BU6006 Strategic Finance and Accounting

(University of Chester)
Session 10

Topics

Review Group Reporting Lecture

Critical success factors / Strategic option generation

Activities/ Feedback
Mini Quiz Research

Capital asset pricing model (CAPM) in corporate finance

Go Top

Review

Lecture
Critical success factors / Strategic option generation

Critical success factors

any of the aspects of a business that are identified as vital for successful targets to be reached and maintained. Critical success factors are usually identified in such areas as production processes, employee and organization skills, functions, techniques, and technologies. The identification and strengthening of such factors may be similar to identifying core competences, and is considered an essential element in achieving and maintaining competitive advantage.

Critical success factors

the Planning Model

Defining Critical Success Factors

Matching the profile to the environment.

Matching the Profile to the Environment Examining the environment Doing an independent and honest review of each aspect Examining the organizational profile
Determining the level of competence the organization has as to:

Determining the level of competence required to operate effectively in this environment as to: Marketing and sales Production Financial Management Research and Development Human Resource Management

Matching what needs 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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Analyzing the Environment, Opportunities and Challenges (threats)

The terms defined

An opportunity is something that if taken, will result in something positive for the organization. A challenge (threat) is quite different. Out of the environment, something with a negative consequence to your organization is going to happen unless you act in some way.
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The Organizational Profile, Strengths and Weaknesses

A strength means you are already equipped to handle the situation and you are using state of the art procedures.
A weakness means you dont have the tools to 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.
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Stages of Industry Evolution

Industry life cycle

Maturity Decline

Growth Development

Growth Rate

Profits

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Critical Success Factors at Each Stage of Industry Evolution

Function
Development Growth Maturity Decline

Marketing & Sales

Create wide spread awareness.

Establish brand recognition. Find effective marketing channels.

Hold existing markets and promote to new markets. Introduce successor products to extend maturity.

Focus on the best channels. Replace old products with new ones.

Finance

Finance initial R&D losses.

Finance expansion and net cash outflows.

Reinvest profits and employ cost controls.

Prune the product line and harvest the resources from liquidation.
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Critical Success Factors at Each Stage of Industry Evolution

Production Limit number of designs, use standards. Increase capacity while retaining quality. Improve the product and reduce operating costs. Re-deploy unused equipment, simplify processes and reduce product variants.

R&D

Ability to make changes and take the bugs out.

Focus on quality and ability to make product variants to satisfy customers. Motivated and loyal workforce with excellent product knowledge and selling skills.

Improve processes to reduce costs and introduce successor products.

Commit resources to new growth products.

Human Resources

Flexibility in staffing and training.

Reduce workforce and increase efficiency.

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Reduce and reallocate personnel.

Critical Success Factors at Each Stage of Industry Evolution

Development

Growth Sales and market share

Maturity Production efficiency and successors

Decline Finance and investment recovery

Focus area

Engineering and marketing

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Process of Identifying CSF

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

Strategic option generation

Strategy Generation

Setting Organizations objectives

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

Strategy in Business

the direction and scope of an organisation over the long-term:

which achieves advantage for the organisation

through its configuration of resources within a challenging environment,

to meet the needs of markets and

to fulfil stakeholder expectations".

Dissecting the Statement

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

* Which markets should a business compete in and what kind of activities are involved in such markets? (markets; scope)
* How can the business perform better than the competition in those markets? (advantage)?

* What resources (skills, assets, finance, relationships, technical competence, facilities) are required in order to be able to compete? (resources)?
* What external, environmental factors affect the businesses' ability to compete? (environment)? * What are the values and expectations of those who have power in and around the business? (stakeholders)

Strategy at Different Levels of a Business

Corporate

Strategy Business Unit Strategy Operational Strategy

Corporate Strategy

concerned with the overall purpose and scope of the business to meet stakeholder expectations.
This is a crucial level since it is heavily influenced by investors in the business and acts to guide strategic decision-making throughout the business.

Corporate strategy is often stated explicitly in a "mission statement.

Business Unit Strategy

concerned more with how a business competes successfully in a particular market.

It concerns strategic decisions about choice of products, meeting needs of customers, gaining advantage over competitors, exploiting or creating new opportunities etc.

Operational Strategy

concerned with how each part of the business is organised to deliver the corporate and business-unit level strategic direction.
Operational strategy therefore focuses on issues of resources, processes, people etc.

Generating Strategic Options

Porters Model
SWOT Matrix SPACE Matrix

Qualitative Strategic Planning Model

Ansoff Matrix

Porters Model
Five Forces

Understanding Porters Model

Porter's Five Forces model is made up by identification of 5 fundamental competitive forces:

Barriers to entry

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

SWOT Matrix
Strength/ Weakness/ Opportunity/ Threat

SWOT Analysis

one of the effective analytical tools to evaluate a situation.

The situation may be strategic related or capabilities related. SWOT Analysis is often used along with Strategic planning

Defining Organizational Factors

SWOT diagram
Environmental Opportunities

Internal Weakness

Internal Strength

Environmental Threats
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SWOT Analysis
Environmental Opportunities

Internal Weakness

Internal Strength

Environmental threats
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the cells of a SWOT diagram

Environmental Opportunities

Cell A Redesign practices

Cell B Be aggressive Internal Strength

Internal Weakness Cell C Be Defensive

Cell D Use your strengths in new places

Environmental threats
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Cell A Grand Strategy, Re-design practices

An organization with internal weakness which is facing an industry with numerous opportunities
must focus attention on redesigning how business is done so that the opportunities can be effectively captured.
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Other Cell A Strategies

Retrenchment/turn around

Joint Venture
Strategic Alliance

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Cell B Grand Strategy, Be aggressive

An organization with internal strengths which is facing an industry with numerous opportunities
expand operations into new markets, invest in growth and reproduce success in other areas.

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Other Cell B Strategies

Product Market Vertical

development
Integration

development

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Cell C Grand Strategy, Be Defensive

An organization with internal weakness which is facing an industry with numerous threats
needs to revaluate whether or not it is advisable to stay in business.

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Other Cell C Strategies

Divestiture

Liquidation

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Cell D Grand Strategy,

Use your strengths in new places

An organization with internal strengths which is facing an industry with numerous threats
evaluate whether or not their expertise could be transferred to a new, less threatening environment.

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Other Cell D Strategies

Horizontal Concentric

Integration Diversification

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SPACE Matrix
Strategic Position & ACtion Evaluation matrix

focuses on strategy formulation especially as related to the competitive position of an organization.

Outcome of the Matrix

The SPACE matrix is broken down to four quadrants where each quadrant suggests a different type or a nature of a strategy:
Aggressive Conservative Defensive Competitive

Areas of Analysis

Internal strategic dimensions:

Financial strength (FS) Competitive advantage (CA) External strategic dimensions: Environmental stability (ES) Industry strength (IS)

Technical Assumptions

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.

Constructing the Matrix

Step 1: Choose a set of variables to be used to gauge the competitive advantage (CA), industry strength (IS), environmental stability (ES), and financial strength (FS).
Step 2: Rate individual factors using rating system specific to each dimension. Rate competitive advantage (CA) and environmental stability (ES) using rating scale from -6 (worst) to -1 (best). Rate industry strength (IS) and financial strength (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

Step 4: Plot values from step 3 for each dimension on the SPACE matrix on the appropriate axis.
Step 5: Add the average score for the competitive advantage (CA) and industry strength (IS) dimensions. This will be your final point on axis X on the SPACE matrix. Step 6: Add the average score for the SPACE matrix environmental stability (ES) and financial strength (FS) dimensions to find your final point on the axis Y.

Constructing the Matrix

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

Qualitative Strategic Planning Model

QSPM

QSPM

high-level strategic management approach for evaluating possible strategies.

ovides an analytical method for comparing feasible alternative actions.

introduces some numbers into this approach making it a little more "expert" technique.
attempts to objectively select the best strategy using input from other management techniques and some easy computations.

Constructing the Matrix

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

Then generate a list of the firm's key external 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.

Constructing the Matrix

Step 2. Having the factors ready, identify strategy alternatives that will be further evaluated.
These strategies are displayed at the top of the table. Strategies evaluated in the QSPM should be mutually exclusive if possible.

Constructing the Matrix

Step 3. Each key external and internal factor should have some weight in the overall scheme.
You can take these weights from the IFE and EFE matrices again. You can find these numbers in our example in the column following the column with factors.

Constructing the Matrix

Step 4. Attractiveness Scores (AS) in the QSPM indicate how each factor is important or attractive to each alternative strategy. Attractiveness Scores are determined by examining each key external and internal factor separately, one at a time, and asking the following question: Does this factor make a difference in our decision about which strategy to pursue? If the answer to this question is yes, then the strategies should be compared relative to that key factor. The range for Attractiveness Scores is 1 = not attractive, 2 = somewhat attractive, 3 = reasonably attractive, and 4 = highly attractive. If the answer to the above question is no, then the respective key factor has 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.

Constructing the Matrix

Step 5. Calculate the Total Attractiveness Scores (TAS) in the QSPM. Total Attractiveness Scores 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 related individual strategy. The higher the Total Attractiveness Score, the more attractive the strategic alternative or critical factor.

Constructing the Matrix

Step 6. Calculate the Sum Total Attractiveness Score by adding all Total Attractiveness Scores in each strategy column of the QSPM.
The QSPM Sum Total Attractiveness Scores reveal which strategy is most attractive. Higher scores point at a more attractive strategy, considering all the relevant external and internal critical factors that could affect the strategic decision.

The BCG Model

Boston Computing Group

BCG

well-known portfolio management tool used in product life cycle theory.

BCG matrix is often used to prioritize which products within company product mix get more funding and attention. The BCG matrix model is a portfolio planning model developed by Bruce Henderson of the Boston Consulting Group in the early 1970's.

Product Classification

A high-growth product is for example a new one that we are trying to get to some market. It takes some effort and resources to market it, to build distribution channels, and to build sales infrastructure, but it is a product that is expected to bring the gold in the future. A low-growth product is for example an established product known by the market. Characteristics of this product 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. This the milking cow that brings in the constant flow of cash. An example of this product would be a regular Colgate toothpaste.

BCG Dimensions

On the horizontal axis: relative market share - this serves as a measure of SBU strength in the market On the vertical axis: market growth rate - this provides a measure of market attractiveness

BCG Quadrants

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 a placement. If market share is kept, Stars are likely to grow into cash cows.

BCG Quadrants

QUESTION MARKS (high growth, low market share) Question marks are essentially new products where buyers have yet 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

DOGS (low growth, low market share)

- Dogs should be avoided and minimized. - Expensive turn-around plans usually do not help.

BCG Quadrants

CASH COWS (low growth, high market share)

If competitive advantage has been achieved, cash cows have high profit margins and generate a lot of cash flow.

Because of the low growth, promotion and placement investments are low. Investments into supporting infrastructure can improve efficiency and increase cash flow more. Cash cows are the products that businesses strive for.

Four possible strategies

(1) Build Share: here the company can invest to increase market share (for example turning a "question mark" into a star)
(2) Hold: here the company invests just enough to keep the SBU in its present position (3) Harvest: here the company reduces the amount of investment in order to maximise the short-term cash flows and profits from the SBU. This may have the effect of turning Stars into Cash Cows. (4) Divest: the company can divest the SBU by phasing it out or selling it - in order to use the resources elsewhere (e.g. investing in the more promising "question marks").

The Ansoff Matrix

Product/Market Expansion Grid

Understanding Ansoff

The Ansoff Matrix was first published in the Harvard Business Review in 1957, and has given generations of marketers and business leaders a quick and simple way of thinking about growth.

The Corporate Ansoff Matrix

Looking at it from a business perspective, the low risk option is to stay with your existing product in your existing market: you know the product works, and the market holds few surprises for you. However, you expose yourself to a whole new level of risk by either moving into a new market with an existing product, or developing a new product for an existing market. The new market may turn out to have radically different needs and dynamics than you thought, and the new product may just not be commercially successful.

And by moving two quadrants and targeting a new market with a new product, you increase your risk to yet another level!

Market Development Diversification

Targeting new markets, or new areas of the market.

Target different geographical markets at home or abroad. Use different sales channels, such as online or direct sales if you are currently selling through the trade. Target different groups of people, perhaps with different age groups, genders or demographic profiles from your normal customers.

Market Penetration

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

Advertise, to encourage more people within your existing market 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 mature markets).

Diversification

This strategy is risky: Theres often little scope for using existing expertise or for achieving economies of scale, because you are trying to sell completely different products or services to different customers
The main advantage of diversification is that, should one business suffer from adverse circumstances, the other may not be affected.

Product Development

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

Extend your product by producing different variants, or packaging existing products it in new ways. Develop related products or services (for example, a domestic plumbing company might add a tiling service after all, if customers who want a new kitchen plumbed in are quite likely to need tiling as well!) In a service industry, shorten your time to market, or improve customer service or quality.

Manage Risks

You research the move carefully.

You build the capabilities needed to succeed in the new quadrant. You've got plenty of resources to cover a possible lean period while you're learning how to sell the new product, and are learning what makes the new market tick. You have firstly thought through what you have to do if things don't work out, and that failure won't "break" you.

Activities and Review Activities

Using your company of choice

Conduct the following Strategic Generation Option:

BCG Ansoff

End of Part 1

Part 2 Group Research

Group Research
Capital

asset pricing model (CAPM) in corporate finance Weighted Average Cost of Capital (WACC)

End of Part 2 See you next Session