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A Framework for Strategic

Analysis
D. R. Ziemer and P. D. Maycock

Strategic Analysis Branch,


Texas instruments Incorporated,
Dallas, Texas

It may well be that strategic planning Analysis, Risk Analysis, Operational


0. R. Ziemer and P. D. Maycock will always remain somewhat of a ‘develop- Situation, Admissible Strategies
have been involved with the de- as-one-goes’ type of discipline. Even so, one III. SOME METHODOLOGY-WITH
velopment and use of strategic needs some sort of overall frame of refer- ILLUSTRATIONS
analysis techniques at Texas ln- ence if desired goals are to be achieved.
struments for nearly a decade. Mr. A. Requirements Analysis
The authors have become convinced
Ziemer is manager of the Strategic 1. Partitioning
that good strategic plans evolve through
Analysis branch and Mr. Ma ycock is 2. Statement of Premises
iteratively considering many alternatives.
a Senior Business Analyst in the 3. Relevance Analysis
branch. The activities of the branch, Basic to any business strategy is the 4. Environmental Factors
for the most part, support Corporate analysis that precedes it. A thorough
Development. The framework for B. Benefit/Cost Analysis
strategic analysis should seek to answer
strategic analysis is an attempt to 1. Solution Approaches
three basic questions.
summarize the entire range of 2. Specific Product/Service Assess-
0 What market? ment
activities involved in determining
l What product/service? 3. Market Size, Market Share and
alternatives for the strategic alloca-
tion of resources. The methodology l What return? Product Price
described can be viewed as an Implied in each question is the ‘why’
C. Risk Analysis
iterative analysis that produces alter- question. It is not sufficient to pick a
1. Funds Flow Modelling
native strategy candidates. The market, for example, and not give visi-
analysis techniques discussed are 2. Internal Rate of Return
bility to why the selection is a good one.
quite straightforward and easy to 3. Upside/Downside Risk Analysis
Before any of these questions can be
implement. answered, a thorough analysis must be D. Selecting Admissible Strategies.
done to determine what are the alterna-
tives. It is important that the decision DEFINITIONS’

T HE IMPORTANCE WHICH MODERN maker be given visibility of not only what The relationships basic to the framework
management places on strategic plan- has been considered in the analysis, but are shown in Figure 1. We view the evolu-
ning is obvious to anyone who has noted also some of what has been left unexplored. tion of admissible strategies as the inter-
the explosive growth of literature in the A good strategic analysis clearly sets section of sets of relationships that have
field.The diversity of this literature,though, forth the key alternatives to be considered been iteratively interacted with another
points up the fact that strategic planning by the decision maker. The purpose of this one to obtain the best balance among
is a many-faceted, complex subject. The report is to sketch a framework for Needs, Resources and the Environment. To
literature leaves the impression that strat- strategic analysis that will give the analyst facilitate the understanding of the frame-
egic planning is far from a well defined a basis for determining the key alterna- work and its implications for strategic
body of knowledge. tives. analysis, we begin with some definitions.
We believe that plans become strategic In the next section we define the key Needs: Continuing problems or latent
when they are the basis for decisions to concepts in our framework for strategic desires. The totality of needs is the
commit resources over a long period of analysis. We show that each concept is, in potentially available market.
time. ‘Long’ in this context means com- essence, a set of relationships. The key Resources: The totality of the where-
mensurate with the life cycle of the pro- alternatives sought are found by searching withal (ours and the competition’s)
ducts/services involved. We have concluded the intersection of these sets of relation- allocable to finding solutions to needs.
that any lower level planning is tactical in ships. The last section of this paper illus- Resources consist of energy, materials,
that it involves a set of milestones to ac- trates the methodology. information, capital and people.
complish goals for which resources were
allocated. Conversely, any higher level I. INTRODUCTION Environment: Factors and relation-
planning effort is basically at the policy II. DEFINITIONS ships beyond one’s control that provide
level since it considers objectives of the Needs, Resources, Environment, Re- both opportunities and constraints
organization. quirement Analysis, Benefit/Cost for satisfying needs.
c

6 LONG RANGE PLANNING


value of the expected return should
be compared to the estimated present
---
Y’ value of the resources to be expended.
Such an analysis is called an internal
Admissible Strategies rate of return. The alternative imple-
mentation possibilities can be rank
ordered relative to their internal rate
of return-all normalized to present
values. A refined risk analysis com-
pares the upside gain possibility for
each proposed implementation to its
downside risk.
Operational Situation: The set of
factors and interrelationships consid-
ered in making decisions concerning
needs, resources, and the environment.
As Figure 1 implies, our thinking
conceives of strategic analysis as a
trade-off analysis involving the factors
---2-_ and inter-relationships identified from
-- OPERATlONA~ATlON a requirements analysis, a benefit/
cost analysis, and a risk analysis.*
Figure 1. Strategic Analysis. Admissible Strategies: Those strategies
that (1) identify feasible requirements
Requirements Analysis: The oppor- BenejitlCost Analysis: For each pro- based on desirable opportunities from
tunity to satisfy neeeds because of a posed solution satisfying some need, unfulfilled needs allowed by the en-
change in constraints in the envi- alternative approaches implementing vironment; (2) offer suitable problem
ronment. Requirements may arise the solution should be identified and solutions because of desirable bene-
because of changes in society, tech- evaluated. For each approach the fits with practicable costs; and (3) can
nology, economy, and/or political benefits to the user must be compared be implemented with acceptable risks.
climate. This entire analysis is basical- to the cost to the user. Specific
ly one of evaluating long-standing factors deemed to be important in *More precisely, we view strategic analysis as
problems or latent desires to see if the documenting significant advantages/ the intersection of sets of relationships where the
time for their solution has arrived. The cost reductions to the user are pre- Operational Situation is the universal set.
analysis usually begins with the state- pared to evaluate each approach; then Operational SituationzNeeds U Resources U
the approaches are rank ordered. Environment
ment of premises and the expression
Admissible StrategiesERequirements Analysis
of relationships among important Risk-Analysis: For every new solution D Benefit/Cost Analysis D Risk Analysis where :
factors which are later combined to offered to a user, there must be a Requirements AnalysiszNeeds D Environment
form scenarios. The analysis is com- supplier who assumes the risk of pro- Benefit/Cost Analysis=Needs D Resources
pleted when the identified needs have viding the solution. The amount of Risk AnalysisrResources n Environment
The ultimate in problem solution obtains when
been rank-ordered relative to the risk should be estimated. Since the Operational SituationEAdmissible Strategies,
intensity for need fulfilment in the risk usually stretches over an extended that is Needs U Resources U Environment=
environment. period of time, the estimated present Needs D Resources D Environment.

‘II . . .
Identified Opportunities I

C.. . c.. .

Proposed
Solutions IA

Approach ,IA1
I’,, IA2’
Implementations

Figure 2. The Protiferation of Alternatives.

JUNE, 1973 7
Figure 2 indicates the immensity of alternatives? are, then those performing This last requirement is the systems
thoroughstrategic analysis. Seldom do time the analysis-by modern standards-have analysis extension of the mathematical
and resources permit a complete analysis failed to complete their assignment. The concept of partitioning. It is extremely
leading to fully documented admissible best method we have found to ensure that a important. As one moves further into the
strategies. In fact, Figure 2 illustrates strategic study has completeness is to future, functional considerations become
the immense amount of information begin each analysis with a partition of its more important because they require less
the continually successful entrepreneur domain. specificity. Functional descriptions of en-
processes - subconsciously - when mak- In systems analysis usage partitioning is tities tell what they do; non-functional
ing strategic decisions. (The modifier an enlargement of the simple mathematical descriptions of entities merely tell how the
‘continually successful’ is added to remove concept of looking at the whole in terms of entities are presently implemented. Func-
from consideration the ‘one-in-a-thousand its parts or elements. To form a partition tional descriptions are verb oriented; non-
lucky speculation that results in spectacu- one should first be sure that all alternatives functional descriptions are noun oriented.
lar success and implies insight the specu- have a possibility of surfacing during the The requirement to consider all alterna-
lator probably did not have.) study. When all the generic categories tives may seem an impossible task. The
have been set forth, the partition has an secret to a solution lies in the third part of
exhaustive set of elements. Second, each our strategic definition of a partition-
SOME METHODOLOGY- WITH generic category should be distinctly differ- functional descriptions. This point will
ILLUSTRATlONS ent from the others. The main reason for become clearer with an illustration. To be
The intent of Figure 1, together with the this requirement is to remove the likelihood convincing the illustration should involve
accompanying definitions, is to present a of inefficient, redundant analysis. When a subject matter that has a large domain.
heuristic framework for what we believe the elements represent completely different Toward this end consider the consumer
constitutes comprehensive strategic analy- categories, the partition has a mutually market-an enormous entity!
sis. In the paragraphs to follow we discuss exclusive set of elements. Third, each gener-
some of the methodology available for per- To begin, note that the focal point for all
iccategoryshould bedescribed functionally.
forming the three cornerstone analyses- consumer expenditures is the household.
requirements, benefit/cost, and risk. Since Certainly all consumer expenditures are
methodology development has become SO
tThe word alternative(s) is troublesome. Strictly not restricted to some residential location,
speaking, it means offering two choices, but
extensive, we will make extensive use of but the household is the point of resource
modern usage has widened its meaning to in-
summary tables and figures. clude two or more choices. It is the more-than-
allocation decisions concerning consumer
two connotation that is used in this paper. expenditures.

Requirements Analysis
A requirements analysis, more so than
most types of analysis, must be done in an
iterative fashion. The following tasks 800
must be accomplished: F
700
l Determine what is already known 600
about the subject matter. Summarize
through the use of premises. 500
0 Organize the knowledge of the sub-
ject matter in some communicable 400
form. Basic to the process is the artful
use of partitioning.
l Make judgemental commitments con-
cerning which opportunities will be
studied in most detail.
l Write several scenarios describing the
probable environment for the most
attractive opportunities when and if
the opportunities are addressed with
products/services.

(1) Partitioning
One of the most important considera-
tions in undertaking any analysis is the
striving for completeness. Completeness
is realized when a subject matter is con-
sidered from an overall point of view.
Stated another way, completeness results
when the key relationships one must con-
sider are put into perspective. At the very
heart of modern strategic planning is the
trade-off among alternatives. If a strategic
analysis of some operational situation does
not show the decision maker what the Figure 3. Partition of Consumer Spending.

8 LONG RANGE PLANNING


In the United States consumer spending the necessary steps to theoretically make Table 3. Dispose Function.
has been traditionally partitioned into it possible to consider every alternative.
three distinct categories : durables, non- Disposition of People
durables, and services.* Figure 3 shows Table 1. Acquire Function. l Nursing Geriatric Care Centres
some historical data for consumer expend- l Legal Services/Estates
itures for the recent past with projections Acquisition of Land/Shelter l Final Remains
to 1990. Note that by 1990 consumer l Real Estate Services Disposition of Goods
l Construction Services l Salvage Recycle
expenditures for services will be of l Legal Services
the same magnitude as the 1J.S. GNP in l Waste Disposal
Acquisition of Goods l Used Goods Merchandising
the early 1970’s.
l Retailing Services Disposition of Land/Shelter
A significant portion of this increase, l Leasing Services
though, will be due to inflation. Even so, l Real Estate
Acquisition of Information l Redevelopment
the enormity of the expenditure is breath- l Land Bank
l Management
taking. Figure 4 shows that expenditures l Instruction Disposition of Information
for services are a major cause for the rise in l Entertainment l (No items defined in this study)
the Consumer Price Index over the past l Personal Services
couple of decades. Acquisition of People
To make the illustration manageable in l Prenatal Care (2) Statement of Premises
the space available, assume that the study l Birth Control
0 Adoption Agency
Consider the Acquire function for con-
is constrained to consider only consumer
sumer services in its enlarged format
services-the fastest growing segment of
shown in Table 1. Specifically, consider the
consumer expenditures. One possible par- Table 2. Maintain Function. consumer service of supplying ‘Home
tition of services sold to the consuming
Instruction’ under the more general cate-
household is shown in Figure 5.t
Maintenance of Personnel gory, ‘Acquisition of Information’. In the
Does this partition meet the conditions l Personal Care Services interest of conserving space, we will res-
set forth above for a strategic partition? l Recreation Services trict our discussion of a requirements
First, it is intuitively exhaustive since we l Medical Health Services
l Food Services analysis to Home Instruction Services.
cannot think of an expenditure that re-
l Legal/Finance/Insurance Table 4 lists a set of disciplines in which
quires another category.: (We have in-
instruction in the home may be desired.
cluded such expenditures as entrance fees Maintenance of Goods
at amusement centres, etc., as expenditures l Equipment Repair Table 4. Home Instruction Disciplines.
l Auto Repair
for maintenance of household personnel.)
Second, the elements of the partition are Maintenance of Land/Shelter
different from one another in content. l Property Upkeep Repair
l Protection Services
Third, the elements are functionally de-
finable. We ensured that this would be the Maintenance of Information
case by giving the elements of the partition l Vital Records Management
l Libraries
verb orientation.
Although we have met the basic re-
quirements for obtaining a partition, the
objection may be raised that this partition
is too general to be really useful. To over-
come this objection we need to subdivide
the partition in more detail. 120
Table 1 builds up the Acquire function, t - Durables /
Table 2 the Maintain function, and Table ----Non-Durables
3 the Dispose function. The important x IIO-
point to be made here is that since we --- All Items
started with an exhaustive partition, and if
we make each sub-partition exhaustive to --Services
some level of workability, we have taken

*It is important to note at the outset that one


cannot always use partitions of first choice. It
may be impossible or at least very difficult to
locate a data base to document the desired par-
tition. When this situation occurs, a compromise
must be made.
tit also should be noted that, in essence, an in-
finite number of partitions can be constructed to
describe virtually any subject matter.
$lf we were not sure that our partition was ex-
haustive, we could include an ‘other’ category I / I
and seek to further refine it to add additional 1955 1960 1965 I!
elements to the partition. The ‘other’ category
is not merely a logical guise to obtain complete-
ness, but rather an incentive to search for com-
pleteness. Figure 4. Consumer Price Indices (1997=199).

JUNE, 1973 9
Table 5. Problems in Acquisition of
Home Instruction.

Class/work schedule conflicts


Classes too expensive
Texts too expensive
Extensive note-taking required
Acquire r) Maintain I) Dispose No teacher or place for subject
Adult classes too far from home
Classes too large for student/teacher
cl . interaction
Not available at age/training level desired
All or nothing-no summary
Mismatch between student comprehension
and teaching technique
Figure 5. Analysis of Services to the Household
Not timely

As discussed above, a requirements ing of problems known to exist with the


analysis usually starts with a set of pre- current implementations of the services (or ject matter, we use a relevance analysis. A
mises. Premises are usually simple de- lack of services) being analysed. Table 5 relevance analysis is a convenient method-
clarative sentences that seek to set forth lists 11 problems associated with the ac- ology for obtaining relative size scalings
what is known about a subject. Premises quisition of home instruction. To obtain a of entities for which absolute scales are
are a straightforward way to aid com- measure of the intensity of need, we basically non-existent. Furthermore, the
munication between analysts and decision evaluate how troublesome each problem methodology lends itself to rank order-
maker. They also serve another purpose. is judged to be relative to each discipline. ing the scaled results when the analysis is
For example, sometimes during the be- Since absolute measures are not possible complete.
ginning phases of a study, each individual because of the subjective nature of the sub- Figure 6 is an illustration of the initial
member of the team proceeds with his
phase of the analysis under the mis-
apprehension that the assumptions he has
made are equally acceptable to the other
Acquisition of Information-
members of the team. Often the individual cn”
Home Instruction
himself has not objectively reviewed the u) 0
assumptions used in his own analysis. Only t; 5
after some severe communication prob- 0= None 2 3
1 = Small 3 z E
lems have arisen, does it occur to the team
2 = Medium 5 1 P d
members that the assumptions used by one 3 E .
4= Large Types L .!! 3
member of the team may not be accep- E % ‘Ei =
2
e 4 ‘i; 5 .; 50
table to other members. Much of the 9 P 1
wasted effort that invariably ensues from Problems ; u;:,s,
3 a ;
0
such instances could be avoided if an ex-
plicit set of premises had been set forth Class/work schedule conflicts S N S L L L 14
1 0 1 4 4 4
by each team member before he began his
analysis. Classes too expensive N ssM~M8
0 1 1 2 2 2
After a fairly extensive list of premises
has been set forth, an effort should be Texts too expensive S S N L L M 14
made to determine their verity and sign@ 1 1 2 4 4 2
cMce to the subject matter being analysed. Extensive note-taking required N M M M M s 9
We have found that a panel of experts 0 2 2 2 2 1
structured to evaluate the significance and No teacher or place for subject N S L M M S 10
verity of each premise can be very useful on 0 1 4 2 2 1
most occasions. The panel of experts does
Adult classes too far from home N N M L L L 14
not have to be confined to one’s own 0 0 2 4 4 4
organization but can be broadly based.
The Delphi’ methodology can be very Classes too large for N L M M M S 11
student/teacher interaction 0 4 2 2 2 1
helpful in obtaining the opinion of experts
over large geographical areas. The set of Not available at age/training S M M L L s 14
premises considered by experts becomes level desired 1 2 2 4 4 1

the basis for determining the intensity of All or nothing-no summary M M L M L S 15


need. In our illustration the ‘need’ is that 2 2 4 2 4 1
associated with home instruction from a Mismatch between student comprehension M L L L M S 17
consumer services point of view. and teaching technique 2 4 4 4 2 1
(3) Relevance Analysis Not timely M M M M S S 10
How does one go about measuring the 2 2 2 2 1 1
intensity of need? We have found no simple 9 19 26 32 31 19 136
Total
and unique answer to this question. An
evaluation of the intensity of need some-
times can be achieved by a relative weight- Figure 6. Relevance Analysis.

10 LONG RANGE PLANNING


phase of a relevance analysis. The cell
entriesare subjective estimatesof how severe
each problem is judged to be relative to G
Acquisition of information B
each discipline category. Convenient scale -Home Instruction v)
ranges are one-to-four, one-to-ten, etc. 3 7
However, in a number of instances we have x (P
N =g a f
found it better not to force a numerical 2
s =1 J E
scale on the ‘experts’ at all, especially M=2 2
a
:
t ;
when the ‘experts’ are not numerically L =4 Types Iz u 5
g E ‘5 1 f
inclined. Often in these cases we have r z
or e % Z
found it beneficial to use qualitative scale
Problems g 3 l j f i
z
values such as ‘none’, ‘small’, ‘medium’, or P v) : I-
‘large’. Numerical values can be supplied
Class/work schedule conflicts L S N S L L L 56
later by the analysts to obtain numerical 4 4 0 4 16 16 16
rankings. We have found that the quasi-
Class too expensive M N S S M M M 16
logarithmic scaling of ‘O’, ‘I’, ‘2’, ‘4’ is
2 0 2 2 4 4 4
quite useful and corresponds to the natural
logarithmic profile of the human senses. Texts too expensive M S S M L L M 28
2 2 2 4 8 8 4
In the relevance analysis of Figure 6 we
Extensive note-taking required M N M M M M S 18
have illustrated the scalings both in terms
2 0 4 4 4 4 2
of the qualitative scales ‘none’, ‘small’,
‘medium’, or ‘large’ and quantitative No teacher or place for subject M N S L M M S 20
scales ‘O’, ‘l’, ‘2’, or ‘4’. In actual practice 2 0 2 8 4 4 2
either qualitative or quantitative scales Adult classes too far from home L N N M L L L 56
would be used but not both. When the 4 0 0 8 16 16 16
qualitative scalings are used, the analyst Classes too large for M N L M M M S 22
must substitute some numerically equiva- student/teacher interaction 2 0 8 4 4 4 2
lent scalings before the row and column
Not available at age/training L S M M L L S 56
totals can be obtained. level desired 4 4 8 8 16 16 4
When each of the disciplines in the Home All or nothing- M M M L M L s 30
Instruction partition is scaled to the sig- no summary courses 2 4 4 8 4 8 2
nificance of the set of problems, the im-
Mismatch between student com- L M L L L M S 68
portance of the problems themselves must prehension and teaching technique 4 8 16 16 16 8 4
be considered. Clearly, all the problems
Not timely M M M M M S S 20
are not of equal significance to all pros-
2 4 4 4 4 2 2
pective users of home instruction services.
Some sort of ‘market survey’ is now in Total 26 50 70 96 90 58 390
order to determine a consensus. The
findings of the ‘experts’ may serve as the
Figure 7. Expert Opinion.
market survey. Their indication of the sig-
nificance of the premises from which the
set of problems was distilled often can be ciplines. In both instances the sums are sets selected for further consideration.
used in determining a set of weights. shown both weighted and unweighted to Specifically, we need to identify the oppor-
We assume that a consensus opinion of give visibility to the effect of the weights tunities and constraints that are implicit
the relative importance of the problems assigned. in the operational situation as we have
has been obtained and is as shown in defined it. There are basically two ways to
(4) Environmental Factors
Figure 7. The final rank ordering of the speculate about the factors in the environ-
Our discussion thus far has stressed the
disciplines is obtained by multiplying* ment that must be considered as a prelude
importance of stating premises at the out-
each cell scaling in each row-column to some strategic action.. One way is to
set of any problem analysis. We have also
intersection of Figure 6 with the assigned project historic trends into the future. The
stressed the importance of partitioning
weight shown in the first column of Figure other way is to postulate ‘alternative
the domain of the study to ensure that all
7. The sum across the bottom of Figure 7 futures’ and to determine what changes
alternatives will be considered-at least at
essentially ranks the segments of the would have to take place in the state of the
the generic level. The idea of a relevance
Home Instruction market as to the inten- environment and in the state of the re-
analysis was discussed to provide a
sity of needed instruction in each of the sources as we know them today and their
methodology for bringing into focus the
disciplines noted across the top of the postulated state at some specified future
solutions implicit in the premises. In
figure. The sums down the far right of the time period to make the ‘alternative
essence, a relevance analysis is one form of
figure indicate which problem areas are futures’ possible.
deductive analysis. It is a way of making
most severe when integrated over all dis- explicit that which is already implicit in Figure 8 is an attempt to summarize the
the premises and partition. task at hand and some of the methodolo-
Our analysis to this point must be suf- gies available to assist in determining the
*We are in effect describing a matrix multipli- ficient to supply background for the task factors of significance. The literature on
cation. However, the figure is not constructed to
of identifying factors in the environment these methodologies is extensive. Des-
make this point obvious. We have found it more
practical to construct relevance analyses with of the operational situation that can signi- cription of applicable methodologies noted
the format shown. ficantly affect those opportunity/solution in Figure 8 is referenced below.

JUNE, 1973 11
Lead Time
Dimension

increasing Functional Abstraction


INOWl-j THE YEAR 2000 1
C$k;~e;l Needs Analysis

Research Analysizbf Latent


Desires

Applicable
Methodologies

Data Compilation
*and Interpretation
Trend
l Extrapolation
. F;ye;on
. Delphi
Method
. Cross-Impact
Analysis . Scenario
Writing

Figure 8. Determining Significant Environmental Factors.

Data Compilation and Interpretation: element of the partition. The degree of the following main steps in this phase of a
Wide range of general techniques. understanding, of course, will steadily de- strategic analysis:
crease as we seek to go further out in time. l Convert the requirements into solu-
Trend Extrapolation: Extrapolation of
trends as used by Ralph Lenz, tion approaches;
Benefit/Cost Analysis
Wright-Patterson Air Force Base, 0 Identify specific products/services
From a requirements analysis an opera-
Schmidt and Smith at U.S. Naval which could implement the solutions :
tional situation can be described to the
Ship Systems Command and many
point of a ranked set of requirements. The l Determine the market size and mar-
others.
next major task is to develop a product ket share as a function of product
Citation Index: Do not know of plan for filling these requirements. We use price/volume.
specific reference. The technique is
one of monitoring articles describing
technology. A graph is kept of the
rate of occurrence of articles for dis-
lFunlcfionljFun2CfionJ
/Fun3ctionl
jfunqcfian)...
tinct (new) technologies. Often times a
breakout pattern indicating that a
technology is about to be exploited Solution No.1 - - - - Approach No.1
can be detected by noting a definite
upward break in rate trend.
Solution No.2 - - - - Approach No.2
Delphi Technique: op cit.
Cross-Zmpact Analysis: Cross-impact
Solution No.3 - - - _ Approach No.3
techniques in Selwyn Enzer, Tech-
nology Assessment, Futures, Vol. 4,
No. 1, p. 30 (March 1972). r/ i ~
-- Approach No.4
Solution No.4 - ---c-
Scenario Writing:
A good example . .
would be the classic scenarios by . .
-- .
Herman Kahn, The Year 2000. Solution No.5 - .
.
The end result of a good environmental .
/
study is a refinement of the elements in the Solution No.6 - .
original partition and a more sharply de- . . .
fined operational situation. With the com- . . .
. . .
pletion of an environmental study, we
should have a high level of understanding
of what the future could hold for each Figure 9. The Methodological Approach.

12 LONG RANGE PLANNING


( 1) Solution Approaches In Figure 10 we show the basic format Given a ranked set of approaches
To convert requirements into solution for carrying out this aspect of a benefit/ (products/services), the next step in the
approaches, it may be useful, again, to cost analysis. Down the left column of the analysis is to match our resources to the
begin by stating premises. The subject figure the problem statements transformed approaches and to identify specific pro-
matter of the premises proposed ap- into benefit functions are noted. Along the ducts/services to be offered.
proaches toward satisfying the oppor- top of the figure are proposed solutions
tunities identified in the requirements to the problems. A relevance analysis is (2) Specific Product/Service Assessment
analysis. then performed. The weights associated The analyst begins by assessing the
From the premise set, alternative solu- with the benefit/cost function are assumed specific products/services that have been
tion approaches are evolved. After several to be the same as those associated with proposed within his organization. He can
solutions have been formulated, the be- the problems from which they were taken. use product identification methods such as
ginning of a product partition will take The entries in the main body of the figure Synectics’ brainstorming, etc. or, again,
shape in the analyst’s mind. After some trial are different from those shown in Figure he can use the morphological approach.
and error, a meaningful partition usually 7. In Figure 10 we enter plus or minus In performing the home instruction study,
is obtained. One expedient approach scalings, depending upon whether we the products proposed might range from a
for obtaining a meaningful product judge the proposed solution to be better 2-way interactive video terminal to com-
partition is to transform each problem or worse than the solution that now plete wired cities. Here again, effort is made
into a benefit statement. This techni- exists in the marketplace. The sums along to obtain completeness with the obvious
que is illustrated in the example to follow. the bottom of the figure indicate the re- proliferation of alternatives shown in
An auxiliary methodology to stretch the lative rankings of the solution. Figure 2 occurring once more. Corporate
imagination to obtain alternative solutions
is Morphological Analysis.s This techni-
que was devised by Professor F. Zwicky,
an astronomer at California Institute of Acquisition of
ul YE
Technology, and is illustrated in Figure 9. Information-
Home : 3
The method consists of describing the
major functions a solution must contain Instruction
and then seeking a multitude of ways to N =O Types
satisfy each function. The functions are s =l
chosen so that an implementation of each M=2
will, when combined with the others, form L =4
a solution to the problem. Therefore,
taking all combinations of the specific
Benefits
implementations of each function results
in a multitude of alternative approaches Reduce work/class L L S M M L L M L S
toward implementation of a solution. schedule conflict 4 16 4 8 8 16 16 8 16 4
Table 6 lists some of the alternative ap- Cheaper classes M -M L -S -S -M -M -M -M -S
proaches for implementing the Home 2 -4 8 -2 -2 -4 -4 -4 -4 -2
Instruction Service. To facilitate analysis, Cheaper texts M -S N -M N -S M -S -S M
the approaches will be analysed with res- 2 -2 a -4 0 -2 4 -2 -2 4
pect to their ability to satisfy requirements.
Reduce note-taking M M -S S -S S L N M L
First, we must convert the requirements 2 4 -2 2 -2 2 8 0 4 8
into benefits for evaluating each of the
Provide teachers M S S M M L L L L N
proposed solutions relative to their suit- and/or space 2 2 2 4 4 8 8 8 8 0
ability. One simple way to obtain a bene-
fit/cost function is to invert the problem Adult classes L L L L L L L S M N
closer to home 4 16 16 16 16 16 16 4 8 0
statements, since the problem as originally
stated noted both improvements desired Improve student/ M -M -L -L -L M M N S N
and cost reductions needed. teacher interaction 2 -4 -8 -8 -8 4 4 0 2 0

Available at all age/ L N -M M M M M N M S


Table 6. Partition of Home Instruction training levels 4 0 -8 8 8 8 8 0 8 4
Service.
Provide summary M N S S S M M S S N
courses 2 0 2 2 2 4 4 2 2 0
l Cable Service Utility (TV Receive Only)
l Cable Service Utility (2-way Dialogue) Improve student/ L -M -M -M M M M S M N
teaching correlation 4 4 -8 -8 8 8 8 4 8 0
l Correspondence Courses
l Videotape with Grading Option More timely M -S -M -S S M M S M L
l Fax Newspaper 2 -2 -4 -2 2 4 4 2 4 8
. N.E.T. TV
l Rental Library of Suitable Cassettes
l ‘TAGER’*-like Networks at Shopping
Centres
l Teaching Machine Lease or Rental

*The Association for Graduate Educa- Total 30 22 2 16 36 64 76 22 54 26


tion and Research, a TV graduate edu-
cation network in North Texas
Figure 10. Costf Benefit Analysis.

JUNE, 1973 13
policy, though, would limit the range of In Figure 1 I(d) we see price directly tied ket penetration goals. If one can determine
proposed products. to experienced-determined costs. The mar- the experience factor for the product under
In this stage of strategic analysis the ket leader experiences real competition consideration, one can develop powerful
analyst is ready to make extensive use of only if he cannot deliver or his competitor IO-year sales and cost forecasts which are
the talents within his own organization as accepts great losses to gain experience. inputs to the financial model to be des-
well as the services of external consultants. Figures 11(e) and (f) show some actual cribed in the next section.
Our experience convinces us that teams are price/volume relationships for silicon tran- In our experience, most analysts fail in
often used too early-before strategic al- sistors and integrated circuits. The pricing their estimates of sales, not because they
ternatives have been developed. The early strategies were different. have not identified a need and a market,
use of high technology teams can result in a For a new product, the planner must but because they fail to consider competi-
product looking for a need rather than the postulate various experience curves, de- tion of similar products and competition
satisfying of a need based on requirements velop pricing policies and determine mar- of other approaches to fill the need.
analysis. After the products/services are
identified in detail. we can commence
analysis of the markets served.
.ii
(3) Market Size, Market Share, and
Product Price
5 300
Now we are ready for a Classical
5 C
Market Analysis. The product has been ‘Z 200 5 l-00
blocked out and the customer’s response 8 ‘; o-70
has been studied using such methods as 2 100 B o-50
u
questionnaires, market surveys, trial mar-
0
keting, etc. The competition’s market res- 0 40 80 120 160180
ponse is analysed with respect to product Accumulated Volume, Units
and price and, finally, a scenario is written Accumulated Volume, Units
showing the expected sales in units and unit
price for the particular products consi- (b)
dered.
One method used to develop long-term
price/volume scenarios is that of exper-
ience curves as recently described by the
Boston Consulting Group.5.a Figure 11
serves to illustrate the concept. The major
premise of experience curves is that costs
decrease with experience. Figure 11(a)
shows cost versus volume plotted on a
linear scale; Figure 11(b) shows the in-
formation plotted on a log-log scale. The
linear relationship of Figure 1l(a) plotted
on a log-log scale has a slope which is
characteristic of the ‘learning’ rate for a TotalAccumulated Volume TotalAccumulated Volume
product/service. For example, a 20 per
cent reduction in costs for each doubling
of total output is called an 80 per cent ex-
perience curve. An 80 per cent experience
curve is typical for many products. Figure
1l(b) notes the experience of three different
producers (A, B and C) of a product.
Producer C with four times the experience
of A has costs 64 per cent of those of A.
If C’s capacity to produce and market the
product has been correctly developed, C 2 O.lOl
100 1K 10K 1OOK 1M 1
will obtain market share and accelerate its Industry Total Accumulated Industry Total Accumulated
experience to the detriment of newcomers Volume(Thousands of Units) Volume (Millions of Units)
like A. Figures 11(c) and (d) show two
price/cost experience scenarios. In 11(c)
price was at a high level during phase (a),
price shake-out occurred during phase (b),
and price follows cost down in phase (c).
Figure 11. (a) Representation of Experience Relationships Graphically on a Linear
Under such a ‘price umbrella’, competitors Scale.
gain experience, start cutting price, pre- (b) Market Share and Costs for Three Competitors.
cipitate phase (b) to gain market share, (c) A Characteristic Pattern of Costs and Prices.
and the leader-not cutting prices soon (d) An Alternative Pattern of Costs and Pricer.
(e) Revenue Curve for Silicon Transistors during the Period from 1964 to 1968.
enough in phase (a)-loses market share (f) Price Curve for Integrated Circuits-Monthly Price Data, 1966-1966:
and often his market dominance. Annual Average Price Data, 1964-l 968.

14 LONG RANGE PLANNING


Typical penetration or market share long- modelling, (2) parametric internal rate of thrusts, we believe it should be a matter of
range forecasts are often estimated well return analysis, and (3) upside/downside corporate policy to utilize the most com-
beyond what actually happens. In order to risk analysis. plete analysis possible prior to decision
quantify total units to be sold, we have making.
studied several case histories of products. (I ) Funds Flow ModeNing
Experience has shown that the develop- (2) Internal Rate of Return
We attempt for every new product to estab- After the particular alternative has been
lish a product life profile.5 A typical work- ment of a IO-year funds flow model pro-
viding an operating statement and some modelled so that a funds flow for an ex-
sheet for this task is shown in Figure 12. extended period of time is established, we
The analyst must provide the amplitude balance sheet items as well as a funds flow
output, is valuabie to the planner as a begin to compare alternative solutions by
(a), the duration to maturation (b) in using the metric cash flow divided by
years, and the total product life (c) in discipline in considering the total business
and as a management communication capital resources discontinued to the
years. After the above market factors are present time. The typical expression of the
quantified for as long a time period as tool. For the alternatives developed in a
strategic study, financial models can be metric is :
possible, we can analyse the impact the
product will have on the corporation’s used to permit the parametric analysis of ;=“i CF (N) sv
financial resources. We call this kind of an internal rate of return presented below. +
N4-j (l+R)N (I+R)N~ -
analysis a Risk Analysis. Figure 13 is a sample output of a IO-year
funds flow model which permits detailed ;= Nr CAP (N) o
Risk Analysis internal rate of return analysis. After the -=
The benefit/cost analysis should provide model is operating, a sensitivity analysis is N=O (1 +RY
the decision maker sufficient insight to undertaken to test the basic premises used where
initiate a detailed risk analysis of the in the model. Forcing a model to close and CF(N) is cash flow in year N,
alternatives. Many strategic studies fail to to fit corporate policy has raised many CAP (N) is the capital expenditures
consider more than one way to enter the key strategic issues involving impact of required in year N,
marketplace and, therefore, do not expose capital required, depreciation alternatives, N,=is the last year considered,
strategic alternatives. Our approach di- tax factors, etc. One may question whether SV is the salvage value or sales value
vides the risk analysis of the alternatives the depth of analysis described above can at year NC.and
into three major activities: (1) funds flow be afforded. For analysis of major strategic R is the internal rate of return.

CONSUMER ENVIRONMENT
Mobility

PERIPHERAL
ENVIRONMENT

Administration

, immediate Environment

Investment Opportunitv/Costs Regulatory Affairs Taxation

INDUSTRIAL ENVIRONMENT POLITICAL ENVIRONMENT

Figure 12. The Product Life Cycle.

JUNE, 1973 15
Year 0 1 2 3 4 5 6 7 6 9 10 Total 15 Total

Sources of Funds (SOOOs)


Beginning Cash Balance 0 1 10 13 17 19 23 27 29 35 63
Loans 110 128 81 57 :; 17 19 17 0 0 0 466 0 466
Equity 55 :; 41 1:: 2:: 26: 32; 9 50: 0 0 234 0 234
Revenue 0 89 411 597 691 3254 1286 a409

Total 165 221 220 244 272 303 373 460 530 626 725 1349

Uses of Funds (SOOOs)


Capital Expenditure 151 99 58 59 60 69 111 115 118 124 1046 177 1837
Operating Expenses 13 96 127 145 166 185 265 295 347 393 2267 722 5146
Interest Payments 0 17 22 26 29 30 31 33 33 32 31 284 368
Income Taxes 0 0 : 0 0 0 2 25 54 :3’ 94 247 23: 1116
Loan RepaY 0 0 0 0 0 0 0 4 44 71 40 467

Total 164 212 207 230 255 285 350 434 501 592 686 1173

Ending Cash Balance 10 13 14 17 19 23 27 29 35 39 72


Excess : 0 0 0 0 0 0 0 0 0 0 0 103 103

Loans Outstanding 110 238 319 377 414 431 449 467 463 440 396 0
Total Loans Repaid 0 0 0 0 0 0 0 0 4 27 71 467

Internal Rate of Return for 10 years=9.64%; For 15 Years= 16.60%


Years to Payback for 10 years=N For 15 years=1 1

Figure 13. IO-Year Funds Flow Model.

In a typical study we calculate R as a the business over an extended period of critical point the fair market ‘sell the
function of the alternative approaches and time. Further insight into the critical business’ prices are estimated. Figure 15 is
as a function of key parameters. Figure 14 ‘first 2 years’ is often required. a graphical display of the total expenses
shows the sensitivity of the internal rate of (3) Upside/ Downside Risk Analysis (operating and capital) and the possible
return on investment for a particular al- Figure 15 is an attempt to present this egress points including total salvage value
ternative as a function of variables ‘A’ ‘transient’ analysis of start up risks of the as we begin the start-up of a new venture.
and ‘B’. business. Here the analvst must first write The analysis consists of
The risk analysis just described is es- a scenario which covers the evolution of a (a) Determining critical events in time
sentially a ‘steady-state’ analysis. The typical entry into the marketplace. Key as a new system is conceived and
analysis tends to highlight the calibre of events are quantified. Finally, at each installed. The events here are:
l Start programme Time=0
0 Event 1 12 months
l Event 2 18 months
l Event 3 24 months
0 Event 4 30 months
0 Operating business Ongoing.
(b) Determining total costs accrued at
the end of each event.
(cl Determining salvage value at the
end of each event.
We have found this event-based, upside/
downside risk analysis a valuable tool for
communicating ‘risk’ to management.
If each venture alternative has a funds
flow model, an IRROI analysis with
sensitivity analysis, and a display of upside/
downside risk, the decision maker can
make action decisions with a degree of
confidence not usually established.
(4) Selecting Admissible Strategies
We now come to the trade-off stage of
strategic analysis: the selection and com-
munication of Admissible Strategies. The
role of the analyst is to provide the deci-
sion maker with a framework with which
to select those strategic alternatives which
Figure 14. Sensitivity Analysis. are best for his company. Each company

LONG RANGE PLANNING


Table 7. Suggested Factors for Ranking
Alternative Strategies.

Resources Required
Capital
People/Skills
Facilities
0

Return on investment
IRROI
Operating Profit Levels
Earnings per Share

:
0

Market Factors
Market Share
Market Size
Growth Rate
Product Lifetime
0

Other Factors
Economic Environment
Technology Impact
International Situation

:
0
Figure 15. Upside/Downside Business Risk.


a set of resource allocations to REFERENCES
probably will establish its own approach . . .

to this step. We propose an iterative rele- which there is a long-term commitment.” (1) This report is an application of some of the
vance analysis involving the following Table 7 shows the factors that might be basic planning and control philosophy set
forth in a working paper by D. R. Ziemer and
key steps : considered. The task of the analyst is to E. L. Jones, Design for an Executive System
0 Obtain management concurrence on scale the factors for the alternatives. The (September 1967).
the basic premises of the entire task of the decision maker is to provide
the weights. (2) An Experimental Application of the Delphi
operational situation; Method to the Use of Experts, N. C. Dolkey

0 Present management with a summary The factors in Table 7 are meant only and 0. Helmer, Management Science, Vol. 9,
to be exemplary. The key requirement is to pp. 458-467 (1963).
review of the results of the require-
ments analysis, the benefit/cost analy- determine the factors that must be assessed (3) Fritz Zwicky. Discovery, Invention, Research
sis, and the risk analysis; to obtain management’s commitment to through the Morphological Approach. Mac-
specific strategicalternatives. The corporate millan, London (1969).
0 Present the most attractive alterna- objective and the business objective in (4) The creative problem solving method de-
tive strategies that evoived from the which the strategy is being developed will veloped by George M. Prince and offered to
strategic analysis; be key sources of factors and weights industry by Synectics Inc. See George M.
Prince, The Practice of Creativity. Harper &
0 Provide management a framework for to be considered. Row (1970).
ranking these alternatives; When the trade-off analysis has gone (5) Boston Consulting Group, Perspectives on
through several iterations and manage- Experience (1968).
0 Write the strategy.
ment has selected an admissible strategy(s), (6) Conley, Experience Curves as a Planning
This section will summarize some of the the analyst may have another vital role to Tool, /.EfE Spectrum, June 1970.
factors one might consider in selecting play: the preparation of the detailed
(7) Chester R. Wasson. Product Management:
strategic alternatives. At this point the strategy. If the above tasks have been Product Life Cycles and Competitive Mar-
reader should have in mind our concept performed well, this task becomes most keting Strategy. Challenge Books, St.
of a strategic plan. rewarding. n Charles, Illinois (1971).

JUNE, 1973 17

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