Strategic Management - Some Lecture Notes.docx

Section 5 Grand Strategy Matrix •

All firms can be positioned in the matrix

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A firms divisions can also be positioned

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Based on two evaluative dimensions: 1. Competitive Position 2. Market (Industry) Growth

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Any industry with 5% annual growth can be considered to have rapid growth

Quadrant 1 1. Market Development 2. Market Penetration 3. Product Development 4. Forward integration 5. Backward Integration 6. Horizontal Integration 7. Related Diversification Quadrant 2 1. Market Development 2. Market Penetration 3. Product Development 4. Horizontal Integration 5. Divestiture 6. Liquidation Quadrant 3 1. Retrenchment 2. Related Diversification 3. Unrelated Diversification 4. Divestiture 5. Liquidation Quadrant 4 1. Related Diversification

2. Unrelated Diversification 3. Joint Ventures

Section 8 Red-Blue-Purple Ocean Strategy Competing in overcrowded industries is no way to sustain high performance The real opportunity is to create blue oceans of uncontested market space (Kim and Mauborgne, 2005) •

Red oceans represent all the industries that currently exist in the known market space where industry boundaries are defined and accepted and the rules of the game are to outperform rivals, achieve differentiation and competitive advantage – in order to survive

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Inevitably, as the market becomes ever more crowded, opportunities for growth and increasing profits reduce and firms need to become more innovative

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A Red Ocean Strategy is a business strategy based on competition

Red Oceans Refers To •

Industry boundaries defined and accepted

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Competitive rules of game known

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Firms try to outperform rivals; competition may be cutthroat

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Market space gets crowded, prospects for profits and growth reduce

Studying 150 companies in 30 industries they found that only 14% of the companies created new markets but in doing so they achieved significantly greater profits than the others •

They argue that these companies created a blue ocean – an unknown market space where competition is irrelevant, where demand is created rather than fought over and growth is both rapid and profitable

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Most blue oceans are created from within, not beyond, the red oceans of existing industries

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Incumbents often create blue oceans within their core businesses

Innovation can lead to market domination and this innovation is achieved by four types of breakthroughs – either separately or simultaneously: 1. Technological breakthrough 2. Business Model breakthrough 3. Design breakthrough

4. Process breakthrough

Blue Oceans Refers To •

Undefined market space, demand creation, opportunity for high profitable growth

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Most are created from within red oceans by expanding existing industry boundaries

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Rules of game waiting to be set

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Competition irrelevant or non-existent

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Blue ocean strategy is a market-creating strategy

Six Principles of Blue Ocean Strategy 1. Reconstruct market boundaries 2. Focus on the big picture, not the numbers 3. Reach beyond existing demand 4. Get the strategic sequence right 5. Overcome key organizational hurdles 6. Build execution into strategy

Purple Ocean Strategy •

Just as the Blue Ocean Strategy states that a Red Ocean Strategy (Competitive Strategy) does not guarantee success for the firm, a Purple Ocean Strategy claims the Blue Ocean Strategy cannot guarantee business success in the long-term since the blue ocean will ultimately turn red

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The Purple Ocean Strategy suggests that in today’s business world firms require both innovative ideas as well as a series of strategies to compete with rivalry and to remain functional in the long-term

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Most MNC, and large conglomerates are in this group of firms

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There are no permanent Blue Oceans – ultimately the ocean will become purple due to blue turning red, since they exist simultaneously

Red Ocean vs. Blue Ocean •

Compete in existing market space

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Beat the competition

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Exploit existing demand

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Make the value-cost trade-off

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Align with strategic choice of differentiation or low cost

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Create uncontested market space

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Make the competition irrelevant

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Create and capture demand

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Break the value-cost trade-off

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Align with strategic choice of differentiation and low cost

Red Blue vs. Purple Ocean •

Compete in existing market space but provide more for value

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Differentiate from the competition

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Exploit current customer base to reduce attrition, drive loyalty, promote word-of-mouth

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Break transactional mindset, to exceed expectations

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Align with strategic choice of differentiation with added value

Section 7 Competitive Advantage •

A firm has a competitive advantage over its rivals when its profitability is greater than the average profitability of all firms in its industry

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A firm has a sustainable competitive advantage when it is able to maintain above- average profitability over a number of years

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The primary objective of strategy is to achieve a sustainable competitive advantage, which in turn will result in superior profitability and profit growth

Distinctive Competencies •

Competitive advantage is based on distinctive competencies

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Distinctive competencies are firm-specific strengths that allow a firm to differentiate its products from those offered by rivals and/or achieve substantially lower costs than its rivals

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Distinctive competencies arise from two complementary sources: 1. Resources 2. Capabilities

Resources refer to the assets of the firm •

A firm’s resources can be divided into two types: a. Tangible b. Intangible

Resources are particularly valuable when they enable a firm to create strong demand for its products, and/or to lower its costs

Capabilities refer to a firm’s skills at coordinating its resources and putting them to productive use These skills reside in an organization’s rules, routines, and procedures, i.e., the style or manner through which it makes decisions and manages its internal processes to achieve organizational objectives Like resources, capabilities are particularly valuable if they enable a firm to create strong demand for its products and/or to lower its costs

Synergy between Resources and Capabilities •

For a firm to have a distinctive competency , it must at a minimum have either:

1. A firm-specific and valuable resource and the capabilities or skills necessary to take advantage of that resource, or 2. A firm-specific capability to manage the resources 3. A firm’s distinctive competency is strongest when it possesses both firm-specific and valuable resources, and firm-specific capabilities, to manage those resources 4. This strength in the competence is superior when it results in synergy between firm-specific valuable resources and firm-specific valuable capabilities

Role of Strategy •

Distinctive competencies shape the strategies that a firm pursues, which lead to competitive advantage and superior profitability

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However, it is also very important to realize that the strategies a firm adopts can build new resources and capabilities or strengthen the existing resources and capabilities, thereby enhancing the distinctive competencies

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The relationship between distinctive competencies and strategies is not a linear one; rather, it is reciprocal one in which distinctive competencies shape strategies, and strategies help built and create distinctive competencies

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Competitive advantage leads to superior profitability

Core Competence •

C. K. Prahalad and Gary Hamel introduced the concept in 1990

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They wrote that a core competency is ‘an area of specialized expertise that is the result of harmonizing complex streams of technology and work activity’

Strategic Competence •

Strategic competency is the competency of a firm to achieve and sustain a competitive advantage

Threshold Competences •

Threshold competences are activities, processes, and abilities that provide an entity with the capability to provide a product or service with features that are sufficient to meet customer needs

Resource Analysis •

Resource analysis is a strategic planning tool which considers:

(a) the resources required to support particular strategies, and those needed to gain competitive advantage, and (b) the required competencies to effectively use those resources •

A resource-based view of the firm is based on the view that strategic capability comes from competitive advantage, which comes in turn from the resources of the firm and the use of those resources (capabilities and competences)

Building Blocks of Competitive Advantage •

Four factors help a firm build and sustain competitive advantage:

1. Superior efficiency 2. Superior quality 3. Superior innovation, and 4. Superior customer responsiveness

Strategic Outsourcing •

Strategic outsourcing is the decision to allow one or more of a firm’s value-chain activities or functions to be performed by independent specialist firms

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When a firm chooses to outsource a value-chain activity, it is choosing to focus on a fewer number of value-creation activities to strengthen its business model

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If managers decide after evaluating the value chain that there are ‘noncore’ or ‘nonstrategic’ activities that when outsourced can provide differentiation or cost advantages, then, these activities are outsourced on long-term contractual basis

Benefits of Outsourcing •

Outsourcing has several advantages

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It can help a firm to:

1. Lower its cost structure 2. Increase product differentiation, and 3. Focus on the distinctive competencies that are vital to its long-term competitive advantage and profitability Outsourcing is the reverse of vertical integration

Business Process Outsourcing (BPO) •

BPO involves firms hiring other firms to takeover various parts of their functional operations like HR, information systems, payroll, accounting, customer service, and even marketing

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The reasons may be: a) It is less expensive b) It allows the firm to focus on its core business c) It enables the firm to provide better service

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Other advantages of an outsourcing strategy are: a) It allows the firm to align itself with ‘best-in-world’ suppliers who focus on performing the special task b) It provides the firm flexibility should customer needs shift unexpectedly, and c) It allows the firm to concentrate on other internal value chain activities critical to sustaining competitive advantage

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BPO is a means for achieving strategies that are similar to partnering and joint ventures

Risks of Outsourcing •

There are some risks associated with outsourcing:

1. A firm may lose its core competencies over time 2. The focus may shift to short term benefits of cost of doing business

3. The firm may become too dependent on outside suppliers 4. Proprietary information may leak to competitors through the suppliers 5. There may result a high cost of managing the outsourcing activity 6. There may result an increased complexity in the management of outsourcing

VRIO Analysis •

VRIO analysis is a tool that is used to analyse a firm’s internal resources

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VRIO analysis stands for four questions that ask if a resource is: 1. Valuable? 2. Rare? 3. Costly to imitate? 4. Firm organized to capture the value of the resources?

Section 9 Competing in Global Markets Firms that conduct business across national borders are called international (at least one foreign country, one continent) or multinational (several foreign countries, several continents) Strategic implementation can be more difficult because different cultures have different norms, values, and work ethics

Difference in Culture •

Cultural Complexity Varies in Different Regions Varies with Countries in the Same Region Varies within a Large Country Varies within a Large/Small Country with a High Population Varies in Any Country in Rural and Urban Areas

Differences in Demographics •

Variables like unemployment rates vary greatly across countries

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Unemployment rates are a good indicator of consumers’ disposable income for purchase

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The rates are also a good indicator of a country’s overall financial soundness and attractiveness for doing business

Differences in Markets •

A growing middle class is emerging in many geographies like China, India, and Indonesia

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Markets are shifting rapidly and in many cases converging in tastes, trends, and prices

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Labor Relations – laws affect bargaining power

Multi-Country Competition •

Core Concept:

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Multi-country competition exists when competition in one national market is not closely connected to competition in another national market – there is no global or world market, just a collection of self-contained country markets

Global Competition •

Core Concept:

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Global competition exists when competitive conditions across national markets are linked strongly enough to form a true international market and when leading competitors compete head to head in many different countries

Strategic Issues •

Issues in competitive strategy that apply to domestic companies apply also to companies that compete internationally

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But there are four strategic issues unique to competing across national boundaries:

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Whether to customize the firm's offerings in each different country market to match the tastes and preferences of local buyers or offer a mostly standardized product worldwide 2. Whether to employ essentially the same basic competitive strategy in all countries or modify the strategy country by country to fit the specific market conditions and competitive circumstances it encounters 3. Where to locate the company's production facilities, distribution centres, and customer service operations so as to realize the greatest locational advantages 4. How to efficiently transfer the company's resource strengths and capabilities from one country to another in an effort to secure competitive advantage

Strategy Options •

Once a firm has chosen to establish international operations, it has three basic options:

1) A think-local, act-local approach – is appropriate for industries where multi-country competition dominates 2) A think-global, act-global approach – works best in markets that are globally competitive or beginning to globalize 3) A combination think-global, act-local approach – can be used when it is feasible for a firm to employ essentially the same basic competitive strategy in all markets but still customize its product offering and some aspect of its operations to fit local market circumstances

Implementing Strategy across Countries •

Firms can use four basic strategies as they begin to market their products and establish production facilities in foreign markets:

1. A localization strategy – is oriented toward local responsiveness, and a firm decentralizes control to subsidiaries and divisions in each country in which it operates to produce and customize products to local markets, e.g., Ford, GM 2. An international strategy – is based on R&D, manufacturing, and marketing being centralized at home and all the other value creation functions being decentralized to national units, e.g., Mercedes-Benz and IBM operated in this mode, but today they are using the localization strategy 3. A global standardization strategy – is oriented towards cost reduction, with all the principal value creation functions centralized at the optimal global location, e.g., WalMart, McDonald’s, P&G 4. A transnational strategy – is focused so that it can achieve local responsiveness and cost reduction; some functions are centralized while others are decentralized at the global location best suited to achieve these objectives , e.g., Nestle, Unilever

Competing in Emerging Markets •

A multinational may face competition in an emerging market from other, existing or new entrant, multinationals; as well as, existing or new entrant, domestic players

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A domestic player, not used to foreign competition, may eventually find itself competing with one or more foreign players due to new government economic reforms

Strategies for Emerging Market Firms •

Most emerging market firms have assets that give them a competitive advantage mainly in their domestic market

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Some competitive assets may also be the basis for expansion into other markets

These two parameters – the strength of globalization pressures in an industry and the degree to which a firm’s assets are transferable internationally can guide a firm’s strategy

Assets Customized to Domestic Market •

Dodgers – focuses on a locally oriented link in the value-chain, enters a joint venture, or sells out to a multinational

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Defenders – focuses on leveraging local assets in market segments where multinationals are weak

Assets Transferable Abroad •

Contenders – focuses on upgrading resources and capabilities to match multinationals globally, often by keeping to niche markets

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Extenders – focuses on expanding into markets similar to those of the home base, using competencies developed at home

Section 10 Mergers and Acquisitions •

Mergers and acquisitions are a common way to pursue strategies – horizontal integration or global entry strategy

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A merger refers to two firms of about equal size combining to form one enterprise

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An acquisition refers to a large firm purchasing a small firm, or vice versa

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When a merger or acquisition is not desired by either firm it is termed as a takeover or hostile takeover

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If desired it is called a friendly merger or acquisition

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A leveraged buyout occurs when a firm’s shareholders are bought (buyout) by the firm’s management with the help of other private investors using borrowed funds (leverage)

Related mergers and acquisitions are more successful than unrelated ones

Types of Mergers •

There are three types of mergers from an economics point of view:

1. Horizontal mergers – two companies that are in direct competition and share the same product lines and markets ,i.e., it results in the consolidation of firms that are direct rivals, e.g., Tata Steel and Corus, Exxon and Mobil, Volkswagen and Rolls Royce and Lamborghini 2. Vertical merger – a firm and a customer firm or a firm and a supplier firm, i.e. merger of firms that have actual or potential buyer-seller relationship, e.g., Ford and Bendix 3. Conglomerate mergers – generally a merger between firms that do not have any common business areas or no common relationship of any kind

Potential Benefits of Mergers and Acquisitions

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Improve capacity utilization

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Better use of existing sales force

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Reduce managerial staff

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Gain economies of scale

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Smooth out seasonal trends in sales

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Gain access to new suppliers, distributors, customers, products, and creditors

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Gain new technology

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Reduce tax obligations

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Corporate synergy or better use of complimentary resources

Reasons why Mergers and Acquisitions Fail •

Integration difficulties

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Inadequate evaluation of target firm

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Large or extraordinary debt

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Inability to achieve synergy

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Too much diversification

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Managers overly focused on acquisitions

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Too large an acquisition

Strategic Alliances & Joint Ventures •

Strategic alliances are long-term agreements between two or more firms to jointly develop new products or processes that benefit each firm concerned

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It is an alternative to vertical integration

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In a short-term contract a firm uses a competitive bidding strategy

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Unlike short-term contracts, strategic alliances between a firm and its supplier are long-term cooperative relationships

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Both firms agree to make the necessary investments and work jointly to find ways to lower costs or increase quality and differentiation

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A strategic alliance becomes a substitute for vertical integration and allows both firms to benefit

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It avoids the bureaucratic costs that may arise from managerial inefficiencies that result when a firm owns its own suppliers

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Similarly, the component suppliers benefit because their business and profitability grow as the firms they supply grow

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They can invest their profits in ever more specialized assets

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A strategic alliance outsourcing arrangement does not preclude hard bargaining because both or all parties want to maximize their profits and reduce their risks

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A strategic alliance may involve outsourcing, information sharing, joint marketing, and joint R&D

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Strategic alliances with foreign partners have appeal from several angles: Gaining wider access to attractive country markets, allowing capture of economies of scale in production and/or marketing, filling gaps in technical expertise and/or knowledge of local markets, also saving on costs by sharing distribution facilities and dealer networks, helping gain agreement on important technical standards, and helping combat the impact of alliances that rivals have formed

Building Strategic Alliance Relationships •

Strategic alliance requires building enduring cooperative profitable relationships

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There are several strategies a firm can adopt to promote the success of a long-term cooperative relationship:

1. Hostage taking – the aligning partner demands a hostage investment from the firm, to guarantee it will keep its side of the bargain 2. Credible Commitment – is a believable promise or pledge to support the development of a long-term relationship between the firms 3. Maintaining Market Discipline – means holding some power over the alliance partner. A firm has two options against this happening. One is periodical renegotiation of a long-term contract, every three to five years. Second is parallel outsourcing policies – that is entering into long-term contracts with at least two suppliers for the same component

Joint Ventures •

A joint venture is a popular strategy that occurs when two or more firms form a temporary partnership or consortium for the purpose of capitalizing on a market opportunity

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Often the two or more firms form a new entity with shared equity ownership

Advantages of Joint Ventures •

Shared Vision

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Mutually Beneficial

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Equity Partnership – one side has management control

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Co-Managed – generally operations

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Requires Less Resources – reduces amount and risk of investment

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Know-How – can be swapped for equity

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Technology Transfer – may be a key component; training possibilities

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Leverage Local Marketing Capabilities – of partner

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Firm with limited resources can enter foreign markets

Disadvantages of Joint Ventures •

On the average, a joint venture lasts for about 10 years

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As the market situation changes, the original vision for the joint venture becomes incompatible for the partners

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Individual partners grow and mature in the market with diverging views on sourcing, operations, financing, and marketing strategies creating conflict in the JV

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A joint venture is a favorable global entry strategy

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A typical JV is one with a 50/50 stake, in which both partners own 50% stake and share management control

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In a 51% to 49% or unequal ownership split, the firm with the higher stake holds management control

Advantages of Joint Ventures in Global Markets 1. A firm can benefit from a local partner’s knowledge of a host country’s competitive conditions, culture, language, political and business systems 2. Sharing costs and risks when the development costs and risks are high

Disadvantages of Joint Ventures in Global Markets 1. A firm that enters into a JV risks giving control of its technology to its partner, e.g., the JV between Boeing and Mitsubishi for the 787 wide-bodied jet raised such fears •

Holding majority ownership can minimize this risk

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A firm can wall-off technology that is central to is core competence

2. The JV may not give the firm sufficient control over JV subsidiaries in order to realize its experience curve or location economies

Vertical Integration •

Firms that use horizontal integration to strengthen their business model and improve their competitive position also use the corporate-level strategy of vertical integration for the same purpose

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A firm pursuing a strategy of vertical integration expands its operations either backward into an industry that produces inputs for the firm’s products, as in backward vertical integration, or forward into an industry that uses, distributes, or sells the firm’s products, as in forward vertical integration

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Backward integration means moving into component parts manufacturing and raw material production

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Forward integration means moving into distribution and sales, i.e., retail

Defensive Strategies •

Defensive strategies include:

1. Retrenchment 2. Divestiture, and 3. Liquidation Retrenchment – occurs when a firm regroups its businesses through cost and asset reduction to reverse declining sales and profits •

Retrenchment can entail selling off land and buildings to raise needed cash, pruning product lines, closing marginal businesses, closing obsolete factories, automating processes, reducing the number of employees, and instituting expense control systems

Divestiture – selling a division or part of a firm is called divestiture •

Divestiture is often used to raise capital for further strategic acquisitions or investments

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Divestiture can be part of an overall retrenchment strategy to rid a firm of businesses that are unprofitable

Liquidation – selling all of a firm’s assets, in parts, for their tangible worth is called liquidation •

Liquidation can be an emotional strategy to implement

However, it is better to cease operations than continue to lose large sums of money

There are five basic defensive strategies that are market centric: 1. Retaliation strategies described by Porter as discipline, denying a base, and commitment are efforts to discourage rival firms from attacking 2. Commitment strategies include those that: Deter retaliation by communicating a commitment to unequivocally follow through on offensive moves

3. Government intervention strategies involve the use of political and legal tactics to prevent rival firms from changing the rules of the game 4. Strategy flexibility protects firm resources through the ability to move quickly out of declining markets into more prosperous ones 5. Avoidance strategies dodge confrontation by focusing on market segment of little interest to rival firms

Offensive Strategies An offensive strategy, is a competitive strategy in which a firm actively or aggressively pursues to change or alter the competitive environment in the industry, protect market share, or to pursue growth •

Corporate-level offensive strategies include:

1. Research and Development – a firm that is managed offensively invests heavily in R&D in an effort to stay ahead of the competition 2. Mergers and Acquisitions – a firm may acquire another firm to fuel its growth; or merge to deliver better shareholder value 3. Intensive Strategies – may also be considered as corporate-level offensive strategies, like: a) Product Development – new product in same market b) Market Development – current product in new market c) Market penetration – current product in current market

Other offensive strategies that are market centric are: 1. Direct Competition – sell a similar product at a lower price, introduce new features, launch comparison advertising, or go after market segments that are neglected by the competition It includes attacking the competitor in a: 1. Frontal attack – going against the competitor’s strengths with similar product, price, promotion, distribution, and quality 2. Flank attack – going against the competitor’s weaknesses, is less risky; competitor may be unable to defend 3. Bypass attack – overtaking the competitor by introducing new strategies or diversifying the product portfolio 4. Guerrilla attack – chasing markets where competitor has little to no presence 2. Strategic encirclement – dominating the market 3. Predatory pricing – forcing competition to exit by slashing prices over an extended period of time

Section 11 Strategy Evaluation and Control Strategy Evaluation and Control is the final stage in strategic management •

Managers particularly need to know when strategies are not working well, and strategy evaluation is the primary means for obtaining this information

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All strategies are subject to future modification because external and internal factors are constantly changing

Strategy Evaluation Activities •

Three fundamental strategy evaluation activities are:

1. Reviewing the external and internal factors that are the basis for current strategies – examining the underlying bases of a firm’s strategy 2. Measuring performance – comparing expected results with actual results, and 3. Taking corrective actions – taking corrective action to ensure that performance conforms to plans

Evaluation & Control Criteria Pre-Implementation Richard Rumelt offers four criteria that can be used to evaluate strategy: 1. Consistency – a strategy should not represent inconsistent goals and policies 2. Consonance – a strategy must represent an adaptive response to the changing external environment 3. Feasibility – a strategy must neither overtax resources not create new unsolvable problems 4. Advantage – a strategy must provide for the creation or maintenance of a competitive advantage in a selective area of activity

Process of Evaluating Strategies Post-Implementation •

Strategy evaluation activities should be performed on a continuing basis, rather than at the end specified periods of time or just after problems occur

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Evaluating strategies on a continuous rather than a periodic basis allows benchmarks of progress to be established and more effectively monitored

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Some strategies take years to implement; consequently, associated results may not become apparent for years

Strategy Evaluation Framework

1. Reviewing Bases of Strategy 2. Measuring Firm’s Performance 3. Taking Corrective Action

The Balanced Scorecard Developed in 1993 by Robert Kaplan and David Norton, and refined continually trough today, the Balanced Scorecard is a strategy evaluation and control technique •

Balanced Scorecard derives its name from the perceived need of firms to ‘balance’ financial measures that are often used exclusively in strategy evaluation and control with nonfinancial measures such as product quality and customer service

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The overall aim of the Balanced Scorecard is to ‘balance’ shareholder objectives with customer and operational objectives

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Financial measures and ratios are vitally important in strategic planning, but of equal importance are factors such as customer service, employee morale, product quality, pollution abatement, business ethics, social responsibility, community involvement, and other items

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A Balanced Scorecard for a firm is simply a listing of all key objectives to work towards, along with an associated time dimension of when each objective is to be accomplished, as well as, a primary responsibility or contact person, department, or division for each objective

It is a process that allows firms to evaluate strategies from four perspectives: 1. Financial performance 2. Customer knowledge 3. Internal business processes, and 4. Learning and growth The four building blocks of competitive advantage, i.e., superior efficiency, quality, innovation, and customer responsiveness can be part of a Balanced Scorecard evaluation Characteristics of an Effective Evaluation System

Strategy evaluation must meet several basic requirements to be effective •

First, strategy evaluation activities must be economical; too much information can be just as bad as too little, and too many controls can do more harm than good

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Second, strategy evaluation activities should be meaningful; they should specifically relate to a firm’s objectives

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Third, strategy evaluation activities should provide timely information; on occasion but in some instances information on a daily basis

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Fourth, strategy evaluation should be simple, not too cumbersome, and not too restrictive

Strategic Control Systems •

Strategic managers choose the firm’s strategies and structure they hope will allow the firm to use its resources most effectively to pursue its business model and create value and profit

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Then they create strategic control systems, tools that allow them to monitor and evaluate whether, in fact, their strategy and structure are working as intended, how they could be improved, and how they should be changed if they are not working

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Strategic control is also about how to create the incentives to keep employees motivated and focused on important problems that may confront the firm

An effective control system should have three characteristics: 1. It should be flexible enough to allow managers to respond as necessary to unexpected events 2. It should provide accurate information, thus giving a true picture of a firm’s performance 3. It should supply managers with the information in a timely manner because making decisions on the basis of outdated information is a recipe for failure

Types of Strategic Control Systems The Balanced Scorecard is a way to ensure that managers compliment the use of ROIC with other kinds of strategic controls to ensure they are pursuing strategies that maximize long-term profitability There are three additional types of control systems: 1. Personal control – is the desire to shape and influence the behavior of a person in a face-toface-interaction in the pursuit of a firm’s goals 2. Output control – is a system in which strategic managers estimate or forecast appropriate performance goals for each division, function, and employee and then measure actual performance relative to these goals 3. Behavioral controls – is control through the establishment of a comprehensive system of rules and procedures to direct the actions or behavior of divisions, functions, and individuals

Section 12 Change Management and Turnaround Strategies Change management is a systematic approach to dealing with change both from the perspective of a firm and the individual

For a firm, change management means defining and implementing procedures and/or technologies to deal with changes in the business environment and to profit from changing opportunities Change management has at least three different aspects, including: 1. Adapting to change – successful adaptation to change is as crucial within an organization as it is in the natural world 2. Controlling change – managing 3. Effecting change – implementing

Change Management Objectives Specific change management objectives include: 1. Sponsorship – ensuring there is active sponsorship for the change at a senior executive level within the organization, and engaging this sponsorship to achieve the desired results 2. Buy-in – gaining buy-in for the changes from those involved and affected, directly or indirectly 3. Involvement – involving the right people in the design and implementation of changes, to make sure the right changes are made 4. Impact - assessing and addressing how the changes will affect people 5. Communication – telling everyone who's affected about the changes 6. Readiness – getting people ready to adapt to the changes, by ensuring they have the right information, training, and help

Kotter’s 8-Step Change Model John Kotter introduced his eight-step change process that firms can use to implement change – 1995 Step 1: Create Urgency – for change to happen, it helps if the whole company really wants it •

Develop a sense of urgency around the need for change

Step 2: Form a Powerful Coalition – convince people that change is necessary •

This often takes strong leadership and visible support from key people within your organization

Step 3: Create a Vision for Change – when you first start thinking about change, there will probably be many great ideas and solutions floating around •

Link these concepts to an overall vision that people can grasp easily and remember

Step 4: Communicate the Vision –what you do with your vision after you create it will determine your success

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Your message will probably have strong competition from other day-to-day communications within the company, so you need to communicate it frequently and powerfully, and embed it within everything that you do

Step 5: Remove Obstacles – put in place the structure for change, and continually check for barriers to it •

Removing obstacles can empower the people you need to execute your vision, and it can help the change move forward

Step 6: Create Short-Term Wins – create short-term targets – not just one long-term goal •

You want each smaller target to be achievable, with little room for failure

Step 7: Build on the Change – many change projects fail because victory is declared too early •

Real change runs deep

Step 8: Anchor the Changes in Corporate Culture – to make any change stick, it should become part of the core of your organization •

Your corporate culture often determines what gets done, so the values behind your vision must show in day-to-day work

Three Levels of Change Management 1. Individual Change Management – it is the natural psychological and physiological reaction of humans to resist change •

Yet, people are actually quite resilient

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When supported through times of change, people can be adaptive and successful

2. Organizational or Initiative Change Management – while change happens at the individual level, it is often impossible for a project team to manage change on a person-by-person basis •

Organizational change management is complementary to project management

3. Enterprise Change Management – enterprise change management is a firm’s core competency or capability that provides competitive differentiation and the ability to effectively adapt to the everchanging business environment •

It is the management of change on a continuous basis

Guiding Principles for Change Management Ten guiding principles for change management: 1. Address the ‘human side’ systematically – any significant transformation creates ‘people issues’ 2. Start at the top – because change is inherently unsettling for people at all levels of an organization, when it is on the horizon, all eyes will turn to the CEO and the leadership team for strength, support, and direction

3. Involve every level – as transformation programs progress from defining strategy and setting targets for design and implementation, they affect different levels of the organization 4. Make the formal case – individuals are inherently rational and will question to what extent change is needed, whether the firm is headed in the right direction, and whether they want to commit personally to making change happen 5. Create ownership – leaders of large change programs must perform during the transformation and be the ones who create a critical mass among the work force in favour of change 6. Communicate the message – too often, change leaders make the mistake of believing that others understand the issues, feel the need to change, and see the new direction as clearly as they do 7. Assess the cultural landscape – successful change programs pick up speed and intensity as they cascade down, making it critically important that leaders understand and account for culture and behaviours at each level of the organization 8. Address the culture explicitly – leaders should be explicit about the culture and underlying behaviors that will best support the new way of doing business, and find opportunities to model and reward those behaviors 9. Prepare for the unexpected – no change program goes completely according to plan People react in unexpected ways; areas of anticipated resistance may go away; and the external environment may shift 10. Speak to the individual – change is both institutional and about the individual Most leaders contemplating change know that people matter

Turnaround Turnaround Strategy is a retrenchment strategy followed by a firm when it feels that the strategic decisions made earlier were wrong, or are turning out wrong, and they need to be undone before they damage the profitability of the firm Turnaround strategy is backing out or retreating from the decision wrongly made earlier and transforming from a loss making firm to a profit making firm

Internal Indicators for Turnaround •

Certain internal indicators which make it mandatory for a firm to adopt this strategy for its survival are:

1. Continuous losses 2. Poor management 3. Wrong corporate strategies

4. Persistent negative cash flows 5. High employee attrition rate 6. Poor quality of functional management 7. Declining market share 8. Uncompetitive products and services

External Causes for Turnaround •

The need for a turnaround strategy may arise because of the changes in the external environment:

a. Change in the government policies b. Saturated demand for the product c. A threat from the substitute products d. Changes in the tastes and preferences of the customers

Other Internal and External Factors A successful turnaround requires leadership that can inspire the stakeholders and manage all aspects of the process from start to finish The performance of a firm in terms of growth, profitability, and return on investment to the shareholders is affected due to several internal and external factors like: 1. Corporate strategies 2. Mergers and acquisitions 3. Rigors of competition 4. Changes in technology 5. Globalization 6. Deregulation 7. Privatization 8. Economic reforms 9. Labor migration

Phases in Turnaround Management •

There are three phases in turnaround management:

1. Diagnosis of the problem faced by the firm

2. Choosing the appropriate turnaround strategy 3. Implementation of the strategy

Turnaround Process 1. Management Change Stage – ‘leadership’ It is very important to select a CEO who can successfully lead the turnaround 2. Situation Analysis Stage – ‘viability’ This analysis should culminate in formulating a preliminary action plan stating what is wrong, how to fix them, key strategies to turn the entity in a positive direction, and a cash flow forecast to understand cash usage 3. Emergency Action Stage – ‘crisis control’ The objective is to gain control of the situation, particularly the cash, and establish breakeven 4. Business Restructuring Stage – ‘change’ The objective is to create profitability through remaining operations 5. Return to Normal Stage – ‘going concern’ The objective is to institutionalize the changes in corporate culture to emphasize profitability, ROI, and return on assets employed

Turnaround Strategies Generic turnaround strategies include: 1. Strategic repositioning turnaround 2. Reorganizational turnaround 3. Operational turnaround 1. Strategic repositioning turnaround – changes the mission and customer value proposition of the distressed firm by changing what products are offered to what markets and in which fashion 2. Reorganizational turnaround – Reorganization deals with all the people issues in the business 3. Operational turnaround – operational turnaround strategies associated with the value chain are revenue enhancement, cost reduction, asset reduction, and financial turnaround