CHAPTER 15: MANAGING STRATEGICALLY€¦ · 1) Strategic goals broadly define the targets or future...

Linstead, Fulop & Lilley, MANAGEMENT & ORGANIZATION 2

CHAPTER 15: MANAGING STRATEGICALLY

• What is a strategy?

• How are strategies formulated?

• What is the value of strategic planning?

• Why do some firms outperform others?

• Do all organisations need a strategy?


The planning process and its major components

Copyright 2011 McGraw-Hill

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PowerPoint slides to

accompany Bartol et al,

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How the parts link together

Vision Mission Goals Plans


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Where is the

organisation

going?

What is the

organisation’s

purpose or

reason for

existence?

Future

targets or

end results

Instructions

on how to

achieve it all


The Mission Statement


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Customers

Products or services

Location Technology

Concern for survival

Philosophy Self-

concept

Concern for public image

Concern for employees

Vision

statement

Goals

&

Plans


Levels and types of goals

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Organisations usually have three levels of goals: strategic, tactical and operational as shown above. 1) Strategic goals broadly define the targets or future results for which senior management are aiming 2) Tactical goals convert strategic goals into targets for specific departments or units. They are more detailed. 3) Operational goals convert the goals in 1) and 2) into specific actions for the lower level management.


The focus of strategic goals

Focus of strategic

goals

Market position

Innovation

Human resources

Financial resources

Physical resources

Productivity

Social responsibilit

y

Profit requirement

s

Where organisations tend to focus their strategic goals:

1) Market standing – or the desired share of present and new markets, where new products are needed, and service goals aimed at building customer loyalty.

2) Innovations – in products, services as well as in the skills and activities needed to supply them.

3) Human resources – the supply, development and performance of managers and others in order to meet organisational goals. This may include changes in

employee attitudes, skill development and relations with unions.

4) Financial resources – sources of capital and how well it is being utilised.

5) Physical resources – or physical facilities and how well they are being utilised.

6) Productivity – efficient use of resources relative to outcomes.

7) Social responsibility – responsibilities in such areas as concern for community and maintenance of ethical behaviour.

8) Profit requirements – level of profitability and other indicators of financial wellbeing.

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How goals facilitate performance


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How to make goals effective

Specific

Measurable

Attainable

Relevant

Time-limited

Challenging


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SMART


The major benefit of goals

Focus attention on key areas e.g. strategic, economic, social, environmental

Clarify expectations and set performance benchmarks

Can improve performance

10-25% as raises motivation.


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Are there any disadvantages with setting goals?


The major disadvantages of goals Potential Problems Possible Remedies

Excessive risk taking Analyse risk; avoid careless or foolish risks

Increased stress Eliminate unnecessary stress by adjusting

goal difficulty, adding staff and offering

training in necessary skills

Undermined self-

confidence

Treat failure as a problem to be solved

rather than as a signal to punish (due to

failure)

Ignored non-goal areas Make sure goals encompass key areas

Excessive short-run

thinking

Include some long-term goals


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Types of plans


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The strategic management process


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What is management by objectives?


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The strengths and weaknesses of MBO


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The three main strategy levels in organisations


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The BCG (Boston Consulting Group) Matrix


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CHARACTERISTICS OF THE BOSTON CONSULTING GROUP’S BUSINESS QUADRANTS

• Stars, with high shares of fast growing markets, have the benefits of high relative experience, and consequently low relative costs. They should thus be the highest profit generators in the markets in which they operate. They may nevertheless consume cash, since growth is often costly in terms of the set up of new production facilities and increased working capital demands (e.g. Pfizer’s Viagra in the fast growing market for treatments for erectile dysfunction).

• Cash cows, who have high market shares of low growth markets, are likely to be profitable as a result of their high relative market shares and the economies of scale and experience derived cost advantages that come with them. Better still, in cashflow terms, the lack of growth in the markets they serve means that they do not require cash to fund expansion. They generate surplus cash that can be invested elsewhere in the business (e.g. Microsoft Windows in the relatively mature market for operating systems).

• Dogs is the name given to low growth businesses with low market share. Their low market share means that they are unlikely to be very profitable, if at all, but the lack of growth in their market means that they are also unlikely to require investment to fund growth (e.g. Red Hat Linux would be rendered a dog of the operating systems market by BCG).

• Wild cats (or ‘problem children’ or ‘question marks’) are businesses with a low share in a fast growing market. They again are unlikely to be very profitable due to their relatively small market share and worse still, in cashflow terms, they are likely to require significant investment merely to maintain that share and their market position as the market grows (e.g. Abbott’s Uprima, another oral treatment for erectile dysfunction.[1]


PRESCRIPTIONS FOR MANAGING CASHFLOW BY BCG QUADRANT

• Stars: Invest to fund growth, to maintain market share, to ensure that today’s star becomes tomorrow’s cash cow. Keep prices up, reducing them only if it becomes necessary to do so to maintain market share.

• Cash cows: Ration new investment. Again keep prices up where possible. Reduce them only to prevent new entrants to the market. Use cash flow surpluses to fund growth of stars and promising wild cats.

• Wild cats: Since the BCG analysis suggests that the value of increased market share is at its highest when markets are growing fast, if possible investment should be made to fund growth in order to convert these businesses into stars, even though this may prove extremely costly in the short term. If such a strategy appears to be prohibitively expensive, or otherwise unlikely to succeed (for example, if the market leader is simply too far ahead) the BCG advised withdrawing on the most advantageous terms, by progressively pricing out of the market.

• Dogs: Manage carefully for cash and withdraw.


The McKinsey Nine-Cell Matrix

6-19 looks at the industry attractiveness and competitive strength of a business.


The McKinsey Nine-Cell Matrix • Industry attractiveness looks at factors like market size and growth rate,

industry profit margins (historical and projected), competition intensity, seasonality and cyclical influences, emerging opportunities and threats, resource requirements, cross industry strategic fits, environmental factors (social, legal, political, technological, international) and industry uncertainty and business risk

• The competitive strength of a business depends on factors like its relative market share, costs relative to competitors, ability to match or beat rivals on key product attributes, ability to benefit from strategic fits with sister businesses, bargaining leverage with suppliers/buyers, brand image and reputation, competitively valuable capabilities and profitability relative to competitors. It is therefore more complex to use than the BCG matrix.

• In the nine-cell matrix the upper three cells represent high industry attractiveness and strong competitive strength. Businesses in these cells need high capital investment for future growth

• The three cells at the lower right end of the matrix represent situations of low industry attractiveness and weak competitive strength. These need to be harvested or divested.


Porter’s Competitive Advantage Strategies

Strategic options

Cost leadership

Differentiation

Focus

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COST LEADERSHIP OR DIFFERENTIATION?

• Cost leadership entails directing all efforts to ensuring that the organisation is the lowest cost producer in the industry. Keeping cost down delivers above-average profitability if the market price is still obtained for the product, but is often most successful if combined with a price leadership position due to the benefits of economies of scale and experience (see later resource based view).

• Differentiation entails the provision of products that are perceived to be sufficiently different from those of other competing suppliers to command a premium price. The basis of differentiation must be one that is valued by the consumer, rendering the product sufficiently superior in the consumer’s eyes to merit a premium price. For above average profitability to result from the adoption of this provision, the difference between the increased price commandable for the product and its increased production cost must be greater than the difference between the industry average price and the industry average cost.

• Focus marketing strategy in which a company concentrates its resources on entering or expanding in a narrow market or industry segment. A focus strategy is usually employed where the comopany knows its segment and has products to competitively satisfy its needs.


Activity

• In groups, please make a list of organisations that have the following strategies

• Cost leadership

• Differentiation

• Focus


The use of SWOT to assess environmental factors

Strengths Weaknesses

Opportunities Threats


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External environmental analysis

Internal environmental analysis

Try to match Try to avoid matching


SWOT ANALYSIS

• Choose a company and complete a SWOT Analysis in your groups for this company

• What are their Strengths, Weaknesses, Opportunities and Threats?


The use of Porters Five Forces Model for external analysis


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The process of strategy implementation


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CONSIDERATIONS THAT LEAD TO UNCERTAINTY IN STRATEGIC ANALYSIS

• The diversity and complexity of both the internal and external environments;

• The natural limits to the cognitive capacities of managers.


Figure 15.1 An example of a hierarchy of plans


The generic value chain

What would be the supply chain for Coles?


Strategic drift


The relationships between emergent, intended and realized strategy


Developing scenarios


SCENARIO PLANNING STEPS

1 Focal issue: The first step in the scenario planning process requires the team to think about the issue for which they must develop sets of scenario logics. The team is confronted with the challenge of exploring the future of a particular issue for which a strategic choice needs to be made, for example should we enter a new market, should we broaden our product range, etc. There has to be sufficient uncertainty about the future, in particular the external environment, for scenario planning to be considered.

2 Key factors: This step helps to identify the critical uncertainties that relate to the focal issue. Key factors tend to be issues over which the organization has some or would hope to have some future influence. Key factors usually relate to the industry(ies) within which the organization operates. The organization’s management must believe they can influence these factors, for example size of market, competition, customer base, suppliers, employees, partners.

3 Environmental Forces: This step relates to the previous one, whereby the team is looking to establish the critical uncertainties over which the organization has little or no influence. The team develops a list of key factors and environmental forces through a brainstorming process, for example social forces, technological changes, organizational competencies. These are not categorized as in a SWOT. This process is by no means highly structured nor does it result in an ordered set of factors.


SCENARIO PLANNING STEPS CONTINUED

4. Critical uncertainties: In this step the team tries to identify what are both very critical and highly uncertain issues in relation to the focal issue. Issues need to be gradually eliminated so that the team arrives at the two most important and uncertain issues. Failure to achieve such a culling results in an exponential problem. Too many dimensions create too many futures for any of them to be seriously

5. Scenario Logics: At this stage the team now has a scenario matrix with four separate quadrants, each one representing what is best described as a version of the future. The purpose of this step is to create a meaning for each of the four quadrants. Each of the four quadrants requires that a theme or story be created around the four different quadrants


SCENARIO PLANNING CONTINUED

6. Scenarios: This step involves developing the scenario logic into a story about the future. Stories should focus on the external environment of the organization, and should not describe the organization’s strategies, activities or results.

7. Implications and Options: After having constructed the four stories, the team then develops the implications for the industry and the organization of each scenario. Once the scenarios have been developed, then ideally implications of each scenario are further explored to develop strategic options for each scenario. So the team ends up with four sets of implications and strategic options.

8. Early indicators: The team has completed the scenario matrix and all the implications and options of each scenario. The purpose of this step is to identify early warning signs of change that support a particular scenario story.


Figure 15.11 An example of a scenario matrix


Conclusion

• Planning is the process whereby a vision is converted to a mission, then to goals, strategies and finally to activities.

• Goals help to focus employees’ attention on what is important.

• Strategic management takes into consideration internal and external environmental factors in the planning process.

– Some useful tools to help with environmental analysis are SWOT,

Porters 5 Forces, BCG, 9-cell matrix.

• MBO is a process used to align individual employees goals with the organisation’s overall direction.

• A plan is only as good as its ability to be implemented.


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CHAPTER 15: MANAGING STRATEGICALLY€¦ · 1) Strategic goals broadly define the targets or future...

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