Planning and Strategy: The future of a firm

Guest Lecture Planning and Strategy: The future of a firm

What is Strategic Planning? • Strategic planning is long-term planning that focuses on the organization as a whole. The question is what must be done in the long term to attain organizational goals. • Strategy is defined as a broad and general plan developed to reach long-term objectives. Strategy is actually the end result of strategic planning. A strategy must be consistent with organizational objectives, which in turn must be consistent with organizational purpose.

Strategic Process • It is the process of ensuring that an organization possesses and benefits from the use of an appropriate organizational strategy. The process is generally thought to consist of five sequential and continuing steps: • Environmental analysis • Establishment of an organizational direction • Strategy formulation • Strategy implementation • Strategy control

Feedback Step 1 Environmental Analysis General Operating Internal Step 2 Establishing Organizational Direction Mission Objectives Step 3 Strategy Formulation Step 4 Strategy Implementation Step 5 Strategy Control

Environment Analysis • Environmental analysis is the study of the organizational environment to pinpoint environmental factors that can significantly influence organizational operations. • Managers commonly perform environmental analysis to help them understand what is happening both inside and outside their organizations. They can then increase the probability that the organizational strategies they develop will appropriately reflect the organizational environment.

Environmental Factors • The general environment is the level of an organization’s external environment that contains components normally having broad long-term implications for managing the organization; its components are economic, social, political, legal, and technological. Several concepts are important in the study of the general environment. • Economics is the science that focuses on understanding how people of a particular community or nation produce, distribute and use various goods and services.

The social component is part of the general environment that describes the characteristics of the society in which the organization exists. Demographics are the statistical characteristics of a population. Social values are the relative degrees of worth society places on the manner in which it exists and functions. Over time, demographics and social values change. • The political component is the part of the general environment related to government affairs. The legal component refers the legislation, and the existing sets of laws and regulations. The technology component includes new approaches to producing goods and services.

The operating environment is the level of the organization’s external environment that contains components normally having relatively specific and immediate implications for managing the organization. Major components include customers, competition, labour, suppliers, and international issues. The international component is the operating environment segment that is composed of all the factors relating to the international implications of organizational operations.

The internal environment is the level of an organization’s environment that exists inside the organization and normally has immediate and specific implications for managing the organization. In broad terms, the internal environment includes marketing, finance, and accounting. From a more specific management viewpoint, it includes planning, organizing, influencing, and controlling within the organization.

Establishing Organizational Direction • The organization mission is the purpose for which, or the reason why, an organization exists. Organizational mission is a very broad statement of organizational direction and is based upon a thorough analysis of information generated through environmental analysis. A mission statement is a written document developed by management, normally based on input by managers as well as non-managers, which describes and explains the organization’s mission. • Organizational objectives must reflect and flow naturally from an organizational mission.

The Chinese University of Hong Kong • To be acknowledged locally, nationally and internationally as a first-class research university whose bilingual and bicultural dimensions of student education, scholarly output and contribution to the community consistently meet standards of excellence. • To assist in the preservation, creation, application and dissemination of knowledge by teaching, research and public service in a comprehensive range of disciplines, thereby serving the needs and enhancing the well-being of the citizens of Hong Kong, China as a whole, and the wider world community.

PCCW • Attract the best talent as the employer of choice • Create and capture growth opportunities in the global New Economy • Deliver innovative services that enhance the lifestyles and businesses of our customers • Be the preferred partner to develop and propel focused businesses that achieve our vision • Be the pre-eminent channel for prudent institutional investment

Changes of Vision and Mission • Julius Rosenwald acquired the control of Sears, Roebuck & Co., in 1985. He started the regular, factual mail-order catalog and adopted the policy of “satisfaction guaranteed or your money back”. Sears became the world largest mail order plant at the earlier 20th century. • By the mid 1920s, major highways were built to link up cities passing through rural areas. Farmers were no longer isolated, since automobiles became affordable. General Robert E. Wood developed the vision of “quality at a good price—the mass merchandiser for middle America.” • By the 1970s, new entrepreneurs recognised much earlier than Sears the concept of discount merchandising goods. Sam Walton’s Wal-Mart stores emphasise value for customers. Sears has been replaced by Wal-Mart as America’s largest merchandiser

Organizational Objectives • Organisational objectives are the targets set out for the organization. Organisational input, process, and output are required to reach organisational objectives. Organisational objectives reflect the purpose (mission) of the organisation. • Peter F. Drucker indicates that the very survival of a management system may be endangered if management emphasises only a profit objective. This single objective emphasis encourages managers to take action that will make money today with little regard for how a profit will be made tomorrow.

Peter Drunker proposed a multi-objective framework: • Marketing standing: Market share is the ratio of dollar sales of an organisation in a particular market to the total sales of all competitive products and services in that market. • Innovation: Most successful companies, especially in the areas of technology where most engineers will work, are continually searching for new products and services. 3M, for example, requires of its 40-odd divisions that at least 25% of sales be of products introduced in the last five years.

Productivity: Productivity measures an organisation’s ability to produce more goods and services per unit of input (labour, materials, and investment). • Physical & financial resource: An organisation needs to establish goals for the resources (plant, equipment, inventory, and capital) it needs to perform effectively. • Profitability: The profitability of an organisation is essential to its continuation, and the desired level should be set explicitly as an objective against which to measure organisation success. • Managerial performance & development: Since good management is the key to organisational success, effective firms plan carefully to assure that managers will be available in the years ahead in the quality and quantity needed for the organisation to prosper.

Worker performance & attitude: Today’s more educated work force has much to offer the company that knows how to motivate it and challenge it effectively. • Social responsibility: Every organisation has responsibilities as a “corporate citizen” that extend beyond the legal and economic requirements. These include responsibility to customers, employees, suppliers, community, and society as a whole. The organisation that does not at least take responsibility for its effect on the environment deserves to be penalised by society

Strategy Formulation Tools • Strategy formulation is the process of determining appropriate courses of action for achieving organizational objectives and thereby accomplishing organizational purpose. Tools commonly used are: • Critical question analysis • SWOT analysis • Business portfolio analysis • Porter’s model for industry analysis

Critical Question Analysis • Critical question analysis is a strategy development tool that consists of answering basic questions about the present direction and environment, and actions that can be taken to achieve organizational objectives in the future. Four basic questions are typically addressed: • What are the purposes and objectives of the organization? • Where is the organization presently going? • In what kind of environment does the organization now exist? • What can be done to better achieve organizational objectives in the future?

SWOT Analysis • SWOT analysis is a strategy development tool that matches internal organizational strengths and weaknesses with external opportunities and threats. • A strength is something a company is good at doing or a characteristic that gives it an important capability. A company’s internal strengths usually represent competitive assets. • A weakness is something a company lacks or does poorly or a condition that puts it at a disadvantage. A company’s internal weaknesses usually represent competitive liabilities.

Strengths and Weaknesses • Successful strategists seek to capitalise on what a company does best. One of the “trade secrets” of first-rate strategic management is consolidating a company’s technological, production, and marketing know-how into core competencies that enhance its competitiveness. A core competence is something a company does especially well in comparison to its competitors. Typically, a core competence relates to a set of skills, expertise in performing particular activities, or a company’s scope and depth of technological know-how. It resides in a company’s people, not assets.

Examples of Strengths and Weaknesses Potential Internal Strengths • Core competencies in key areas • Adequate financial resources • Well-thought-of by buyers • An acknowledged market leader • Well-conceived functional area strategies • Access to economies of scale • Insulated from strong competitive pressures • Proprietary technology • Cost advantages • Better adverting campaigns • Product innovation skills • Proven management • Ahead on experience curve • Better manufacturing capability • Superior technological skills • Others? Potential internal weaknesses • No clear strategic direction • Obsolete facilities • Lack of managerial depth and talent • Missing some key skills or competencies • Poor track record in implementing strategy • Plagued with internal operating problems • Falling behind in R&D • Too narrow a product line • Weak market image • Weak distribution network • Below average marketing skills • Unable to finance needed changes in strategy • Higher overall unit costs relative to key competitors

Opportunities • Marketing opportunity is a big factor in shaping a company’s strategy. Not all industry opportunities are relevant to a company. The industry opportunities most relevant to a particular company are those that offer important avenues for profitable growth, those where a company has the most potential for competitive advantage, and those which the company has the financial resources to pursue.

Threats • Threats can stem from the emergence of cheaper technologies, rivals’ introduction of new or better products, the entry of low-cost foreign competitors into a company’s market stronghold, new regulations that are more burdensome to a company than to its competitors, vulnerability to a rise in interest rates, the potential of a hostile takeover, unfavourable demographic shifts, adverse changes in foreign exchange rates, etc.

Examples of Opportunities and Threats Potential External Opportunities • Ability to serve additional customer groups or expand into new markets or segments • Ways to expand product line to meet broader range of customer needs • Ability to transfer skills or technological know-how to new products or businesses • Integrating forward or backward • Falling trade barriers in attractive foreign markets • Complacency among rival firms • Ability to grow rapidly because of strong increases in market demand • Emerging new technologies • Others? Potential External Threats • Entry of lower-cost foreign competitors • Rising sales of substitute products • Slower market growth • Adverse shifts in foreign exchange rates and trade policies of foreign governments • Costly regulatory requirements • Vulnerability to recession and business cycle • Growing bargaining power of customers or suppliers • Changing buyer needs and tastes • Adverse demographic changes • Other?

Business Portfolio Analysis • Business Portfolio Analysis is the development of business related strategy based primarily on the market share of businesses and the growth of markets in which businesses exist. Two business portfolio tools are the BCG Growth-Share Matrix and the GE Multifactor Portfolio Matrix. • The BCG Growth-Share Matrix: The Boston Consulting Group (BCG) developed and popularised a portfolio analysis tool that helps managers develop organizational strategy based upon market share of businesses and the growth of markets in which businesses exist.

The first step is identifying the organizational strategic business units (SBUs). A strategic business unit is a significant organization segment that is analysed to develop organizational strategy aimed at generating future business or revenue. A SBU is a single business or collection of related businesses, has its own competitors, has a manager, and can be independently planned for.

The next step is to categorize each SBU within one of four matrix quadrants: • Stars have a high share of a high-growth market and typically need large amounts of cash to support their rapid and significant growth. • Cash cows have a large share of a market that is growing only slightly. • Question marks have a small share of a high-growth market. In this case, it is uncertain what management should do. • Dogs have a relatively small share of a low-growth market.

The BPA Framework High Question Marks Stars Market Growth Rate Dogs Cash Cows Low Low High Relative Market Share

Limitations of BPA • Although this has been widely used, it suffers several pitfalls. The matrix does not consider such factors as • various types of risk associated with product development, • threats that inflation and other economic conditions can create in the future, and • social, political, and ecological pressures.

The GE Multifactor Portfolio Matrix • This matrix helps managers develop organizational strategy that is based primarily on market attractiveness and business strengths.

Business Strength High Medium Low 5 4 3 2 1 4 High Industry Attractiveness Medium 3 I – Invest/grow S – Selective Investment H – Harvest/divest Low 2

Each of the organization’s businesses or SBUs is plotted on a matrix in two dimensions: Industry attractiveness and business strength. • Industry attractiveness might be determined by such factors as the number of competitors in an industry, the rate of industry growth, and the weakness of competitors within an industry. • Business strengths might be determined by such factors as a company’s financially solid position, its good bargaining position over suppliers, and its high level of technology use.

Circles represent a company line of business or SBU. In a circle, a shaded portion represents the proportion of the total SBU market that a company has captured. A company has to determine its strategy in each circle. Circles at the low and right most section of the matrix are candidate for divestitute.

Michael E. Porter’s Competitive Model • We show a five forces model of competition: • The rivalry among competing sellers in the industry • The market attempts of companies in other industries to win customers over to their own substitute products • The potential entry of new competitors • The bargaining power and leverage exercisable by suppliers of inputs • The bargaining power and leverage exercisable by buyers of the products

Firms in other industries offering substitute products Competitive pressures coming form the market attempts of outsiders to win buyers over to their products. RIVALRY AMONG COMPETING SELLERS Competitive forces created by jockeying for better market position and competitive edge Competitive pressures growing out of ability to exercise bargaining power and leverage. Competitive pressures growing out of ability to exercise bargaining power and leverage. Suppliers of Key Inputs Buyers Competitive pressures coming from the threat of entry of new rivals. Potential New Entrants

Rivalry • Rivalry emerges because one or more competitors see an opportunity to better meet customer needs or is under pressure to improve its performance. The big complication in most industries is that the success of any one firm’s strategy hinges on what strategies its rivals employ and the resources rivals are willing and able to put behind their strategic efforts. Also the intensity and pressure of competition shift over time. Regardless of the industry, several common factors seem to influence the tempo of rivalry among competing sellers:

Rivalry intensifies as the number of competitors increases and as competitors become more equal in size and capabilities. • Rivalry is usually stronger when demand for the product is growing slowly. • Rivalry is more intense when industry conditions tempt competitors to use price cuts or other competitive weapons to boost unit volume. • Rivalry is stronger when customers’ costs to switch brands are low.

Rivalry is stronger when one or more competitors is dissatisfied with the market position and launches moves to bolster its standing at the expense of rivals. • Rivalry increases in proportion to the size of the payoff from a successful strategic move. • Rivalry tends to be more vigorous when it costs more to get out of a business than to stay in and compete.

Rivalry becomes more volatile and unpredictable the more diverse competitors are in terms of their strategies, personalities, corporate priorities, resources, and countries of origin. • Rivalry increases when strong companies outside the industry acquire weak firms in the industry and launch aggressive, well-funded moves to transform their newly acquired competitors into major market contenders.

New Entrants • New entrants to a market bring new production capacity, the desire to establish a secure place in the market, and sometimes substantial resources with which to compete. The degree of threats from new entrants depends on the nature of barriers of entry. There are several types of entry barriers: • Economies of scale: Scale economies deter entry because they force potential competitors either to enter on a large scale basis or to accept a cost disadvantage. • Inability to gain access to technology and specialised know-how.

The existence of learning and experience curve effects: When lower unit costs are partly or mostly a result of experience in producing the product and other learning benefits, new entrants face a cost disadvantage. • Brand preferences and customer loyalty. • Capital requirements. • Cost disadvantages independent of size. • Access to distribution channels. • Regulatory policies, Tariffs and trade restrictions.

Substitute • Firms in one industry are quite often in close competition with firms in another industry because their respective products are good substitutes. Competitive pressures from substitute products operate in several ways. Their price is a ceiling. Their presence allow customers to compare quality and performance. Their threats depends on switching cost.

Suppliers • Whether the suppliers to an industry are a weak or strong competitive force depends on market conditions in the supplier industry and the significance of the item they supply. Suppliers have market power only when supplies become tight and users are so anxious to secure what they need. Suppliers have less leverage when the industry they are supplying is a major customer

Customers • The competitive strength of buyers can range from strong to weak. The bigger buyers are and the larger the quantities they purchase, the more clout they have in negotiating with sellers. Buyers also gain power when the costs of switching to competing brands or substitutes are relatively low.

Strategy Formulation • Based on Porter’s model, three generic strategies may be used: • Differentiation is a strategy that focuses on developing a product or products that customers perceive as being different from products offered by competitors. Differentiation includes uniqueness in such areas as product quality, design, and level of after-sale service. • Cost leadership is a strategy that focuses on producing products more cheaply than competitors can. • Focus is a strategy that emphasizes targeting a particular customer. For instance, magazine publishers commonly use a focus strategy in offering their products to specific customers

As the result of the BCG Growth-Share Matrix, and the GE Multifactor Portfolio Matrix, four forms of strategies may arise: • Growth is a strategy to increase the amount of business that an SBU is currently generating. The growth strategy is generally applied to start SBUs or question mark SBUs that have the potential to become stars. Management generally invests substantial amounts of money to implement this strategy and may even sacrifice short-term profit to build long-term gain. A company may also pursue a growth strategy by purchasing an SBU from another organization.

Stability is a strategy to maintain or slightly improve the amount of business that an SBU is generating. This strategy is generally applied to cash cows, since these SBUs are already in an advantageous position. • Retrenchment is a strategy to strengthen or protect the amount of business a strategic business unit is currently generating. This strategy is generally applied to cash cows or stars that are beginning to lose market share . • Divesture is a strategy adopted to eliminate an SBU that is not generating a satisfactory amount of business and that has little hope of doing so in the near future. The organization may sell or close down the SBU in question.

Strategy Implementation • Strategy implementation is putting formulated strategies into action. The successful implementation requires four basic skills: interacting skill, allocating skill, monitoring skill, and organizing skill.

Strategy Control • Strategic control consists of monitoring and evaluating the strategy management process as a whole to ensure that it is operating properly. Strategic control focuses on the activities involved in environmental analysis, organizational direction, strategy formulation, strategy implementation, and strategy control itself.

Planning and Strategy: The future of a firm