BU6006 Session 10 - Critical Success Factors

7/31/2019 BU6006 Session 10 - Critical Success Factors

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Session 10

BU6006Strategic Finance and Accounting(University of Chester)


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Review Group Reporting Lecture

Critical success factors / Strategic option generation

Activities/ Feedback Mini Quiz Research

Capital asset pricing model (CAPM) in corporatefinance

Topics

Go Top


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Review


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Critical success factors /Strategic option

generation

Lecture


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Critical successfactors


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any of the aspects of a business that are identifiedas vital for successful targets to be reached andmaintained.

Critical success factors are usually identified insuch areas as production processes, employee andorganization skills, functions, techniques, andtechnologies.

The identification and strengthening of suchfactors may be similar to identifying corecompetences , and is considered an essentialelement in achieving and maintaining competitive

advantage .

Critical success factors


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the Planning Model


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Matching the profile to the environment.

Defining Critical SuccessFactors

Matching the Profile to the Environment

Examining the

environment Doing an

independentand honest

review of eachaspect

Examining the

organizational profile

Determining the level of competence required to operate

effectively in this environmentas to:

Determining the level of competence the organization

has as to:

Marketing and sales Production

Financial Management Research and Development

Human ResourceManagement

Matching whatneeds to be done With what can be

done In all aspects of

the business

Marketing and sales Production Financial Management Research and Development Human Resource Management


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The terms defined An opportunity is something that if

taken, will result in somethingpositive for the organization. A challenge (threat) is quite different.

Out of the environment, somethingwith a negative consequence to yourorganization is going to happenunless you act in some way.

Analyzing the Environment,Opportunities and Challenges(threats)


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A strength means you are already equippedto handle the situation and you are usingstate of the art procedures.

A weakness means you dont have the toolsto deal with the issue.

Put another way: A strength is something you have that you need, A weakness is something you dont have that you

need.

The Organizational Profile,Strengths and Weaknesses


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Industry life cycle

Stages of Industry Evolution

GrowthRate Profits

Development

Growth

Maturity Decline


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Critical Success Factors at EachStage of Industry EvolutionFunction Development Growth Maturity Decline

Marketing& Sales

Create widespreadawareness.

Establish brandrecognition. Findeffectivemarketingchannels.

Hold existingmarkets andpromote to newmarkets.Introducesuccessor products toextend maturity.

Focus on thebest channels.Replace oldproducts withnew ones.

Finance Finance initialR&D losses.

Financeexpansion andnet cashoutflows.

Reinvest profitsand employ costcontrols.

Prune theproduct line andharvest theresources fromliquidation.


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Critical Success Factors at EachStage of Industry Evolution

Production Limit number of designs, usestandards.

Increasecapacity whileretaining quality.

Improve theproduct andreduceoperating costs.

Re-deployunusedequipment,simplifyprocesses andreduce product

variants.

R&D Ability to makechanges andtake the bugsout.

Focus on qualityand ability tomake productvariants tosatisfycustomers.

Improveprocesses toreduce costsand introducesuccessor products.

Commitresources tonew growthproducts.

HumanResources

Flexibility instaffing andtraining.

Motivated andloyal workforcewith excellentproductknowledge andselling skills.

Reduceworkforce andincreaseefficiency.

Reduce andreallocatepersonnel.


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Critical Success Factors at EachStage of Industry Evolution

Focusarea

Engineeringand

marketing Sales and

marketshare

Productionefficiency

andsuccessors

Finance andinvestment

recovery

Development Growth Maturity Decline


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Company Objectives

Long listing of identified factors Customer segmentation Company vs. Industry

Deliberations importance of the factors impact analysis

Obstacles determination Short List of Identified Factors

Process of Identifying CSF


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Strategic optiongeneration


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Setting Organizations objectives Evaluating the Organizational

Environment Setting Quantitative Targets Aiming in context with the divisional plans Performance Analysis Choice of Strategy

Strategy Generation


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the direction and scope of anorganisation over the long-term:

which achieves advantage for theorganisationthrough its configuration of resources

within a challenging environment ,to meet the needs of markets andto fulfil stakeholder expectations".

Strategy in Business


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* Where is the business trying to get to in the long-term ( direction)

* Which markets should a business compete in and what kind of activitiesare involved in such markets? ( markets ; scope )

* How can the business perform better than the competition in thosemarkets? ( advantage )?

* What resources (skills, assets, finance, relationships, technicalcompetence, facilities) are required in order to be able to compete?(resources )?

* What external, environmental factors affect the businesses' ability tocompete? ( environment )?

* What are the values and expectations of those who have power in andaround the business? ( stakeholders)

Dissecting the Statement


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Corporate Strategy

Business Unit Strategy Operational Strategy

Strategy at Different Levelsof a Business


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concerned with the overall purpose andscope of the business to meet stakeholderexpectations.

This is a crucial level since it is heavilyinfluenced by investors in the business andacts to guide strategic decision-makingthroughout the business.

Corporate strategy is often stated explicitly ina "mission statement.

Corporate Strategy


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concerned more with how a businesscompetes successfully in a particularmarket.

It concerns strategic decisions aboutchoice of products, meeting needs ofcustomers, gaining advantage overcompetitors, exploiting or creating newopportunities etc.

Business Unit Strategy


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concerned with how each part of the business is organised to deliver thecorporate and business-unit levelstrategic direction.

Operational strategy therefore focuseson issues of resources, processes, peopleetc.

Operational Strategy


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Porters Model SWOT Matrix

SPACE Matrix Qualitative Strategic Planning Model Ansoff Matrix

Generating StrategicOptions


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Five Forces

Porters Model


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Porter's Five Forces model is made up byidentification of 5 fundamental competitiveforces:

Barriers to entry Threat of substitutes Bargaining power of buyers Bargaining power of suppliers Rivalry among the existing players

Understanding PortersModel


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Strength/ Weakness/Opportunity/ Threat

SWOT Matrix


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SWOT Analysis one of the effective analytical

tools to evaluate a situation.

The situation may be strategicrelated or capabilities related. SWOT Analysis is often used

along with Strategic planning


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SWOT diagram

Defining OrganizationalFactors

EnvironmentalThreats

EnvironmentalOpportunities

InternalStrength

InternalWeakness


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SWOT Analysis

Environmentalthreats


InternalStrength

InternalWeakness


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the cellsof a SWOT diagram


InternalWeakness

Environmentalthreats

InternalStrength

Cell B Be aggressive

Cell A Redesign practices

Cell C Be Defensive

Cell D Use your strengths in

new places


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An organization with internalweakness which is facing anindustry with numerousopportunities

must focus attention on re-designing how business is doneso that the opportunities can beeffectively captured.

Cell A Grand Strategy,Re -design practices


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Retrenchment/turn around Joint Venture Strategic Alliance

Other Cell A Strategies


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An organization with internalstrengths which is facing anindustry with numerousopportunities

expand operations into newmarkets, invest in growth andreproduce success in other areas.

Cell B Grand Strategy,Be aggressive


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Product development Market development Vertical Integration

Other Cell B Strategies


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An organization with internalweakness which is facing anindustry with numerous threats

needs to revaluate whether or notit is advisable to stay in business.

Cell C Grand Strategy,Be Defensive


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Divestiture Liquidation

Other Cell C Strategies


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An organization with internalstrengths which is facing an industrywith numerous threats

evaluate whether or not theirexpertise could be transferred to anew, less threatening environment.

Cell D Grand Strategy,Use your strengths in newplaces


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Horizontal Integration

Concentric Diversification

Other Cell D Strategies


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StrategicPosition & ACtionEvaluation matrix

SPACE Matrix


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focuses on strategy formulationespecially as related to thecompetitive position of an

organization.


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The SPACE matrix is broken down tofour quadrants where each quadrantsuggests a different type or a nature ofa strategy:

Aggressive Conservative Defensive Competitive

Outcome of the Matrix


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Internal strategic dimensions: Financial strength (FS)

Competitive advantage (CA) External strategic dimensions: Environmental stability (ES)

Industry strength (IS)

Areas of Analysis


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the CA and IS values in the SPACE matrix are

plotted on the X axis.

- CA values can range from -1 to -6.- IS values can take +1 to +6. - The FS and ES dimensions of the model are

plotted on the Y axis.

- ES values can be between -1 and -6.- FS values range from +1 to +6.

Technical Assumptions


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Step 1: Choose a set of variables to be used to gauge thecompetitive advantage (CA), industry strength (IS),environmental stability (ES), and financial strength (FS).

Step 2: Rate individual factors using rating system specific toeach dimension. Rate competitive advantage (CA) andenvironmental stability (ES) using rating scale from -6(worst) to -1 (best). Rate industry strength (IS) and financialstrength (FS) using rating scale from +1 (worst) to +6 (best).

Step 3: Find the average scores for competitive advantage(CA), industry strength (IS), environmental stability (ES),and financial strength (FS).

Constructing the Matrix


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Step 4: Plot values from step 3 for each dimensionon the SPACE matrix on the appropriate axis.

Step 5: Add the average score for the competitiveadvantage (CA) and industry strength (IS)dimensions. This will be your final point on axisX on the SPACE matrix.

Step 6: Add the average score for the SPACE matrixenvironmental stability (ES) and financial strength(FS) dimensions to find your final point on the axisY.



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Step 7: Find intersection of your X and Y points.Draw a line from the center of the SPACE matrix toyour point. This line reveals the type of strategy the

company should pursue.



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QSPM

QualitativeStrategic PlanningModel


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high-level strategic managementapproach for evaluating possiblestrategies.

ovides an analytical method for comparingfeasible alternative actions.

introduces some numbers into thisapproach making it a little more " expert"technique.

attempts to objectively select the best strategy using input from othermanagement techniques and some easycomputations.

QSPM


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STEP 1. Provide a list of internal factors -- strengths and weaknesses.

Then generate a list of the firm's keyexternal factors -- opportunities and threats . These will be included in the left column of the

QSPM. You can take these factors from the EFE matrix and

the IFE matrix.



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Step 2. Having the factors ready, identify strategyalternatives that will be further evaluated.

These strategies are displayed at the top of thetable.

Strategies evaluated in the QSPM should bemutually exclusive if possible.



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Step 3. Each key external and internal factor shouldhave some weight in the overall scheme.

You can take these weights from the IFE and EFEmatrices again.

You can find these numbers in our example in thecolumn following the column with factors.



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Step 4. Attractiveness Scores (AS) in the QSPM indicate how eachfactor is important or attractive to each alternative strategy.

Attractiveness Scores are determined by examining each keyexternal and internal factor separately, one at a time, and asking the

following question: Does this factor make a difference in our decision aboutwhich strategy to pursue?

If the answer to this question is yes, then the strategies should becompared relative to that key factor.

The range for Attractiveness Scores is 1 = not attractive, 2 = somewhatattractive, 3 = reasonably attractive, and 4 = highly attractive.

If the answer to the above question is no, then the respective key factorhas no effect on our decision. If the key factor does not affect the choice being made at all, then the Attractiveness Score would be 0.



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Step 5. Calculate the Total AttractivenessScores (TAS) in the QSPM. Total AttractivenessScores are defined as the product of multiplying

the weights (step 3) by the Attractiveness Scores(step 4) in each row. The Total Attractiveness Scores indicate the relative

attractiveness of each key factor and relatedindividual strategy.

The higher the Total Attractiveness Score, the moreattractive the strategic alternative or critical factor.



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Step 6. Calculate the Sum Total AttractivenessScore by adding all Total Attractiveness Scores ineach strategy column of the QSPM.

The QSPM Sum Total Attractiveness Scores revealwhich strategy is most attractive.

Higher scores point at a more attractive strategy,

considering all the relevant external and internalcritical factors that could affect the strategicdecision.



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Boston ComputingGroup

The BCGModel


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well-known portfolio managementtool used in product life cycle theory.

BCG matrix is often used to prioritizewhich products within companyproduct mix get more funding andattention.

The BCG matrix model is a portfolio planning model developed by BruceHenderson of the Boston ConsultingGroup in the early 1970's.

BCG


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A high-growth product is for example a new one that weare trying to get to some market. It takes some effort andresources to market it, to build distribution channels, andto build sales infrastructure, but it is a product that isexpected to bring the gold in the future.

A low-growth product is for example an establishedproduct known by the market. Characteristics of thisproduct do not change much, customers know what they

are getting, and the price does not change much either.This product has only limited budget for marketing. Thisthe milking cow that brings in the constant flow of cash.An example of this product would be a regular Colgatetoothpaste.

Product Classification


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On the horizontal axis: relativemarket share - this serves as ameasure of SBU strength in the

market On the vertical axis: market growth

rate - this provides a measure ofmarket attractiveness

BCG Dimensions


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STARS (high growth, high market share) Stars are defined by having high market

share in a growing market. Stars are the leaders in the business but still

need a lot of support for promotion aplacement.

If market share is kept, Stars are likely togrow into cash cows.

BCG Quadrants


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QUESTION MARKS (high growth, low market share)

Question marks are essentially new products where buyers haveyet to discover them.

The marketing strategy is to get markets to adopt these products. Question marks have high demands and low returns due to low

market share.

These products need to increase their market share quickly or they

become dogs. The best way to handle Question marks is to either invest heavily in

them to gain market share or to sell them.

BCG Quadrants


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DOGS (low growth, low marketshare)

- Dogs should be avoided andminimized.- Expensive turn-around plansusually do not help.

BCG Quadrants


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CASH COWS (low growth, high market share) If competitive advantage has been achieved,

cash cows have high profit margins and generatea lot of cash flow.

Because of the low growth, promotion and placementinvestments are low.

Investments into supporting infrastructure canimprove efficiency and increase cash flow more.

Cash cows are the products that businesses strive for.

BCG Quadrants


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(1) Build Share: here the company can invest to increasemarket share (for example turning a "question mark" intoa star)

(2) Hold: here the company invests just enough to keep theSBU in its present position

(3) Harvest: here the company reduces the amount ofinvestment in order to maximise the short-term cash flows

and profits from the SBU. This may have the effect ofturning Stars into Cash Cows.

(4) Divest: the company can divest the SBU by phasing itout or selling it - in order to use the resources elsewhere(e.g. investing in the more promising "question marks").

Four possible strategies


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Product/MarketExpansion Grid

The AnsoffMatrix


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The Ansoff Matrix was first publishedin the Harvard Business Review in1957, and has given generations of

marketers and business leaders aquick and simple way of thinkingabout growth.

Understanding Ansoff


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Looking at it from a business perspective, the low riskoption is to stay with your existing product in yourexisting market: you know the product works, and themarket holds few surprises for you.

However, you expose yourself to a whole new level ofrisk by either moving into a new market with an existingproduct, or developing a new product for an existingmarket. The new market may turn out to have radicallydifferent needs and dynamics than you thought, and thenew product may just not be commercially successful.

And by moving two quadrants and targeting a newmarket with a new product, you increase your risk to yetanother level!

The Corporate Ansoff Matrix


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Targeting new markets, or new areas of themarket.

Target different geographical markets at home

or abroad. Use different sales channels, such as online or

direct sales if you are currently selling throughthe trade.

Target different groups of people, perhaps withdifferent age groups, genders or demographicprofiles from your normal customers.

Market DevelopmentDiversification


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this approach, youre trying to sell more of thesame things to the same people. Here you might:

Advertise, to encourage more people within your existingmarket to choose your product, or to use more of it.

Introduce a loyalty scheme. Launch price or other special offer promotions. Increase your sales force activities.

Buy a competitor company (particularly in maturemarkets).

Market Penetration


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This strategy is risky: Theres oftenlittle scope for using existing expertiseor for achieving economies of scale,

because you are trying to sellcompletely different products orservices to different customers

The main advantage of diversificationis that, should one business sufferfrom adverse circumstances, the othermay not be affected.

Diversification


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Here, youre selling more things to the same people.Here you might:

Extend your product by producing different variants, orpackaging existing products it in new ways. Develop related products or services (for example, a domestic

plumbing company might add a tiling service after all, ifcustomers who want a new kitchen plumbed in are quitelikely to need tiling as well!)

In a service industry, shorten your time to market, or improvecustomer service or quality.

Product Development


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You research the move carefully. You build the capabilities needed to

succeed in the new quadrant.

You've got plenty of resources to cover apossible lean period while you'relearning how to sell the new product,and are learning what makes the newmarket tick.

You have firstly thought through whatyou have to do if things don't work out,and that failure won't "break" you.

Manage Risks


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Activities and ReviewActivities


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Conduct the following StrategicGeneration Option:

BCG Ansoff

Using your company ofchoice


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End of Part 1


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Part 2Group Research

Group Research


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Capital asset pricing model(CAPM) in corporate finance

Weighted Average Cost ofCapital (WACC)

Group Research


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End of Part 2See you next Session

BU6006 Session 10 - Critical Success Factors

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