Learning Centre News Update

PAGE 16 Spring 2010

Strategic Choice –
Johnson and Scholes
Suitability, Feasibility,
and Acceptability Model
(relevant to paper P3)
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Introduction evaluation 1. Candidates must relate the The chosen strategy should capitalise on
As the environment changes, companies framework to information specifically the firm’s strengths and core competences.
need to change their strategies to adapt to provided in the question to maximise their It should also be congruent with the firm’s
the environment to prosper or just to survive. marks. In addition, the number of marks existing culture and in alignment with the
Within the P3 framework, candidates are available for the question will dictate the broader environmental, political, and social
required to perform external environmental depth and breadth of analysis. context.
analysis and internal capability evaluation Here we will go through the Johnson To determine suitability, candidates can
to determine the companies’ strategic and Scholes Suitability, Feasibility, and use external analytical models to evaluate
positions. Based on the strategic position Acceptability model to clarify what the each strategic choice. These models include
analysis, possible strategic choices are thought process entail: the framework to the PESTEL analysis, Porter’s Five Forces,
determined. Each strategic choice is apply in each step, and where to focus your and Porter’s Diamond. Other analytical tools
evaluated and an optimal one is selected efforts. that can be used include life-cycle analysis,
(Figure 1). This article will focus on how to value chain analysis, positioning of the firm
use the Johnson and Scholes framework of Strategic Position or its products, portfolio analysis, business
Suitability, Feasibility, and Acceptability as profile evaluation, gap analysis, and other
External
selection criteria to determine the optimal PESTEL decision making tools like ranking, decision
Internal
strategic choice. 5 Forces tree, scenario planning, and sensitivity
SW
Strategic choice evaluation and selection Diamond analysis.
OT
is very frequently asked in Part A of P3. Candidates must keep in mind that for
For example, this model was used in the the suitability analysis, these models are
ONA case in the December 2007 paper, the Strategic Choice 6M applied differently than when they are used
Money
greenTech case in the June 2009 paper, and Cost / Differentiation / Focused Machinery for external analysis. Within this context,
Relevant Manpower
again in the ABCL case in the December points only Ansoff Matrix Markets
candidates should think through the models
2009 paper. Vertical / Horizontal Integration Marterials but only relevant and important factors are
Conglomerate Make up
In these questions, candidates were to be discussed in the answer (Figure 1).
given several strategic choices to choose Candidates should not spend time discussing
from. Candidates were asked to evaluate Strategic Evaluation and every aspect of the model(s) in their answer.
each strategic choice and provide a Selection Each strategic choice will have their
recommendation together with support on Suitability unique advantages and disadvantages.
their decisions. Two points to remember for One of the candidates’ major tasks is to
Feasibility
this type of question. First, candidates will determine their importance and incorporate
Acceptability
have a lot of information to absorb and it is these factors in the decision making
vital for candidates to be able to recognise Financial Stakeholders process qualitatively. It is inevitable that
Risk / Return Figure 1 Mandelow
and discuss the relevant points. Second, matrix candidates will perceive and interpret the
candidates should realise that each strategic case information in their own ways and arrive
choice will have its own advantages and Suitability at different recommendations. Fortunately,
disadvantages. There will be multiple sets Candidates must first determine if the marks are allocated to the “why” of the
of correct answers dependent on how the strategic choices are suitable and compatible candidates’ decisions. As a result, candidates
information is interpreted. More importantly, within the current and expected external must explain clearly the reasons and the
the number of marks earned will hinge on environment. For example, high pollution rationale for their decisions.
how clearly the candidates articulate the industry or the use of coal fire power plant For non-profit oriented NGOs or
reasons and rationale for their selections. might be contrary to what is perceived governmental departments, the public sector
When encountered with strategic to be suitable within the political, social, portfolio matrix can be used to evaluate the
choice evaluation and selection questions, environmental, and legal aspect of the suitability of public services to be provided.
a common cause of poor performance PESTEL analysis. Customer and market To conclude, suitability analysis evaluates
is the candidates’ failure to provide a demand also play a key role in the suitability each strategic choice to determine their
comprehensive analysis. Candidates will over- analysis. viability given conditions that exist in the
write on one or two points and do not reserve The topics covered are extensive and external environment.
enough time for a multi-perspective analysis. many marks can be available. The best
In order to achieve a systematic analysis way to approach the suitability perspective Feasibility
of each strategic choice, candidates can is to determine if the strategic alternatives Feasibility focuses on whether the
use the Johnson and Scholes framework to can help the firm exploit opportunities and organisation has the resources to pursue the
ensure a methodological and comprehensive overcome or avoid threats in the environment. strategic choices. Feasibility analysis is an
Learning Centre News Update
PAGE 18 Spring 2010

evaluation of the internal capabilities of the has the production systems in place or
company. At this point, some candidates the spare capacity to handle the output
might find that a firm does not have requirement of each alternative. The effect
adequate resources to pursue some of the on production of existing items must also be
strategic choices and can decide to exclude considered. For example, if a differentiation
these choices from further evaluation after or high quality strategy is being pursued,
providing adequate written support. then the ability of the production system to
As in suitability analysis, numerous provide the customer perceived differentiation
internal analytical models are available to or the quality required must be assessed.
the candidates. The most common is the 6M
model 2, which stands for money, machinery,
manpower, markets, materials, and make- Manpower. Every strategic change will entail
up (Figure 1). These six factors do not need some form of personnel change. For each
to be discussed in this order. In most cases, strategic choice, candidates should determine
some factors would be more relevant and if the existing employees and management
they should be discussed first and in more have the required knowledge and skill set.
details. For employees, if the skills required are not
available within the company, can existing
staff be trained or can external recruits solve
Money. The financial resources available this gap? There are many real life examples
or required must be determined for each of failed strategies because of this skill factor.
strategic choice. Three financial resources For example, during the Internet boom, many
considerations must be determined. They companies had grand plans to expand to high
are financing availability, the cost of the growth high profit product space, and they
financing, and the repayment capacity of the restructured the whole company based on
strategic choice. For availability, candidates these plans. Then these companies found out
need to ensure that financial resources that they were not able to recruit the required
are available throughout the term of the personnel because of political, economic,
strategy. Even good strategies can fail when social, or supply reasons. For management,
financing is curtailed with a slight setback candidates should realise that different
or during economic downturn. The cost of management skills are required for different
the financing will determine the margin for strategic choices. For example, a strategic
profits. If the cost of financing is low, there plan to grow by acquisition would require
will be higher margin for safety. For financing a very different management skill set than
availability and cost, candidates should a plan to grow organically. There are three
be aware that financing is always readily steps to this analysis:
available and cheap when it is not needed; First, does the existing management team
but always unavailable or expensive when it have the experience and foresight to see all
is required. The repayment capacity of each the viable strategic alternatives? The scope of
strategic choice would also interact with the this question relates to the first half of the P3
financing, and the repayment profile should syllabus on performing external and internal
be consistent with the expect cash flows of analysis, and determining alternatives that
each strategic choice. Candidates should are available.
also consider the differing level of repayment Second, does the existing management
commitments and their consequences when team have the knowledge and the ability to
breached. For example, bankruptcy cost must select the most viable strategic alternative?
be included when debt financing is used to This part relates mostly to this particular relate more to the second half of the P3
fully account for the risk embedded within article in that a comprehensive evaluation syllabus where more detailed implementation
this financing alternative. must be performed on each alternative and issues are studied. Candidates should be
the optimal choice selected. sensitive to potential agency problem as
Third, does the existing management well. The strategic choices proposed by
Machinery. For each strategic choice, the team have the experience and skills to top management would inevitably include
candidates have to determine if the company implement the selected strategy? This would themselves as the main characters;
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management never plan themselves out of available for each strategic choice. This is a or services, the competitive landscape,
a job. Candidates should consider whether customer or downstream focused evaluation. and other customer and market related
there are agency issues limited the choice set The main input comes from external information. Another aspect of markets
or the selection process. analysis consisting of PESTEL and Porter’s is whether the company has become a
Five Forces. The output of the evaluation competitor to its customers. An example of
are expected market size and its growth, this can be found in the greenTech case in
Markets. This is an evaluation of the markets customers’ openness to the new products the June 2009 paper in which one of the
Learning Centre News Update
PAGE 20 Spring 2010

strategic alternatives would put greenTech financial return of the strategic choices have knowledge on a wide topic range, and
into direct competition with its customers can be calculated using various financial be able to focus on the relevant factors. The
who are more experienced and better measurements like net present value (NPV), Johnson and Scholes Suitability, Feasibility,
equipped. internal rate of return (IRR), cost benefit and Acceptability model provides candidates
analysis, economic value added (EVA), and with a logical and comprehensive approach
shareholder value analysis (SVA). The risk of to manage this type of strategic choice
Materials. While markets focus on the the choices can be evaluated using sensitivity questions. 
customers, materials focus on the suppliers. and probability analysis, proforma financials
The supply of vital input must be assured and ratios, to the more advanced value at
1
for the success of each strategic choice. risk (VaR) analysis. Within the context of In addition to the Johnson and Scholes
Other considerations for materials would be P3, it is unlikely that adequate information framework, there are other approaches that
the implications of the relationships with will be available to prepare detailed financial candidates can use. For example, there is a
strategic selection method by Lynch using
suppliers, potential backward integration, and analysis on return and risk; however, many
the criteria of consistency, suitability, validity,
the risk of forward integration by suppliers. valuable marks can still be obtained by
feasibility, business risk, and attractiveness to
alerting the company to the financial aspects stakeholders. Another strategic selection tool
of the strategic choices. by Thompson uses appropriateness, feasibility,
Make-up. The make-up aspect considers two and desirability as selection criteria.
major areas, the organisation structure and
the culture of the company. The organisation Stakeholder aspect. New strategic direction 2
Other internal analytical models include the 7S
structure of the company must be consistent would encompass changes which might model, value chain analysis, product life cycle,
with the strategic choice. If the strategy is to be discomforting for some stakeholders. BCG matrix, resource based analysis, business
become a decentralised global company, the The stakeholder aspect of the acceptability attractiveness matrix, core competency agenda
organisation structure must evolve as well if analysis evaluates how each strategic choice matrix, and of course SWOT analysis.
this strategy were to succeed. The culture of will affect the stakeholders and their likely
the company is also very important because reactions. The stakeholder aspect is quite
any change to existing “ways of doing things qualitative but important because any new Thomas Wu
around here” would be resisted. In the strategy selected can only succeed if there programme director
National Museum case from the December is stakeholder support. For example, in the Kaplan Financial
2008 paper, all changes were put on hold ONA case in the December 2007 paper,
because the resisting forces due to cultural one of the major factors inhibiting ONA’s
reasons were too great to overcome. In these becoming a budget airline is the powerful
situations, stakeholder analysis should be unionised employees of the company. For
performed to determine the appropriate stakeholder analysis, the Mendelow power
responses. interest matrix can be used to determine the
To summarise, feasibility analysis likely stakeholder reaction and the approach
evaluates each strategic choice within the to manage any adverse stakeholder actions.
context of the resources available within the During the analysis, be aware of potential
company. movements of stakeholder positioning within
the Mendelow power interest matrix as
Acceptability they react to the new strategy. For example,
Acceptability focuses on two other employees having high interest but low power
aspects of the strategic choices: the financial might decide to organise themselves into
aspect and the stakeholder aspect. The a union in order to influence management
financial aspect focuses on the return to risk decisions. Once unionised, employees
profile of each alternative. The stakeholder become “Key Player” with higher power and
aspect focuses on the interaction between this group can hinder the implementation of
the strategic choices and the stakeholders’ some strategies.
reaction to these choices.
Summary
Strategic choice questions are relatively
Financial aspect. The financial aspect covers common. To handle this type of questions
the expected return and the risk associated well, candidates need to analyse the external
with each strategic choice. The potential and internal environments of the company,