Strategic Cost Management

UIAMSPanjab University, Chandigarh

Session 3rd dated 24th July, 2013

Strategic Positioning Analysis

• Organizations are not isolated entities but operate in the context of an external environment. It is therefore imperative to not only evaluate oneself on an absolute scale but more so in relation with what is happening on the exterior.

• One of the foremost prerequisites in defining an organization's strategic orientation is the knowledge of the organization's current positioning.

Need for understanding

• An organization operates within certain bounds that are created by its direct competitors and industry of operations (the immediate neighborhood) as well as the macro-environment.

• To estimate the current positioning, these elements have to be analyzed separately and in unison to understand the possible effects and develop a clearer image of strategic positioning.

Understanding Strategic Positioning

• Begin stepwise by first understanding the macro environment and then the industry and competitors.– Political Environment: A country's economic health

is inseparably conjoined with its polity. Political environment should be necessarily studied to assess the strategic position of the organization. • In what ways it has a bearing is manifold and specific to

the industry; for the polity being both the legislative and executive body for the entire nation.

Understanding Strategic Positioning

• Continued…– Economic Environment:

• Economic health of the country of establishment and the world market. For this, regular scrutinizing has to be done to decipher the influence of economic decisions made by the government on the industry and possible turbulences in the external world

– Social Environment• Social fabric of the society is of tremendous significance in shaping up an

organization. Extensive research goes into figuring out the needs and demands of the people and their expectations, which by itself is quite a task for market research companies.

• Culture of the place, the traditions, the history … everything contributes to the making of the social fabric.

– It is within the dynamics of this fabric that an organization directly interacts with making it one of the key macro environmental factors for assessment

Understanding Strategic Positioning

• Continued– Technological Factors

• It emphasizes current technology and its relevant future advancements. Over the years, world has changed due to the development in science and technology. Many companies that failed to adapt to the changing environments either perished through major defaulting or were hostilely acquired by black nights.

• As Darwin's theory suggests, the world is all about survival of the fittest. To remain strong in today's competitive world, technological update is of prime relevance and organizations need to be aware of it

Strategic Positions• Some of the strategic positions that one might consider are:

– The low-cost firm that churns out good enough services or products at the lowest possible cost.

– The highly differentiated firm that creates the highest quality, best designed, best supported, most attractive products or services in their area.

– The narrowly focused firm that ties itself to a very specific market and serves its needs assiduously, typically with segmented products and services or niche, often customized, products or services.

– The broadly focused firm that serves a wider market, either with a standardized product or through mass customization.

– The firm that elaborates a previously chosen position, by penetrating deeper, developing new markets or niches, developing new products, carving out space at the edge of a niche, or raising barriers to competitors wanting to do what ones firm does at present.

SWOT Analysis

Strengths (S) Weaknesses (W)--------------------------- ------------------------

InternalFactors

ExternalFactors

Opportunities (O)-------------------------

SO Strategies-------------------------

WO Strategies------------------------

Threats (T)------------------------

ST Strategies--------------------------

WT Strategies-------------------------

List 5-10 externalopportunities here

List 5-10 externalthreats here

Use strengths toavoid threats

Min. weaknesses to avoid threats

Use strengths to take advantage of opportunities

Offset weaknessesto take advantage of opportunities

List 5-10 internalstrengths here

List 5-10 internalweaknesses here

Critical Success Factors

• Critical Success Factor (CSF) is the term for an element that is necessary for an organization or project to achieve its mission. It is a critical factor or activity required for ensuring the success of your business. The term was initially used in the world of data analysis, and business analysis. – For example, a CSF for a successful Information

Technology (IT) project is user involvement.

CSF contd

• The concept of "success factors" was developed by D. Ronald Daniel of McKinsey & Company in 1961.

• The process was refined by Jack F. Rockart in 1986.

• In 1995, James A. Johnson and Michael Friesen applied it to many sector settings, including health care.

Some CSFs• A Business Plan should be implemented that considers a platform for

growth and profits as well as takes into consideration the following critical success factors:– Money: positive cash flow, revenue growth, and profit margins.– Your future: Acquiring new customers and/or distributors.– Customer satisfaction: How happy they are?– Quality: How good is your product and service?– Product or service development: What's new that will increase business with

existing customers and attract new ones?– Intellectual capital: Increasing what you know is profitable.– Strategic relationships: New sources of business, products and outside

revenue.– Employee attraction and retention: Your ability to extend your reach.– Sustainability: Your personal ability to keep it all going.

Performance Evaluation• Traditional

– Example: Annual Performance Appraisal– In the traditional performance appraisal process, a manager annually writes

his opinions of the performance of a reporting staff member on a document supplied by the HR department. In some organizations, the staff member is asked to fill out a self-review to share with the supervisor.

– Shortcoming:• Most of the time, the appraisal reflects what the manager can remember; this is

usually the most recent events. • Almost always, the appraisal is based on opinions as real performance measurement

takes time and follow-up to do well. • In many organizations, the supervisor is also asked to make judgments based on

concepts and words such as excellent performance (?), exhibits enthusiasm (?) and achievement oriented (?).

• Many managers are uncomfortable in the role of judge, so uncomfortable, in fact, that performance appraisals are often months overdue

Balanced Scorecard

• The balanced scorecard (BSC) is a strategic performance management tool for measuring whether the smaller-scale operational activities of a company are aligned with its larger-scale objectives in terms of vision and strategy.– Advantage: By focusing not only on financial outcomes but

also on the operational, marketing and developmental inputs to these, the Balanced Scorecard helps provide a more comprehensive view of a business, which in turn helps organizations act in their best long-term interests

Balanced Scorecard-continued• Balanced scorecard is a strategic planning and management system

that is used extensively in business and industry, government, and nonprofit organizations worldwide to

– align business activities to the vision and strategy of the organization, – improve internal and external communications, and monitor organization

performance against strategic goals. • Balanced Scorecard was originated by Dr. Robert Kaplan (Harvard

Business School) and David Norton as a performance measurement framework that added strategic non-financial performance measures to traditional financial metrics to give managers and executives a more 'balanced' view of organizational performance.

• Balanced scorecard was coined in the early 1990s

Adapted from The Balanced Scorecard by Kaplan & Norton

Four perspectives

• The balanced scorecard suggests that we view the organization from four perspectives, and to develop metrics, collect data and analyze it relative to each of these perspectives:

• The Learning & Growth PerspectiveThis perspective includes employee training and corporate cultural attitudes related to both individual and corporate self-improvement. In a knowledge-worker organization, people -- the only repository of knowledge -- are the main resource. In the current climate of rapid technological change, it is becoming necessary for knowledge workers to be in a continuous learning mode. Metrics can be put into place to guide managers in focusing training funds where they can help the most. In any case, learning and growth constitute the essential foundation for success of any knowledge-worker organization.

Continue..

• Learning and growth constitute the essential foundation for success of any knowledge-worker organization.

• Kaplan and Norton emphasize that 'learning' is more than 'training'; it also includes things like mentors and tutors within the organization, as well as that ease of communication among workers that allows them to readily get help on a problem when it is needed. It also includes technological tools; and "high performance work systems."

Business Process Perspective

• The Business Process Perspective refers to internal business processes.

• Metrics based on this perspective allow the managers to know how well their business is running, and whether its products and services conform to customer requirements (the mission).

• Such metrics have to be carefully designed by those who know these processes most intimately.

The internal business process perspective contains three stages:

• In the innovation cycle, customer preferences are determined and the products are designed.

• In the operations cycle, goods and services are produced and delivered to the customer.

• The post-sales service cycle supports the customer after the sale.

The Internal Business Process Perspective• Examples of possible performance measures

for the:• Innovation cycle include the number of new

technologies developed and new product development time.

• Operations cycle include defect rates and the percent of on-time deliveries.

• Post-sales service cycle include the accounts receivable turnover ratio and warranty repair times.

Customer Perspective• The Customer Perspective emphasizes customer focus and customer

satisfaction.• Recent management philosophy has shown an increasing realization of

the importance of customer focus and customer satisfaction in any business.

• These are leading indicators: if customers are not satisfied, they will eventually find other suppliers that will meet their needs.

• Poor performance from this perspective is a leading indicator of future decline, even though the current financial picture may look good.

• Customers are analyzed in terms of kinds of customers and the kinds of processes for which we are providing a product or service to those customer groups.

The BSC Translates Strategy to a Series of Cause and Effect Relationships

Long-Term Strategy

Internal Perspective

Customer Perspective

Learning & Growth

Financial Perspective

How do shareholders view organization?

How do customers view organization?

How do employees view organization?

How can organization grow and improve?

Performance measurements for each perspective can be used to

determine appropriate operational and strategic

changes.

Financial Perspective• The Financial Perspective is equally important• Kaplan and Norton do not disregard the traditional need

for financial data. • Timely and accurate funding data will always be a priority,

and managers will do whatever necessary to provide it. • However, the current emphasis on financials leads to the

"unbalanced" situation with regard to other perspectives. • There is also perhaps a need to include additional

financial-related data, such as risk assessment and cost-benefit data, in this category.

Balanced Scorecard Implementation• A BSC implementation includes the

following stages:• Clarify vision, competencies, and strategies.• Analyze the four BSC perspectives to develop

objectives and measures.• Communicate the components of the BSC

throughout the organization.• Establish performance targets and action plans.• Collect and analyze scorecard data.• Investigate variances and reward employees.• Provide feedback and refine the scorecard.

Balanced Scorecard Strengths• The greatest strength of the BSC is the

communication of strategies throughout the organization.

• The BSC forces top management to clarify the vision and strategies of the organization.

• The BSC links employee rewards to performance objectives that are linked to the organization’s vision and strategies, so short-term and long-term strategies are more likely to be in alignment.

Balanced Scorecard Potential Weaknesses• If based on inappropriately defined visions

and strategies, the BSC provides the wrong incentives for managers.

• Sometimes performance measures are chosen because the data is easy to obtain, rather than because they are linked to the vision and strategies.

• If performance measure targets are unattainable, employees may not be interested in BSC initiative.

Strategy Mapping

• Strategy maps are communication tools used to tell a story of how value is created for the organization. – They show a logical, step-by-step connection between

strategic objectives (shown as ovals on the map) in the form of a cause-and-effect chain.

• Improving performance in the objectives found in the Learning & Growth perspective enables the organization to improve its Internal Process perspective Objectives, which in turn enables the organization to create desirable results in the Customer and Financial perspectives.

Kaizen• Literally means “ tightening”- for making continuous,

incremental improvements to the production process • The focus is on the production process, seeking efficiencies

in production, purchasing and distribution and in turn helps in reducing costs

• Incremental improvements can be in the form of developed improved setups process, improving machine performance to reduce waste, and increasing employee training and motivation to encourage employee to identify and implement the incremental daily changes that can improve the cost and quality performance.

Continue..

• Kaizen ( "improvement") is a Japanese word adopted into English referring to a philosophy or practices focusing on continuous improvement in manufacturing activities, business activities in general, and even life in general;

• When used in the business sense and applied to the workplace, kaizen typically refers to activities that continually improve all functions of a business, from manufacturing to management and from the CEO to the assembly line workers.

• By improving standardized activities and processes, kaizen aims to eliminate waste.

• Kaizen was first implemented in several Japanese businesses during the Japan’s recovery after World War II and has since been used by corporate world. It’s usage has spread to businesses throughout the world

Continue..

• The focus area of the Kaizen is not only production and marketing.

• It is based on making changes anywhere that improvements can be made.

Benefits of Kaizen

• Helps in reducing waste n areas such as inventory, waiting times, transportation, worker motion, employees skills, over production and in process

• Helps in improving space utilization, product quality, use of capital, communication, production capacity and employee retention

• It provides immediate results

Six Sigma• Six Sigma is a business management strategy tool originally

developed by Motorola.– As of 2009, it enjoys widespread application in many sectors of industry

• Six Sigma seeks to improve the quality of process outputs by identifying and removing the causes of defects (errors) and minimizing variability in manufacturing and business processes.

– Six Sigma uses a set of quality management methods, including statistical methods, and creates a special infrastructure of people within the organization ("Black Belts", "Green Belts", etc.) who are experts in these methods.

– Each Six Sigma project carried out within an organization follows a defined sequence of steps and has quantified targets. These targets can be financial (cost reduction or profit increase) or whatever is critical to the customer of that process (cycle time, safety, delivery, etc.).

Continue..

• Is a rigorous and disciplined methodology that uses data and statistical analysis to measure and improve a company’s operational performance by identifying and eliminating defects in manufacturing and service related processes.

• Commonly defines as 3.4 defects per million opportunities

THANK YOU