Strategic management Lecture 8 Strategic decision and strategic

Strategic management Lecture 8 Strategic decision and strategic goals

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

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

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

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

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

Suitability – Strategic Position Concept To understand Strategy must address PESTEL Growth/decline Changes in industry structure Industry convergence Scenarios Uncertainty/risk Contingency plans 5 -forces Competitive forces Barriers to new entrants Strategic Groups Attractiveness of groups, Mobility barriers, strategic spaces Repositioning Core Competence 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 Strategic Option Suitability in terms of Environment Capability Consolidation Withdraw from declining markets Sell valuable assets Maintain market share Build on strengths – invest and innovate Market penetration Gain market share for advantage Exploit superior resources & competences Product developm’t Exploit knowledge of customer needs Exploit R&D Market developm’t Opportunities for new geographical market, new segments/uses Exploit current products Diversification Current markets saturated/declining Exploit core competences in new areas Expectations Better returns at low risk by exploiting current strategies Better returns at medium risk by exploiting current strengths or market knowledge Better returns at higher risk by seeking new business

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

Criteria for Acceptability Criteria To Understand Examples Limitations Risk Financial ratio Robustness of projections strategy Break-even analysis Impact on gearing/liquidity Sensitivity analysis What if? analysis Tests factors separately Test assumptions/ robustness 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 Mission General, 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 Performance Assumption of the unchanging environmemt Present Time

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

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

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

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 Customer perspective e. g. Customer satisfaction Internal Perspective Innovation & learning e. g. Operational view Cost reduction % Cost reduction Sales growth % Sales growth e. g. Shareholder view ROCE % ROCE EVA € EVA e. g. Assess quality of people & processes Training & development Job turnover % Product quality Stock turnover / e. g. Customer retentionsatisfaction % Customer retention Customer loyalty % Customerofloyalty Acquisition new customers % Acquisition of new customers 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 Objectives Measures Targets Initiatives

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, timedefined, owners