Kim Warren on Strategy
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Strategy Dynamics Briefing 65: Evaluating strategic opportunities
We have previously laid out a rigorous, logical description of an organization as a system of tangible resources that enable pursuit of its purpose by supporting each others’ development. The strategic architecture is, if you like, “the machine” designed for that purpose, so this question is effectively whether it is possible for that machine to exist at all. For that to be true, its resources must be capable of generating sufficient cash flow to fuel their own development, as well as delivering cash-flow or whatever other output is desired. Two inter-related problems could cause this requirement to be missed:
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Sensitivity analysis for new business opportunities
It is common practice when evaluating a new business opportunity to include a sensitivity analysis. This is useful whether the opportunity comes from an entrepreneur seeking funding for a new venture, or a corporate executive seeking approval to develop a new line of business. Typically, such a business case will justify the estimated potential market and likely sales, lay out the resources and costs needed to develop the opportunity, and show a “central forecast” for the expected profit outcomes. It will also include some analysis of the sensitivity of this forecast to uncertainties in the underlying assumptions, e.g. what if sales turn out to be +/ 20 % vs. the central estimate, or costs required are 10% higher or lower than expected. Such sensitivities are easy to test with the spreadsheet models on which business cases are usually evaluated.
Interdependence in the strategic architecture suggests that such simplistic sensitivities can be badly inadequate – the impact on performance of an error in estimating one resource in the system can be multiplied substantially by interactions with other resources. Sensitivity analysis should therefore be explicit both about the assumptions regarding underlying resources and about the interdependence between them.
This briefing summarises material from chapter 8 of Strategic Management Dynamics, pages 518-521.
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- there could be too few potential customers to generate adequate cash flows, and/or
- it could be too costly, or require too many supply-side resources to win and sustain those customers.


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