Strategic Management Final Notes

STRATEGIC PLANNING & MANAGEMENT

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MEANING & DEFINITION Strategic Management can be defined as “the art and science of formulating, implementing and evaluating cross-functional decisions that enable an organization to achieve its objective.” • Definition: “The on-going process of formulating, implementing and controlling broad plans guide the organization in achieving the strategic goods given its internal and external environment”.

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STRATEGIC MANAGEMENT • Globalization: The survival for business • E-Commerce: A business tool • Earth environment has become a major strategic issue • Strategic management – A route to success

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MODEL FOR STRATEGY FORMULATION Scenario’s Visions, Missions,Values External Analysis

Internal Analysis Functional Level Strategies Business Level Strategies Strategy Implementation

Structure

Match Structure & Controls Manage Strategic Change

Controls

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INTERPRETATION

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STAGES OF SM • The strategic management process consists of three stages: • Strategy Formulation (strategy planning) • Strategy Implementations • Strategy Evaluation

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THREE ASPECTS OF STRATEGIC FORMULATION

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• Corporate Level Strategy: In this aspect of strategy, we are concerned with broad decisions about the total organization's scope and direction. • It is useful to think of three components of corporate level strategy: (a) growth or directional strategy (b) portfolio strategy (c) parenting strategy

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Global Corporate Strategies High

Need for Global Integration

Globalization Strategy

Low

• Treats world as a single global market • Standardizes global products/advertising strategies

Export Strategy •Domestically focused •Exports a few domestically produced products to selected countries

Transnational Strategy • Seeks to balance global efficiencies and local responsiveness • Combines standardization and customization for product/advertising strategies Multi-domestic Strategy • Handles markets independently for each country • Adapts product/advertising to local tastes and needs

Low Need for National Responsiveness 8

High

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Global Strategy

• Globalization = product design and advertising strategies are standardized around the world • Multi-domestic = adapt product and promotion for each country • Transnational = combine both globalization and national responsiveness

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• Competitive Strategy (often called Business Level Strategy): This involves deciding how the company will compete within each line of business (LOB) or strategic business unit (SBU). • Functional Strategy: These more localized and shorter-horizon strategies deal with how each functional area and unit will carry out its functional activities to be effective and maximize resource productivity.

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Tools for Putting Strategy into Action

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Strategy

Environment Organization Leadership  Persuasion  Motivation  Structural Design Culture/values Human Resources  Organization Chart   Teams Recruitment/selection   Centralization Transfers/promotions Decentralization,  Training  Facilities, task design  Systems Layoffs/recalls Information and Control  Pay, reward system  Budget allocations  Information systems  Rules/procedures 11

Performance

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Portfolio Strategy • Mix of business units and product lines that fit together in a logical way to provide synergy and competitive advantage

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BCG Matrix

Exhibit 8.5

Strategic Management Process Scan External Environment – National, Global Evaluate Current Mission, Goals, Strategies Scan Internal Environment – Core Competence, Synergy, Value Creation

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Identify Strategic Factors – Opportunities, Threats

SWOT

Define new Mission Goals, Grand Strategy

Identify Strategic Factors – Strengths, Weaknesses

Formulate Strategy – Corporate, Business, Functional

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Implement Strategy via Changes in: Leadership culture, Structure, HR, Information & control systems

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conclusion • In order to formulate Business functions strategy is to be formulated as well as implemented with the right approach • Management is basically managing the strategies and making them function. • Strategic management of an organization leads to the benefits as well as growth of the organization.

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Strategic Planning: • Strategic planning is concerned with the growth and future of a business enterprise. • It consists of a stream of decisions and actions that lead to effective strategies and which, in turn, help the firm achieve its growth objectives. • The process involves a thorough self-appraisal by the corporation, including an appraisal of the business it is engaged in and the environment in which it operates. • Marketing environment keeps changing fast. Practically everything outside the four walls of the firm is changing fast, resulting in a discontinuity with the past. • Strategic planning provides the road map and ensures that the enterprise keeps moving in the right direction.

Strategic Planning (contd.) Starting from the corporation’s mission and philosophy, down to choice of businesses and strategies, all vital aspects in the governance of business are chartered through strategic planning. It is through strategic planning that the corporation takes decisions concerning its mission, the business it will pursue and the markets it will serve; it is through strategic planning that it lays down its growth objectives and formulates its strategies. In other words, all decisions of high significance and consequence to a corporation are taken through the strategic planning process. Strategic planning ensures that these resources are put to optimum and best possible use. Strategic planning helps the firm acquire the best of a lead time for all its crucial decisions and actions, as it helps the firm anticipate trends. Strategic planning has the burden of equipping a corporation with the relevant competitive advantages in its fight for survival and growth.

Objectives of Strategic Planning: Strategic Planning is concerned with the a) b) c) d) e) f) g) h)

Future or long-term dynamics of the firm; not day-to-day tasks. Growth – direction, extent, pace and timing of growth. Environment, the fit between the enterprise and its environment. Business portfolio - Basket of businesses the firm should have – changes/additions/deletions to the firm’s product-market posture. Its concern is strategy – not routine operational activities – growth priorities, choice of corporate strategy and choice of business level/competitive strategy are its concern. Creation of core competencies and competitive advantages, is its concern. This equips the organization with capabilities needed to face uncertainties. Integration of all management functions – not a particular function. It views the organization/business in its totality. Corporate strategy – creating long-term, sustainable organizational capability.

Components of Strategic Planning: 1. 2. 3. 4. 5. 6.

Clarifying the mission of the corporation Defining the business Surveying the environment Internal appraisal of the firm Setting the corporate objectives Formulating the corporate strategy.

1. Clarifying the mission of the corporation •

The mission is the expression of the corporate intent telling insiders and outsiders what the corporation stands for.

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The mission carries the grand design of the firm and communicates what it wants to be. It subtly indicates the business the firm will pursue and the customer needs it will seek to satisfy.

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The mission is shaped by the capabilities and vision of the corporation’s leaders.

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The business philosophy of the founder and present leaders of the corporation gets expressed through the mission statement.

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The mission directs the entire planning endeavour of a corporation.

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The mission is a reference point and the guiding spirit for the growth plan of a firm.

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It brings the corporate purpose or the long-term objective of the firm into focus.

2. Defining the business •

A business definition is a pithy, clear-cut statement of the business or businesses the firm is engaged in or is planning to purse. It prescribes the boundaries of the firm’s business.

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Defining the business correctly is the pre-requisite for selecting the right opportunities and steering the firm on the correct path. Even to understand what constitutes its relevant environment and to make the environmental search effective, the firm must have a proper definition of the business it is in.

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Defining one’s business has become an exacting exercise today because of the fast changes taking place in the areas of technology, products and customer preference. • When product-market boundaries get extended, when different product categories of yesteryears blend and merge, and when new and substitute products keep invading the market altering existing business boundaries, understanding and defining one’s business becomes very difficult.

3. Surveying the environment •

Today strategic planning occupies the central stage in management purely because a great deal of change is taking place in the environment. • In environmental survey, basically a firm gathers all relevant information and analyses it in detail. It analyses the macro environmental factors as well as the environmental factors that are specific to the business concerned. Under the macro factors, the firm studies the demographic, socio-cultural and economic scene. It also studies the political environment, the legal environment and the government policies covering various areas. • As for the environmental factors that are more specific to the business, the firm studies the emerging trends in the industry, the structure of the industry and the nature of the competition. It also studies the market and the customer closely. It examines alternative technologies that are emerging, their relative cost-effectiveness, and the scope for invasion by substitutes. • The significant point is that under environmental study, the firm does not confine the study to the existing business but looks beyond it, because both opportunities and threats can emerge from many difference sources.

4. Internal appraisal of the firm • While environmental survey helps to identify areas of opportunities and threats in the areas of interest, in order to tap these opportunities, it is necessary to find out whether the firm has the requisite capabilities. For this an internal appraisal is undertaken. • Internal appraisal has three distinct parts: – assessment of the strengths and weaknesses of the firm in different functional areas; – appraisal of the health of individual businesses; – assessment of the firm’s competitive advantage and core competence.

5. Setting the corporate objectives • The main task here is to decide the extent of business growth, the firm wants to achieve. The firm examines the present level of performance, its achievable level over the planning period, and its aspirational level. Balancing the opportunities with the organization’s capabilities and ambitions, the firm figures out its growth objective. Usually, firms set objectives in all key areas, like, sales, profits, asset formation, productivity, market share, and corporate image. • Objectives have to be stated clear-cut in a measurable time-bound manner. In setting objectives, the firm integrates its growth ambition with the findings it has made with its environment survey and internal appraisal.

6. Formulating the corporate strategy Product-market scope, growth vector, competitive advantage and synergy are the constituents of corporate strategy. Findings from the environment survey/opportunity-threat profile, the competitive advantages and synergies enjoyed, and the resources available for growth, are the other major parameters in deciding the basket of businesses and the productmarket posture. Corporate strategy has to specify through which businesses and through what kind of product-market posture is the growth objective going to be achieved. And it is from this statement that each business of the corporation –existing and new ones – derives its growth targets, direction and priority.

Formulating the corporate strategy (contd.) • Business appraisal and choice of strategy go hand in hand. The firm decides which businesses are to be cultivated through fresh investment and care, which ones are to be given mere maintenance, without committing much further investment and which businesses it should phase out. Standard analytical models can be of help to the strategic planner, in the matter of bringing to the fore what needs to be done with the different businesses. • Most large companies consist of four organizational levels – the corporate level, the Division level, the business unit level and the product level.

Formulating the corporate strategy (contd.) • Corporate headquarters is responsible for designing a corporate strategic plan to guide the whole enterprise; it makes decisions on the amount of resources to allocate to each division; as well as which business to start or eliminate. • Each Division establishes a plan covering the allocation of funds to each business unit within the division. • Each Business Unit develops a strategic plan to carry that business unit into a profitable future. • Each product level (product line, brand) within a business unit develops a marketing plan for achieving its objectives in its product market.

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STRATEGIC MANAGEMENT

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MEANING & DEFINITION • Strategic Management can be defined as “the art and science of formulating, implementing and evaluating cross-functional decisions that enable an organization to achieve its objective.” • Definition: “The on-going process of formulating, implementing and controlling broad plans guide the organization in achieving the strategic goods given its internal and external environment”.

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COMPARISON STRATEGIC

TACTICAL

OPERATIONAL

Long range

Intermediate

Short range

3 or more yrs

2-3 yrs

One yr

Top mgt

Middle

Lower

Broad objectives

Integration of departments

Day to day working

Focus on planning & forecasting

On co-ordination

On control

Benefits of Strategic Planning • • • • •

Roadmap to firms Utilization of resources Respond to environmental changes Minimizes chances of mistakes Creates framework of internal communication.

Levels of Strategic Planning  Corporate –Level  Business-Level  Functional -Level

Elements of a Strategy Goals Scope Competitive Advantage Logic

Various types of strategies MASTER STRATEGIES

PROGRAMME STRATEGIES

SUB-STRATEGIES

TACTICS

BUSINESS POLICY Business policy provides a basic framework defining fundamental issues of a company, its purpose, mission and broad business objectives and a set of guideline governing the company's conduct of business within its total perspective.  Overall Guide  Focus on strategic allocation of scarce resources

Types of Policies MAJOR POLICIES:  Lines of business  Code of ethics SECONDARY POLICIES:  Selection of geographic area  Identification of major customers  Major products

Types of Policies FUNCTIONAL POLICIES:  Production  Marketing  Finance  Personnel  Research RULES:  Salary & wage Adm.  Discipline& discharge  Welfare Adm  Safety & health

Types of Policies • PROCEDURES & STANDARD OP. PLANS:  Handling & processing of orders  Shipments of foreign locations  Servicing customer complaints

Strategy Vs Policy STRATEGY Strategic decisions

POLICY Guidelines

Putting a policy into effect General course of action Deals with crucial decisions, requires top mgt involvement.

Once formulated can be delegated to lower levels

STRATEGIC MANAGEMENT PROCESS

STRATEGIC MANAGEMENT PROCESS

(SMP) 1. Vision formulation which leads to the statement of the Mission. 2. The mission is then converted into performance Objectives 3. To achieve objectives you develop Strategies 4. Strategy Implementation 5. Evaluation of performance

Diagram (Strategic mgt by VSP Rao and V Hari Krishna)

Purpose of SMP • CORE COMPETENCE • SYNERGY • VALUE Creation

• CORE COMPETENCE: An org’s core competence is something it does exceptionally well in comparison to its competitors. It reflects a distinct competitive advantage like superior research, development etc..

SYNERGY: Two or more sub systems working together to produce more than the total of what might they produce working alone. 1+1=3

• VALUE CREATION: Exploiting core competencies and achieving synergy help organizations create value for customers. Value is the sum total of benefits received and cost paid by the customer.

Steps in SMP • Vision,Mission,Objectives • External Analysis • Internal analysis DETAILED IN (Strategic mgt by VSP Rao and V Hari Krishna)

STRATEGY FORMULATION • CORPORATE LEVEL STRATEGIES:  Growth/Expansion Strategy  Stability Strategy  Retrenchment Strategy  Combination Strategy

• • • • • •

FUNCTIONAL LEVEL STRATEGY: R & D Strategy Operations Strategy Financial Strategy Marketing Strategy Human Resource Strategy

STRATEGY FORMULATION & IMPLEMENTATION • Detail & Diagram : (Strategic mgt by VSP Rao and V Hari Krishna)

Motivational Techniques To Implement Strategy • • • • • • •

MBO Incentives Performance appraisal Salary Administration Recruiting & termination Security Power & Influence

STRATEGIC INTENT: Vision,Mission,Objectives

• Strategic intent is about clarity, focus and inspiration.

VISION

MISSION

OBJECTIVES

GOALS

PLANS

VISION • Corporate vision is a short and inspiring statement of what the organization intends to become and to achieve at some point in the future, often stated in competitive terms. Vision refers to the category of intentions that are broad, all-inclusive and forward-thinking. It is the image that a business must have of its goals before it sets out to reach them. It describes aspirations for the future, without specifying the means that will be used to achieve those desired ends .

Mission • Mission Statement describes what business you’re in and who your customer is. As such, it captures the very essence of your enterprise - its relationship with its customer. • Developing mission statement is the step which moves your strategic planning process from the present to the future. It depicts the mission statement connects “today” with the “future.” Your mission statement must “work” not only today but for the intended life of your strategic plan of which your mission statement is a part. If you’re developing a five year strategic plan, for example, you develop a mission statement which you believe will “work” for the next five years.

Values • For any statement, whether mission or vision, to be embraced and acted upon, it must reflect the values of your organization. • Values describe what your management team really cares about. What it holds dear. What “makes ‘em tick.” How would your managers respond to a trade-off between product quality and profit? That’s really a question of value.

Corporate Goals & Objectives • 1. 2. 3. 4. 5.

Role of Objectives: Legitimacy Direction Coordination Benchmarks for success motivation

Characteristics of obj; • • • •

Obj. form a HIRERACY Network Multiplicity of Obj Long and short-range obj

ENVIRONMENTAL ANALYSIS

• Env. may be defined as the set of external factors such as economic, socio cultural, Govt. & legal, demographic, which are uncontrollable in nature & affect the business decisions of a firm or company. 1) Micro Environment 2) Macro Environment • Micro Environment1) Supplier 2) Customers-industrial, retailers, wholesalers, Govt., foreigners 3) Market intermediates- middlemen, physical distribution firms, marketing service agencies, and financial intermediaries

•     •   

CompetitorsDesire competitions – limited disposable income many unsatisfied desires T.V./washing machine/ investment Generic competition-among alternatives which satisfied particular category of desire- Investment in U.T.I./P.O./Bank/Any other. Product form competition- Washing machine, semi/ automotive Brand competition- videocon/godrej Public – media citizen action public local public

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Macro Environment-uncontrollable

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Economic Environment Eco. Conditions- business cycle, growth of economy, size of domestic Market & its dynamic effect Eco. Policies- budgets, industrial regulations, eco planning, import & export regulations, business laws, , industrial policy, control on price & wages, trade & transport policy, size of national income, demand & supply of various goods Economic System—of a country free enterprise i.e. capitalist socialist communist mixed

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    

2. Political & Govt. Environment. • Legislature- decide particularly course of action • Executive -implementation • Judiciary -to see above both working public interest.

3. Socio Cultural Environment- people attitude to work & health, role of family, marriage, religion & education, ethical issues, social responsibilities of business 4. Natural Environment- geographical & ecological factors- natural resources endowments, weather & climatic conditions, topographical factors, locational aspects, port facilities

5. Demographic Environment. - Size growth age composition of population, family size, economic stratification of population, educational level, caste religion etc. 6. Technological Environmentmarketing, innovation, R & D 7. International Environment-liberation force of view global perspectives

• Environmental Scanning: helps every mgt in attaining maximum profits and growth and the same time helps in minimization of future threats. Environment analysis has 3 basic objectives • Under taking of current & potential changes • Should provide inputs for strategic decision making • Rich source of idea & understanding of the context, bring fresh views

Environmental AnalysisScanning – general supervision of all env. Factors & their interaction in order 1. to identify early signals of change, 2. Detect env. Changes underway Monitoring -- tracking the env. Trends sequences of events or stream of activities. Study of Indicators, assemble data to discern emerging patterns. Three outcomes emerges in monitoring 1. A specific description of env. trends 2. Identification of trends 3. Identification of areas of further scans Forecasting -scanning & monitoring provide a picture of what is happening strategic decision Making requires future orientation. Forecasting is developing future projections of changes Assessment - outputs of above 3 steps are assessed to determine implementation. Assessment involves identifying & evaluate how & why current & projected env. Changes affect strategic Mgt. Of the organization

Techniques of Environment Analysis • • • • • • •

SWOT Analysis, strengths, weakness, opportunities, & threats. Forecasting methods Time services analysis & projection-moving averages, exponential smoothing book Jenkins, trend projection. Casual Methods- regression model, econometric model, anticipation surveys, input output model, diffusion index, leading indicators, life cycle analysis. Qualitative Method-Delphi method, market research, panel consensus, visionary forecast, historical analogy. Scenario technique- preparation of background, selection of critical indicators, establishing past behavior of indicators, verification of potential future events, forecasting the indicators, writing of scenario. Preparation of ETOP-environmental threat & opportunity profile is a summary of environmental factors. It is a structured way. Assessing Importance of environmental factors, assessing impact factor combining importance & impact factor.

Environmental Scanning & Monitoring Environmental scanning is a concept from business management by which businesses gather information from the environment, to better achieve a sustainable competitive advantage. To sustain competitive advantage the company must also respond to the information gathered from environmental scanning by altering its strategies and plans when the need arises.

Environmental Scanning & Monitoring- Techniques SWOT PEST

Techniques

Industry Analysis

QUEST

Competitor Analysis

SWOT (Strength-Weakness-Opportunity-Threat)

Identification of threats and Opportunities in the environment (External) and strengths and Weaknesses of the firm (Internal) is the cornerstone of business policy formulation; it is these factors which determine the course of action to ensure the survival and growth of the firm.

What is “PEST”?

PEST Analysis – The Meaning • A PEST analysis is an analysis of the external macroenvironment that affects all firms. • P.E.S.T. is an acronym for the Political, Economic, Social, and Technological factors of the external macroenvironment. • Such external factors usually are beyond the firm's control and sometimes present themselves as threats. • However, changes in the external environment also create new opportunities.

Industry Industry Analysis: Analysis: Three Three sections sections A. Industry Life Cycle Analysis B. Study of the structure and characteristics of an Industry C. Profit Potential of Industry (Porter Model)

A. A. Industry Industry Life Life Cycle Cycle Analysis Analysis Four Stages: • Pioneering Stage • Rapid Growth Stage • Maturity and Stabilization Stage • Decline Stage

B. B. Study Study of of the the structure structure and and characteristics characteristics of of an an Industry Industry 1. Structure of the Industry and nature of Competition 2. Nature and Prospectus of the demand 3. Cost, Efficiency and Profitability 4. Technology and Research

3. 3. Profit Profit Potential Potential of of Industry Industry (Porter (Porter Model) Model)

1. 2. 3. 4. 5.

Michael Porter has argued that the profit potential of an industry depends on the combined strength of the: Threat of new entrant Rivalry among existing firms Pressure from substitute products Bargaining power of buyers Bargaining power of sellers

INTERNAL ANALYSIS

• • • • • •

SWOT analysis Value chain Analysis Financial Analysis Key factor rating Functional area profile Strategic advantage profile

Internal Analysis Resource-Based View

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Firms have heterogeneous resources and capabilities.

By exploiting core competencies, firms can develop valuecreating strategies superior to their competitors.

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Four criteria must be met for a sustained competitive advantage. Valuable Costly to imitate Rare Non-substitutable

Internal Analysis Resources • Tangible • Intangible • Brand Equity

Components of the ResourceBased View

Capabilities

Core Competencies Competitive Advantage

Above-Average Returns

Internal Analysis

Resources and Capabilities:

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Resources

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Represent what the firm has to work with.

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Resources must be combined to establish a capability.

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Types:

• Tangible • Intangible • Brand Equity

Internal Analysis Tangible Resources – Assets that can be seen, touched or quantified. - Financial resources (borrowing capacity) - Physical Resources (facilities, locations) - Organizational structure (reporting structures) - Technological (patents) Intangible Resources - Human resources (experience, training) - Resources for innovation (technical employees, facilities) - Reputation Brand Equity - Brand name - maintaining brand equity (Mercedes example – value/performance and Japanese automakers)

VALUE CHAIN ANALYSIS • A value chain identifies and isolates the various economic value adding activities that occur in every firm. It portrays activities required to crate value for customer for a given product.

The Value Chain System • A firm's value chain is part of a larger system that includes the value chains of upstream suppliers and downstream channels and customers. Porter calls this series of value chains the value system,

Porter's Generic Value Chain Porter's Generic Value Chain M Inbound Logistics

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Operations

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Outbound Logistics

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Marketing & Sales

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Service

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A R G I

N Firm Infrastructure HR Management Technology Development Procurement

The primary value chain activities are: • Inbound Logistics: the receiving and warehousing of raw materials, and their distribution to manufacturing as they are required. • Operations: the processes of transforming inputs into finished products and services. • Outbound Logistics: the warehousing and distribution of finished goods. •

The primary value chain activities are: • Marketing & Sales: the identification of customer needs and the generation of sales. • Service: the support of customers after the products and services are sold to them.

These primary activities are supported by: • The infrastructure of the firm: organizational structure, control systems, company culture, etc. • Human resource management: employee recruiting, hiring, training, development, and compensation.

These primary activities are supported by: • Technology development: technologies to support value-creating activities. • Procurement: purchasing inputs such as materials, supplies, and equipment.

Cost Advantage and the Value Chain • Porter identified 10 cost drivers related to value chain activities: • Economies of scale • Learning • Capacity utilization • Linkages among activities • Interrelationships among business units

10 cost drivers related to value chain activities: • • • • •

Degree of vertical integration Timing of market entry Firm's policy of cost or differentiation Geographic location Institutional factors (regulation, union activity, taxes, etc.)

Differentiation and the Value Chain • • • • •

Policies and decisions Linkages among activities Timing Location Interrelationships

Differentiation and the Value Chain • Learning • Integration • Scale (e.g. better service as a result of large scale) • Institutional factors

Technology and the Value Chain • • • • • • •

Inbound Logistics Technologies Transportation Material handling Material storage Communications Testing Information systems

Operations Technologies • • • • •

Process Materials Machine tools Material handling Packaging

Operations Technologies • • • •

Maintenance Testing Building design & operation Information systems

Outbound Logistics Technologies • • • • •

Transportation Material handling Packaging Communications Information systems

Marketing & Sales Technologies • • • •

Media Audio/video Communications Information systems

Service Technologies • Testing • Communications • Information systems

Linkages Between Value Chain Activities • Value chain activities are not isolated from one another. Rather, one value chain activity often affects the cost or performance of other ones. Linkages may exist between primary activities and also between primary and support activities.

Linkages Between Value Chain Activities • Consider the case in which the design of a product is changed in order to reduce manufacturing costs. Suppose that inadvertently the new product design results increased service costs; the cost reduction could be less than anticipated and even worse, there could be a net cost increase.

Outsourcing Value Chain Activities • Whether the activity can be performed cheaper or better by suppliers. • Whether the activity is one of the firm's core competencies from which stems a cost advantage or product differentiation.

Outsourcing Value Chain Activities • The risk of performing the activity inhouse. If the activity relies on fast changing technology or the product is sold in a rapidly-changing market, it may be advantageous to outsource the activity in order to maintain flexibility and avoid the risk of investing in specialized assets.

Outsourcing Value Chain Activities • Whether the outsourcing of an activity can result in business process improvements such as reduced lead time, higher flexibility, reduced inventory, etc.

Financial Analysis • Assessment of the firm’s past, present and future financial conditions • Done to find firm’s financial strengths and weaknesses • Primary Tools: – Financial Statements – Comparison of financial ratios to past, industry, sector and all firms

Types of Ratios • Financial Ratios: – Liquidity Ratios • Assess ability to cover current obligations

– Leverage Ratios • Assess ability to cover long term debt obligations

• Operational Ratios: – Activity (Turnover) Ratios • Assess amount of activity relative to amount of resources used

– Profitability Ratios • Assess profits relative to amount of resources used

• Valuation Ratios:

• Assess market price relative to assets or earnings

LIQUIDITY RATIO:

Current Ratio= Current Assets/Current Liabilities.

Quick Ratio= CA-Inventory/CL

LEVERAGE RATIO • Debt-Equity Ratio: Total long term debt/Shareholder’s funds •

Interest coverage ratio: EBIT/shareholder’s funds

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Proprietary ratio: Shareholder’s funds/total assets

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Debt to assets ratio: Total Debts/total assets

Activity Ratio •

Asset Turnover = Sales turnover / assets employed

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Stock turnover = Cost of goods sold / stock expressed as times per year

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Working Capital ratio = Sales (net)/W.C.

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Fixed Assets TO ratio = Sales (Net)/Net fixed Assets

Profitability ratio • G.P.ratio=GP/Net Sales • N.P.ratio=NP/Net sales • Operating ratio = Op. Cost/Net sales

Operating Profitability Ratios EBIT Sales EBIT × = Sales Total Assets Total Assets EBIT Interest Expense Net Before Tax − = Total Assets Total Assets Total Assets

KEY FACTOR RATING • The key factors that affect org functioning. Info regarding key factors is collected. Answers are being closely examined with respect to key factors. The impact of each key factor is examined.

FUNCTIONAL AREA PROFILE & RESOURCE DEVELOPMENT MATRIX

• To make a comparative analysis of a firm’s own resource deployment position and focus of efforts with those of competitors. • First, technique requires preparation of matrix of functional area with common features. • Secondly matrix is prepared showing deployment and focus of efforts over a period of time.

STRATEGIC ADVANTAGE PROFILE • SAP tries to find out the org strengths and weaknesses with relation to some CSF.

• • • • •

Critical Success Factor Analysis Developed – John Rockart Satisfactory performance – required – for organization – achieve goals Identify – tasks & requirements – for success CSFs – means to achieve goals Sources of CSF - industry, environment & temporal factors

• Characteristics of CSF Analysis – Internal – External – Monitor – Develop

• Process of CSF Analysis – Identify – CSF – Critical information – internal & external – Critical assumption set – Critical decisions

• Benefits of CSF Analysis – Results –needs – enterprise – clearly – Measure success – prioritize goals – Needs of end users & enterprise are met

Long term Mission & Goals • Mission – short /long term activity – to achieve vision • Mission statement – statement that communicates – total essence – organization • Gives – what an organization is today and what it should be • Focus and guide - internal decision making

• Characteristics of mission statement – Feasible, – Precise – Clear – Motivating – Should give the means to achieve objectives

• Characteristics of successful strategic planning – Will lead to action – Builds a shared vision which is value based – Will be a participative process – Accepts accountability – Externally focused to organization’s environment – Will be relying on quality data – Will require openness to questioning

Contingency Planning • Contingency planning – approach – identify – what if – something wrong happens • Planning – strategies – cope up – contingency events • Objective – make – to think – possible contingencies and its responses

• Process of contingency planning – Identifying - Identify events when plan is to be invoked and who will be responsible for implementing it – Assessing - Assess the value of the resources and correlate them with their functions to identify the critical elements – Prevention - Preventative measures for critical resources – Developing – build the plan – simple & straight forward – step by step workflows an checklists – Communicate and rehearse

• Benefits of contingency planning – Strengthens the organization – cope up with unexpected developments – Reduces stress – reduce delay & indecisiveness – Respond sensibly & wisely – Focus on issues and identify constraints – Clarifies roles and responsibilities • Barriers – Maintaining commitment & participation – Keeping the process on going – Updating and reviewing the process

BALANCED SCORECARD FRAMEWORK

BALANCED SCORECARD FRAMEWORK Financial perspective

Customer’s

Vision &

Perspective

Strategy

Learning & growth

Internal Business process

Translate Strategy to Operational terms The Strategy Financial Perspective “If we succeed, how will we look to our shareholders

A Strat Set of o f

egy Is

A

Hypoth eses About C ause & Effect

Customer Perspective “To achieve my vision, how must we look to our customers? Internal Perspective “To satisfy my customer, at which processes must I excel?”

Organization Learning “To achieve my vision, how must my organization learn and improve?’’

60% of organization s don’t link strategy & budgets

STRATEGY

85% of management Strategic teams spend less Learning Loop than one hour per month on strategy BALANCED issues SCORECAR D

A good Balanced scorecard describes the Organizational Strategy

Strategy

Balanced Scorecard

Measures are Balanced between • Outcome measures ( results from past efforts)and the measures that drive performance •Objective, easily quantified outcome measures and subjective, somewhat judgmental performance drivers •Lagging and leading indicators •Short-term and long-term objectives •Stakeholders

•BSC ‘s are more than just a somewhat adhoc collection of financial & non-financial performance measures •BSC is a Top –down process driven by the mission and strategy

What does BSC do? •Clarify and translate vision and strategy •Communicate and link strategic objectives and measures •Plan ,set targets, and align strategic initiatives •Enhance strategic feedback and learning

What does BSC do? •Clarify and gain consensus about strategy •Communicate strategy throughout the organization •Align departmental and personal goals to strategy •Link strategic objectives to long term targets and annual budgets •Perform periodic and systematic strategic reviews •Obtain feedback to learn about and improve strategy

Financial perspective Indicate whether company’s strategy implementation and execution are contributing to bottom-line improvement •Profitability •Operating income, •Return-on-capital employed •EVA •Growth •Cash flow

ve e i t c ll w e wi ers sp r Pe how old l ia ed, reh c (ROCE) an cce sha n Fi su our e to w “If look

Financial perspective Increase EVA to +2%

Revenue Growth Strategy

New Products

High end products

ve e i t ec ill w p rs w w ers e P ho old l ia ed, reh c n ce ha a s c n Fi su our w e k to f “I loo

Productivity Strategy

Cost

Productivity

Customer Perspective Customer & Market segment in which the unit is competing e •Performance in the targeted •Customer satisfaction •Customer retention •New customer acquisition

tiv how c pe on, r markets s r si u e P vi o o r e my k t m o ve loo rs? t s ie e e u m h C c t w to a us us o c “T m

•Customer profitability •Specific measures of value propositions- short lead time or on-time delivery •New approaches to satisfy emerging needs

Customer Perspective Win-win Relations with Channel partners

Differentiators On time delivery

Relation ship

•Basic Requirement •Clean •Quality •Variability within specified limits

Technical support

Survey

Assistance

Internal –Business-process perspective Critical internal process in which organization must excel Deliver value proposition

Satisfy shareholders expectations

t e a tiv er, I c pe tom ust s r e us s m P c al my se n er sfy ces l?” t In ati pro xce s h e o c i “T wh

Internal – Process Identify entirely new process at which organization must excel to meet customer & financial objectives

Internal –Business-process perspective Customer Value Proposition

Achieve Operational excellence

lowest cost producer t e a tiv er, I c pe tom ust s r e us s m P c al my se n er sfy ces l?” t In ati pro xce s h e o c i “T wh

Learning and growth perspective

•People based measures •ESI •Competencies •Skill Mix •Systems (Technology)

“T o or ac Org ga hie a ni ve niz za a tio my tio n n le visi Le ar on ar n an , ho ning d w im m pr us ov t m e? y ’’

Infrastructure that organization must build to create long-term growth and improvement

Learning and growth perspective

Motivated and prepared workforce

Climate for action •ESI

Competencies

IT Technology

Cause and Effect Relationship ROCE Customer Loyalty On-line delivery Process Cycle Time

Process Quality Employee Competency

Four perspectives: Are they sufficient •Community perspective - Social responsibility •Suppliers perspective

Question : Is it vital for success of business unit’s strategy?

Involvement Athlete Outreach / Program Expansion

Internal Operations

Community

Measures  # of new programs / # athletes  Volunteer retention / recruitment  New donors  Donor feedback  # athletes in outreach program

Internal Operations

Financial Donor

Objectives Positive Image

Customer / Athlete

The Balanced Scorecard Effectively Communicates How Well the MSO Is Achieving Their Massachusetts Special Olympics Mission Statement Mission

Objectives Measures Training & Competition  # athlete able to find a team Controlled Cost  Cities wit registered athletes Quality Programs  Fee incre Community For  Family feedback Athletes  # of acti outside of competit

Objectives Measures Organization and Administration  % Plans distributed team Public Relations meetings  # area management team  $ raised Training  # training classes offered outreach  # first time athletes Objectives Knowledge of MSO and Management time Database Management Recognition

Measures  Volunteers trained in MSO sports  Registration forms in one  Program guide distribution  Volunteers in database  Advanced coaches’ training/ coaches’/ meetings

Balanced Scorecard Example Vision To provide patients, families and primary care physicians with the best, most compassionate care possible and to excel at communications Customer Patient • % Satisfied • % would Recommend • % Parents Could Articulate Care Plan • Discharge Timeliness

Financial

Primary Care Physician • % Satisfied with Communication • % Parents Could Identify DCH Physician

• Operating Margin • Cost per Case

• Revenue from Neonatal Care

Internal Processes Wait Time

Quality

Productivity

• Admissions • Discharge

• Infection Rates • Blood Culture Contaminate Rate • Use of Clinical Pathways (Top 10)

• Length of Stay • Readmission Rate • Daily Staffing vs. Occupancy

Learning & Growth • Incentive Plan - Awareness - Implementation

• Strategic Database - Availability - Use

A successful Balanced Scorecard program starts with a recognition that it is not a metrics” project, it’s a “change” process.

A Good Balanced Scorecard Describes the Organization Strategy. Financially Strong

Customer

Financial

Financially Strong

Strategic Objectives

F1 Return on Capital Employed F2 Existing Asset Utilization

Strategic Measures

   

F3 Profitablity

Delight the Customer

Win-Win Dealer Relationship

F4 Industry Cost Leader



F5 Profitable Growth

 

C1 Continually Delight the Targeted Consumer



C2 Build Win-Win Relations with Dealer







ROCE Cash Flow Net Margin Rank (vs. Competition) Full Cost per Gallon Delivered (Vs. Competition) Volume Growth Rate vs. Industry Premium Ratio Non-Gasoline Revenue and Margin

Share of Segment in Selected Key Markets Mystery Shopper Rating Dealer Gross Profit Growth Dealer Survey

A Good Balanced Scorecard Describes the Organization Strategy.

Build the Franchise

Internal

Increase Customer Value

I1 Innovative products and services

 

I2 Best-in-class Franchise Teams

     

I3 Refinery Performance

Operational Excellence

I4 Inventory Management

Good Neighbor

I5 Industry Cost Leader

 

I6 On Spec-On Time

Learning & growth

I7 Improve EHS Motivated and Prepared Workforce

L1 Climate for Action L2 Core Competencies and Skills L3 Access to Strategic Information

    

New Product ROI New Product Acceptance Rate Dealer Quality Score Yield Gap Unplanned Downtime Inventory Levels Run-out Rate Activity Cost. vs. Competition Perfect Orders Number of Environmental Incidents Days Away from Work Rate Employee Survey Personal BSC (%) Strategic Competency Availability Strategic Information Availability

MAKE STRATEGY EVERYONE’S JOB

CORP Top-Down “Bridging Process” To Share the Strategy & Align the Workforce

SBU • EDUCATION • PERSONAL GOAL ALIGNMENT • BALANCED PAYCHECKS

The Strategy Focused Workforce

Bottom-Up Process to Internalize & Execute the Strategy

Build STRATEGY-FOCUSED ORGANIZATIONS 1 Mobilize Change through Executive Leadership

2 Translate the Strategy to Operational Terms • Strategy Mape • Balanced Scorecards

• Mobilization • Governance Processes • Strategic Management

STRATEG Y

5

• Link Budgets & Strategy • Strategic Learning • Analysis & Information System

4 3

Align the Organization to the Strategy • Corporate Role • Business Unit Synergic • Support Unit Synergic

Make Strategy a Continual process

Make Strategy Everyone’s Job

• Strategic Awareness • Personal Scorecard • Balanced Paychecks

Describing Strategy : Strategy Is a Step in a Continuum MISSION Why we exist VALUES What we believe In VISION What we want to be STRATEGY Our game plan BALANCED SOCRECARD Implementation & Focus STRATEGIC INITIATIVES What we need to do PERSONAL OBJECTIVES What I need to do

STRATEGIC OUTCOMES

Satisfied SHAREHOLDERS

Delighted CUSTOMERS

Satisfied PROCESSES

Motivated & Prepared WORKFORCE

What Is A Good Balanced Scorecard? #1.

Executive Involvement Strategic decision makers must validate the strategy and related measures

#2

Cause-and-Effect Relationships Every objective selected should be part of a chain of cause and effect that represents the strategy

#3

Performance Drivers A balance of outcome measures and leading measures facilitates anticipatory management

#4

Linked to Budget/Financials Every measure selected can ultimately be supported/enabled by Budgetary Funds

#5

Change Initiatives Aligned Strategic Initiatives that change the behavior of the organization

CORPORATE LEVEL STRATEGIES

Types of CLS • • • •

Growth/expansion Stability Retrenchment combination

Growth/Expansion A) INTENSIFICATION    

Market penetration Market development Product development Innovation

B) DIVERSIFICATION    

Concentric Conglomerate Forward Backward

Concentric Diversification(RELATED) • When an org diversifies into a related but distinct business. With concentric diversification, new businesses can be related to existing businesses through products, markets or technology. Example: Philips into Cellular phones,etc

CONGLOMERATE(UNRELATED) • An org diversifies into an area that are unrelated to its business. The decision is taken due to technological change.

STABILITY STRATEGY • When firms are satisfied with their current rate of growth and profits, they may decide to use a stability strategy. This strategy is essentially a continuation of existing strategies. Such strategies are typically found in industries having relatively stable environments. The firm is often making a comfortable income operating a business that they know, and see no need to make the psychological and financial investment that would be required to undertake a growth strategy.

RETRENCHMENT STRATEGIES • Retrenchment strategies involve a reduction in the scope of a corporation's activities, which also generally necessitates a reduction in number of employees, sale of assets associated with discontinued product or service lines, possible restructuring of debt through bankruptcy proceedings, and in the most extreme cases, liquidation of the firm.

DIVESTMENT STRATEGY • A divestment decision occurs when a firm elects to sell one or more of the businesses in its corporate portfolio. Typically, a poorly performing unit is sold to another company and the money is reinvested in another business within the portfolio that has greater potential.

BUSINESS-LEVEL STRATEGIES

• Business-level strategies are similar to corporate-strategies in that they focus on overall performance. In contrast to corporate-level strategy, however, they focus on only one rather than a portfolio of businesses. Business units represent individual entities oriented toward a particular industry, product, or market

• A common focus of business-level strategies are sometimes on a particular product or service line and business-level strategies commonly involve decisions regarding individual products within this product or service line. There are also strategies regarding relationships between products.

ANALYSIS OF BUSINESS-LEVEL STRATEGIES • PORTER'S GENERIC STRATEGIES.: Cost leadership Strategy Differentiation Strategy Focus Strategy

COST LEADERSHIP • Cost-leadership strategies require firms to develop policies aimed at becoming and remaining the lowest cost producer and/or distributor in the industry. Note here that the focus is on cost leadership, not price leadership. This may at first appear to be only a semantic difference, but consider how this fine-grained definition places emphases on controlling costs while giving firms alternatives when it comes to pricing (thus ultimately influencing total revenues).

DIFFERENTIATION STRATEGY • Differentiation strategies require a firm to create something about its product that is perceived as unique within its market. Whether the features are real, or just in the mind of the customer, customers must perceive the product as having desirable features not commonly found in competing products. The customers also must be relatively price-insensitive. Adding product features means that the production or distribution costs of a differentiated product will be somewhat higher than the price of a generic, non-differentiated product. Customers must be willing to pay more than the marginal cost of adding the differentiating feature if a differentiation strategy is to succeed.

FOCUS STRATEGY • Focus, the third generic strategy, involves concentrating on a particular customer, product line, geographical area, channel of distribution, stage in the production process, or market niche. The underlying premise of the focus strategy is that the firm is better able to serve its limited segment than competitors serving a broader range of customers. Firms using a focus strategy simply apply a cost-leader or differentiation strategy to a segment of the larger market. Firms may thus be able to differentiate themselves based on meeting customer needs through differentiation or through low costs and competitive pricing for specialty goods. •

COMPETITIVE ADVANTAGE • Competitive advantage occurs when a organization acquires or develops an attribute or combination of attributes that allows it to outperform its competitors. These attributes can include access to natural resources, such as high grade ores or inexpensive power, or access to highly trained and skilled personnel human resources. New technologies such as robotics and information technology either to be included as a part of the product, or to assist making it. The term competitive advantage is the ability gained through attributes and resources to perform at a higher level than others in the same industry or market

How to build/acquire CA? • • • • • • •

Innovation Integration Alliances/mergers/acquisitions R&D Entry Barriers Benchmarking Value chain approach

How to build/acquire CORE COMPETENCE? • Focus on two or more skills • Low cost strategies • Benefits of cost leadership

STRATEGIC ANALYSIS AND CHOICE

STRATEGY CHOICE • How effective has the existing strategy been? • How effective will that strategy be in the future? • What will be the effectiveness of selected strategies?

STRATEGY CHOICE •

Strategists collect and evaluate information to assess strengths and weaknesses of the internal environment and opportunities and threats of the external environment. Such an assessment presents a list of possible strategic alternatives.From among those alternatives, choices are made. • It determines the characteristics and forms of an organization's strategic direction. “the decision to select among the grand strategies considered, the strategy which will best meet the enterprise’s objectives”.

GAP Analysis • Gap analysis is a tool that helps a company to compare its actual performance with its potential performance. • It simply answer two questions - where are we now? and where do we want to be? . • The difference between the two is the GAP - this is how you are going to get there.

Tools of Determining Strategic Choice • • • • • •

BCG Portfolio GE Multifactor Portfolio Matrix Hofer’s Product-Market Evolution Matrix Shell Direction Policy Industry’s level policy Porter’s five forces model

Portfolio Analysis And BCG Matrix

The Growth Share Matrix • It evaluates the strength of a firm from the portfolio of businesses or products the firm has in different stages of PLC, which are required for future growth.

• It analyses the impact of investing resources in different SBUs on the corporate’s future earnings and cash flow.

SBUs are evaluated from two ways 1. Industry attractiveness (market growth) And 2. Competitive strength (relative market share)

The Growth Share Matrix A Matrix is created considering the market growth and relative market share of all the businesses in their respective industries and businesses are placed in that matrix for analysis and evaluation.

The Growth Share Matrix • The market growth rate on the vertical axis is the proxy measure for the industry Attractiveness. • The relative market share is proxy for its competitive strength in the industry.

BCG Growth-Share Matrix In BCG approach, the company classifies all its SBUs into 4 types as “star”, “cash cow”, “question mark” and “dog” according to their market growth and relative market share.

The BCG Matrix

Market growth rate

High

Stars

Question marks

Cash cows

Dogs

Low High

Relative market share

Low

Source: Perspectives, No. 66, “The Product Portfolio,” Adapted by permission from The Boston Consulting Group, Inc., 1970.

BCG Matrix Problem Child

Market growth rate

Stars

? $ Cash Cows

Dogs

Relative market share

BCG Matrix Problem Child

Market growth rate

Stars Revenue +++ + Expenses _ _ _ Net +

Revenue + + + ++ Expenses _ Net +++ + Cows Cash

Revenue Expenses _ Net

+ ___ ___

Revenue + + Expenses _ _ _ _ Net ___

Relative market share

Dogs

BCG Market Share/Market Growth Matrix

BCG Matrix • Dogs are businesses that have a very small share of a market that is not expected to grow. • Cash cows are businesses that have a large share of a market that is not expected to grow substantially. • Question marks are businesses that have only a small share of a quickly growing market. • Stars are businesses that have the largest share of a rapidly growing market.

Stars are high-growth, high-share businesses or products. They often need heavy investment to finance their rapid growth. Therefore, they may not be producing a positive cash flow. The business strategy will generally be for growth fueled by externally acquired capital. Eventually, their growth will slow, and they will turn into cash cows.

Cash cows are low-growth, high-share businesses or products. These established and successful SBUs need less investment to keep their market share. They produce a lot of cash to be used for other business units of the company. They are either milked for investment in stars or question marks or harvested if there is little optimism for a stable future.

Question marks sometimes called problem children, are lowshare business units in high-growth markets. They need a lot of cash to keep and increase their share; they can not generate enough cash themselves. Management must decide which question mark it should build into stars and which should phase out.

Dogs are low-growth, low-share businesses and products. They often have poor profitability. Therefore, the business strategy for a dog is most often to divest, but occasionally to hold for possible strategic repositioning as a question mark or cash cow.

Portfolio Strategies BUILD Does the SBU have the potential to be a star? HOLD Can you maintain and preserve market share?

Four Portfolio Strategies

HARVEST . Increase the short-term return without impacting long-run prospects. DIVEST Is it appropriate to dump SBU’s with low-growth potential?

Limitations of the BCG Matrix 1.

Market Growth rate is an inadequate descriptor of overall industry attractiveness.

2.

Relative market share is inadequate as a descriptor of overall competitive strength.

3.

The analysis is highly sensitive to how growth and share are measured.

4.

It provide little guidance on how best to implement the investment strategies.

5.

The model implicitly assumes that business units are independent or one another except for the flow of cash.

How to Identify SBUs? • It is the basic competitive unit of a company. • It has a specific and identifiable group of customers. • It has specific and identifiable competitors. • It can be measured as an independent entity in terms of profit and loss. • Therefore, it may require a separate marketing strategy.

GE / McKinsey Matrix • In consulting engagements with General Electric in the 1970's, McKinsey & Company developed a nine-cell portfolio matrix as a tool for screening GE's large portfolio of strategic business units (SBU). This business screen became known as the GE/McKinsey Matrix and is shown below: • The GE matrix has nine cells vs. four cells in the BCG matrix. •

• The GE / McKinsey matrix is similar to the BCG growth-share matrix in that it maps strategic business units on a grid of the industry and the SBU's position in the industry. The GE matrix however, attempts to improve upon the BCG matrix in the following two ways: The GE matrix generalizes the axes as "Industry ∀• Attractiveness" and "Business Unit Strength" whereas the BCG matrix uses the market growth rate as a proxy for industry attractiveness and relative market share as a proxy for the strength of the business unit.

Industry Attractiveness • The vertical axis of the GE / McKinsey matrix is industry attractiveness, which is determined by factors such as the following:  Market growth rate  Market size  Demand variability  Industry profitability  Industry rivalry  Global opportunities  Macroenvironmental factors (PEST)

Each factor is assigned a weighting that is appropriate for the industry. The industry attractiveness then is calculated as follows:

Business

Unit Strength

The

horizontal axis of the GE / McKinsey matrix is the strength of the business unit. Some factors that can be used to determine business unit strength include: Market

share

Growth

in market share

Brand

equity

Distribution Production Profit The

channel access

capacity

margins relative to competitors

business unit strength index can be calculated by multiplying the estimated value of each factor by the factor's weighting, as done for industry attractiveness.

GE MATRIX contd.. Industry

attractiveness and business unit strength are calculated by first identifying criteria for each, determining the value of each parameter in the criteria, and multiplying that value by a weighting factor. The result is a quantitative measure of industry attractiveness and the business unit's relative performance in that industry Industry

attractiveness

=

factor value1 x factor weighting1 + factor value

x factor weighting +…

Plotting the Information Each

business unit can be portrayed as a circle plotted on the matrix, with the information conveyed as follows: Market

size is represented by the size of the circle. Market

share is shown by using the circle as a pie chart. The

expected future position of the circle is portrayed by means of an arrow.

The following is an example of such a representation:

The

shading of the above circle indicates a 38% market share for the strategic business unit. The arrow in the upward left direction indicates that the business unit is projected to gain strength relative to competitors, and that the business unit is in an industry that is projected to become more attractive. The tip of the arrow indicates the future position of the center point of the circle.

Strategic Implications Resource allocation recommendations can be made to grow, hold, or harvest a strategic business unit based on its position on the matrix as follows: • Grow strong business units in attractive industries, average business units in attractive industries, and strong business units in average industries. • Hold average businesses in average industries, strong businesses in weak industries, and weak business in attractive industries.

Harvest weak business units in unattractive industries, average business units in unattractive industries, and weak business units in average industries. 

There

are strategy variations within these three groups. For example, within the harvest group the firm would be inclined to quickly divest itself of a weak business in an unattractive industry, whereas it might perform a phased harvest of an average business unit in the same industry.

LIMITATION GE • While the GE business screen represents an improvement over the more simple BCG growthshare matrix, it still presents a somewhat limited view by not considering interactions among the business units and by neglecting to address the core competencies leading to value creation. Rather than serving as the primary tool for resource allocation, portfolio matrices are better suited to displaying a quick synopsis of the strategic business units.

GE Mckinsey Matrix Bus Str Ind at High

STR AVERA WEAK - ONG GE GROW

AVERAGE Low

HOLD

HOLD

HARVEST

Hofer’s product Market evolution • According to Hofer and Schendel, "The Principal difficulty with GE Business Screen is that it does not depict as affectively at it might the positions of new businesses that are just starting to grow in new industries.

• Major changes in basic competitive position occur in the stages of development, shakeout and decline because in these stages the basic nature of competition changes. It is more difficult to make changes to competitive position in the other stages of growth, maturation and saturation as the bases for competition are usually well established.

• Market shifts during these stages of the market evolution do happen however and can be caused by:    

a major blunder by the industry leader a major investment program by a well positioned follower through the acquisition and effective integration of another firm within the industry through a sustained effort to produce small, consistent incremental advantages over a long period of time

.

Stages of Product-market evolution

Direction Policy Matrix •

It uses two dimensions-business sector prospects and company’s competitive capabilities-in order to choose appropriate strategies.

•

Each dimension is further divided into three degress:business sector prospects into attratctive,unattractive and average and company's competitive capabilities into strong, average and weak. The combination of two dimensions further sliced into three compartments gives a nine cell matrix.

•

Leader – Top position; major resources are focused upon the SBU.

•

Try harder – Average capabilities but operating in attractive prospects. New additional resources top strengthen their position.

•

Double or quit – Business prospects are attractive but company’s own resources are weak. Two possibilities either INVEST MORE or QUIT

•

Growth - grow the market by focusing on R&D,innovations.

•

Custodial – Average position in both the cases bear with the situation with little help from other product divisions.

•

Cash Generator – strong capabilities but unattractive prospects .May continue for satisfactory profits.

•

Phased withdrawal – Average to weak position, little chance of generating cash..

•

Divest – Business Capabilities are weak here.SBU;s running in losses with uncertain cash flows. Not likely o improve in future..

Business-Level Strategic Analysis • • • • •

Industry analysis Strategic Group analysis Competitor analysis Life cycle analysis SWOT Analysis

Subjective Factors influencing Strategic Choice • • • • • • •

Commitment of past strategies Attitudes towards risk Degree of firms’ external dependence Internal political considerations Time constraints Competitive reactions Corporate culture.

STRATEGIC IMPLEMENTATION

• “Implementation of strategies is concerned with the design and management of systems to achieve the best integration of people,structures,processes and resources in reaching organizational purpose”.

RESOURCE ALLOCATION • While implementing strategies, the scarce resources (financial,physical,human,etc) resources need to be allocated carefully. In this regard, one can follow, top-down and bottom-up approach. • In top -down approach resources are allocated through a process of segregation down to operating levels. • In the bottom-up approach resources are distributed after a process of aggregation from the operating level .

Means of resource allocation • • • • • • •

Strategic Budget Capital budget Performance budget ZBB Decision package Ranking Resource allocation

Structural Issues • FUNCTIONAL STRUCTURE:A company organized with a functional structure groups people together into functional departments such as purchasing, accounts, production, sales, marketing. These departments would normally have functional heads who may be called managers or directors depending on whether the function is represented at board level.

Advantages • • • • • •

Clarity Economies of scale Specialization Coordination In-depth skill development Suitability

Limitations • Effort Focus • Poor decision-making • Sub-unit conflicts • Managerial vacuum

PRODUCT DEPARTMENTATION •

The purpose of product departmentation is that every product is handled by separate management team and the problems faced in the development of a product are carried out by single group of employees working in that unit.

•

The disadvantage is that the product managers need to coordinate each other for the resource sharing which becomes a difficult process because of lesser communication between the product divisions.

•

Sometimes, products of the same company start competing with each other which results in snatching one's division profit from other division leaving behind net profit for the company zero. However this kind of structure works best in the big organizations which have lots of products in their product portfolio.

PRODUCT DEPARTMENTATION

• Advantage: The manager can aware about their particular activity in the firm about the activities which are related to the manufacturing a product. Disadvantage: Sometimes the managers and employees do not meet the requirement of other department which is somewhere related to their particular department because they are working in their department and there is no more communication between the other departments

GEOGRAPHIC DEPARTMENTATION

MATRIX ORGNAISATION STRUCTURE • A Matrix structure organisation contains teams of people created from various sections of the business. These teams will be created for the purposes of variety of projects rather than a specific project and will be led by a project manager. Often the team will only exist for the duration of the projects and matrix structures are usually deployed to develop new products and services .

The advantages of a matrix include • Individuals can be chosen according to the needs of the project. • The use of a project team which is dynamic and able to view problems in a different way as specialists have been brought together in a new environment. • Project managers are directly responsible for completing the project within a specific deadline and budget.

the disadvantages include • A conflict of loyalty between line managers and project managers over the allocation of resources. • If teams have a lot of independence can be difficult to monitor. • Costs can be increased if more managers (ie project managers) are created through the use of project teams

Factors affecting Organizational structure • Size • Technology • Environment • People

PROJECT MANAGEMENT • Project management is a carefully planned and organized effort to accomplish a specific (and usually) one-time objective. • for example, construct a building or implement a major new computer system. • Project management includes developing a project plan, which includes defining and confirming the project goals and objectives, identifying tasks and how goals will be achieved, quantifying the resources needed, and determining budgets and timelines for completion..

• It also includes managing the implementation of the project plan, along with operating regular 'controls' to ensure that there is accurate and objective information on 'performance' relative to the plan, and the mechanisms to implement recovery actions where necessary. Projects usually follow major phases or stages (with various titles for these), including feasibility, definition, project planning, implementation, evaluation and support/maintenance.

Benefits of Project Mgt. • • • • • • • • •

Better efficiency in delivering services Improved/increased/enhanced customer satisfaction Enhanced effectiveness in delivering services Improved growth and development within your team Greater standing and competitive edge Opportunities to expand your services:. Better Flexibility: Increased risk assessment:. Increase in Quality:

BUSINESS ETHICS AND SOCIAL RESPONSILBILTY

VALUES Values are those things that really matter to each of us ... the ideas and beliefs we hold as special. Caring for others, for example, is a value; so is the freedom to express our opinions.

CULTURE • The totality of socially transmitted behavior patterns, arts, beliefs, institutions, and all other products of human work and thought. • These patterns, traits, and products considered as the expression of a particular period, class, community, or population: • These patterns, traits, and products considered with respect to a particular category, such as a field, subject, or mode of expression:

ETHICS • a system of moral principles • the rules of conduct recognized in respect to a particular class of human actions or a particular group, culture, etc.: • .(usually used with a singular verb ) that branch of philosophy dealing with values relating to human conduct, with respect to the rightness and wrongness of certain actions and to the goodness and badness of the motives and ends of such actions.

BUSINESS ETHICS • Business ethics (also known as Corporate ethics) is a form of applied ethics that examines ethical principles and moral or ethical problems that arise in a business environment. It applies to all aspects of business conduct and is relevant to the conduct of individuals and business organizations as a whole. Applied ethics is a field of ethics that deals with ethical questions in many fields such as medical, technical, legal and business ethics.

Factors influencing business ethics • Legislation • Government rules & regulations • Social pressures • Conflicts between personal values and needs of the firms.

SOCIAL RESPONSIBILITY • Social responsibility is an ethical or ideological theory that an entity whether it is a government, corporation, organization or individual has a responsibility to society at large. This responsibility can be "negative", meaning there is exemption from blame or liability, or it can be "positive," meaning there is a responsibility to act beneficently”.

• corporate responsibility is a form of corporate self-regulation integrated into a business model. Ideally, CSR policy would function as a built-in, self-regulating mechanism whereby business would monitor and ensure their adherence to law, ethical standards, and international norms. Business would embrace responsibility for the impact of their activities on the environment, consumers, employees, communities, stockholders and all other members of the public sphere.

• Corporate social responsibility (CSR) isn't just about doing the right thing. It means behaving responsibly, and also dealing with suppliers who do the same. It also offers direct business benefits.

BENEFITS OF CSR • A good reputation makes it easier to recruit employees. • Employees may stay longer, reducing the costs and disruption of recruitment and retraining. • Employees are better motivated and more productive. • CSR helps ensure you comply with regulatory requirements. • Activities such as involvement with the local community are ideal opportunities to generate positive press coverage.

• Good relationships with local authorities make doing business easier. See the page in this guide on how to work with the local community. • Understanding the wider impact of your business can help you develop new products and services. • CSR can make you more competitive and reduces the risk of sudden damage to your reputation (and sales). Investors recognize this and are more willing

LEADERSHIP & It’s STYLE

Leadership

The ability to influence a group toward the achievement of goals

Principles of Leadership •

Know yourself and seek self-improvement - In order to know yourself, you have to understand your be, know, and do, attributes. Seeking self-improvement means continually strengthening your attributes. This can be accomplished through self-study, formal classes, reflection, and interacting with others.

•

Be technically proficient - As a leader, you must know your job and have a solid familiarity with your employees' tasks

. •

Seek responsibility and take responsibility for your actions Search for ways to guide your organization to new heights. And when things go wrong, they always do sooner or later -- do not blame others. Analyze the situation, take corrective action, and move on to the next challenge

Principles of Leadership • Make sound and timely decisions - Use good problem solving, decision making, and planning tools. • Set the example - Be a good role model for your employees. They must not only hear what they are expected to do, but also see. We must become the change we want to see - Mahatma Gandhi • Know your people and look out for their well-being Know human nature and the importance of sincerely caring for your workers. • Keep your workers informed - Know how to communicate with not only them, but also seniors and other key people.

Principles of Leadership • Develop a sense of responsibility in your workers -. • Ensure that tasks are understood, supervised, and accomplished - Communication is the key to this responsibility. • Train as a team - Although many so called leaders call their organization, department, section, etc. a team; they are not really teams...they are just a group of people doing their jobs. • Use the full capabilities of your organization - By developing a team spirit, you will be able to employ your organization, department, section, etc. to its fullest capabilities

Factors of leadership

Factors of leadership • Follower • Leader • Situation • communication

types of leaders • • • •

Authoritarian Team Leader Country Club Impoverished

• Authoritarian Leader (high task, low relationship) : • People who get this rating are very much task oriented and are hard on their workers (autocratic). There is little or no allowance for cooperation or collaboration. Heavily task oriented people display these characteristics: they are very strong on schedules; they expect people to do what they are told without question or debate; when something goes wrong they tend to focus on who is to blame rather than concentrate on exactly what is wrong and how to prevent it; they are intolerant of what they see as dissent (it may just be someone's creativity),

• Team Leader (high task, high relationship) This type of person leads by positive example and endeavors to foster a team environment in which all team members can reach their highest potential, both as team members and as people. They encourage the team to reach team goals as effectively as possible, while also working tirelessly to strengthen the bonds among the various members. They normally form and lead some of the most productive teams.

• Country Club Leader (low task, high relationship) This person uses predominantly reward power to maintain discipline and to encourage the team to accomplish its goals. Conversely, they are almost incapable of employing the more punitive coercive and legitimate powers. This inability results from fear that using such powers could jeopardize relationships with the other team members.

• Impoverished Leader (low task, low relationship) A leader who uses a "delegate and disappear" management style. Since they are not committed to either task accomplishment or maintenance; they essentially allow their team to do whatever it wishes and prefer to detach themselves from the team process by allowing the team to suffer from a series of power struggles

The Process of Great Leadership • Challenge the process - First, find a process that you believe needs to be improved the most. • Inspire a shared vision - Next, share your vision in words that can be understood by your followers. • Enable others to act - Give them the tools and methods to solve the problem. • Model the way - When the process gets tough, get your hands dirty. A boss tells others what to do, a leader shows that it can be done. • Encourage the heart - Share the glory with your followers' hearts, while keeping the pains within your own.

Managers Vs Leaders Manager Characteristics • Administers • A copy • Maintains • Focuses on systems and structures • Relies on control • Short range view • Asks how and when • Eye on bottom line • Imitates • Accepts the status quo • Classic good soldiers • Does things right

Leader Characteristics • Innovates • An original • Develops • Focuses on people • Inspires trust • Long range perspective • Asks what and why • Eye on horizon • Originates • Challenges the status quo • Own person • Does the right thing

Charismatic Leadership Key Characteristics of Charismatic leaders 1.

Self Confidence- They have complete confidence in their judgment and ability.

2.

A vision- This is an idealized goal that proposes a future better than the status quo. The greater the disparity between idealized goal and the status quo, the more likely that followers will attribute extraordinary vision to the leader.

3.

Ability to articulate the vision- They are able to clarify and state the vision in terms that are understandable to others. This articulation demonstrates an understanding of the followers’ needs and, hence acts as a motivating force.

4.

Strong convictions about vision- Charismatic leaders are perceived as being strongly committed, and willing to take on high personal risk, incur high costs, and engage in self-sacrifice to achieve their vision.

5.

Behavior that is out of the ordinary- Those with charisma engage in behavior that is perceived as being novel, unconventional, and counter to norms. When successful , these behaviors evoke surprise and admiration in followers.

6.

Perceived as being a change agent- Charismatic leaders are perceived as agents of radical change rather than as caretakers of the status quo.

7.

Environmental sensitivity- These leaders are able to make realistic assessments of the environmental constraints and resources needed to bring about change.

Transactional vs Transformational leaders Characteristics of Transactional and transformational leaders Transactional Leaders • • • •

Contingent Reward: Contracts exchange of rewards for effort, promises rewards for good performance, recognizes accomplishment Management by exception (active): Watches and searches for deviations from rules and standards, takes corrective action. Management by exception (passive): Intervenes only if standards are not met Laissez faire: Abdicates responsibilities, avoids making decisions

Transformational Leaders • • • •

Charisma : Provides vision and sense of mission, instills pride, gains respect trust. Inspiration: Communicates high expectations, uses symbols to focus efforts, expresses important purposes in simple ways. Intellectual Stimulations: Promotes intelligence, rationality, and careful problem solving. Individualized consideration: Gives personal attention, treats each employee individually, coaches, advises.

The Activities of Successful & Effective leaders Type of Activity

Description categories Derived from free Observation Exchange Information

Routine Communication

Handling paperwork Planning

Traditional Management

Networking

Decision Making Controlling Interacting with outsiders Socializing /Politicking Motivating/Reinforcing

Human Resource Management

Disciplining/Punishing Managing conflict staffing Training/Developing

What skills do leaders need? •

Personal Skills

•Coping with stressors •Managing time •Delegating

2.Managing stress

1.Developing Self-awareness

•Determining values and priorities •Identifying cognitive style •Assessing attitude toward change

3. Solving Problems creatively •Using the rational approach •Using the creative approach •Fostering innovation in others

•Interpersonal Skills

•Coaching •Counseling •Listening

5. Gaining power and influences

4. Communication supportively

•Gaining power •Exercise influence •Empowering others

6. Motivating others 7. Management conflict

•Diagnosing poor performance •Identifying causes •Creating a motivating environment •Selecting appropriate strategies •Rewarding accomplishment •Resolving confrontations

STRATEGIC LEADERSHIP • Strategic leaders are generally responsible for large organizations and may influence several thousand to hundreds of thousands of people. They establish organizational structure, allocate resources, and communicate strategic vision. • Strategic leaders work in an uncertain environment on highly complex problems that affect and are affected by events and organizations outside their own.

• Strategic leaders apply many of the same leadership skills and actions they mastered as direct and organizational leaders; however, strategic leadership requires others that are more complex and indirectly applied. • Strategic leaders, like direct and organizational leaders, process information quickly, assess alternatives based on incomplete data, make decisions, and generate support. However, strategic leaders’ decisions affect more people, commit more resources, and have widerranging consequences in both space and time than do decisions of organizational and direct leaders..

Features of Strategic Leaders • • • • • •

Strategic vision Managing change Governance and management Culture Structure and policies Communications & network

Strategic Evaluation and Control

Nature of Strategic Evaluation Evaluate effectiveness of organisational strategy in achieving organisational objectives Perform the task of keeping organisation on track

Importance of Strategic Evaluation The need for feedback Appraisal and reward Check on the validity of strategic choice Congruence between decisions and intended strategy Successful culmination of the strategic management process Creating inputs for new strategic planning

Ability to coordinate the tasks performed

Barriers in Evaluation Limits of Controls Difficulties in measurement Resistance to evaluation Short-termism Relying on efficiency versus effectiveness

Requirements of Effective Evaluation Control should involve only the minimum amount of information Control should monitor only managerial activities and results Control should be timely Long term and short term control should be used Control should aim at pinpointing exceptions Rewards for meeting or exceeding standards should be emphasized

Evaluation Criteria for a Strategy • Qualitative Factors • Quantative Factors

Quantitative Factors • Company’s performance over a period of time, • Company’s performance with the competitor’s • Company’s performance to industry averages.

•        

Ratio’s play an important role in evaluating the strategy in quantitative terms: ROI ROE Employee turnover Employee satisfaction index Return on capital employed Profit margin Debt to equity EPS Asset growth

Qualitative Factors Consistency Feasibility Advantage

Strategic Control

Four Types of Strategic Controls Premise Control Implementation Control Strategic Surveillance Special alert control

Premise Control Premises control is necessary to identify the key assumptions and its implementation. Premises control serves the purpose of continually testing the assumptions to find out whether they are still valid or not. This enables the strategists to take corrective action at the right time rather than continuing with a strategy which is based on erroneous assumptions.

Implementation Control

Implementation control is aimed at evaluating whether the plans, programmes, and projects are actually guiding the organization towards its predetermined objectives or not.

Strategic Surveillance

Strategic surveillance aimed at a more generalized and overarching control “designed to monitor a broad range of events inside and outside the company that are likely to threaten the course of a firm’s strategy”.

Special Alert Control

Special alert control, which is based on a trigger mechanism for rapid response and immediate reassessment of strategy in the light of sudden and unexpected events

Operational Control Aimed at the allocation and use of organisational resources Concerned with action or performance

How do Strategic Control and Operational Control Differ Attribute

Strategic Control

Operational Control

1. Basic question

Are we moving in the right How are we performing? direction?

2. Aim

Proactive, continuous questioning of the basic direction of strategy

3. Main Concern

Steering the organization’s Action control

Allocation and use of organisational resources

future direction

4. Focus

External environment

Internal organization

5. Time Horizon

Long- term

Short- term

6. Main Techniques

Environmental scanning, information gathering, questioning and review

Budgets, schedules, and MBO

Process of Evaluation • Setting standards of performance • Measurement of performance • Analyzing variances • Taking corrective action

Setting of Standards Quantitative Criteria It has performed as compared to its past achievements  Its performance with the industry average or that of major competitors 

Qualitative Criteria There has to be a special set of qualitative criteria for a subjective assessment of the factors like capabilities, core competencies, risk- bearing capacity, strategic clarity, flexibility, and workability

Measurement of Performance The evaluation process operates at the performance level as action takes place. Standards of performance act as the benchmark against which the actual performance is to be compared. It is important, however, to understand how the measurement of performance can take place.

Analyzing Variances The measurement of actual performance and its comparison with standard or budgeted performance leads to an analysis of variances. Broadly, the following three situations may arise: The actual performance matches the budgeted performance The actual performance deviates positively over the budget performance The actual performance deviates negatively from the budgeted

Taking Corrective Actions

There are three courses for corrective action: checking of performance, checking of standards, and reformulating strategies, plans, and objectives.

Techniques of Strategic Evaluation and Control Evaluation Techniques for Strategic Control Evaluation Techniques for Operational Control

Evaluation Techniques for Strategic Control Techniques for strategic control could be classified into two groups on the basis of the type of environment faced by the organisation. The organisation that operate in a relative stable environment may use strategic momentum control, while those which face a relatively turbulent environment may find strategic leap control more appropriate.

Evaluation Techniques for Operational Control Operational control is aimed at the allocation and use of organisational resources The evaluation techniques are classified into three parts: Internal analysis Comparative analysis Comprehensive analysis.

What is Strategic control? “…it is the process by which managers monitor the ongoing activities of an organization and it’s members to evaluate whether activities are being performed efficiently and effectively and to take corrective action to improve performance if they are not…”

The importance of Strategic Control • The success of a chosen strategy • The implementation compass • Organizational performance • Ensuring competitive advantage

Strategic Control: • Requires more than re-acting on past performance • Keeps the organization on track • Anticipating events that might occur in future • Allows the organization to respond to new opportunities that may present itself

The importance of Strategic Control & quality: : • Efficiency measures how many units of inputs are being used to produce a single unit of output • Must also measure how many units are produced • The control system should contain these measures

The importance of Strategic Control & quality: • Organizational control is important because it determine the quality of goods & services • Can make continuous improvements to quality over time and this gives them a competitive advantage • Customer complaints is the basis for determining the quality of a product or service • Total Quality Management can be regarded as control system

The importance of Strategic Control & Innovation:

: • Managers must create an environment in which people feel free to experiment and take risks • Managers are challenged to build control systems that encourage risk taking • Measures cost reduction, process improvement and improved quality measures.

Control and Innovation • Problem: Time wasted due to unavailable parts from central store. Electrical workshop not close to central store (Witbank Municipality) • Electricians designed a innovative solution through simple measures (trips to stores per electrician per day • Applied 80/20 principle Established decentralized store • Major savings

STRATEGIC CONTROL Strategic Control Systems “… are the formal target setting , measurement and feedback systems that allow strategic managers to evaluate whether the company is achieving on the four building blocks of a competitive advantage..”

Types of Control systems • Financial controls • Output controls • Behavior controls • Organization culture

STRATEGIC CONTROL Financial controls • Growth • Profitability • ROCE • Share prices( Private sector) Is a favorite control because it is objective

STRATEGIC CONTROL Types of Control systems • Output controls: It is a system of control in which managers estimate or forecast appropriate performance goals for each division, department and employee and measure achievement against these goals

• Divisional Goals • Functional Goals • Individual Goals

STRATEGIC CONTROL Types of Control systems Divisional Goal Goal: “To be the number 1 or 2 in the industry in terms of market share”

STRATEGIC CONTROL Types of Control systems Behavior controls: “ happens through the establishment of a comprehensive systems of rules and procedures to direct the actions of divisions, functions and individuals • Operating budgets • HR rules & regulations • Standardization

STRATEGIC CONTROL Strategic Control Systems Characteristics • Be flexible to allow managers to respond as necessary to unexpected events; • Should provide accurate information, giving a true picture of organizational performance; • Should provide information in a timely manner

STRATEGIC CONTROL PROCESS

Four steps to design an effective control system: 1. 2. 3. 4.

Establish the standards & targets against which performance is to be evaluated; Create the measuring & monitoring systems that indicate whether the standards & targets are being reached; Compare actual performance against established targets Initiate corrective action when it is decided that the standards & targets are not being achieved

STRATEGIC CONTROL Kinds of measures Efficiency: Level of production costs, number of hours needed to produce an item, cost of raw materials

Quality: Number of rejects, number of customer returns, level of product reliability

Innovation: number of new products introduced, time taken to market; cost of product development

Responsiveness to customers: number of repeat customers; level of on-time delivery to customers, level of customer service