Strategic Management of Business

Source : Chapter 3 from MIS by waman S Jawadekar

The concept of corporate planning ..(1)

What is a plan?

A plan is a predetermined course of action to be taken in the future It is a document containing the details of how the action will be executed Made against a time scale Goals and objectives that are to be achieved by the plan should have been decided

What are the pre requisites?

What is the relevance of planning to top management?

Primary task of management is to set the goals and objectives

The concept of corporate planning ..(2)

Planning

Looking into future and asses likely events in the total business environment and taking suitable actions to meet any eventuality Generating the courses of actions to meet the most likely eventuality A dynamic process Future becomes present, might force changes in course of action Continuous assessment of predetermined course of action Vs the current requirements of the environment In essence, eliminating threats and converting opportunities into business

The concept of corporate planning ..(3)

Planning is a course of actions

Chain of decisions One after other Successful implementation of a plan means the execution of each decision in the chain went correct one after other Long range Short range

Planning can be

The concept of corporate planning ..(4)

Long range planning

5 Years or more More concerned about the business as a whole Focus on Goals Deals with subjects like growth, rate of growth, direction of business, establishing some position in the corporate world, market share etc. Deals with

Resource selection, its acquisition and allocation Technology (No emphasis on methods and procedures Strategy Right strategy improves the chances of success

Talks about

The concept of corporate planning ..(5)

Short range planning

Concerned with attainment of business results of the year More in terms of business tasks like

Launch of a new product Starting a manufacturing facility Completion of a project Achieving intermediate milestones

Focus on Objectives Hierarchy of objectives which together take the company towards attaining the goals

The concept of corporate planning ..(6)

Corporate Business Planning

Deals with corporate business goals and objectives Apart from the company considers

World trends in business The industry Technology International markets National priorities Competitors Business plans Corporate strengths and weaknesses

Complex exercise

The concept of corporate planning ..(7)

Dimensions of planning

Time

Execution of plan is year after year Plan is made on a rolling basis where every year it is extended by one year Rolling plan provides an opportunity to correct or revise the plan in light of any new information the planner may receive Entity is the thing on which planning is focused Entity could ne production, finance, marketing, capacity, manpower , or research and development Goals and objectives will be stated in terms of these entities A corporate plan may have several entities

Entity

The concept of corporate planning ..(8)

Dimensions of planning

Organization

Plan for the company has to be taken down to subsidiaries, functional groups, divisions, product groups or projects Corporate plan is a master plan The master plan is broken down into smaller organizational units helps to fix the responsibility for execution Corporate plan is made out of several elements Begins with mission and the goal Policy statements Strategies in various business functions Business objectives and targets budgets

Elements

The concept of corporate planning ..(9)

Dimensions of planning

Characteristics

No defined characteristics Typical characteristics are the goals, resources, important milestones, investment details and variety of schedules Plan is confidential and known only to few Long term plans are flexible where as short term plans are not flexible

Essentiality of strategic planning(1)

The following reasons make planning an essential management process to keep the business in god shape and condition
1) 2) 3) 4) 5)

Market forces Technological change Complex diversity of business Competition Environment

Essentiality of strategic planning(2)

Market forces

Difficult to predict Ability of organization to predict these forces is limited These forces affect sales, growth, profitability Need to reorient organization quickly to meet eventualities Reorientation is possible only by having a business plan Technological breakthroughs are a threat and at the same time open new business opportunities Managerial and operational styles get affected Can pose questions on survival of a company Need preplanned investment in business plan for

Technological change

Essentiality of strategic planning(3)

Complex diversity of business

Different products Different market segments Multiple locations Dependence on external factors So many uncontrollable factors & Increased complexity Need plans for diversification, expansion etc Direct or indirect competition Multiple issues such as knowhow. Quality, delivery, service etc Need to evolve new strategies to deal with competition which calls for forward thinking and planning

Competition

Essentiality of strategic planning(4)

Environment

Management cannot control Social, business, economic, industrial, technological environments A mix of environment changes affect business Forecasting environment changes is a major task under corporate planning

Evolving strategies to meet these changes is also a major task Defines planning as the process of making the present managerial decisions systematically and with the best possible knowledge of futurity, organizing systemically the efforts and measuring the results against feedback

Peter drucker

Planning does not eliminate risk but provides an effective tool to face it

Development of business strategies

Definite process and methodology involved Top management responsibility Starts with deciding the social responsibility proceeds to spell out the business mission and goals and the strategies to achieve them Mission statement relates the organizations existence, sets direction of the organization and decides scope and boundaries of the business After setting mission, set goals Goals are specific and have a limited time frame (3-5 Yrs) After goals set objectives Objectives have further less time may be a

What is strategy ?

The manner in which the resources, such as men, material, money and the know-how will be put over a period of time to achieve the goals Resources of the organization are deployed based on its goals and objectives but also based on the competition being faced by it Strategy development considers environmental factors such as technology, markets, the life cycle, work culture, attitudes, government policies Needs to consider the strength of the organization while deploying resources and at the same time has to cover for organization weakness Unstructured exercise

How hard it is to formulate a strategy?

Strategy formulation Model

Types of strategies

A strategy means specific decision(s) usually, but not always, regarding the development of the resources to achieve the mission and goals of the organization Pure strategy : If a strategy considers a single point of attack by a specific method Mixed strategy : If a strategy acts on many fronts by many fronts A business strategy can be a series of pure strategies handling several external forces simultaneously Whether pure or mix, strategy can be classified as any one of the below Overall company strategy, growth strategy, product strategy, marketing strategy

Overall company strategy

Long term business perspective Overall strength of the entire company and evolves policies of business which will dominate the course of the business movement.

E.g. Wal-Mart strategy of Mass merchandising

Growth strategy

Growth can be from existing business or through expansion and diversification Growth is possible in the organic way also

By acquiring companies

Growth strategies are adapted to establish, consolidate and maintain a leadership and acquire a competitive edge in the business and industry

Product strategy

A growth strategy, where the company chooses a certain product with particular characteristics becomes a product strategy Potential to expand as a family of products Closely related to product strategy Deals with distribution, services, market research, pricing, advertising, packing and the choice of market itself Act as expediting and activating force for the product and growth strategy Creates consumer loyalty, market share, communicating consumer needs and explains how they are fulfilled

Market strategy

Short range planning

Deals with targets & objectives of the organization Normally for 1 year with specified targets accompanied by specific budgets The organization translates long range planning into target covering all the critical areas f business Budgets

are resources required to achieved targets Physical terms to financial terms E.g. budgets for sales, production, expenses, capital expenditure, etc Control mechanism Self motivating tool

Relationships of Budgets to Financial Budgets

Advantage of short range planning with budgets

Gives the manager a clear target of achievement Specifies to the manager the resource allocation for a given task and freedom to use it Provides the manager with information on the performance Helps the management assess the overall performance of the business in light of the short terms targets and long term goals Provides an efficient tool to coordinate all the efforts within the organization Provides the management with selective information on shortfalls and over runs for immediate action Provides information in monetary terms to

Tools of planning

They are decision making tools Business plans have a number of alternatives upon being planned Optimum resource allocation and profit maximization Achieving the common goals Tools are influenced by the below factors

Creativity Systems approach Sensitivity analysis Modelling

Creativity

Comes out of an experience, a judgment, an intuition of an individual or a group of individuals Only tool when judgment is required for a situation where no precedent is available Conceptual skills of individuals

Ability to generate ideas rapidly Change quickly from on frame of reference to another Originality in interpreting an event and generating different views on the situation Ability to handle with clarity and ease a complex relationship of various factors in a given situation

More no of creative people at key positions might create new ideas and new strategies of business development

Systems approach

Systems approach to planning considers all the factors and their inter relationship relevant to the subject Analytical study of the total system, generate alternative courses of action and select the nest in given circumstances Used in situation of risk / uncertainty Testing the solutions for technical, operation and economic feasibility Tools like GANT, PERT / CPM are used

Sensitivity analysis

Test the validity of the solution under variable conditions Problem situation is handled with certain assumptions and conditions and based on these assumptions a rational solution is found Will the solution remain valid if assumptions changed Finds out the impact of change on the solution in economic terms when certain conditions change Validate optimal solutions Test solutions on the principles of utility

Modeling

Meaningful representation of a real situation in mini scale Only significant factors are highlighted Purpose is to understand the complex situation based on only the significant factors Can be physical or logical Mathematical models use variables, constraints and parameters

Model is based on the relationship between variables Long range dynamic, short range static

Dynamic or static

E.g. break even analysis model, statistical regression models

Strategic analysis of business

Kindly remember the earlier class in which we talked about Porters five forces model Moving up the value chain can be a option in terms of gaining competitive advantage using information technology

Value chain and six dimensions of improvement

Strategic Analysis Model

What is the Balanced Scorecard (BSC)?

Developed in early 90s

Robert Kaplan (Renaissance Group) David Norton (Harvard Business School)

Translating Strategy Into Action Traditional financial measures were

Too narrow no connection to strategy Too focused on the past not predictive Encouraged tendency to manage qtr to qtr

Too much what Too little why

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BSC: Four Perspectives

Financial perspective Customer perspective Internal Business perspective Learning & Growth perspective

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BSC strategic focus

Sanger, Mark, Supporting the Balanced Scorecard. Work Study, V 47, No 6

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Example of a Balanced Scorecard

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Financial perspective

Uses traditional tools and reports Considers EVA and ROCE

Economic Value Added

NOPAT- (capital x cost-of-capital)

Return on Capital Employed

Emphasizes growth and improvement Links financial performance to strategy

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BSC encourages use of ABC

Traditional accounting Salaries $375,000 Benefits 92,000 Supplies 47,000 Phone 8,500 Travel 13,000 Total $535,000 Activity Based Costing Select suppliers $82,000 Procure matls 175,000 Certify vendors 92,000 Resolve problems 103,500 Expedite shortages 83,000 Total $535,000

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Johnson, Christian C., Introduction to the Balanced Scorecard and Performance Measurement Systems,

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Linking Finance to Strategy

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Customer Satisfaction Market Share Customer Acquisition Customer Profitability Customer Satisfaction
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Customer Retention

Customer perspective
Market share (various criteria) Customer retention (absolute or relative) Customer acquisition (absolute or relative) Customer satisfaction

Specific performance criteria Defined value proposition Profitability by account Net of any special account-specific expenses

Customer profitability

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Customer perspective

Value proposition typically includes elements of

Time Quality Price

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Internal Business perspective

Focus on process improvement Chose processes aligned with strategy Identify customer need

Identify the market Create the product/service offering Build the products/services Deliver the products/services After-sale customer service

Customer need satisfied

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Learning & Growth perspective

Core measurements

Employee productivity Employee satisfaction Employee retention Staff competencies Technology infrastructure Climate for action/change

Enablers

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Balancing the BSC

Heaviest emphasis is on business processes

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MIS : Strategic business planning

Business environment is prone to change Factors like market forces, technological changes and competition have significant impact MIS design is supposed to provide insight into these factors enabling the management to evolve strategies MIS supplies information to top management for strategy formulation Current information on business status Vs goals is given by MIS Continuous assessment of business progress in terms of sales, market, quality, profit by MIS

To summarize

MIS helps top management in

Deciding goals and objectives To determine the correct status of the further business and projects Provide correct focus Evolve decide and determine mix of strategies Evaluate performance and give critical feedback Provide cost benefit evaluation to decide on choice, mobilization and mix of resources Generate standards, norms, ratios and the yardsticks for measurement and control