Strategic managementStrategic management

Lecture 8 Lecture 8

Strategic decision and strategic Strategic decision and strategic goalsgoals

screening options

Strategic analysisStrategic analysisIdentifies the organisation'scircumstances

Strategic optionsStrategic optionsIdentifies possibilities

for development

Assessment of suitabilityAssessment of suitability

FeasibilityFeasibilityAcceptabilityAcceptability

establishing the rationale

ReturnRiskStakeholder reactions

Selection of strategiesSelection of strategiesplannedenforcedlearningcommand

A framework for the evaluation and selection of strategies

Success Criteria for Strategic Options (1)Success Criteria for Strategic Options (1)

SuitabilitySuitability• Whether strategy addresses Whether strategy addresses

circumstances in which organisation is circumstances in which organisation is operatingoperating

• Linked to strategic positionLinked to strategic position• Rationale of strategyRationale of strategy

Success Criteria for Strategic Options (Success Criteria for Strategic Options (22))

FeasibilityFeasibility• Whether strategy can be made to work Whether strategy can be made to work

in practicein practice• Linked to strategic capability Linked to strategic capability

Success Criteria for Strategic Options (Success Criteria for Strategic Options (33))

AcceptabilityAcceptability• The expected performance outcomes The expected performance outcomes

(e.g. risk/return)(e.g. risk/return)• Meeting expectations of stakeholdersMeeting expectations of stakeholders

Does it fit the stagewe will be in?

Life cycle analysesLife cycle analyses PositioningPositioning

Business profileBusiness profileValue chain analysisValue chain analysis

Portfolio analysesPortfolio analyses

SuitabilityIs this a good strategy?

Does it improve value for money? Does it exploit core competences?

Will it lead to good financial performance?

Does it strengthen thebalance of activities?

Is the positioningviable?

Testing suitability

Suitability – Strategic PositionSuitability – Strategic Position

ConceptConcept To understandTo understand Strategy must addressStrategy must address

PESTELPESTEL Growth/declineGrowth/decline

Changes in industry structureChanges in industry structureIndustry convergenceIndustry convergence

ScenariosScenarios Uncertainty/riskUncertainty/risk Contingency plansContingency plans

5-forces5-forces Competitive forcesCompetitive forces Barriers to new entrantsBarriers to new entrants

Strategic Strategic GroupsGroups

Attractiveness of groups, Attractiveness of groups, Mobility barriers, strategic Mobility barriers, strategic spacesspaces

RepositioningRepositioning

Core Core

CompetenceCompetenceIndustry threshold standardsIndustry threshold standards

Basis of competitive advantageBasis of competitive advantageEliminate weaknessesEliminate weaknesses

Exploit strengthsExploit strengths

Value chainValue chain Opportunities for vertical Opportunities for vertical integration/outsourcingintegration/outsourcing

How to integrate (e.g. How to integrate (e.g. merger/alliance)merger/alliance)

StakeholdersStakeholders Acceptability to stakeholdersAcceptability to stakeholders

Power and interestPower and interestEffect on stakeholdersEffect on stakeholders

Manage power/interestManage power/interest

Cultural webCultural web ““Real” acceptability, impact on Real” acceptability, impact on feasibilityfeasibility

Manage culture clash in Manage culture clash in merger/alliancemerger/alliance

Examples of Suitability - Directions for GrowthExamples of Suitability - Directions for Growth

StrategicStrategic

OptionOptionSuitability in terms ofSuitability in terms of

EnvironmentEnvironment CapabilityCapability ExpectationsExpectations

Consolid-Consolid-ationation

Withdraw from Withdraw from declining marketsdeclining markets

Sell valuable assetsSell valuable assets

Maintain market shareMaintain market share

Build on Build on strengths – strengths – invest and invest and innovateinnovate

Better returns at Better returns at low risk by low risk by exploiting current exploiting current strategiesstrategies

Market Market penetrationpenetration

Gain market share for Gain market share for advantageadvantage

Exploit superior Exploit superior resources & resources & competencescompetences

Product Product developm’tdevelopm’t

Exploit knowledge of Exploit knowledge of customer needscustomer needs

Exploit R&DExploit R&D Better returns at Better returns at medium risk by medium risk by exploiting current exploiting current strengths or market strengths or market knowledgeknowledge

Market Market developm’tdevelopm’t

Opportunities for new Opportunities for new geographical market, geographical market, new segments/usesnew segments/uses

Exploit current Exploit current productsproducts

Diversifi-Diversifi-cationcation

Current markets Current markets saturated/decliningsaturated/declining

Exploit core Exploit core competences in competences in new areasnew areas

Better returns at Better returns at higher risk by higher risk by seeking new seeking new businessbusiness

Criteria for Acceptability Criteria for Acceptability

CriteriaCriteria To UnderstandTo Understand ExamplesExamples LimitationsLimitations

ReturnReturn

ProfitabilityProfitability Financial return on Financial return on investmentsinvestments

ROCEROCE

Payback periodPayback period

DCFDCF

Apply to discrete Apply to discrete projectsprojects

Only tangible Only tangible costs/benefitscosts/benefits

Cost-benefitCost-benefit Wider Wider costs/benefits (incl. costs/benefits (incl. intangibles)intangibles)

Major Major infrastructure infrastructure projectsprojects

Difficulties of Difficulties of quantificationquantification

Real optionsReal options Sequence of Sequence of decisionsdecisions

Real options Real options analysisanalysis

QuantificationQuantification

Shareholder Shareholder value value analysisanalysis

Impact on Impact on shareholder valueshareholder value

Mergers and Mergers and acquisitionsacquisitions

Technical detail Technical detail often difficultoften difficult

Criteria for Acceptability Criteria for Acceptability

CriteriaCriteria To UnderstandTo Understand ExamplesExamples LimitationsLimitations

RiskRisk

Financial ratio Financial ratio projectionsprojections

Robustness of Robustness of strategystrategy

Break-even Break-even analysisanalysis

Impact on Impact on gearing/liquiditygearing/liquidity

Sensitivity Sensitivity analysisanalysis

Test assumptions/Test assumptions/

robustnessrobustnessWhat if? analysisWhat if? analysis Tests factors Tests factors

separatelyseparately

Stakeholder reactionsStakeholder reactions

Political dimension Political dimension Stakeholder Stakeholder mappingmapping

Game theoryGame theory

Largely Largely qualitativequalitative

Approach Dominantprocesses

Elements of goodpractice

Dangers

Planning Analytical techniquesTested againstobjectivesQuantified wherepossible

Involve linemanagersAnalyse ‘holistic’pictureBuild in flexibilityCommunicationbetween analystsand decision-makers

No ownershipFragmented analysisRigidity - lostopportunitiesDecision-makers disownanalysis

Enforced choice Bend toenvironmental‘pressure’

Assess riskPreparecontingencies

‘Victims ofcircumstances’Evaluation not done

Learning fromexperience

Reactive moves inseparate parts oforganisationCultural/politicalcontext important

Processes needcredibilityAvenues ofchallengePromote inter-unitlearning

Fragmented/inefficientPragmatismRisk of strategic drift

Command Dominantstakeholder selectsstrategies

Inform/educatedecision-makerNeed ‘completeness’Challenge theparadigm

Incomplete visionVision institutionalised

Processes for selecting strategies

What are the goals and objectivesWhat are the goals and objectives

Objectives: desired outcomes for individuals, Objectives: desired outcomes for individuals, groups, and entire organizations.groups, and entire organizations.

Why oraganizations set up objectives? Why oraganizations set up objectives? Enviroment orientation, Enviroment orientation, Guide actionsGuide actionsHierarchy linkageHierarchy linkageCoordinate decisionsCoordinate decisionsBasis for controlBasis for control

Why peoples set up objectives: Why peoples set up objectives: Personal challenges, Personal challenges, Integration of poersonal objectivesIntegration of poersonal objectivesFostering of motivationFostering of motivation

Types of purposesTypes of purposes

Types of purposesTypes of purposes Common charecteristicsCommon charecteristics Open or closedOpen or closed

MissionMission General, General,

VisionaryVisionary

Central, and overridingCentral, and overriding

Often unwrittenOften unwritten

Mostly openMostly open

Strategic Strategic objectives objectives

Often financialOften financial

Express expectationExpress expectation

Derived from missionDerived from mission

Mostly closedMostly closed

Unit or Unit or functional functional objectivesobjectives

Unit specificUnit specific

OperationalOperational

Short termShort term

Always closed, Always closed, resource resource orientedoriented

The hierarchy of objectives and their place in the strategy process

Objectives need to meet five specificationsObjectives need to meet five specifications

1. An objective should be clear, single, specific 1. An objective should be clear, single, specific topics (It sould not be stated in vague form) topics (It sould not be stated in vague form)

2. An objective should relate to a result, not to an 2. An objective should relate to a result, not to an activity to be performes (The objective is a activity to be performes (The objective is a result of an activity, not to performing the result of an activity, not to performing the activity) activity)

3. An objective should be measurable (An objective 3. An objective should be measurable (An objective should be stated in quantitive terms whenever should be stated in quantitive terms whenever feasible) feasible)

4. An objective should contaion a time deadline and 4. An objective should contaion a time deadline and a responsible person of its achievement a responsible person of its achievement

5. An objective should be challenging but 5. An objective should be challenging but achievable. achievable.

1. Step of the GAP planning 1. Step of the GAP planning

Assumption of the unchanging environmemt Assumption of the unchanging environmemt

Present

Perf

orm

anc

e

Time

2. Step of the GAP planning 2. Step of the GAP planning

Present

Perf

orm

anc

e

Time

Unfavorable conditions

Favorable conditions

Unchange convditions

Assumption of the different – favorable, or unfavorable - environmental conditions.

3. Step of the GAP planning 3. Step of the GAP planning

Strategic goals based on mission Strategic goals based on mission

Present

Perf

orm

anc

e

Time

Favorable condition

Goals based on mission

Unchanged conditions

4. Step of the GAP planning 4. Step of the GAP planning Strategic goals based on mission, and actions fitted to Strategic goals based on mission, and actions fitted to

enhanced goals enhanced goals

Present

Perf

orm

anc

e

Time

Favorable condition

Goals based on mission

Unchanged conditions

Gap what you have to fill with actions

BSC: four basic perspective of a companyBSC: four basic perspective of a company

Based on „balenced score card” four perspectives Based on „balenced score card” four perspectives are seen to affect the long term economic value are seen to affect the long term economic value of a company: of a company:

Financial perspective: This includes consideration of factors Financial perspective: This includes consideration of factors such as the return on capital employed, cash flow such as the return on capital employed, cash flow

Customer perspective: This requires the company to set Customer perspective: This requires the company to set specific goals besides price, that are important to the specific goals besides price, that are important to the customers, qualitiy, performance, and servicecustomers, qualitiy, performance, and service

Internal perspective: This includes consideration of factors Internal perspective: This includes consideration of factors such as capacity, and cost connected with effectiveness such as capacity, and cost connected with effectiveness

Innovation, and learning perspective: This includes the Innovation, and learning perspective: This includes the generation of new business from innovation, and staff generation of new business from innovation, and staff attitudes and moraleattitudes and morale

The Balanced ScorecardThe Balanced Scorecard

Based on Kaplan & Norton

The Balanced ScorecardThe Balanced Scorecard Key Performance Indicators KPIsKey Performance Indicators KPIs

Financial perspectivee.g. Operational viewCost reductionSales growthe.g. Shareholder viewROCEEVA

Customer perspectivee.g. Customer satisfactionCustomer retentionCustomer loyaltyAcquisition of new customers

Financial perspectivee.g. Operational viewCost reduction %Sales growth %e.g. Shareholder viewROCE %EVA €

Customer perspectivee.g. Customer satisfactionCustomer retention %Customer loyalty %Acquisition of new customers %

Internal Perspectivee.g. Assess quality of people & processesTraining & developmentJob turnover %Product qualityStock turnover /

Innovation & learninge.g. Continuous improvementQuality circlese.g. Research & DevelopmentSpeed to market / months

Balanced Score Card

The structure of the goalsThe structure of the goals

OObjective bjective GGoals oals SStrategies trategies MMeasures Tacticseasures Tactics

The Balanced Scorecard – An ExampleThe Balanced Scorecard – An Example

The BSC helps to translate mission The BSC helps to translate mission to strategy and tacticsto strategy and tactics

Financial

To succeed financially how should we appear to our shareholders

Objectives Measures Targets Initiatives

A possible definition of goal-strategy systemA possible definition of goal-strategy system

Mission or Mission or Objective:Objective: WORDS long-term (3-5 yrs ?) WORDS long-term (3-5 yrs ?) somewhat visionary, business right to be in, our somewhat visionary, business right to be in, our ambitionambition

Goals:Goals: NUMBERS “stretch“, specific by year, sales, NUMBERS “stretch“, specific by year, sales, profit, competitive position (share), back-up sheetsprofit, competitive position (share), back-up sheets

Strategies:Strategies: WORDS, HOW to, FOCUS sustainable WORDS, HOW to, FOCUS sustainable competitive advantage, long-term directioncompetitive advantage, long-term direction

Measures:Measures: NUMBERS one or two per strategy, readiliy NUMBERS one or two per strategy, readiliy optainable, sensitive to permit 3-monthly readingsoptainable, sensitive to permit 3-monthly readings

Tactics:Tactics: KEY NEXT PROJECTS recommended by Strategy KEY NEXT PROJECTS recommended by Strategy Owner, agreed by top management, prioritized, Owner, agreed by top management, prioritized, time-defined, ownerstime-defined, owners