Validation of Strategic Alternatives Using the Economic Screen Alignment with Market Demand

Finding opportunities in a state of continual economic evolution requires vigilance of emerging trends and structural changes in markets. Managers need to understand the competitive forces at work that will shape the future and the linkages to market position. Validation of new ideas requires a deeper understanding of the financial implications of strategy in the short and long run. These insights are gleaned from intrinsic value analysis (Chapter 11).

If Strategic Alternatives are not aligned with market demand, the result can be the destruction of value. Efficiency-driven alternatives such as reengineering can destroy value if the end result is an organization that cannot accommodate new demand. Many reengineering efforts are shortsighted and do not take into account increases in future demand. Assume an order entry operation is reengineered and the capacity of the operation is cut from 10,000 orders per day to 8,000 orders per day, the profit per unit is $2,000, and the implementation time frame is six months. If demand goes back up in six months to 10,000 orders, then the orders opportunity cost would be:

• The inability to process 2,000 orders

• The cost to restaff the operation

• The cost of implementation of the reengineering

On the other hand, if market demand is declining, it may be irrational to introduce innovative new business models, as the market will not support them.