For the exclusive use of M. Kim, 2022. W20932 VIRAL NATION: THE COVID-19 PANDEMIC AND THE ENTREPRENEURIAL VENTURE SALE DECISION Vania Sakelaris wrote this case under the supervision of Professor Simon C. Parker solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality. This publication may not be transmitted, photocopied, digitized, or otherwise reproduced in any form or by any means without the permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Business School, Western University, London, Ontario, Canada, N6G 0N1; (t) 519.661.3208; (e) cases@ivey.ca; www.iveycases.com. Our goal is to publish materials of the highest quality; submit any errata to publishcases@ivey.ca. i1v2e5y5pubs Copyright © 2020, Ivey Business School Foundation Version: 2020-11-26 Joe Gagliese, a 28-year-old entrepreneur from Caledon, Ontario, had built the US$100 million 1 company Viral Nation from scratch in 2014 with his business partner, Mathew Micheli. Now, in March 2020, he faced the decision of a lifetime: to sell or not to sell? The company, a great Canadian success story, had rapidly grown to become the largest social media influencer agency in North America and one of the largest globally. As the world was being affected by the global COVID-19 pandemic, Viral Nation was in the midst of delicate acquisition negotiations with three potential buyers. LEADER PROFILE As the son of an entrepreneur, Gagliese had entrepreneurship in his blood. As a teenager, he had started numerous innovative entrepreneurial ventures: selling paintballs, DVDs (digital versatile discs), and LED (light-emitting diode) dog collars, and launching an e-commerce cosmetics company. By the time he started university, Gagliese was making CA$20,000–$30,000 per month from his entrepreneurial endeavours. Unlike other entrepreneurs, who followed their passions, Gagliese cared more about creating scalable businesses from nothing; he remarked, “If I had to sell rubber gloves and could become the biggest rubber glove wholesaler in the world, I would do that. I don’t care what the opportunity is. It just has to be big, the scale needs to be there, and I need to find it.” In 2014, while pursuing entrepreneurship studies at Ryerson University in Toronto, Gagliese and his best friend, Micheli, observed that big brands such as Nike were increasingly sponsoring athletes to promote their goods, even though many of these celebrities had fewer followers than the leading non-celebrity social media stars. They wondered whether working with these social media stars could be more valuable to prominent brands than traditional forms of marketing. Building on their deep curiosity about social media, Gagliese and Micheli started up a new talent agency, Viral Nation. Their objective was to represent social media influencers and to broker deals with companies that would help them target their audiences through digital platforms. The pair elected to bootstrap their venture rather than seeking external financing. Within their first year, the founders signed agreements with 1 All currency amounts are in US dollars unless specified otherwise. This document is authorized for use only by Minseong Kim in 2022. For the exclusive use of M. Kim, 2022. Page 2 9B20A088 65 influencers; they doubled that number within two years and soon became experts on influencer marketing. Their innovative marketing concept quickly attracted the attention of millennials, who were the frequent users of new and emerging social media platforms including Instagram and Facebook. 2 The young entrepreneurs found themselves rapidly unleashing the power of influencer marketing in innovative ways. THE EMERGENCE OF SOCIAL MEDIA INFLUENCERS In contrast to the one-way communication of traditional advertising, where brands pushed out desired messages to consumers to stimulate interest and influence buying behaviour, online marketing enabled twoway communication between brands and consumers. The emergence and growth of online marketing allowed companies to push out brand messages that online consumers could then respond to with “likes,” comments, and network sharing. As more marketing moved online, brands began to use celebrities as brand ambassadors to promote their value offerings and increase their revenues. The pool of social media influencers rapidly expanded from an original base of celebrities to include non-celebrities who had numerous online followers. Influencer types proliferated and filled a variety of niches that attracted a wide range of target audiences. Influencers with 10,000–50,000 followers could earn up to a few thousand dollars per post, while those with 1 million followers or more could receive up to $10,000 per post. 3 According to Business Insider, brands were expected to spend over $15 billion on influencer marketing by 2022, up from $8 billion in 2019. 4 Several new marketing agencies emerged in response to the emergence of social media influencer marketing. However, unlike Viral Nation, many of these did not operate in compliance with US Federal Trade Commission (FTC) requirements. FTC guidelines helped to ensure that consumers were protected from fraud or unfair business practices, including those related to marketing and advertising on the Internet. 5 Key to the success of influencer marketing was consumer trust in the authenticity of influencers’ claims about the products or services they promoted online on behalf of brands. Viral Nation acknowledged that authenticity was essential. It specialized in product placement, and carefully selected and monitored its influencers by tracking influencer reviews and audience demographics in order to align the influencers with brands and their values. Gagliese and Micheli knew that influencer marketing was a fluid and changing activity that required agility and responsiveness to remain effective. The company was proud of its deep connection to the dynamic market and landscape and its ability to continually evolve its strategies to maximize value and return on investment (ROI) for its partners. COMPANY BACKGROUND From its inception, Viral Nation had grown at a rate of 100–300 per cent per year, and it had quickly established itself as the largest social media influencer talent agency in North America. This status in turn 2 Joe Gagliese, “The New Playbook for Gen Z Marketing,” Forbes, October 22, 2019, accessed August 24, 2020, www.forbes.com/sites/theyec/2019/10/22/the-new-playbook-for-gen-z-marketing/. 3 Alyssa Lopez, “Devil’s Advocate: Instagram Should Prioritize Mental Health over Popularity,” Daily Titan, December 9, 2019, accessed July 15, 2020, https://dailytitan.com/2019/12/instagram-mental-health/. 4 Audrey Schomer, “Influencer Marketing: State of the Social Media Influencer Market in 2020,” Business Insider, December 17, 2019, accessed July 15, 2020, www.businessinsider.com/influencer-marketing-report. 5 United States Federal Trade Commission, “Advertising and Marketing on the Internet: Rules of the Road,” December 2000, accessed July 15, 2020, www.ftc.gov/tips-advice/business-center/guidance/advertising-marketing-internet-rules-road. This document is authorized for use only by Minseong Kim in 2022. For the exclusive use of M. Kim, 2022. Page 3 9B20A088 helped Viral Nation attract larger brands as clients and further fuelled its skyrocketing growth. The agency was soon running multiple large-scale campaigns. By March 2020, Viral Nation had expanded its team to nearly 100 employees to cope with surging market demand and had evolved from a talent agency to a fullservice agency that supported companies in over 28 countries around the world. Viral Nation’s business model involved providing tailored performance-marketing solutions to optimize clients’ mobile and web campaigns (see Exhibit 1). The company specialized in integrating multiple marketing channels and functions into one cohesive strategy for each client, and this approach produced actionable results. Viral Nation’s offerings included bespoke influencer marketing campaigns, social experiential events, and creative content campaign support. It excelled in business-to-consumer influencer marketing while also leveraging its insights into business-to-business offerings. Viral Nation charged clients based on the specific services it provided, reflecting the human capital or labour margin required for each service. Viral Nation’s influencers’ repeated exposure to social media audiences and the consistency of the company’s messaging were critical success factors for the company’s marketing campaigns. In 2018, Viral Nation identified an opportunity to develop a proprietary technology platform, Influsoft, to support its social analytical capability. This platform enabled Viral Nation to collect and monitor information on demographic profiles, social media behaviour, and attribution (e.g., the number of clicks) to help support all phases of its marketing campaigns. The platform was designed to align with the ever-changing constellation of social media platforms and to reflect the diversity of the company’s clients. Influsoft had licensed application programming interface integrations with major platforms, including Facebook, Instagram, YouTube, LinkedIn, and Tik Tok, 6 which gave clients and brands information that helped them track and assess the effectiveness of their campaigns and goals 7 (see Exhibit 2). To Gagliese and Micheli’s surprise, the value of this analytic capability quickly overtook the value of the service aspect of their business. By 2020, Viral Nation was known for its captivating social media content and for the high ROI of its campaigns. The company worked closely with its team of influencers to develop appropriate, effective, and stimulating content. Tapping into this subject matter expertise helped keep the company’s content current and relevant and helped it maintain high sales conversion rates—i.e., rates at which influencers’ followers visited clients’ marketing and e-commerce sites. In early 2020, Viral Nation was working with over 14,000 influencers and serving 50–100 brands per week, providing a number of services: (1) turnkey marketing campaign services, (2) expansions of existing campaigns, (3) help with failing marketing efforts, and (4) support to existing media campaigns. The company’s influencers included contestants on the reality TV series The Bachelor and The Bachelorette, Raptors superfan Nav Bhatia, tennis star Bianca Andreescu, and professional basketball stars Isaiah Thomas and Giannis Antetokounmpo. 8 Viral Nation had switched from serving mainly small businesses to serving large businesses, since the average cost of its campaigns had grown to $50,000–$100,000; the average cost of its deals ranged from $500,000–$1 million. The company’s client roster spanned several industries and included organizations such as Microsoft Corporation, Scotiabank, Crayola LLC, and Victoria’s Secret. ACQUISITION OFFERS As a rapidly growing and reputable industry leader, Viral Nation quickly attracted the attention of major competitors. By the start of 2020, Gagliese and Micheli found themselves in receipt of three unsolicited 6 Viral Nation, “Tracking and Measurement with Influsoft,” July 15, 2020, accessed July 15, www.viralnation.com/services/tracking-measurement/. 7 Influsoft, “Plan: Say Goodbye to Spreadsheets,” accessed July 15, 2020, www.influsoft.com/platform. 8 Shorty Awards, “PUBG Mobile Team Up Superstar Showdown,” accessed July 15, https://shortyawards.com/12th/pubg-mobile-superstar-showdown. This document is authorized for use only by Minseong Kim in 2022. 2020, 2020, For the exclusive use of M. Kim, 2022. Page 4 9B20A088 acquisition proposals, all in the CA$80 million–$120 million range, which appeared independently and almost simultaneously. 9 Proposal 1: Special Purpose Acquisition Company Bidder: a billion-dollar Asian marketing conglomerate with 26 agencies of its own. Viral Nation could help fill a gap in this bidder’s array of service offerings. The conglomerate proposed forming a special purpose acquisition company to raise investment capital for the acquisition through an initial public offering. Gagliese and Micheli had a good personal relationship with this bidder, who was open to reviewing various options regarding control rights. The buyer was agreeable to having Gagliese and Micheli remain in place to manage the company from within. Gagliese and Micheli acknowledged that this offer included access to funds from the parent company, which could help them realize their ambition to make Viral Nation part of the number one media influencer companies in the world. However, they wondered whether they would be happy reporting and being accountable to a board and having to wait for approvals rather than making speedy decisions, as they were accustomed to doing. Proposal 2: Public Relations Firm Bidder: a Los Angeles–based public relations firm, backed by wealthy investors, that created industryspecific influencer marketing companies and then sold them to brands. This firm was interested in discussing a strategic partnership that would help support its businesses. This bidder’s primary interest in Viral Nation and its key focus of the bid were the proprietary data analytics and technology tools that the company had developed through its Influsoft offering, which had received rave reviews. This bid was the highest of the three bids received. The potential buyer was also open to the option of retaining Gagliese, Micheli, and their team—giving them continuing roles in growing revenue while granting them some operational autonomy. These considerations were important to Gagliese and Micheli, who felt strongly that they would need to be richly rewarded in return for giving up control. Proposal 3: Global Advertising Agency Bidder: a New York City–based advertising agency, one of the largest in the world, with 600 of its own clients. This bidder was interested in a strategic acquisition that would allow it to service its own clients through Viral Nation’s offerings, folding Viral Nation into the larger company under the parent company’s name. Accepting this offer would provide cash in hand and promised rapid growth. However, it would also mean a complete loss of control over the company, and—although the bidder acknowledged that one of Viral Nation’s main assets was its investments in its people—it would potentially disrupt the team that had grown with Gagliese and Micheli. The pair had already turned down a previous offer from this company, which had then returned with an improved bid. Gagliese and Micheli were aware that accepting this offer would be an opportunity to cash out completely and would protect them from exposure to the uncertain future of social media marketing. As he reviewed the three offers with Micheli, Gagliese continued to reflect on the primary question: Was now the right time to sell? Viral Nation was expanding fast and was well positioned in a rapidly growing 9 For reasons of confidentiality, the names of all three bidders have been suppressed. This document is authorized for use only by Minseong Kim in 2022. For the exclusive use of M. Kim, 2022. Page 5 9B20A088 sector. Given persistent uncertainty about the value of media influencer firms, Gagliese was aware that there was an “option value to waiting” 10 if the company’s value had substantial upside potential. However, he did not know what that future value would be, and so he needed to decide whether or not to open negotiations based on limited information. Gagliese and Micheli had forecast that the company would grow in revenue within the next five years, but they knew there was a risk of some radical, unforeseen change in the influencer marketing space, and of an impending recession, which could see client demand dry up. Gagliese knew that if they waited, they would risk missing out on an opportunity to forge a strategic partnership that could quickly move Viral Nation from one of the top five influencer marketing companies in the world to the number one position. He wondered whether Viral Nation could get to the number one spot on its own, and what that might take. From a personal perspective, both partners wanted to retain some control over the company—at least for the next three to five years—to develop the brand through continued, accelerated growth. Gagliese acknowledged that they could achieve this goal by selling the company in return for cash, equity, and an ongoing leadership position in the acquiring company. He did however, acknowledge that simply taking $25 million cash and retiring to spend more time with his family did not interest him. Becoming a billionaire had been his vision from the start of his career as an entrepreneur. Gagliese was motivated by cash, control, and growth. Was Viral Nation the ticket to his billionaire dream? As Gagliese and Micheli discussed and considered their options, one of the interested buyers initiated the primary due diligence process. The letter of intent stipulated an intention to acquire both equity interest and assets of Viral Nation, valuing the company in the high eight figures. This valuation was based on a multiple of Viral Nation’s adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) for 2020. The due diligence checklist included company financials for three years, internal compensation structures, profit and loss, expenses, and revenue. This information would help the prospective buyers to do some preliminary financial modelling in advance of a full due diligence process in the next four to eight weeks. Only one of the potential buyers knew that there were competing offers on the table; the others did not. CONCLUSION As Gagliese and Micheli considered their choices in March 2020, the COVID-19 global pandemic struck, placing the economy into lockdown and endangering the possibility of acquisition. The world as they knew it was quickly changing, and the opportunities in front of them were also subject to change, as the macroeconomic environment was shifting at an almost unprecedented pace. The partners realized that time was of the essence and that they faced possibly the biggest decision of their lives: to sell or not to sell. Should they agree to being acquired or start looking to organically acquire other companies themselves? 10 In finance, holders of options had the freedom to exercise options at a time of their choosing. For example, if the value of a stock was low but might well rise later, investors could choose to wait before exercising a call option, illustrating the option value of waiting. This document is authorized for use only by Minseong Kim in 2022. For the exclusive use of M. Kim, 2022. Page 6 9B20A088 EXHIBIT 1: VIRAL NATION BUSINESS MODEL OVERVIEW Note: VN = Viral Nation; ROI = return on investment Source: Created by the case authors. EXHIBIT 2: INFLUSOFT VALUE OFFERINGS Viral Nation developed this proprietary software to help provide its clients with enhanced information and transparency regarding its social media marketing campaigns. Features included the following: Brand Analysis and Social Listening ● Brand sentiment analysis and competitor comparison ● Cross-platform campaign comparisons ● UGC social listening and analysis ● In-depth hashtag and RSS feed analysis End-to-End Influencer Campaign Management ● Cross-platform API-grade campaign analytics tracking ● Visual goal and performance tracking ● Live, 24/7 intuitive dashboard ● Customizable API integrations AI-Powered Authenticity Analyzer and Fraud Detection ● Proprietary influencer authenticity score ● Brand safety assurance ● Fraud detection reports Notes: UGC = user-generated content; RSS = really simple syndication; API = application programming interface; AI = artificial intelligence Source: Adapted from Viral Nation, “Tracking & Measurement with Influsoft,” accessed October 21, 2020, www.viralnation.com/services/tracking-measurement/. This document is authorized for use only by Minseong Kim in 2022. The Case Analysis Framework The case analysis framework presented here is a synthesis of the frameworks used by your professor and other marketing professors who use case analysis in their courses. It will provide a solid structure to organize the diverse information presented in a case. As you work your way through this framework, or a similar approach to case analysis, we offer the following hints to increase your probability of success: 1. No one can analyze a case after reading it only one time, or even worse, doing the analysis during the first reading of the case. You should read through the case once just to get an understanding of the nature of the case. During the second reading, you can begin to structure and classify the issues as they appear. A truly comprehensive case analysis will probably require at least three readings. 2. Don’t get trapped into thinking the “answer” to the case is hidden somewhere in the case text. There is never a single answer to a case just as there is never a single marketing strategy that is appropriate for all situations. Each case is unique. Looking for tricks or shortcuts is not appropriate. 3. Make an effort to put yourself in the shoes of the decision maker in the case. The use of roleplaying as part of the analysis can be very useful. It helps you gain some feeling for the perspective of the key parties at the time the case took place. After you have done several analyses, you will likely come up with your own additional procedures or guidelines that assist you with this process. Step 1: Situation Analysis The material presented in a case is much like the communications we have in our daily lives. Usually our conversations involve the selection of a topic and then the discussion of that topic, and so it is with cases. The problem is that we end up with bits and pieces of information that by themselves are not very useful, but once organized, can be quite valuable in our assessment of the situation. The first step in the framework helps you organize the pieces of information into more useful topic blocks. The process of assessing a situation is widely accomplished through the use of SWOT Analysis (strengths, weaknesses, opportunities and threats). Looking at an organization’s strengths and weaknesses is the first half of Step 1. This involves looking at the organization’s internal environment. Strengths are those aspects of the internal environment that can help the firm address a present problem, issue, or opportunity, while weaknesses are negative factors or deficiencies that do not allow the firm to reach its full potential. One topic that should be addressed is the content and appropriateness of the current marketing or sales plan. Is the plan current? Do the key parties understand and utilize it? Was it developed with input from all levels of the organization? The organization’s financial condition may also present strengths and weaknesses. Is it in a solid position, and does it have, or can it acquire, needed funds at a reasonable cost of capital? Other possible strengths and weaknesses might include managerial expertise, human resources, product reputation and customer loyalty, patents and trademarks, age and capacity of production facilities, channel relationships, and promotional programs (sales force, advertising program, publicity, and sales promotion efforts). These are all issues that we want to consider in terms of both the present state of the firm and identifiable trends. Students assessing a case situation see the importance of considering the organization’s internal environment fairly naturally. The aspect of SWOT analysis that gives students the most difficulty is the external environment where all opportunities and threats reside. These are issues that exist outside the boundaries of the firm. All opportunities and threats will exist at their present levels even if the organization in question does not exist. Technology, competition, the macroeconomic environment, regulation, and social and cultural trends are all issues that affect the success of an organization’s strategies, but the organization has only limited influence on them. Because the power to affect the external environment significantly is usually absent, management must view the factors and forces present in the external environment as issues to be considered, but not usually controlled. Managers should take steps to minimize the exposure to threats and to take full advantage of the opportunities. You might think of opportunities and threats as currents in a river. It is much easier to find a river whose currents will help take you where you are going than to try to make headway going against the force of the river. You may get hung up on several points when conducting a SWOT analysis. First, while a factor will usually fall into only one of the four categories, this is not always the case. A factor can be both a strength and a weakness, or an opportunity and a threat. For example, excess capacity in a factory would be a weakness from a production efficiency standpoint. But, it could be a strength if the firm is looking to introduce a new product because it will not have to build a new factory. The second and more serious issue is the difficulty in identifying opportunities. There is a tendency to confuse opportunities with possibilities. Something the company might do, such as franchise its operations in an effort to expand, is not an opportunity. The mention of the organization’s name in the opportunity is a clear indication that it is not an issue from the external environment. Both threats and opportunities would be present even if the organization did not exist. Finally, you are accustomed to the material in a textbook containing accurate information that should be believed and remembered. However, in some cases, you will find statements of opinion that are often biased by a person’s motives and position in a firm. The organization’s CEO who has just recently given approval to the firm’s strategic plan might say, “This is an excellent mission statement that will effectively direct our firm’s efforts for the next decade.” Is this really true? It might be, but it will be up to you to determine what is fact as opposed to someone’s opinion. Opinions will need to be assessed in your case analysis to determine their accuracy. Step 2: Assumptions and Missing Information As with life, it is neither possible nor realistic for cases to contain all the information a decision maker might wish to have available. Usually a decision maker has only bits and pieces of information. He or she must either fill in the gaps, or make the decision that the information is not critical, fairly predictable, or simply too costly and time-consuming to justify collecting for the decision at hand. A marketing manager might want to know the history of competitive reactions to price cuts by his firm. This information may be present in company files. It also might be available from trade sources or other noncompetitive channel members. In step two you will list important information not contained in the case, why that information might be useful, and how you might go about acquiring it. This is more than just a wish list. The items included here should considered thoroughly. The list should contain pieces of information that would help shore up or fill gaps in your SWOT analysis. Some of the information that is not available can be addressed through assumptions. One might assume that if information about the firm’s advertising budget is not available, it would be equal to industry averages. The same assumptions might be made for other costs and revenues. It is critical that these assumptions be realistic and clearly identified before and during the case analysis. This list should contain only those items that will be truly useful in enhancing the quality of the decisions made. It should not be a list of things that would be interesting to know. The quality of your analysis will depend on your coverage of the framework, the depth of your analysis, and the degree to which you can defend your recommendations. Step 3: Problem Definition The identification and clear presentation of the problem(s) or issue(s) facing the company is the most critical part of the analysis framework. Only a problem properly defined can be addressed. Define the problem too narrowly, or miss the key problem all together, and all subsequent framework steps will be off the mark. Getting a clear picture of the problem is one major benefit derived from SWOT analysis. The process of identifying problems is similar to the one people go through with their doctors. A nurse or assistant comes in to conduct a strength and weakness assessment on you. Your vital signs are taken and you are asked about any symptoms you may be experiencing. Symptoms are observable manifestations or indications that a problem may be present. Symptoms are not the problem themselves. If you have a temperature of 103 degrees, that is a symptom. If the medical staff were to pack you in ice for several minutes, that reading would probably approach 98.6 degrees. Would that make you well? It might make your condition worse! The doctor uses the information collected from you, with knowledge of the viruses and diseases that are present in the external environment, to identify what has led to your high fever. The doctor will attempt to diagnose the real problem, then prescribe treatment from a set of feasible alternatives (make recommendations about what steps will help solve the problem) and provide you with a prognosis (an indication of the things you can expect to occur as you are recovering). The case analysis process is similar to the doctor’s analysis and treatment of a patient in several basic ways. First, symptoms are the most observable indication that a problem exists. Many students are very quick to start treating the symptoms found in a case, as opposed to digging deeper to find the underlying problem(s). A symptom may be that sales are down from previous periods. If this is how you define the problem, your answer might be to cut the price. This might be an appropriate step, but not based on the analysis to this point. Sales might pick up, but will this reaction make the company healthier? This is a clear case of prescription without adequate diagnosis. The most important question in the identification of any problem is “Why?” The Why question should always be asked after a potential problem has been proposed. To illustrate, pinpointing the problem associated with the sales decline in our previous example might progress like this: The problem is that sales have declined. Why have sales declined? Sales have declined because there are too many sales territories that are not assigned to a salesperson. Why are so many sales territories unassigned? Sales territories are unassigned because sales force turnover has doubled in the past year. Why has sales force turnover doubled? Turnover began to increase over a year ago when the sales force compensation plan was altered in order to reduced variable expenses. When you can no longer devise a meaningful response to the Why? question, you have probably found the problem. In this instance, the problem statement might read: The current sales force compensation plan at XYZ Company is inadequate to retain an acceptable percentage of the firm’s salespeople, resulting in lost customers and decreased sales. The problem statement should be brief—almost always one or two sentences. It should be to the point, and it should provide a clear indication as to what must be addressed to improve the performance of the organization. Given this problem statement, our first reaction, to work on the symptom of reduced sales by cutting prices, would clearly not solve the problem. When we work on symptoms, the symptom may go away, but the problem will always manifest itself again with the same symptom, or a related one. Cutting prices would enhance sales, but would it be profitable? And, with an understaffed sales force, could the firm serve customers at a level that would keep them satisfied? Step 4: Development of Alternatives Once we have the problem clearly and succinctly defined, we are in a position to develop a set of strategic alternatives that have a reasonable potential to solve the problem. A key problem students face in this step is that they generate a laundry list of a dozen fairly detail-oriented items. These items have a lot more to do with the tactics of implementing a strategy than with presenting alternative strategies from which we will make our selections. Going back to the sales force example above, the list may include ideas such as:       Take candidates through a more rigorous interview process Lengthen the training program Give every salesperson a company car Offer both individual and regional bonuses Increase company contribution to the retirement program for each year of employment Conduct an employee-evaluation training program for the firm’s sales managers While these may all be good ideas, they are not strategic alternatives. The term alternative suggests an either/or situation. From the list above, you might include several items in your recommendation section. Strategic alternatives should identify basic directions the firm might go with the sales force support of its product. One alternative is always the status quo. You must understand that this is not a means of avoiding a decision. If recommended as the next step, it is a conscious decision, based on a careful evaluation, that the present strategy in use, perhaps with some tactical modifications, is the best course of action in the current situation. Besides the status quo, you should use creative thinking to come up with several truly strategic alternatives. For our present example, one option might be to eliminate the external sales force and start using a manufacturer’s representative network to sell to the firm’s customers. Another alternative would be to use direct marketing, with an inside sales force to market the product. Another possible option is to reemphasize the sales force with a more effective sales management program, including better selection, compensation, evaluation, and recognition of the sales force. Frequently, the underlying problem facing the organization is the failure to have a current, widely used, well-developed marketing plan. If the analysis indicates this to be the case, conducting a comprehensive strategic market planning process should be one of the alternatives listed. This is one of the few options that might be selected in combination with some other alternative. Step 5: Evaluation of Alternatives & Recommendations Once you have developed a set of realistic alternatives, it is time to do a thorough evaluation of each of the options. Three major criteria should be used in this evaluation process. First, how well does the alternative address the problem or issue as stated in Step 3? Closely related to the first criterion is the consistency of the alternative with the organization’s mission, as well as its ability to assist in achieving the plan’s stated goals and objectives. Clearly, for an organization whose mission includes providing the most innovative health care products to doctors, nurses, and patients, a low cost/price competitive organization model would be inappropriate. This does not mean alternatives that are not consistent with the present plan should never be selected. It does indicate that part of the evaluation for such alternatives must address the complete modification of the organization’s strategic plan. Likewise, an objective of increasing profit margins from 15% to 25% is not consistent with the alternative of becoming a low-price provider. The deletion, or at the very least modification, of this aspect of the plan must be considered in evaluating this alternative. For each alternative, you should make an effort to estimate and evaluate the cost and revenue implications of the option. Probable income statements, under corresponding stated assumptions, should be included for each alternative. Exhibit 1 provides an example of just such an assessment. Costs are certainly easier to calculate than revenue projections, but an effort must be made to do both. To conclude simply that developing a new innovative product line for the organization, without any discussion of the costs and benefits involved, or in what year each is likely to occur, is an incomplete and unrealistic approach to case analysis. You should use what you have learned from your accounting and finance courses when you conduct case analyses. Look at any financial information you are given in the case, or that you can acquire, as a key resource in conducting your analysis. The final criterion is an important one that relates to the feasibility and probable success of each alternative: How well do the alternatives coincide with the key findings from the SWOT Analysis you conducted in Step 1? In other words, how well does each alternative match up with the internal and external environments of the organization? Does the organization have, or can it realistically acquire, the human and financial resources required by each alternative? Building additional capacity to increase volume as the low-price provider is probably not a reasonable alternative for an organization in great financial difficulty. Conversely, for a firm with limited history and investment in research and development, becoming the innovative leader in the industry will not be possible in the near term. The external environment, in terms of the economy, competition, regulation, and cultural trends, will have a major impact on the pro forma revenue projections you make in this step. Any alternative that adds pollution to the environment will not be well received today. Often, alternative analyses assume the competition is an inanimate object. Thinking that competitors will stand still while you steal their customers with a new marketing strategy is not at all realistic. Part of the evaluation of alternatives, and making projections about their potential success, is to use the assessment of the external environment to make assumptions about what key competitors will do. You must remember that as one company is setting a course for the future, most of its effective competitors are doing likewise. The recommendation portion of this step is often included as a separate phase in the case analysis framework. We include evaluation with recommendation because, if the former is done well, the latter should be a natural continuation of the process. The alternative chosen is the one that stands up best in terms of all three criteria: consistency with mission, goals and objectives as stated or as modified, strongest probable financial performance, and harmony with the internal and external environments of the organization. With a thorough evaluation, the recommended alternative should be a natural move. This does not mean that two alternatives will never be close in terms of their attractiveness, but usually one will be a better match for the organization as a whole. One more note: Become accustomed to making recommendations in the face of unknown economic or competitive conditions. While you will be able to know some things for certain (such as gross domestic product or consumer spending), no one can possibly predict all future events. As long as your evaluation is thorough, and your assumptions are clearly stated and reasonable, your recommendations will be justified. Exhibit 1 Hypothetical Pro Forma Assessment Unfavorable Environment Neutral Environment Favorable Environment Sales Dollars $2,000,000 $3,500,000 $7,000,000 400,000 750,000 1,400,000 $250,000 $250,000 $250,000 $1,200,000 ($3 per unit) $2,062,500 ($2.75 per unit) $3,500,000 ($2.50 per unit) Advertising $300,000 $300,000 $300,000 Sales commission (10%) $200,000 $350,000 $700,000 Other selling expenses $100,000 $135,000 $200,000 Earnings before taxes $ -50,000 $402,500 $2,050,000 Units ($5 per unit) Costs Product development Production costs Conclusion We conclude with one final piece of advice: Like anything else, the learning benefits of case analysis are dependent on the amount of effort you put into the analysis. Learning to think critically and see the big picture are important lessons to be learned in a case course. Likewise, learning how business activities (not just marketing activities) can be strategically integrated to achieve superior results is the ultimate goal. Strong (4-5) Average (1-3) Weak (0) Points (1) Well describes the history of the company indicated in the case (written in your own words, no quotations) (2) Clearly identifies problems described in the case (1) Provides a weak description of the company’s history in the case (2) Provides somewhat vague problems with the case (1) Does not describe the company’s history and its problems (2) Use a large amount of quotations 5 Clearly explains the situation described in the case Provides a weak description of the situation covered in the case or omits a significant amount of information regarding the situation described in the case Clearly explains alternatives Alternatives and and recommendations that Recommendations solve the issues identified Briefly explains alternatives and recommendations that somewhat solve the issues identified Explains the implementation in detail Briefly explains how to implement the solution Background Situation Analysis Implementation Implemented Solution References (APA) (1) Identifies multiple possible solutions (2) Supports proposed solutions with strong reasoning, argumentation and data (1) References, in text citation, document format, following APA guidelines. Grammar, spelling, and logical flow (2) Minimum 3 citations (including the case study) Does not explain the company/industry situation or the situation described is not relevant to the case (1) Does not explain alternatives and recommendations (2) Alternatives and recommendations do not solve the issues identified Does not explain how to implement the selected solution 5x2 5x3 5x3 (1) Identifies and proposes some possible solutions (2) Solutions are not supported by strong reasoning, argumentation or data (1) Does not propose any possible solutions (2) Proposes solutions that are not relevant or not feasible 5x2 (1) Minor grammar and spelling errors (2) Does not follow APA guideline well (3) Only 1 and 2 citations (including the case study) (1) Too many grammar and spelling errors (2) Does not follow APA guideline at all (3) no citation 5
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