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Strategic Management of Business
Source : Chapter 3 from MIS by waman S Jawadekar
The concept of corporate planning …..(1) What is a plan?
A plan is a predetermined course of action to be taken in the future
It is a document containing the details of how the action will be executed
Made against a time scale What are the pre requisites?
Goals and objectives that are to be achieved by the plan should have been decided
What is the relevance of planning to top management? Primary task of management is to set the goals and
objectives
The concept of corporate planning …..(2) Planning
Looking into future and asses likely events in the total business environment and taking suitable actions to meet any eventuality
Generating the courses of actions to meet the most likely eventuality
A dynamic process Future becomes present, might force changes in
course of action Continuous assessment of predetermined course
of action Vs the current requirements of the environment
In essence, eliminating threats and converting opportunities into business
The concept of corporate planning …..(3) Planning is a course of actions
Chain of decisions One after other Successful implementation of a plan means the
execution of each decision in the chain went correct one after other
Planning can be Long range Short range
The concept of corporate planning …..(4) Long range planning
5 Years or more More concerned about the business as a whole Focus on Goals Deals with subjects like growth, rate of growth,
direction of business, establishing some position in the corporate world, market share etc.
Deals with Resource selection, its acquisition and allocation Technology (No emphasis on methods and procedures
Talks about Strategy Right strategy improves the chances of success
The concept of corporate planning …..(5) Short range planning
Concerned with attainment of business results of the year
More in terms of business tasks like Launch of a new product Starting a manufacturing facility Completion of a project Achieving intermediate milestones
Focus on Objectives Hierarchy of objectives which together take the
company towards attaining the goals
The concept of corporate planning …..(6) Corporate Business Planning
Deals with corporate business goals and objectives
Apart from the company considers World trends in business The industry Technology International markets National priorities Competitors‘ Business plans Corporate strengths and weaknesses
Complex exercise
The concept of corporate planning …..(7) Dimensions of planning
Time Execution of plan is year after year Plan is made on a rolling basis where every year it is
extended by one year Rolling plan provides an opportunity to correct or revise the
plan in light of any new information the planner may receive
Entity Entity is the thing on which planning is focused Entity could ne production, finance, marketing, capacity,
manpower , or research and development Goals and objectives will be stated in terms of these
entities A corporate plan may have several entities
The concept of corporate planning …..(8) Dimensions of planning
Organization Plan for the company has to be taken down to subsidiaries,
functional groups, divisions, product groups or projects Corporate plan is a master plan The master plan is broken down into smaller
organizational units helps to fix the responsibility for execution
Elements Corporate plan is made out of several elements Begins with mission and the goal Policy statements Strategies in various business functions Business objectives and targets budgets
The concept of corporate planning …..(9) Dimensions of planning
Characteristics No defined characteristics Typical characteristics are the goals, resources,
important milestones, investment details and variety of schedules
Plan is confidential and known only to few Long term plans are flexible where as short term plans
are not flexible
Essentiality of strategic planning…(1) The following reasons make planning an
essential management process to keep the business in god shape and condition1) Market forces2) Technological change3) Complex diversity of business4) Competition5) Environment
Essentiality of strategic planning…(2) Market forces
Difficult to predict Ability of organization to predict these forces is limited These forces affect sales, growth, profitability Need to reorient organization quickly to meet
eventualities Reorientation is possible only by having a business
plan Technological change
Technological breakthroughs are a threat and at the same time open new business opportunities
Managerial and operational styles get affected Can pose questions on survival of a company Need preplanned investment in business plan for
recovery management
Essentiality of strategic planning…(3) Complex diversity of business
Different products Different market segments Multiple locations Dependence on external factors So many uncontrollable factors & Increased complexity Need plans for diversification, expansion etc
Competition Direct or indirect competition Multiple issues such as knowhow. Quality, delivery,
service etc Need to evolve new strategies to deal with competition
which calls for forward thinking and planning
Essentiality of strategic planning…(4) Environment
Management cannot control Social, business, economic, industrial, technological
environments A mix of environment changes affect business Forecasting environment changes is a major task under
corporate planning Evolving strategies to meet these changes is also a major
task Peter drucker
Defines planning as the process of making the present managerial decisions systematically and with the best possible knowledge of futurity, organizing systemically the efforts and measuring the results against feedback
Planning does not eliminate risk but provides an effective tool to face it
Development of business strategies Definite process and methodology involved Top management responsibility Starts with deciding the social responsibility
proceeds to spell out the business mission and goals and the strategies to achieve them
Mission statement relates the organization’s existence, sets direction of the organization and decides scope and boundaries of the business
After setting mission, set goals Goals are specific and have a limited time frame
(3-5 Yrs) After goals set objectives Objectives have further less time may be a year or
two
What is strategy ? The manner in which the resources, such as men,
material, money and the know-how will be put over a period of time to achieve the goals
Resources of the organization are deployed based on its goals and objectives but also based on the competition being faced by it
How hard it is to formulate a strategy? Strategy development considers environmental factors
such as technology, markets, the life cycle, work culture, attitudes, government policies
Needs to consider the strength of the organization while deploying resources and at the same time has to cover for organization weakness
Unstructured exercise
Strategy formulation Model
Types of strategies A strategy means specific decision(s) usually, but not
always, regarding the development of the resources to achieve the mission and goals of the organization
Pure strategy : If a strategy considers a single point of attack by a specific method
Mixed strategy : If a strategy acts on many fronts by many fronts
A business strategy can be a series of pure strategies handling several external forces simultaneously
Whether pure or mix, strategy can be classified as any one of the below
Overall company strategy, growth strategy, product strategy, marketing strategy
Overall company strategy Long term business perspective Overall strength of the entire company and evolves
policies of business which will dominate the course of the business movement. E.g. Wal-Mart strategy of Mass merchandising
Growth strategy Growth can be from existing business or through
expansion and diversification Growth is possible in the organic way also
By acquiring companies Growth strategies are adapted to establish, consolidate
and maintain a leadership and acquire a competitive edge in the business and industry
Product strategy A growth strategy, where the company chooses a
certain product with particular characteristics becomes a product strategy
Potential to expand as a family of products Market strategy
Closely related to product strategy Deals with distribution, services, market research,
pricing, advertising, packing and the choice of market itself
Act as expediting and activating force for the product and growth strategy
Creates consumer loyalty, market share, communicating consumer needs and explains how they are fulfilled
Short range planning Deals with targets & objectives of the
organization Normally for 1 year with specified targets
accompanied by specific budgets The organization translates long range planning
into target covering all the critical areas f business
Budgets are resources required to achieved targets Physical terms to financial terms E.g. budgets for sales, production, expenses, capital
expenditure, etc Control mechanism Self motivating tool
Relationships of Budgets to Financial Budgets
Advantage of short range planning with budgets Gives the manager a clear target of achievement Specifies to the manager the resource allocation for a
given task and freedom to use it Provides the manager with information on the
performance Helps the management assess the overall performance of
the business in light of the short terms targets and long term goals
Provides an efficient tool to coordinate all the efforts within the organization
Provides the management with selective information on shortfalls and over runs for immediate action
Provides information in monetary terms to compare between any two business entities in the organization
Tools of planning They are decision making tools Business plans have a number of alternatives
upon being planned Optimum resource allocation and profit
maximization Achieving the common goals Tools are influenced by the below factors
Creativity Systems approach Sensitivity analysis Modelling
Creativity Comes out of an experience, a judgment, an
intuition of an individual or a group of individuals Only tool when judgment is required for a
situation where no precedent is available Conceptual skills of individuals
Ability to generate ideas rapidly Change quickly from on frame of reference to another Originality in interpreting an event and generating
different views on the situation Ability to handle with clarity and ease a complex
relationship of various factors in a given situation More no of creative people at key positions might
create new ideas and new strategies of business development
Systems approach Systems approach to planning considers all
the factors and their inter relationship relevant to the subject
Analytical study of the total system, generate alternative courses of action and select the nest in given circumstances
Used in situation of risk / uncertainty Testing the solutions for technical, operation
and economic feasibility Tools like GANT, PERT / CPM are used
Sensitivity analysis Test the validity of the solution under variable
conditions Problem situation is handled with certain
assumptions and conditions and based on these assumptions a rational solution is found
Will the solution remain valid if assumptions changed
Finds out the impact of change on the solution in economic terms when certain conditions change
Validate optimal solutions Test solutions on the principles of utility
Modeling Meaningful representation of a real situation in
mini scale Only significant factors are highlighted Purpose is to understand the complex situation
based on only the significant factors Can be physical or logical Mathematical models use variables, constraints
and parameters Model is based on the relationship between variables
Dynamic or static Long range dynamic, short range static
E.g. break even analysis model, statistical regression models
Strategic analysis of business Kindly remember the earlier class in which we
talked about Porter’s five forces model Moving up the value chain can be a option in
terms of gaining competitive advantage using information technology
Value chain and six dimensions of improvement
Strategic Analysis Model
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What is the Balanced Scorecard (BSC)? Developed in early 90s
Robert Kaplan (Renaissance Group) David Norton (Harvard Business School)
“Translating Strategy Into Action”
Traditional financial measures were Too narrow – no connection to strategy Too focused on the past – not predictive Encouraged tendency to manage qtr to qtr
Too much “what” – Too little “why”
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BSC: Four Perspectives Financial perspective
Customer perspective
Internal Business perspective
Learning & Growth perspective
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BSC strategic focus
Sanger, Mark, Supporting the Balanced Scorecard. Work Study, V 47, No 6
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Example of a Balanced Scorecard
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Financial perspective
Uses traditional tools and reports
Considers EVA© and ROCE Economic Value Added
NOPAT- (capital x cost-of-capital) Return on Capital Employed
Emphasizes growth and improvement
Links financial performance to strategy
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BSC encourages use of ABC
Traditional accountingSalaries $375,000Benefits 92,000Supplies 47,000Phone 8,500Travel 13,000Total $535,000
Activity Based CostingSelect suppliers $82,000Procure mat’ls 175,000Certify vendors 92,000Resolve problems 103,500Expedite shortages 83,000Total $535,000
Johnson, Christian C., Introduction to the Balanced Scorecard and Performance Measurement Systems,
Linking Finance to Strategy
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Customer Satisfaction
CustomerProfitability
MarketShare
CustomerRetention
CustomerAcquisition
CustomerSatisfaction
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Customer perspective Market share (various criteria) Customer retention (absolute or relative) Customer acquisition (absolute or relative) Customer satisfaction
Specific performance criteria Defined value proposition
Customer profitability Profitability by account Net of any special account-specific expenses
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Customer perspective Value proposition typically includes elements
of Time Quality Price
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Internal Business perspective Focus on process improvement Chose processes aligned with strategy Identify customer need
Identify the market Create the product/service offering Build the products/services Deliver the products/services After-sale customer service
Customer need satisfied
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Learning & Growth perspective Core measurements
Employee productivity Employee satisfaction Employee retention
Enablers Staff competencies Technology infrastructure Climate for action/change
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Balancing the BSC
Heaviest emphasis is on business processes
MIS : Strategic business planning Business environment is prone to change Factors like market forces, technological
changes and competition have significant impact MIS design is supposed to provide insight into
these factors enabling the management to evolve strategies
MIS supplies information to top management for strategy formulation
Current information on business status Vs goals is given by MIS
Continuous assessment of business progress in terms of sales, market, quality, profit by MIS
Feedback mechanism
To summarize MIS helps top management in
Deciding goals and objectives To determine the correct status of the further
business and projects Provide correct focus Evolve decide and determine mix of strategies Evaluate performance and give critical feedback Provide cost benefit evaluation to decide on
choice, mobilization and mix of resources Generate standards, norms, ratios and the
yardsticks for measurement and control