resisted by those within the organization. The evaluation of suitability of strategic options also needs to identify and appraise the sources of advantage on which they are based, in terms of cost efficiency and added value. This can be done by using Porter’s generic strategies framework. Finally, a SWOT analysis is a useful generic tool for evaluating the suitability of strategic options, by looking at the strengths and weaknesses of the organization in relation to the opportunities and threats posed by the environment.

2. Consistency/Acceptability

The assessment of the consistency or acceptability of a strategy involves looking at if it is likely to meet stakeholder expectations and their anticipated rewards/returns. The following questions will help evaluate the consistency or acceptability of a strategy:

• What are the expected outcomes of the strategy and are they in line with stakeholder expectations?
• Does the strategy look attractive in terms of financial returns and the timescale required for delivery of these returns?
• What are the risks involved in following the strategy and how significant are they?

How to Assess Consistency or Acceptability

Stakeholder mapping can be very useful for assessing stakeholder expectations, their likely reaction to any particular strategy and, therefore, likelihood of acceptability. It can also be used as a start point for proactively managing relationships with stakeholders to improve the chances of accepting a strategy. The assessment of the acceptability of the returns from a strategy is commonly defined in terms of financial measures and the timescale needed to achieve them. Organizations often set required rates of return for the return on capital employed (ROCE) of strategic options, and reject those options where the projections fail to meet the required rates. Another financial measure that can be used to assess acceptability is the payback period, which assesses the likely timescale needed to recover any investment. As well as assessing the returns from strategic options, the risks need to be considered. Again, financial measures, such as break-even analysis, can be used here. The consequences of adopting a strategy, based upon projections for the liquidity (short-term financial solvency) and gearing (long-term capital structure) ratios of the organization can also help measure risk. Finally, sensitivity analysis can be used to assess acceptability of risk, which allows for the evaluation of “what if” questions about the key assumptions underpinning a strategy.

3. Feasibility

Assessing feasibility involves examining whether the organization has the resources and capabilities to successfully implement the strategy. This generally leads to an analysis of the tangible resources of the organization, but other intangible organizational resources and capabilities should not be ignored, such as the skills and knowledge of employees. As well as assessing whether or not the current resources and capabilities will meet the needs of strategic options, the gaps must be identified and the ability of organization to address these gaps must be assessed. The following questions will help evaluate the feasibility of a strategy:

• Has the organization got the resources and capabilities to deliver the strategy?
• What resource and capability gaps need to be addressed in order to ensure success?

How to Assess Feasibility

Financial feasibility can be conducted using funds flow analysis. However, a broader assessment (particularly of strategic capabilities built on core competencies and resources) is important. Resource and capability analysis tools such as, resource audits, value chain analysis, core competence analysis and activity mapping, can all help assess feasibility. These analyses can then lead to the identification of resource and capability gaps. All evaluations of feasibility must assess the ability of strategic options to bridge these gaps.

4. Advantage

Rumelt’s final test is of competitive advantage, or whether the organization can capture enough of the value it creates. Competitive strategy is the art of creating and exploiting those advantages that are most telling, enduring and difficult to duplicate. A strategic option must provide for the creation and/or maintenance of a competitive advantage in one or more of three areas: superior skills; superior resources; superior position.

Risk and Uncertainty

Another aspect of strategy evaluation that must be addressed is risk and uncertainty. Risk concerns the probability of foreseen outcomes of the failure of a strategy. Uncertainty is to do with outcomes that may be unforeseen, or those which are foreseen but against which a degree of estimated risk cannot be set. Assessing uncertainties and weighing up risks is a difficult, often personal process and depends largely on the business environment. In making choices about strategic options, acceptance of different degrees of risk is often a matter of personal preferences. Some individuals and organizations are very risk averse, while others take risks as a matter of course. Formal risk assessments can help with the evaluation of strategic options. Risk management techniques, such as scenario planning and future modeling, can also help organizations to make judgments in terms risk and uncertainty.

Conclusion

Strategic analysis and choice are of little value to an organization unless the strategies are capable of being implemented. There are a number of key tests and tools organizations can use to evaluate the potential success of strategic options. These tests will help to clarify the underlying principles behind strategic options and help assess risk, uncertainty and likelihood of acceptance by key stakeholders.