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Corporate Planning
A formalized approach to the formulation of corporate strategy.
Helps to ensuring that sufficient attention is given to:
• Deciding on strategic issues.
• Facilitating the co-ordination of the planning process.
For all organisations, the formulation of long-term corporate strategy is extremely important.
• The design and selection of future areas of activity is crucial to the success and survival.
• Frequently difficult, due to:
• A high degree of uncertainty and complexity.
• An almost infinite number of possible courses of action.
Nature of strategic issues:
Strategic issues addressed in corporate planning differ from the more common day-to-day problems
and decisions facing line managers.
• Strategic issues usually involve taking a long-term rather than a short-term view.
• Actions considered usually have enduring effects which may be difficult to reverse.
• Strategic issues usually have a wide impact on the majority of an organization's activities.
• Strategic issues often involve fundamental consideration of organizational objectives as well
as the development of ways of achieving those objectives.
Typical strategic issues include:
• Expansion or contraction of the product range.
• Major expansion or contraction of manufacturing capacity.
• Diversification into new product or market areas.
• Securing raw material supplies for the long term.
• The acquisition of key skills and resources.
It involves taking a long-term view of the whole organisation’s activities.
Senior management must:
• Consider trade-offs between:
• Long- and short-term profitability.
• Profit generation, sales growth, and market-share acquisition.
• Make decisions about the type of business they want to pursue.
Strategic issues must be approached seriously, since the long-term success or viability of the
organization may be jeopardized.
• It is too easy to give priority to the more well-defined operating and administrative problems
of running the organization.
The corporate planning process:
The term' corporate planning' is usually defined as:
‘A formalised process whereby the totality of strategic issues faced by an organization
is examined in a systematic way’.
A more realistic view is to regard it as:
‘A process for co-ordinating decisions about individual strategic issues into a
consistent set of strategies for the organization as a whole’.
It relies upon the formulation of a coherent framework:
• Within which detailed strategies and plans can be developed.
• To provide a method for co-ordinating these decisions into more coherent patterns.
2
Steps in the corporate planning process
• Establishing a set of strategic objectives for the organization.
• Assessing the organization's current strategies and capabilities.
• Assessing the organization's environment in order to identify opportunities and threats facing it.
• Carrying out a Gap Analysis:
• The gap between projected performance with current strategies and the strategic
objectives is estimated.
• Identifying or designing alternative strategies to close the anticipated gap in performance.
• Evaluating the strategic options and choosing appropriate strategies for implementation.
Establishing a set of strategic objectives:
• A key feature prior to formulating strategy.
• To ensures that strategies are directed to a common purpose.
For the private-sector business organisations the single primary objective is inevitably the
optimization of the long-term rate of return on shareholders' capital.
However,
• Where there are a number of objectives, the problem of formulating strategy is complicated.
• Since the relative importance of each objective must be taken into account.
• Where objectives are inconsistent, choice of strategies may require trade-offs between
conflicting objectives.
A vital consideration for senior management is profitability:
• A firm must make a profit:
• In order to survive.
• To avoid shareholder dissatisfaction
• To ensure that there are sufficient funds generated for renewal and growth.
Other influences on organizational activity:
• Personal objectives of managers and other employees.
• To enhance job security, social status, personal power, or the value of share options.
• May lead managers to be more interested in increasing turnover or the size of the
organization than actually seeking to increase profits.
• Legal constraints and responsibilities to society.
Assessing the organization's capabilities, its environment, and prospects for each area of business
activity:
• Should be a continuous process.
The overall process covers two tiers of operation:
• A general level of analysis over-viewing all areas of business activity
followed by
• More detailed attention to strategy within each business area.
• A refined assessment of its performance and capabilities with a view to formulating
strategies for competing in its market area.
Based on assessments of each unit:
• Some areas of business will be developed
• Some will be maintained.
• Some will be contracted or divested.
The techniques used to make such decisions are termed, collectively, 'strategic portfolio analysis'.
Subsequently, formulated strategies are implemented and the organization's performance monitored
against the corporate plan.
3
Criteria for selecting strategy:
The corporate strategist ideally wishes to identify strategies which have the desirable characteristics
of high return and low risk.
Desirable strategies are simultaneously consistent with both the organization and its environment.
• Having a superb production facility for a product is no good if the market for it is falling.
• If the environment changes, or is expected to change, a successful organization will change its
activities to maintain a good 'fit' with the new environment.
Internal consistency:
Strategies undertaken by an organization will be internally consistent to the extent that they are
consistent with:
• The organizational objectives
• Other activities and available resources.
On the basis that the corporate objective is expressed in terms of a target rate of return on
shareholders' capital, a primary consideration in selecting strategy is the return promised by each
strategy.
• Projects or strategies should only be undertaken if the expected return from them is
sufficiently high to reward the firm for the level of risk undertaken.
• The total of the various strategies of the firm must promise the required rate of return on
shareholders' capital.
• Activities which promise low returns but are relatively risk-free may be balanced
by activities which promise returns higher than the required return on
shareholders' capital.
When considering whether a strategy is consistent with other activities and available resources,
there are two basic issues:
• Identification of strengths and weaknesses.
• Assessment of resource availability.
Resources include:
• Intangible assets such as:
• Management skills or know-how
• Patents
• Reputation
• Access to markets
• Tangible assets such as:
• Land
• Plant
• Machinery
• Manpower,
• Finance.
Strengths and weaknesses relate to resources which are important to the future success of the
organization.
Preferred strategies are those that exploit or build upon existing strengths:
• For example, producing a range of products based on a secure patent.
Next preferred are strategies that seek to remedy existing weaknesses:
• For example, acquiring a firm with strong marketing skills to complement an existing
business that is primarily production-orientated.
Least preferred are strategies that rely on areas of weakness:
• For example, expanding a supermarket chain nationally from a local base when the local
business already lacks an adequate management control system.
4
A useful way of assessing an organization’s strengths and weaknesses is to develop a 'Competence
Profile' of the its major skills and resources rated with respect to other organizations with the same
capabilities.
Items that may be subject to appraisal in this way include:
• Physical resources:
• Buildings – size, age, location, suitability
• Machinery – age, efficiency, suitability
• Stocks – levels, mix, adequacy
• Liquidity
• Patents, licences
• Human resources:
• Employees – number, age distribution, location, suitability
• Specific skills –production, R&D, marketing, sales force, management skills,
entrepreneurial skills, planning skills
• Systems:
• Production – planning, control
• Quality control
• Purchasing
• Accounting – costing, cash management
• Distribution channels
• Payment systems
• Project appraisal
• Planning
• Intangibles:
• Goodwill
• Reputation
• Brand names
• Image
• Organisation culture
• Knowledge and experience
Consideration of strengths and weaknesses will provide some indication of the desirable and
undesirable characteristics of possible strategies.
• But the choice of strategies will be restricted by the level of resources available to the
organization.
A common failing is to be excessively optimistic about the resources required and their availability.
• A frequent cause of failure in small businesses which may seek to expand too rapidly with
inadequate financial backing to:
• Meet increased working capital requirements.
• Weather unforeseen downturns in business conditions.
External consistency:
Strategies undertaken by an organization are externally consistent to the extent that they take into
account the main characteristics of the relevant business environment.
• Requires an appraisal of the relevant business environment.
• Can be determined by considering the scope of existing activities in terms of the
following aspects:
• Natural (the physical and biological environment)
• Social/cultural
• Technological
• Political
• Economic.
5
Within each of these aspects it is possible to consider:
• Important events
• Trends, both general and relating to the industry
• Constituent demands which are the expectations of different" pressure groups in each area.
An important reason for undertaking environmental analysis is to identify major opportunities and
threats facing the organization.
• Preferred strategies seek to exploit opportunities or counter threats to future performance.
Flexibility:
In a highly uncertain environment it is sensible to adopt a flexible overall strategic position.
• To pursue strategies which maintain the ability to rapidly switch products, markets, sources of
supply, etc.
A flexible corporate strategy is likely to be one which:
• Pursues several different product-markets simultaneously
• Expects product life to be limited;
• Stresses innovation to keep ahead of the competition
• Requires products to become profitable in the short term.
Flexibility may be desirable only to the extent that it is warranted by the nature of an organization's
environment.
• High flexibility is appropriate in a turbulent environment.
• Low flexibility is more appropriate in a stable environment.
Organizations with low flexibility in a turbulent environment should either:
• Adopt a more flexible strategic posture.
• Try to operate in a more stable environment by:
• Seeking out more stable markets.
• Seeking long-term contracts
• Lobbying for government protection or regulation of an industry.
Organizations with highly flexible operations in a stable environment should either:
• Pursue a strategy of market penetration leading to increasing specialization.
• Seek higher returns by competing effectively in more turbulent, higher-risk product-markets.
Synergy:
This relates to 'strategic efficiency'.
• It is a measure of the relative advantage of carrying out two or more activities together rather
than separately.
An organisation wishing to expand should look at new activities which have a high level of synergy
with respect to existing activities.
Different types of synergy all leading economies of scale:
• Sales synergy.
• Using common distribution channels, advertising, or sales administration for a number
of products.
• Operating synergy.
• Manufacturing products which use the same raw materials or components.
• Using the same machinery or personnel to manufacture several different products.
• Investment synergy.
• Using the same plant to manufacture different products permits greater utilization of
plant and lower unit costs.
• Manufacturing products which make use of existing R&D expertise.
• Management synergy.
• Choosing activities which exploit particular available management skills or resources.
Strategic portfolio analysis:
A number of related techniques to assist in identifying desirable strategies when an organization is
built up of a group of Strategic Business Units (SBUs).
Each technique involves plotting each SBU on a two-dimensional matrix according to:
• It profitability or competitive capability.
• Its attractiveness in each area of business.
The relative size and location of each SBU on the matrix is then used to:
• Determine the general investment strategy of the firm.
• Identify SBUs where investment should be increased or decreased.
The Growth-Share Matrix: - developed by the Boston Consulting Group (often known as the 'BCG
matrix') – Figure 1.
Cash
StarsHigh Cows
Relative
market
share
6
It is the most widely known approach for analysing a firm's portfolio of SBUs
Individual SBUs are plotted according to:
• The growth rate of the market in which each competes.
• Its relative market power.
SBUs with high relative market share and high growth markets:
• Referred to as ‘stars'.
• Usually show positive levels of profit.
• But their high growth rate and need for reinvestment may not result in a positive
cash flow for the firm.
• Highly desirable as they represent excellent opportunities for long-term growth
and profitability.
SBUs with high relative market share in low-growth industries:
• Referred to as 'cash cows'.
• Typically have established market positions in mature industries with low costs and low
demand for investment funds.
• Able to generate significant cash surpluses for the firm.
Dogs
Question
MarksLow
High Low
Market growth rate
FIG 1 The BCG growth-share matrix
7
SBUs with low relative market share in high-growth industries:
• Referred to as 'question marks'.
• Usually developing businesses with inferior market positions.
• Usually unable to generate sufficient cash to sustain a high level of growth from current
levels of activity.
• If successful - should develop into star SBUs.
• If unsuccessful – should be divested from the company.
SBUs with low relative market share in low-growth markets:
• Referred to as 'dogs'.
• Because low-growth markets generally provoke strong competitor reactions - may not
be very profitable.
• May not be feasible to increase market share.
• Profits generated may be insufficient to maintain existing market share.
All the company’s SBUs are plotted on the matrix with a view to identifying general strategies for
each based on the following guidelines:
• Maintain the position of cash cow SBUs but avoid excessive reinvestment.
• Consolidate the market share of star SBUs.
• Invest in the most promising question-mark SBUs to acquire more market share.
• Try to pursue cash-generating strategies with the least promising question-mark SBUs and all
dog SBUs.
If this is not achievable, then eliminate them from the portfolio.
For long-term profitability a firm should aim to always have a balanced portfolio of:
• Developing businesses, (question marks).
• Strong, high-growth businesses (stars).
• Established, profitable businesses (cash cows).
Over time:
• Successful question-mark SBUs will become stars.
• Star SBUs may become cash cows as particular industries mature and growth rate falls off.
• Without carefully management, today's cash cow SBUs may become tomorrow's dogs.
The growth-share matrix provides only a partial strategic analysis of a firm's SBU portfolio.
• E.g. a separate assessment must be made of the availability of manpower, plant, and finance
before strategies implied by the matrix can be implemented.
The growth-share matrix has been criticised as being too simplistic:
• Market growth rate is not a good proxy for industry attractiveness.
• Relative market share is inadequate as a determinant of competitive position.
• The matrix implicitly assumes that firms with the highest market share earn the highest
profits.
• Not necessarily the case.
8
A fundamental problem with strategic portfolio analysis is the division of the organization into
SBUs which can be regarded as separate business activities for strategic planning purposes.
• Ambiguity of definition
• No hard and fast rules for identifying SBUs
• Could be defined on:
• Product market segments
• Geographical location
• Distribution channels
• Products which have:
• Interdependent prices
• Similar competitors
• Similar customers
• The same R&D requirements or marketing expertise.
• Degree of interdependence between SBUs:
• The SBUs of all organisations will be interdependent to some extent.
• Makes it difficult to define them as separate entities.
• Avoidance of an excessive number of SBUs.
• Thought that about 45 SBUs is a practical upper limit for carrying out strategic portfolio
analysis
Competitive Strategy:
For each individual SBUs, strategy formulation must focus on how the firm should compete in each
business area or product-market.
• Requires a more detailed appraisal of the chosen product-market which centres on the
competitive forces operating in that product-market.
Competitive forces in a particular industry:
• Rivalry among existing competitors in the industry.
• The threat of new competitors entering the industry.
• The threat from substitute products.
• The bargaining power of buyers.
• The bargaining power of suppliers.
Rivalry amongst existing competitors:
• There will be pressure to pursue strategies involving:
• Price competition
• Advertising campaigns
• Product introductions
• Enhancements.
Threat of new entrants:
• Other firms may be deterred from entering the market if there are significant 'barriers to
entry'.
• High start-up costs.
• Strong existing competition.
• Product patents.
• Lack of general experience.
• Lack of established lines of supply or distribution channels.
Threat from substitute products:
• A substitute product is one that performs the same function and meets the same market needs
as an existing product.
9
Bargaining power of buyers and suppliers:
• A particular buyer or buyer group is powerful where:
• Purchases are concentrated or large in volume relative to producer sales.
• Products purchased are of a standard nature.
• It is easy to switch to a new supplier.
• Full information about demand, market prices, supplier costs, and so on is available.
• The conditions which make a supplier or supplier group powerful mirror those making buyers
powerful.
Therefore, theoretically:
• Buying should involve:
• Large volumes.
• Raw materials or components of a standard nature.
• Allowing easy switching between suppliers.
• Selling should:
• Not be too heavily concentrated in small numbers of large orders.
• Products should be differentiated.
• Services or contracts should be offered which make switching to other suppliers
difficult.
Competitive advantage:
A firm should seek to develop some form of 'competitive advantage'.
• Identify ways to give it a strong competitive position.
• Identify particular properties of products and markets.
• Applying capabilities and resources in particular product-markets.
Examples:
• A large firm might seek product-market areas with a high cost of entry:
• Thereby minimizing disruptive competition from small, low-cost firms.
• A firm with a strong R&D capability might seek to develop a breakthrough product offering a
dramatic performance- or price-advantage over competing ones.
Implementing strategy: - Not easy
Depends greatly upon the commitment of staff responsible for implementing the strategies.
Strategy formulation and implementation is often complicated by political activity within the
organization.
• Individuals often seek to impose their own personal goals or views on organizational
decisions. Individuals or groups with similar interests form coalitions which bargain or
negotiate with rival coalitions in the organization.
Political activity is a major reason for delays and 'recycling' in any decision process. It can lead to
the:
• Withholding, distortion, and manipulation of relevant information
• The pursuit of inconsistent strategies.
Chief executives:
• Rarely have sufficient formal power to pursue the goals unilaterally
• Depends on their skills in communication, bargaining, and persuasion.
Found best to:
• Introduce strategies gradually over a period of time by instilling a general sense of direction.
• Develop them in stages through a series of incremental steps.
• Implement portions of a strategy in areas where there is support or comparative indifference
to the new strategy.
• As more and more parts are implemented, opposition to the remaining changes tends to
crumble.
• Pressure for the changes is brought to bear from the altered areas of the
organization.
10
Effective planning systems::
It is most important to integrate corporate planning into the overall management process.
This implies a need to:
• Obtain senior management's commitment to corporate planning.
• Ensure that the nature of corporate planning is well understood by management.
• To understand that:
• It is not just extended budgeting.
• The benefits are more of a long-term than a short-term nature.
• Build commitment to planning.
• For example by linking management reward systems to strategic effort.
• Encourage and develop participation in the planning effort.
• Allocate sufficient time and resources to planning.
The format of plans is also regarded as important.
• Should be as simple as possible for the given circumstances.

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Corporate planning

  • 1. 1 Corporate Planning A formalized approach to the formulation of corporate strategy. Helps to ensuring that sufficient attention is given to: • Deciding on strategic issues. • Facilitating the co-ordination of the planning process. For all organisations, the formulation of long-term corporate strategy is extremely important. • The design and selection of future areas of activity is crucial to the success and survival. • Frequently difficult, due to: • A high degree of uncertainty and complexity. • An almost infinite number of possible courses of action. Nature of strategic issues: Strategic issues addressed in corporate planning differ from the more common day-to-day problems and decisions facing line managers. • Strategic issues usually involve taking a long-term rather than a short-term view. • Actions considered usually have enduring effects which may be difficult to reverse. • Strategic issues usually have a wide impact on the majority of an organization's activities. • Strategic issues often involve fundamental consideration of organizational objectives as well as the development of ways of achieving those objectives. Typical strategic issues include: • Expansion or contraction of the product range. • Major expansion or contraction of manufacturing capacity. • Diversification into new product or market areas. • Securing raw material supplies for the long term. • The acquisition of key skills and resources. It involves taking a long-term view of the whole organisation’s activities. Senior management must: • Consider trade-offs between: • Long- and short-term profitability. • Profit generation, sales growth, and market-share acquisition. • Make decisions about the type of business they want to pursue. Strategic issues must be approached seriously, since the long-term success or viability of the organization may be jeopardized. • It is too easy to give priority to the more well-defined operating and administrative problems of running the organization. The corporate planning process: The term' corporate planning' is usually defined as: ‘A formalised process whereby the totality of strategic issues faced by an organization is examined in a systematic way’. A more realistic view is to regard it as: ‘A process for co-ordinating decisions about individual strategic issues into a consistent set of strategies for the organization as a whole’. It relies upon the formulation of a coherent framework: • Within which detailed strategies and plans can be developed. • To provide a method for co-ordinating these decisions into more coherent patterns.
  • 2. 2 Steps in the corporate planning process • Establishing a set of strategic objectives for the organization. • Assessing the organization's current strategies and capabilities. • Assessing the organization's environment in order to identify opportunities and threats facing it. • Carrying out a Gap Analysis: • The gap between projected performance with current strategies and the strategic objectives is estimated. • Identifying or designing alternative strategies to close the anticipated gap in performance. • Evaluating the strategic options and choosing appropriate strategies for implementation. Establishing a set of strategic objectives: • A key feature prior to formulating strategy. • To ensures that strategies are directed to a common purpose. For the private-sector business organisations the single primary objective is inevitably the optimization of the long-term rate of return on shareholders' capital. However, • Where there are a number of objectives, the problem of formulating strategy is complicated. • Since the relative importance of each objective must be taken into account. • Where objectives are inconsistent, choice of strategies may require trade-offs between conflicting objectives. A vital consideration for senior management is profitability: • A firm must make a profit: • In order to survive. • To avoid shareholder dissatisfaction • To ensure that there are sufficient funds generated for renewal and growth. Other influences on organizational activity: • Personal objectives of managers and other employees. • To enhance job security, social status, personal power, or the value of share options. • May lead managers to be more interested in increasing turnover or the size of the organization than actually seeking to increase profits. • Legal constraints and responsibilities to society. Assessing the organization's capabilities, its environment, and prospects for each area of business activity: • Should be a continuous process. The overall process covers two tiers of operation: • A general level of analysis over-viewing all areas of business activity followed by • More detailed attention to strategy within each business area. • A refined assessment of its performance and capabilities with a view to formulating strategies for competing in its market area. Based on assessments of each unit: • Some areas of business will be developed • Some will be maintained. • Some will be contracted or divested. The techniques used to make such decisions are termed, collectively, 'strategic portfolio analysis'. Subsequently, formulated strategies are implemented and the organization's performance monitored against the corporate plan.
  • 3. 3 Criteria for selecting strategy: The corporate strategist ideally wishes to identify strategies which have the desirable characteristics of high return and low risk. Desirable strategies are simultaneously consistent with both the organization and its environment. • Having a superb production facility for a product is no good if the market for it is falling. • If the environment changes, or is expected to change, a successful organization will change its activities to maintain a good 'fit' with the new environment. Internal consistency: Strategies undertaken by an organization will be internally consistent to the extent that they are consistent with: • The organizational objectives • Other activities and available resources. On the basis that the corporate objective is expressed in terms of a target rate of return on shareholders' capital, a primary consideration in selecting strategy is the return promised by each strategy. • Projects or strategies should only be undertaken if the expected return from them is sufficiently high to reward the firm for the level of risk undertaken. • The total of the various strategies of the firm must promise the required rate of return on shareholders' capital. • Activities which promise low returns but are relatively risk-free may be balanced by activities which promise returns higher than the required return on shareholders' capital. When considering whether a strategy is consistent with other activities and available resources, there are two basic issues: • Identification of strengths and weaknesses. • Assessment of resource availability. Resources include: • Intangible assets such as: • Management skills or know-how • Patents • Reputation • Access to markets • Tangible assets such as: • Land • Plant • Machinery • Manpower, • Finance. Strengths and weaknesses relate to resources which are important to the future success of the organization. Preferred strategies are those that exploit or build upon existing strengths: • For example, producing a range of products based on a secure patent. Next preferred are strategies that seek to remedy existing weaknesses: • For example, acquiring a firm with strong marketing skills to complement an existing business that is primarily production-orientated. Least preferred are strategies that rely on areas of weakness: • For example, expanding a supermarket chain nationally from a local base when the local business already lacks an adequate management control system.
  • 4. 4 A useful way of assessing an organization’s strengths and weaknesses is to develop a 'Competence Profile' of the its major skills and resources rated with respect to other organizations with the same capabilities. Items that may be subject to appraisal in this way include: • Physical resources: • Buildings – size, age, location, suitability • Machinery – age, efficiency, suitability • Stocks – levels, mix, adequacy • Liquidity • Patents, licences • Human resources: • Employees – number, age distribution, location, suitability • Specific skills –production, R&D, marketing, sales force, management skills, entrepreneurial skills, planning skills • Systems: • Production – planning, control • Quality control • Purchasing • Accounting – costing, cash management • Distribution channels • Payment systems • Project appraisal • Planning • Intangibles: • Goodwill • Reputation • Brand names • Image • Organisation culture • Knowledge and experience Consideration of strengths and weaknesses will provide some indication of the desirable and undesirable characteristics of possible strategies. • But the choice of strategies will be restricted by the level of resources available to the organization. A common failing is to be excessively optimistic about the resources required and their availability. • A frequent cause of failure in small businesses which may seek to expand too rapidly with inadequate financial backing to: • Meet increased working capital requirements. • Weather unforeseen downturns in business conditions. External consistency: Strategies undertaken by an organization are externally consistent to the extent that they take into account the main characteristics of the relevant business environment. • Requires an appraisal of the relevant business environment. • Can be determined by considering the scope of existing activities in terms of the following aspects: • Natural (the physical and biological environment) • Social/cultural • Technological • Political • Economic.
  • 5. 5 Within each of these aspects it is possible to consider: • Important events • Trends, both general and relating to the industry • Constituent demands which are the expectations of different" pressure groups in each area. An important reason for undertaking environmental analysis is to identify major opportunities and threats facing the organization. • Preferred strategies seek to exploit opportunities or counter threats to future performance. Flexibility: In a highly uncertain environment it is sensible to adopt a flexible overall strategic position. • To pursue strategies which maintain the ability to rapidly switch products, markets, sources of supply, etc. A flexible corporate strategy is likely to be one which: • Pursues several different product-markets simultaneously • Expects product life to be limited; • Stresses innovation to keep ahead of the competition • Requires products to become profitable in the short term. Flexibility may be desirable only to the extent that it is warranted by the nature of an organization's environment. • High flexibility is appropriate in a turbulent environment. • Low flexibility is more appropriate in a stable environment. Organizations with low flexibility in a turbulent environment should either: • Adopt a more flexible strategic posture. • Try to operate in a more stable environment by: • Seeking out more stable markets. • Seeking long-term contracts • Lobbying for government protection or regulation of an industry. Organizations with highly flexible operations in a stable environment should either: • Pursue a strategy of market penetration leading to increasing specialization. • Seek higher returns by competing effectively in more turbulent, higher-risk product-markets. Synergy: This relates to 'strategic efficiency'. • It is a measure of the relative advantage of carrying out two or more activities together rather than separately. An organisation wishing to expand should look at new activities which have a high level of synergy with respect to existing activities. Different types of synergy all leading economies of scale: • Sales synergy. • Using common distribution channels, advertising, or sales administration for a number of products. • Operating synergy. • Manufacturing products which use the same raw materials or components. • Using the same machinery or personnel to manufacture several different products. • Investment synergy. • Using the same plant to manufacture different products permits greater utilization of plant and lower unit costs. • Manufacturing products which make use of existing R&D expertise. • Management synergy. • Choosing activities which exploit particular available management skills or resources.
  • 6. Strategic portfolio analysis: A number of related techniques to assist in identifying desirable strategies when an organization is built up of a group of Strategic Business Units (SBUs). Each technique involves plotting each SBU on a two-dimensional matrix according to: • It profitability or competitive capability. • Its attractiveness in each area of business. The relative size and location of each SBU on the matrix is then used to: • Determine the general investment strategy of the firm. • Identify SBUs where investment should be increased or decreased. The Growth-Share Matrix: - developed by the Boston Consulting Group (often known as the 'BCG matrix') – Figure 1. Cash StarsHigh Cows Relative market share 6 It is the most widely known approach for analysing a firm's portfolio of SBUs Individual SBUs are plotted according to: • The growth rate of the market in which each competes. • Its relative market power. SBUs with high relative market share and high growth markets: • Referred to as ‘stars'. • Usually show positive levels of profit. • But their high growth rate and need for reinvestment may not result in a positive cash flow for the firm. • Highly desirable as they represent excellent opportunities for long-term growth and profitability. SBUs with high relative market share in low-growth industries: • Referred to as 'cash cows'. • Typically have established market positions in mature industries with low costs and low demand for investment funds. • Able to generate significant cash surpluses for the firm. Dogs Question MarksLow High Low Market growth rate FIG 1 The BCG growth-share matrix
  • 7. 7 SBUs with low relative market share in high-growth industries: • Referred to as 'question marks'. • Usually developing businesses with inferior market positions. • Usually unable to generate sufficient cash to sustain a high level of growth from current levels of activity. • If successful - should develop into star SBUs. • If unsuccessful – should be divested from the company. SBUs with low relative market share in low-growth markets: • Referred to as 'dogs'. • Because low-growth markets generally provoke strong competitor reactions - may not be very profitable. • May not be feasible to increase market share. • Profits generated may be insufficient to maintain existing market share. All the company’s SBUs are plotted on the matrix with a view to identifying general strategies for each based on the following guidelines: • Maintain the position of cash cow SBUs but avoid excessive reinvestment. • Consolidate the market share of star SBUs. • Invest in the most promising question-mark SBUs to acquire more market share. • Try to pursue cash-generating strategies with the least promising question-mark SBUs and all dog SBUs. If this is not achievable, then eliminate them from the portfolio. For long-term profitability a firm should aim to always have a balanced portfolio of: • Developing businesses, (question marks). • Strong, high-growth businesses (stars). • Established, profitable businesses (cash cows). Over time: • Successful question-mark SBUs will become stars. • Star SBUs may become cash cows as particular industries mature and growth rate falls off. • Without carefully management, today's cash cow SBUs may become tomorrow's dogs. The growth-share matrix provides only a partial strategic analysis of a firm's SBU portfolio. • E.g. a separate assessment must be made of the availability of manpower, plant, and finance before strategies implied by the matrix can be implemented. The growth-share matrix has been criticised as being too simplistic: • Market growth rate is not a good proxy for industry attractiveness. • Relative market share is inadequate as a determinant of competitive position. • The matrix implicitly assumes that firms with the highest market share earn the highest profits. • Not necessarily the case.
  • 8. 8 A fundamental problem with strategic portfolio analysis is the division of the organization into SBUs which can be regarded as separate business activities for strategic planning purposes. • Ambiguity of definition • No hard and fast rules for identifying SBUs • Could be defined on: • Product market segments • Geographical location • Distribution channels • Products which have: • Interdependent prices • Similar competitors • Similar customers • The same R&D requirements or marketing expertise. • Degree of interdependence between SBUs: • The SBUs of all organisations will be interdependent to some extent. • Makes it difficult to define them as separate entities. • Avoidance of an excessive number of SBUs. • Thought that about 45 SBUs is a practical upper limit for carrying out strategic portfolio analysis Competitive Strategy: For each individual SBUs, strategy formulation must focus on how the firm should compete in each business area or product-market. • Requires a more detailed appraisal of the chosen product-market which centres on the competitive forces operating in that product-market. Competitive forces in a particular industry: • Rivalry among existing competitors in the industry. • The threat of new competitors entering the industry. • The threat from substitute products. • The bargaining power of buyers. • The bargaining power of suppliers. Rivalry amongst existing competitors: • There will be pressure to pursue strategies involving: • Price competition • Advertising campaigns • Product introductions • Enhancements. Threat of new entrants: • Other firms may be deterred from entering the market if there are significant 'barriers to entry'. • High start-up costs. • Strong existing competition. • Product patents. • Lack of general experience. • Lack of established lines of supply or distribution channels. Threat from substitute products: • A substitute product is one that performs the same function and meets the same market needs as an existing product.
  • 9. 9 Bargaining power of buyers and suppliers: • A particular buyer or buyer group is powerful where: • Purchases are concentrated or large in volume relative to producer sales. • Products purchased are of a standard nature. • It is easy to switch to a new supplier. • Full information about demand, market prices, supplier costs, and so on is available. • The conditions which make a supplier or supplier group powerful mirror those making buyers powerful. Therefore, theoretically: • Buying should involve: • Large volumes. • Raw materials or components of a standard nature. • Allowing easy switching between suppliers. • Selling should: • Not be too heavily concentrated in small numbers of large orders. • Products should be differentiated. • Services or contracts should be offered which make switching to other suppliers difficult. Competitive advantage: A firm should seek to develop some form of 'competitive advantage'. • Identify ways to give it a strong competitive position. • Identify particular properties of products and markets. • Applying capabilities and resources in particular product-markets. Examples: • A large firm might seek product-market areas with a high cost of entry: • Thereby minimizing disruptive competition from small, low-cost firms. • A firm with a strong R&D capability might seek to develop a breakthrough product offering a dramatic performance- or price-advantage over competing ones. Implementing strategy: - Not easy Depends greatly upon the commitment of staff responsible for implementing the strategies. Strategy formulation and implementation is often complicated by political activity within the organization. • Individuals often seek to impose their own personal goals or views on organizational decisions. Individuals or groups with similar interests form coalitions which bargain or negotiate with rival coalitions in the organization. Political activity is a major reason for delays and 'recycling' in any decision process. It can lead to the: • Withholding, distortion, and manipulation of relevant information • The pursuit of inconsistent strategies. Chief executives: • Rarely have sufficient formal power to pursue the goals unilaterally • Depends on their skills in communication, bargaining, and persuasion. Found best to: • Introduce strategies gradually over a period of time by instilling a general sense of direction. • Develop them in stages through a series of incremental steps. • Implement portions of a strategy in areas where there is support or comparative indifference to the new strategy. • As more and more parts are implemented, opposition to the remaining changes tends to crumble. • Pressure for the changes is brought to bear from the altered areas of the organization.
  • 10. 10 Effective planning systems:: It is most important to integrate corporate planning into the overall management process. This implies a need to: • Obtain senior management's commitment to corporate planning. • Ensure that the nature of corporate planning is well understood by management. • To understand that: • It is not just extended budgeting. • The benefits are more of a long-term than a short-term nature. • Build commitment to planning. • For example by linking management reward systems to strategic effort. • Encourage and develop participation in the planning effort. • Allocate sufficient time and resources to planning. The format of plans is also regarded as important. • Should be as simple as possible for the given circumstances.