Forming A Business Strategy ENGINUITY TUTORIAL Copyright Virtual Management Simulations

Why Have A Strategy ? Business Strategy A smartly designed, well-executed business strategy is indispensable not only to an organization’s long-term success, but to its very survival. Simply having one does not give you a competitive advantage. It’s the depth, quality and flexibility of a business strategy that makes the difference. The new management team need to develop a clear strategy, or business plan to :-  Grow the business and improve its value  Keep shareholders happy  Enhance the company’s reputation with clients The value of the company is measured by a number of assets, such as the company cash account, capital base (infrastructure) and investments. OBJECTIVES Developing an effective strategy will involve acquiring a good understanding of :-  The economic environment in which the company is operating  The strengths and weaknesses of the business as it currently stands The strategy will consist of number of objectives relating to :-  Identifying new work in different sectors and locations (UK/Overseas)  Expanding the infrastructure of the business to achieve growth  Winning new work in a competitive bidding environment  Improving profitability through effective job and overhead management

Current State Of The Company We will now look at an example of setting and reviewing company strategy. We have been given the task of running a fledgling UK-based multinational construction company, with its headquarters in London, that has been trading for just one year (4 periods). To be able to develop an effective strategy we need to first look at the status of the company when we take control at the end of the History, at the beginning of period 5. To do this we refer to information shown in the Performance Summary. Business Strategy  The company is valued at 4.7m  The company share price is trading at 1.16  To date the company have identified 11% of the new work in the market (market share)  42% of the company’s infrastructure has been utilised in procuring and progressing jobs  The average turnover per period to date has been 6m  A gross profit of 5.7% (of cost) was made on the work progressed  After taking overhead costs and tax into account the net operating profit was 1.9% (of cost)  The company order book looks healthy, with a forward workload of around 15.9m Navigate to "Main menu/Assessing performance/Performance summary"

Global Economic Outlook Business Strategy As well as the status of the company, to develop a strategy for the business we need to look closely at the predicted global economic environment in which the company is operating. GLOBAL OUTLOOK Looking at the outlook for the UK and Overseas it appears that after tighter fiscal policies by Governments worldwide caused stagnation over recent years, there is finally signs of growth, and there is optimism of a global upturn for the Construction Industry. Navigate to "Main menu/Industry information/The environment in which the company is operating"

The Global Market Business Strategy NEW WORK In line with an expected upturn in the construction industry worldwide, the overall value of new work in the global market is predicted to steadily increase from currently 400m to around 469m by the end of period 9. There appears to be work in all sectors, particularly in the building & commercial sector. Navigate to "Main menu/Assessing performance/Overhead analysis/Market trend"

Setting Objectives - 1 Business Strategy After a thorough review, the following key objectives are set for the foreseeable future, all aimed at :-  Increasing the value of the business  Keeping shareholders happy  Improving the company’s reputation MARKETING Increase market share, and the number of new jobs indentified by :  Increasing the size of the Marketing Department.  Targeting 2 specific sectors of work :- o Primarily the Building & Commercial sector to guarantee a flow of new work as it is the largest, with plenty of new work for the foreseeable future in both the UK and Overseas. o Secondly the smallest sector, Industrial, with the hope that competitors will avoid the sector due to its size, and it could become a niche sector with the opportunity for repeat work as improving client relationships are formed.

Setting Objectives - 2 Business Strategy GROWTH Increase the average turnover each period through a combination of :-  Identifying a larger share of the new work in the market, as outlined above.  Expanding the company’s infrastructure, known as the capital base, to support more work.  Competitive bidding in our target sectors to secure more jobs. PROFITABILITY To increase the operating profit of the business by:  Progressing jobs won as profitably as possible by completing them on or before schedule, allocating appropriate personnel, effective risk and cost management.  Efficient management of the particular the Head Office, QHSE and Measurement departments, to ensure that the staff can cope the company’s turnover. There are many other areas that could be considered, and creating a long-term strategy is a complex task. Indeed, the strategy will have to be periodically reviewed, particularly as the economic environment is constantly changing, and our original objectives may not have been met. ONE YEAR LATER, how did we perform against the objectives that were set ?

Reviewing Performance: Marketing Business Strategy OBJECTIVE To increase market share. ASSESSING PERFORMANCE Navigate to "Main menu/Assessing performance/Performance summary" By the end of period 8 the market share had increased from 11 to 29%. This was achieved by :-  Increasing the size of the Marketing Department each period.  Targeting the Building & Commercial and Industrial sectors in particular, which accounted for 63 and 30% respectively of the new work identified.

Reviewing Performance: Growth Business Strategy OBJECTIVE To increase the average turnover each period. ASSESSING PERFORMANCE Navigate to "Main menu/Assessing performance/Performance summary" By the end of period 8 the average turnover each period had increased significantly from 6m to 11.9m. This was achieved by :-  Identifying more new work in the market.  Increasing the company’s infrastructure, or capital base, to enable more work to be undertaken.  Successfully winning new work.  Progressing the work won. During periods 5 to 8, 7 new contracts were secured.

Navigate to "Main menu/Assessing performance/Performance summary" Reviewing Performance: Profitability Business Strategy OBJECTIVE To increase the operating profit of the business. ASSESSING PERFORMANCE x By the end of period 8 the net operating profit had fallen from 1.9% to 1.2%. The target was not achieved because the job profitability fell from 5.7% to 3.8%. Despite many good areas of job management, such as risk management and excellent project manager choice, there were some problems, and completing one job late due to delays was particularly costly.

Navigate to "Main menu/Assessing performance/Performance summary" Reviewing Performance: Overheads Business Strategy OBJECTIVE Efficient management of the Head Office, QHSE and Measurement Departments. ASSESSING PERFORMANCE During periods 5 to 8 the Head Office, QHSE and Measurement Departments were well managed. Bearing in mind that the benchmark level was 100% of the required level to prevent any understaffing, all 3 departments were more than adequately staffed. It is almost impossible to achieve 100% of the required levels due to the required levels themselves not being whole numbers, and hence the slight overstaffing did result in a net loss over the 4 periods. However, this is negligible compared to the figure if the departments had been understaffed.

Strategy Successful ? Business Strategy Having met the objectives, have we also achieved the strategic goal of increasing the value of the business, improving the company’s reputation, and increasing the company share price ? COMPANY VALUE COMPANY REPUTATION KEEPING SHAREHOLDERS HAPPY By the end of period 8 company value had increased by 2%. The increase was only slight because all market share and turnover grew, the operating profit did not. During periods 5 to 8 the company’s share price rose slightly by 7% from 1.16 to This was influenced by dividend payments and changes in company value, forward profitability and the debt burden of the company. During periods 5 to 8 the company’s reputation with clients improved significantly (client satisfaction) as jobs were successfully undertaken.