BUSM3319

Managing Emerging Issues

Lecture 9: Final considerations and
presenting a Balanced Strategy

Chris Boulton

Dr Kay Emblen-Perry

Senior Teaching Fellow

Senior Lecturer

Evaluating Emerging Issues

Issue Evaluation
Strategic
Choice/Response
Recommendation

Chris Boulton
Managing Emerging Issues

Learning outcomes
Todays lecture:

Strategy in practice;
Using external consultants;
Reward systems & strategy;
Private equity shareholders;
Exits;
The need for a balanced strategy & associated frameworks.

Who gets involved in Strategy?

Non-executive directors

Chief Executive Officer

Top management team

Able to offer an external & objective

view
Involvement depends on Governance
style country and company shareholder
structure (e.g. public vs private/family)
Delegates responsibility
Ideally with Board is able to remove
CEO
Chief Strategist
Owns the strategy & is accountable
Often replaced when setbacks (larger
businesses).
In smaller businesses has more
influence

Can share strategic responsibilities

Objective ability reduced by closer
involvement in day to day operations
Can tend to follow CEO e.g.
Groupthink
Less experienced (depending on size of
organisation.

Johnson & Scholes, Exploring Corporate Strategy (2011), Chapter 15

Who gets involved in Strategy? (2)

Part of executive management with a

specific responsibility for managing the
planning process
Luxury of large businesses
Usually appointed from within i.e. with
good understanding of the organisation

Strategic Planners

Middle Management

Strategy Consultants

Operational work-horses and likely to

be heavily influenced in terms of
operational matters with little time or
share of mind for objective strategic
thinking
Useful information source support for
strategic proposals
Ideal champions of strategic projects
Often used to analyse/prioritise/generate
options
Implementing change
Can be a political tool to effect change
Excellent information source
Top firms include BCG, Bain, McKinsey
etc.

Using Consultants (1)

Useful in challenging/confirming proposed

strategy and assumptions
Able to help consensus process
Can provide new options/ideas

Analysing, prioritising,
and generating options

Transferring/applying
knowledge

Can bring significant sector knowledge to bear

Useful confidential competitor/benchmarking
information
Some have deep specialist knowledge e.g. Oil &
Gas, Financial, Tax, Legal, HR, Country/Political Risk
etc.

Promoting strategic decisions

Implementing strategic
change

A tool of the CEO/Board to promote a particular

strategy
Objectivity? Who pays the invoice?

A growing area of popularity & income

Ideally working with internal managers

Using Consultants (2)

1. Defining the Specific Issue

Work out exactly what issue(s) you need them to address. A broad scope
= lots of time and high fees.

2. Can they do the job?/Review Proposal

Ask for evidence of experience sector, issue, geography etc

Who will be on the team? Key point of contact?
How would they approach the task?
How long will it take?
What are deliverables? E.g. weekly updates
How much will it cost? Drivers of cost.
Required input from the business/internal managers

3. Continual review of progress.

Keep pressure on senior attendance at updates.

Ensure stay on message monitor senior consultant involvement in the
project
Update on costs/incidentals. (If they take YOUR people out to lunchit will
end up on YOUR bill!)

Reward Systems
The reward systemis an unequivocal statement of the
corporations values and beliefs. As such, [it] is the key to
understanding culture. An analysis of reward systems can
provide executives with a basis for effectively managing long
term cultural change.
Kerr & Slocum Managing Corporate Culture Through Reward
Systems (1987)

Reward the right things

Monetary rewards
Non monetary rewards
Reward employee for results not activities

Reward Systems Linking to Strategy

To be effective, reward systems must be congruent with an organisations

strategy and fit with its structure and processes (Lawler, 1998)(Models
include: McKinsey 7-S Framework, Balanced Scorecard)

Objectives in designing the reward system

Generously reward those achieving objectives
Deny rewards to those who dont
Tie incentive compensation to relevant outcomes - both strategic and
financial

Types of Rewards:
Basic Pay (for doing the job)
Perks (part of basic package)
Bonuses (for achieving something individual/collective sometimes
part of basic package)
Share Options (public vs private)

Reward Systems Reviewing

UNDERSTAND EXISTING SYSTEM

What behaviours is it rewarding?

Do these behaviours fit with desired
strategy?

DETERMINE DESIRED
BEHAVIOURS

ADJUST PRESENT SYSTEM

Be aware of implications of change

Implement & Communicate?

What is the strategy going forward?

What behaviours support desired strategy

Private Equity Shareholders & Exits

1. Formal Private Equity Funds typically look to exit within 3-5 years:

Fund life normally 10 years

IRR base target 25-30% (Double money in 3 years)
Longer holding period without growth in value leads to declining IRR
Rationale for longer holding period includes: prospect of further significant
value growth; recovery from dip in performance.

2. Impact of dip in performance or fall behind business plan

PE shareholders will often become more hands on and impact strategy;

Management change is frequently and option. Studies reveal that some 1/3 of
CEOs are replaced in first 100 days of investment and 2/3 replaced over 4 year
period (Acharya and Kehoe 2008)
Acceleration of Exit Strategy (sale of business)

3. Exit for PE Fund can mean either selling shares or selling the company
best value is usually gained from selling 100% of the business.

Exit as a Strategic Option

1. To maximise value timing is everything:

A ready buyer (funds & strategic rationale)

Strong financial track record (trends!)
Potential for growth in future
Strategic value (e.g. geography, technology,
customers, expertise)

2. Types of Exits:

Trade Buyers
Private Equity
Management/Private Equity
Public Listing
Liquidation

3. Rationale for Acquisition (Trade Buyers) includes:

Economies of Scale
Economies of Vertical Integration
Complementary Resources
Surplus Funds (both in acquired and acquiring company!)
Industry Consolidation
Eliminating Inefficiences buyer sees opportunities to improve
Brealey et al, Principles of Corporate Finance 9th ed (2008)

Exit (Divestment) Valuations

1. Types of Valuation on Exit:
1. Net Assets e.g. value of assets-liabilities on balance sheet
. Multiple of Earnings e.g. 7 x EBITDA, or 12 x Net Profit

2. Distress Sale Usually by value of Net Assets

Usually in bankruptcy situations, but also relevant in underperforming

situations where shareholders force an exit
Assets such as buildings can attract market price
Other assets may be discounted:
Machinery secondhand value
Inventory is individually assessed but can be discounted from 0-100%
Debtors are seen as difficult to collect and also discounted heavily
Creditors particularly banks will want full payment from proceeds
If company is underperforming but a sale is required then PE Funds can be
open to other options e.g. sale to management rather than asset sales.

What is a balanced strategy?

An organisation cannot expect to eliminate all risks, adopt all

opportunities, do everything and be everywhere
A balanced strategy takes all different inputs into consideration,
analyses them and agrees the key areas to focus on across all
aspects of the organisation and sets priorities

Priorities must be set, trade-offs considered and opportunity costs

understood
Balancing strategies across a business retains focus on all aspects of
the organisation
Organisations are most effective when all aspects are coordinated

Benefits of a balanced strategy

Sees businesses as systems of interrelated strategies, owners,

investors, management, workers, finance, processes, products,
suppliers, customers, and competitors all of which provide risks
and benefits
Provides early warning signals for both opportunities and risks
from as many areas as possible
If performance problems can be identified
early changes can be implemented to
achieve intended strategic objectives
Customers

Staff

STRATEGY

An unbalanced wheel
will roll neither fast nor far
(Vadim Kotelnikov)

Finance

Operations

Balanced strategy framework: McKinsey 7-s framework

Shared Values: core values of the company

that are evidenced in the corporate culture and
the general work ethic

Strategy: the plan devised to maintain and

build competitive advantage over the
competition

Structure: the way the organization is

structured and who reports to whom

Style: the style of leadership adopted

Staff: the employees and their general

capabilities

Skills: the actual skills and competencies of

the employees

Systems: the daily activities and procedures

that staff members engage in to get the job
done

Balanced strategy
4 areas of equal importance to be balanced
1. Customers - customer satisfaction i.e. keeping them happy, there is

a limited number of customers and competition is never far away

2. Staff people are most important resource of a business; key to
success is through recruitment, training, mentoring and rewarding
appropriately
3. Operations cost effective operations required for all service and
manufacturing businesses; productivity, efficiency and quality
4. Finance - once the other three components in the balance are working
successfully, the financial component will also begin to improve

2 models to help an organisation balance its strategies

.McKinsey 7 ss
.Balanced Scorecard

Balanced scorecard

A balanced scorecard is a performance management tool which is

gives an holistic view of an organisation by integrating both financial
and non-financial parameters
Joined up thinking

It can be used to significantly improve the implementation of

objectives and strategies
Establishes targets with owners and timing against all key actions i.e.

SMART targets

It provides a mechanism for controlling and monitoring the

organisational progress

It is a communications device to keep team members up-to-date

It helps in translating strategy into operational and measurable actions

and achieve strategic implementation

Balanced strategy framework: Balanced scorecard

What is important for our
shareholders?

How do customers
perceive us?

Are we innovative
and ready for the
future?

What internal processes

can add value?

Adapted from Robert S. Kaplan and David P.

Norton, Using the Balanced Scorecard as a
Strategic Management System, Harvard
Business Review (January-February 1996): 76.

Balanced scorecard

4 areas of the scorecard:

Customers: Measures customers' satisfaction and their performance

requirements
Financial: Tracks financial requirements and performance.
Internal business process: Measures your critical-to-customer
process requirements
Knowledge, education, and growth: Focuses on how employees are
educated, how to gain and capture knowledge, and how to use it to
maintain a competitive edge

These four elements have to be measured, analysed, and improved

together in order for the business to thrive
The key to successful scorecards is to keep it a live document i.e.

continuously monitor and report performance

Thank You!

Questions
?

Chris Boulton
c.boulton@worc.ac.uk

A Balanced Strategy

A practical guide to completing a balanced scorecard:

Allan Mackay. A practitioners guide to the balanced scorecard
(2005), Chartered Institute of Management Accountants.
http://www.cimaglobal.com/Documents/Thought_leadership_docs/tech_resrep_a_practitioners_gui
de_to_the_balanced_scorecard_2005.pdf