You should now be clear that Strategic Analysis is the process of conducting research into the business environment within which an organization operates, and into the organization itself, to help form future strategies.
One step ahead, after acquiring a clear view of the business and its environment, is Strategic Choice:
Identifying strategic options and choosing between them;
Good strategic options have the following features:
- They create a competitive advantage to the business;
- They are achievable considering the business' resources and capabilities.
For Strategic Choice we look in to three techniques:
Ansoff Matrix Model*;
Force-Field Analysis;
Decision Tree Technique.
The Ansoff Analysis is a tool in between Strategic Analysis and Strategic Choice.
This technique is based on two variables: the market and the product:
Market:
- Option to stay in an existing market;
- Option to enter new markets;
Product:
- Option to sell existing products;
- Option to develop new products.
The Ansoff Matrix is used to show the degree of risk associated with four common business strategies - the four basic options for sales growth:
These strategies are narrowed down from the four product/market options we just looked at. Let's look at each of them individually:
Market Penetration: the one with the least risk:
- Increasing the penetration of existing products in existing markets (market share);
- The risk comes when a pricing-led strategy is used:
-- There can be a price war reducing profit margins within the entire industry.
Product Development: moderate risk:
- Introduction of new products in existing markets;
- The risk is associated with the cost of product development;
- Innovation can bring businesses distinctive identity and competitive advantage.
Market Development: moderate risk
- Exporting existing products to new markets;
- It can also be done by introducing an existing product to a new segment of buyers.
Diversification: high risk
- Related Diversification: new but familiar products introduced to a new market (less risky);
- Unrelated Diversification: completely new and unrelated products introduced to a completely new market (riskier).
Attention to Diversification:
- The riskiest of all strategies: market and product challenges;
- Companies pursuing diversification are likely leaving the neighborhood of their core competencies;
- Cost-benefit analysis is necessary;
- Allows for large expansions.
Ansoff Matrix - Food For Evaluation:
All strategies differ in their degree of risk;
Managers can visualize and assess the risks and benefits in each of them;
The matrix is for exploring the options only - decision-making techniques need to be implemented for an actual decision to be made;
Multiple strategies can be carried out simultaneously;
It's a limited analysis as it just considers two variables (market and product);
The matrix does not provide further insights on the strategies:
Which market?
What product?
Apart from Ansoff Matrix, the Force-Field Analysis also helps identifying and choosing between strategic choices:
The Force-Field Analysis focuses on identifying and analyzing two types of factors in a decision:
Positive factors that support a decision/choice (a.k.a. driving forces);
Negative factors that are constraints of the option/decision (a.k.a. restraining forces).
This analysis, therefore, analyzes all impacting forces (pros and cons) of making a decision and by doing so it allows managers to:
Strengthen driving forces;
Mitigate restraining forces;
So that the decision/choice can thrive.
The Force-Field Diagram is used to represent the forces in favor or against a decision:
The steps on performing a Force-Field Analysis:
List the driving factors on the right;
List the constraining factors on the left;
Allocate a significance score to each force (from 1 to 10, generally);
Total the scores and if the decision is said to be made:
Work on strengthening driving forces and weakening restraining forces - whichever yields more significant results.
Let's look at another example - do you see anything troubling about this decision?
Restraining forces are greater than the driving forces (although by only 1) - careful consideration is required for the decision.
What could be done to make this decision feasible?
Adding/strengthening driving forces and/or removing/weakening restraining forces:
Invest in training the staff: increases costs to 4 but reduces fear of technology to 1;
Showing staff that the upgrade is needed for survival adds another driving force (+2);
Add a driving force showing that new technology would increase variety and interest for staff's job (+1);
Raise wages to reflect the new productivity would increase costs but staff would be less bothered by loss of overtime pay;
Investing in less polluting equipment to reduce impact on environment.
Such measures would change the results.
Food for Evaluation on Force-Field Analysis:
- Unexperienced/unskilled managers might miss out on relevant forces impacting the decision;
- Subjectivity on ratings: two managers may have very different results;
- Requires the use of other strategic choice tools;
- Seems simple but can be complicated on complex decisions with multiple forces.
Our saga to identifying and choosing between strategic choices is nearly ending: after the Ansoff Matrix and the Force-Field Analysis, it is now time for us to dive in to Decision Trees:
Decision Trees are a logical approach to decision making:
It focuses on decreasing the risks involved in the decision;
It considers all of the options available;
It looks into the possible outcomes and economic returns of the possible decisions.
The main differential of a Decision Tree is that it considers all the four features in a business decision:
All the possible options;
All different possible outcomes;
The chances of such outcomes occurring;
The economic returns of these outcomes.
How is it done?
They are built from left to right;
Each branch represents an option with its range of consequences and chances of occurrence;
A square (decision node) represents a decision-point;
A circle (chance node) represents a range of outcomes from the decision;
Numerical possibilities are included in each possible outcome from the chance node - represents their chance of occurring;
It includes the possible economic returns (profit/loss) of different outcomes;
From that, you can visualize the option with the most beneficial economic return.
Let's look into a simple Decision Tree example: should an event manager hold a fundraising indoors or outdoors? The financial success of the event depends on this decision.
From past weather records for this month (March) there is a 60% chance of fine weather and 40% of poor weather;
The indoor event costs $2,000;
The outdoors event costs $3,000.
Decision Tree:
The expected financial returns for the two options are shown on the diagram. Which of the options would give the highest expected return?
The expected value is found by:
Multiplying the possibility (chance) by the economic return of the outcomes;
Adding the results of the different outcomes from the decision;
Subtracting the costs to find the net return.
Let's work another (more complex) example:
Should we sell our building?
If we sell now we can make $1,000.000;
If we invest $500,000 on improvements the building could be sold as a house;
If we do the improvements and invest an additional $250,000 in separations we could sell the building as 3 separate flats.
We know that the returns on this investment will depend on the interest rate at the time of sale - high interest would reduce our returns either way.
Interest Rates | Revenue sale of house | Revenue sale of flats |
Low | $2m | $2.5m |
High | $1.5m | $2m |
Records show that given the time for renovations, improvements, and separations, there is 60% chance of high interest at the time of sale and 40% chance of low interest:
It's clear that renovating yields an overall higher net return than selling the building now, but..
What should we do?
Sell it as a house?
Sell it as flats?
The highest net return is from the sale of the 3 flats, even after renovations and separations:
It is important to consider that either way (selling as a house [$1.2m] or as a flats [#1.45m]) the return would be higher than selling the building as it is right now [$1.2m].
Food for your evaluation on Decision Trees:
Although it considers all the possible options, outcomes, chances, and economic returns it can be inaccurate because it relies on forecasts/estimates;
Unpredictable factors may change the possibilities/chances;
Historical data/info does not guarantee repetition;
Even though results may be inaccurate, it is still useful for comparison of options;
It is a numerical decision-making technique and non-numerical (qualitative) factors are left-out;
Although it considers the risks involved in the decision, it does not eliminate those risks.
To-Do List:
Exam-Style Questions
Decision Making Question #2 - Restaurant Owner Considers Her Options
Chapter 8 - Business Strategy
Comentários