Thursday, 15 June 2017

How to evaluate and prioritise strategic options

Once you've developed a comprehensive list of strategic options, it's time to evaluate, prioritise and select the ones you want to pursue.

Evaluation is typically based on four criteria:
  1. feasibility,
  2. strategic fit,
  3. interdependencies, and
  4. financial risk and reward.

Feasibility


It doesn't matter how compelling your strategy is, if it requires you to build a time travel machine and teleport into a parallel universe, you're probably going to fail.

Feasibility is a measure of how easy it will be to execute an option.

One way to establish this is to cross-check the option against the strengths and weaknesses in your SWOT analysis. Does the option capitalise on your strengths? Do your strengths provide you with a unique opportunity to succeed with this initiative where others might find it more difficult? Does the option require strengths you don't have or where you are weak? Would the option protect you from exposure to your weaknesses?

Of course, you may find the option requires capabilities which you simply did not evaluate when you originally did your SWOT, in which case, you may want to consider updating it.

Just because an option will be difficult for you to execute does not mean you should give up on it. When America decided to put a man on the moon, no-one thought it would be easy. But it is certainly an important consideration when weighing an option up against alternatives.

Strategic Fit


There is little point in starting to build a commanding position offering a product or service for which demand is in free fall.

Strategic fit is a measure of the future attractiveness of an option.

You can establish this by cross-checking the option against the threats and weaknesses in your SWOT analysis, PESTEL analysis and/or Porter's 5 Forces analysis. Do industry trends suggest that demand for a product, service feature or attribute is likely to increase or decrease? Does the option capitalise on recent or anticipated changes in order to operate more effectively or efficiently? Do other external factors mitigate in favour of or against this option? Is it a unique fit to your specific relative strengths and weaknesses, or is it a me-to undifferentiated move?

Typically, lower strategic fit is less of an issue for very short-term options (think, for example, Horizon 1) which play strongly relative to strengths and weaknesses. However, they mitigate much more strongly for or against longer term investments (think, especially, Horizon 3).

Looked at together, a rigorous assessment of feasibility and strategic fit should also stop organisations from meandering aimlessly in pursuit of the next shiny idea, and instead help to develop a portfolio of strategic options which is holistic and based on sound analysis.

Interdependencies


It is important to remember that not all strategic options are independent of each other. There may be trade-offs and mutual exclusions (going in one direction may make it harder, or even counterproductive, to go in another), or dependencies (executing one option first may make it easier to implement another one second).

It is important to identify these before proceeding to look at financial risk and reward, as these interdependencies can have a significant impact on financial costs, benefits and risks.

The matrix below illustrates a simple approach to bulleting out the potential interdependencies between options (additional supporting documentation may be required):

Financial Risk and Reward


Financial risk and reward is probably the most widely written about of the 4 criteria. It is also the least strategic in that it can be applied to any project on a standalone basis. However, having worked through the other three criteria have a significant impact in understanding the costs and risks of implementation (feasibility & interdependencies) and the size and risk of the prize at stake (strategic fit and, again, interdependencies).

There are a number of ways of assessing financial risk and reward, including NPV, Profitability Index, IRR, Payback Period, Discounted Payback Period, etc. each with its pros and cons. Discussion of these is beyond the scope of this post. (If there is demand, I may consider a future post - please let me know in the comments.) All of these methods are based on future expected cash flows. Again, there are numerous ways of calculating these, and again, they are beyond the scope of the post (but could be the subject of a future post if there is demand).

It is self-evident but never-the-less worth stating that all of these methods of assessment are only as good as the forecasts on which you base them. Garbage in - garbage out. Furthermore, forecasts are notoriously unreliable, and probably more so as the options you're evaluating get more innovative and strategic. 

It is important to undertake financial risk and reward forecasts as they force you to confront difficult to answer questions. However, it is equally important not to then believe that your forecasts are somehow factual or accurate.

Bringing it all together


Once you've evaluated all of your options against each of the 4 criteria, you're in a position to review your portfolio and to start making choices.

Start by assigning a simply High, Medium and Low score to each option for each of Feasibility, Strategic Fit and Financial Risk and Reward. The result can easily be translated into a total score from 3 to 9 by giving one point for a Low and 3 points for a High, and the options can then be sorted based on that score. Then, where there are dependencies, firstly remove any lower scoring options which are mutually exclusive with higher scoring options, and if any preceding options score less well than their succeeding options, move the preceding options to just before the succeeding options.

The strategic portfolio analysis matrix provides a useful way to visualise the solution.

This basic approach will yield a prioritised list of options from which you can build a roadmap for delivering your strategy. There will inevitably arise situations where you disagree with the result. Any system for prioritisation will give you an indication but not a definitive solution. So if you really think you should charge what the formula spits out, then do so - but do it consciously and make sure you document and agree your reasons so that you're not left second guessing yourself.

Once you've evaluated and prioritised your strategic options, you're ready to move on to build your implementation roadmap. But that will have to wait for another post. Do be sure to signup to receive email updates to make sure you don't miss it if you've not already done so - just enter your email address in the panel to the right at the top of the page.