Evaluating and Selecting Strategies

Chapter 9 (Part 2)

Learning Outcomes
Understand financial tools used to evaluate strategic options Application of evaluating and selecting strategic options

In Support of Evaluation Criteria: Financial Tools

Cash-flow forecasting Investment appraisal

Cash-flow forecasting
The organization forecasts (predicts) the expected income from the strategic option Example 1: Lets assume you are going to purchase a machine to manufacture products to sell to customers

The

cost is $100,000, and the value of the machine after 5 years is $10,0000

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 Adjustments

$1,023

$10,461

$19,531

$21,142

Add Back Depreciation

$14,290

$24,490

$17,490

$12,490

$ 8,930

Asset Purchase Salvage Value Net Cash Flow

$100,000 ($100,000) $18,059 $25,513 $27,951 $32,021

$10,000 $40,072

Investment Appraisal

Payback period how long it takes to make a profit on the investment

A

shorter payback period is more attractive than a longer one

Discounted Cash Flow Analysis

In Support of Evaluation Criteria: Other Tools

Cost/benefit analysis comparing the costs of the strategic option (including financial and opportunity costs), with the benefits (financial and intangible benefits)

Starbucks Strategy: Rapid Growth

Starbucks intends to open at least 10,000 new stores over the next four years and double its size within five years The chain had 13,168 stores at the end of 2006. Starbucks intends to have locations in Brazil, Russia, India and Egypt by the end of 2007 Strategies used here are market penetration and market development

Problem at Starbucks

Brand is becoming watered down The sameness of the stores are hurting the coffee shop feel Same store sales are slowing, growing by only 7% in fiscal 2006, compared to 8% in 2005 and 10% in 2004 Starbucks faces increased competition from Dunkin Donuts and McDonalds, which introduced premium coffee (Consumer Reports rates McDonalds premium coffee ahead of Starbucks, saying it tastes better and costs less)

Starbucks 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.

Questions for Discussion

Identify some strategic growth options for Starbucks Evaluate the options based on the evaluation criteria and a cost/benefit analysis Make a recommendation based on your evaluation