STRATEGIC MAGEMENT2. Strategic planning

Central European competitiveness

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Introduction 1.

The economic „planning” has long traditions (see the story of Egyptian 7 good and bad years from the Bible).

After the II. world war the planning’s theory developed very quickly. In the course of the successive progress the main stream US concepts are financial planning, long range planning, strategic planning, strategic management.

In the centre of the two latter concepts is the market strategy.

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Introduction 2.

A firm’s (strategic) plan is a document which defines its goals and the way of their fulfilment.

Obviously the main criteria of the strategic decision making is the profit maximisation (or the firm’s value). But the interests of the owners (the dividend or company shares value maximisation) and the management (career, profit maximization), further, the social aspects of decisions are important as well.

M. Porter: The main goal of a firm is to get, save or improve competitiveness.

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Introduction 3.Competitiveness is an ability to get, preserve and

improve market position/power.A market can be competitive, oligopolistic and

monopolistic. Main characteristics of a competitive market are: great number of suppliers and buyers, their limited market power and the limited role of the state in the market.

Economic competition is basically relevant inside the different branches of industry.

(An industry is a group of competitors producing products that compete with each other.)

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Introduction 4.In the modern economy the competition can be

different among large and small companies. Among big oligopols the competition is always

heavy. In the SMEs sector however the main competitors are not firms, but value chains (groups of cooperating enterprises). In a value-chain firms co-operate (do not compete).

Today small firms are often more effective than great ones. „Small is beautiful” became the motto of this view (photos of a profitable business).

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Source: www.gt2006.freeblog.hu/albumunk/bolivia - halál-út (death-road)

7Source: www.gt2006.freeblog.hu/albumunk/bolivia

The growing effectiveness in the SME sphere was caused by a great change in the world economy. At the beginning of the XX. century the economy of scale and mass production were the main factors of profitability. Large firms were most successful.

But, because of the rapid technical development, in the middle of the century the adaptability became more important. Firms’ strategies adapted to the mentioned changes too. The creation of flexible production and just in time became frequent goals.

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Main factors of business success

Market success requires a lot of efforts from companies. On the base of some case studies the main factors can be listed as follows:

1. A bias for action, active decision making - 'getting on with it'.

2. Close to the customer - learning from the people served by the business.

3. Autonomy and entrepreneurship - fostering innovation and nurturing 'champions'.

4. Productivity through people - treating rank and file employees as a source of quality. 9

5. Hands-on, value-driven - management philosophy that guides everyday practice - management showing its commitment.

6. Stick to the knitting - stay with the business that you know.

7. Simple form, lean staff - some of the best companies have minimal HQ staff.

8. Simultaneous loose-tight properties - autonomy in shop-floor activities plus centralised values.

Source: Peters, T.J. – Waterman, R.H.

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SWOT analysisTo develop plans (goals and tools) of a company it is very

important to analyse its situation (figure).

A good technique for the evaluation of a firms’ situation is the SWOT analysis.

SWOT is an acronym for the internal Strengths and Weaknesses and the environmental Opportunities and Threats of a firm.

A strength is a resource, skill, or other advantage relative to the competitors, a weakness is a limitation or deficiency in resources, skills and capabilities. An opportunity is a major favourable situation, a threat is a major unfavourable situation in a firm’s future environment.

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ExerciseThere are two food-shops in a block of houses. Mr. A’s new shop is always open and shining. He

always welcome his customers (with an accent). His portfolio (of products) is abundant.

Ms B’s shop is old and sometimes closed – but well-known by all inhabitants of the block long ago. The products on the stands are old-fashioned as well.

Develop the SWOT analysis of Mr A’s business!12

The SWOT analysis of Mr A’s business:

Strengths Experiences in

entrepreneurship Well found with capital Well supplied with labour

Weaknesses Weak connections with

customers Negligence of the

traditional demand

Opportunities Developing a modern

shop for all inhabitants of the block

Threats Rise of nationalism

Completions of SWOT

The M. Porter’s basic completion: during the development of a strategies the analysis of managerial and social interests is important as well.

“Factors” (types of competitors) according to M. Porter: The possible competitors can be not only competitors of the given industry, but suppliers, buyers, new entrants and producers of substitute products as well.

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Main tasks of strategy development

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Source: M. Porter

A recommendation for the system of tasks in strategy making:

Some types of strategic actions

Enterprise’s foundation, market entry of a product, harvest, liquidation.

Product and technology development, strengthening of market positions.

Rationalisation. Application of modern management methods (IT, marketing, HR).

Outsourcing, strategic allience. Integration: buy-out, merger, strategic alliance,

common enterprise.16

M. Porter’s types of product strategies:Overall cost leadership involves trying to keep

costs as low as possible.Differentiation is the process of setting the

firm’s product (his quality, style or services) apart from those of other companies.

Targeting (niche strategy) occurs when a firm attempts to focus on a highly specialized market.

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BCG’s growth-share matrixThe product life-cycle refers to how sales volume

for a product changes during the purchase of this product.

The stages of the life-cycle are the development (market entry), growth, maturity and decline.

In most cases the product life-cycle has two summits.

If a firm has more products (or businesses), it can analyse its product „portfolio” (structure of its offer) and the possible product strategies by the help of a BCG matrix (figure).

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The form of a Boston Consulting Group’s growth-share matrix is the following:

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Market growth rate

0 Market share

Question marks Stars

Dogs Cash cows

The market-share of a firm (product, business) is the proportion of its sales volume to the total sales on the given market.

The recommendations of the BCG analysis are based upon the hypothesis that business strengths of a product can be described by market share, and its market opportunities by growth.

In general new products are question marks. Their market entry needs development and marketing efforts (and the success is uncertain).

If development of a question mark is successful, the product will be starstar. Continuous increase of its sales often needs investments.

Products in the maturity are cash cows because of their great profit.

Dogs are products in the stage of decline.20

The rational corporate strategy try to find new question marks, develop stars from them, cash cows from stars, and liquidate dogs.

It is important to have enough products in the first mentioned three quadrants of the matrix.

The product development and investments can be financed only from the profits of cash cows. Sooner or later the decline of cash-cows’ sales being unavoidable, so, it is always important to develop stars – and, for having stars, find question marks.

The analyse of the development possibilities of cash-cow products (so, the search of a possible new summit of the product life cycle) can be useful as well.

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ExerciseA firm has 5 product groups: A, B, C, D, E. The

following data characterise their turnover:

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Indexes Data (1000 euros) of the product A B C D E

Firm’s turnover 2000 2004

100 200 80 500 50 130 200 96 540 60

Total turnover 2004 260 1000 960 1350 240

The calculation and the matrix are the following:

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A B C D E Growth rate, % (2/1) 30 0 20 8 20 Market share, % (2/3) 50 20 10 40 25

Growth rate

0 25 50

20

Market share

40 A

B

C

D

E

Central European competitivenessEconomic growth is a statistical data about the

yearly change of the real GDP.Development is a complex process, which can be

characterised by a system of indicators. Such a system is the UN Human Development Report, which contain data on the life expectancy at birth, the number of illiterates etc.

Competitiveness of Central Europe is influenced equally by some special human strengths and weaknesses of development (photos).

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25Fortified Saxon church, Bazna – Felsőbajom Source: own photo

26Source: own photo

Strengths and weaknessesGKI analysed influencing factors of countries’

competitiveness by factor analysis. In the database was collected data of 40 countries

about 100 economic characteristics from World Competitiveness Yearbook.

The basic formula of computations was the following:

GDP/capita = = GDP/working hours * working hours/capita(productivity * working time of one employed in a year)

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Main statements of the analyse are as follows:

One third of the development level can be explained by the average of the yearly working hours (firs of all by the activity rate, table) , two third by the productivity.

Activity rate: the total number of employed and unemployed (that is economically active) persons as a percentage of the total population between the age of 15 and 74. Employed person: who worked one hour or more for pay during the reference week (or had job to be temporarily absent from). Unemployed person: who were not employed and had been looking for work actively in the four weeks before the survey week.

The level of the productivity can be explained by the culture of manpower (figure), the innovation performance and the economic environment (first of all: regulation - figures).

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Activity rate (%)Male Female

15-24 25-54 55-64 15-24 25-54 55-64

USA 63,6 90,5 68,7 58,7 75,3 56,3

EU-15 51,8 92,4 55,2 44,4 75,5 34,5

Hungary 26,3 80,5 36,4 24,3 71,0 25,8

Czech Republic 40,0 94,6 60,1 31,5 80,8 31,3

Poland 37,7 88,0 41,3 29,9 76,4 23,3

Slovak Republic 43,1 93,7 51,9 35,6 84,0 14,8

29Source: OECD Employment Outlook, 2005

Percentage of graduates in the 24-35 years old population

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Változás 2000-2005 (%pont)

Source: OECD: Education At a Glance 2006.

Average percentage of taxes in wages, 2006

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Source: OECD: Taxing Wages 2007.

Administrative costs

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Source: EC: Administrative Costs 2008.

Thank you for your attention!