Evaluating and Selecting Strategies 2

8/3/2019 Evaluating and Selecting Strategies 2

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Evaluating and SelectingEvaluating and Selecting

Strategies 2Strategies 2

Prof. Rushen Chahal


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Learning OutcomesLearning Outcomes

y Understand financial tools used to

evaluate strategic options

y Application of evaluating and selecting

strategic options


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In Support of Evaluation Criteria:In Support of Evaluation Criteria:

Financial ToolsFinancial Tools

y Cash-flow forecasting

y Investment appraisal


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CashCash--flow forecastingflow forecasting

y The organization forecasts (predicts) theexpected income from the strategicoption

y Example 1: Lets assume you are going topurchase a machine to manufactureproducts to sell to customers

The cost is $100,000, and the value of the

machine after 5 years is $10,0000


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Current Year 1 Year 2 Year 3 Year 4 Year 5

Net Sales $80,000 $96,600 $116,424 $141,453 $169,653

Variable Costs $48,000 $57,960 $69,854 $84,872 $101,792

Fixed Costs $12,000 $12,600 $13,230 $13,892 $14,586

Depreciation $14,290 $24,490 $17,490 $12,490 $ 8,930

Gain/Loss - Equip. Sale ($12,310)

Pre-tax Income $ 5,710 $ 1,550 $15,850 $29,591 $32,034

Tax Expense $ 1,941 $527 $5,389 $10,060 $10,892

Net Income $3,769 $1,023 $10,461 $19,531 $21,142

Adjustments

Add Back Depreciation $14,290 $24,490 $17,490 $12,490 $ 8,930

Asset Purchase Salvage Value $100,000 $10,000

Net Cash Flow ($100,000) $18,059 $25,513 $27,951 $32,021 $40,072


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Investment AppraisalInvestment Appraisal

y Payback period how long it takes to

make a profit on the investment

A shorter payback period is more attractive

than a longer one

y Discounted Cash Flow Analysis


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In Support of Evaluation Criteria:In Support of Evaluation Criteria:

Other ToolsOther Toolsy Cost/benefit analysis comparing the

costs of the strategic option (including

financial and opportunity costs), with

the benefits (financial and intangiblebenefits)


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Starbucks Strategy: Rapid GrowthStarbucks Strategy: Rapid Growth

y Starbucks intends to open at least 10,000 new

stores over the next fouryears and double its

size within five years

y The chain had 13,168 stores at the end of 2006.y Starbucks intends to have locations in Brazil,

Russia, India and Egypt by the end of 2007

y Strategies used here are market penetration

and market development


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Problem at StarbucksProblem at Starbucks

y Brand is becoming watered down

y The sameness of the stores are hurting the coffeeshop feel

y Same store sales are slowing, growing by only 7% in

fiscal 2006, compared to 8% in 2005 and 10% in 2004y Starbucks faces increased competition from DunkinDonuts and McDonalds, which introduced premiumcoffee (Consumer Reports rates McDonalds premiumcoffee ahead of Starbucks, saying it tastes better and

costs less)


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Starbucks Mission StatementStarbucks Mission Statement

The following six guiding principles will help us measure the

appropriateness of our decisions:

Provide a great work environment and treat each other with respect and dignity.

Embrace diversity as an essential component in the way we do business.

Apply the highest standards of excellence to the purchasing, roasting and fresh

delivery of our coffee.

Develop enthusiastically satisfied customers all of the time.

Contribute positively to our communities and our environment.

Recognize that profitability is essential to our future success.


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Questions for DiscussionQuestions for Discussion

y Identify some strategic growth options for

Starbucks

y Evaluate the options based on the

evaluation criteria and a cost/benefit

analysis

y Make a recommendation based on your

evaluation

Documents

Evaluating and Selecting Strategies 2