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Module 1 - Introduction.........................................................................................................................1 Module 2: Modelling the Strategic Planning Process ............................................................................. 6 Module 3 – Company Objectives ............................................................................................................ 8 Module 4 – The Company and the Economy........................................................................................14 Module 5 - The company and the market ...........................................................................................22 Module 6 – Internal analysis of the company.......................................................................................40 Module 7 – Making Choices among Strategies.....................................................................................49 Module 8 - Implementing and Evaluating Strategy .............................................................................59 Module 1 - Introduction 1.2.1 Managers definition of strategy The Planning approach: Set objective, analyse environment, make forecasts and work out plan Assumptions with this approach: o The future can be predicted accurately enough to make rational choices o It’s possible to detach strategy formulation from everyday management but data goes out of date quickly & who decides what data is relevant? o Its possible to forego short term benefit in order to gain long term advantage – everyone may be focused on next quarters figures o Strategies proposed are capable of being managed in the way proposed - change is difficult o CEOs has knowledge and power to freely choose amongst options o After analysis, strategy does not need to be altered to reflect changing circumstances o Implementation is a separate phase that comes after strategy has been agreed This approach often fails as individuals become committed to strategic plan & not company success Emergent Strategy Assumes people are not totally rational and logical React to events as they occur
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Based on : o Managers can only handle a relatively small number of options o Managers are biased in interpretation of data o Managers likely to seek a satisfactory solution rather than maximise profits o Organisations consist of coalitions of interest groups o When making decisions, managers pay as much attention to a company culture and politics as to resource availability and external factors o Strategy not planned before event but emerges over time o Claims that world is too complex to be rationalised Resource Based Strategy It assumes that strategy is basically concerned with the search for competitive advantage and that this lies in company’s resources Resources: physical, human, financial, intellectual Competencies arise from continual deployment and integration of resources over time and across activities Core competencies and distinctive capabilities (advantages over competitors) form a company’s strategic capabilities Roles of strategic capabilities in creating sustainable competitive advantage depends on several characteristics: o Rarity o Complexity o Causal ambiguity – difficulty in attributing cause and effect to superior performance o Culture Wicked vs. Tame problems Problems can be defined as tame (like a mathematical problem) or wicked (like a strategic one) [Ritell]
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1.2.7 Strategic Planning and Strategic Thinking Two skills are key to strategic thinking: Synthesis and Evaluation 1.3 The process of Strategy and Decision Making CEO’s questions o How well are we performing? o What should we do in the future? o How can we achieve successful change? Elements of strategic planning: o Structure : individual managers backgrounds give them structure in which to tackle problems; e.g. marketing manager will talk in terms of competitive advantage o Analysis: what information is important and what’s irrelevant Do not confuse rigour with numbers Precision is not essential Data can be expressed as: Relative orders of magnitude Positive or negative Quantitative or qualitative o Integration: take views of all stakeholders and merge them into a vision o Evaluation: devise measures which generate information on how well objectives are being obtained e.g. ROI, market share, NPS o Feedback – strategies need to be aligned with actual events 1.4 Business vs. corporate strategy o Analogous to corporate strategy vs. SBU strategy
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1.5 Development of Strategic Ideas Divisionalisation – decentralise of activities into divisions or SBUs -> makes corporations more manageable but raised fundamental issues of control Diversification – quest for synergy -> assimilation of different but related businesses Increased acquisitions drove the price up and made it more difficult to get value for money Portfolio planning – difficulties in managing diversity lead to balanced portfolio of products More sophisticated capital markets meant internally financing rising star product with cash cows didn’t make sense, external financing was available Restructuring – corporate raiders taking over failed companies and releasing value Value based planning (e.g. NPV) used extensively Core businesses: performance of conglomerates had not been improved by take overs Focus on linking businesses based on core competencies, like technologies, product development, human resources Parenting advantage – four ways a corporate parent might add value together with reservations attached to each: o Stand alone influence: parenting activities like performance monitoring, monitoring capex, human resource management, product strategies o The more a parent extends into SBU, the more value it will destroy. Better to have a SBU manager work full time on something rather than parent manager part time o Linkage influence: parent encourages relationships to capitalise on synergy But SBU managers would have been free to establish linkages if there is no parent - enlightened self interest o Functional and service influence: parent provides functional leadership and cost effective services Can parent company beat the specialists e.g. provide better supply chain than DHL? Corporate development activities: role of parent is buying and selling businesses and redefining new businesses. Majority of corporately sponsored acquisitions fail Globalisation: large number of international mergers to compete in new global market place. No guarantee of economies of scale Knowledge : tacit knowledge (learned on the job) is difficult to identify 1.6 Is Strategic Planning only for top management Company benefits of strategic planning: o Individual manager is able to see where their sub unit falls into the overall system of objectives o Manager is better able to make arguments for a proposal which is consistent with overall corporate objectives o Being involved in implementing strategy doesn’t necessarily mean you are up to date in the latest strategic direction, as it can change Individual Benefit of Understanding Strategic Planning o Knowing strategy may personally benefit manager who can position themselves to take advantage of it
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Module 2: Modelling the Strategic Planning Process 2.1.1 Components of a Model 1. Setting company goals 2. Forecasting Payoffs of different courses of action 3. Forecasting shortfalls of different courses of action 4. Identifying potential strategies 5. Selecting the best strategy mix 6. Organisation and implementation 7. Control and reappraisal 8. Feedback to previous activities Benefits of modelling planning: o Provides a structure o Simplifies complex processes o Acts as a check list o Identifies areas of disagreement Costs of modelling planning: o Imparts a mechanistic impression to the process o Introduces rigidity to a dynamic process o Gives impression that strategy can be derived from a model 2.1.3 The Strategic Process model
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General questions which arise from the model include: o Do the strategists have the appropriate characteristics for the type of company? Have they formulated clear objectives? o Has adequate analysis of the environment and the company been carried out? o Was an appropriate choice of strategy made in the light of the potential options? o Were company resources used effectively to achieve the strategic objectives? o Was the company able to learn from subsequent feedback and adapt accordingly? 2.2 Strategy Making Individuals, not companies, make decisions – but decisions are constrained by the organisation and its traditions 2.2.1 Strategy and the Evolution of the Company The roles undertaken by decision makers is dependant on the stage of the company’s evolution: o Small or Entrepreneurial : single product, little formal structure, controlled by owner/manager o Integrated: single product line, vertically integrated with specialised functions, owner/manager retains control over strategic decisions, most operating decisions are delegated through policy o Diversified: Multi product company with formalised managerial systems, uses objective criteria (e.g. ROI), product market decisions, delegated to head of SBUs 2.2.2 Strategists Different companies at different stages of evolution require different types of strategist Roles in the strategy process model: o Strategist, entrepreneur and goal setter – not just CEO, often delegated to managers o Analyser and competitor – manager needs to be constantly aware of change in economic environment, efficiency of company and competitive position o Strategic decision maker – at times managers will be assessing strategy decisions, at other times they will be making them o Implementer and Controller – once decisions have been made the manager has a key role to play in making them happen o Communicator – manager keeps everyone aware of changes in direction There is a degree of conflict in the above roles – control vs. entrepreneurialism
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Module 3 – Company Objectives 3.1 Setting Objectives: Key question: what are we trying to achieve? Key danger: the plan becomes more important than the objective 3.2 From Vision to Mission to Objectives: Steps: 1. Develop the mission statement 2. Disaggregate the mission 3. Derive objectives Mission Statement should: o Define the business the organisation is in o Be clear o Provide focus 3.2.1 Defining the business of the organisation Its worth asking what business a company is really in Questions: o What is the productive scope of the company – this influences skill set required e.g. do you buy in (negotiators required) or make your own product (bottle makers required, for a beer company)? o What’s the market positioning? Do you control distribution and marketing channels? Do you own the brand? o What’s the breath and focus of the company? Example soft drinks as a replacement for alcoholic drinks or as a replacement for tea/coffee. Or Railway companies in the transport business o What’s the target market? Is it a compliment to another product or a replacement? 3.2.2 Deriving the mission statement After business definition comes mission statement Factors related to mission statement: o Quality of company’s products o Degree of differentiation o Geographical area which is served o Target segment
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Mission statement can be aspirational 3.2.3 Disaggregating the Mission Break it down into constituent parts Need to modify the mission statement for the company as a whole so that it can be applied to individual parts of the organisation 3.2.4 Setting Objectives Mission must be stated in measurable performance targets = objectives 3.3 The Gap Concept This shows what has to be accomplished to achieve specific objectives What is the desired outcome? What will be the expected outcome if we make no change to strategy Closing of gap between desired and expected outcomes = company objective Once gap has been identified, three questions must be tackled o Does the gap arise because of external or internal factors (e.g. economic conditions vs. internal skills deficiency) o Does the company have the potential resources to close the gap o Can a strategy be developed which will close the gap 3.4 Credible Objectives Setting of realistic objectives is a constant process which is always under review An objective may not be feasible now, but may become so in terms of where company is expected to be in the future Objectives should be consistent – reducing marketing costs while make more sales is not consistent 3.5 Quantifiable and non Quantifiable objectives Objectives are usually expressed in terms of a number of components, A company can attempt to link a non quantifiable target to ROI e.g. how much will spending €20K on a social club increase the productivity of the workforce 3.6 Aggregate Objectives ‘Maximising Shareholder wealth’ is a way of having one objective which can be applied to a large range of products and SBUs
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3.7 Disaggregated Objectives Aggregate objectives must be translated into something lower level managers can understand and are consistent with overall objectives o E.g. must ensure production objectives are in line with sales objectives (correct level of stock) and those are in line with SBU objectives, which are linked to overall corporate ones 3.8 The Principal Agent problem This is the need of the principal (boss) to assign tasks to agent (worker) that are in line with principals objectives without having to constantly monitor agent activity o E.g. CEO has a bonus linked to profit, but short term profit is boosted artificially by cutting R&D Its due to a information asymmetry between principal and agent Objectives and incentives have to be aligned 3.9 Means and Ends What is to be achieved should be differentiated from how it should be achieved 3.10 Behavioural Objectives vs. Economic and Financial Objectives Economic & Financial approach to objectives stresses specifying metrics in economic or financial terms Behavourist approach states that effective interpersonal process greatly improve the chance of success The two approaches are complementary 3.11 Economic Objectives Economists always ask ‘what is being maximised?’ – they look at how many resources will maximise a particular objective o For example, a financial objective could be to ‘maximise the contribution from the sales of a certain product’. An economist would try to balance the financial contribution with the amount of resources being applied to it (diminishing marginal returns) Economists say that consumer try to maximise their wellbeing, companies maximise profits 3.12 Financial Objectives NPV, IRR Capital Sum = Earnings/(i-g); i=interest rate, g = growth in earnings
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Capital Asset Pricing Model => uses a combination of risk free interest rate (taken from govt bonds) and some allowance for risk of project (equity risk premium) ROI = net income/value of assets Problem includes whether to include the value of assets after depreciation or use average book value E.g. above in yr 4 the 66.7% ROI = net income/average book value = 200/300; but in yr 5 ROI=200% based on the same net income! ROI doesn’t discount to present value Trends in ROI can be useful e.g. ROI of company dropping from 18% to 8% in one year means something’s amiss Shareholder wealth = expected income stream/interest rate; Several stages to estimating shareholder wealth o Stage 1: Decide on planning period – typically 5 years o Stage 2: Determine cost of capital – using CAPM o Stage 3: decide on residual cash flow – the net cash flow at end of planning period o Stage 4: determine the cash flows during the planning period o Stage 5: calculate NPV of cash flows during planning period o Stage 6: Calculate the present value of residual cash flow o Stage 7: Add the NPV, PV of residual cash flow, Marketable Securities (non wealth producing assets minus debt) Assume 15% cost of capital 393 above is found by NPV calculation on years 1 through 5: (100/1.15 + 110/1.152 + ….) 464 = 393 plus PV of year 6 (140), but do it over 5 yrs not 6 as the residual cash is available at end of yr 5 = 140/(1.15)2 = 71 & 71+393 = 464 Its good to compare what people are working on to what difference it makes to shareholder value
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3.13 Social Objectives Corporate Social Responsibility (CSR) = companies must have objectives which are broader than simply maximising profits Arguments against CSR: No efficiency criteria 3.14 Stakeholders Includes shareholders, local community, suppliers, government Each has a different interest: Possibility of conflict of interest between stakeholders Influence: o Shareholders usually exert little influence on day to day running of company; larger investment funds may club together and exert power at AGM o Creditors: some creditors have people on board (e.g. VC’s) Stakeholder Maps
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For example, company moving into new market would need employees on board, as they have high influence, even if they are low priority. 3.15 Ethical Considerations Moral behaviour is difficult to define for companies and managers Whats moral today maybe immoral tomorrow (e.g. fur) Different considerations of what is moral or immoral (e.g. bribes ) 3.16 Are objectives SMART? Specific Measurable Achievable Relevant and Time-bound Specific: may be impossible to be specific about aggregate objectives like quality; typically easier to be specific about means vs. ends – should concentrate on ends! Measurable – qual factors may not be quantifiable e.g. happiness of workforce Achievable – easier to gauge with benefit of hindsight, not so easy at the time Relevant – should be in keeping with resource capability of company Time-bound: will always be a degree of guessing
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Module 4 – The Company and the Economy 4.1 The Company in the economic environment A company must look at Political, Economic, Social and Technological environment before identifying strategic possibilities = PEST review ETOP review = Environmental Threat and Opportunity Profile External sources: newspapers, statistical publications, trade journals Internal: management accounts, performance measures, consultancy reports 4.2 Revenue and Costs: the basic model Revenue = total market x market share x price Outlay = number of workers x wage rate + units of capital x price + units of material x price
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4.3 The workings of an economy Several reasons for analysing and trying to understand the economy o Must understand which events are in control of company vs. out of company’s control o Must be aware of whether economic changes represent opportunities or threats o Understanding how the economy works enables more accurate predictions Macroeconomics covers: o GNP generated from demand and supply o Role of expectations o Money support and the rate of interest o The rate of interest and investment expenditure o Factors affecting the demand for and supply of imports and exports o Exchange rate and international financial flows 4.3.1 Understanding and using economic information Last year: o Economy growing, but: o Investment expenditure declining o Price and wages increasing above inflation (economy overheating) This year o Slow down in economic activity (GNP) o Unemployment increased, while inflation and wages down…..boom of last year is over Conclusions (assuming CEO only has last years data & CEO is involved in the B2B, not B2C) o GNP growth was fuelled by retail sales (consumer boom) o Despite boom, investment was down – companies selling from inventories and/or imports increased o Wage costs rose faster than inflation If last years pattern rolls into this year: o Revenue = Total Market x Market Share x Price = 0.99 [-1.1%] x 1 x 1.093 = 1.08 => cash flows increase by 8% o Assumes inflation raises prices by 9.3% and total market shrinks by 1% (or 1.1%), finally market share remains static Outlay = Number of workers x wage rate+ capital x price + material x price
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o We know wage inflation = 12% , assuming other costs increase the same than this outstrips the 8% increase in revenues However trends may not continue because: o Customer expenditure boom will likely cause an increase in investment expenditure in near term => increase capacity o Relatively low unemployment figures => skill shortage o Govt may increase interest rates to tackle inflation Given gloomy early figures from this year, CEO may be better holding off on any investment 4.3.2 Supply and demand in the economy Total value of goods and service = Gross National Product (GNP) Potential output = when labour is fully employed and there is no spare capacity First question = what is the difference between actual and potential output? Unemployment is comprised of: o Structural unemployment – when whole industries close e.g. miners o Frictional employment – between jobs, little can be done about this in short term o Demand related unemployment – caused by difference between actual and potential output, varies a lot in the short term 4.3.3 Unemployment and Inflation Low unemployment leads to increased wages, capital costs and material prices as there is a supply bottle neck Demand pull inflation when too much money chasing too few goods Usually even if unemployment grows, wages are slow to reduce (wages are sticky) Usual relationship shown above However in 1970s we had stagflation – high unemployment and inflation
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Curve had shifted because people had expectation that inflation would stay high To remove expectation of continued high inflation, monetarists keep money supply constant - this is better than letting unemployment to grow as a way of reducing inflation CEOs must look at inflation when signing forward based contracts 4.3.4 The International Economy Even companies selling domestically are up against import competitors Relative Inflation Rates: o exchange rates don’t always compensate for different inflation rates in two countries o Relative costs may increase domestically vs. foreign if domestic rates are expected to increase faster than foreign Exchange rate fluctuations o Exchange rates are now effected mostly be capital flows rather than value of imports vs. exports o Capital flows are influenced by relative interest rates and expectations o There are constant cyclical as foreign exchange dealers sell short and long to guess the movement of a currency If company believes a currency is undervalued, then perhaps breaking into that market now and incur losses but build market share. Then when currency appreciates, we will earn more back in our domestic currency. Competitive Advantage of Nations o Domestic factor conditions – specialised resources e.g. skilled manpower o Related and supporting industries – suppliers
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o Demand conditions – e.g. fascination with miniaturisation in Japan o Strategy, structure and rivalry – competition at home o Country Specific advantage => export to foreign markets o Company Specific advantage => invest in foreign markets e.g. Toyota in Britain 4.4 Forecasting: What will happen next? Even vague forecasts can be useful – even forecasting the direction of change is useful e.g. GNP up or down Leading indicator can be used for forecasting e.g. number of new house builds useful for window glazing company The business cycle is comprised of o The general trend over time o The underlying smooth cycle o Random fluctuations Important to ask o What is the trend – the long term growth in potential output (in the case of an economy) o What is the underlying cyclical pattern – can use peak and troughs of unemployment o What random influences are likely to be disturbing this trend – changes in govt policy or exchange rate changes o If half way up the peak – invest 4.5 PEST analysis Checklist of Political, Economic, Social and Technological factors can be used alongside macro economic forecasts Political – changes in political climate can have far reaching implications for company operations Economic: macro and micro influences
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Social – changes in demographics, social norms – tends to be qualitative Technological change 4.6 Environmental Scanning Need to constantly scan for changes to PEST 4.7 Scenarios Scenario = investigation of implication of possible futures for company Can be short term e.g. competitor dropping price Long term e.g. inflation drops to zero State different PEST scenario assumptions, and then the implications for each of them – again in PEST format 4.8 The Economy and Profitability 4.8.1 Implications for company sales and revenues Impact on sales of changes in economic activity depends on GNP elasticity e.g. food vs. GNP = not as responsive as CD players vs. GNP Example: GNP forecast to drop 4% , company has 15% share of CD player market. GNP elasticity = 1.5. How are sales effected if elasticity = 0? Above shows 0 elasticity = no change in sales 1.5 elasticity means 4% x 1.5 = 6%. Total market will drop by 6% => 1000 x 94% = 940 = market One way around this is to attempt to increase market share by 1% to 16% Distribution of national expenditure amongst the components of a product is also import o Example: taxes drop but so does govt spending = demand increases for consumer goods but not goods related to govt spending e.g. defence industry
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4.8.2 Competitive Reaction and the economic environment If competitor does not conduct analyses of GNP trends and elasticity, they could be stuck with falling market share, in a declining market with decreasing competitive pricing Cumulative effect of all the drop can be dramatic (e.g. 23% fall in 2a above) 4.8.3 Implications for Inputs and Company costs Outlay = number of workers x wage rate + units of capital x price + units of material x price o Example: 10% increase in demand due to GNP growth, it intends to increase purchase of inputs by 10% Three scenarios on what happens to input prices o 1 - They will all be unchanged o 2a – they will all increase by 5% o 2b – labour and materials increases by 15%, capital by 10% Its likely that an increase in the GNP growth will also mean increases to input prices – ignoring them could mean ignoring up to 25% increase in total costs The real threat in ignoring changes in the economy is that competitors will take pre-emptive action which will lead to a loss of competitive position 4.9 Environmental Threat and Opportunity Profile: Part 1 Need to prioritise changes in environment according to the effect they may have Draw up a profile of how changes in the environment are likely to present threats and opportunities = ETOP (Environmental Threats and Opportunities) Approach: o Use the PEST approach as a checklist o Apply economic ideas to economy wide influences o Consider international factors - exchange rates and international competitive influences o Use environmental scanning approach to think beyond immediate situation o Put together some scenarios to help put factors into context o Build a profile of opportunities and threats
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