The financial analysis of strategic alternatives was developed for the Company carrying out wholesale shipment of electronic components to the enterprises including the automobile plants.    Nowadays, the electronic components market can be characterized as a pure competition, where a many producers and sellers of those products are competing. The Company takes a small share of the market.

But the development of the automobile cluster in Saint Petersburg and the Company’s experience obtained in this market allows increasing considerably the electronic components sale volumes provided it organizes its own production meeting high ISO level requirements.  

The following variants are considered as the strategic alternatives:

1.  The organization of its own electronic components production at an automatic- or a semi-automatic plant;  purchasing existing enterprises producing electronic components;
2.  Organization of electronic components production subject to the conditions of the goods made on commission.   

The main criteria of the strategic alternative estimation were as follows: Project investment volumes, Project’s financial effectiveness in comparison with the Company’s current financial results and the level of financial risks.  

In order to assess the adequacy and reality of the alternative variants, the financial predictions allowing to estimate the possibility to generate money flows, as well as the possibilities to attract investments in necessary volumes have been developed.

The integral parameters of investment projects’ effectiveness on the basis of the discounted money flow method verifying the effectiveness of not all the alternative strategic variants was estimated.
As the analysis of the Project variants was considered on the level of strategic alternatives, the characteristic subset built into the financial model was determined on the expert evaluation basis, as the Company did not have its own experience in producing electronic components. Some deviations leading to considerable index fluctuations of the investment project effectiveness may appear at realizing the Project on those parameters.
To assess the "safety factor", the investment project risk, the sensitivity analysis of investment performance indicators to changes in various investment project parameters (amount of investment, sales, direct costs, wages, deferred payments, etc.) was carried out. According to the analysis data, the list of the parameters having the greatest impact on the Project’s effectiveness and the influence degree of each of these parameters (their criticality rating) was determined.

To determine the Project’s sustainability towards the financial market state and changes in macroeconomic conditions, the performance sensitivity in relation to the discount rate changes was researched. It allowed the Company to have a good notion, whether this Project would be evaluated as effective in case of changing its profitability requirements.
The sensitivity analysis allowed estimating the deviation impact of any parameter, provided that other parameters corresponded to those indicated in the Project. However, while realizing the Project, the deviation could occur on several parameters simultaneously, both in positive and negative directions in terms of the investment project performance. The Monte Carlo method was used to determine the synergy impact degree of all the uncertainties and risks.

This method was supposed to use statistical programs, which use could allow multiple recalculations (100-1000 times) of the Project’s effectiveness parameters with various (random) combinations of the Project’s parameter deviations within the specified range. The list and the range of possible deviation values for each selected parameter were determined on the basis of the expert assessments. The values of efficiency (risk profile) obtained in recalculating probability distribution revealed the extent of risk at fluctuating uncertainties of the  initial data put in the Project’s financial model.

The permitted deviation "corridors" data obtained in analyzing the sensitivity with the help of the Monte Carlo method, from the hypotheses pledged as initial data and the degree of alternative variant risks allowed the Company to make its final choice in accepting an optimal alternative variant and clarifying the initial data for calculations (removing the uncertainty) to re-iterate the analysis of alternative variants.
When the strategy realization variant had been selected and the Company had identified and agreed on its position as a whole, it began developing a plan of specific actions and functional strategies.