Strategy in brief. Lecture 1

Transcription

1 Strategy in brief Lecture 1 Strategic management ranks as one of the most prominent, influential, and costly stories told in organizations. It is how an organisation takes what happens in the external environment into account when it is planning its business for future purposes. It is interdisciplinary, both externally and internally focused and future focused. In strategy, firms will need to develop clearer nonmarket strategies and integrate them more rigorously with their market strategies. And they will need to do this amid greater uncertainty about the future state of markets, regulation, and profit prospects and greater pressure from a diverse range of stakeholders for a broader assortment of outcomes. Where does strategy come from? It has been with us since the early 1920s, so relatively new and Igor Ansoff is seen as the founder of the term. Came out of the idea of business planning. Strategy derived from ancient greek: stratos meaning army and agein meaning to lead. There are also some military tradition in strategy, and from this tradition we get this idea that you have a leader that sets the plan. Big separation from who sets the strategy and who follows it. Economics had a really big influence in the early days, known as homo economicus. The idea that the one at the top makes really rational decicions, and the only purpose is to make money. Rational planning and profit maximisation. Coming out of the military and the economic ways of thinking was A. P. Sloan (president of General Motors). He said that A firm s fundamental strategic problem was positioning of the firm in those markets in which maximum profits could be earned. How do we position ourselves in the market to make us maximise profits? Another important face of strategy is A. D. Chandler, who said that structure follows strategy. Strategy is: The determination of the basic, long term goals and objectives of an enterprise and the adoption of courses of action and the allocation of resources necessary for those goals. Think about how new CEOs always want to change the structure of the firms. Consulting firms came to life after strategy became more important. These firms looked at how business could apply strategy to preform better. Strategy is created at the intersection of an external appraisal of threats and opportunities facing an organisation and an internal appraisal of its strengths and weaknesses. Compared to other sorts of ideas around planning and early theories, Michael Porter said that there are very few strategies that companies can pursue. Position is really important, but there are only three ways you can achieve this. There is a clear separation between formulation and implementation (matter of control). What is strategy? It is the creation of a unique or valuable position involving a different set of activities. Is it really as simple as Porter suggest? People have challenged his thoughts, including Karl Weick (influenced by Herbert Simon). He believed in bounded rationality we can not plan everything. And if you spend too much time on all this planning, you will loose opportunities. Organisations are collections of choices. It is better if organisations just get on to do things, and stop planning it all. Actions are more important. A much more social way of looking at strategy, taking the human element more into account.

2 Lecture 1 Another important man is Henry Mintzberg, and his key word in strategy is process. Strategy continuous (it happens all the time) and iterative, and a process within which strategy emerges from a combination of influences within the organisation. Really it is about the past of the organisation. What have we done well, and what have we done not so well. Take this into account with the future in mind. Represents a set of pragmatic compromises between various stakeholders in the organisation. Everyone in the organisation can come up with strategy. Deliberate strategy: focus on the plan. When you have a close relationship between intended and realized strategy. Focus on the external and on fit. Emergent strategy: focuses on the process. No intention, rather clear pattern of behaviour. Continuum intention, choice and pattern of formation. More focused internally, but takes more external stakeholders into account when making decisions. Strategy Concerns both organisation and environment Is complex Affects overall welfare of the organisation Involves issues of content and process Never purely deliberate Involves various thought processes

3 Balance Scorecard and mapping When implementing and developing strategy, the first step should be to look at the resources that are available for the firm. These are the building blocks that you have to work with, and from then you have the capability for this strategy to be built. Further you need to look at how you can gain competitive advantage, choose your industry and then go into strategy building. The Balanced Scorecard tracks all the important elements of a company s strategy, and is used as a tool for motivating and measuring business unit performance. The scorecard lets executives see whether they have improved in one area at the expense of another. It allows managers to look at the business from four important perspectives: Finance How do we look to shareholders? And how do we add value for customers while controlling costs? Customer How do customers see us? Who do we define as our customer? Internal Business Processes What must we excel at? What must we be best at? Learning and Growth Can we continue to improve and create value? (Remember that the financial measure does not have to be at the top all times. With nonfor-profit organizations for example, the customer aspect is often more important so that one is at the top. These aspects are all equally important, and sometimes firms can choose to map it out as a circle model) The scorecard forces managers to focus on the handful of measures that are most critical, and avoids having an overload of information. Sometimes managers puts too many measurements into the framework, making it harder to work with. But it is also important to treat them as a whole, and forgetting one can be crucial for the firm. The tool is great because it is a better measure for long-term measurements. From these measures the firm should develop objectives they can work with to improve performance. It was developed because too many firms were only focused on the tangible and financial assets. But research showed that the people are so much more important, also known as intangible

4 assets. And these assets are not measured by financial terms, which is why other aspects are added to the equation. BSC is a communication, information and learning system: articulating a strategy, communicating a strategy and aligning with the strategy. When developing a Balanced Scorecard (or any other performance management system), it is recommended to use a combination of lead and lag indicators. And you need to have a mix. Lag indicators are those that are easy to measure, but hard to improve. Lead indicators are those that are hard to measure, but you have more control over them. The financial and customer perspective for example tend to have fewer lead indicators and more lag indicators.

5 Financial outcomes Financial performance measures indicate whether the company s strategy, implementation and execution are contributing to bottom-line improvement. Often linked to profitability, growth and shareholder value. Placed at the top of the scorecard in most cases, but if you have a business that is non-for-profit etc. you might place it further down. The first thing we need to think about is the life cycle of the firm, and depending on where the firm is you can choose what to measure. It will matter to measure the right things to know better where to go next and what we need to be pushing for. There are three stages; rapid growth, sustain and harvest. Rapid growth is the earliest stage and there are many firms in this stage. There are a lot of investments in this stage, we are trying to enhance products and services, expand our production facilities and we are developing new capabilities and infrastructure. Emphasising sales growth: new products, services customers, segments Maintaining adequate spending levels for product process development, systems, employee capabilities Establishing new marketing, distribution channels. Sustain is the phase where you seek to attract new investments, you want to earn excellent ROI, you need to focus on retaining or keeping your market share and just really focus on continuous improvement. Emphasise return on capital, operating income and grow margin Employ measures such as shareholder value. What are we returning to our shareholders? Are they getting value? Attract new investments and expanding capacity Harvest is the last stage where the focus is less on new investments but more on diversification and maybe even repositioning. Stress cash flow Immediate return on investment Very little or no spending on R&D, or on expanding capabilities. From these life cycles, there are essentially three central themes that we should focus on. And what theme you choose will depend on the life cycle. The first one is the revenue growth and mix; if we are expanding product offerings, reaching a new customer base or increasing spending we have to ensure that there is a balance to ensure income. We could also be focusing on cost reduction and productivity improvement: trying to lower the direct costs, and the indirect costs. We want to share common resources, like the HR function or the IT function. Lastly we might want to think about asset utilization and investment strategy. Customer outcomes Many companies today have a corporate mission that focuses on the customer To be the number one in delivering customer value, and is therefore seen as a priority for managers.

6 Customers concerns tend to fall into four categories: time, quality, performance and service, and cost. Most of them are intangible assets, and some are easier to measure than others. Here are some of the things that you might look at when measuring how good the firm is at the customer level: Customer satisfaction how satisfied are they? Customer retention how can we keep our customers? New customer acquisition how good are we at getting new customers? Market and account share how good are we at penetrating a specific market? Customer profitability make sure that customers are actually spending money At the very heart is value, and you have to remember that different customers are looking for different things. It can be product or service attributes, customer relationships or image and reputation. What is really important for the customer? Think about delivering time, maybe speed is very important for the customer. Quality, price and CSR are other examples that might be crucial to meet. Without customers seeing value in the brand, is will be hard to succeed. Internal business process outcomes The internal measures for the scorecard should stem from the business processes that have the greatest impact on customer satisfaction factors that affect cycle time, quality, employee skills and productivity for example. Companies should also attempt to identify and measure their core competencies, the critical technologies needed to ensure continued market leadership. In this case there will also be a difference in what is easy to measure. Remember to always link these measures to both financial and customer segments. Quality and time based metrics Improving existing processes Implementing entirely new processes Innovation processes The short wave of value creation is when you control and improve existing operations. You assess what you are already doing and improve these processes so that internal operations works better and gives better outcomes. The long wave of value creation is when you develop new products and services and system that go with them. This is to grow the firm and brand, and try new ways of value creation that can result in a better market share and value creation. The BSC incorporates measures for both short wave and long wave operations. Learning and growth outcomes Intense global competition requires that companies make continual improvements to their existing products and processes and have the ability to introduce entirely new products with expanded capabilities. Look at the people and make sure you have the right people on board with an interest in the vision for the firm and committed to the value proposition. But also ensure you have the right customers. Look at the systems are the internal processes working and are they aligned with each other? And look at the organisational procedures!

7 This is an example of a Balanced Scorecard from a professional service firm. The two main strategies are a productivity strategy and a growth strategy, and then the main goal is to attain long-term shareholder value. Financial objectives under the productivity structure are 1. Improve the cost structure and 2. Increase asset utilization. Then under the growth structure they focus on expanding revenue opportunities and enhance customer value. Customer perspectives are focused on both product attributes and relationships and image. Including price, quality and partnership. Some intangible and some tangible there. Internal perspective looks at what they need to deliver to preform on this customer perspective. Focus on operations management, customer management, innovation management and regulatory and social processes. Learning and growth perspective is really important in these service firms as the human capital is a big part of the business. Also included the informational capital and the organisational capital. Because these are all very important, the BSC had an additional part which explains these points more in depth: