Strategic management Lecture 8 Strategic decision and strategic goals

screening options Strategic analysis Identifies the organisation's circumstances Strategic options Identifies possibilities for development Assessment of suitability Feasibility Acceptability establishing the rationale Return Risk Stakeholder reactions Selection of strategies planned enforced learning command A framework for the evaluation and selection of strategies

Success Criteria for Strategic Options (1) Suitability Suitability Whether strategy addresses circumstances in which organisation is operatingWhether strategy addresses circumstances in which organisation is operating Linked to strategic positionLinked to strategic position Rationale of strategyRationale of strategy

Success Criteria for Strategic Options (2) Feasibility Feasibility Whether strategy can be made to work in practiceWhether strategy can be made to work in practice Linked to strategic capabilityLinked to strategic capability

Success Criteria for Strategic Options (3) Acceptability Acceptability The expected performance outcomes (e.g. risk/return)The expected performance outcomes (e.g. risk/return) Meeting expectations of stakeholdersMeeting expectations of stakeholders

Does it fit the stage we will be in? Life cycle analyses Positioning Business profile Value chain analysis Portfolio analyses Suitability Is this a good strategy? Does it improve value for money? Does it exploit core competences? Will it lead to good financial performance? Does it strengthen the balance of activities? Is the positioning viable? Testing suitability

Suitability – Strategic Position Concept To understand Strategy must address PESTELGrowth/decline Changes in industry structure Industry convergence ScenariosUncertainty/risk Contingency plans 5-forces Competitive forces Barriers to new entrants Strategic Groups Attractiveness of groups, Mobility barriers, strategic spaces Repositioning CoreCompetence Industry threshold standards Basis of competitive advantage Eliminate weaknesses Exploit strengths Value chain Opportunities for vertical integration/outsourcing How to integrate (e.g. merger/alliance) Stakeholders Acceptability to stakeholders Power and interest Effect on stakeholders Manage power/interest Cultural web “Real” acceptability, impact on feasibility Manage culture clash in merger/alliance

Examples of Suitability - Directions for Growth StrategicOption Suitability in terms of EnvironmentCapabilityExpectations Consolid- ation Withdraw from declining markets Sell valuable assets Maintain market share Build on strengths – invest and innovate Better returns at low risk by exploiting current strategies Market penetration Gain market share for advantage Exploit superior resources & competences Product developm’t Exploit knowledge of customer needs Exploit R&D Better returns at medium risk by exploiting current strengths or market knowledge Market developm’t Opportunities for new geographical market, new segments/uses Exploit current products Diversifi- cation Current markets saturated/declining Exploit core competences in new areas Better returns at higher risk by seeking new business

Criteria for Acceptability Criteria To Understand ExamplesLimitations Return Profitability Financial return on investments ROCE Payback period DCF Apply to discrete projects Only tangible costs/benefits Cost-benefit Wider costs/benefits (incl. intangibles) Major infrastructure projects Difficulties of quantification Real options Sequence of decisions Real options analysis Quantification Shareholder value analysis Impact on shareholder value Mergers and acquisitions Technical detail often difficult

Criteria for Acceptability Criteria To Understand ExamplesLimitations Risk Financial ratio projections Robustness of strategy Break-even analysis Impact on gearing/liquidity Sensitivity analysis Test assumptions/ robustness What if? analysis Tests factors separately Stakeholder reactions Political dimension Stakeholder mapping Game theory Largely qualitative

Processes for selecting strategies

What are the goals and objectives Objectives: desired outcomes for individuals, groups, and entire organizations. Why oraganizations set up objectives? Enviroment orientation, Guide actions Hierarchy linkage Coordinate decisions Basis for control Why peoples set up objectives: Personal challenges, Integration of poersonal objectives Fostering of motivation

Types of purposes Common charecteristics Open or closed MissionGeneral,Visionary Central, and overriding Often unwritten Mostly open Strategic objectives Often financial Express expectation Derived from mission Mostly closed Unit or functional objectives Unit specific Operational Short term Always closed, resource oriented

The hierarchy of objectives and their place in the strategy process

Objectives need to meet five specifications 1. An objective should be clear, single, specific topics (It sould not be stated in vague form) 2. An objective should relate to a result, not to an activity to be performes (The objective is a result of an activity, not to performing the activity) 3. An objective should be measurable (An objective should be stated in quantitive terms whenever feasible) 4. An objective should contaion a time deadline and a responsible person of its achievement 5. An objective should be challenging but achievable.

1. Step of the GAP planning Assumption of the unchanging environmemt Present Performance Time

2. Step of the GAP planning Present Performance Time Unfavorable conditions Favorable conditions Unchange convditions Assumption of the different – favorable, or unfavorable - environmental conditions.

3. Step of the GAP planning Strategic goals based on mission Present Performance Time Favorable condition Goals based on mission Unchanged conditions

4. Step of the GAP planning Strategic goals based on mission, and actions fitted to enhanced goals Present Performance Time Favorable condition Goals based on mission Unchanged conditions Gap what you have to fill with actions

BSC: four basic perspective of a company Based on „balenced score card” four perspectives are seen to affect the long term economic value of a company: Financial perspective: This includes consideration of factors such as the return on capital employed, cash flow Customer perspective: This requires the company to set specific goals besides price, that are important to the customers, qualitiy, performance, and service Internal perspective: This includes consideration of factors such as capacity, and cost connected with effectiveness Innovation, and learning perspective: This includes the generation of new business from innovation, and staff attitudes and morale

The Balanced Scorecard Based on Kaplan & Norton

The Balanced Scorecard Key Performance Indicators KPIs Financial perspective e.g. Operational view Cost reduction Sales growth e.g. Shareholder view ROCE EVA Customer perspective e.g. Customer satisfaction Customer retention Customer loyalty Acquisition of new customers Financial perspective e.g. Operational view Cost reduction % Sales growth % e.g. Shareholder view ROCE % EVA € Customer perspective e.g. Customer satisfaction Customer retention % Customer loyalty % Acquisition of new customers % Internal Perspective e.g. Assess quality of people & processes Training & development Job turnover % Product quality Stock turnover / Innovation & learning e.g. Continuous improvement Quality circles e.g. Research & Development Speed to market / months

Balanced Score Card

The structure of the goals Objective Goals Strategies Measures Tactics

The Balanced Scorecard – An Example

The BSC helps to translate mission to strategy and tactics Financial To succeed financially how should we appear to our shareholders ObjectivesMeasuresTargetsInitiatives

A possible definition of goal-strategy system Mission or Objective: WORDS long-term (3-5 yrs ?) somewhat visionary, business right to be in, our ambition Goals: NUMBERS “stretch“, specific by year, sales, profit, competitive position (share), back-up sheets Strategies: WORDS, HOW to, FOCUS sustainable competitive advantage, long-term direction Measures: NUMBERS one or two per strategy, readiliy optainable, sensitive to permit 3-monthly readings Tactics: KEY NEXT PROJECTS recommended by Strategy Owner, agreed by top management, prioritized, time- defined, owners