Question 1. Detail Internal & Environmental information & Company thinking

Competitive Position Using Strategy Models

1. ETOP (Environmental Threats and Opportunities Profile)

(Economy & Market External to Company)

Threats

Opportunities

Rank Threats & Opportunities

            Long Term

            Short Term

Five forces.

Entrants                                   

Substitutes                              

Suppliers                                  

Buyers                                       

Rivalry                                      

2. SAP (Strategic Advantage Profile)

            (Internal characteristic of company)

COMPANY

Profitability

% =  Operating Surplus / Gross Profit  <50% overhead may be high

 % = Cash flow / Gross profit 

Gross profits high cash flow low ? use of resources

Ratio Analysis  - provides information on how efficiently resources are being used

            Return on owner Equity (ROE) % = Operating Surplus / Owner Equity

Return on total assets (ROTA) % = Operating Surplus / Total Assets

            Gearing Ratio % = debt / owner equity and/or   debt / total liability  - when these numbers are high it indicates poor financial control and loans may be difficult to secure

Cash Flow

·        Short term loans – cash in bank and net cash flow to pay or transfer to Long term

·        Long term loans – status on ability to pay

PRODUCTS

Comparison of Products – explain why one is favourable over other

·        Gross profit per unit sold $ = gross profit $ / sales unit

·        Market share of each product %

·        Work time > 100 leads to OT and extra cost

·        Labour attrition high results in lack on learn curve achievement

·        Inventory – high results in money not well spent

·        Back order – leads to lost sales

·        Price compared to competitor price – can lead to lost revenue especially if you have back order price could certainly have been increased

Product Life Cycle

BCG Market Share growth matrix (framework)

Information used to place product on the BCG (analyze each product)

Look at the following for each product to help with placement on BCG

·        % = gross profit $ / sales revenue of $

·        stage in the product life cycle

·        market share of product

·        competitiveness of product

Value Chain

Supportive activities

·        Management System – quality control, financial & operational planning

·        HR Management – Mange work force

·        Technology Development – Learning by doing, product design, process development

·        Procurement

Review product under development

Estimated Gross Profits

Market share x market peak x (competing price – unit price)

 

 

Breakeven (number of units)

Development cost  (development cost total to date, spending this year, remaining years estimate) /contribution (product cost – competing price)

 

 

Payback (number of years)

Breakeven units / (market size x forecast market share) 

 

 

Return on Investment (ROI) $$

Cash flow (unit sales x contribution) / development cost

 

Scenario - Sensitivity analysis (what if)

            Change in

·        unit sales

·        market share

·        contribution cost

 applied to breakeven, payback, ROI

Competence

Primary Activity

SAP Advantages

SAP Disadvantages

SAP Rank Advantages & Weaknesses

Question 1.2 or / and 2.2  Strategic Future do you see , Derive strategy to improve short term / long term

1. SWOT (Strength Weakness Opportunity Threat)

            (this analysis provide comprehensive view of strategic position attempt to find fit between company potential & market opportunities)

Strength                                            Opportunity

 

Weakness                                        Threat

           

2. Strategic Option

            Generic

                        Stability (status quo)

                                    Risk

                                    Contingency

                        Retrench ( abandon?)

Risk

                                    Contingency

                        Expand ( move forward with new market / product)

                                    Risk

                                    Contingency

3. Choice

Pick one option indicate the trade offs i.e. threat, opportunity or risk

 

 

Question 1 Benchmarking & Investment

 

Review Product

            Gross Profit $ per unit comparison

            Gross profit % per unit of total = gross profit unit / total gross profit

            Calculate additional cash flow gross profit x # years investment will increase life

            Would investment pay for itself?

            Return on Sales = gross profit / cost of goods sold

            Suggest it is a reliable benchmark

           

First step focus attention on performance improvements

Compare product 1 to product 2

            Warranty Rate

            OT ? inventory being up

            Attrition

            Resource management inventory up – weak supply chain, poor communication between production, marketing, distribution

 

Use approximate calculations equalize warranty                          x thousand saved

Eliminate OT                                                                                                x thousand saved

Reduced attrition                                                                                     x thousand saved

Impact OT in learning effect lead to additional 5% labour          x thousand saved

Added up total                                                                                         x thousand saved @ year

 

Build Inventory consistent excess capacity necessary in growth stage, market share up, Inventory 30% of output not excessive not significant economies possible

 

Basis Assumption potential cost saving new profit from increased production life positive NP at # % cost capital

 

2 other possible

            market % $ spent reduced and revenue at competitive price vs current price , both are contrary to continue development depend on elasticity demand , ? Oligopoly


When move from Star to cash cow expect significant $ up, benchmark critical unless substantial increase in cash flow investment was a waste

 

Question 1.2 Critique Investment appraisal

Critique of NPV tackle # ways

 

1. Alternative use of data

 

2. Investment Appraisal is based on assumption, which may not be valid:

·        Cost of Capital, NPV would be positive if Cost of Capital lower

·        market size several year future impossible y

·        Develop cost, develop time > 3 year

·        Life cycle x years long

 

3. Various Risk factors:

 

4. Product Portfolio:

 

5. Reallocation to Cash Cow:

            Doubt additional resources generate significant returnns

           

Question 1.2 Derive strategy to improve short term / long term

1. SWOT (Strength Weakness Opportunity Threat)

            (this analysis provide comprehensive view of strategic position attempt to find fit between company potential & market opportunities)

Strength                                            Opportunity

 

Weakness                                        Threat

 

2. Short Term

            Corporate – normally not option short term

            Business – e.g. improve OT, Attrition, reduce inventory, increase communication Production, Marketing, Distribution

 

3. Long Term

            (Generic Options)

            Corporate – Expansion, Stability, Retrenchment

            Business – Cost leadership, Differentiation, Focus

2. Several years changing competitive environment – 2 –3 pg narrative few tables or diagrams – Assess Strategic Process type question

What has really been happening?

Clear objectives

Understand market

Rational choices

Implement effectively

Learn from  mistakes

Apply the model:

The Process Model

1. Who decides to do what

1.1 Strategist

Prospector

Primary concern is to identify new market opportunities and issues relating to internal organization are secondary

 

 

Analyzer

Sophisticated internal information systems and detail investigation of options unlikely to follow up same as prospector

 

 

Defender

Maintain current position with out great deal of initiative in developing new market opportunities

 

 

Reactor

Deal with if something happens

1.2 Objectives

·        What business is company in

Overall who does what

2. Analysis & Diagnosis

2.1 Macro environment

Political         (normally slow moving)

Economics    (GNP, unemployment, inflation, exchange rates, labour cost, interest rates, tariff, quota)

Social- (cultural differences, demographics)

Technology ( change(s) rapidly)

2.2 Industry environment

2.2.1 Five forces

The five forces facing in its core and non core business were roughly as follows.

Force

High or Low

 Example/Explain

Entrants

 

 

Substitutes

 

 

Suppliers

 

 

Buyers

 

 

Rivalry

 

 

2.2.2 Market structure / Market Force

·        Perfect competition  -profit above opportunity cost cannot be sustained, identify market not perfect and capitalize on these factors i.e. barrier of entry,

·        Monopoly – one producer  - barrier of entry, economies of scale

·        Oligipoly – few competitors in market reaction of competitors to changes in price and market taken into account Kinked Demand Curve

2.2.3 Product life cycle

·        Introduction

·        Growth

·        Mature

·        Decline

2.2.4 Portfolio

            BCG Rating

2.2.5 Differentiation

 Cost, Price, Stuck in the middle Yes / No explain

2.3 Internal factors (operations)

2.3.1 Value Chain

                        Primary Activity – logistics of production & sales

                        Supportive Activity – necessary for effective function not directly production & sales

            2.3.2 Core Competence
 
2.4 Competitive position

Yes / No explain (relates to unit cost, competitive reaction, market share)

Product Market familiarity matrix

2.5 Overall Analysis

Repeat support of Analyzer or prospector

3. Strategic Choice

3.1 Generic Strategy alternatives

Stability (Cost Control, Defend, Restructure)

            Retrench (Downsize, Divest, Rationalize)

Expand (Investment, Acquisition, International)

3.2 Strategy Variations

Alliance & Joint Venture

Acquisition

Vertical Integration

International Expansion

 

3.3 Strategy Choice

            Emergent

            Shareholder wealth

3.4 Overall Choice

4. Implementation

How strategy implement i.e. Retrench cut facilities / reduce workforce

4.1 Resource & Structure

 

4.2 Resource Allocation

 

4.3 Monitor & Control

            (Decide what to measure, how to measure, interpret outcome, convert to policies)

 

4.4 Overall Implementation

5. Feedback

Support for the decision

6. Overall process

 

Question 3. Managers don’t feel involved in overall strategic process

 

Managers are involved in the overall strategic process but they may not recognise their role. There is a problem in relating cause and effect, i.e. the relationship between strategy decision making and managers' activities may be obscure. In some instances the strategic process may be seen as mechanistic and rigid and of little relevance to the managerial function. Managers are typically most heavily involved in the implementation part of the strategic process; some reasons for not perceiving that a role is played in each part of the strategic process are as follows.

Strategists and objectives

o        The size of company (small, medium integrated or large diversified) has an impact on the roles managers perform.

o        Objectives need to be credible or they will be seen as wishful thinking.

o        Managerial style may be dictatorial leading to lack of communication.

o        Management adopts a reactive rather than proactive approach – time is spent dealing with problems as they arise.

o        May be prospectors rather than analysers.

o        The company culture may be task orientated.

o        Lack of a strategic overview and clear objectives: managers lack participation; corporate objectives are not disaggregated.

o        Conflict of objectives: SBUs may pursue different objectives; SBE and corporate managers may have different perspectives. The principal agent problem may divert managers from their strategic functions.

Analysis and diagnoses

o        Lack of time to identify and assimilate relevant information.

o        Lack of tools: managers are not well educated.

o        Difficult to obtain information because of poor IT systems.

o        Accounting information which is not integrated with marketing information.

o        Requires interaction among functional specialists.

Strategic choice

o        Generic decisions made only occasionally.

o        May not recognise a strategic decision.

Implementation

o        Divisional and matrix structures may conceal the individual manager's strategic role.

o        Monitor and control is an important strategic function.

o        Reacting to changes in the environment within strategic parameters.

o        Managerial focus on financial control instead of strategic control.

o        Stage of product life cycle: more effort required for new product launches.

o        Bureaucratic structure: size; organisation; promotion criteria.

o        Principal agent: rewarded for doing rather than thinking.

o        Incentive structure: may not be aligned with company objectives.

Feedback

o        Dynamic process: strategy and implementation are closely related in real life.

o        Communications channels are necessary to ensure that the company learns and adapts to changing circumstances.

 

Question 3 Using formal technique apply to strategic Planning

Formal investment appraisal is typically used to allocate resources within the company; it is the basis for making selections among competing alternatives. Strategic decisions about the company's future can be assessed within the net present value framework, given that the overall objective of the company is to maximise shareholder value.

The contribution of formal investment appraisal techniques include:

o        They make explicit the assumptions which are made in arriving at the evaluation of alternatives.

o        They force managers to be explicit about factors such as risk premiums, time horizons, revenues, costs, cash flows, market share.

o        They make it possible to compare completely different options.

o        They enable choices to be made among competing projects within a strategy.

o        The appraisal framework can be used as the basis of scenario evaluations which can show the sensitivity of different strategies to changes in key variables.

But it is inadvisable to rely on formal techniques along in arriving at a strategic thrust. Reasons include:

o        The raw data may be suspect because it is necessary to use information about the past, which may be suspect if it is based on accounting conventions.

o        Formal appraisal techniques can evaluate what might happen, but they cannot take into account the unknowable; the assumptions about the future may be wrong.

o        Different projects may have completely different implications for personnel management through their impact on job satisfaction and incentives.

o        While risk can be incorporated in the formal analysis, managers vary in their risk aversion and the desire to maintain contingency

o        Although it is important to quantify the options confronting the company as far as possible, decisions are often based on qualitative rather than quantitative factors.

The overall limitation of formal techniques is that they can give the impression that strategy is a mechanical process which can be solved.

 

Q 3 Explain why it is impossible to generate scientifically acceptable evidence that strategic approaches are effective.

There are two main approaches to the issue: analyse a few companies in depth or many companies using fewer variables. The results of the first approach may be so particular that they cannot be generalised, while the second may not be able to take into account sufficient variables to make the results worthwhile.

The second approach accords with what is generally known as the scientific approach, which requires the specification of a model, the generation of relevant data, and the application of appropriate statistical techniques.

o        The model is difficult to specify because it is not easy to define exactly what comprises strategic planning; for example, strategy decisions occur over a period, and there are feedbacks and continual changes taking place. It is therefore not possible to specify a model which controls for all relevant variables.

o        The measurement of outcomes is ambiguous

o        There are likely to be interactions among variables, which adds further to the complexity of a statistical model.

o        There are lags between actions and results, and these lags are not only difficult to identify but vary depending on the circumstances.

o        It is therefore difficult to relate cause and effect in an unambiguous manner.

o        Relevant data are difficult to generate because of the dynamic environment within which companies operate, the effect of exogenous shocks, the unexpected actions of competitors, changing consumer tastes. The lack of a proper model and relevant data makes it impossible to apply statistical techniques with any degree of confidence.

The second part relates to strategic planning as a process, and what benefits might accrue from implementing it. Good answers relate this to the strategy process model.

Objectives

o        The communication of a sense of direction

o        Individual managers can visualise where they fit into the general scheme, and are in a better position to interpret their own objectives.

o        managers will also be able to relate their own proposals to the overall strategic thrust.

o        Managers are enabled to ask the right kind of questions, such as ‘what are company objectives?’, ‘what are the characteristics of the competitive environment?’, ‘what strategy option should we be following?’, and ‘how effectively are we allocating resources?’.

o        The very fact of adopting a ‘planning’ stance can make the difference between being proactive and reactive. Rather than simply reacting to events, managers anticipate and make things happen.

o        A general planning framework can assist managers to identify their roles in the organisation, while the process of setting objectives, and disaggregating objectives, can make a contribution to solving the principal agent problem.

Analysis

o        The use of frameworks such as SAP, ETOPS and SWOT provides the basis for evaluating where the company is in relation to its environment, its competitors, and helps identify performance gaps and potential generic strategies. At the very least such frameworks provide checklists of potentially important issues.

o        The individual business disciplines tend to provide answers to particular questions. The objective of the planning framework is to integrate the disciplines, see why they may be delivering different answers, make trade-offs and arrive at a strategic thrust.

o        The very fact of carrying out a planning process can reveal a great deal about the company which is not apparent to managers preoccupied with day to day problems and issues. For example, the frameworks can reveal whether company performance has been determined by internal or external factors.

o        It also makes it possible to be much more explicit about risk and uncertainty, and provides the basis for analyses of options using tools such as sensitivity analysis and break even analysis.

Choice

o        The planning approach enables the company to differentiate between short term and long term actions.

o        The identification of generic options provides a focus.

Implementation

o        The planning process can lead to improvements in communications within the company.

o        Explicit feedback contributes to flexibility of response.

o        It can help eliminate unnecessary conflict and provide an overall sense of direction, thus contributing to the development of a company team spirit.

o        If such evidence cannot be generated, are there any real benefits from adopting a structured strategic approach?

Some benefits may accrue to individual managers rather than to the company as a whole.

o        With a better understanding of company objectives the manager will be in a better position to predict changes which are likely to affect him personally.

o        Proposals submitted by the manager can be made consistent with the aspirations of superiors.

On the other hand, there are potential costs of adopting a planning approach. (Give extra credit for this)

o        It can introduce a degree of rigidity into corporate affairs, and make it difficult to react flexibly to changing circumstances because of adherence to ‘the plan.’

o        It may give the impression that strategy is a mechanistic process

o        It is necessary to view planning as a means to an end rather than as an end itself.

Too much planning may restrict innovation.

1.      Compare how risk and uncertainty might be incorporated into Strategic Planning by a strongly risk averse company and a high risk taking company.

It is not possible to categorise companies precisely, but the following describes the general behavioural differences which might be expected.

Strategists and objectives

A high risk taking company will tend to be a prospector and adopt a proactive stance. The risk averse company will tend to be a defender or analyser and reactive. There is a difference between the risk to managers and the risk to shareholders which leads to a principal agent problem; aligning the willingness to take risks is a major problem.

Analysis and diagnosis

The risk averse company will tend to collect and analyse information in much more detail and with greater sophistication than the risk taking company. However, even when presented with the same information and the same degree of analysis their reactions will differ. The risk taking company will be much more likely to act on the basis of what is available, and what might appear to the risk averse company as grounds for caution might seem to be an opportunity for a risk taking company.

Strategy choice

The risk averse company is likely to spend more time on sensitivity analysis, break even and payback while the risk taking company will tend to look at the general scenario and act on that basis. The risk averse company will be more likely to adopt a minimax solution, and will attempt to hedge against potentially unfavourable outcomes. Risk averse companies will set a higher hurdle rate for investments.

The risk averse company will be more likely to adopt stability or retrenchment strategies, and will expect to achieve a return roughly equivalent to the rest of the industry. The risk taking company is likely to aim at expansion. The risk averse company will aim at a balanced portfolio in which risks are spread, while the risk taking company will aim for those products which have a potential for high return, irrespective of how the overall pattern of expected cash flows might be. The two will tend to make choices in different parts of the familiarity matrix.

The risk averse company will be more concerned with contingency planning.

Implementation and control

The risk averse company will devote more resources to close monitoring of activities and costs while the risk taking company will be more concerned with the exploitation of market opportunities. The risk averse company will operate a structure where individuals are aware of their precise roles and their place in the hierarchy. The risk taking company will probably have a looser structure and a more innovative approach by employees.

The risk averse company will tend to adopt a tight financial approach as opposed to the looser strategic planning approach of the risk taking company in the planning and control matrix.

2.      Identify the likely main strategic benefits and drawbacks in Risk Averse and Risk Taking case.

To some extent the definition of costs and benefits depends on the attitude of the observer; what appears as a cost to a risk averse manager may seem the opposite to a risk taker.

Risk averse

Costs

The emphasis on information collection and analysis by the risk averse company can lead to overload. The emphasis on control can lead to slow reactions, and unwillingness to commit resources and enter new markets until there is evidence that the strategy will work – but by this time first mover advantage has been lost. There is a danger that concentration on processes rather than on the profit objective will lead to a culture which pays relatively little attention to market opportunities.

Benefits

A clear statement of risk criteria can enable the company to avoid certain mistakes, such as entering an activity which does not fit with the company culture.

Risk taking

Costs

The likelihood of variable returns over time and a relatively high risk of bankruptcy.

Benefits

The potential to make very high returns as market opportunities are pursued. The potential to develop an innovative and proactive culture. The chance of achieving first mover advantage.

 

You decide that you will reconcile the two points of view rational approach, emergent view set out the arguments you would use and the guidance you would offer the two groups in approaching strategy issues.

It is clearly necessary to reconcile the two points of view because they appear to present two totally different approaches to running the business. The rational approach is a somewhat static view which treats company objectives as fixed, while the emergent view is focused on taking changing circumstances into account.

The difference between the two can be resolved by first identifying the parts of the process model with which they are most concerned.

Objectives
There is clearly a need for defining the markets the company is in and the basis for its competitive advantage. However, this cannot be done in more than general terms and the rationalists need to realise that there is a difference between prescription and direction. If objectives are set too precisely and no variation is allowed then managers will be inhibited from being innovative and identifying new opportunities.

Analysis
It is necessary for both groups to understand the environment, competitive forces and the company's internal operations. But these need to be assessed in a dynamic fashion and the rationalists must avoid regarding analysis as a once for all activity. The use of scenarios is a particularly potent method of demonstrating the potential folly of the rationalist approach. On the other hand an infinite number of scenarios can be drawn up and in the extreme the approach can be used to demonstrate that it is pointless to look ahead at all.

Choice
Unless analysis has been carried out and objectives set choice might as well be random. The choice process must not simply consist of a series of reactive moves to changing conditions. At the same time choices need to be made in such a way as to ensure flexibility in the face of changing economic conditions. Consideration needs to be given to contingency planning in case events turn out to be significantly different from initial predictions. The rationalists must appreciate that competitors do not act passively in the face of strategic moves.

Implementation
The structure of the company and the techniques of resource allocation can help ensure flexibility. There are many instances of successful profitable companies which have found their value chains break down when competitive conditions change.

Feedback
The rationalists appear to attribute much less importance to feedback than the emergent group. The danger for the rationalists is to focus exclusively on achieving the identified objectives without taking the dynamics of the market into account.

The advice to both groups falls naturally out of the attempt to reconcile their views. The rational group needs to appreciate the dynamics of the market place much more, be less rigid, and stop regarding strategy as a plan. It is essential that they see it as a process.

On the other hand the emergent group needs to see the importance of structure and how the organisation can be designed so that it is not only able to achieve objectives but have the flexibility to meet changing conditions

3.      Demerger  benefit realised by unrelated diversification

o        Synergy

o        Similar SBU strategies

o        Economies of Sale or Scope

o        Risk spreading

o        Corporate identify

o        Parenting advantage

o        Core competence

o        Principal agent problem

o        Peak load resource allocation