SM all in one

EVOLUTION OF THE CONCEPT• STRATEGY –

Strategia -General or Military Commander

1. Igor Ansoff’s: Strategic Success Paradigm

2. Mintzberg’s : Strategy as Craft

3. Peter Drucker’s MBO

4. Michael Porter : Strategy & Competitive Advantage

Components of SM• Vision• Company Mission• Company profile • External Environment• Strategic Analysis & Choice• Annual Objectives• Long term Objectives• Grand Strategy• Functional or Operational Strategy• Policies• Institutionalizing the strategy• Control & Evaluation

Need or importance of SMMeans

Ends

Intended Strategy

Realised Strategy

Plan

PoliciesStrategic Intent, Vision,

Mission, Goals , Objectives

Action TakenResult Oriented

Levels of Strategic Planning• Corporate LevelEx: Ford- “Profit Centers”, PSU-1956,Integrated companies in Europe

• Business LevelEx: ABB (Asea Brown Boveri)- Economies of Scale @ Power

Transformer Production Centers. Operating Revenue- from $316mn in1997 to $374million- ’98

• Functional LevelEx: Canon’s – “any product on any line”, “stop & fix it” -system

MAKING STRATEGIC DECISIONS

(Critical Tasks)1. Formulating mission and goals.

2. Developing company profile.

3. Assessing environment

4. Matching resources with environment needs

5. Identifying suitable options – company’s mission

6. Selecting long-term & Grand Strategies

7. Developing annual & Short term strategies

8. Resource allocation & Strategy implementation

9. Evaluating the Success & feed back as i/p.

Characteristics of strategic Decisions

• Strategic Management integrates Various functions

• Considers a broad range of stake holders• Entails multiple time horizons• Concerned with both efficiency and

effectiveness

Vision

• What a firm wants to be.• Ideal description of an organization and

gives shape to its intended future.• It reflects the firms values and aspirations.• It tends to be short and concise making it

easily remembered • It is the foundation for mission

Vision - Examples

“ To be the World’s Best quick service restaurant” – Mc Donald’s

Mission

• Specifies the business in which the firm intends to compete and the customers in intends to serve.

• It should establish a firm’s individuality and should be inspiring and relevant to all its stakeholders.

Mission - Examples

• Be the best employer for our people in each community around the world and deliver operational excellence to our customers in each of our restaurants

-Mc Donald’s

Stake holders

• Individuals and groups who can affect, and are affected by the strategic outcomes achieved and who have enforceable claims on a firm’s performance.

Stake holders - classificationStakeholders- People who are affected by firm’s performance and who have

claims on its performance

Capital Market Stakeholder• Share Holders

• Major Suppliers of Capital ( Ex: Banks)

Product Market Shareholders1. Primary Customers2. Suppliers3. Host Communities4. Unions

Organizational Stakeholders1. Employees2. Managers3. Non Managers

Challenges / Issues :• Lack of awareness with in the top management

about the original real operating situations• Kidding themselves Syndrome• Manager’s personal interest to maintain position &

power• Excessive involvement in operational problems• Top management’s complacent after initial success• Change in direction is misinterpreted.• Inability to locate competitive advantage.

Need for Learning Organizations

• To cope up competition• To develop competitive advantage• Quick change adoption• Strategic Flexibility• Knowledge creation & transfer• Behavioral modifications as per KM

Activities of Learning Organizations

• Systematic Problem Solving• Experimentation with new approach• Learning from other’s new experiences• Efficient & Quick Transfer of knowledge

Corporate Governance• Relationship among the three groups i.e, BOD,

Shareholders and top management in determining the direction and performance of the organization.

• It enables them to monitor the firm’s strategies to ensure effective managerial response.

Board Of Directors

• Collective responsibility for organization's performance.

• Exercise authority as per MOA & AOA.• Selects CEO, Mission & organizational goals.• No of BODs – Min-3 & Max.20• Max directorship for an individual is 20

Roles & Responsibilities of BODs • Tasks for SM:

– Monitor – Evaluate – Initiate & Determine

• Duties specified in Sec291 of Companies Act 1956.

• Make regulations

Chief Executive Officers (CEO)- Roles

• Figure Head• Leader• Liason• Recipient• Disseminator• Spoke person• Entrepreneur• Disturbance handler• Negotiator• Resource Allocator

CONCEPT OF ENVIRONMENT

1. EXTERNAL ENVIRONEMNT :

i. Opportunity : A favorable situation, which enables an organization to strengthen its present position. Ex: Access to new market

ii. Threats : Unfavorable situation results in risk and damage. Ex: Entry of MNCs.

CONCEPT OF ENVIRONMENT

2.INTERNAL ENVIRONEMNT :• Strength: Inherent capacity which can be used

for developing strategic advantage. Ex: R&D- Biocon

• Weakness: Inherent constraint, which creates disadvantage for firms. Ex: Supply of materials to govt as a single buyer

EXTERNAL ENVIRONMENTMeaning:“ The aggregate of all conditions, events and

influences that surround and affect it”Nature :• Complex• Dynamic• Factors arise from different sources• Changing continuously• Impact on organization is deep & far reaching

Societal Environment

Internal Envt- Structures- Culture

- Resources

Task Environment (industry)

Employee/ Labour unions

Suppliers

Share Holders

Government

Special Interest Groups

Customers

Creditors

Communities

Competitors

Trade Associations

Socio cultural Factors

Technological ForcesPolitical –Legal Forces

Economic forces

ENVIRONMENTAL FACTORS

1.Macro environmental Factors

• Demographic • Socio cultural • Economic• Political • Natural • Technology • Legal

2. Task Environment Factors (those directly affect the environment)

• Market• Industry • Competition• Supplier• Consumer

ENVIRONMENTAL FACTORS

3. International Environment• Globalisation• Global Economic Forces• Global Trade• Global financial Systems, Legal Systems,

HR, Tech Standards.• Global Demographic Patterns, Market

Competitiveness, Information System.

Firm’s External EnvironmentRemote Environment

Economic, Social, Political, Technological, Ecological

Industry Environment 1. Entry Barriers2. Suppliers Power3. Buyer Power4. Substitute availability5. Competitive Rivalry

Operating Environment(Global & Domestic)• Competitors• Creditors• Customers• Labour• Suppliers

THE FIRM

Environmental Scanning

“ Monitoring, Evaluating and disseminating of information from external and internal environments to managers in organisations so that long tern health of the organization will be ensured and strategic shocks can be avoided”.

Scanning the external EnvironmentAnalysis of Societal Environment

Economic, Sociocultural, Technological, Political –Legal factors

Market Analysis

Selection of Strategic Factors -Opportunities

-Threats

Interest Group Analysis Government

Analysis

Supplier Analysis

Competitor Analysis

Community Analysis

Sources of Environmental Scanning

1. Internal Sourcesa. World Development Report

b. World Economic Survey

c. Statistical Year Book

d. Year Book of International Trade Statistics

Sources of Environmental Scanning2. Government Sourcesa. Census of Indiab. % Year Plan Reportsc. India Year Bookd. Economic Surveye. Annual Survey of Industriesf. Centre for monitoring Indian Economy Reportsg. Monthly Bulletins of RBIh. Indian Trade journali. Reports of Tariff Commission, CII, FICCIetc

Sources of Environmental Scanning

3. Other Sorcesa. Bombay Stock Exchange Directoryb. Kothari’s Industrial Directoryc. Economic Timesd. Financial Expresse. Business- Line, Standards, Today, India, Worldf. ICICI Portfolio Studies, CRISIL Reportsg. MC Kinsey Quarterlyh. HBRi. Fortune, Economic & Political Weekly

Identifying External Strategic Factors

Issues :• Strategic Myopia: Personal Values of a

corporation’s managers and the success of current strategies are likely to bias managers perception of what is important to monitor in the external environment as well as their interpretations of what they perceive.

• The willingness to reject unfamiliar as well as negative information

Environmental Scanning & Monitoring- Techniques

SWOT

Industry Analysis

Techniques

Competitor Analysis

PEST ETOP

What is “PEST”?

PEST Analysis – The Meaning

• A PEST analysis is an analysis of the external

macro-environment that affects all firms.

• P.E.S.T. is an acronym for the Political, Economic,

Social, and Technological factors of the external

macro-environment.

• 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.

Strengths and Weakness form a basis for INTERNAL analysis

• By examining strengths, you can discover untapped potential or identify distinct competencies that helped you succeed in the past.

• By examining weaknesses, you can identify gaps in performance, vulnerabilities, and erroneous assumptions about existing strategies.

Industry analysis

• Industry is a group of firms producing a similar Products or services.

• Industry Analysis is an examination of the important stakeholder groups in the task environment of a particular corporation.

Issue Priority Matrix- Boulden

• Identifies the likely emerging trends

• Assess the probability of trends

• Attempt to ascertain their impact.

Critical High Priority

Medium Priority

High Priority

Medium Priority

LowPriority

Medium Priority

Low Priority

Low Priority

Probable Impact on Corporation

High Medium Low

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Michael Porter’s Model- Industry Analysis

Industry competitors

Rivalry among Existing firms

Buyers

Potential entrants

Other stakeholders

Suppliers

Substitutes

Bargaining Power of Buyers

Bargaining Power of Suppliers

Threat of Substitute

Products or Services

Threat of New

entrants

Relative power of unions,

governments etc.

Threat of new entrance“An obstruction that makes it difficult for a company to

enter in to an industry “

• Economies of scale (Innova)• Product differentiation (Branded wardrobe)• Capital requirements (Reliance Petro)• Switching costs (MS-Excel to Tally)• Access to Distribution Channels (FMCG @ Big

Bazar)• Cost disadvantages Independent of size • Government policy (Quota- Garment Export)

Rivalry among existing firms

“Amount of Direct competition in an Industry”

• Number of competitors ( Automobile Industry)• Rate of industry growth ( Air Line Industry)• Product or service characteristics (Electronic Goods)• Amount of fixed costs ( Seasonal Air Fairs)• Capacity (Manufacturing industries)• Height of exit barriers (Brewing Industries)• Diversity of rivals (Retailing)

Threat of Substitute Products/Services

Products that appear to be different but can satisfy the same need as another product.

• Limits the potential returns• Places a ceiling on pricing

Bargaining Power of Buyers

“Buyers ability to forced own prices, bargain for high quality or more services and play competitors against each other. “

• Purchases a large proportion of products/ services (Auto spares)

• Has the potential for backward integration (News paper chain could make its own paper)

• Changing supplier cost very little (Grocery)• Availability of alternatives / Substitutes (Stationery)• Buyers are sensitive to cost and service difference

(Retailing)

Bargaining power of suppliers

“ Suppliers got the ability to raise prices or reduce the quality of purchased goods / services”.

• The supplier industry is dominated by a few companies. (Petrol)

• It product or service is unique (Softwares)• Substitutes or not readily available (Electricity)• Suppliers are able to do forward integration. (PC)

EFAS/IFAS (External/Internal Factors Analysis Summary)

Steps Involved• List 8 to 10 Important O & Ts (S & W)• Assign Weightage to each factors (1.0-0.0)• Assign rating to each factor from 5-1• Calculate weighted Score• Design the comments as per the ratings

EFAS/ IFASExternal/ Internal Factors

Internal Factors

weights Ratings WeightedScore

Comments

Opportunities / Strengths

Strength Quality culture Experienced top

management Vertical Integration Employee relations ’s International

orientation

.15 .5 .75 Quality key to Success

Threats/ Weakness

Weakness Distribution Channels Financial Positions Global Positioning Manufacturing

Facilities

.05 .2 .10 Super store replacing small dealers

Fore Casting

Developing projections of anticipated outcomes based on monitored changes and trends.

Techniques for Environmental Analysis

• Verbal & Written Information• Search & Scanning• Spying• Forecasting

Forecasting Techniques• Time Series Analysis – Extrapolation • Judgmental Forecasting• Brain storming• Statistical modeling• Delphi Technique• Multiple Scenario – Scenarios, industry ScenarioOthers• Expert Opinion• Dynamic Modeling• Cross-impact analysis• Demand / Hazard Forecasting

Conducting the Corporate Audit

Approaches:• Seek Verbal information more than source• Spying to get more information• Collecting Past Information through Company Records.Process:• Matching Strengths & Weaknesses• ETOP - List Environmental Factors - Assess Importance of Environmental Factors = Assessing the impact = Combine to get a big picture

Organizational Analysis

• Internal Environmental Scanning is also known as “Organizational Analysis”, and it is concerned with developing and identifying an organization's resources.

The Value Chain

• A framework for identifying core competencies– Inside the firm– In the supply chain

• Can be used to– Identify strengths and weaknesses– Identify sources of competitive advantage– Identify market opportunities

The Value Chain

Firm Infrastructure

Human Resource Management

Technological Development

Procurement

InboundLogistics

Operations Outbound Logistics

Marketing& Sales

Service

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Relationship with Suppliers Relationship with Buyers

Elapsed Time - Value added time cost

Primary Activities in the Value Chain

1. Inbound Logistics – Materials handling, warehousing, inventory control used to receive,

store and disseminate inputs to a product– Ex: Fertilizer and chemical storage, delivery of inputs, application of

inputs

2. Operations– Take inputs from inbound logistics and convert to final products– Ex : Plowing, planting, spraying, harvesting, feeding, medicating,

weighing,etc.

3. Outbound Logistics– Collecting, Storing, and physical distribution of the final product.– Crop storage, finished hog handling, Processing and determining

delivery dates, delivery to the packer or elevator etc.

Primary Activities in the Value Chain

4.Marketing and Sales– Provide means through which customers can purchase

products and to induce them to do so– Advertising, communicating with buyers, developing

customer relationships, pricing products (futures, hedging, forward contracting, etc.), delivery scheduling

5.Service– Activities designed to enhance or maintain a product’s value– Timely delivery, identity preservation, ISO9000, certifying as

organic, etc.

Supporting Activities in the Value Chain

1. Procurement– Activities to purchase the inputs needed to produce products– Negotiating with suppliers, standard timing of replenishing parts and tools,

setting up buying groups, etc.

2. Technological Development– Activities that improve the firm’s products and/or processes – Volunteering for test plots, being a part of feeding trials, attending technology

seminars/field days, designing equipment to make specific production tasks more efficient, etc.

3. Human Resources– Recruiting, hiring, training, developing, and compensating all personnel

Supporting Activities in the Value Chain

4.Firm Infrastructure– General Management, planning, finance, accounting, legal

support, governmental relations, etc.– Establishment of accounting practices, management

information systems, compliance with environmental regulations, tracking and reporting for government programs, etc.

– Where strategy development takes place identifying opportunities and threats, resources and capabilities, and support of core competencies

Primary Activities for a Grain Farm

InboundLogistics

Fertilizer and chemical storage, custom application of inputs

Operations

PlanningFertilizingSprayingCultivateHarvest

Outbound Logistics

Grain transport

to elevator or buyer

Grain transport to storage

Marketing& Sales

Fwd. contractsFuturesOptionsIP grainValue added grain

ServiceOn-time deliveryForward contractStorageTracing

Relationship with Suppliers Relationship with Buyers

Supporting Activities for a Grain Farm

Infrastructure: management, planning, finance, accounting, government compliance, quality control

Human Resource: motivation tools, compensation, training, and directing farm employees, including family, management, and laborers

Technological Development: research and adoption practices for things like GPS, VRT, GMO’s, No-Till, the Internet, IP storage facilities

Procurement: Purchasing inputs: seed, fertilizer, chemicals, fuel, land, Machinery, storage equipment, office supplies, parts, tools, insurance etc. with focus on negotiating capabilities

Example: Key Value Chain Activities

Timber farming

Logging

Pulp mills

Papermaking

Printing & publishing

PULP & PAPER INDUSTRY

Value Chain Analysis (VCA)• A firm’s value chain must be compared to

competitors’ value chains to determine where competitive advantages exist.

• To be a source of competitive advantage a resource or capability must allow a firm to:– Perform an activity in a manner that is superior to

competitor’s performances– Perform a value-creating activity that competitors

cannot complete

Steps in VCA

• Identify Activities• Allocate Costs• Identify activities that differentiate the firm• Examine the value chain

Components of Value Chain & Functional Sources

It can be studied by Scanning the following functional sources.

1. Organization Structure

2. Culture & Various functions

3. Finance

4. Marketing

5. Operations

6. HR

7. Information Systems

Types of Organization Structure

• Simple Structure• Functional Structure• Divisional Structure• Strategic Business Units (SBUs): Acts as independent

business units with its own mission, own set of competitors and unique business environment.

Ex: Asian Paints-SBUs on the basis of consumer segments

• Conglomerate Structures: For large organizations with many product lines in several unrelated industries.

Ex: GE ‘s Cross Functional teams

Organization Culture“It refers to the shared- values, beliefs &

expectation of Employees”.

• It reflects the value of the founder• Stability to organization as a social system• Integrates the employees• Serves as a competitive advantage• If compatible with new strategy , becomes

strength

Strategic Financial Issues“ Availability, usage &management of funds decides

the firm’s financial capability”Significant Factors:• Factors related to source of funds: Capital

Structure, reserves & Surplus, bank relation.• Usage of Funds: Fixed & Current assets, loans &

Advances, Dividends.• Management of Funds: Tax planning, cost

reduction, risk &returns, budgeting.

Strengths that develops Financial Capability

• Access to financial resources• High rate of credit worthiness• Availability of low cost capital compared to

competitors• Favorable tax positions given by

government• High level of share holders confidence• Cordial relationship with bankers

Strategic Marketing Issues

• Marketing capability factors with respect to product, price, place & promotion have direct impact on strategy implementation.

• Strengths: Wide Variety, Quality, low price, advertisements, brand building, effective distribution, Strong R&D for new product development.

Strategic Operations Management Issues

Issues involved in it are manufacturing process mass customization and R&D mix.

Significant Factors:

Related to production system

Related to operations & control system

Related to R&D system

Strengths that builds Operations Capability

• High Capacity Utilization• Suitable plant location• Good inventory control system like JIT• High profile technocrats• Technical Collaborations with world class

R&D firms

Strategic HR Issues

“ Concentrate on labour cost, keeping employee satisfied to have competitive advantage”.

Significant Factors:

Related to personnel system

Related to employee characteristics

Related to Industrial Relation

Strategic Information Management Issues

• Usage of information management in corporate performance decides its strength.

Significant factors are related to : Acquisition and Retention of information, Processing & Synthesis of information, Retrieval & usage, dissemination & transmission, integrative, systemic and supportive factors.

Strengths that supports IM Capability

• Availability of state of art equipments• Presence of fool proof information security

systems• Widespread use of computerized info

system• Internet for marketing• Top management support for IT

applications• Positive mind set

Merits - VC• Provides a generic framework to analyse both the behaviour of costs

as well as the existing and potential sources of differentiation.

• Emphasis on the importance of (re)grouping functions into activities.,

• The Value Chain model was intended as a quantitative analysis.

• It can also be used as a quick scan to describe the strengths and weaknesses of an organisation in qualitative terms.

• Identifies synergies or shared activities between Strategic Business Units and to provide a tool to focus on the whole rather than on the parts.

Demerits - VC

• The quantitative analysis is time consuming. • It often requires recalibrating the accounting system to

allocate costs to individual activities. • The Value Chain Analysis should be accompanied with a

customer segmentation analysis to mix the internal and external view.

• Customer value chains need to be analyzed to determine where value is created.

• Assumes rivalry drives profitability. • The Value Chain Analysis was developed to analyse

physical assets in product environments only.

Strategic Audit

• The process of ensuring that the organizational resources and competencies are understood and evaluated so as to meet the external threats.

Stages of Strategic Audit(1) Resource Audit : identifies the resources available to a

business (2) Value Chain Analysis : Relate the business activities with its

competitive strength.(3) Core Competence Analysis : Identifying capabilities that

are critical to a business achieving competitive advantage. (4) Performance Analysis: evaluate the overall performance of

the business (5) Portfolio Analysis : the overall balance of the strategic

business units of a business (6) SWOT Analysis: auditing the overall strategic position of a

business and its environment

Generating Alternative Strategies From SWOT

• SWOT analysis is a tool for helping assess the current situation for the firm.

• However, we need to be able to combine the information in the SWOT analysis in a meaningful way to generate alternative strategies that we might pursue.

• The TOWS matrix is a tool designed to match external opportunities and threats with our internal strengths and weaknesses

SWOT Analysis

• Strengths• Weaknesses• Opportunities • Threats

The purpose of SWOT Analysis

• It is an easy-to-use tool for developing an overview of a company’s strategic situation– It forms a basis for matching your

company’s strategy to its situation

Strengths

• A STRENGTH is something a company is good at doing or a characteristic that gives it an important capability.

• Possible Strengths:– Name recognition– Proprietary technology– Cost advantages– Skilled employees– Loyal Customers

Weaknesses• A WEAKNESS is something a company

lacks or does poorly (in comparison to others) or a condition that places it at a disadvantage

• Possible Weaknesses:– Poor market image– Obsolete facilities– Internal operating problems– Poor marketing skills

Strengths and Weakness form a basis for INTERNAL

analysis• By examining strengths, you can discover

untapped potential or identify distinct competencies that helped you succeed in the past.

• By examining weaknesses, you can identify gaps in performance, vulnerabilities, and erroneous assumptions about existing strategies.

SWOT – Modi Xerox

• Strengths: – Strong Brand Name– Strong market Presence– Access to technology– Trained & Skilled manpower– Motivated sales force

SWOT – Modi Xerox

• Weakness– Expensive than competitors– Small Product Range– Low productivity.– Inadequate investments

SWOT – Modi Xerox

• Opportunity– Large & Growing Market– Easy access to technology– Advantage of Synergie’s in the product range

SWOT – Modi Xerox

• Threats– International competition– Prices down– Costs Up– High Attrition

TOWS Matrix Internal Factors

External Factors

Internal FactorsInternal Strength (S) (R&D,HR)

Internal Weakness (W)(Functional areas)

External Opportunities (O) (Economic, political, social)

SO Strategy(Maxi- Maxi)Maximize Strengths & Opportunities

WO Strategy(Mini- Maxi)Maximize Opportunities & Minimize Weaknesses

External Threats (T)(Competition, govt)

ST Strategy(Maxi- Mini)Maximize Strengths & Minimize Threats

WT Strategy(Mini- Mini)Minimize Weaknesses & Minimize Threats

TOWS - STRATEGY MIX

• WT- Retrenchment, joint ventures& liquidations

• WO- Acquire needed competencies based on weaknesses to meet external opportunities

• ST – use functional strengths to overcome competition

• SO- use strengths to take advantage of opportunities.

Competitive Advantage - Definition

• A competitive advantage is an advantage over competitors gained by offering consumers greater value, either by means of lower prices or by providing greater benefits and service that justifies higher prices.

Competitive Strategy

• Strategies to succeed in the chosen business

• “Taking offensive or defensive actions to create a defendable position in an industry, to cope successfully with the five competitive forces and thereby yield a superior return on investment for them”

Competitive Strategies

Cost Leadership• To become the lowest cost producer in the industry

through a set of functional policies aimed at these basic objectives:-

– Aggressive construction of efficient scale facilities– Vigorous pursuit of cost reduction from experience– Tight cost and overhead control– Avoidance of marginal customer accounts– Cost minimization in areas like R&D, services, sales force,

advertising etc.– Ex: Reliance, Ranbaxy, Arvind Mills, Bajaj Auto.

Differentiation Strategy

• A firm seeks to be unique in its industry along some dimensions that are viewed widely valued by key buyers.

• It selects one or more attributes that many buyers in an industry perceive as important, and uniquely position itself to meet those needs.

• Rewarded fir its uniqueness with a premium price.Ex : Arvind Mills – Basic Product is denim, but

stuffs with VAP like ring denim,stretch denim, overdyed denim.

Bases for Differentiation

• Product• Delivery System• Marketing approach• Credit Facilities• After – Sales Service

Focus

• Cost Focus: a firm seeks a cost advantage in its target segment

• Differentiation Focus: A firm seeks differentiation in its target segment.

Strategic Positioning• The essence of strategy is in the activities –

Choosing to perform activities differently or to perform different activities than rivals.

• Types: – Variety Based– Needs Based– Access Based

Four Routes to Strategic Advantage

• Strategy based on KFS (Key Factors for Success)

• Strategy Based on Relative Superiority• Strategy Based on Aggressive Initiative• Strategy Based on SDF (Strategic Degree of

Freedom).

CORPORATE STRATEGY

To identify the businesses in which a company should participate

The value creation activities it should perform in those businesses

the best means for expanding or concentrating in different businesses, including mergers, acquisitions.

CORPORATE STRATEGY• DEALS WITH THREE KEY ISSUES:

-- The firm’s overall orientation toward growth (directional strategy)

-- The industries or markets in which the firm competes through its products and business units (portfolio strategy)

-- The manner in which the management coordinates activities and transfers resources and cultivates capabilities among product lines and business units (parenting strategy)

DIRECTIONAL STRATEGY A corporation’s directional strategy is composed of

three general orientations toward growth. It is also called as grand strategies:

1.Growth strategies (expand the business activities)

2.Stability strategies (make no change to the company’s current activities)

3.Retrenchment strategies (reduce the company’s level of activities

1.GROWTH STRATEGIES

The two basic corporate growth strategies:

I. Concentration within 1 product line or industry

II.Diversification into other products or industries.

I.CONCENTRATION STRATEGIES: (Horizontal & Vertical)

1.Horizontal integration is the process of acquiring or merging with industry competitors in an effort to achieve the competitive advantages that come with large scale and scope.

a. ACQUISITION: An acquisition occurs when one company uses its capital resources such as stock, debt, or cash to purchase the other

b. MERGER: A merger is an agreement between equals to pool their operations and create a new entity

EXAMPLE The corporate strategy of WorldCom pursued between 1983 and 2001. WorldCom acquired over sixty companies over this period in an effort to become one of the largest players in the telecommunications service industry.

BENEFITS OF HORIZONTAL INTEGRATION:Reducing costs Increase the value of the company’s product offering

through diversificationManaging rivalry within the industry to reduce the risk

of price warfare Increasing bargaining power.DRAWBACKS OF HORIZONTAL INTEGRATION:Majority of merger and acquisitions destroy value.Different company cultureHigh management turnoverCan bring company into conflict with the government

agency

2. VERTICAL INTEGRATION: It means the company is expanding its

operations either backward into an industry that produces inputs for the company’s product or forward into an industry that uses or distributes the company’s products.

Example: -- A steel company that supplies its iron ore needs

from company-owned iron ore mines is backward integration

--- A personal computer maker that sells its PCs through company-owned retail outlets is forward integration. APPLE COMPUTER IN 2001, entered the retail industry when it decided to set up a chain of apple stores to sell its computers.

BENEFITS OF VERTICAL INTEGRATION:Enables the company to build barriers to new

competition.Facilitates investments in efficiency – enhancing

specialized assetsProtects product qualityResults in improved scheduling.

DRAWBACKS OF VERTICAL INTEGRATION:Cost disadvantagesTechnological changeDemand unpredictability

II.DIVERSIFICATION STRATEGY• Done ,if a company’s current product lines do not have

much growth potential.• Concentric diversification is expansion into a related

industry. This strategy may be appropriate when a firm has strong competitive position but current industry attractiveness is low.

• Conglomerate diversification is expansion into an unrelated industry. When a management realizes that the current industry is unattractive and that firm lacks outstanding abilities could easily transfer to related products or services in other industries.

III.STABILITY STRATEGIES

• A company may choose stability over growth by continuing its current activities without any significant change in direction

• It is appropriate for a successful company operating in reasonably predictable environment

• It can be useful for short run but dangerous if followed for too long.

IV.RETRENCHMENT STRATEGIESCONDITIONS:When the company has a weak competitive

position in some or all of product linesWhen sales are down and occurs losses.This strategy generate a great deal of pressure

to improve performance.It helps to eliminate the weaknesses

• TURNAROUND STRATEGY: It emphasizes the improvement of

operational efficiency and is probably most appropriate when a company’s problem are pervasive but not critical. It includes contraction and consolidation.

• CAPTIVE COMPANY STRATEGY: A Company with a weak competitive

position may offer to be a captive company to one of its larger customer in order to guarantee the company’s continued existence with a long- term contract.

SELL OUT OR DIVESTMENT STRATEGY:- Under weak competitive position the firm can

sell the entire company - If it has multiple business lines, it can sell out

its business units. (Divestment) BANKRUPTCY OR LIQUIDATION STRATEGY:

- Giving up the management of the firm to the courts in return for some settlement of the corporation’s obligations.

- Liquidation is piecemeal sale of all of the firm’s assets.

PORTFOLIO ANALYSIS

• Companies with multiple product lines or business units• One of the most popular aids to developing corporate

strategy in multibusiness corporation• Top management views its product lines as a series of

investments from which it expects a profitable return.• Two of most popular approaches are the BCG growth-

share matrix and the GE Business Screen.

History of the BCG Matrix

• 1960’s – diversification of businesses

• Need for universal management tool

• First implementation in 1969 by Boston

Consulting Group

Portfolio Analysis

• Strategic Business Unit (SBU) Definition– Single independent operation of a company– Has its own competitors– One manager responsible for performance

• Allocation of resources over all SBUs• Goals

– Set benchmarks– Create generalized descriptions of strategic

situations

Basis of the BCG Portfolio Matrix

Time

Introductory Phase “?”

Growth Phase “Star”

Sales V

olume

Mature Phase “Cash Cow”

Decline Phase “Dog”

BCG Matrix Construction

• Internal measure: Relative market share– Firm’s sales of the SBU .

Total market’s average sales– Firm’s Sales of the SBU .

Strongest Competitor’s Sales

• External measure: Market growth– Match strategy with market stage

The BCG Matrix

High Low

High

Low

Product Sales Growth Rate

Relative Market Share

Cash Cows

Stars

Strategy Recommendations

• Investment– Further Growth– Maintain Market Position

• Cash flow– Self-sustaining: Fund their own growth– Require funds from other SBUs (Cash Cows)

• Assure the future of the company• Grow into Cash Cows

Strategy Recommendations

• Investment– Increase market share– Selectively develop into Stars

• Cash Flow– Require funds from other SBUs (Cash Cows)

• Unrealized future opportunities

Strategy Recommendations

• Investment– Maintain market share– Maintain capacity

• Cash Flow– Positive cash flow– Provides funding to support Stars and “?”

• No potential for profit growth

Strategy Recommendations

• Investment– Divestiture strategy– Reduce capacity to free up resources

• Cash Flow– Goal of Positive Cash Flow– Negative Cash Flow = Divestment

• No real growth opportunities

Evaluation of BCG Matrix: Cons

• Oversimplifies complex decisions• Only 2 factors considered & creates risk• Uncertainty in market and SBU definition• Only considers current businesses no

dynamics• Does not recognize possible synergies

between SBUs• Can fall prey to the “GIGO” syndrome

Evaluation of BCG Matrix: Pros

• Simple and rapid• Solid basis for decision-making• Good measurability of market share and

growth• Provides information about efficient

resource allocation within the organization• Generator for strategic options

ITC – An example

•

Vision & Mission statements

• Vision: Sustain ITC’s position as one of India’s most valuable corporations through world class performance, creating growing value for the Indian economy and the Company’s stakeholders.

• Mission: To enhance the wealth generating capability of the enterprise in a globalizing environment, delivering superior and sustainable stakeholder value.

Business Mix of ITC Ltd.

FMCG

• Cigarettes • Foods • Lifestyle Retailing • Greeting, Gifting & Stationery • Safety Matches • Agarbattis

Paperboards & Packaging • Paperboards & Specialty Papers • Packaging

Business Mix (Cont’d)Agri – Business

• Agri -Exports• e-Choupal• Leaf Tobacco

Hotels

Group Companies • ITC Info tech; etc.

Business wise Sales data

Business/ Year Growth %

Value (Rs in Crore)

2005 2004

FMCG-Cigarettes 8.4 10002.54 9230.27

FMCG-Others 85.2 563.39 304.16

Hotels 124.1 577.25 257.53

Agribusiness 4.2 1780.07 1708.77

Paper & pkg. 24.9 1565.31 1253.29

Net revenue 12.99 13349.58 11815.04

CAGR during FY 2005-2008

Category CAGR Growth parameters

Cigarettes 10.9 % Pricing power

Hotels 22.7% Inward traffic, occupancy

Paper 17.2 % Capacity utilization, value added products

Agri business

34.3 % E-choupal, choupal sagar,

FMCG-Others

60.2 % Fast track, decent share.

Market share of ITC Ltd.

Outstanding market leader • Cigarettes, Hotels, Paperboards,

Packaging and Agri-Exports.Gaining market share

• Nascent businesses of Packaged Foods & Confectionery, Branded Apparel and Greeting Cards.

Market attractiveness & Competitive strength is also important.

The BCG Matrix for ITC Ltd.Stars•Hotels•Paperboards/ Packaging.•Agri business.

?•FMCG- Others

Cows•FMCG-Cigarettes

Dogs •Maybe ITC InfoTech.

Figure 10.2: The McKinsey / GE MatrixCompetitive Position

Ind

ust

ry A

ttra

ctiv

enes

sGood Medium Poor

High

Medium

Low

Winner

Winner

Winner

ProfitProducer

AverageBusiness

QuestionMark

Loser

LoserLoser

ADVANTAGES OF PORTFOLIO ANALYSIS: It encourages top management to evaluate each of the

company’s business To set objectives To allocate resources It raises the issue of cash flow availability for use in

expansion and growth.

LIMITATIONS OF PORTFOLIO ANALYSIS: It is not easy to define market segments It suggests the use of standard strategies that can miss

opportunities or be impractical It is not always clear

CORPORATE PARENTING

• It views the company in terms of resources and capabilities that can be used to build business unit value as well as generate synergies across business units.

• According to CAMPBELL, GOOLD AND ALEXANDER: Multi-business companies create value by influencing or parenting the businesses thy own. The best parent companies create more value than of their rivals would if they own same businesses. Those companies have what we call parenting advantage.

FUNCTIONAL STRATEGY

• It is the approach a functional area takes to achieve corporate and business unit objectives and strategies by maximizing resource productivity.

• It is concerned with developing and nurturing a distinctive competence to provide a company or business unit with a competitive advantage.

• EXAMPLE: A multidivisional corporation has several business units, each with its own business strategy, each set of departments , own functional strategy.

MARKETING STRATEGY(Deals with pricing, selling and distribution of products)

• MARKET DEVELOPMENT STRATEGY , a company or business unit can capture large share of an existing market for current products and develops new markets for current products

• PRODUCT DEVELOPMENT STRATEGY, a company can develop the products for existing markets or develop new products for new markets

• PUSH STRATEGY: It means spending a large amount of money on trade promotion in order to hold space in retail outlets. It includes discounts in-store special offers to “push” products.

• PULL STRATEGY: In which advertising pulls the products through distribution channels.

• PRICING STRATEGIES: skim pricing or penetration pricing.

FINANCIAL STRATEGIES: Financial strategy examines the financial implications of

corporate and business-level strategic options and identifies the best financial course of action

EXAMPLE: equity financing, is preferred for related diversification while debt financing is preferred for unrelated diversification

A popular financial strategy is the leveraged layout. In a leveraged strategy a company is acquired in a transaction financed largely by debt, usually obtained from a third party such as insurance company.

RESEARCH AND DEVELOPMENT STRATEGY

• It deals with product and process innovation and improvement

• One of the R&D choices is to be either a technological leader that pioneers an innovation

• May be of technological follower that imitates the product of competitors.

• EXAMPLE: NIKE spends more on R&D in order to differentiate its athletic shoes from its competitors in terms of performance. As a result, its products have become the favorite of the serious athlete.

HUMAN RESOURCE STRATEGY• Human resource attempts to find the best fit between

people and the organization• A company or business should hire a large number of

low-skilled employees who receive low pay, perform repetitive jobs, and most likely quit after a short time.

• Example: The McDonald’s restaurant strategyHire skilled employees who receive relatively high

pay and are cross-trained to participate in self-managed work teams.

Hire leasing employees360 degree appraisals

INFORMATION SYSTEM STRATEGY

• It is used to provide business units with competitive advantage

• EXAMPLE: When FedEx first offered its Power Ship computer software to customers for storing addresses, printing shipping labels, and tracking package location, its sales jumped.

ResourcesResources

** TangibleTangible** IntangibleIntangible

CapabilitiesCapabilities

Teams of ResourcesTeams of Resources

Sources ofSources of

CoreCore

CompetenciesCompetencies

CompetitiveCompetitiveAdvantageAdvantage

StrategicStrategicCompetitivenessCompetitiveness

Above-AverageAbove-AverageReturnsReturns

CompetitiveCompetitiveAdvantageAdvantage

Gained throughGained throughCore CompetenciesCore Competencies

DiscoveringDiscoveringCoreCore

CompetenciesCompetencies

Discovering Core CompetenciesDiscovering Core Competencies

Criteria ofSustainableAdvantages

ValueChain

Analysis

ValuableRareCostly to ImitateNon substitutable

****

* Outsource

What a firm has to work with:

its assets, including its people and the value of its brand name

What a firm Has...ResourcesResources

Resources represent inputs into a firm’s production process...

such as capital equipment, skills of employees, brand names, finances and talented managers

Tangible ResourcesTangible ResourcesFinancialFinancial**

PhysicalPhysical**

Human ResourcesHuman Resources**

OrganizationalOrganizational**

Intangible ResourcesIntangible Resources

TechnologicalTechnological**

InnovationInnovation**

ReputationReputation**

ResourcesResources

What a firm Does...

Capabilities represent:

the firm’s capacity or ability to integrate individual firm resources to achieve a desired objective.

CapabilitiesCapabilities

Capabilities become important when they are combined in unique combinations which create core competencies which have strategic value and can lead to competitive advantage.

What a firm Does...that is Strategically

Valuable

“…are the essence of what makes an organization unique in its ability to provide value to customers.”

Leonard-Barton, Bowen, Clark, Holloway & Wheelwright

McKinsey & Co. recommends identifying three to four competencies to use in framing strategic actions.

Core CompetenciesCore Competencies

For a strategic capability to be a Core Competency, it must be:

Core CompetenciesCore Competencies

ValuableValuable

RareRare

Costly to ImitateCostly to Imitate

Non substitutableNon substitutable

What a firm Does...that is Strategically

Valuable

Core Competencies must be:

Non SubstitutableNon SubstitutableCapabilities that do not have strategic equivalents, such as firm-specific knowledge or trust-based relationshipsCapabilities that do not have strategic equivalents, such as firm-specific knowledge or trust-based relationships

What a firm Does...that is Strategically

Valuable

Core CompetenciesCore Competencies

ValuableValuable

RareRare

Costly to ImitateCostly to ImitateCapabilities that other firms cannot develop easily, usually due to unique historical conditions, causal ambiguity or social complexityCapabilities that other firms cannot develop easily, usually due to unique historical conditions, causal ambiguity or social complexity

Capabilities that are possessed by few, if any, current or potential competitorsCapabilities that are possessed by few, if any, current or potential competitors

Capabilities that either help a firm to exploit opportunities to create value for customers or to neutralize threats in the environment

Capabilities that either help a firm to exploit opportunities to create value for customers or to neutralize threats in the environment

Examples: Distinctive Competencies • Sharp Corporation

– Expertise in flat-panel display technology • Toyota, Honda, Nissan

– Low-cost, high-quality manufacturing capability and short design-to-market cycles

• Intel– Ability to design and manufacture ever more powerful

microprocessors for PCs• Motorola

– Defect-free manufacture (six-sigma quality) of cell phones

Core Competencies• Resources and capabilities serve as a source

of competitive advantage for a firm over its rival.

• Not all resources and capabilities are core competencies.

• Many suggest that firms should identify and concentrate on only 3 or 4 core competencies.

Identifying and Building Core Competencies

• Core competencies must be distinctive.– Capabilities that are done better than

competitors

• Identifying core competencies is key to development of sound strategy.

• We use the value chain to help identify core competencies.

Core Competencies--Cautions and RemindersCore Competencies--Cautions and Reminders

Never take for granted that core competencies will continue to provide a source of competitive advantageNever take for granted that core competencies will continue to provide a source of competitive advantage

All core competencies have the potential to become Core RigiditiesAll core competencies have the potential to become Core Rigidities

Core Rigidities are former core competencies that sow the seeds of organizational inertia and prevent the firm from responding appropriately to changes in the external environment

Core Rigidities are former core competencies that sow the seeds of organizational inertia and prevent the firm from responding appropriately to changes in the external environment

Strategic myopia and inflexibility can strangle the firm’s ability to grow and adapt to environmental change or competitive threats

Strategic myopia and inflexibility can strangle the firm’s ability to grow and adapt to environmental change or competitive threats

SupportActivities

Primary Activities

Outsourcing

Technological Development

Human Resource Management

Firm Infrastructure

Procurement

Inb

oun

d

Log

isti

cs

Op

erat

ion

s

Ou

tbou

nd

Log

isti

cs

Mar

ket

ing

& S

ales

Ser

vice

MARG

IN

MARGIN

Strategic Choice to Purchase Some Activities From Outside Suppliers

SupportActivities

Primary Activities

Technological Development

Human Resource Management

Firm Infrastructure

Procurement

Inb

oun

d

Log

isti

cs

Op

erat

ion

s

Ou

tbou

nd

Log

isti

cs

Mar

ket

ing

& S

ales

Ser

vice

MARG

IN

Inbound Logistics

Operations

OutboundLogistics

Service

Marketing & Sales

Technological Development

Human Resource Management

Procurement

MARGIN

Firms often purchase a portion of their value-creating activities from specialty external suppliers who can perform these functions more efficiently

OutsourcingStrategic Choice to Purchase Some Activities From Outside Suppliers

OUTSOURCING

• OUTSOURCING involves purchasing a product or service, previously provided internally, from someone else.

• It is opposite of vertical integration• One study found that outsourcing resulted in 9- percent average

reduction in costs.15-percent increase in the capacity and quality.• According to American Management Association Survey of member

companies, 94% of the firms outsource atleast one activity• An outsourcing decision depends on the fraction of total value added

by the activity under consideration and by the amount of competitive advantage in that activity for the company or business unit

STRATEGIC ANALYSIS & CHOICE

• SAC determines alternative course of actions to achieve its mission

• “SC is the decision to select among the grand strategies considered, the strategy which will best meet the enterprise’s objectives”

STRATEGIC CHOICE

Steps Involved:

1.Focus on a few alternatives

2.Determining the selection Factors

3.Evaluating Alternatives

4.Making the strategic choice

PROCESS OF STRATEGIC CHOICE• Strategic choice is the evaluation of alternative

strategies and the selection of the best alternative• DEVIL’S APPROACH: A person assigned to identify

pitfalls and problems• One GROUP to present the advantages of a particular

alternative• Second group to present the disadvantages of the same

alternative in debate• CRITERIA: -- Mutual exclusivity -- success --completeness -- internal consistency

DEVELOPMENT OF POLICIES

• The selection of best strategic alternative is not an end of strategic formulation

• It should establish policies that define the rules for implementation• Policies provide guidance for decision making and action in

organization• Effective policy comprises: -- It forces of trade-offs -- It tests the strategic soundness of a particular action -- It sets clear boundaries within which employees must operate• Managing policy is one way to manage the corporate culture

STRATEGY IMPLEMENTATION• It is the sum total of the activities and choices

required for the execution of a strategic plan.

• Three things should be taken for consideration while implementing

-Annual objectives

-Functional strategies

-Polices

Activates involved• Developing the Following:-

– Programs : a statement of the activities or steps needed to accomplish a single use plan.

– Budget : a statement of a corporation’s program in monetary terms.

– Procedures/Standard Operating Procedure (SOPs): a system of sequential steps or techniques that describes in detail how a particular task or job is to be done.

Steps in Strategy Implementation

• Formulation of SBU Strategy• Leadership Implementation• Communicating the strategies• Annual Objectives• Functional strategies• Resource Allocation• Development of Policies• Organisational Implementation

Approaches to Strategy Implementation

• Commander Approach• Organisational change / Change Approach• Collaborative approach• Cultural approach(3rd Order Control

Technique)• Crescive Approach( Increasing / Growing)

Developing Budget

• BUDGET – it is a plan shows how much money is earned by the firm and how much they can able to spend

• In simple words resource allocation plan

Two approaches• Top down approach-

Top mgt will design budget plan and allocate it to lower level

• Bottom up approach

various departments will submit preliminary budget proposal to budget committee ,they will select final budget

ORGANISATION STRUCTURE

• An organization structure is the way in which the task & subtasks required to implement a strategy are arranged.

• Good structure allows the organization to improve its ability to create value and competitive advantage

TYPES OF STRUCTURE

• ENTREPRENEURIAL STRUCTURE

• FUNCTIONAL STRUCTURE

• DIVISIONAL STRUCTURE

• STRATEGIC BUSINESS UNIT

• MATRIX STRUCTURE

• NETWORK STRUCTURE

• CELLULAR (MATRIX + NETWORK)

ENTREPRENEURIAL STRUCTURE• The entrepreneurial structure, is the most elementary form of

structure & is appropriate for an organization that owned and managed by one person.

• These organizations are single- business, product /service firms that serve local market

OWNER-MANAGER

EMPLOYEES

FUNCTIONAL STRUCTURE• The most widely used structure is the functional/centralized type.• The functional group & activities by business function, such as

production/operations, marketing, finance / accounting, R & D,MIS.

CEO

MARKETINGHRFINANCEMANUFACTURING

DIVISIONAL STRUCTURE The divisional or decentralized structure is the second most common type.

It has more difficulty managing different products &services in different market.

The divisional structure can be organized in four ways:–By geographic area–By product or service–By customer–By process

STRATEGIC BUSINESS UNIT• As the number, size and diversity of divisions in an

organization increase, controlling and evaluating divisional operations become increasingly difficult for strategists.

CEO

Group Head SBU1

Group Head SBU2

Group Head SBU3

MATRIX STRUCTURE• Provide dual channels of authority, performance responsibility, evaluation and control

Finance PurchaseR&DMarketing

Proj

ect B

Proj

ect A

Functional Manager

Proj

ect m

anag

ers

NETWORK STRUCTURE

Project group M

Project group N

Function YRegion B

Corporate head quarters

Function XREGION A

Mc Kinsey 7-S Framework

1. Structure

2. Systems

3. Style

4. Staff

5. Skills

6. Strategy

7. Shared Value

Corporate culture

• The phenomenon which distinguishes good organizations from bad ones.

• It has a powerful influences on the behavior of managers.

• Corporate culture contains two major assumptions –Beliefs &Values.

• Corporate cultures are responsible for their ability to successfully implement strategies.

IMPACT OF CULTURE ON CORPORATE LIFE

• Culture affects the decision making capacity of organisation and its relationship with its environment & strategy

• It contains both strengths &weakness.– STRENGTH - It can facilitate communication, decision

making & control.– WEAKNESS -It may obstruct the smooth implementation of

strategy by creating resistance to change

Methods of Managing the culture of an Acquired Firm

Integration Assimilation

Separation Deculturation

How much members of the Acquired Firm value preservation of their own Culture

Very much Not at All

Perc

epti

on o

f th

e A

ttra

ctiv

eness

of

the

Acq

uir

er

N

ot

at

all

Att

ract

ive Very

A

ttra

ctiv

e

STAFFING FOLLOWS STRATEGYHIRING&TRAINING REQUIREMENTS CHANGE• A corporation may find that it needs to either hire different

people or restrain current employees to implement the new strategy

• Employee selection & training are crucial to the success of their new growth strategy

MATCHING THE MANAGER TO THE STRATEGY• The most type of general manager needed to effectively

implement a new corporate or business strategy• Executives with a particular mix of skills and experiences may

be classified as executive type & paired with a specific corporate strategy

Sources of Power

At functional and divisional level• Ability to cope with uncertainty• Centrality• Control Over information• Non sustainability• Control Over contingencies• Control over resources

Organizational Conflict

“ A situation when the goal directed behaviour of one group blocks the goal directed behaviour of another.”

Sources of Organizational Conflict

Differentiation a. Differences in subunit

orientation b. status Inconsistencies

Task Relationships a. Overlapping authority b. Task interdependencies c. Incompatible evaluation

systems

Scarcity of resources a. Distributing

resources

Level of Conflict

CONFLICT AND NEGOTIATION

Dealing With Conflict• Conflict– a disagreement over issues of substance and/or an emotional

antagonism. • Substantive Conflict

– disagreement over goals, resources, rewards, policies, procedures, and job assignments.

• Emotional Conflict – results from feelings of anger, distrust, dislike, fear, and resentment, as

well as relationship problems.• Functional Conflict

– stimulates us toward greater work efforts, more creativity in problem solving, and even to cooperate more with others.

• Dysfunctional Conflict– Is destructive and hurts task performance

CONFLICT AND NEGOTIATION

Dealing With Conflict

CONFLICT AND NEGOTIATION

Dealing With Conflict

Dealing With Conflict

Conflict Management Styles

Conflict Resolution Strategies

• Changing the task relationship• Changing controls• Implementing Strategic Change• Changing Leadership• Changing the Strategy• Changing the organisation

STRATEGY EVALUATION & CONTROL(SEC)

• Final Phase of SM

Includes the following Activities:

1. Examining the underlying bases of a firm’s strategy

2. Comparing expected results with actual results

3. Taking Corrective actions to ensure that performance conforms to plans

SEC- Definition

• It is the process of determining the effectiveness of a given strategy in achieving the organisational objectives and taking corrective actions whenever required.

Importance of SEC

• Feed Back• Reward• Future Planning

Barriers of SEC• The limits of Control

• Difficulties in Measurement

(Validity & Reliability)

• Motivational Problems

Evaluation Criteria

I .Quantitative Factors:• Return on Investment (ROI) : the result of

dividing net income before taxes by total assets.

• Earnings Per Share (EPS) : dividing net earnings by the amount of common stock.

• Return on Equity (ROE) : dividing net income by equity.

• Operating Cash flow : the amount of money generated by a company before the cost of financing and taxes.

Stakeholders Measures(Impact of corporate activities on stakeholders interest)

• Sales & Sales growth – customers• Cost & Delivery time - Suppliers• Stock & Buy lists - Financial community• Turnover & Grievances – Employees• Negative Legislations & Financial

incentives- Government• Legal Actions & Hostile Encounters -

Consumer & Environmental advocates

• Share Holders Value : the present value of the anticipated future stream of cash flows from the business, plus the value of the company if liquidated.

• Economic Value Added (EVA): after –tax operating profit minus the total annual cost of the capital. i.e., difference between the pre-strategy and post-strategy value of the business. Can be achieved through :• Earning more profit without using more capital• Using less capital• Investing capital in high return projects

• Market Value added (MVA): Measures the stock market’s estimate of the net present value of a firm’s past and expected capital investment projects.

II . Qualitative Factors

Strategic Control• “SC is concerned with tracking a strategy

as it is being implemented, detecting problems or changes in its underlying premises, and making necessary adjustments”

Types of Strategic control

1. Premise control

2. Implementation Control

3. Strategic Surveillance

4. Strategic Alert Control

Operational Control• Provides post-action evaluation and control over short

periods.• Steps involved:

– Establishing Criteria and Standards– Measuring & Comparing Performance– Performance Gap analysis– Taking Corrective Measures

Types / Techniques:

1. Value Chain Analysis

2. Quantitative Performance Measurement

3. Bench Marking

4. Balance Score Card

5. Key Factor Rating

CONTROL PROCESS1.

Determine what to

measure

2.Establish standards of performance

3. Measure Actual

Performance

Take Corrective

Action

Stop

Does Performance match with standards

No

Yes

1.Quantitative Standards -Time Standards - Cost Standards2.Qualitative Standards

1.Completeness2.Objectivity3.Responsiveness

STRATEGIC CONTROL AS A MEDIATOR

Strategic control

Mission, goals, and objectives of the firm

Strategy formulation

Strategy implementation

Qualitative and quantitative results

Macroenvironment

Industry Environment

Characteristics of an Effective Control System

• Suitable• Simple• Selective• Sound & Economical• Flexible• Forward Looking• Reasonable• Objective• Responsibility for failure• Acceptable

Strategic Audit

“ An examination and evaluation of areas affected by the operation of a strategic management process within an organization”.

BALANCED SCORECARD

FRAMEWORK

Balance Score Card Approach• Combines financial measures that tell the results of actions

already taken with operational measures on customer satisfaction, internal processes& innovations, the drivers of future financial performance.

• Done through Key Performance Measures (KPM): essential for achieving a desired strategic options.

• It evaluates Based on the following areas:-– Financial – Customer – Internal Business Perspective– Innovation & Learning

Vision &

Strategy

Learning & growth

Internal Business process

Financial perspective

Customer’s

Perspective

BALANCED SCORECARD FRAMEWORK

Translate Strategy to Operational terms

The Strategy

Financial Perspective

“If we succeed, how will we look to our shareholders

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?’’

A Strategy Is A Set of of HypothesesAbout Cause & Effect

60% of organization

s don’t link strategy & budgets

85% of management

teams spend less than

one hour per month on strategy

issues

STRATEGY

Strategic Learning Loop

BALANCED SCORECAR

D

Strategy

Balanced

Scorecard

A good Balanced scorecard describes the Organizational Strategy

• 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

Measures are Balanced between

• 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

• 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

What does BSC do?

Indicate whether company’s strategy implementation and execution are contributing to bottom-line improvement

• Profitability

• Operating income,

• Return-on-capital employed (ROCE)

• EVA

• Growth

• Cash flow

Financial perspective

Financia

l Pers

pectiv

e

“If we s

uccee

d, how

will we l

ook to our

share

holders

Financial perspective

Financia

l Pers

pectiv

e

“If we s

uccee

d, how

will we l

ook to our

share

holdersIncrease EVA to +2%

Productivity StrategyRevenue Growth Strategy

New Products High end products Cost Productivity

Customer Perspective

Customer & Market segment in which the unit is competing• Performance in the targeted markets• Customer satisfaction• Customer retention• New customer acquisition• Customer profitability• Specific measures of value propositions- short lead

time or on-time delivery• New approaches to satisfy emerging needs

Customer

Perspec

tive

“To achiev

e my visi

on,

how must

we look to

our custo

mers?

Customer Perspective

Relationship

On time delivery

Technical support

Survey Assistance

Differentiators

• Basic Requirement

• Clean

• Quality

• Variability within specified limits

Win-win Relations with Channel partners

Internal –Business-process perspective

Critical internal process in which organization must excel

Inter

nal P

erspe

ctive

“To s

atisfy

my

custo

mer, at

whic

h

proc

esse

s mus

t I

exce

l?”

Deliver value proposition

Satisfy shareholders expectations

Internal – Process

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

Internal –Business-process perspective

Inter

nal P

erspe

ctive

“To s

atisfy

my

custo

mer, at

whic

h

proc

esse

s mus

t I

exce

l?”

Achieve Operational excellence

Customer Value Proposition

lowest cost producer

Learning and growth perspective

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

• People based measures

• ESI

• Competencies

• Skill Mix

• Systems (Technology)

Organ

izatio

n Lea

rnin

g

“To

achi

eve m

y vi

sion,

how

mus

t my

orga

niza

tion

learn

and

impr

ove?

’’

Learning and growth perspective

Climate for action

IT TechnologyCompetencies

• ESI

Motivated and prepared workforce

ROCE

Customer Loyalty

On-line delivery

Process Cycle Time

Process Quality

Employee Competency

Cause and Effect Relationship

Four perspectives: Are they sufficient

• Community perspective - Social responsibility

• Suppliers perspective

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

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

Positive Image # of new programs / # athletes

Community Volunteer retention / recruitment

Involvement New donorsAthlete Outreach / Donor feedbackProgram Expansion # athletes in

outreach program

Fin

an

cia

l D

on

or

Training & Competition # athletes not able to find a team

Controlled Cost Cities with no registered athletes

Quality Programs Fee increaseCommunity For Family

feedbackAthletes # of

activities outside of competition

Cu

sto

mer

/ A

thle

te

Objectives MeasuresOrganization and Administration % Plans distributed team Public Relations meetings # area management team

$ raisedTraining # training classes offered outreach # first time athletes

Inte

rnal

Op

era

tion

s

Objectives Measures Objectives Measures

Objectives MeasuresKnowledge of MSO Volunteers trained in MSO and sportsManagement Registration forms in one time

Program guide distributionDatabase Management Volunteers in database Recognition Advanced coaches’ training/

coaches’/ meetings

Inte

rnal

Op

era

tion

s

Balanced Scorecard - Example

VisionTo provide patients, families and primary care physicians with the best, most compassionate care possible and to excel at communications

CustomerPatient Primary Care

Physician• % Satisfied • % Satisfied with

• % would Recommend Communication • % Parents Could • % Parents Could Articulate Care Plan Identify DCH Physician• Discharge Timeliness

Financial• Operating Margin

• Cost per Case • Revenue from Neonatal Care

Internal ProcessesWait Time Quality Productivity

• Admissions • Infection Rates • Length of Stay• Discharge • Blood Culture • Readmission Rate

Contaminate Rate • Daily Staffing vs. • Use of Clinical Occupancy

Pathways (Top 10)

Learning & Growth• Incentive Plan • Strategic Database

- Awareness - Availability- Implementation - 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.

Strategic Objectives Strategic Measures

Fin

anci

al

F1 Return on Capital Employed

F2 Existing Asset Utilization

F3 Profitablity

F4 Industry Cost Leader

F5 Profitable Growth

o ROCEo Cash Flowo Net Margin Rank (vs.

Competition)o Full Cost per Gallon

Delivered (Vs. Competition)

o Volume Growth Rate vs. Industry

o Premium Ratioo Non-Gasoline Revenue

and Margin

Financially Strong

Financially Strong

Cust

om

er

Delight the Customer

Win-Win Dealer Relationship

C1 Continually Delight the Targeted Consumer

C2 Build Win-Win Relations with Dealer

o Share of Segment in Selected Key Markets

o Mystery Shopper Rating

o Dealer Gross Profit Growth

o Dealer Survey

Learn

ing

&

gro

wth

Inte

rnal

Build the Franchise

Increase Customer Value

Operational Excellence

Good Neighbor

I1 Innovative products and services

I2 Best-in-class Franchise Teams

I3 Refinery Performance

I4 Inventory Management

I5 Industry Cost Leader

I6 On Spec-On Time

I7 Improve EHS

o New Product ROIo New Product

Acceptance Rateo Dealer Quality Scoreo Yield Gapo Unplanned Downtimeo Inventory Levelso Run-out Rateo Activity Cost. vs.

Competitiono Perfect Orderso Number of

Environmental Incidents

o Days Away from Work Rate

Motivated and Prepared Workforce

L1 Climate for Action

L2 Core Competencies and Skills

L3 Access to Strategic Information

o Employee Surveyo Personal BSC (%)o Strategic Competency

Availabilityo Strategic Information

Availability

A Good Balanced Scorecard Describes the Organization Strategy.

MAKE STRATEGY EVERYONE’S JOB

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

Workforce

Bottom-Up Process to Internalize &

Execute the Strategy

CORP

SBU

• EDUCATION

• PERSONAL GOAL

ALIGNMENT

• BALANCED PAYCHECKS

The Strategy Focused Workforce

Build STRATEGY-FOCUSED ORGANIZATIONS

STRATEGY

Mobilize Change through Executive

Leadership

Make Strategy a Continual

processTranslate the Strategy to

Operational Terms

Align the Organization to

the Strategy

Make Strategy Everyone’s Job

• Mobilization• Governance Processes• Strategic Management

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

• Strategic Awareness• Personal Scorecard• Balanced Paychecks• Corporate Role

• Business Unit Synergic• Support Unit Synergic

• Strategy Mape• Balanced Scorecards

1

2

3

4

5

Describing Strategy : Strategy Is a Step in a Continuum

MISSION Why we exist

VALUESWhat we believe In

VISIONWhat we want to be

STRATEGYOur game plan

BALANCED SOCRECARD Implementation & FocusSTRATEGIC INITIATIVES

What we need to doPERSONAL OBJECTIVES

What I need to do

STRATEGIC OUTCOMES

Satisfied SHAREHOLDERS

DelightedCUSTOMERS

Satisfied PROCESSES

Motivated & PreparedWORKFORCE

What Is A Good Balanced Scorecard?#1. Executive Involvement

Strategic decision makers must validate the strategy and related measures

#2 Cause-and-Effect RelationshipsEvery objective selected should be part of a chain of cause and effect that represents the strategy

#3 Performance DriversA balance of outcome measures and leading measures facilitates anticipatory management

#4 Linked to Budget/FinancialsEvery measure selected can ultimately be supported/enabled by Budgetary Funds

#5 Change InitiativesAligned Strategic Initiatives that change the behavior of the organization

Strategic Issues in Managing Technology & Innovation

1.Environmental Scanning

a. External Scanning

b. Impact of Stakeholders on Innovation

c. Lead Users

d. Market Research

e. New Product Experimentation

f. Internal Scanning

g. Resource Allocation issues

2. Time to Market Issues

3. Strategy formulation

a. Technology Sourcing, b. Technology Competence

4. Strategic Implementation

5. Innovative culture

a. Positive Attitude to Change

b. Decentralized decision making

c. Informal Structure

d. Interconnectedness

e. Complexity

f. Slack Resources

g. System Openness

Corporate Entrepreneurship ( Intrapreneurship)

“ A person who focuses on innovation and creativity and who transforms and dreams of an idea in to a profitable venture by operating within the organisational environment”