Strategic management

Lecture 8 Strategic decision and strategic goals

A framework for the evaluation and selection of strategies

Strategic analysis Identifies the organisation's circumstances Strategic options Identifies possibilities for development

Assessment of suitability establishing the rationale screening options

Acceptability Return Risk Stakeholder reactions

Feasibility

Selection of strategies

planned enforced learning command

Success Criteria for Strategic Options (1)

Suitability
Whether strategy addresses circumstances in which organisation is operating Linked to strategic position Rationale of strategy

Success Criteria for Strategic Options (2)

Feasibility
Whether strategy can be made to work in practice Linked to strategic capability

Success Criteria for Strategic Options (3)

Acceptability
The expected performance outcomes (e.g. risk/return) Meeting expectations of stakeholders

Testing suitability
Life cycle analyses Does it fit the stage we will be in? Positioning Is the positioning viable?

Suitability
Is this a good strategy?

Value chain analysis Does it improve value for money? Does it exploit core competences?

Business profile Will it lead to good financial performance?

Portfolio analyses
Does it strengthen the balance of activities?

Suitability Strategic Position

Concept PESTEL Scenarios 5-forces Strategic Groups Core Competence Value chain Stakeholders Cultural web To understand Growth/decline Changes in industry structure Uncertainty/risk Competitive forces Attractiveness of groups, Mobility barriers, strategic spaces Industry threshold standards Basis of competitive advantage Opportunities for vertical integration/outsourcing Acceptability to stakeholders Power and interest Real acceptability, impact on feasibility Strategy must address Industry convergence Contingency plans Barriers to new entrants Repositioning

Eliminate weaknesses Exploit strengths How to integrate (e.g. merger/alliance) Effect on stakeholders Manage power/interest Manage culture clash in merger/alliance

Examples of Suitability - Directions for Growth

Strategic Option Suitability in terms of Environment Withdraw from declining markets Sell valuable assets Maintain market share Gain market share for advantage Exploit knowledge of customer needs Opportunities for new geographical market, new segments/uses Capability Build on strengths invest and innovate Exploit superior resources & competences Exploit R&D Exploit current products Expectations Better returns at low risk by exploiting current strategies

Consolidation

Market penetration Product developmt Market developmt

Better returns at medium risk by exploiting current strengths or market knowledge

Diversification

Current markets saturated/declining

Exploit core competences in new areas

Better returns at higher risk by seeking new business

Criteria for Acceptability

Criteria
Return Profitability Financial return on investments ROCE Payback period DCF Apply to discrete projects Only tangible costs/benefits Difficulties of quantification Quantification

To Understand

Examples

Limitations

Cost-benefit

Wider Major costs/benefits (incl. infrastructure intangibles) projects Sequence of decisions Real options analysis Mergers and acquisitions

Real options

Shareholder Impact on value analysis shareholder value

Technical detail often difficult

Criteria for Acceptability

Criteria
Risk Financial ratio Robustness of projections strategy Break-even analysis Impact on gearing/liquidity What if? analysis Tests factors separately

To Understand

Examples

Limitations

Sensitivity analysis

Test assumptions/ robustness

Stakeholder reactions

Political dimension

Stakeholder mapping Game theory

Largely qualitative

Processes for selecting strategies

Approach Dominant processes Elements of good practice Dangers

Planning

Analytical techniques Tested against objectives Quantified where possible

Involve line managers Analyse holistic picture Build in flexibility Communication between analysts and decision-makers Assess risk Prepare contingencies Processes need credibility Avenues of challenge Promote inter-unit learning Inform/educate decision-maker Need completeness Challenge the paradigm

No ownership Fragmented analysis Rigidity - lost opportunities Decision-makers disown analysis

Enforced choice

Bend to environmental pressure Reactive moves in separate parts of organisation Cultural/political context important

Victims of circumstances Evaluation not done Fragmented/inefficient Pragmatism Risk of strategic drift

Learning from experience

Command

Dominant stakeholder selects strategies

Incomplete vision Vision institutionalised

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
Types of purposes Common charecteristics General, Visionary Central, and overriding Often unwritten
Often financial Express expectation Derived from mission Unit specific Operational Short term

Open or closed Mostly open

Mission

Strategic objectives Unit or functional objectives

Mostly closed

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.

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

The structure of the goals

Objective Goals Strategies Measures Tactics

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 An Example

The BSC helps to translate mission to strategy and tactics

Financial
Objectives Measures Targets Initiatives

To succeed financially how should we appear to our shareholders

Balanced Score Card