Strategic management-Module 3

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Strategic Management

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Module 3 Strategy Formulation

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Chapter Mission, Vision & Goals & Organisational Assessment

Vision & Mission – An introduction:

Vision & Mission – An introduction An organization’s vision & mission act as guidelines for strategy formulation The process of strategy involves articulating a vision for the organization, translating the vision into a mission that defines the organization’s purpose, converting the vision into performance objective, detailing each objective into specific goals & formulating tactics & strategies for accomplishing the goal

Vision statement :

Vision statement A strategic vision points an organisation in a particular direction, charts a strategic path for it to follow in preparing for the future, & moulds organizational identity A strategic Vision is a roadmap of a company’s future – providing specifics about technology & customer focus the geographic & product markets to be pursued the capabilities it plans to develop & the kind of company that the management is trying to create The company’s vision is a description of what the organization is trying to do & to become

Vision statement :

Vision statement Vision is a powerful motivation & keeps an organization moving forward in the intended direction Utility of vision increases immensely if it percolates, is understood & is accepted by all down the line As such, the top corporate leader should share the vision conceived by him with employees, customers, suppliers, investors etc.. to help him interpret, refine & make it operational

Vision statement:

Vision statement The vision needs to be communicated effectively as a first step to its actual implementation The vision needs to be specific so that scope for different interpretation is minimized The vision of an organization is what insiders of the organization create or perceive. However, vision should also reflect the concern of other stakeholders such as shareholders, customers, the local community & society in order to be effective

Essentials of a Vision statement:

Essentials of a Vision statement Clarity Reachable,achievable Brevity The vision statement should be built around certain core values – should spell out the core purpose of the organisation

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Mission statement The term “mission” is defined as “the fundamental & enduring purpose of an organization that sets it apart from other organization of a similar nature” It is the description of an organization’s reasons for existence indicates what it is trying to achieve & in what field The mission identifies the scope of the company’s operations, describes the company’s product, market, technological area of thrust & reflects the values & priorities of its strategic decision makers

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Mission statement Following are some of the essential components of a mission statement Customers – Who are the firm’s customers? Products or services – What are the firm’s major products or services? Markets – Geographically, where does the firm compete? Technology – Is the firm technologically current? Concern for survival, growth & profitability – Is the firm committed to growth & financial soundness? Philosophy – What are the basic beliefs, values, aspirations & ethical priorities of the firm? Self – concept – What is the firm’s distinctive competence or major competitive advantage? Concern for public image – Is the firm responsive to social, community & environmental concerns? Concern for employees – Are employees a valuable asset of the firm?

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Mission statement Organizations carefully develop a mission statement for the following reasons To ensure unanimity of purpose within the organisation To provide a basis for aligning organizational resources To establish a general tone or organizational climate To specify organizational purposes & translation of these purposes into objectives in such a way that cost, time & performance parameters can be assessed & controlled

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Mission statement Thus, a company’s Mission statement is typically focussed on its present business scope – “ who we are & what we do”. It broadly describes an organization’s present capabilities, customer focus, activities & present make-up. ie it states what customers it serves, what need it satisfies & what type of product it offers Mission statements come in various form but the most effective are those that are direct, memorable & precise Eg : Google – “To organize the world’s information and make it universally accessible and useful”. Wal-Mart - “To give ordinary folk the chance to buy the same thing as rich people.”

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Difference between Vision & Mission The chief concern of a strategic vision is “where we are going”, where as Mission statement, tends to deal with a company’s present business scope- “who we are and what we do” Mission statement answers the question “What is our business” while Vision statement answers the question “What do we want to become?”

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Objectives An objective indicates the result that an organisation expects to achieve in the long run The organisation may or may not achieve the desired result, but the chances of doing so are greater if the objectives are framed & understood properly Objectives serve as reference points to concentrate resources & efforts They determine what action to take today to obtain results tomorrow In highly competitive environment, the ultimate objective of a firm to survive & grow successfully & out-beat the rivals

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Objectives Profit objective is the most important objective for any business as this is the only way by which it can protect its capital To earn profit, a firm has to set multiple objectives in key result areas like market share, quality of service, new product development & even social responsibilities Objectives are expressed qualitatively as well as quantitatively Eg : profitability objectives may be stated qualitatively in terms of profits, return on investment ,earning per share & quantitatively in the form of ‘to increase market share to 20% within 5 years’

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Objectives - Role Objectives serve the following functions Legitimacy Objectives describe the purpose of the organisation so that people know what it stands for & will accept its existence & continuance Thus, objectives help to legitimize the presence of organisation in its environment Direction Objectives provide guidelines for organisational efforts They keep attention focused on common purposes Coordination Objectives keep activities on the right track They make behaviour more rational, more coordinated & more effective as everyone knows the accepted goals to work toward

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Objectives - Role Objectives serve the following functions Benchmark for success Objectives provide a sound basis for evaluating the performance of an organisation They help the management to exercise effective control over the operations of the organisation & ensure that the organisation is moving satisfactorily in the required direction Motivation Objectives encourage employees to work with zeal for accomplishment of targets They feel satisfied when they achieve the targets set They need not wait for guidance & decisions as they have clearly defined purposes before them

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Objectives - Characteristics Objectives have the following features Objectives form a hierarchy Socio-economic purpose Targets for individuals Departmental objectives Divisional objectives Goals Long-term objectives Mission

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Objectives - Characteristics Objectives have the following features Objectives form a hierarchy The hierarchy begins with a broad statement of purpose & concludes with very specific goals Objectives are arranged in such a manner that each sub-objective contributes to the achievement of its immediately higher objective Objectives at the upper levels tend to be less specific & quantified than those at the lower levels & serve as a foundation for setting objectives at lower levels

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Objectives - Characteristics Objectives have the following features Objectives form a network Objectives interlock in a network fashion. This implies that objectives are established for every department & every individual in an organisation, these subsidiary objectives must contribute to meet the basic objectives of the total organisation If the various objectives do not support one another, people may pursue goals that may be good for their own function, but may be detrimental to the company as a whole

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Objectives - Characteristics Objectives have the following features Multiplicity of objectives Organisations pursue multiple objectives as they have to meet internal as well as external challenges effectively Long & short-range objectives Objectives are usually related to time Long- range objectives extending over 5 or more years are the ultimate or ‘dream’ objectives for the organisation Short -range & medium-range objectives reflect immediate, attainable goals Short -range & medium-range objectives are the means for achieving long-range objectives

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Goals Goals ar short-term objectives expressed in a specific dimension They are usually very specific & concrete They are expressed in precise terms as quantitatively as possible Goals are always time-oriented eg : ‘to bring out the new product by January 2015’ They are established whenever the top management wishes to guide activity, set standard for performance & measure performance Goals should cover every important activity for which performance is to be evaluated Goals must be challenging, attainable,specific & measurable

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Goals - Features Are derived from objectives Offer a standard for measuring performance Are expressed in concrete terms Are time-bound

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Goals - types Official goals/Stated goals Are general aims of the organistion as described in a MOA,charter or annual report They reflect what the organisation should be doing & perform the function of legitimising the organisation in its environment Generally reflect the basic philosophy of the organisation & are expressed in abstracted phraseology. Eg : achieving ‘sufficient profits’ & ‘market leadership’ are very ambiguous & cannot be understood by the lower level people Operative goals Indicate what the organisation is really attempting to do They may be inferred from the actual operating policies of the organisation & help the managers to focus attention & reduce uncertainty

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Goals - types Operational goals Are used by supervisory personnel/managers to influence the behaviour of subordinates & to measure their performnec

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Difference between Objectives & Goals Objectives & goals conceptually differ in terms of time spectrum, focus & measurement Objectives have long-term time range, but, goals are time bound Objectives are less specific than goals & focus more on the external environment of the firm, whereas, goals are expressed in terms of conditions existing within the firm – commitment of firm’s resources to achieve specified target Accomplishment of goals can be measured more objectively than objectives because the former are comparatively more specific & quantitative

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Environmental scanning Environmental scanning is a process by which organisations monitor their internal & external environment to spot opportunities & threats affecting their business The basic purpose is to help management determine the future direction of the organisation Environmental scanning – Information sources International sources World Development Report World Economic Survey etc.. Government sources Census of India Five Year Plan Reports Economic Survey etc.. Other sources Bombay Stock Exchange Directory Newspapers & Magazines CRISIL research reports

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Environmental scanning Environmental scanning helps the strategic manager time to anticipate opportunities & plan alternative responses to hose opportunities It also helps them develop an early warning system to prevent threats or develop strategies which can turn a threat to the organisation’s advantage It is important to scan the environment, before the planning exercise is carried out

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Organisational assessment using organisational & environment information (SWOT analysis) Organisational assessment is the process of monitoring an organisation’s internal environment to identify strengths & weaknesses that may influence the firm’s ability to achieve goals The purpose of analyzing an organisation’s internal environment is to identify & evaluate an organisation’s strengths & weaknesses SWOT analysis is a widely used technique through which managers create a quick overview of the company’s strategic situation

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Organisational assessment using organisational & environment information (SWOT analysis) It is based on the assumption that an effective strategy derives from sound ‘fit’ between a firm’s internal resources (strengths & weaknesses) & its external situation (opportunities & threats) A good ‘fit’ maximizes a firm’s strengths & opportunities & minimizes its weaknesses & threats Terminology Strengths Implies competitive advantage & other distinct competencies, which a firm enjoys in the market place A strength is only a strength if it is something that is of value to customers & is also something which a firm does better than its competitors

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Terminology Weaknesses Refers to an inherent limitation that creates a strategic disadvantage for a firm These are internal forces that need to be studies & assessed from time to time Opportunities Result from external market changes or existing needs which are poorly served Threats Challenges posed by an unavoidable trend or development that can lead to erosion of the company’s position The list of strengths & weaknesses have to be evaluated after they have been identified. What makes an opportunity or a threat relevant is its importance to the firm & its likelihood of occuring

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SWOT analysis - Usefulness SWOT analysis helps managers find answers to questions like What the firm is good at doing? What the firm is weak at doing? What kind of opportunities need to be exploited keeping the strengths & weaknesses of the firm in mind? What strategies have to be chalked out to ward off environmental threats? etc.. Successful businesses build on their strengths, correct weaknesses and protect against vulnerabilities and threats. Just as important, they have an eye on their overall business environment and spot new opportunities faster than competitors

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Objective setting The purpose of management is to lead & motivate employees towards accomplishment of an organization’s objectives Ideally, an organisation’s objectives, both long-range as well as short-range, should be compatible with its culture & should Match its strengths to opportunities Eliminate weaknesses in the organisation Minimise threats to the organisation The type of objectives that are established depend on The nature of a particular organisation Mix of objectives from prior years Degree of achievement of prior objectives

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Objective setting An organisation’s objectives result from the interaction of the following factors Organisational culture Competitive analysis Environmental scanning & forecasting Internal organisation analysis (refer to the diagram from the text book)

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Objective setting – process Following are the steps involves in the process of objective setting The objective setting process starts at the top of the organisation with a statement of mission Long-range & short-range objectives are set to achieve this mission. These objectives set the performance targets for the entire organisation Long-range & short-range objectives are set for each SBU, major division or operating unit Long-range & short-range objectives are set for functional areas within each SBU, major division or operating unit The same process continues through the rest of the organisational hierarchy (refer to the diagram from the text book)

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Chapter Tools of strategic management

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Tools of strategic management An important element of corporate strategy is to identify ways & means of optimum deployment of resources available with a company When a firm’s divisions compete in different industries, a separate strategy often must be developed for each business During the 1960’s & 1970’s, a number of management consulting companies developed a series of conceptual techniques whose stated purpose was to help the top officers of diversified corporations better manage their portfolio of businesses Portfolio analysis is primarily concerned with balancing of a company’s investment in different products/industries

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The Boston Consulting Group (BCG) Matrix The matrix compares various businesses in an organisation’s portfolio on the basis of relative market share & market growth rate Relative market share is determined by the ratio of a business’s market share compared to the market share of its largest rival Market growth rate The combination of high & low market share & high & low business growth rate provide four categories for a corporate portfolio

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The Boston Consulting Group (BCG) Matrix Market Growth Rate Relative Market Share Low Low High High Stars Dogs Cash Cows Question Marks/ Problem child

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The Boston Consulting Group (BCG) Matrix Stars SBUs that have a high share of a high growth market Generate as well as large amounts of cash to support their rapid & significant growth Have additional growth potential … hence profits should be ploughed back into this business for future growth & profits The appropriate strategy for STARS is to maintain the market share through large doses of investment & consolidate the company’s high relative competitive position

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The Boston Consulting Group (BCG) Matrix Cash Cows SBUs that have a high market share in a slowly growing market Low market growth rate implies that the cash demand for the business would be low Hence, they tend to generate more cash than is necessary to maintain their market position Provides financial base for the company & can be ‘milked’ to provide cash for other riskier & struggling businesses These businesses have less future potential as these are mature businesses with low growth rate

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The Boston Consulting Group (BCG) Matrix Question Mark/Problem Child SBUs that have a small share of a high growth market A risky business, since there is already a leader in that business Requires lot of funds to invest in plant, equipment & personnel to keep pace with the fast-growing market The term Question Mark is well-conceived, because at every stage, the organisation has to think hard about whether to keep investing funds in the business ( to turn it into a star) or to get out

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The Boston Consulting Group (BCG) Matrix Dogs SBUs that have a relatively small share of a low-growth market Low market share normally means poor profits They may barely support themselves, or they may even drain cash resources that other SBUs have generated Usually, d ogs are harvested, divested or liquidated

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The Boston Consulting Group (BCG) Matrix After the SBUs have been plotted on the growth-share matrix, the next step is to evaluate whether the portfolio is healthy & well-balanced A balanced portfolio has a number of stars & cash cows & not too many question marks or dogs Depending on the position of each SBU, 4 basic strategies can be formulated while building a balanced portfolio Heavily invest in STARS as high market share & high industry growth rate mean higher probability of future success Maintain CASH COWS as they provide resources for future growth investment in question marks & stars Use selective resource allocation for QUESTION MARKS to convert them into stars Liquidate or divest DOGS that are not worth investing in to improve their position

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The Boston Consulting Group (BCG) Matrix As time passes, SBUs change their position in the growth-share matrix Successful SBUs have a life cycle They s tart as question marks, become stars, then cash cows, & finally dogs towards the end of their life cycle Therefore, companies should keep an eye not only on the current positions of their businesses, but, also on their moving positions Each business should be examined as to where it was in past years & where it will probably move in the years ahead If the expected journey of a business is going to be a tough one, alternative plans must be kept ready Thus, growth-share matrix becomes a useful planning framework for strategists

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BCG Matrix - Shortcomings As time passes, SBUs change their position in the growth-share matrix Successful SBUs have a life cycle They s tart as question marks, become stars, then cash cows, & finally dogs towards the end of their life cycle Therefore, companies should keep an eye not only on the current positions of their businesses, but, also on their moving positions Each business should be examined as to where it was in past years & where it will probably move in the years ahead If the expected journey of a business is going to be a tough one, alternative plans must be kept ready Thus, growth-share matrix becomes a useful planning framework for strategists