The Business Management System - Portal Comerţ Exteriorportaldecomert.ro/Files/BMS_Guide_for_Managers_20092185737328.pdf · The Business Management System A Guide on Enterprise Competitiveness

The Business Management System A Guide on Enterprise Competitiveness International Trade Centre (ITC), 2003

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The Business Management System A Framework for Building International Competitiveness

TABLE OF CONTENTS

INTRODUCTION 1

THE BUSINESS MANAGEMENT SYSTEM CHAPTER 1 THE BUSINESS MANAGEMENT SYSTEM 2 CHAPTER 2 SEPARATING YOU FROM WHAT YOU MANAGE 5 CHAPTER 3 DETERMINING THE GOAL OF YOUR BUSINESS 7 CHAPTER 4 THE GOAL OF BEING A COMPETITIVE MONOPOLY 12 CHAPTER 5 MANAGING THE RESOURCES OF AN ENTERPRISE 18 CHAPTER 6 OPERATING BUSINESS FUNCTIONS 31

BUSINESS DEFINITION AND STRATEGY DESIGN CHAPTER 7 UNTANGLING MANAGEMENT: THE DESIGN OF BUSINESS STRATEGIES 36 CHAPTER 8 WHAT IS THE BUSINESS OF YOUR ENTERPRISE? 37 CHAPTER 9 SELECTING A BUSINESS DEFINITION 40 CHAPTER 10 CASE: NASRI BABA 45 CHAPTER 11 DESIGNING STRATEGY: A SUMMARY 48 CHAPTER 12 SEGMENTATION: THE CRITICAL DECISION 51 CHAPTER 13 POSITIONING 59 CHAPTER 14 INNOVATION & POSITIONING 64 CHAPTER 15 BUSINESS DEFINITION, STRATEGY AND MANAGEMENT 68 CHAPTER 16 GENERIC BMS STRATEGIES AND CRITICAL TASKS SELECTION 73

DEVELOPING BUSINESS CAPABILITIES CHAPTER 17 CONNECTING STRATEGY AND CAPABILITIES 77

MANAGING BUSINESS TRANSACTIONS CHAPTER 18 FROM STRATEGY TO BUSINESS TRANSACTION 79 CHAPTER 19 INTERNATIONAL VS. DOMESTIC IN THE BMS 80 CHAPTER 20 THE TRANSACTION CYCLE 82 CHAPTER 21 THE TRANSACTION TASKS 85 CHAPTER 22 MANAGEMENT OF TRANSACTION CYCLE TASKS 88 CHAPTER 23 LINKING TASK CONTENT AND TASK MANAGEMENT IN TRANSACTIONS 89 CHAPTER 24 TRANSACTION CYCLE MARKETING TASKS: GETTING ORDERS 90 CHAPTER 25 TRANSACTION CYCLE PRODUCTION TASKS: FULFILLING ORDERS 95 CHAPTER 26 TRANSACTION CYCLE MANAGEMENT: GETTING PAID 101

SUMMARY CHAPTER 27 THE COMPLETE BMS 104

APPENDICES APPENDIX A THE BMS’S FAILURE MECHANISMS 109 APPENDIX B SELF-ASSESSMENT 113 APPENDIX C NOMENCLATURE OF THE BUSINESS MANAGEMENT SYSTEM 119 APPENDIX D BMS GLOSSARY: ENGLISH, SPANISH AND FRENCH 123 APPENDIX E WHO IS EMDS ? 131 APPENDIX F FEEDBACK FORMS 135 This copy belongs to: _______________________________

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INTRODUCTION IS THIS BOOK FOR ME? Before reading this introduction you might have rightfully wondered whether this book is for you and whether it will actually help you run your business and improve its results. Most business literature will either explore the tools and technical aspects of marketing, sales, strategy, finance, production, etc., some creatively and some not, or provide a lengthy and resource consuming process to bring these all together in an attempt to reveal the “big picture”, e.g. a Business Plan. In the first case, you will be left puzzled about which tool to apply when, and about how it fits together with the others; and in the second case, you will be drowned under the enormity and complexity of the job at hand, and you will balk at the task for lack of resources and lack of faith in its ability to produce business results improvements. On the contrary, this book is about your enterprise and its management. It describes Business Management and will enable you to be the best manager you can be. DEVELOPING ECONOMIES This book has been designed for you as a manager, but maybe your business operates in a developing economy and your local environment is not favourable to business development? Read on and the BMS will define for you the role of a manager as “securing resources and applying them to business tasks in order to reach enterprise goals.” Subsequently, you will learn how to react when facing these environment shortcomings. SMALL TO MEDIUM SIZE ENTERPRISES Again, maybe you are a small to medium size enterprise and you have been disappointed with business tools which recommend inadequate courses of action because they were designed mostly for large corporations? Read on and the BMS will introduce you to competitive monopolies, bargaining power, and the optimal market size for your business, and you will understand how they do apply to small businesses. FIELD TESTING The description of Business Management contained in this book has been tested and re-tested in more than a dozen countries with hundreds of participants. Trainers, counsellors, consultants, academics and above all managers like you, have provided feedback and enabled us to turn the Business Management System into the most comprehensive and practical Business Management description that exists today.

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THE BUSINESS MANAGEMENT SYSTEM

Chapter 1 THE BUSINESS MANAGEMENT SYSTEM

WHY DO YOU NEED THE BMS? Selling to markets outside of your borders is not easy. Besides, you may be enjoying certain advantages within your domestic markets and do not have an incentive to go exporting. You

may be an established firm in the domestic market. You may have loyal customers, weak competitors, and even government protection. The domestic markets you are serving may be imperfect and these imperfections may be to your advantage or disadvantage. If they are advantageous, there may be little incentive for you to spend a lot of effort improving the effectiveness and efficiency of the management of your enterprise. None of these apply once you leave your domestic market and operate in the global markets. There are few imperfections or advantages. Customers are not loyal by nature; their loyalty must be won and nurtured. Competition is cutthroat. There are no governments to provide preferential treatment to your enterprise. Simply stated, advantages rising from market imperfections are insignificant for most small and medium size enterprises. There are new rules to follow, new ways to do business and different people to deal with. You may have succeeded in your domestic market because you were an entrepreneur, and a good one at that too. If you wish to succeed in international markets, you must manage your enterprise effectively and efficiently. You must graduate from being an entrepreneur to being a manager. The long-term survival chances of enterprises in the international markets are almost nil if they are not managed effectively and efficiently. International markets offer big prospective gains if you succeed. Losses are equally big if you fail. WHAT IS THE BMS? The Business Management System is a model describing the components of Business Management and the interactions between these components. The BMS is simple to apply but not simplistic. It is based on conceptual foundations of business1. The BMS is about the entire business and the way to manage it, not about the tasks of business or the activities of management. It must be understood and absorbed as a whole. The BMS is a generic structure for managing a business; therefore it is not time dependent. The BMS is not case specific; the principles of the BMS apply to small companies as well as big ones in any sector. Although it may seem that the BMS is designed for the manufacturing industry, with a little imagination, the BMS can be applied to the services industry as well.

1The BMS is based on a management framework described in The Business Management Grid - Theory and Practice of Competitive Containment, Osman A. Atac, Ph.D., The Association of Training Institutions for Foreign Trade in Asia and the Pacific (ATIFTAP), Manila, Philippines: 1995.

Countries, sectors, enterprises do notcompete, managers do. Enterprises that arenot managed effectively and efficientlycannot succeed in competitive environments.

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The BMS is useful for managing a business, not an enterprise. If your enterprise has more than one business, then the BMS should be applied separately to each business. If enterprise resources are shared by more than one business, then all the BMS-induced resource allocations in these businesses should be synchronised for compatibility. WHAT WILL THE BMS DO FOR YOU? The BMS will enable you to decide what needs

to be done for the enterprise to achieve its goal. It does not impose a particular selection of business tasks or management activities to do, nor does it recommend a specific way of doing these selected tasks and activities. The responsibility for selecting the right things to do, and finding the best way to do them right, rests with the manager. As such, the BMS does not guarantee success. Even with the BMS, you can still pick the wrong things to do, or pick the right things and fail to do them the right way. However, with the BMS, you will not overlook any part of your business nor will you be lost in details and miss the big picture. Proper utilization of the BMS requires a thorough understanding of its structure and underlying conceptual foundations. Like most comprehensive models, the BMS is both simple and complex. It is simple because it brings clarity to a complex phenomenon such as business management by classifying, prioritising and structuring to produce a finite number of alternate courses of action. It is complex because although the number of alternate courses of action is finite, there are many and they are not independent. In short, the BMS will help you understand what effective and efficient management is all about, and will provide a roadmap to follow to take your enterprise where it should be. Which specific route you will take and how you will move the enterprise is up to you. As an added bonus, because the BMS does not discredit or oppose any of the existing approaches to business management, it enables you to incorporate any model or approach into an integrated framework. You need not discard what you already know. However, you will be able to use your existing knowledge more effectively and efficiently. Understanding the BMS will integrate seemingly not related topics in a single model enabling you to initiate strategic alliances, prepare organizational plans, write job descriptions, design promotional campaigns and build a system to promote your products and services. The BMS comes along with support tools. Understanding the BMS will enable you to prepare strategic plans using the PLANSME tool. If you think that this is too much to claim and no business management model can solve all your problems, you are right. The BMS will not solve your problems, but using the BMS, you may be able to define them. The BMS is not about how you do things. It is about what you do. The BMS will provide you with a clear picture of things that you must do to approach your goals as a manager. How you do them is up to you.

The BMS is based on theoretical constructsbut is practical. It does not refute noradvance a particular school of thought. It isnot derived from cases, therefore, it isapplicable to all enterprises regardless oftime, place or sector. It is an integratedmodel for business that enables themanagers to view their businesses as awhole from strategy to managing exporttransactions.

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This book on the BMS is organised into four main sections: 1. The Business Management System, which explains the principles of the BMS and

describes how the BMS models the components of a business into functions, tasks, resources, activities, etc.;

2. Business Definition and Strategy Design, which details the Strategy Cycle of business management and walks the reader through it;

3. Developing Business Capabilities, which goes over what the Capability Cycle is and why it is important for the business;

4. Managing Business Transactions, which covers the Transaction Cycle of business management, details transaction level tasks, and emphasises their importance for exporting businesses.

Enjoy the reading and don’t hesitate to ask us questions and give us your positive (or negative) feedback using our coordinates or the forms in the Appendix!

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Chapter 2 SEPARATING YOU FROM WHAT YOU MANAGE

One of the first things you must never forget is the principle of the separation of business from management. This principle is fundamental to the BMS. Managing a business is no different than driving a car to a destination. The car has parts and each part

has a job. Although different parts do different things, all together they serve a single purpose of moving the car towards a destination. The parts do what they are supposed to do under the direction of the driver. The driver initiates the motion and steers the car. While doing so, the driver uses his skills and knowledge about the car, the driving conditions, traffic rules, etc. The BMS has its own nomenclature. Every concept is defined precisely, and some familiar phrases have a different but specific meaning in the BMS. To avoid misunderstandings, it is important to get familiar with them. For example, we will call functions the components of business. The parts that make up these functions will be referred to as tasks. While describing the components of a car and the parts that make up those components one can be quite specific. Since there is a finite list of parts, one can prepare a comprehensive list of these parts. Similarly, tasks in the BMS are collectively exhaustive and mutually exclusive, i.e. all the tasks taken together cover all aspects of a business (and no more), and any two selected tasks are independent in their execution and produce different and separate outputs. This feature allows the manager to examine each and every part of the business independently. The manager is the driver. He must have certain skills and possess knowledge. Drivers do not ignite the petrol in the cylinder, they initiate the ignition. Managers do not produce but facilitate production. Drivers see to it that the car arrives at its desired destination. Managers see to it that the business achieves its objectives. The BMS is not about the skills and knowledge of the “driver,” it is about what must be done. For example, to be able to drive, the driver must be able to see and hear. However, seeing and hearing are not the same as looking and listening. Looking is utilizing your ability to see and listening is utilizing your ability to hear. The driver should look and listen. The BMS is not about seeing and hearing, it is about looking and listening. Therefore, it is not a discussion of the skills and knowledge that managers should have for effective and efficient management of the business. It is a structured discussion of “what the manager should do.” It is important to keep in mind that the BMS is about what needs to be done and not about how it is done. The BMS does not only separate business from management, it also detaches what the manager does from how he does it. Two managers may do the same things in entirely different ways. In the BMS, the ways of doing things is left to the managers, but what needs to be done is clearly described. The things that managers should do are called activities in the BMS.

A business is managed. Clear separation of the understanding of what is managed from what is required for managing it has important practical implications.

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Activities grouped for specific purposes are called activity groups. Unlike business tasks, the activities in the BMS are neither mutually exclusive nor collectively exhaustive. The activity list of the BMS does not include all managerial activities and there are overlaps. This does not constitute a problem for the user when building strategies, capabilities or conducting business transactions. All the manager has to figure out is how the suggestions of the BMS would be executed given the business, its environment and the manager’s personality. While driving a car you have a very good idea about your objective. You are going somewhere. It may be near or far, but you know where you want to be and when you want to be there. Furthermore, you also have a good idea of how long it will take you to get there. Driving a car to reach a destination is a fairly clear task. Most things are known and most variables are under control (give or take unexpected changes in road or weather conditions, the condition of the car, etc). In managing a business, things are not that clearly determinable. Most important is where you want to go. The ultimate goal of business has been expressed in a variety of sensible ways: “profit maximization,” “maximization of shareholder value,” etc. Nevertheless, we will not start a debate on what the ultimate goal of business is; we simply call it the goal in the BMS.

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Chapter 3 DETERMINING THE GOAL OF YOUR BUSINESS

While there seems to be some consensus among managers and management thinkers about the goal of business, we will reopen the debate and define the reasons why you are in business. It would be correct to say that you are in business to make money. Most managers would agree. Some may say that you are in business to help your city, state, country, etc., but if you do not make money, you will not be in business for long and your assigned social responsibility will go down the drain. Money is not considered a good measure of anything. Nevertheless, it is used to measure the worth of things. In business, money is used as a measure of worth even for things where it should ordinarily not be utilized as a measure. Consider the worth of information and know-how. Naturally, collection of information and acquisition of know-how cost money. Thus, one may attach a monetary value to them. But, this would be the measure of the cost of obtaining the resource and not its worth. Consider human resources. Surely, recruiting and utilizing human resources costs money. But is this

amount a good reflection of its worth? Probably not. Money itself costs money. One may have borrowed the money, in which case there is an interest to pay. Or one may be using his own money, in which case there is the opportunity cost. Capital assets cost money. The price that is paid for a machine is depreciated over time to provide the monetary value of that asset at a given time. Is that value the true worth of that asset? Probably not. Joining the local chamber of commerce costs money. Is the annual due that an enterprise pays to become a member of the chamber a true reflection of the worth of membership? Most probably not. While it is clear that the worth of something has nothing to do with its cost, it is certain that when we speak about worth in business we often mean monetary worth. This is so because without incurring some kind of a cost none of the above mentioned resources could be obtained. To incur costs the enterprise needs money. With these considerations in mind, let us think about making money as the ultimate goal of a business. A couple of questions immediately come to mind. First, how much money is an enterprise supposed to make? The answer is clear: As much as possible. However, this answer is not precise. Making as much money as possible sounds acceptable but is not measurable. Being not-measurable is not a problem in itself. However, there needs to be a yardstick against which success will be judged. How will the manager know if the money his business made is the “maximum possible” amount? This question needs to be

In the BMS one phrase describes theultimate purpose of a business:Dominating the market(s) it chooses toserve. The degree of domination is equivalentto the degree to which an enterprisecan dictate terms on price, time ofdelivery, quantity of delivery, andquality to its buyers and suppliers. This is the same as the bargainingpower of an enterprise. The BMS usesthe same concept to definecompetitiveness. In the BMScompetitive enterprises are defined asthose that have higher bargainingpower compared to their competitors. Thus, in the BMS, the concepts ofvision, mission, goal, purpose, andcompetitiveness are all synonyms,which are described in terms of marketdominance, i.e. bargaining power.

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answered because managers need to know whether they have achieved their goal. Therefore, some criterion needs to be established to judge if the enterprise has made the monies it should have made. Economists suggest that you should compare your earnings with the “opportunity cost,” i.e. what the money invested in your business could have earned elsewhere. After all, you have chosen to invest in your business as opposed to investing in another business; thus, the concept of what your money could have earned elsewhere makes sense. The tricky part is calculating the opportunity cost. One popular suggestion is to use the interest rates for time deposits. The logic is that instead of investing in your business, you could have deposited your money in the bank and earned interest. So if your business is earning 5% but bank interest rates are 6%, you would read this as losing 1% on your money. This seems sensible. However, your investment is not in the form of money any more. Your money has been converted into people, machines, raw materials, buildings, telephone bills, etc. Therefore, although it is true that your money could have earned interest, it makes little sense to look at your earnings and sigh “I would be better off if I had kept my money in the bank.” You cannot deposit people, machines, raw materials, buildings, telephones, etc., and earn interest on them. Since you no longer possess the cash to earn interest, there is no alternative but to earn your money from your business. The people you have hired, the machines that you have bought, the building you have rented must bring in the monies you need. Thus, the only yardstick that you can use to measure your success must be related to your business as an investment in people, machines, raw materials, buildings, telephones, etc., not to bank interest rates. In other words, depositing money in a bank is not “an alternative” to your business anymore. Therefore, it is not a good measure of the degree of your success. You may liquidate your business and deposit whatever you can recover but you would not consider this the “next best alternative” to your business. It probably would be the last alternative as you will be out of business. What is the next best alternative of a business? If it is not cash, what should be used as the next best alternative of the investment? What comes to mind immediately is the last period. The assertion that a business that succeeds in making more monies compared to the last time should be considered successful sounds meaningful. However, it still does not mean that the enterprise has earned all it can. Since the purpose of the business is to make as much money as possible, comparing your present earnings to your past earnings is not a good measure of business success. You may have made even more. What is the next “next best alternative” of an investment in people, machines, raw materials, buildings, telephones, etc.? For all practical purposes, what you do not know does not exist and cannot be an alternative. Moreover, what is beyond your reach is not feasible, and should not be considered as an alternative. Thus, the next best alternative must be known by the manager and must be feasible. What fits this description? Why competition of course. Can competitors be the next best alternative we have been looking for?


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Is competition known to the manager? If another enterprise is identified as a competitor, the manager knows most there is to know. He knows the market (probably similar to his own or the same), the product (same or similar products) as well as the people, machines, raw materials, buildings, telephones, etc. to make them. In fact, other than his own business, the next best-known business to a manager is the business of its competitors- Thus, so far as the requirement that the next best alternative should be known, competitors fit the description. What about the second criterion? Is it feasible? If you are making machine parts, you cannot judge your earnings against the earnings of General Motors because they also make machine parts. If you are selling software you may find it difficult to compare your earnings with those of Microsoft. However, so far as feasibility is concerned, the competitors that are most similar to an enterprise in terms of people, machines, raw materials, buildings, telephones, etc., fit the description. After all, they sell the same goods and services to the same markets and they have same or similar investment. In conclusion, we may say that comparing the earnings of an enterprise with those of its competitors is a sensible yardstick for success. Thus, one may state the goal of business as making more money than its competitors. This goal is acceptable but leaves something out. The level of your success, here, depends on how successful others are. If we use this criterion, in a group where management of enterprises is ineffective and inefficient, an enterprise may make an insignificant amount of money and still be considered successful. In a highly competitive group an enterprise who makes a little less than its competitors would be considered a failure. Surely, if you are exporting, you do not expect your competitors to be ineffective and inefficient. In the domestic market you may enjoy a position where your competitors are managerially weak. The chance of being in that position in international markets is almost nil.

Let us think a little more about making as much money as possible with our investment. What prevents us from making as much money as we want? We make goods and services. Assuming there are buyers, there are two things that prevent us from making as much money as we want. These are the natural limits of the markets, and present and future competitors. Suppose an enterprise can produce unlimited number of goods and the buyers are willing to pay any price the enterprise asks. Even under these circumstances, an enterprise cannot make unlimited amounts of money. First, there are a limited number of buyers in the market and they can consume only so much of a product. Therefore, even if an enterprise could offer unlimited number of goods, only

so much can be sold. Secondly, even if the buyers are willing to pay the price you ask, they can afford only so much. Therefore, the number and purchasing power of the consumers limit the amounts of monies that an enterprise can make. At the same time, an enterprise can hardly expect a situation where buyers are totally insensitive to the price of the product. If the enterprise charges an unreasonably high price, the competitors will gain advantage. An enterprise that keeps its price high to make as much

Profits

Natural size of themarket as determined

by the number of buyersand their purchasing

power

Strategies of presentand future competitors

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money as possible when its costs are low is said to keep an umbrella over the market. Such an enterprise provides an opportunity to its present competitors to gain market share and invites future competition. Of the two forces that prevent an enterprise to make as much money as it wants, the natural size of the market is, in most cases, immune to the interventions of the enterprise. In other words, there is very little the enterprise can do to enlarge the natural size (both in terms of the number of buyers and the purchasing power) of the market.2 If the pressure on earnings originating from the limitations of natural market sizes cannot be removed, the question then is “can an enterprise do something about its competitors?” The logical answer to this question is a simple yes. Let us assume for a moment that an enterprise is in a market where there are no competitors. The market belongs to that enterprise alone. Economists call these enterprises monopolies. Such an enterprise is in a position to “dictate terms.” An enterprise in a position to dictate terms can choose whom it wishes to sell to and what conditions it wishes to impose on this transaction. A dominating enterprise, i.e. an enterprise that does not have any competitors, possesses the ability to find markets whenever it wants and wherever it wishes. It has the freedom to produce the goods as it wants them and does not have any problems to replenish its resources. Such and enterprise can demand its buyers to buy more frequently and more, determine profitability by dictating higher prices and payment terms and decide how much it will produce and deliver, at what quality level, at what cost and when. You are probably thinking, “Dream on.” Most exporting enterprises from developing countries start exporting by an unsolicited order. The buyer just shows up or is met during a trade fair. The buyer probably supplies the design and the process requirements. They may state the price for the enterprise to worry about how much money they will make, if any. They even supply the raw materials from another source of their choice. They probably give instructions as to when they want the goods and where. They may even dictate the terms of payment. Some may even dispatch their own staff within the enterprise as quality consultants, operators, etc. In other words, the buyer dictates what to produce, how to produce it, how and when it should be delivered, and under what terms. In short, many developing country enterprises never use their marketing function, their production function have very little initiative and their finance people accept the terms delivered. In fact you may even have heard that this is the way to follow if you want to go global. Well! We disagree. In fact, we find such an approach totally against good business sense. Think about an enterprise that is the sole supplier in a market. Such an enterprise does not face pressure from its competitors on the amount of monies it makes. So far so good. All it has to worry about is future competition. If a monopolistic enterprise fails to erect barriers to entry, it will invite future competition, especially if it gets greedy in making “as much money as possible.” Other than that, this enterprise is in an enviable position. Previously in this chapter, we concluded that a good yardstick to use in measuring the earnings of an enterprise was the earnings of its competitors who are making the same goods for the same markets. Now, we conclude that an enterprise that has no competitors is the one

2 This is not entirely correct. There are ways of expanding the natural boundaries of the markets. Their effects, however, are rather limited.


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that can make as much money as possible. Are these two conclusions compatible? Yes they are. A monopoly has no competitors: it is uncontested. Its earnings are only compared to its past performance. In a sense, a monopoly, by definition is guaranteed to make more money than its competitors as it can dictate terms.

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Chapter 4 THE GOAL OF BEING A COMPETITIVE MONOPOLY

Let us look into the issue of being in a position to dictate terms. Such an enterprise does not have to worry about buyers going to competitors, as there are none. They need not track new buyers, as those who enter the market will have no options. Such an enterprise does not even have to worry about building brand loyalty. It will have an easier time to secure and replenish resources due to its strong and unchallenged market position. Therefore, an enterprise that dominates the market stands a chance of making as much money as possible. Thus, in the BMS, business success is defined in terms of the degree to which an enterprise comes close to a position where it faces no

competition. Consequently, an uncompetitive enterprise is the one to which terms are dictated. In other words, an uncompetitive enterprise is constrained and in contest with competition. Even if an enterprise is in contest with competition, it may still make profits. It may even be a business that everybody considers as highly profitable. The amount of profits it makes, however, is constrained by competition. As the degree of its market dominance increases, the constraints get weaker enabling it to push its profits upward. Facing competition, an enterprise makes profits. Without competition it makes even more profits. The amount of money an enterprise can make when it faces little or no competition that is over and above the expected profits from its business under competitive conditions is called a “rent.” The only two ways an enterprise can generate rents are: 1. By subjugating competition; 2. By finding a market where there is no competition. Of course, few enterprises will be able to find markets where there are no competitors and few would be able to exclude future competitors from entering that market. In export markets one may think that this is impossible. Similarly, few, if any, enterprises will be able to force all of their competitors out of a market. There will almost always be some competition. However, the closer an enterprise gets to the ideal situation of being in the enviable position of having no competitors, the more competitive it is. The ultimate case of course, is the situation where an enterprise has no competition at all, that is, it becomes a monopoly. Often, readers are taken aback with this statement. First, there seems to be a consensus that monopolies are inefficient and therefore bad. Let us look at this unfortunate term “monopoly.” We all know what a state-sanctioned monopoly is. Most countries have monopolies on utilities, tobacco, oil, spices, etc. In developing countries, most of these monopolies were

An enterprise can dominate markets by subjugating its present competitors or by finding markets where there are no competitors. The way to subjugate competitors is by dividing the market(s) in sufficiently small sub-markets and capturing maximum market share, so as to make it uneconomical for a competitor to enter. The same can possibly be achieved by dominating supplies and/or distribution. Dominating suppliers and distributors, something that was already next to impossible for SMEs is getting extremely difficult even for multinationals all over the world. In Export markets it is rarely possible. The last way leading to market domination is by innovation.

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created during the early stages of their development. Being able to produce a product alone was sufficient to create a monopoly since what the enterprises offered was almost always in short supply. Therefore, most of these companies capitalized on being the “first entry” and became monopolies. Sometimes state policies encouraged the creation of such monopolies by erecting barriers to imports. Faced with an explosion of population and urbanization, most developing countries had to adopt policies to protect “producers.” These policies created imperfections in the competitive system and enterprises capitalized on it by becoming monopolies (or oligopolies) without competing. We call such monopolies, whether state-owned or private, “simulated monopolies” because they did not have to manage the process of becoming a monopoly. There is another kind of monopoly. Sometimes the market is either highly specialized and/or very small. If the market is very small, the production of one enterprise becomes sufficient to meet demand and competition does not make sense. Thus, there is no incentive for competition to enter the market. Enterprises that become monopolies by producing for a market that is naturally small are called “natural monopolies” in the BMS. Natural monopolies also emerge where although the market size is large, due to high specialization, it does not make economic sense to compete. For example, competing in the distribution of utilities such as electricity, water, etc. would require installation of networks of power lines, pipes, etc. which would make the service very expensive if enterprises were to compete. In many developing countries, natural monopolies are common due to market size and also due to specialization. But we are not going to discuss simulated or natural monopolies in the BMS. Our focus is on “competitive monopolies”. Competitive monopolies are a special kind of natural monopolies. They are the ones who become dominant in their markets by overcoming their competitors or those who develop markets where there are no competitors. These monopolies are the ones the BMS advocates. Hypothetically, if an enterprise can capture 100 percent of the market, it becomes a competitive monopoly. However, this is extremely rare. For most products, the market is too large and too diverse to monopolize. It may, on the other hand, be possible to divide the market into smaller sub-markets. In fact, the market size can be reduced all the way to one buyer only. Advances in the information communication technologies make this easier everyday. To dominate a sub-market, product design has to appeal to that sub-market’s specific preferences. This process of dividing the market in smaller sub-groups will be called “segmentation” and designing a product on the basis of confirmed market preferences will be called “product positioning.” By using proper segmentation and product positioning, an enterprise can subjugate its competitors, and render uneconomic the entry to the segments it is serving. In other words, the enterprise can become a competitive monopoly in a market segment. The production function of the business can help the enterprise not only by delivering the “positioned” products to subjugate competition, but also by: 1. Monopolizing the sources of supplies; 2. Monopolizing the distribution channels.


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The domination of markets through monopolizing supplies and/or distribution has been common in the developing world. This is observed especially in developing countries where importing is difficult due to shortages of hard currencies. Under such circumstances, enterprises that can monopolize the domestic or imported supplies end up dominating the markets. This approach to market domination is disappearing as developing countries increase their productive capacities and imports become easier due to globalisation. An enterprise can also dominate its markets by dominating the physical distribution channels. A common form of this approach is for an enterprise to establish its own channel. This is commonly seen in countries where purchasing power is concentrated. For example, about 1/3 of the population of Egypt is in one city. Furthermore, purchasing power is concentrated in the hands of a few who can afford most products both as individual or institutional customers. When purchasing is concentrated, it becomes possible to monopolise display shelves in outlets, the outlets themselves, and even the means of transportation, keeping competition out. However, dominating markets through distribution channels is also getting less practical. Many developing country enterprises which have monopolized channels in the past, are facing difficulties as physical distribution infrastructure improves and new purchasing centres emerge. In developed countries it is rarely possible for enterprises to subjugate competition by monopolizing supplies and/or distribution for the same reasons presented above. In export markets, dominating supplies or distribution channels is extremely difficult even for multinationals. For SMEs in developing countries, it is nearly impossible. Another way to become a competitive monopoly is to find a market in which there are no competitors. The production function of the business can help innovate a product that the market will accept, making the enterprise the only supplier in the market. An innovator is, by definition, a competitive monopoly. Since it is unlikely for an enterprise to dominate markets through supply or distribution, innovation is even more important. It is only through innovation that the production function will be able to help the enterprise to find a market where there are no competitors, and thus stand a fair chance of dominating it. With the caveat that no innovation can be protected indefinitely, especially in the international arena, the BMS asks the enterprises to be innovative. So far we have discussed the goal of the organization. But the organization has its parts. Remember, your business is like a car. Each part should be doing what it is supposed to do for the car to do what it is supposed to do. Each part has a role. This role will be defined by the overall purpose of the entity. Since the overall purpose of business is to dominate a segment, the objectives of the parts should be in line with this goal. In the BMS, the term objective refers to the generic objectives of the functions of a business. Generic objectives are objectives that apply to all enterprises, everywhere. Whether they operate solely in the domestic market or engage in international operations does not matter. The BMS specifies two core functions for a business: Production and marketing. Remember that our basic premise was that you are in business to make money. A business makes money by exchanging something of value (your offer) for something of a higher value to you (the


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price paid by the buyer). To do that you have to produce something you can exchange, and find someone to exchange it with. In other words, you need production and you need marketing. Thus, marketing and production are the core functions of your business. Generic business objectives relate to the two core functions of an enterprise: marketing and production. An enterprise must be able to market what it produces and produce what it can market. In a nutshell, the enterprise must sell what it makes and make what it can sell. Let us first look at the issue of selling. At a given time there are only three types of generic markets for a business, i.e. selling what it makes can only be done by: selling more to present buyers, selling to competitors’ buyers, and selling to those who do not buy from anybody.

The “market” of a business consists of flows as shown in the Figure. At a given point in time, the customers of an enterprise are the sum of those who switch from competitors, those who are new to the market and have chosen the enterprise and the present customers minus those who leave the enterprise (either to go to competitors or because they leave the market.) The role of the marketing function is to capture buyers without losing present customers, i.e. the responsibility of the marketing function in a business is to “find and keep markets.”

From this statement the BMS derives the generic objectives of the marketing function: 1. Enable the enterprise to sustain a position such that it could sell more frequently and more

to present buyers, and/or avoid present users buying less frequently or less;

2. Enable the enterprise to sustain a position such that it could induce brand switching from competitors, and/or avoid its users switching to competitors;

3. Enable the enterprise to sustain a position such that it could convert nonusers into users of its own products, and/or avoid its users becoming nonusers;

4. Enable the enterprise to sustain a position such that it could secure medium to long-term profitability.

An enterprise achieving all these objectives is in good shape: it increases its sales to its present customers both in terms of the frequency and quantity; attracts customers from competitors while not losing any of its own; becomes the only choice of those who enter the market while none of its customers leave the market; and succeeds in achieving the first three objectives without compromising profitability. Now let us look at the production function. The production function is the other core function that is supposed to help the enterprise achieve its goal of dominating markets. For this, the

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Quantity

Quality

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production function must make what can be marketed. Making what can be marketed means delivering the products on time at an acceptable cost and quality. Therefore, the generic objectives of the production function are listed as: 1. Enable the enterprise to sustain a position such that the enterprise could produce and

deliver the desired quantities of goods and services (quantity includes all the physical properties of the product such as shape, weight, size, and colour, or ingredients and ingredient characteristics, composition, and even packaging);

2. Enable the enterprise to sustain a position such that it could produce and deliver the goods and services at the desired level of quality;

3. Enable the enterprise to sustain a position such that it could produce and deliver the goods and services at the desired time;

4. Enable the enterprise to sustain a position such that it could produce and deliver the goods and services at an acceptable cost.

An enterprise that achieves all of its generic production objectives has no problem producing and delivering the right quantities with the right quality at the right time and at an acceptable cost. Surely, this enterprise can be called highly successful. Think about the case of an enterprise that achieves all the production and marketing objectives at the same time. This can only happen when the enterprise can dictate to its buyers when they should buy, at what price, at what quality and how many. In other words the enterprise exerts absolute control over its buyers. Suppose this enterprise also has the same power over its suppliers. In other words the enterprise dictates to them how much to send, at what quality, when and at what price. Consider now the case of an exporter. The buyer requests 100,000 shirts, to be delivered in 7 days, insists that his quality controllers be present at the production facilities of the producer and states a “take it or leave it” price. This case illustrates an enterprise that is not “competitive.” On the other hand, an exporter who still achieves all of its marketing objectives while saying: this is how much I will deliver, this is when, this is the quality and this is the price, take it or leave it. Surely this hypothetical enterprise is a competitive one. This is why, in the BMS, competitiveness is defined as the ability to dictate terms vis-à-vis the generic production objectives to buyers and suppliers while still achieving the generic marketing objectives. Clearly, no enterprise can achieve that end unless it is a monopoly and is assured to stay as a monopoly for a foreseeable future. Nevertheless, the difference between a competitive


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enterprise and a non-competitive enterprise is clear. The competitive enterprise can dictate terms on quantity, time, quality and cost to its buyers and suppliers, and the non-competitive enterprise cannot. The word can is underlined and is in bold. There are reasons for it. Competitiveness is a state of being. Just because an enterprise can dictate terms does not mean that it would and it certainly does not mean that it should. Nevertheless, the mission of the enterprise is clear. Businesses must strive to reach a state where they can dictate terms while achieving one or all of their marketing objectives. As absolute dominance in the market where the enterprise can dictate terms to its buyers and suppliers is not possible, especially in international markets, the concept of bargaining power is introduced. Bargaining power refers to the leverage the enterprise has to negotiate with suppliers and buyers the quantity, quality, price and time of delivery of the goods that it buys and the goods that it sells. To move from a competitive position to a more competitive one, an enterprise must decide what it should be doing to increase its bargaining power over these. The selection of the things to be done will be called “strategy.” After all, a strategy is defined as the things one does to reach an objective, and we now know our enterprise goal and function objectives.

A business needs to be managed to achieve these objectives and reach its goal. Let us now look at what the BMS thinks the driver of the car, i.e. the manager, should be doing.

Chapter 4 GENERIC OBJECTIVES OF BUSINESS FUNCTIONS Marketing Objectives

1. Enabling the enterprise to sustain a position whereby the enterprise could sell more frequently and more to present buyers, and/or avoid present users buying less frequently or less;

2. Enabling the enterprise to sustain a position whereby the enterprise could induce brand switching into the markets of the competitors, and/or avoid its users switching to competitors;

3. Enabling the enterprise to sustain a position whereby the enterprise could convert nonusers into users of its own products, and/or avoid its users becoming nonusers;

4. Enabling the enterprise to sustain a position whereby the enterprise could secure medium to long-term profitability.

Production Objectives

5. Enabling the enterprise to sustain a position whereby the enterprise could produce and deliver the desired quantities of goods and services;

6. Enabling the enterprise to sustain a position whereby the enterprise could produce and deliver the goods and services at the desired level of quality;

7. Enabling the enterprise to sustain a position whereby the enterprise could produce and deliver the goods and services at the desired time;

8. Enabling the enterprise to sustain a position whereby the enterprise could produce and deliver the goods and services at an acceptable cost.

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Chapter 5 MANAGING THE RESOURCES OF AN ENTERPRISE The enterprise operates in a national and international environment. It is from this environment that the enterprise acquires its resources to start and continue its operations. The BMS specifies four types of resources: • Information and Know-how; • Human resources; • Financial and Physical Assets; • Networks and Relationships. The enterprise requires information about markets, economic and legal environment, money to hire the place of business, to buy machinery, technology, recruit employees, communicate with buyers at the start-up. The enterprise expends resources to acquire resources. Machinery, equipment, tools, require financial resources, the networks and relationships require effort to establish, information acquisition require systems to be built for survey, collection and dissemination, and often cost money. One may argue that at the end of the day it all boils down to the availability of financial resources and that only one kind of input is required for an enterprise. However, while availability of financial resources is a necessary condition for acquisition of other resources, it is rarely sufficient. There are many examples where enterprises have failed to acquire the needed human, information and physical resources even with adequate financial resources. Information and Know-how: Information and know-how ranges from simple to complex. It may be in the form of an address of a prospective buyer, information about legal requirements, knowledge about manufacturing technologies, etc. Once formed, the enterprise generates information as well. Human: Human resources both in terms of quantity and quality are essential to undertake any organizational activity. Human resources are not just production inputs but bring information and know-how to the enterprise. Financial & Physical Assets: Financial and physical assets are essential inputs for producing goods and services. They include cash resources to purchase inputs, to pay for expenses, machinery and tools to produce, etc. The enterprise generates financial resources especially once operational. Networks & Relationships: Networks and relationships are inputs needed to secure other resources, meet social obligations and coexist with other organizations in a complex national and international environment.

THE ENTERPRISE

Financial &Physical Assets

Networks &Relationships

Information &know-how

HumanResources

THE ENTERPRISE




HumanResources




HumanResources

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While resources are presented and discussed individually, it should be kept in mind that they are interdependent and therefore overlap. For example, a newly hired human resource usually brings information and know-how into the enterprise, while another may be hired because it brings in valuable networks and relationships. Keeping these overlaps in mind is imperative for the proper use of the BMS paradigm. The success of management will not only depend on the correct identification of priority tasks, correct calculation of the quantity and quality of resources needed, timely and proper acquisition and allocation of the resources to the priority tasks, and the monitoring of the use of these resources. Success of management will also depend on the “efficiency” of this process. Management that can take advantage of the synergies stemming from the overlapping nature of resources would execute its priority business tasks with minimum expenditure of resources. While each task demands its own unique resource allocation process, management must capitalize on the synergies without causing conflict and waste. Capitalizing on synergies should not be interpreted as allocating a resource to several tasks but as finding ways of utilizing them such that they can serve multiple objectives. More often than not managers tend to allocate the same resource to several tasks or do the opposite and allow a task to use a resource exclusively. While the BMS suggests that the resources should be allocated using the priority tasks as a basis, it should be kept in mind that the priority tasks are selected because they are expected to enable the enterprise to achieve their generic objectives. Resource allocation process should not only take into account the tasks but also the objectives that they are expected to achieve, while capitalizing on synergies. An enterprise expends resources to acquire other resources; it uses human resources, information, and know-how to hire more human resources and manage them, and uses financial resources to compensate them. In a way, it is in charge of a pool of resources and continuously exchanges resources of one kind for resources of another kind. The flow of resources with the environment is continuous and reciprocal. The enterprise gives and takes resources. While the resource inflow and outflow of the enterprise is to and from its business environment, there can be in- and outflows with the non-business environment as well. Acquiring inputs for production is an example of flow with the business environment. Subsidizing activities outside of the business such as a grant to a charity is an example of flow with the non-business environment. While during the start-up the enterprise primarily acquires resources from the business environment to build its business, after start-up it also generates resources, especially financial resources. The manager, as defined in the BMS, undertakes activities to determine the quantity and quality of the resources needed by the business of an enterprise, acquires and allocates these resources, and monitors their usage. The manager’s role is basically to secure resources and apply them to business tasks content (processes) in order to reach the goal of the enterprise.

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It may well be the case that a necessary resource is not readily available. This happens in developing economies where the country’s infrastructure often leaves much to be desired, and where, for instance, the lack of quality of service of utility companies (such as electricity supply) can hamper business operations to the point where the enterprise is in jeopardy. At this point, the manager has no influence whatsoever on the utility company and therefore, true to its role, the manager must search for alternate sources of energy, or seek to reduce the dependency of the business tasks content (processes) on the quality of energy supply. If these improvements do not achieve the expected results or if they put an unduly burden on the business, then the manager should challenge the viability of this particular business in this environment and should consider changing business altogether or moving it to a better environment. Acquisition and utilization of resources by the enterprise requires a series of rational decisions. The manager or a designated group must make the following decisions ordinarily in the stated order:

1. Decide what needs to be done for the enterprise to achieve its objectives; 2. Identify how the selected things should be done, when and by whom; 3. Identify the resources which will be required for implementation; 4. Acquire the resources and allocate them to the things to be done; 5. Develop measures in order to know when things have been done effectively and

efficiently; 6. Assess whether things should be done differently the next time. The first two define the business of the enterprise. The enterprise undertakes a series of tasks to produce and market its output. Starting with the decisions concerning the choice of the product to be marketed and the markets to be served, the enterprise builds its capabilities and conducts sales transactions. Prioritisation of the things to be done for effective and efficient utilization of resources is essential. The manager decides what tasks should be undertaken, determines the best way of doing them, identifies by whom they should be undertaken and when. While selecting the things to be done is crucial, if the resources required for the tasks cannot be made available, this decision is irrelevant. The manager, while making decisions about what needs to be done, must calculate the quality and quantity of the resources needed. Each and every task selected will require human resources, information and know-how, financial and physical assets, and networking and relationships in different quantities and quality. In addition, the manager also needs and expends resources while making these decisions. To summarize, during this stage the manager decides what needs to be done, how it should be done, when and by whom, and identifies the resources that will be required for implementation. In short the enterprise “plans.” We will call this group of managerial activities “analysis and planning.” The manager then acquires the resources that are needed, in the desired quantities and at the desired level of quality, on time and at an acceptable cost, and allocates them to the things to be done. While resource planning can be done per-task, it is obvious that acquisition and allocation cannot be. Acquisition and allocation should be done to gain maximum synergies.


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Efficiency, therefore, is not only a matter of getting maximum output for a given amount of resources but also minimising the number of tasks undertaken At this stage, if a manager finds out that it cannot acquire the needed resources, either on its own or through building alliances with others, he must go back to the selection process and revise the tasks to be undertaken. Nevertheless, managers may still fail to acquire the resources in the desired quantities and quality on time or may fail to allocate them to the selected tasks. In short managers may fail in “execution.” We will call this group of managerial activities “organizing and coordinating.” In competitive environments, managers also track the results of their task selection and resource allocation. At the end of the day, if business results are not satisfactory, either the

task selection (things to do) or resource allocation or both are at fault. While periodic checks are customary, discovery that there is something wrong with plans and/or execution after the business results show signs of failure is too late. Thus, managers should constantly monitor their plan and resource allocation by developing measures so that they know when things have been done effectively and efficiently and determine whether different things should be done next time. In short build systems for “control.” We will call this group of managerial activities “monitoring and improving.”

Planning, execution and control make up the management of the enterprise. Needless to say, planning, execution and control are not disjointed endeavours. What is controlled depends on what is executed and what is executed depends on what is planned. Therefore, management is a perpetual cycle from planning to control. Managers do not actually plan, execute and control. They engage in “managerial activities” which serve to these ends. What the managers do is straightforward: examining a report from production on cost per unit is a control-related activity, calculating the money needed to buy a certain machine is a planning activity, applying to the bank for the money is an activity of execution. In other words, managers engage in a series of activities and not in planning, execution and control. There are many activities and almost endless ways of doing them. What activity is undertaken and the way it is executed is a function of the need to manage the business but also of the personality of the managers, politics and power in the enterprise. In summary, the BMS defines three focuses for activities: PLANNING • Decide what things need to be done; • Justify what will be done in terms of expected results; • Identify how things should be done; • Determine by whom they should be done; • Determine when things should be done. EXECUTING • Identify the resources required for implementation; • Obtain and allocate resources.


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CONTROLLING • Develop measures to know when things are done; • Check that they are done satisfactorily; • Assess whether things should be done in a different way next time. Managers undertake numerous activities to plan, execute and control. Example activities they undertake to plan, execute and control the information resource are described below: 1. All managers undertake various activities, formally or informally, to collect and

interpret pertinent internal and external information for effective and efficient management of the business. This activity is called Analysing Business Management Requirements in the BMS.

2. Information concerning what the enterprise owns, owes, is owed, has earned and is

worth is one of the oldest activities managers undertake both for management purposes and because it is a legal requirement. Activity directed at generating this information is called Designing General Accounting Systems in the BMS.

3. To be able to allocate expenses or costs to different end products produced, or to

different services rendered or tasks performed, managers establish systems and procedures. An activity directed at generating information concerning the costs of activities and tasks is called Designing Cost Accounting Systems in the BMS.

4. To determine whether or not the buyers receive the offers of the enterprise

favourably, whether the communications from the enterprise are achieving their objectives, managers need information about consumer reactions. The activity directed at generating this information is called Appraising Reactions in the BMS.

5. To be able to calculate the total cost of a product, managers need information on

standards for each cost element. Associating the time necessary to do defined amounts of work with costs generates this information. The activity concerning the generation of information on standards is called Calculating and Using Standard Costs in the BMS.

6. Managers need to know whether or not a prospective product, process, or service can

be developed and tested by their enterprises. The activity to generate this information requires the building of conceptual or tangible operating models and includes designing and conducting experiments, field-testing and making modifications, and interpreting results, and is called Conducting Development Experiments.

7. Information about the ability of potential buyers from a designated market/segment

to buy an offer is important for segmentation decisions. The activity directed at generating this information is called Conducting Market Potential Studies.

8. Information about the rate of achievement of the whole enterprise or one of its

functions, departments or activities is essential for taking remedial action. This information is usually generated by the conduct of audits. This activity is called Conducting Audits in the BMS


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9. Information concerning how much and when capital is required, including working capital and capital used to secure other resources, is important for the enterprise to make rational decisions and achieve its objectives. The activity concerning this information is called Conducting Economic Studies.

10. Together with the information concerning the ability of a market to purchase a

product, the willingness of potential buyers from a designated market/segment to buy that offer is extremely relevant to segmentation decisions. The activity concerning this information is called Evaluating Markets in the BMS.

11. Information concerning estimates of the sales volume for a given offer within a

specific period is critical for preparing operational plans and verification of strategies. The activity concerning this information is called Forecasting Sales.

12. Needless to say, information when not available to all concerned in an enterprise is

useless. Communicating management policies to both the enterprise and internal/external stakeholders is also a way of generating information. The activity including planning or preparing house publications, bulletins, etc. for this purpose is called Preparing Internal Publications and Handbooks in the BMS.

13. Information concerning whether or not an investment of money or effort in terms of

other resources should be made in comparison with the expected return is critical for decision making. The activity concerning the generation of this information is called Preparing Feasibility Studies in the BMS.

14. Information concerning scientific research on products, markets and technology can

be generated internally by R&D or by following such research done elsewhere in areas concerning one's business. The activity concerning this information is called Conducting Basic Research in the BMS.

INFORMATION & KNOW-HOW

RESOURCE RESOURCES NECESSARY FOR ACTIVITY

MANAGEMENT ACTIVITIES Information Human

Resources Financial &

Physical Assets Networks &

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1. Analysing Business Management Requirements 2. Designing General Accounting Systems 3. Designing Cost Accounting Systems 4. Appraising Reactions 5. Calculating and Using Standard Costs 6. Conducting Development Experiments 7. Conducting Market Potential Studies 8. Conducting Audits 9. Conducting Economic Studies 10. Evaluating Markets 11. Forecasting Sales 12. Preparing Internal Publications and Handbooks 13. Preparing Feasibility Studies 14. Conducting Basic Research 15. Communicating


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15. The ability of the enterprise in determining the effectiveness of formal and informal information flows in all directions within the enterprise, as evidenced by the presence and effective use of communication systems and procedures, is necessary for recommending action for cases where such flow is not effective and efficient. The activity concerning making information available in the enterprise is called Communicating in the BMS.

Undertaking these resource-generating activities requires resources. In other words, every activity described above will have its own resource requirements in the form of information, human resources, financial and physical assets and networks and relationships as shown in the Figure above. It is this circular nature of management that makes it a very difficult job. Let us examine the activities managers undertake concerning the planning, execution and control of the human resources. 16. Managers need to develop a practical organizational structure which details how

individual authorities and responsibilities are related to one another to best meet the short and long-range goals of the enterprise. This activity is called Developing Organizational Plans.

17. It is important to be able to describe what each job in the enterprise entails and the

skill, knowledge and attitudes required for the successful completion of the job. This is called Describing and Evaluating Jobs.

18. The activity concerning the building of the ability of an enterprise to design, develop

and sustain the management of new business tasks at the time it is needed is called Installing Activities.

19. The activity concerning the building of the ability of an enterprise to prepare and

implement an equitable salary and wage plan which accomplishes the objectives of attracting and retaining competent employees and motivating them to perform to their fullest potential is called Preparing Wage and Salary Administration Plans.

20. Managers need to develop ways to anticipate future work force needs. This activity

may include plans for upgrading, transfers, and recruitment to fill vacancies and is called Forecasting Work Force.

21. Making experienced and trained managers in the enterprise to serve as arbitrators,

expert witnesses, or as enterprise or union representatives in a dispute, and their potential to play a significant role in policy related issues to be settled between an enterprise and a union, between an enterprise and an employee or between two unions is called Arbitrating.

22. The activity of making skilled personnel who can represent management in union

contract negotiations, handle employees' grievances and the day-by-day agreements reached with the union as well as the ability of the enterprise to handle negotiations with the union effectively and efficiently is called Collective Bargaining.


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23. Managers need to provide, if and when needed, advice to individuals on how to

maximize personal assets and minimize liabilities while accomplishing stated enterprise and personal objectives. This activity is called Counselling Personnel.

24. Enterprises install ways and means for creating and/or improving information

exchanges with employees and their immediate families. This activity is called Exchanging Information with Employees.

25. Management needs to install ways and means for executing individual growth

programmes that will provide the enterprise with trained and capable management when needed. The activity concerning this is called Conducting Management Development Programmes.

26. Managers install the ways and means to determine enterprise policies and secure the

adoption of such policies, in regard to enterprise views on credit unions, recreational activities, sponsorship of outside education, personal counselling, etc. This activity is called Providing Employee Services.

27. The activity concerning locating and hiring the best-qualified candidate to fill a

technical or managerial position is called Recruiting. 28. The activity concerning the building of the capability of management to work

effectively as a team is called Securing Teamwork. 29. The activity concerning the design of the ways and means for establishing test

batteries, developing new tests, implementing these tests, and evaluating results for recruitment purposes is called Testing Personnel.

30. Managers develop and execute programmes for purposes of allowing enterprise

personnel to acquire knowledge, skills and attitudes to help them achieve enterprise and personal objectives. This activity is called Training.

31. The activity concerning the systems and procedures for using test results, educational

background, work history, and other data to prepare a report discussing the strengths and weaknesses of an individual to work on a specific job or in a work area is called Appraising Personnel.

32. The activity concerning the development, implementation and utilization of objective

appraisal techniques, and use the results to tie pay to performance is called Rating Merit.


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The managerial activities needed for planning, executing and controlling human resources also require the expense of resources, as can be seen on the Figure above. Let us now examine the activities that the BMS describes in the area of planning, executing and controlling the financial and physical assets. 33. The management of financial and physical assets of an enterprise requires the

determination of general and operating policies concerning financial and physical assets. This activity is called Determining Policies.

34. The management of assets requires the development of effective methods of

accomplishing paperwork to exercise control and facilitate planning or coordinating action. This is called Developing Systems and Procedures.

35. The activity utilizing effective and efficient processes to develop functional plans for

its marketing and production functions is required to determine asset needs. This activity is called Preparing Functional Plans.

36. The activity concerning the determination of especially financial and physical asset

requirements of the enterprise for at least a three-year period is called Preparing Long Range Plans.

37. The activity undertaken to assure that the enterprise has adequate cash at all times by

managing funds temporarily invested in inventories (including work-in-process), in

HUMAN RESOURCE RESOURCES NECESSARY FOR ACTIVITY

MANAGEMENT ACTIVITIES Information Human Resources

Financial & Physical Assets

Networks & Relationships

16. Developing Organizational Plans 17. Describing and Evaluating Jobs 18. Installing Activities 19. Preparing Wage and Salary Administration Plans 20. Forecasting Work Force 21. Arbitrating 22. Collective Bargaining 23. Counselling Personnel 24. Exchanging Information with Employees 25. Conducting Management Development Programs 26. Providing Employee Services 27. Recruiting 28. Securing Teamwork 29. Testing Personnel 30. Training 31. Appraising Personnel 32. Rating Merit


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accounts receivable and short term financing to facilitate production (pre/post shipment financing) is called Maintaining an Adequate Level of Working Capital.

38. The activity undertaken to ensure that the enterprise has adequate funds for asset

replacement as predicted by the long-range plans is called Securing Funds for Asset Replacement.

39. The activity undertaken to develop and control total operations by way of comparing

predetermined financial plans or budgets (including budgets for sales and income) and all or parts of expenses is called Controlling Budgets.

40. Managers develop targets for an enterprise or one of its functions or activities to

enable management to take necessary control action in time if these targets are not met. This activity is called Conducting Management Controls.

41. The activity undertaken to install and utilize systems and procedures for regularly

reviewing the effectiveness and efficiency of the processes it utilizes to select and position its offers is called Reviewing Product Development Processes.

Again these activities themselves require resources as shown:

Finally let us have a quick look at the example activities that concern the networks and relationships resource. 42. The activity that managers undertake to seek, evaluate and engage in mutually

profitable partnerships in order to increase its capabilities is called Seeking and Building Strategic Partnerships.

43. The activity that managers undertake to participate in the management and activities

of industry, management, technical, and professional organizations, to evaluate the benefits derived from such participation and make recommendations about the form and extent of enterprise participation is called Establishing Association and Society Relations.

FINANCIAL & PHYSICAL ASSETS RESOURCE RESOURCES NECESSARY FOR ACTIVITY




33. Determining Policies 34. Developing Systems and Procedures 35. Preparing Functional Plans 36. Preparing Long Range Plans 37. Maintaining an Adequate Level of Working Capital 38. Securing Funds for Asset Replacement 39. Controlling Budgets 40. Conducting Management Controls 41. Reviewing Product Development Processes


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44. The activity that the manager undertakes to evaluate, recommend, and plan the

participation of the enterprise in public projects to benefit the nation, community or some segment of the population, including civic, social, educational and charitable organizations is called Participating in Civic Affairs.

45. The activity that managers undertake to build relationships for the purpose of

securing counsel and/or representation for management in legal matters relating to enterprise operations or relations against external parties on time, effectively and efficiently is called Securing Legal/Secretarial Assistance.

These activities too require resources.

Managers do not do analysis and planning, organizing and coordinating, monitoring and improving, they undertake activities that are indicative of their presence. Certainly, in many organizations there are formal processes where management debates and determines a “plan.” This only illustrates the presence of a process and does not indicate the ability to analyse and plan. Many accept the presence of a process as evidence of the presence of the output. However, the ability to plan cannot be seen or measured directly. Organizing and coordinating is about implementation. Needless to say, a bad plan, that is a plan based on poor or no positioning or segmentation, cannot provide good results. Many good plans, however, fail to produce the expected results because they are poorly implemented. Coordination is important in order to balance the potentially conflicting objectives of the business functions. If one has managers or supervisors in charge of the marketing and production functions, conflicts can arise even in a small enterprise. If this issue has been handled during the planning phase, such conflicts can be minimized. Coordinating the activities in the light of the “bigger picture” is what this aspect of management is all about. Managers need to be aware of how they are each contributing to the goals of the enterprise and receive regular feedback about how they are doing. Clear organizational goal and objectives have the additional benefit of enabling the establishment of an internal “culture” within an enterprise which leads staff to behave in a way that naturally reinforces the goals and objectives of the enterprise. Like planning, execution cannot be seen or directly measured. Enterprises may fail to acquire the resources in the desired quantities and quality on time or may fail to allocate them to the selected tasks. So far as execution is concerned two of these resources come to the forefront:

NETWORKS & RELATIONSHIPS RESOURCE RESOURCES NECESSARY FOR ACTIVITY




42. Seeking and Building Strategic Partnerships 43. Establishing Association and Society Relations 44. Participating in Civic Affairs 45. Securing Legal/Secretarial Assistance


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Human and financial resources. If the enterprise lacks the quantity and quality of the required human resources, regardless of how meticulous the plans are failure in achieving objectives is inevitable. The same argument can be applied to the financial resources. The availability of financial resources and the quality of human resources can address most issues concerning physical assets. Moreover, most of the enterprise’s information needs concern external information from the environment to design strategies. This information can be purchased externally (financial resource) or generated internally (skills of the human resources). The second important area where information is needed and mostly generated by the enterprise itself concerns monitoring. Therefore, execution should emphasize the acquisition and allocation of human and financial resources. Control is the last activity group of management. The purpose of control is to assess how effectively and efficiently an enterprise implements its strategy, and identifies ways of achieving better results. Essentially, control monitors what is being done and seeks ways to improving it. This can only be done if an enterprise is able to identify which activities contribute to the achievement of which objectives. That is why the task approach is so important. If, an enterprise, starting from its priority objectives, can correctly select the critical tasks that will enable it to achieve them, it has a basis on which to monitor how the enterprise is doing. Otherwise, control is technically irrelevant. If an enterprise has a clear idea as to what it wants to control and why, control, to a large extend, is then reduced to setting up procedures for information collection and dissemination. Obviously, if an enterprise cannot collect information about the effectiveness of its performance and its efficiency, it is difficult to talk about control. The information concerning the effectiveness of an enterprise’s activities, in the final analysis, depends on the achievement of business objectives. The enterprise must sell more frequently and more to its present buyers and avoid present buyers buying less frequently or less; it must induce brand switching into the markets of the competitors and prevent its users switching to competitors; it must convert nonusers into users of its own products and avoid its users becoming nonusers; and it must be profitable in the medium and long term. To achieve these ends, the enterprise must maximize its bargaining power with its suppliers and buyers vis-à-vis quantities produced, quality, price and time of delivery. Efficiency of the enterprise’s activities is a matter of input to output ratio. If an enterprise fails in achieving these objectives, then it could be for the following reasons: management may have decided to do the wrong things (effectiveness), or may have done the right things wrongly (efficiency), or both. We have just addressed the first part “securing resources and applying them” of the role of the manager and deduce that one way for management to go wrong is to waste resources.


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RESOURCES NECESSARY FOR ACTIVITY




1. Analysing Business Management Requirements 2. Designing General Accounting Systems 3. Designing Cost Accounting Systems 4. Appraising Reactions 5. Calculating and Using Standard Costs 6. Conducting Development Experiments 7. Conducting Market Potential Studies 8. Conducting Audits 9. Conducting Economic Studies 10. Evaluating Markets 11. Forecasting Sales 12. Preparing Internal Publications and Handbooks 13. Preparing Feasibility Studies 14. Conducting Basic Research 15. Communicating 16. Developing Organizational Plans 17. Describing and Evaluating Jobs 18. Installing Activities 19. Preparing Wage and Salary Administration Plans 20. Forecasting Work Force 21. Arbitrating 22. Collective Bargaining 23. Counselling Personnel 24. Exchanging Information with Employees 25. Conducting Management Development Programs 26. Providing Employee Services 27. Recruiting 28. Securing Teamwork 29. Testing Personnel 30. Training 31. Appraising Personnel 32. Rating Merit 33. Determining Policies 34. Developing Systems and Procedures 35. Preparing Functional Plans 36. Preparing Long Range Plans 37. Maintaining an Adequate Level of Working Capital 38. Securing Funds for Asset Replacement 39. Controlling Budgets 40. Conducting Management Controls 41. Reviewing Product Development Processes 42. Seeking and Building Strategic Partnerships 43. Establishing Association and Society Relations 44. Participating in Civic Affairs 45. Securing Legal/Secretarial Assistance

Managing a business consumes resources.Management is efficient when it allocatesresources to management activities in such a waythat they create synergies which allow most of theresources to be left available for the business.

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Chapter 6 OPERATING BUSINESS FUNCTIONS Let us now examine what the manager applies the resources to and must also manage. We already know that there are two functions to be managed: Marketing and Production. Marketing is in charge of finding and keeping markets, production is in charge of preparing the goods (and services) in marketable form. Each function has specific generic objectives, as seen in chapter 5. Now let us examine the tasks of business. In the BMS, the tasks refer to the things to be managed. These are the steering wheel, the gas pedal, and the breaks of the car. These are the parts of the car that the driver has to manipulate to get the vehicle to the desired destination. Let us begin with marketing. One of the first things that come to mind when we mention marketing is communications. Indeed, marketing is what you use to communicate especially with your buyers. Thus, most of the tasks of marketing are related to communications. The others are related to managing sales transactions and distribution channels. There are seven tasks assigned to the marketing function. We will examine some of these in detail when we examine the structure of the BMS. For the time being let us review these marketing tasks: a. Preparing Sales Literature: Preparing price lists, catalogues, technical papers, and

instruction books for the buyers and dealers. b. Programming Promotions: Developing personal sales competence and text,

materials, and demonstration equipment for a promotional programme. Includes determining the relative worth of different media for contacting specific groups in targeted markets or segments.

c. Programming Advertising: Determining the schedules, themes, layout, text and

media of advertising. Includes determining the relative worth of different media for reaching specific groups in targeted markets or segments.

d. Setting Up the Channels of Distribution: Selecting and developing the most

effective and efficient network of intermediaries for flow of goods, services, information and money. If the channel decision is part of the strategy, this task is about implementing the strategic decision. If not, the task still needs to be undertaken to establish a capability to have access to the markets.

e. Prompting and Responding to Sales Enquiries: Building procedures to answer

enquiries and initiate contact with prospective buyers. This task is in the Transaction Cycle.

f. Preparing Specifications and Negotiating: Making sure that the products to be sold

are clearly specified and that their sale is negotiated in accordance with the enterprise's policies and procedures. It enables all parties to have a clear understanding of the terms, and allows the enterprise to secure favourable terms. This task is in the Transaction Cycle.

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MANAGEMENT CYCLE MARKETING BUSINESS TASKS

Information

Human Resources


Analy

sis

Plan

ning

Network & Relationships

Information

Human Resources Financial &

Physical Assets Orga

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a. Preparing Sales Literature b. Programming Promotions c. Programming Advertising d. Setting Up the Channels of Distribution e. Prompting and Responding to Sales Enquiries f. Preparing Specifications and Negotiating g. Pricing and Quoting

g. Pricing and Quoting: Determining the final or tentative selling price of goods or services and preparing quotations. This task is in the Transaction Cycle.

These tasks need to be managed individually, simultaneously and as a group. That is, the manager must think about planning, executing and controlling the resource requirements of each one of these tasks one at a time and as a group as shown: Clearly this is a taxing job. Each task requires its own information, human resources, financial and physical assets, and networks relationships inputs. The manager needs to determine which task needs what quantity and quality input and decide where and how to get it (planning). Then, the manager must secure these inputs on time and allocate them to the relevant tasks (execution). Finally, the manager must monitor the tasks to see whether or not the resources allocated have produced the desired results (control). To do all of these things without wasting resources is the challenge of management.

Let us briefly again examine the production tasks: h. Determining Inventory Requirements: Setting up a system to determine and

maintain the optimum quantities of material required for the business of the enterprise considering the existing conditions, such as production methods, product design, raw material specification, sales policies, and plant layout.

i. Handling Materials: Developing the most effective means of moving raw materials,

parts, tools, supplies, work in process, finished goods and other materials required to produce goods or services.

j. Purchasing and Expediting: Improving ways of buying, expediting, record

keeping, and supplier research to secure the required supplies and materials at the right quantity, quality, time and at minimum cost for the production process.


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k. Keeping Stock: Developing records and ordering procedures that will assure adequate operating supplies with a minimum of inventory cost. Includes storage considerations.

l. Designing and Installing Plant: Using engineering studies of the production

process, demand for goods, equipment required, and available plant site to develop specifications for a new plant or for alterations to the existing plant, or to install a complete plant or any of its major parts in conformity with prior plans and specifications.

m. Engineering Production Processes: Determining the nature and exact sequence of

operations, required for a given part or material in order to produce the finished product in the most efficient manner. Includes consideration of factors such as delivery dates, equipment, material flow, worker availability and capabilities.

n. Locating and Evaluating Plant Site: Determining the best location for a plant,

office or warehouse in order to meet the objectives of the enterprise or the needs of business functions.

o. Tooling: Determining and designing the tools, jigs and fixtures for the manufacture

of a given product. Distinct from process engineering in that emphasis is placed on holding devices and cutting or forming tools accessory to the actual process itself.

p. Balancing Production or Line Systems: Arranging manufacturing processes in the

form of a continuous flow, so that a part or material moves continuously at a specified rate through the necessary operations towards its completion with all operations performed simultaneously at a balanced time interval.

q. Developing Maintenance Systems: Developing a system for maintaining the

physical assets of an enterprise. Includes performing preventive maintenance and the periodic inspection of plant assets and equipment to uncover and correct conditions that might lead to production breakdowns or excessive wear.

r. Improving Methods: A detailed analysis of specific manufacturing operations, in

order to distinguish between those that are necessary and those that can be eliminated and determining the best way of performing those that are necessary.

s. Installing Cost Reduction Programmes: Initiating a programme for reducing costs

through improved methods, reduction of waste, and more efficient use of all available resources. Includes appraising of the products and processes with respect to material, appearance, performance and manufacturing requirements.

t. Developing Quality Standards: Analysing the product, its components and

performance to develop an acceptable quality level based on requirements such as competition, customer acceptance, industry-standards, and economy of manufacture.

u. Developing Quality Control Procedures: Establishing procedures to keep quality

within established limits through the use of accepted statistical or other techniques.

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MANAGEMENT CYCLE PRODUCTION BUSINESS TASKS

Information

Human Resources

Financial & Physical Assets An

alysis

Pl

anni

ng


Information

Human Resources Financial &

Physical Assets Orga

nisin

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Information

Human Resources

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h. Determining Inventory Requirements i. Handling Materials j. Purchasing and Expediting k. Keeping Stock l. Designing and Installing Plant m. Engineering Production Processes n. Locating and Evaluating Plant Site o. Tooling p. Balancing Production or Line Systems q. Developing Maintenance Systems r. Improving Methods s. Installing Cost Reduction Programs t. Developing Quality Standards u. Developing Quality Control Procedures v. Designing Product Service Departments w. Estimating Production Costs x. Dispatching Work y. Scheduling Work and Routing z. Fulfilling Freight Operations

Includes selection of the physical means such as measuring instruments, equipment and facilities to be used in the measurement of product quality.

v. Designing Product Service Departments: Developing the function, organization,

and operations of product service departments, for the purpose of improving total quality. This involves developing standard policies and procedures for merchandise return, warranty servicing, repair, recalls, updates, upgrades, support, etc., and may include designing and running test applications for diagnostic purposes, and developing and running related training programmes.

w. Estimating Production Costs: Estimating manufacturing costs in terms of projected

manufacturing schedules, and standard costs. This task is in the Transaction Cycle. x. Dispatching Work: Setting into motion production activities with job orders

authorizing operations, material and tool movement orders from stores to processing departments or from process to process for a given order. This task is in the Transaction Cycle.

y. Scheduling Work and Routing: Prescribing when and where each operation

necessary for the manufacture of a part or product is to be performed for a given order by determining the movement of a part or product through the required manufacturing processes or operations for a specific order. This task is in the Transaction Cycle.

z. Fulfilling Freight Operations:

Scheduling freight operations to achieve distribution objectives. This task is in the Transaction Cycle.

The production tasks need to be managed individually and as a group. That is, the manager must think about planning, executing and controlling the resource requirements of each one of these tasks one at a time and as a group. The task of the manager once again is to determine which task needs what quantity and quality of input and decide where and how to get it (planning). Then, the manager must secure these inputs on time and allocate them to the relevant tasks (execution). Finally, the manager must monitor the tasks to see whether the resources allocated have produced the desired results (control). The job of the manager is an extremely complex one. Once we combine the managerial activities and the business tasks, we get a


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matrix where the rows are the management activity focuses and the columns are the business tasks. This is a big matrix of 12 rows and 26 columns. If you list the management activities in full, the matrix gets blown up to 45 rows and 26 columns. This is the Business Management Grid ® © on which the BMS is based.3 You knew the complexity of managing an enterprise. Now you know from where this complexity arises. Up until now you may not have been able to delineate management from business, or to define management in terms of specific activities, and business in terms of specific tasks. Now you can. Although the task of managing an enterprise does not seem any easier, it should look much clearer. Furthermore, the BMS can help you simplify the job of managing an enterprise by reorganizing the business tasks around the cycles of business.

3The table is taken with permission from Diagnostic Consulting Expert System (DICONEX) by O. A. Atac, The Association of Training Institutions for Foreign Trade in Asia and the Pacific (ATIFTAP), Version 2.0, Manila, Philippines.

MANAGEMENT ACTIVITIES BUSINESS TASKS


a. Preparing Sales Literature b. Programming Promotions c. Programming Advertising d. Setting Up the Channels of Distribution e. Prompting and Responding to Sales Enquiries f. Preparing Specifications and Negotiating g. Pricing and Quoting h. Determining Inventory Requirements i. Handling Materials j. Purchasing and Expediting k. Keeping Stock l. Designing and Installing Plant m. Engineering Production Processes n. Locating and Evaluating Plant Site o. Tooling p. Balancing Production or Line Systems q. Developing Maintenance Systems r. Improving Methods s. Installing Cost Reduction Programs t. Developing Quality Standards u. Developing Quality Control Procedures v. Designing Product Service Departments w. Estimating Production Costs x. Dispatching Work y. Scheduling Work and Routing z. Fulfilling Freight Operations

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BUSINESS DEFINITION AND STRATEGY DESIGN Chapter 7 UNTANGLING MANAGEMENT: THE DESIGN OF BUSINESS STRATEGIES

When one is faced with the difficulties of selecting what to do, the only way out is prioritisation. Unfortunately we cannot help you in prioritising management activities. Everything requires the four resources. You must engage in one or more of the activities described in section one. We cannot tell you how you plan, execute, and control the resources your business needs. We cannot shorten the list of management activities for

you nor help you put them in some order of importance. You must do this on your own taking into account the realities of your business, the people in it (including yourself) and the environment. We can, however, help you prioritise the business tasks. Selecting the tasks that are important to you will reduce your management effort, as you will know where you should concentrate your efforts. To start systematizing your management we begin with the definition of your business. For the BMS to make life easier for the manager, the manager must use it. This does not mean that the manager is helpless without the BMS. Managers have their feel, insight and experience to count on. Using the BMS is no substitute for your managerial skills but it makes managing more systematic. The destination for the business is given. The enterprise must dominate a market. Now is the time to figure out how to get there. That is, design a strategy. Strategy design in the BMS will help you prioritise your objectives and select the critical business tasks in a rational manner.

The job of managing an enterprise is burdensome if one cannot establish priorities. No manager can manage all the business tasks with the same efficiency. The business tasks need to be prioritised such that management effort can be focused. The BMS enables the manager to prioritise business tasks through the definition of the business of the enterprise and its strategy.

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Chapter 8 WHAT IS THE BUSINESS OF YOUR ENTERPRISE?

We start the strategic business management planning by defining your business. Let’s remember what we have discussed in the previous section. You are in business to make money. This means that you must have something to sell and someone to sell to. In other

words you must have a product (or service) and buyers. Without them there is no exchange and no business. Therefore, to define a business all you need to know is the product and the market. To make the things you want to sell you need production and to find the markets that will buy these products from you, you need marketing. Therefore, in the BMS, a business is defined in terms of only two business functions: Production and Marketing. When we ask you to define your business, you must think about what you want to sell to whom. Let us start with production. If we ask you to define your business right now, you will probably be thinking about what you are making: shoes, sunglasses, etc. But is this really your business? Is what you are making really what you are selling? If you were to make sunglasses, “making sunglasses” is not the only way to define your production. Your business could have been defined in terms of “protection from the sun,” or, perhaps as the business of producing “fashion.” If you say: “I’m in the sunglasses business,” you should realize that sunglasses are just two pieces of coloured glass, held over your eyes by a metal or plastic frame that secures itself to your face around your ears. Nobody buys a pair of sunglasses because they want “two pieces of coloured glass, held over their eyes by a metal or plastic frame that secures itself to their faces around their ears.” Surely, you must be making more than that. To define a business, one must also define its marketing. Suppose you define your business as “sunglasses for Italy.” We have already discussed why making sunglasses was not a good description of the production function. The marketing definition needs improvement as well. First Italy is a country, countries do not buy things, people do. Suppose the definition is modified as “I am in the business of making sunglasses for Italians.” This sounds a bit better but there are millions of Italians, surely you are not in the business of making sunglasses for all of them. Think about it in terms of why are these people buying. If Italian buyers are interested in looking good, you could have defined your business as “making a style or a fashion statement with sunglasses.” Thus, the buyers are not “Italians” but “fashion conscious Italians.” If the Italian buyers were also those who are interested in protecting their eyes from the sun, you could have claimed your business to be “making UV protection sunglasses for Italians who want to make a style or a fashion statement.”

The business of an enterprise is defined in terms of what it produces and for whom. That is what the production and marketing functions do. Defining one’s business is the first step of strategy planning.

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Millions of businesses sell to a few, and some sell to one customer only. Let us take another example. Suppose you said your business was producing T-shirts for K-mart. Suppose K-mart provides you with all the necessary materials and patterns for the production of these T-shirts, which is a typical case for many developing country exporters. Obviously, K-mart has all the resources they would need to produce the T-shirts themselves, but they chose your company to make the product instead. You are only providing the labour that is needed to produce these T-shirts. K-mart has provided all the rest of the materials. Therefore, what you may be adding to the whole venture is the low cost of your labour. What do you think your business is in this case? What does K-mart really buy from you? Is it cheap labour? Not entirely. If you mismanage your company, or produce late or substandard T-shirts, K-mart would not buy from you even if you had the lowest labour rates on the Globe, would they? Therefore, you may say your business is providing a service rather than making a product. Even though what you are delivering to K-mart is a product, your management service is what K-mart is interested in. Thus, you are in the business of selling your production management skills to K-mart. As can be seen, what you are making may not be what you are selling and thus may not define your business. To better understand the very important point made above, let us think about a rather unconventional product: a newspaper. What does a newspaper sell? You are probably thinking it sells news to the general public. But ask yourself: does selling news to the general public generate enough money to keep the newspaper profitable? Well most know that it does not, as the cost of printing a paper is about twice its selling price. It is the selling of advertising space in that newspaper that generates the profits. So here again is another example of a company that appears to be making one thing but in reality they are selling something completely different. If you fail to make this vital realization of what your enterprise is really selling, you will be looking in the wrong direction and your business will not be able to survive. Let us now look at the other side of the coin: the buyer. For K-mart, we stated that the business could be defined as “selling a production management service to K-mart.” Like “Italy,” a country that does not buy, K-mart is the name of a company. Companies do not buy either, but managers of organizations do. So you may redefine your business as “selling a production management service to the purchasing agents of K-mart.” You may expand this business definition to “selling a production management service to purchasing and marketing managers of K-mart,” or to “selling a production management service to buying agents of large retail chain stores.” Remember the newspaper example? The business was defined in terms of “providing advertising space.” So who are the buyers? The advertising agencies. So, perhaps you should define the business of a newspaper as “providing advertising space to the agencies.” But then you could do better by defining the business as: “providing advertising space to the account executives in the advertising agencies.” An even better definition would be “providing advertising space to advertising agency executives who manage big retail chains (or financial institutions, etc.).”

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However, advertising agencies will not buy advertising space unless the paper reaches the readers that they are interested in. Account executives who represent financial institutions would prefer newspapers which are read by executives, professionals and people with savings. Thus, a newspaper must produce the “appropriate readership profile” to be of interest to the account executives. Therefore, the business of a newspaper can be defined as “the production of an appropriate readership profile for the account executives representing financial institutions in advertising agencies.” In other words, who you think buys from you may not be clear, and may not help much in defining your business. As you can see, there are many ways of defining your business in terms of “what you make for whom.” To recap, let us review the main points. First, what you make may not be what you are selling. To decide what you are in fact making you should think about why they buy from you. For the examples above we reached the following possible “production” definitions: • Making the best UV protection sunglasses; • Selling production management skills (K-mart); • Providing advertising space (newspaper). Second, while thinking about “who buys from you,” you must think about who is responsible for the financial success of your enterprise. Earlier we reached the possible “marketing” definitions for our examples: • Safety conscious Italians (sunglasses); • Purchasing and marketing managers of K-mart; • Account executives representing financial institutions in the advertising agencies

(newspaper).

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Chapter 9 SELECTING A BUSINESS DEFINITION

Using the BMS approach to define your business allows you to think of your enterprise in terms of its core functions of marketing and production. This does not imply that your enterprise should have departments reflecting these functions, nor that the tasks related to these functions need to be performed by different people. If you do not have such departments or different managers, all you must keep in mind is that you have to wear two hats: one for marketing and other one for production.

An enterprise may have more than one business. Having multiple businesses in one enterprise is very common but often goes unnoticed. If in the process of defining your business you are not able to incorporate all your product/market combinations into a single statement this is probably the case. You must develop a separate strategy for each as technically you have more than one business. Each distinct product/market combination should be defined separately and an appropriate strategy developed. While defining markets you have to think about different criteria. For example, although children usually do not purchase toys, they have a significant impact on the buying decision. Medicines are another example: the real decision makers are the doctors who prescribe medication, not those who purchase the items. You may consider “influencers” as a market definition variable. In most cases the buyer is also the user. However, the buyer may be purchasing on behalf of someone else. An example of this would be a woman purchasing a necktie as a gift for her husband. Most gift items fall in this category. The buyer buys it to give away. Very often the person buying the product does not purchase it directly from the manufacturer. In most cases, the buyer is an independent intermediary; an export merchant based in your own country, an importer, a wholesaler, a retailer in your target market, etc. In this case, your buyer is buying your necktie to sell it, not to give it away. If you are selling to buying agents, importers, wholesalers, retailers, etc., you are operating as part of someone else’s production process. Your buyer has a contract with his customers; whether he makes it or chooses to buy from you, what he offers them stays the same. Thus, he needs to be sure that he will get the product in the form and quality that they require, at the right time and at a reasonable cost, the same way as if he was manufacturing it. Therefore the buyer will expect you to act as if you were his production manager. The main business definition implication of this is that to get the contract, you need to convince your buyer of your ability to manage your part of his production process effectively

Selecting a business definition is critical anddifficult.

First, what the enterprise is producing may notbe what it is selling; the apparent buyers may notbe the actual market.

Second, the enterprise may have more than onebusiness each one needing a separate definition.

Third, a correct definition of one’s business isnot sufficient for competitiveness. One should aimto define the business of the enterprise in such away as to subjugate or avoid competition.

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and efficiently. In other words, you are selling your ability to manage the groups of tasks that relate to producing a product or a component. In this case you are selling a production service and not a product. Your business definition is important as it is intended that you should stick to it for a while. However, you must keep in mind the different motivations and behaviours of the end users of the product. Shifts in their attitudes or expectations, the introduction of new product substitutes, changes in spending power of end-users or technological advances could force you to radically change your market definition. This definition of your business, formulated in terms of what you produce for whom, will be the basis of your strategy. In fact, your strategy is your business definition made more precise. While writing your strategy, you will progressively refine your ideas in terms of whom you are targeting with your offer and what it is you are offering them, until you reach a specific segment and a specific offer. This involves an iterative process of dividing the market in smaller and smaller segments and refining your offer. Where business definition ends and where strategy begins is not clear. The following example may illustrate the progress from a business definition to a strategy. At the level of the market, needs are generally satisfied by a product class. Most business definitions will apply to aggregate markets and product classes. For example the gender variable women define a market. Outerwear on the other hand is a product class. “Outerwear for ladies” is an example of a business definition where a market and a product class are used. As you progress towards segmenting markets with the intention of dominating them, you get closer and closer to a strategy statement. For example the social status variable “career women” and age “25-45" could be used to define a segment. Designer clothes made of natural fibres, on the other hand, is a specific product class. The business definition designer clothes made of natural fibres for career women aged 25-45, is closer to a strategy statement. Larger segments can further be divided into smaller segments to enable the enterprise to dominate it. For example the socio-psychological variable “environmentally consciousness” could be added. “Designer clothes made of natural fibres for environmentally conscious career women aged 25-45" is much more strategy-like. Often reasons for entering a market are confused with the market definition itself. Suppose an enterprise finds there is a boom in demand for its product in Japan. Or an enterprise decides to target Western European consumers because of their purchasing power. Whilst these are valid reasons for investigating a market, they are not in themselves market definitions. The main market definition variables include: • Geographic variables; • Demographic variables (for B2C4), Industry descriptions (for B2B); • Lifestyle variables; • Variables that describe personality differences; • Variables that highlight differences in culture/subcultures; • Variables that categorize social classes.

4B2C is an acronym for Business to Consumer and B2B is the one for business to business, there also is B2G, Business to Government, G2G etc.


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You can use a combination of these (or indeed others that fit your situation) to indicate to whom you are selling, or intend to sell. To look at how these variables can be applied to a market, let's take the example of an enterprise producing hand crafted silver jewellery. Say you are targeting women with your offer. Is this specific enough? Are you really selling to all women everywhere? You refine this with a geographic variable, “women in Chile”. This is still very broad, so you use a demographic variable to pinpoint young women between the ages of 18 and 25. As a further refinement you add a “lifestyle” variable: “who are fashion conscious and have sufficient disposable income to buy jewellery”. In doing so, you have already became more specific about your target market and passed into the strategic territory. With this refined definition you would be in a position to estimate the total potential sales of jewellery to the market you are targeting. However, it does not help you identify why jewellery is bought, nor will it help you assess the likely sales of the silver jewellery you are making. To take another example, demographic data would enable a pantyhose manufacturer to forecast the percentage of women who wear pantyhose within varying age groups in a society. That information would enable the manufacturer to forecast the total sales of pantyhose. However, it would be extremely difficult to use this data to forecast how many pairs of a particular brand of pantyhose will be sold. As you have seen, there are many ways of defining a business. In the K-mart case, a possible definition was “Selling production management skills to purchasing agents of K-mart.” To come up with this definition, we thought about two things: • Why are the buyers buying? • Which buyer is responsible for the business’s financial viability? However, defining your business as “Selling production management skills to purchasing agents of K-mart” may not be the best definition. The criteria to use to choose a good business definition are determined by the conclusions of a previous section: • You are in business to make money; • Your business should make more money for you than what you could have done with your

resources elsewhere; • Specifically, your business should earn you more money than what your competitors are

earning. The way you define your business determines whether the business is likely to earn you more money than what your competitors are earning. Thus, a good business definition is one which enables the business to make more money than its competitors. In other words, businesses should keep that purpose in mind when they specify what they make for whom. So what is wrong with the business definition “Selling production management skills to purchasing agents of K-mart?” This business definition does not suggest that this enterprise will make more money than its competitors. Why? Because millions of other enterprises would have the same definition. All of them will be “Selling production management skills to

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purchasing agents of K-mart.” Being “one of millions” means that you will have little bargaining power with the buyers. What stops you from making more money than your competitors and gain as much money as possible? We already saw that there are natural limits to how much buyers can buy and how much they can afford to pay. However, the real constraint on your revenues is that you lack bargaining power. An enterprise with bargaining power can set the price, delivery dates, quality standards, etc. If your buyers dictate terms, they have the bargaining power. They can do this if they have other enterprises to supply them. That is, if you have competition. If you are the only enterprise selling a particular product, where else are the consumers going to buy? Is this not the ideal situation? Thus, in order to have bargaining power you need to situate yourself in a position where your customers have no option but to buy from you. You can find an untapped market where there is no competition, go to where there is little competition, or find weak competition and beat them out. A good business definition identifies a market for the enterprise where its bargaining power is likely to be maximum so that the business can make more money than its competitors. With this in mind, look back: have you defined your business so that you are not one of millions? Ask yourself, who are my buyers? What do I really know about them? Why are they buying from me and not from my competitors? To which buyer does my enterprise owe its financial well being? What should I really offer to them? Do I have too many competitors? What bargaining power does my enterprise have? Can I negotiate with my buyers from a position of strength? Are my competitors threatening my enterprise? Can I redefine my business so as to avoid surrounding myself with too many competitors? If I redefine my business what should my enterprise make? To whom should my enterprise offer what it is making? Think about all of those questions. If you feel comfortable with your answers, you are now at a stage where you will make the most important decision for your enterprise: the definition of its business. If you are not satisfied with your business definition, it is time to study competition. You want to be able to distinguish yourself from your competitors who are out there to get your business. To maximize your bargaining power you must find a market where: • There are no competitors, or • Competition is weak and can be defeated Let’s remember our K-mart example. The business may have been defined as “Selling production management skills to purchasing agents of K-mart.” This definition is a whole lot better than “selling T-shirts to K-mart.” But this is not sufficient. First, there is no information about why they are buying from us. Second, it does not say how our enterprise is any different from those selling the same. Why would the purchasing managers of K-mart prefer our enterprise? Is it because we manage our company so that we: • Are efficient? • Deliver fast? • Deliver with the highest expected quality? • Have the high production capability to deliver as much as they want? • Have a flexible manufacturing capability to deliver as many as they want? • Are the cheapest?


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• Have reliable delivery? • Help them design products they can easily sell? • All of the above?

Now let’s think about what competitors are doing and what are the priorities of the purchasing managers of K-mart. Do you really know what their priorities are? Do you know who your competitors are and what they deliver? Do you know if and how you can beat them? If you cannot answer these questions, you cannot have a good business definition. In other words, a good business definition specifies what is to be produced for whom on the basis of intimate knowledge of what the buyers’ priorities are and what the competitors are offering. Finding answers to these questions and detailing your business definition is where you move from defining your business to designing your strategy.

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Chapter 10 CASE: NASRI BABA Nasri Baba Spices was a family owned company. Grandfather Nasri built a successful business selling high quality spices in a retail outlet. His son expanded the “business”. The company started packing and selling its spices to other retailers, and business grew. Under his management, Nasri Baba Spices Ltd. was born and business was further extended to include packed candy. At the end of 1991, Sevgin, the daughter of Nasri Jr., finished her MBA at Ohio University and went back to Turkey to take over the “business”. She was full of ideas, one of which was to “go global”. Impressed by the volume of herbal trade in the USA, she decided to market Nasri’s herbs to that country. She defined Nasri Baba’s new business strategy as: “Packing and marketing herbal food supplements to the USA”. At that point Sevgin asked one of her former professors in the business school to evaluate her strategy. Below is a summary of what the professor said. Dear Sevgin “Your definition of business is “packing and marketing herbal food supplements to the USA.” My first question is the following: Does this definition mean that Nasri Baba will have a powerful negotiating position in the targeted market? I don’t think so. Your business definition is insufficiently precise in its description of what Nasri Baba is supposed to produce. What it produces is stated as: “herbal food supplements.” This is too broad for positioning. You should have a more refined positioning statement; one that will enable Nasri Baba to find a market where there is no competition or where competition is weak. A more precise positioning statement could include qualifications like: Herbal food supplements (1) Against illness, (2) For alleviating fatigue, (3) For losing weight, (4) For curing skin disorders, etc. Your strategy statement does not describe for whom Nasri Baba produces. The market is defined as the USA. “The USA” is insufficiently precise, countries do not buy goods; people do. Furthermore, I assume that you have not exported before and herbal remedies are hardly an innovation. Thus, you are going after someone else’s buyer: The buyer of competitors’. You need to have a convincing argument why these people start buying from you. You could also have considered the following options: Marketing Herbal Food Supplements to: • Health food stores that market herbal remedies in the USA; • Mail order houses that market herbal remedies in the USA; • Pharmacies in the USA; • Specific consumer groups in the USA; • Other companies who buy herbs in bulk for retailing, etc. in the USA. After receiving these comments, Sevgin reconsidered her original business strategy definition and stated Nasri Baba’s strategy as: “Getting the mail order houses in the USA to start buying herbal food supplements to alleviate fatigue for men and women above 50 years of age from Nasri Baba.”

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In this statement Sevgin has determined Nasri Baba’s market - the mail order houses servicing men and women over 50 in the USA– and confirmed what it will “produce” – herbal food supplements against fatigue. Furthermore she identified her target market as buyers of competitors’. Sevgin sent this strategy to the professor and asked for comments. Here is what he had to say: Dear Sevgin “This second definition of Nasri Baba’s business strategy is much more convincing than your original one. Nasri Baba Spices may have a higher bargaining power against the mail order houses with a product that is specifically prepared to alleviate fatigue for men and women over fifty. There seems to be enough precision in the definition of the target segment (mail order houses in the U.S.A.) and product positioning (herbal food supplements to alleviate fatigue for men and women over fifty years of age). Nasri Baba’s bargaining power will depend on the level of competition in this segment. The target market segment is “mail order houses.” Thus, competitors are those enterprises who sell herbal remedies to mail order houses. For you to have high bargaining power, you must know what makes the mail order houses buy. Implicit in your strategy is the belief that mail order houses will buy from you when you offer herbal food supplements to alleviate fatigue for men and women over fifty years of age. Nasri Baba is selling a product that the mail order houses will re-sell. That is, mail order houses are businesses themselves. Your strategy statement should have included information about what need is to be satisfied. You can sell to them if they believe that you can meet their needs better than your competitors. Thus, you must further refine your strategy, as in its present form it does not clarify how the mail order houses would be convinced that the market for herbal food supplements to alleviate fatigue for men and women over fifty years of age is a lucrative one. Furthermore there are at least two types of mail order houses: Catalogue and direct mail. Your goal should be to have high bargaining power in both of these two segments. That may mean you would need different capabilities if these two segments are distinct and indeed, they are. These segments have different buying practices and priorities. A catalogue house stocks some inventory and it rarely changes how it advertises its products. Direct mail order houses, on the other hand, do not stock inventory and they frequently change their advertisements. Nasri Baba Spices will have to build capabilities to have bargaining power in these two different export markets. You may, for example, try offering attractive packaging suitable for mailing, prepare complete and standard sales literature and offering low prices to the catalogue mail order houses to switch to Nasri Baba. For the direct mail order houses you may try offering a variety of packages with different brand images, producing small quantities rapidly, offering low prices and prepare brief non-standard sales literature. After receiving this last note Sevgin’s business strategy became: “Getting the mail order houses in the USA to switch to Nasri Baba as supplier of herbal food supplements to alleviate fatigue for men and women above 50 years of age. To do that Nasri Baba will offer: (1) Attractive packaging suitable for mailing, (2) Complete

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and standard sales literature, (3) Low prices, to the catalogue mail order houses, and (1) Variety of packages with different brand images, (2) Production of small quantities rapidly, (3) Low prices, and (4) Brief non-standard sales literature to the direct mail houses.” Compare the two strategy statements of Sevgin. First, “Packing and marketing herbal food supplements to the USA”, and then the one above. Which one do you think is better?

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Chapter 11 DESIGNING STRATEGY: A SUMMARY

In the BMS, strategy is defined as a deliberate configuration of the quality, quantity, cost and time of production to enable the marketing function to achieve its objectives for the purpose of maximizing the bargaining power of the enterprise by subjugating competition or by avoiding it in a market. According to this definition there are two components of strategy. First, the

manipulation of the quality, quantity, cost and time of production to design an offer. Second, the definition of the market where the enterprise expects to subjugate competition or avoid it. There are four variables that pertain to the objectives of the production function. Quantity, quality, cost and time.5 Quantity does not only refer to the number of units produced. It also includes all the physical properties of the product. The most obvious examples include shape, weight, size, and colour. Others might be ingredients and/or the characteristics of those ingredients, their composition, etc. Quantity also includes packaging. The quality of the product is a multidimensional concept. First there is the quality of design. This is usually defined by way of specifications, national and/or international standards, grades, drawings, etc. Next there is the quality of conformance. This is the level of conformity of the manufacturing processes to the designed quality. Then there is the marketable Quality. This is the quality that pertains to the degree to which the product yields customer satisfaction. Next there is the operational quality. To benefit from the disciplines of quality, it is also important to consider the quality of the operations and management itself. What is the quality of the employees? What is the quality of the processes? What is the quality of the system? The concept of quality also incorporates conservation quality. This pertains to the optimum use of resources at our disposal. Among these are materials, machines, money, land, energy, and people. There is also the { XE “Environmental Aspects of Quality” }environmental quality. This pertains to such things as { XE “ecology” }ecology, clean air, unpolluted waters, potable water, tolerable noise levels, safe waste, open space, landscape (natural and developed), recreation, and beauty. Finally there is the human aspects of quality: characteristics of this aspect of quality include the quality of life, including the quality of work life, the quality of health, education, culture, society, freedom, ethical and moral values. Quality also covers the convenience of finding the product where one wants. Therefore, distribution is also a component of quality. Furthermore, the image of the product and the before and after sale service provided by the enterprise are also components of quality.

5The business tasks of the production function related to the four variables will be examined again later when we discuss the capabilities of the business.

Strategy in the BMS is the configuration of the physical, extended, and generic attributes of a product to fit the needs, expected outcomes and purchasing habits and occasions of the target market or segment. The physical, extended and generic features of a product combine the choices about quantity, quality, time and cost of production for the marketing function to achieve its chosen generic objectives.

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The time objective of the production function is also a multidimensional concept. It is related to the time of production, i.e., the processing (throughput) time, the speed with which the enterprise can secure its inputs, the speed with which the enterprise can respond to its buyers and deliver its products, and the timeliness of the delivery (not late but not early either)6. The cost objective of the production function has to do with the price of the final offer. Although basing prices on costs is generally ill advised, the profitability of the enterprise depends, at least to a large extend, on the cost of production. First, there is the cost of production. However, the cost of production does not mean anything to the buyer. The buyer pays more attention to the total cost of the offer. In other words, the total amount of money he paid to get the goods in his warehouse. Then there is the cost of transaction. This cost includes all kinds of imputed costs. It is a monetary measure of the effort the buyer exerts to get the goods. Finally, there is the relative cost of the offer. The relative cost of the offer has to do with the costs of alternative products and substitutes if any.7 It was said that strategy is the mix of Quality, Quantity, Time and Cost of a product or service, i.e. positioning, applied to a segment. A segment, by definition, is a part of something bigger. For business purposes, a segment is a part of a market. That is, the enterprise must first identify a market, and then divide it into “segments.” For an enterprise, three markets are naturally defined: the buyers (those who buy from the enterprise), the buyers of the competitors’, and those who do not (yet) buy. Therefore three natural segments exist. The enterprise may choose any or all of these markets as its target. By doing so, the enterprise also prioritises its marketing objectives. For example, for an enterprise whose primary target market is its own buyers the objective of selling more frequently and more becomes the priority objective. Now the enterprise needs to answer a question: what mix of quality, quantity, time and cost would persuade the target so that the enterprise achieves its priority objectives? To answer that question the enterprise must further divide the market i.e., segment it. There are several criteria that can be used. First, the problem solved or need satisfied. It is an established fact that offers that do not satisfy needs are not accepted. Thus, the enterprise must identify the needs that, in the eyes of the prospective buyers, would be better satisfied by its offer. Next, there are expected outcomes. Buyers expect certain things to happen when they buy or consume a product. Naturally, the offer that delivers the expected outcomes stands a better chance of gaining buyer acceptance. Then, there are purchasing habits and occasions. Buyers have habits of purchasing, which relate to where they buy, how they buy, the quantity they buy, the time they buy, etc. Buyers also buy for different occasions. They may buy for themselves, they may buy as gift, they may buy for entertainment, etc. An offer that caters to the purchasing habits and purchase occasions of target buyers gains buyer acceptance. A segment is a part of a market which has similar needs, expected outcomes, purchasing habits and purchase occasions.

6The quantity, quality and time dimensions of strategy correspond to the “differentiation” concept in the traditional literature. 7The cost dimension of strategy corresponds to the “cost=price” leadership concept in the traditional literature.

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To complete its strategy, the enterprise needs to match the mix of quality, quantity, time and cost variables with one or more of the needs, expected outcomes, purchasing habits and purchase occasions of the target segment. An enterprise that can find a good match that surpasses what its competitors can offer can be said to have a good strategy. Positions targeted for a specific market or segment are called “offers.” 8 Now let us look at the two components of strategy in some more depth.

8Segmentation dimension of strategy corresponds to the “focus” concept in the traditional literature.

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Chapter 12 SEGMENTATION: THE CRITICAL DECISION

Segmentation is a critical component of strategy, as it will determine how the offer will be designed. What the enterprise offers must meet what the buyers want. Therefore, strategy is where the enterprise must show that it is demand driven, customer oriented, market focused, etc. Once your market definition has been refined, you will have to segment it to reduce or eliminate the alternatives as perceived by a specific group of buyers and potential buyers in your market. A

segment is a group of buyers who are similar to one another (and different from the rest of the market) in terms of the problems that they have (“needs”), the benefits that they expect from the product and the similarity of their purchasing habits and product usage (“wants”). A segment is worth targeting if you can meet these “needs” and “wants” better than your competitors and remain profitable. If these needs are not currently being met by any offer, you have found a segment where there is no competition. If you are able to find a segment in which there is little or no competition, your negotiating power with your buyers will be greater. When you have identified a segment, you need to make sure that it is of “optimum size”. It should be big enough to provide reasonable profits yet not too big for you to service, either on your own or in collaboration with partners so that you can become the sole or preferred supplier. If the segment is too big to allow you to serve it effectively, you will invite competition, which is what you are trying to avoid. A segment of optimum size is one which is large enough to be profitable but small enough to be served effectively, and where you have a chance of being the sole or “preferred” supplier. That is, a segment where you can use your negotiating power to influence it. For a small or medium size enterprise the concept of optimum size is particularly important as it gives the opportunity to identify a niche where becoming a preferred or even sole supplier is potentially achievable. For some companies, a market of optimum size may have as few as two or three buyers. Sometimes you may even find that each of your buyers constitutes a separate segment.

Segmentation is one of the two components of the strategy. A segment is a group of buyers selected from the market according to commonalities on needs, benefits expected, purchasing habits and occasions that the enterprise hopes it can meet better than its competitors or that it believes no one has met. The purpose of segmentation is to identify a segment which is too small for competitors to enter and thus can be dominated by the enterprise.

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Fallacies to avoid when considering segmentation: Fallacy 1 - Segments are large groups of people or organizations: For any enterprise, the segment need not be large. If necessary, each buyer can be treated as a segment. For the enterprise, a few buyers, each treated as a separate segment would usually suffice. Treating each customer as a market is getting easier. Electronic commerce gives enterprises an opportunity to reduce segments to the size of one. Fallacy 2 - Segmentation is expensive and is for big companies: Segmentation is not expensive but requires a lot of thinking. To segment a market one needs to know what the priority needs of the target buyers are. Finding these out does not cost much - but not knowing them costs. Fallacy 3 - Main businesses of enterprises are good bases for segmentation: It is almost impossible to use a pre-determined split into businesses to establish a meaningful segmentation. In addition some of the clichés used to describe businesses such as high-tech, banking, garments, etc., do not contribute at all to the segmentation effort. To cite only one example, try imagining the so-called segment which the “Advanced Products and Systems Division” is supposed to define or even serve. Fallacy 4 - Geographical or other market definition variables work for segmentation: Not true. They often do not unless the enterprise is an innovator. It just reflects an organizational structure designed to carve turfs. The idea behind segmentation starts with a need that may not be met at all or not met satisfactorily by your competitors. If you can find a need that is not met and you can meet it, you may have stumbled upon an innovation and therefore reap the benefits of being the first in a product class. If that is not possible you may still have a chance if you can meet that need better with your brand in a specific product class. Variables that define an entire market are too broad to give you a target that is of optimum size. The one exception to this (at least initially) is when you have “innovated” a product which places you first in a market that is so new it has not yet been segmented. In that case the product class is the same as the product. In fact, it is also synonymous with your brand as long as you are the only supplier to a market. However, in most cases, there are already a number of existing segments in a market, so finding a segment or sub-segment to target with your offer will require some work. Needs We already know that, at any given time, for an exporting or non-exporting enterprise there are three possible markets: the buyers, the buyers of competitors’ products and the non-buyers. These three groups are different. What you want them to do is different as well. Segment What your Enterprise wants Present Buyers: Buy more frequently and more from my enterprise Buyers of Competitors’ products: Stop buying from my competitors and buy from my enterprise Non-buyers: Start buying from my enterprise


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You can encourage your existing customers to buy more, and more frequently. Many companies find that a relatively small number of customers account for the majority of sales. Take, for example, a small enterprise producing handicrafts, with 10 customers, who finds that its two major customers account for 80% of sales. The rest of the enterprise's sales are spread fairly evenly across its remaining 8 buyers. If just one of the 8 buyers could be persuaded to purchase as much as one of the two “heavy” buyers, think of the impact that would have on sales! You can also persuade existing customers to buy more regularly. If you achieve this, demand will be more stable, thus enabling you to plan better. This is important for many reasons. Say you suddenly receive an unforeseen order. You may be unable to source the required raw materials to produce the order. Or you may already be operating at full production capacity and be unable to meet the delivery date. Or it may be too late for you to arrange suitable transport to ensure the goods arrive on time. If it is a large order, you may have difficulty raising the necessary working capital. Another option is to try to persuade those who buy from your competitors to switch to you. These are individuals or companies who are buying from another enterprise the type of product or service you propose. This may be because they believe that they are getting a better deal from your competitors, or it may be because they do not know that you exist. So, first of all you will need to consider what you can offer them that will be perceived as better than competitors' offers. Then you will need to make sure that the potential buyers you are targeting know about your enterprise and are aware of what you can offer them. And finally, you can try to get non-buyers to start buying from you. These are people or companies who may already be part of your target segment, but are currently not buying at all. The fact that they are not buying may be because of lack of awareness: they may not know that what you offer is available. If you are going after a new market with an innovation, this is very likely the case. Or perhaps they have not realized that your offer meets their needs. Bear in mind that the marketplace is constantly shifting, with new potential players regularly entering the market. For example, companies yet to be formed, families yet to move into an area, individuals who are yet to reach the age group you have targeted. If you are a first time exporter, your options are limited. You will have to go after the buyer of a competitor. You may go after non-buyers but this will take time. If you have been exporting, you may go after all three potential markets. Once you decide which specific market to go after, you must know the needs and wants of your buyer in order to come up with a strategy. The needs and wants of your buyers will naturally depend on whether you are selling to final consumers or to businesses. If you are targeting the final consumers, you must know about their inherent human needs. Human needs are universal. They are the same and do not change from place to place, time to time or from people to people. Human needs are the same but the way humans satisfy their needs changes drastically. Modern marketing theory and the practice it preaches, are based on a basic assumption about human beings. Marketers borrowing from social psychology assume that the human being is a


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cognitive creature. Cognitive creatures are defined by social psychologists as problem-solvers. They use their cognitive and physical abilities to solve their problems. Taking this model, marketers substituted the phrase “unmet needs” for the phrase “problem” and “purchase behaviour” for “acting” and voila!, the fundamental premise of modern marketing theory and practice: humans purchase to meet unmet-needs. So if you are like the millions of present and past students who unsuccessfully tried to understand how you will be making a salary by “satisfying consumer needs”, you now understand why marketing is defined in textbooks as “need satisfaction.” The logic is simple. The consumer will buy only if there is an unmet need. Therefore, if you meet needs you will sell. There is nothing wrong with this approach, and it provides a disciple the theoretical foundation that it needs. Therefore, marketers, especially in the early days, borrowed heavily from psychologists who studied fundamental human needs. Researchers from Freud to Maslow, from Horney to Murray, became sources of “needs lists” allowing marketing professionals to justify their decisions. One example of such a need is the need for safety. Although this need is universal, the way people satisfy it changes. While some buy vitamin pills, some buy suntan lotions. Some prefer heavy and safe cars, some get medical check-ups. All are satisfying the same need, but these are non-competing products. If you are selling to businesses, the needs and wants are different as they are, to a large extent, business concerns. With modern times, and rather late, came the realisation that there is something called business-to-business marketing; In other words, the case of an enterprise selling to another enterprise. There, the theory and practice become a bit difficult to explain. An enterprise is a collection of people and facilities. It does not “sell.” An enterprise does not make decisions, people in the enterprise do. An enterprise does not buy either. People in the enterprise do. So, one may be inclined to say that in terms of satisfying needs, B2C and B2B are not different. The fact is we know they are. While the purchasing manager of a wholesaler may satisfy his need for “showing off” when he buys a pair of fancy shoes, he probably will not base his decision on his need for “showing off” while buying for his company. However, that same purchasing manager will have personal needs which will be expressed as wants vis-à-vis his role and position within his company, and which he will find difficult to ignore. He may want to demonstrate to his bosses that he performs above expectations in hopes of being rewarded. This kind of need should not be forgotten when putting the offer together, even though normally the interests of his company will take precedence. In that case, to have any justification for our marketing decisions we must know the needs of the enterprise. But what are the needs of the enterprise? There is no study which authoritatively establishes “business needs.” However, with the BMS we determined your needs as a business. If your buyer is a business, there is no reason why your buyer should not have the same needs. Indeed, the needs of your buyer are exactly the same as yours:


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1. He needs to sell more frequently and more to those who are presently buying from him and does not allow the opposite to happen;

2. He needs to get his competitors' buyers to buy from him and avoid the opposite by building favourable attitudes and loyalty among his buyers;

3. He needs to attract the new entries into the market to start buying from him and avoid his buyers to stop buying altogether;

4. He needs to make profits; 5. He needs to produce the sufficient amounts of goods his markets require; 6. He needs to produce the goods his markets require at an appropriate quality; 7. He needs to deliver the goods to his markets on time; 8. He needs to produce and deliver the goods his markets require at an acceptable cost. Like you, while doing all of this, they need to manage their enterprises effectively and efficiently. That is, they need to plan, execute and control the allocation of their human, information, financial, physical and network resources. If, like millions of other enterprises, you are planning to export to businesses abroad, this is the list you will have to cater to. Now ask yourself the following questions: • Which need(s) of my buyers am I satisfying? • Which need(s) of the buyers are my competitors satisfying? • On which need(s) of the buyers can I do a better job than my competitors? For our K-mart example, the enterprise may start building its strategy by refining its business definition as follows: “We are in the business of selling production management skills of fast production and rapid delivery to purchasing agents of K-mart to satisfy their marketing need to deliver the goods their markets require on time.” As a business definition, this is a whole lot better than saying “selling T-shirts to K-mart” and much better than saying selling production management skills to purchasing agents of K-mart. This statement may pass the requirement for specifying why the buyers should buy from this enterprise. Let’s look at this statement more carefully and break it apart into its two major components. First the target market is defined as “purchasing agents” for K-mart. The market is narrowed down to those purchasing agents whose top priority is “fast production and rapid delivery.” This is an example of positioning using the “time” need of a business buyer. But can we meet this “time” need better than our competitors? Before we defined our positioning we checked that there was a time need from K-Mart and that we are able to meet that need more effectively than most of our competitors. If we succeed in doing this we will have found a market where we can set the conditions and we will have to concentrate in keeping potential competitors out.


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Up to this point we have covered the generic elements of selecting markets. That is, those that do not change from place to place or time to time. For example, we first decide whether you want to go after: 1. Present buyers; 2. Competitor’s buyers; 3. Non-buyers. These designations do not change from country to country. Then we “select the business objective(s) you can (should) cater to.” The business objectives listed above do not change from country to country, business to business either. Now, you may be asking “Should one not consider non-generic factors specific to a country or business sector?” Most managers would start their exporting process by saying “we want to export to Japan, or Germany,” etc. Indeed, sometimes, opportunities may arise in a particular country/business sector. For example, finding a close contact in one country, or a change in import duties favouring imports, or the relaxation of import quotas or currency restrictions may create opportunities. A boom in demand for a particular product may make a country/business sector attractive. You may feel more comfortable with a country/business sector because you are familiar with it due to its proximity or other previous experience. Therefore, at least during the initial stages of strategy formulation, it may be worth spending a bit of time researching markets9 defined in general terms. However, keep in mind that while these are reasons for investigating a market more carefully, they are not adequate market/segment definitions. Nevertheless, geographic description of markets remains common practice among the enterprises of developing countries. One often hears EU, United States, Japan as market definitions. Inasmuch as these definitions are inadequate, they are not without justification. There are valid reasons why many managers prefer to define their markets in terms of these locations. The developed countries have high purchasing power, and they often use this purchasing power to import low value-added products from developing countries as they prefer to make the high value-added products domestically. In other words, they do not make locally most of the products the developing countries offer. This makes them natural targets. Other developing or non-industrialized countries offer similar products. Thus, they are unlikely to be present in the market as buyers or prospective buyers. These considerations make the developed world a natural market for developing country exporters. Remember though, that this too, is only a reason for investigating these markets and does not pass the test as an adequate market definition. In general, relaxation of import quotas or currency restrictions within countries, their proximity to the exporter, their booming markets, their adequate purchasing power, their lack of local manufacturing, etc., are reasons for investigating a particular geographical market but they rarely are adequate market/segment definitions for enterprises.

9Market definition information is available in all kinds of places including: your local library, chambers of commerce, export promotion organizations, the United Nations and the World Bank, International Trade Centre UNCTAD/WTO, newspaper archives, directories and yearbooks published by organizations such as The Economist in the UK, the target export country statistical publications and such publications as The Statesman’s Year Book. Most of these sources have web pages on the Internet.


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While segmenting markets you must be careful. It usually is counterproductive to define overlapping segments. Each segment will require special attention. Therefore, segments must be as discrete as possible for you to conserve your valuable resources. When discussing the idea of needs, it is helpful to distinguish between demand for your product and the basic need it satisfies. Basic needs are universal, for example, the individual's need to “avoid harm” can be met by the purchase of a biker's helmet, preventive medicines, etc. There are many ways of satisfying that particular need. Ways of satisfying needs may vary from individual to individual, country-to-country, etc., and may change over time. Being better at satisfying a need (for example, developing a new and better type of biker's helmet) may help you entice buyers away from your competitors. Finding a new way of satisfying a basic need is one way of establishing a new segment (the initial introduction of computer games to satisfy the basic need for “play” is an example of this). When your buyer is an enterprise, you need to bear in mind both the individual needs of the person who is buying from you and the business needs of the enterprise. The individual needs are well covered in the existing literature. On the business-to-business marketing front, very little work has been done on developing generic lists of business needs. However, there is consensus that they should relate to the objectives of the enterprise. Whether you are selling a consumer or industrial product, or a production service, sometimes a need comes to your attention through customers. At other times customers are not yet aware of a potential problem, and you may be able to draw their attention to it, whilst offering a solution. Often, when new products are introduced, they spawn new problems that are potential segments you may cater for. Expected Benefits Customers purchase products for the benefits they expect to receive through its purchase or use. For example, they may purchase vitamins to keep them healthy, cosmetics to make them attractive. Companies purchasing fans to cool the chips in their computers expect these fans to be durable enough to function for the duration of the computer's lifetime. Product benefits expected by resellers might include longer shelf life, packaging convenient for storage, etc. These benefits, whether perceived or real, are important in a buyer's choice of product and supplier. If you are able to identify a common benefit (or benefits) expected by one group in a defined market, this constitutes a segment. Whether or not you decide to target that segment will depend on the extent to which competitors have already captured the segment and/or your ability to address the expected benefit of that segment better than the competition can. Moreover, if the benefit has not been identified by your competitors, it may be an example of a new market in which you could be the sole supplier. Purchasing habits and usage Purchasing habits of customers and their use of the product may assist in segmenting the market by allowing you to “position” yourself to take into account how they buy, where they buy, on what occasions they buy and to what use they put the product. Some individuals buy


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for their own consumption, some buy for others. Some will favour discount stores and some will not. Some enterprises will buy in trade fairs, some will conduct business on the Internet. Inasmuch as the above discussion sounds as if it is merely possible to identify existing segments, creative segmentation allows the enterprise to change the rules and establish profitable businesses. For example, Amazon Book Company revolutionized the retail book selling practices by selling through the Internet. They positioned their offer using distribution and ignored the purchasing habits of buyers to buy books from retail shops and thereby created a new segment that now buys books through the Internet. The three types of segmentation variables outlined above should help you pinpoint segments or sub-segments worth further consideration. In conjunction with this approach, there is a fourth set of segmentation variables relating to the behaviour of your target segment. Together, they account for all actual and potential buyers in a segment. People (or companies) in your target segment buy from you, or they buy from the competition, or they do not buy at all. You can use a combination of the above segmentation variables, namely benefit expected, problem solved and purchasing habits/product usage, together with the fourth variable covering the type of buyer/potential buyer. However, it is advisable to limit yourself to a fairly small number of segmentation variables. Otherwise you will run the risk of trying to do too many things at once, which can send very confusing messages to both buyers and potential buyers. Through segmentation you may decide to target more than one segment. If you develop a tailored offer for each of them through positioning, this is likely to mean that you are in several related businesses. In summary, good segmentation will allow you to identify segments which: 1. Consist of buyers who have the same problems, expect the same or similar benefits, and

have the same purchase and/or usage habits; 2. Are of optimum size in the sense that it is large enough to yield a better than average level

of profitability and small enough for you to become a preferred supplier (even if that means the market consists of two or three customers);

3. Are of optimum size in the sense that competition should either be weak or non-existent.

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Chapter 13 POSITIONING

If you have found a segment worth targeting, you now need to ensure that your offer is preferred to that of competitors by the buyers in that segment. You do that by developing an offer that meets expectations in terms of problems addressed, benefits or purchasing habits and usage. This is what positioning is all

about. Whereas thinking about segmentation options refines your ideas about the individuals and/or companies for whom you are producing and what these buyers want or need, the process of deciding on appropriate positioning helps you specify in greater detail what you are offering. Effective segmentation of your market needs to be matched by good positioning of your product in your target segment by configuring an offer. Configuring an offer means deciding on the priorities and substance of the quantity, quality, cost and time of the production function. We have discussed these positioning factors before. Here, we will tie them to the product attributes. To develop a positioning statement it is helpful to think of each product as a “bundle of attributes.” This “bundle” consists of: 1. Generic characteristics; 2. Physical characteristics; 3. Extended characteristics. Let's consider each of these in turn. “Generic characteristics” are those that relate to the “needs” that we used earlier to identify market segments. Since these are what the segment has in common, they form the basis of your positioning strategy. We have already highlighted the fact that each basic need of your selected segment can be satisfied in a wide variety of ways. Your decision about what “generic characteristics” of your product to emphasize should reflect the reasons why you think your target segment will choose your offer over that of the competition. The closer you can get to their “ideal offer” the better chance you have of reducing or even eliminating the alternatives as far as the buyer is concerned. The sub-segment you capture in this way consists of those buyers who prefer your “brand” to anyone else's. Instead of competing heads-on in an existing segment, finding a new way of satisfying a basic need is one way of establishing a new segment. This is where innovation comes into its own, becoming the basis for your positioning strategy.

Positioning is the deliberate configuration of the physical, extended and generic attributes of a product by combining quantity, quality, time and cost of production in a particular way as to meet the needs, benefits expected, purchasing habits and occasions of the targeted segment.

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“Physical characteristics” as a group includes everything that relates to the physical properties of a product. The most obvious examples include shape, weight, size, and colour. Others might be ingredients and/or the quality of those ingredients, composition, packaging, etc. Naturally, physical characteristics include the “quantity” that is, the actual quantities of the goods made available to the buyer. Quantities that are not available when needed, for all practical purposes do not exist. Thus, in the BMS, physical characteristics also include the time dimension. Strategy is prioritising and arranging the objectives of the production function [Quantity (amount, physical characteristics), Quality, Time (the speed of time and place), Cost (price)] to achieve marketing objectives. “Extended characteristics” is the term used for a composite of variables. These variables include the price of the product, its quality, before and after sale service, distribution (ease of access, availability). In the BMS price and image make up the extended dimensions. Extended variables, too, apply to all products in that each has a price and an image associated with it, and will reach the end user via certain channels of distribution, whether these are owned by you or by someone else. Your positioning strategy determines the overall pricing policy of your enterprise. If your product is exclusive, it is likely to be expensive. At the other end of the spectrum, you will set a very low price if you are aiming at the bottom of the market. However, deciding the actual price of particular products in response to a request for quote is a tactical issue. Careful, focused positioning is vital as it helps you develop an offer for which there is the fewest possible alternative offers in the eyes of your target segment. That means selecting generic characteristics, supported by physical and extended characteristics, which get as close as possible to the “ideal offer” as perceived by your target segment. Any physical or extended variables that are crucial to your positioning strategy become positioning variables. If not, they support your positioning strategy. Although every product will have physical and extended variables, when communicating your offer to your target segment, you highlight only those that will be most relevant to them when making the purchasing decision. For example, suppose your enterprise produces luggage. All luggage items are of a certain colour, durability, shape, size and weight. You discover there is a gap in the market for carry-on luggage for air travellers. Immediately size and weight are highlighted as positioning variables due to limitations imposed by airlines. You decide to position your product as lightweight and of dimensions that will not exceed dimensional limits imposed by airlines. If these variables differentiate you from competitors' offers in a market segment, they become positioning variables. As is the case with physical characteristics, we are concerned with the extended characteristics only when they are central to the positioning strategy. The following are examples of extended characteristics, which become positioning variables:


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Extended Positioning Using Quality and Price

In order to reinforce the fact that you are selling top quality, exclusive merchandise aimed at the top end of the market, you deliberately charge a premium price as part of your positioning.

Physical Positioning Using Quantity

If your prospective buyers are concerned with protecting the environment, you develop a “pro-environmental” image by stressing the use of natural dyes and the absence of chemical processes in the production of your textiles.

Extended Positioning Using Time

If you have decided to offer to a segment faster delivery than it can get elsewhere, distribution becomes a positioning variable for your enterprise.

Extended Positioning Using Distribution (Quality)

If you decide to sell your product exclusively through the Internet rather than through conventional outlets, this becomes part of your positioning strategy.

The right “fit” between the “needs” of your segment and the positioning of your offer is of fundamental importance. It will be difficult, if not impossible, for you to achieve your business objectives if you don't get this right. Before we leave this discussion, let’s think briefly about some of the problems that might be encountered while segmenting and positioning. Reviewing these issues can serve as a “reality check” on the decisions you've made. In the first instance you may fail to identify a segment with a common need. Or you may have identified a segment with a common need, but the market is too small or competition is too intense. Equally important would be the failure to position your product appropriately, that is, the failure to develop a product that clearly meets the identified need(s) (or fails to communicate your positioning). Reviewing your segmentation and positioning decisions and making changes can address these problems. When you first began to develop a definition of your business in terms of what you are producing for whom, we mentioned that you might find that you are in several related businesses. Working through your segmentation and positioning decisions may have confirmed that you are indeed in at least two businesses. This will certainly be the case if you are continuing to supply the domestic market whilst developing a new export market. The critical issue in managing a number of “businesses” is to make sure that if they require common capabilities, you do not waste resources by building separate capabilities for each. Later in this guide we will be giving you an overview of the main capabilities, based around groups of tasks that you will need to implement your strategy. When validating your strategies for a number of “businesses” we suggest you think about how you can reinforce the capabilities you need by ensuring that implementation of your strategies calls for similar sets of critical tasks. We cannot close the discussion on segmentation and positioning without looking at it in the context of competition. The way you define your business defines your competition:

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companies that offer the same product class to the same market are your competitors. If you refine your offer for a particular segment, your competitors are those producing a similar offer for that segment. If you decide to change either what you sell, or to whom you are selling, some of your existing competitors may cease to compete with you or may be replaced by other companies. For example, suppose your enterprise is producing games for children. You decide to produce games that can be played at home with the family. Your competitors might be board game manufacturers. On the other hand, if you were producing games for children to play on-line, your competitors might be software developers. If you have chosen to work on refining your existing strategy, you probably know who your competitors are. If you are trying to develop a new strategy, or entering a new export market, you may need to do further research before you can put names to the type of competition you identify. By defining your business at the level of the product class you are offering to a specific market, the number of competitors you could identify is probably the greatest. That means that the competitive pressures you face are probably considerable. Your aim, therefore, should be to attempt to reduce these competitive pressures as much as possible. If your situation is similar to that of many companies, you have probably found that you have a fair number of competitors who are likely to be exerting considerable competitive pressures on your enterprise. In other words, competition at the level of the market is fairly intense and your negotiating power vis-à-vis your buyers will be fairly limited under these circumstances. As a result, you may be settling for lower prices than you would like, or offering a credit period longer than preferred. The impact of this on your enterprise is to reduce the amount of money you are able to make. Charging a premium for your offer would be the best way to improve profitability. However, there would be problems with this approach in a competitive environment. Since your competitors limit your bargaining power, it is not likely that you will be able to charge higher prices. This is because, where competitors already exist, customers are likely to switch to your competitors. And even if you had no competitors, if you raised your price too high, it is possible that your customers would stop buying altogether. So, the only other thing you can do is to try to become more efficient than your competitors, which means operating at a lower cost. Being more efficient means reducing your resource use while keeping the same output. This means reducing costs anywhere in the management of your business. However, this approach is unlikely to be of significant help to you in a highly competitive market and, in any case, it does not help you get away from competing on price. The only way to get into a position where you can charge a premium price is to think carefully about what you are offering and find a better way of fulfilling the needs and wants of the market. Segmentation and positioning helps you to set yourself apart from others in the market, by focusing only on those buyers and potential buyers who are part of a segment. In doing so you have an opportunity to get closer to their perception of an “ideal offer”. If you do this well, the number of actual and potential alternatives as perceived by the buyer will be reduced or disappear altogether, as will competitive pressures on your enterprise. We refer to


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this as “being better than the competition”. When you are better than your competitors, you can avoid competing on price. There is a second option. You can find a gap in the market and be the first enterprise to fill it, whilst trying to make it as difficult and unattractive as possible for any competitor to enter that market. You do this by creatively redefining the “market” and deciding what to offer that market. However, the same caveat applies here too. If your prices are too high, even without the option of purchasing from another company, you may be unable to persuade potential buyers to purchase from you. There is also the possibility that you will attract competitors into the market because of the profits to be made. That will diminish your negotiating power. Whichever option you choose, remain vigilant, even if you meet with initial success. If you are operating in an existing market or segment, competitors will react to your efforts sooner or later. And if you have managed to find a new segment, there is always the danger of new competition entering the market by further segmenting it if is not of “optimum” size. To counter these potential dangers you need to review constantly what you are doing. As we have seen, segmentation and positioning are powerful tools for crafting suitable market segments to target and design your offer. Initially they help you assess whom you are competing against in each market or segment, and then they enable you to identify ways to limit or eliminate the perceived competitive offers. That is why we have devoted a sizeable portion of this book to these topics. By working with us so far you defined your market (or markets) as precisely as possible. That means you have basically decided where you want to compete. Using the twin tools of segmentation and positioning you have probably been able to identify in each market those segments or sub-segments that could be profitable for your enterprise. Through appropriate positioning you may have been able to find a way to become a “preferred supplier”, or even the sole supplier. If the market (or segment) you are proposing to target is large and diverse even at this stage, it is likely that there are still untapped segments. In that case we advise you to reconsider your segmentation and positioning decisions. You can continue to find new segments and sub-segments until the market becomes saturated - that is, when further subdivision of the market fails to yield profits.

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Chapter 14 INNOVATION & POSITIONING

We mentioned innovation as a way of creating an offer that need not be distinguished from competitors’ offers as it is so new that there are none. The important thing to remember is that we are talking about innovation as perceived by the consumer. To be accepted as an innovation it must be perceived by your buyers as not having existed before and as meeting their needs and wants. Something perceived as innovative may be a completely new product or involve significant changes to an existing product.

Many companies provide their buyers with test versions of their products or prototypes for possible adaptation and improvement before trying to make any sales. Some consumer goods manufacturers even “customize” their products by examining the specific needs of their prospective buyers. Sometimes you can find opportunities for product-service innovation. This refers to services that are provided before and after the sale. In many industries such services are becoming very important. After sales service, which has for years been an integral part of the offer to markets for appliances and machinery is now a routine practice even in consumer goods. Innovation must be accompanied by a considerable investment not just in production but also in marketing. Strategic market research is needed to feed into new innovations. Then you need to position your innovations. Finally you need to communicate your message to potential and existing buyers. Innovation is not just a production issue. Marketing must be directly involved. Innovations, like any other offer, need to be positioned and the positioning needs to be communicated. The supplier of a completely innovative product will, of course, be the sole supplier, at least for a while. However, this success may be short lived unless you continue to be innovative, as sooner or later competitors will emerge. By continuing to innovate, you will keep ahead of the game. The importance of innovation to enterprise success is a well-documented issue in management literature that shows that it is a common attribute of excellent companies. Empirical evidence suggests that innovative enterprises are more profitable, outperform and discourage their competitors and have cost advantages. Because of the importance of innovation, research and development are seen as an integral part of business strategy, whatever the size of your enterprise. In addition to product innovation, you should consider as part of your strategy the possibilities for production process innovation. Process innovation should lead to lower costs, which in turn may allow you to charge prices significantly below your customers' expectations. At the

Innovation is the most direct route to domination. An enterprise with a new product is, by definition, the sole supplier in the market. Innovations can be product innovations, product-service innovations, and process innovations. An enterprise may find it expensive to engage in R&D to innovate. However, an enterprise should at least track the scientific advances for all its product, service and processes as an integral part of managing a business.

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same time you will be discouraging competitors whose costs are likely to be higher without access to the innovation. Of course, this can only happen if the price difference is noticeable, but at the same time there is no perceived difference in quality when comparing your product to those of your competitors. If as a result of production process innovations you reposition the product, this is another example of innovation in your positioning strategy. Even if you decide that innovation should not be part of your positioning strategy, it may be necessary to support the positioning of your product. For example, if your positioning strategy calls for fast delivery, an innovation in your production and distribution process may help you to shorten production time. Such innovations will help you be better than your competitors. If in the previous example, the price reduction did not lead to re-positioning the product, it too would be an example of innovation supporting your positioning strategy. Understandably you may shy away from research. It can be expensive. It certainly is time consuming. But, even if your enterprise has limited resources, a little effort may go a long way if you are alert and have a systematic way of looking at what information is available. Some useful published information is available free or at reasonable cost (either in the form of written reports or from Internet sources). Often you can obtain background information about a country, pointers on how to do business, or an overview of key producers and customers in an industry. Much of this type of information is generally free of charge. The sources of information tend to vary from country to country, as do quality, currency and reliability of the information obtainable from different sources. Similarly, as innovativeness is imperative for building your negotiating power with customers, you need to engage in what is traditionally called “research and development” to develop your business. For many companies, the only way to reduce or eliminate competition is through innovation. If innovation is the cornerstone of your positioning strategy, you need to ensure your enterprise can either engage in its own programme of “R&D” or draw on that of others. Innovating or carrying out R&D doesn’t necessarily need to be expensive. Basing your innovation capability on your creativity can yield truly innovative offers (as opposed to product) without much R&D and with little cash outlays. Take for instance the example of the “Breathe Right”. The Breathe Right is a little self-adhesive flexible plastic strap which people who snore stick on their nose bridge before going to bed in order to increase air-flow, reduce snoring, and reduce the following day’s drowsiness and fatigue symptoms. Severe snoring is actually considered to be a serious illness which can deeply affect people’s lives. So then, how much did the creators of the Breathe Right spend on expensive R&D? There is a plastic strap which a lot of companies can design and manufacture; the creators have only had to experiment with the shape and amount of flex in order to find the best

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compromise between snoring reduction and comfort. There is also some adhesive which still quite a few companies can make; the creators did have to experiment with the adhesive formula so that it would stick enough but not too much (i.e. it wouldn’t come off on its own, but still was easy to take off in the morning without leaving a trace), and so that it would be comfortable and not produce allergic reactions. That didn’t use up much R&D money, and whatever skills or experience the business lacked to perform some of the experimentation, it found in an outside alliance. The idea was very simple and very creative, and yielded an innovative product with a unique positioning (the only other alternatives are surgery or dramatic weight-loss) which translated into a monopolistic position. Because of the importance of innovation as part of positioning, research and development are more than just a search for better goods and services. They are an integral part of business strategy. Innovation, as we have already discussed, is a way of “removing” yourself from the competitive arena by finding a new and better way of doing things. When you do not innovate and just bring to a market segment an offer which is already available, you are just another ineffective “me-too” business. You also need to keep innovating, otherwise, sooner or later, competitors will emerge, and your success will be short lived. Therefore, if innovation is central to your positioning strategy, it is important that you are able to manage the process on a continuous basis. Earlier we referred to three types of innovation: product innovation, product-service innovation, and process innovation. Product and product-service innovation might form the basis of your positioning strategy. Production process innovation, on the other hand, is a way to support your positioning strategy. Let's briefly look at how you might benefit from R&D conducted elsewhere. First and foremost, there is a time gap between innovation and commercialisation. Depending on the product, this time gap could be anywhere between three months to six months, and may even be years. This time gap is, nevertheless, getting shorter and shorter due to globalisation and the rapid dissemination of information. There are various reasons why there still is a time gap. First, not all innovations are made by companies with commercial interests. Many are made by innovators who cannot commercialise their findings immediately. Second, many companies find it does not pay to change existing technologies or products. Third, many innovations are not appreciated immediately. The history of business is full of examples. Whatever your business might be, someone is likely to be working on an innovation right now. And it will take some time before that innovation is commercialised. You can take advantage of this gap by “planning for innovation.” The key to this is information. The more you know about your industry the more creative you will get. Ideas generate ideas. Making use of someone else's ideas is the most efficient way of mobilizing your creativity to come up with your own innovations. Planning for innovation rests on planning to scan the environment. Make sure you are informed about the latest developments in your field. To do that you must first identify the best sources of the most up to date information and ideas. To choose, you must first examine

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as many sources as possible, then identify those that suit your purpose. That way you maximize the results you get from applying your limited resources and manpower. If your positioning strategy is based on innovation, you need to be effective at managing the innovation process. That means deciding which aspects of innovation you will focus upon. For example, you may decide to make use of other sources of innovations and concentrate on being good at the development and testing of new products, services and process. Whether you do your own basic research or rely on the research of others, you may be involved in carrying out development experiments in your search for innovations. Establishing links with other institutions and organizations will help you collect information, find partners and supporters and get involved in community affairs. Such involvement also helps you track competitors, market trends and practices. When you first enter a market, networking can help you define your strategy. In existing markets, it means you keep your finger on the pulse of developments. At the same time you may be able to disseminate information about your enterprise and its products, thereby building up the image of your enterprise. When attempting to build up a network in a new market, you should collect information about customers, competitors and suppliers by reviewing directories, trade journals, and trade fair catalogues, and supplement this information with advice from your existing contacts. Once you get started, you will find that initial contacts tend to generate referrals to others. Gradually you can build up a picture of the key actors and their reputations in the market. There is a wider group of organizations based in a market, which can provide you with alternative perspectives on the market(s) you are targeting. These might be trade associations, industry groups, regulatory bodies, to name just a few. They can often help you identify more clearly who your customers and competitors are. It is helpful to establish connections with these types of organizations when you enter a market. It does not have to be time-consuming, as only a small number of these organizations will be directly relevant to your operations in the market. Also, remember this is the start of a two way communication process. Maintaining networks will also be useful for helping you build up your image and reinforce your positioning, as well as helping you develop favourable attitudes towards your enterprise.

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Chapter 15 BUSINESS DEFINITION, STRATEGY AND MANAGEMENT The BMS specified the job of managing a business in the form of a grid where managerial activities were applied to business tasks. Let us remember the Business Management Grid®©. There were forty-five example activities applicable to twenty-six business tasks in the BMS. Let us examine how the BMS help managers by designing strategies.

In your strategy statement you will specify what business needs of your target market will be satisfied by which offer. Let us look at an example. Deniz Gilman exports garments. The enterprise located in the Philippines prepared the following strategy statement (the actual statement is simplified and specifics are omitted).

MANAGEMENT ACTIVITIES BUSINESS TASKS


a. Preparing Sales Literature b. Programming Promotions c. Programming Advertising d. Setting Up the Channels of Distribution e. Prompting and Responding to Sales Enquiries f. Preparing Specifications and Negotiating g. Pricing and Quoting h. Determining Inventory Requirements i. Handling Materials j. Purchasing and Expediting k. Keeping Stock l. Designing and Installing Plant m. Engineering Production Processes n. Locating and Evaluating Plant Site o. Tooling p. Balancing Production or Line Systems q. Developing Maintenance Systems r. Improving Methods s. Installing Cost Reduction Programs t. Developing Quality Standards u. Developing Quality Control Procedures v. Designing Product Service Departments w. Estimating Production Costs x. Dispatching Work y. Scheduling Work and Routing z. Fulfilling Freight Operations

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“The business of Deniz Ltd. is to produce product A for market B. The market segment in B for which Deniz Ltd. intends to seek maximum negotiating power is the present buyers. Deniz Ltd. will get its present buyers to buy more frequently and more by producing the goods in the time needed by them.” This statement fits the prescribed description in the BMS: 1. A position for the offer is specified; 2. A segment is targeted; 3. The marketing objectives are specified. The target segment has been determined. This means that, the enterprise has completed its segmentation / positioning research and chosen present buyers as its target. Deniz has decided to seek her enterprise’s competitive advantage through a “time-based production10.” Thus follows an extended positioning strategy (see chapter 13). The marketing objectives Deniz wants to achieve are selling more to those who are presently buying from them and getting their buyers to purchase more regularly and frequently. This statement serves several purposes: • It describes what the enterprise is planning to sell to whom to gain maximum bargaining

power; • It clarifies how the enterprise will be achieving this objective; and in doing so, • It places priorities on the enterprise’s own objectives. To do something at the right time is perhaps more important than to do something right. In a business environment, setting priorities is crucial and identifying priorities at the right time can be vital. The effective and efficient performance of tasks that have little bearing on the overall goals of business is considered wasteful. On the other hand, ineffective and inefficient performance of the tasks that have a direct bearing on the goals of the enterprise is obviously counter-productive. Deciding what is important, what is urgent, what is both important and urgent, and what is critical is essential in a competitive business environment. In order to select critical tasks, each task should be examined in terms of its importance and in terms of the competence of the enterprise to undertake that task, for a given strategy. A task is important if it is needed for the design, verification, or implementation of a strategy. Not all tasks are important and not all important tasks are critical. Critical tasks are the tasks that management should undertake because without their outputs a strategy cannot be designed or cannot be implemented. Therefore, one key to effective management is to identify those tasks that have a direct bearing on the enterprise’s strategy (and therefore its objectives), and to ensure that they are (have been) performed efficiently. Critical tasks are critical at a given point in time. As some of them get completed over time they become non-critical. A change in strategy will lead to a change in critical tasks. An unforeseen problem will make other tasks critical.

10From the strategy statement we deduce that the manager expects her present buyers to greatly appreciate speed and that they will increase their purchase quantities per order as well as place more orders.


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To select the critical tasks you can follow a simple procedure: 1. Examine your strategy carefully; 2. Look at each business task (and each management activity) and decide which ones are vital

for the verification and implementation of your strategy. These are your critical tasks (and related management activities).

Which tasks are critical for your enterprise? As with almost everything in business, there is no single correct answer to this question. Those who defined the enterprise’s strategy and what they want to achieve should make the final decision of what is important. Unfortunately, there are no hard and fast rules we can give you. Deciding what needs to be done is where you demonstrate your knowledge and skill as a manager. Let’s remember Deniz Ltd. The strategy relied only on fast manufacturing and delivery. Inasmuch as this is a sensible strategy statement, Deniz was not comfortable. She was not sure whether she could deliver fast enough to make a difference, or whether the marketing objectives could be reached even if she could deliver fast enough. Thus she wanted to verify this strategy through research. Going over her strategy and management activities, Deniz made the following observations and identified four activities related to the information resource. Appraising of Reactions: The strategy assumes that the present buyers will appreciate speed and that they will increase their purchase quantities per order as well as place more orders as long as the enterprise can demonstrate its ability to produce and deliver quickly. This may need to be verified. Thus, this activity may be important. Forecasting sales: Even if one can assume that the sales would increase, it is important to know by how much. An assessment of how many of the present buyers would respond to fast delivery by buying more frequently and more is very critical. Conducting economic studies: There could be investment required such as in facilities, manpower, etc., and consequently additional capital requirements to increase speed of production and delivery. The cost of such investment needs to be calculated. Preparing feasibility studies: This activity may be important. The enterprise needs to know if the additional effort in capital investment calculated from the economic study can be justified given the sales forecasts and expected revenues. As you can see, using the BMS Deniz was able to decide what she had to do clearly. She is focused within the strategy verification process. Now she has to think about engaging in these management activities. Remember, it was stated that management activities require resources themselves. Deniz must figure out how she will complete the four activities using information, human resources, financial and physical assets and networks and relationships that are available to her. After completing her research, Deniz was convinced that her strategy is rational and she has a chance of dominating her buyers. Now that the strategy is determined, she must be thinking

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about whether or not she can really deliver what she promised. In short, she must make sure that Deniz Ltd. has the capability to produce and deliver fast and effectively, and also she must communicate this to her buyers. In other words, using the BMS Deniz must see to it that her enterprise has the capabilities: 1. to produce and deliver fast; 2. to inform the buyer that her enterprise can produce and deliver fast. Deniz must decide what tasks are critical for building these capabilities. Looking for inspiration in the activity and task tables of the BMS, she thought that Deniz Ltd should: 1. improve the effectiveness of its manufacturing processes to cut production time; 2. design and implement a new order processing system to process orders faster; 3. utilize new sources of raw materials selected on the basis of speed of delivery rather than

cost; 4. need the capability to inform the existing buyers about the new order processing system

and the new manufacturing method; 5. install an incentive plan for frequent buyers to encourage them to buy more frequently; 6. utilise alternate methods of shipment to speed up delivery; 7. finance existing customers to speed up shipments without delay even if it means higher

risk of non-payment; and then Deniz Ltd. will need the capability to secure financing to do all of the above. Now she must identify the tasks related to the items above. The task that corresponds to “improving manufacturing processes to cut production time” is easy to identify as: Engineering Production Processes. Seeking new sources of raw materials based on speed of delivery rather than cost seems to be a part of “purchasing.” Thus, a second “critical” task is identified: Purchasing and Expediting. Preparing a marketing campaign for existing buyers to inform them about the new order processing system and the new manufacturing method is related to the tasks of “programming advertising and designing promotional programmes.” Therefore, two more critical tasks are marked: Programming Advertising, and Programming Promotions. Preparing an incentive plan for frequent buyers looks a bit tricky. This task seems to be related to several tasks. First, it is related to selling. Furthermore, it is related to pricing. Finally, as it will affect the working capital, it related to a managerial activity as well. Looking at the list of business tasks, Deniz selected three more critical tasks. These are Prompting and Responding to Sales Enquiries, Scheduling Work and Routing, and Fulfilling Freight Operations. First, response to sales enquiries must be rapid. Then, following the order, the order must be processed quickly and finally the order must be delivered. Based on her strategy Deniz has selected the following management activities:


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To verify her strategy (activities) 1. Appraising of reactions; 2. Forecasting sales; 3. Conducting economic studies; 4. Preparing feasibility studies; and critical tasks she will need to manage through activities: To implement her strategy (tasks) 1. Engineering Production Processes; 2. Purchasing and Expediting; 3. Programming Advertising; 4. Designing Promotional Programmes; To manage her export transactions (tasks) 5. Prompting and Responding to Sales Enquiries; 6. Scheduling Work and Routing; 7. Fulfilling Freight Operations. As you can see, Deniz was able to focus on what she has to do and reduced her management burden. Above all, she knows where she wants to go and has a very clear idea about how she can get there. However, this is not all. The BMS also structures the business tasks and their management activities into three cycles (as will be described in chapter 18) to help the manager go through the process described above.

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Chapter 16 GENERIC BMS STRATEGIES AND CRITICAL TASKS SELECTION We have discussed earlier (in “Designing Strategy: a Summary”) how a business strategy is composed of an offer and of a market, and how the offer within the strategy is based on a combination of the four objectives: Quantity, Quality, Time, and Cost. How many different combinations can we make? The answer is fifteen. In other words, there are fifteen different generic strategies to choose from in the BMS. The generic strategies based on only one production objective (four in total) can be put in a group we call “Simple Strategies”. Those based on a combination of any two production objectives (six combinations in total) make up a group we call “Composite Strategies”. Any three production objectives (four combinations) make up the “Complex Strategies” group. And that leaves us with the strategy based on all four production objectives. Because they are based on only one objective, Simple strategies will most likely generate few critical tasks and be fairly easy to carry out. The positioning of the offer will be straightforward and easy to convey to the target market. Composite strategies will most likely generate more critical tasks. These will require even more resources, as when you add critical tasks you don’t just add the newly required resources in a linear fashion, but you also have to add management resources. If you double the critical tasks requirements for resources, you will likely need three or four times the resources. If you cannot add the necessary resources you will start having to make trade-offs. Positioning will be more sophisticated and require special care in its communication. Complex strategies will most likely generate many critical tasks and you will have to make difficult trade-offs which may harm the strategy. The burden on your resources may be so great that you might consider an alliance to alleviate it. You will find positioning to be difficult and it might even harm the image of the business. With the natural exception of Simple strategies, any strategy from the remaining three groups would require the strategist to ensure that the elements of the offer are designed in such a way that they are compatible with each other and with the target segment in order to produce the expected results. As an example, one cannot expect to obtain sustainable success with a strategy based on high price for a low quality item. Not only they have to be compatible with each other, but they also have to match the needs and wants of the target market segment. For example, Bic made a perfume which was as good as the best, came in a plain plastic cigarette-lighter-shape bottle, was available in all the tobacco shops everywhere, and was very cheap. It was a total failure. On the other hand, a small unknown company made a best-of-class perfume, which came in an exclusive bottle, was very expensive and very difficult to find. It turned out to very successful. The All-out strategy will generate many critical tasks and, if you don’t have the necessary resource, trade-offs will be permanent and could cripple the strategy. Positioning will be impossible unless the offer is made-up of compatible and consistent elements.

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In a way, choosing between generic strategies with one, two, three or four offer elements is similar to the choice between a handgun and a shotgun. A Simple strategy would be the same as choosing a handgun, and an All-out strategy would be the same as choosing a shotgun for a direct kill. If your aim is good, i.e. if you are skilled or extremely lucky, the probability that you will reach your target and achieve a direct kill with the handgun is very high. If you are unskilled, you will miss the target altogether. If you go for the shotgun instead, you will hit the target even without skill, but the probability of a direct kill is low. It all depends on your skills and on what target you are going after, be it a bird or a bear.

Simple Composite Complex All-out

Management burden low more high very high

Compatibility of offer elements N/A easy difficult very difficult

Communication of offer elements easy moderate difficult very difficult

Let us examine the selection of critical tasks with an example: the OXO GOOD GRIPS Angled Measuring Cup. As you can see from the photographs below, we have a measuring cup which comes with an angled oval ring inside. When the cup is filled with liquid or powder there is no need to either raise the cup to eye level or bend to bring the eyes level with the table to read the volume being measured. By just leaning over and looking down at the cup, you can read the volume on the oval ring. Apart from this special feature, the overall design, shape, print, and quality of materials employed, still put this cup at the top of its class.

The market for measuring cups is a mature market where most everybody already has a measuring cup at home and sales are driven by growth of households (1 or 2% of the installed base), replacement of broken or worn-out units (another percent), and purchases to be applied to other uses such as preparing two-stroke mix for petrol engines (maybe another percent). All in all, yearly sales make up three or four percent of the installed base. At this rate, it would take thirty years to equip all the households of a country. What this particular version of the product proposes to do is to get people to throw away their previous cup and switch to this one. This is made possible by the fact that the price of a normal measuring cup is very low and that, even if this version’s price is four times the price of the normal cup, it is still low enough to be accepted by buyers. Getting people to replace their current cup puts the product on a brand new diffusion curve with initial annual sales

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potentially in the ten percent of the installed base, and therefore increases the product’s ability to generate high volumes. The business strategy is a Simple strategy based on physical attributes of the product, i.e. a Quantity-based strategy. We propose to use the following matrix as a tool to conceptualise the selection of critical tasks and help with the actual selection process:

Simple Strategies

Composite Strategies

Complex Strategies Al

l-out

Cost

Cost

Cost

Cost

Cost

Cost

Cost

Cost

Time

Time

Time

Time

Time

Time

Time

Time

CRITICAL TASKS SELECTION

Quali

ty

Quali

ty

Quali

ty

Quali

ty

Quali

ty

Quali

ty

Quali

ty

Quali

ty

BUSINESS TASKS

GENE

RIC

BMS

STRA

TEGI

ES

Quan

tity

Quan

tity

Quan

tity

Quan

tity

Quan

tity

Quan

tity

Quan

tity

Quan

tity

a. Preparing Sales Literature b. Programming Promotions c. Programming Advertising d. Setting Up the Channels of Distribution e. Prompting and Responding to Sales Enquiries f. Preparing Specifications and Negotiating g. Pricing and Quoting h. Determining Inventory Requirements i. Handling Materials j. Purchasing and Expediting k. Keeping Stock l. Designing and Installing Plants m. Engineering Production Processes n. Locating and Evaluating Plant Site o. Tooling p. Balancing Production or Line Systems q. Developing Maintenance Systems r. Improving Methods s. Installing Cost Reduction Programmes t. Developing Quality Standards u. Developing Quality Control Procedures v. Designing Product Service Departments w. Estimating Production Costs x. Dispatching Work y. Scheduling Work and Routing z. Fulfilling Freight Operation

A business has only one strategy and therefore you only need one column with the corresponding generic strategy. If an enterprise has several businesses, each business will use its own generic strategy column and the table may have more than one column used. After reviewing each business task in the table, the critical tasks for the implementation of the strategy (design and verification are supposed to be already completed) are:

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Setting up the Channels of Distribution: Because of the high volumes involved, being able to reach as many people as possible is critical. Since the product is not a high value nor a very important item for the consumer, he will not go out his way to search for it and will probably not even put the item down on his sopping list, therefore we have to make it available for him everywhere he may go food-shopping. Having the product physically available and in plain sight will prompt the consumer to buy it on impulse. For this, the price must be right and the performance feature must be obvious. Programming Promotions: The promotion of the product to retailers should be done on a large scale as the widespread availability of the product depends on the number of outlets which carry it. Getting food stores to stock the product will require convincing them of the potential for higher than usual volumes and higher than usual margin dollars. Using the switching vs. replacement reasoning above should achieve this. Prompting and Responding to Sales Enquiries: Providing stores with Point Of Purchase (POP) displays, for instance near cash registers, will give the store the extra inventory it needs to cope with high volumes of sale, and will provide the product the extra visibility to achieve impulse buying. Engineering Production Processes: It is extremely important to be able to cope with high volumes. Flexibility of production is important to ramp up quickly if demand is higher than anticipated or slow down without much penalty if it is lower than anticipated. Advance production units will have to be planned for to stock the store. One of the main issues is a capability issue: can I make and deliver one million units? If I can, is it worth it and should I do it? Otherwise, an alliance should be envisaged. Critical tasks consume resources, and the next step is to allocate information, human, financial & physical assets, and networks & relationships resources to each critical task as well as to the management activities which are anticipated. As sensible as the set of critical tasks selected above may be, for a given business strategy the set of selected critical tasks is not necessarily unique. It will depend on your own experience, your own environment and the current state of completion of the needed capabilities. For instance, if you have already set up distribution channel because you have already accomplished that particular capability cycle task, you will not include Setting up the Channels of Distribution in the set of critical tasks. On the other hand, you may be lacking a capability which we assumed we had and you will select the corresponding capability building task. Speaking of capability, we will expand on this issue in the next chapter.

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DEVELOPING BUSINESS CAPABILITIES Chapter 17 CONNECTING STRATEGY AND CAPABILITIES In the BMS we are only concerned with things which work, i.e. help us achieve our business objectives, and are possible, i.e. which we are capable of doing. Therefore the strategy pursued should match the capabilities of the enterprise. This is why the business definition and strategy of the enterprise need to be verified. The manager must obtain confirmation of the strategy both in terms of its goals (achieving generic business objectives) and the capacity of the business to implement the strategy (market and produce). This “reality check” will: 1. Confirm the rationale behind the strategy, i.e. verify that such strategy actually enables the

enterprise to achieve its generic business objectives; 2. Confirm the feasibility of the strategy, i.e. verify that the enterprise has or can build the

required capabilities for producing and marketing the goods and services that the strategy prescribes (the enterprise may build these capabilities on its own or by establishing strategic alliances).

To confirm the rationale behind the strategy, the following management activities (implying resources usage) may be relevant. Almost all of these activities aim at collecting the information that may be necessary to reassure the manager that the strategy will actually produce the expected results.

1. Analysing Business Management Requirements

4. Appraising Reactions 5. Calculating and Using Standard Costs 6. Conducting Development Experiments 7. Conducting Market Potential Studies

8. Conducting Audits 9. Conducting Economic Studies

10. Evaluating Markets 11. Forecasting Sales

13. Preparing Feasibility Studies 14. Conducting Basic Research

Information-related activities for strategy verification

To turn strategy into action, you need to have the capabilities in place to produce and to attract and keep customers, that is, market these goods and services. The strategy determined what tasks of the business were critical to produce, attract and keep those customers. Once the critical capabilities have been identified, the job of the manager was to develop them to achieve the business objectives of the enterprise.

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Production Capabilities: The enterprise needs capabilities to serve the quantity, cost, time, or quality dimensions of its business definition and offer strategy. If the enterprise lacks any of the necessary capabilities, it will need to allocate resources to build them either on its own or through strategic alliances. If neither is feasible, the enterprise will have to revise its offer within the strategy and perhaps even its business definition. In the BMS, building production capabilities is synonymous with the management of the relevant task groups. These are the Capability Level tasks of the Production Function:

To Produce Quantities: To Produce Quality: To Produce on Time: To Produce at Cost:

Design & Install Plant Dev. Quality Standards Det. Inventory Requirements Balance Production

Eng. Production Process Dev. Quality Control Proc. Handle Materials Dev. Maintenance Systems

Locate & Evaluate Plant Site Design Product Services Dep. Purchase and Expedite Improve Methods

Tooling Keep Stock Install Cost Reduction Prog.

Marketing Capabilities: The enterprise needs capabilities to serve the communication and distribution dimensions of its business definition and segmentation strategy. If the enterprise lacks any of these necessary capabilities, it will need to allocate resources to build them either on its own or through strategic alliances. If neither is feasible, the enterprise will have to revise its segmentation within the strategy and perhaps even its business definition. Like for the production capabilities, building marketing capabilities means managing the following task groups, i.e. the Capability Level tasks of the Marketing Function:

To Communicate: To Distribute:

Sales Literature Set Up Channels of Distribution

Program Promotions

Program Advertising

Of course, we are not saying that all these capability-cycle production and marketing tasks need to be completed before you even attempt to get an order, but we are saying that when you get your first sales enquiry or your first order, you will be sorry if you did not do the critical Capability Level tasks before. As an example, suppose you just got your first sales enquiry and that you have been requested to send a product brochure which you don’t have because you did not complete the Sales Literature task. How long is the customer prepared to wait for the information? What kind of impression is he going to have of you if you keep him waiting? Capability building can take a long time and should be planned according to the date when the capability will be needed. Let us now take a look at how the BMS incorporates business transactions.

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MANAGING BUSINESS TRANSACTIONS Chapter 18 FROM STRATEGY TO BUSINESS TRANSACTION In the previous chapters we looked at the strategy design and capability building processes of the enterprise. While establishing a strategy and building the required capabilities is necessary, it is not sufficient for business success. Success will occur if and when the enterprise uses those capabilities to fulfil the needs of the customers better than its competitors and profitably completes sales transactions. For this reason, this third and last cycle of the BMS will focus on the management of tasks pertaining to the sales transactions, i.e. the Transaction Cycle. The three cycles of the BMS are shown below. Business Definition & Strategy Design Developing Business Capabilities Managing Business Transactions STRATEGY CYCLE CAPABILITY CYCLE TRANSACTION CYCLE The three cycles of the BMS are not disjointed hierarchical processes. At each stage the manager may have to revise the previous phases depending on considerations of effectiveness and efficiency. Case in point, if an enterprise fails to receive any orders, discussing the merits of strategy is obviously futile. Needless to say, for enterprises that are already in business, business goes on and management cannot put on hold activities and tasks in one cycle to deal with another cycle. Strategy design and fine-tuning, capability building and transactions have to be tackled at the same time. The transition from one strategy (or no strategy) to another must be carefully planned. Before we go into the details of the transaction cycle tasks and how they connect to strategy and capabilities, let us discuss why the BMS talks about the “transaction cycle” and not the “export cycle.”

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Chapter 19 INTERNATIONAL VS. DOMESTIC IN THE BMS The BMS makes no distinction between domestic and international transactions. The system’s objective is to facilitate your role as managers and help you be more competitive inside or outside of your national borders. This said, we now look at the effects entering international markets will have on the way you manage your business. Going international will affect all three cycles of the BMS in one way or another. Managers must be aware of these differences. Note, for example, that the enterprise can have a different strategy for domestic and international markets, in which case the critical tasks will be different. If, for instance, you are a textile producer you might decide that at home speed is more critical than quality to satisfy your target market. In international markets, however, there are strict quality standards that must be met and quality might be as critical as speed for the success of your international strategy. In any event, whether you are exporting or confined to your domestic market, the management activities and all business tasks are relevant and need to be managed (you will judge which tasks are critical and need extra resources). However, while the nature of the managerial activities and business tasks remain the same, their content (the actual processes executed to carry out the task) may differ significantly if you are doing business outside of your national boundaries. In other words, the need to allocate resources and the type of resources do not change between domestic and international operations, but how much and how you allocate those resources may vary. For all practical purposes, it can be said that for exporters management (how resources are planned, allocated and monitored task by task) and task content (how a task is carried out) get more complicated all the way from strategy design to managing sales transactions. The nature and amount of complexity of international business vary for different cycles of the BMS. That is, added risk and uncertainty build up at different rates as an enterprise moves from domestic to international. Risk concerns those possible fluctuations that cannot be measured. Uncertainty, on the other hand, refers to those variances that can be quantified. For example, a company making a new investment can establish a range of possible results for such investment. The manager can determine the worst and best case scenarios (such as losing $2,000 or making $10,000). Once this range is established he can assign a probability to each possible outcome. The cases where probability can be assigned to each possible outcome exemplify uncertainty. All future fluctuations that you cannot guess, that is assigning a probability to their chances of happening, make up risk. While both risk and uncertainty are relevant for domestic and international transactions, the number of things you must know when operating in international markets is much higher. Therefore, the chances of happening for things that you cannot guess, that is risk, is much higher if you are operating in international markets. You must keep in mind that risk and uncertainty are realities for both the buyer and seller. If you are the seller, your buyer has his own risk and uncertainty limits. This is why, for example, parties try to minimize their risks and control uncertainties using “terms of sale” in

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export transactions. Minimizing risk and controlling uncertainties are relatively simpler undertakings in domestic operations. Risk is almost always higher at the strategy level than at the transaction level, be it domestic or international. However, risk at the strategy level is much higher for international than for domestic operations. Uncertainty, on the other hand, is more stable across the board, i.e. if the strategy is well defined the uncertainty attached to an international transaction should not be significantly higher than at the domestic level. Let us think about uncertainty at the transaction level: the chances (probability) of a buyer not paying on time or not paying at all, for example. The uncertainty should not be different in a domestic or international operation if management is doing its job properly. For example, if management conducts a proper creditworthiness check of the client, there is no reason why uncertainty concerning payments should be greater in international operations. However, “doing the job properly” is clearly more burdensome for international operations. It requires more resources internationally than domestically, to choose a client with a certain probability of fulfilling the terms of a contract. Thus, to “do the job properly,” management must be ready to commit more resources. This is why, in the literature, management commitment is considered as the leading indicator of export readiness. With this in mind we can look at the export cycle from a new perspective. Traditionally the export cycle has been explained from the point of view of the sequence of events and the paperwork necessary. While knowing the sequence of things and being aware of the different documents involved is very important, the transaction cycle of the BMS takes you one step back. We want you to focus on what needs to be done to manage the process, that is, think about the tasks of the transaction cycle in terms of the resources necessary to carry them out and make informed decisions on the methods of promotion, transport, payment etc., that will help you achieve your generic business objectives. Therefore, the purpose of this chapter is not to make you an expert in export documentation, methods of payment or shipping, but to help you define the critical tasks that need attention in the context of your business definition, strategy, and capabilities, identify when and by whom these tasks should be done, identify the availability of resources required to implement them, and assess whether things can be done more efficiently in the future. As is always the case, the transaction cycle of the BMS is about what needs to be done for the enterprise to complete a successful transaction domestically or internationally. Let us now take a closer look at the Transaction Cycle within the BMS.

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Chapter 20 THE TRANSACTION CYCLE In a sense, the transaction cycle is the last cycle where the strategy and capability mix of the enterprise is verified. In the transaction cycle the production capability is tested while fulfilling orders and the marketing capabilities are tested while getting orders. The transaction cycle is also the place where the management competence of the enterprise is tested once again. In particular, its competence for “Maintaining an adequate level of working capital” is tested based on its success in making collections i.e. getting paid. In sum, transactions will tell you if your management is going in the right direction. If the strategy development process has been successful, you will have a clear picture of your market and customers and understand why they choose your product over your competitors’. In other words, you know what you produce and for whom. If your business capabilities were built accordingly, you should be able to turn the vision of the business into orders. Competent management of transactions will result in cash flow for the business and should enable you to make the money you want. Once the strategy and capabilities have been developed and verified, management of tasks have to translate into sales. To get orders, the target customers have to be aware of your product, that is, the marketing communication capability must be functioning and generating sales leads and enquiries (solicited and unsolicited) from prospective buyers. Once terms of sale are negotiated and orders secured, you have to prepare them, and ship them. At this stage management must make sure the financial resources depleted are replenished by receiving payment and do so at a profit. After all that is why you are in business. The Transaction Cycle

BUSINESSMANAGEMENT

GET AN ORDER FULFIL THE ORDER

GET PAID

Business TasksMarketing Function

Business TasksProduction Funct ion

Management Act ivity

BUSINESSMANAGEMENT

GET AN ORDER FULFIL THE ORDER

GET PAID

Business TasksMarketing Function

Business TasksProduction Funct ion

Management Act ivity Getting an order and fulfilling an order involve certain tasks. As usual, as a manager, you have to know what resources are needed, how much of each of them is required, and when they will be needed for each of them. You then must get them, allocate them and ensure they serve the purpose(s) they are intended for. For each task from getting the order to getting paid there is a need for resources. Once you know these requirements provided that the necessary

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mechanisms are in place, your enterprise should be able to deal with the transaction cycle automatically. We have defined these resources before; let us briefly review them in the context of international operations: Human Resources: Defining the requirement of human resources both in terms of quantity and quality for each of the tasks and subtasks is essential for a successful transaction. The profiles, qualifications and skills necessary for international transactions might be different than those required for domestic transactions. As a manager you have to define these skills and make sure you will have access to people with those skills (within or outside the enterprise) when needed. Financial & Physical Assets: Securing and allocating financial and physical assets to each of the tasks will ensure personnel will have access to financing and the physical facilities necessary to perform their jobs. Financial resources needed for international operations are likely to be higher and different compared to domestic sales. For example, export costs begin to accumulate as soon as the decision to solicit the export order is made. In addition to the product manufacturing and selling costs there are costs relating to: 1) domestic transport and export formalities, 2) international transport and insurance and 3) customs and distribution costs in the market of destination. As a manager you have to make sure financing is readily available to cover such costs. Networks & Relationships: Networks and relationships are key to secure other resources, meet social obligations and coexist with other organizations in a national or international environment. Contacts with TPOs, business and industry associations, etc., can facilitate the transaction tasks by providing information, financing, and technical expertise. These connections are particularly important in the international arena, where knowledge and access to appropriate resources is trickier. Having access to certain networks and knowing the right people can ease substantially the burden of “international” management. Information and Know-how: All tasks require information. This information could be about the task content or its management. It may be in form of an address of a prospective buyer, or external information about legal requirements, quality standards, bilateral agreements, etc. The enterprise also generates useful internal information that is necessary for the transaction cycle tasks. Speedy flow of correct information is essential to complete transactions successfully. Ability to identify the information necessary and communicate it quickly and clearly to all those involved in processing the export order, both internally and externally is key. In addition, knowledge about procedures and international documents relating to commercial, transport, financial and customs issues is necessary to expedite payment as well as ensure that the goods move safely during transport. The following graph presents the transaction tasks and resources of the BMS:

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Resources and Transaction Cycle Tasks

HumanResources



Information &Know-how

MARKETING TASKSPrompting and Responding to Sales InquiriesPreparing Specifications and NegociatingPricing and Quoting

PRODUCTION TASKSEstimating Production CostsDispatching WorkScheduling Work and RoutingFulfilling Freight Operations

HumanResources



Information &Know-how

MARKETING TASKSPrompting and Responding to Sales InquiriesPreparing Specifications and NegociatingPricing and Quoting

PRODUCTION TASKSEstimating Production CostsDispatching WorkScheduling Work and RoutingFulfilling Freight Operations

Let us take a closer look at the transaction cycle tasks.

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Chapter 21 THE TRANSACTION TASKS Looking at the transaction level tasks of the BMS, one thing you may think is that at this level there are tasks that will affect your exports that are not mentioned. This is because you should have handled the tasks relating to those capabilities well before the transaction cycle is set in motion. For example, if meeting determined quality standards is essential for your international sales, your quality standards and quality control procedures should have been developed at the capability cycle level and already in place by the time you pursue an order. You may also notice that most of the production tasks at this level are procedural. That is because they are dealt with in the strategy and capability cycles. For the production function, the decision to go international affects the tasks more at the strategy and capability cycles. The third thing that you will see (and related to the above) is that most of the tasks of production in the transaction cycle do not change significantly neither in content nor vis-à-vis their management when you operate internationally with the exception of freight operations. For example, while the costs related to your products might be higher for international than domestic markets, the systems to estimate those costs must be operative and are mostly the same regardless of the domestic or international nature of your customer. In contrast, marketing tasks at the transaction level will change in content and management when operating internationally due to distance, cultural and other factors. The way you prompt and respond to sales enquiries, price and quote, specify and negotiate, and the way you present your offer in international markets is likely to be different than your approach at home. We have seen brief descriptions of these tasks before. Now let us expand these definitions and look at them in some more detail. PRODUCTION Before describing the production tasks of the transaction cycle let us review how developing the appropriate production capabilities can facilitate the transaction cycle tasks. The Figure below shows the capability level tasks for the production function. Capability Level Production Tasks

To Produce Quantities: To Produce Quality: To Produce on Time: To Produce at Cost:

Design & Install Plant Dev. Quality Standards Det. Inventory Requirements Balance Production

Eng. Production Process Dev. Quality Control Proc. Handle Materials Dev. Maintenance Systems

Locate & Evaluate Plant Site Design Product Services Dep. Purchase and Expedite Improve Methods

Tooling Keep Stock Install Cost Reduction Prog.

If you have managed the tasks to produce the quantities effectively you would have in place the facilities and the systems and procedures required. You would know the nature and exact sequence of operations, cost components, material requirements, etc.

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If you managed the tasks for the timely production and delivery of products effectively at the capability cycle level, you know prospective suppliers, costs, delivery, and have developed systems and procedures for handling of materials, etc. To produce at an acceptable cost while managing the relevant tasks, you have made a detailed analysis of methods, production systems, waste, etc. In other words, you know everything there is to know about costs. To produce the desired level of quality of goods while managing the relevant tasks you established the facilities, systems and procedures to ensure quality. Thus if all the relevant tasks of production are managed effectively and efficiently at the capability level, you would have all you need to manage the tasks of production at the transaction level as well. To illustrate how it all fits together let us take a simplified export order fulfilling case (excluding getting the order and getting paid, elements of the export cycle). Below we have the chronological steps to fulfil an export order: 1. The order received from marketing triggers the production process; 2. Orders are placed for raw materials; 3. Labour and facilities are made available; 4. The order is produced; 5. The finished products are packed, marked and labelled, shipped and delivered. Now consider the transaction level tasks of production: Estimating Production Costs: This task is defined as estimating manufacturing costs in terms of projected manufacturing schedules, and standard costs; Dispatching Work: This task is defined as setting into motion production activities with a job order authorizing operations, material and tool movement orders from stores to processing departments or from process to process for a given order; Scheduling Work and Routing: This task is defined as prescribing when and where each operation necessary for the manufacture is to be performed, by determining the movement through the required manufacturing processes or operations for a specific order; Fulfilling Freight Operations: This task is defined as arranging for and facilitating the physical movement of goods from the enterprise to its customers. Look at the capabilities and transaction tasks listed above. If you have built your production capabilities, then estimating your production costs, scheduling work and routing, and dispatching can be managed automatically because everything you need to manage these tasks is in place. In addition, if you have built your distribution capability everything will be in place to undertake freight operations. By managing the first three transaction tasks listed above: estimating your production costs, scheduling work and routing, and dispatching work, you would be able to: 1) trigger the production process after receiving the order from

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marketing, 2) place orders for raw materials, 3) make labour and facilities available, and 4) produce the order. Then by managing the task of fulfilling freight operations you will be able to pack, mark, label, ship and deliver your finished product effectively, item number 5 in the chronological steps of fulfilling an export order cited above. MARKETING Let us also review how the capability level marketing tasks relate to the transaction cycle. Capability Level Marketing Tasks

To Communicate: To Distribute:

Sales Literature Set Up Channels of Distribution

Program Promotions

Program Advertising

To communicate you need to manage the relevant tasks. If you have managed these tasks effectively you would have in place the means required to reach your target markets. You know exactly what to say to whom. You also know how to say it, where and when. You would know the schedules, themes, layout and text of your advertisements, you have developed a capable sales force, you will have determined what media channels to use for specific groups, etc. To distribute you also need to manage the relevant task. If you have managed effectively the task of “setting up of your channels of distribution” at the capability cycle level, you would have in place an efficient network of intermediaries to facilitate the flow of your products or services, monies, information, etc. In other words you will have in place the systems and procedures necessary for efficient distribution. You can see now how the capabilities and transaction tasks relate to each other. Furthermore you can see how these two levels come into play when you are trying to fulfil an export order. In other words, if your capabilities are in place, the only thing left to do at the transaction level is to use the facilities, systems and procedures that you built during the capability cycle.

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Chapter 22 MANAGEMENT OF TRANSACTION CYCLE TASKS Managing the transaction tasks means making decisions about your four resources. That is, you need to decide how much of what is needed, acquire and allocate the needed quality and quantity, and see to it that the allocated resources are used efficiently. In other words, engage in activities to plan, coordinate and control. You will remember a long list of management activities presented in Chapter 5. Those are some possible ways of managing, named using their common denomination in business management literature. The BMS does not claim to cover all possible management activities. There may be other activities that are not mentioned in this volume. Furthermore, unlike tasks, activities can overlap, and you may find yourself performing the same management activities for several tasks. Let us also remember that the BMS does not prescribe which management activities you should emphasize, how you implement them, or what you call them. Why are these activities important? Imagine that you do not have an internal communication system (a listed activity), the necessary information (a resource) will not be available to those that need it to perform their tasks. Or think about a situation where you do not have job descriptions and personnel appraisal systems (listed activities), most likely you will not be able to find the right person (a resource) for the job. Keeping this in mind we can proceed to review the concepts of task content and task management.

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Chapter 23 LINKING TASK CONTENT AND TASK MANAGEMENT IN TRANSACTIONS By now you probably realized how the BMS differentiates task content from task management. The task content refers to the things you must do while performing a task. For instance, if you are trying to install a manufacturing plant (a capability cycle task), the equipment that comes packed in crates needs to be unpacked, moved to its location, assembled, calibrated, tested, etc. All of these concern “task content.” However, knowing what is to be done is only a first step. To get all those things done, you need to have resources. First of all you may need to do some research contacting industry associations to find out equipment standards of your industry, what is the latest technology available, if you can get it and how to get it (the resource in question would be networks and relationships); you need to have people able to do the job (human resources); monies will be spent on these people. You also may require forklifts, calibrators and other tools and equipment (finance and physical resources); and finally, you probably will need blueprints, instructions, manuals, etc. (information and know-how). Obviously the manager does not need to contact associations, read the blueprints or know how to operate a forklift, but it is the role of the manager to make sure those resources are available when needed in the quantities and quality needed. You will find below a description of the content of each task and some ideas about the way these tasks could be managed. First let us review the content and management of the marketing tasks in the transaction cycle, those that allow you to get an order.

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Chapter 24 TRANSACTION CYCLE MARKETING TASKS: GETTING ORDERS Prompting and Responding to Sales Enquiries: this marketing task is defined as building procedures to initiate contact with prospective buyers and answer enquiries. Development of procedures and allocation of responsibilities for making sales contacts and responding to enquiries is often neglected by most SMEs. Making sales calls may be left into the hands of few who do not have a well-designed standard procedure to follow. This results in arbitrary offers, varied promises and unexpected compromises. Similarly, there may be no clear procedures for specifying who should respond to enquiries and how. This may result in delays in response, wrong responses and even lost sales. Quite often, the owner-manager monopolizes the authority for making sales contacts and responding to enquiries, and as he may not himself put into practise a standard procedure, he gets the same results again and adds organizational confusion. Therefore, development of detailed procedures (e.g. how to respond to a phone call) and training of staff is very important. There are a variety of means to reach your target customers: trade fairs and exhibitions, buyers-sellers meetings, promotional Web pages, personal sales visits, direct sales literature, trade missions, press releases in the trade press, sales advertisements in newspapers are some forms. Making sure the most effective means to reach customers is efficiently used is the role of the manager. Surely, you will be aware of how expensive all of this may get. Thus, you will have made choices about which methods are the most cost effective. Hopefully you will have built systems to track the effectiveness of these methods too. If you have done all this well, you will have generated sales leads and enquiries from prospective customers requesting you to prepare a sales offer. In other words, once you know what you have to do (content, above) you have to think on how to allocate your resources efficiently and effectively. Let us look at an example. Imagine you weighted all the possible ways to reach potential customers and decided that participating in a trade fair is the most efficient way for reaching target clients to generate sales enquiries. Once you have decided what to do (participate in a fair) you will have to allocate resources. You will have to make sure all the necessary systems and procedures are in place to:

1) Plan, i.e. determine what needs to be done, what are the objectives of those actions, how will those things be done, who will execute them when, and assess again the enterprise’s participation in the fair;

2) Execute, i.e. obtain and allocate the necessary resources;

3) Control, i.e. develop checkpoints and procedures to know when things are done, evaluate if they are done appropriately, assess if and how they can be done better in the future.

Human resources: The necessary personnel has to be available and ready to plan prepare and make the most of the participation of your enterprise in the fair. Some questions you might want to ask yourself:

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Do I have the personnel required? Do I need to hire some people for the fair, translators, support staff, etc? Who will be responsible for organizing, preparing and monitoring participation? Example activities: Describing and evaluating jobs, Developing organizational plans, Installing activities, etc. Are these people trained to handle the participation in this fair? Example activity: Appraising personnel. Do they need some additional training to perform their duty? Who can provide that training? How? Example activity: Training. Is legal staff available to provide support during the preparation, implementation and follow up of the fair? Example activity: Securing secretarial assistance. Networks and Relationships: For a successful participation you will need to activate the connections (that you of course built in previous cycles) of the enterprise before the event. Inform regional, national and international networks about the presence of your enterprise in the event to ensure their support for the event. You could provide them with information about your products, present them with concrete requests for actions which they would conduct to support your goals, and promote with some of them the coordination of visits of domestic and international customers, etc. Are the contacts and networks updated? Example activities: Seeking and building strategic partnerships, Establishing association and society relations. Financial and Physical assets: The participation in the fair will require cash and assets. Establishing what they are and making them available in time is the role of the manager. Budgeting for the event means knowing what will be needed. The stand must be paid for (the resources available will determine the type of stand), it might need furniture, decorations and equipment such as computers, phones, faxes, funds for hospitality expenses for prospective clients will be needed. Technical and sales materials must be printed beforehand (invitations, brochures, mailings, promotional gifts, etc), maybe even in several languages. Promotion and advertising of the event must be programmed. You might want some pictures or recording for reference. Travel expenses, transport of products, insurance for personnel and shipped goods, rental of premises must be budgeted for. Some of these support services can be contracted at the “last minute” but they will be more expensive and might not be available on time. How much investment is appropriate for this fair given the objectives? Example activities: Controlling budgets, Developing systems and procedures.


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Do we have the cash necessary to take care of all the expenses? Example activity: Maintaining an adequate level of working capital. Information and know how: You must make sure everyone in the enterprise is aware of the objectives and their role for the event. Each person must be aware of what they are supposed to know to carry out their job properly. You will need to make sure that the personnel participating in the fair has all the relevant information about products, specifications, contacts, needs of prospective clients, etc. You might need personnel who speaks foreign languages, maybe some technical expert to explain your products and bring in the news about technological developments. Of course you will also be generating information about the attitudes and responses of the clients to your products, services etc., and collecting new contact information for follow up. You will also need to make sure information is gathered to analyse domestic and foreign competition. Is all the relevant information available and in the appropriate form to be used? Example activities: Preparing internal publications, Communicating. Do you have all the relevant information on the clients you want to visit your stand? Example activity: Appraising of reactions. All these questions and many more are part of the process of managing the transaction level task; you should be able to develop standard procedures to make sure all these issues are checked for each of the tasks. Preparing Specifications and Negotiating: The definition of this task is ensuring that the products to be sold are clearly specified and their sales are negotiated in accordance with the enterprise's policies and procedures to enable all parties to have a clear understanding of the terms and secure favourable terms for the enterprise. Sales negotiations are integral parts of doing business. What is to be supplied and how payment will be done are key to the negotiation. Having clear and detailed specifications will avoid prospective disagreements and possible losses for both parties. Detailed knowledge of national, international and company specific product features is required for preparing specifications. Pricing and Quoting: This is the task that concerns determining the final or tentative selling price of goods or services and preparing quotations. Pricing is an extremely critical task for an enterprise. In the BMS pricing is discussed at two levels. An enterprise decides whether to charge a “high” price or a “low” price at the strategy level when product-positioning decisions are made. Nevertheless, a time comes at the transaction cycle level when at least a tentative or a final price needs to be quoted to the buyers. There are several pricing methods enterprises can use. Most small enterprises use “cost plus” pricing where a profit margin is added on top of the estimated costs to arrive at a price. Cost plus pricing often diminishes “cost discipline” and reduces the competitiveness of an enterprise. For competitive pricing, a lot more must be considered in addition to costs.

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Although information about costs may not determine the price set for an order, it is important that you relate the two if you are intent on making a profit. Costing is related to the amount of money spent in producing a product under given manufacturing conditions. Pricing is related to the amount of money received by selling that product under existing market conditions. In a sense they are two separate exercises in that one does not necessarily dictate the other. Eventually, however, the process of manufacturing and marketing must end in a profit, therefore pricing and costing, in reality do influence one another. The ultimate arbiter of the price you set will be your customers and how you set your price is a vital component of the extended positioning of your product and your ability to attract and retain customers. Your strategy will enable you to communicate the product features precisely to your buyer in a way that meets his expectations. In cases where your buyers demand changes in your product, you must keep in mind that extensive product adaptations can raise the price of the product for export. Even if your strategy does not consider it “significant”, it is always good practice to mention in your quotation any quality assurance standards you have achieved (e.g. ISO9000). Furthermore, the number of regulatory standards governing international trade seems to be growing every day in spite of the efforts of trading nations to harmonize and streamline standards. Many of these standards are being established in response to changes in consumer values and preferences, particularly with respect to concerns about health and safety and the destruction of our environment. Some standards are market driven and therefore optional, while others are mandatory and imposed by both the governments of importing and exporting nations. Regulatory standards fall into the categories of 1) quality, 2) health and safety, 3) environmental and 4) product composition standards. To determine if you should include all of these in your quotation or not you have to consider if doing so is consistent with your strategy and your capabilities. If so, all the necessary information should be included in your quotation to help the buyer with his or her decision-making. In conclusion, your quotation may include information items from the following list without being limited to it: timing of the typical buying season(s), nature of trial orders (e.g. product ranges/quantities), payment methods (how to identify and decide on the best method of payment so that you can balance the objectives of your customer, the bank, and your own objectives in terms of financing the export order, improving cash flow and minimizing the risks of non-payment), credit periods, delivery terms, patterns of product distribution, accepted mark-ups, product characteristics, packaging methods and buyer expectations of the exporter regarding promotional support. Accepted industry practices vary in different parts of the worlds and in different markets and should not be confused with the widely used INCOTERMS which refer to the universally accepted conditions of sale in a buyer-seller contract. Amongst the important components of a quotation, most concern business tasks, while one in particular concerns the managerial activity of “maintaining an adequate level of working capital”: the payment methods. Although there are, in theory, an unlimited number of payment methods available, in normal commercial practice, there are principally four classes of payment methods:


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1. Cash in Advance; 2. Open Account; 3. Documentary credits; 4. Collections.11 There are several variables to take into account when choosing a payment method ranging from your own cash flow needs to your capability to support a specific payment method (e.g. do you have trained export documentation people to follow the export documents through the system?). Some of these variables are listed below: 1. Regarding the customer: his/her preferred payment method, business objectives (e.g.

security, speed to market, cash flow), creditworthiness (e.g. years in business, reputation, financial health), reliance on imported product (e.g. are your customers used to dealing overseas), the size of the export order (e.g. is it a trial order, a large order shipped infrequently, or a series of small orders shipped on a regular basis?);

2. Regarding institutions: the track record of the banking institutions in the export market

(e.g. evidence of bank failures, bribery and corruption); 3. Regarding the industry: the accepted industry/market norms (e.g. Open account, Bill of

Exchange); 4. Regarding competitors: their payment terms (e.g. will the method of payment be

prejudicial to building a long term sales relationship with the customer?). The choice of payment methods, insurance, credit, transport, etc., will affect your quote and will provide the elements for your negotiation. Up to this point we have seen the content of the Pricing and Quoting task; how you go about making sure things get done efficiently falls under the category of management. It starts with thinking about the most efficient mechanisms that should be in place for preparing specifications and negotiating a specific export order, and then putting them in place. The quotation must be clear and contain all the relevant details requested by the customer, so you need to clarify any details of the customer's requirements which are not clear and respond appropriately. In addition to containing information about price, terms of delivery, etc., the price quotation is also a selling document, and must be accompanied by all necessary sales information. Also don’t forget to think about the management of all these issues and about making resources available to handle them. Let us now look at the transaction level production tasks.

11 For more on documentary credits and Payment Methods consult the International Chamber of Commerce (ICC) publications UCP 500 and UCP 522 respectively.

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Chapter 25 TRANSACTION CYCLE PRODUCTION TASKS: FULFILLING ORDERS Estimating Production Costs: This task is defined as estimating manufacturing costs in terms of projected manufacturing schedules, and standard costs. Estimating the cost of manufacturing an order means calculating the resources the enterprise has to expend to manufacture and deliver the goods to the buyer. When an export order is received, the enterprise should be able to quickly and accurately calculate the direct cost and the overhead allocation based on standard procedures. This estimate may or may not be the basis of pricing, however, it must be known for the enterprise to make a rational decision about the price to quote and accurately calculate the expected profits (or losses). By the time you are dealing with transactions, your capability to estimate production costs should be in place. Production tasks, such as Engineering production processes, Tooling, Installing cost reduction programmes, etc., carried out at the capability cycle will have given you production cost information, and will have put in place the systems and procedures needed to estimate production costs. Let us examine the task content briefly vis-à-vis an export order. Major cost items are: 1) product costs; 2) domestic transport and export formalities; 3) international transport and insurance; 4) customs and distribution costs in the export market. In a domestic situation, non-production overheads include the costs of marketing, distribution and administration. When selling overseas there are some additional categories of cost: 1) packing, labelling and marking costs; 2) loading and transportation costs; 3) documentation charges; 4) finance, insurance and duty cost. The Estimating Production Costs task content refers to the tools and techniques of estimating and adding these costs up to come up with a unit cost at a given volume of production. There are different procedures ranging from complicated to simple. Software products and procedural guides abound for forecasting and calculating cost-volume relationships12. You will have to determine when and why use one method over another, as well as evaluate, given your strategy, how the chosen method supports or undermines your position in the export market.13.

12 Interested readers are referred to the two publications titled “Forecasting” and “E-Curve” both published by the Association of Training Institutions in Foreign Trade in Asia and the Pacific (ATIFTAP), 1995 Manila, Philippines. 13 For more on costing see the relevant sections from “Costing and Pricing for Exports” and “Readings in Costing and Pricing” International Trade Centre UNCTAD/WTO, 1989, 1993.

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There is a relationship between the INCOTERM14 quoted to your customer and the cost of fulfilling the order in question. Obviously the more costs and risk you assume, the less the buyer has to concern himself with. The purpose of the INCOTERMs is to provide for the interpretation of the most commonly used terms in foreign trade. The most recent amendment was made in 200015. INCOTERMS used in your quotations affect how you calculate your costs. Exporters should have a thorough knowledge of this standard international practice. Now let us look at the management side of this task. Like all other tasks in the BMS this task needs to be managed, i.e. the four resources of the BMS must be made available for the task to happen. Following are some examples of questions a manager may want to answer and the relevant managerial activities: Human resources: Identifying personnel to perform cost calculations, i.e. who will be responsible for doing the calculations? Examples activities: Describing and evaluating jobs, Developing organizational plans, Installing activities, etc. Are these people trained for handling calculations for this offer? Example activity: Appraising personnel. Do they need some additional training to perform their duty? Who can provide that training? How? Example activity: Training. Information and Know-how: Is the information on product design and specifications, quantities, costs, etc. made available? Examples activities: Communicating, Calculating and using standard costs. Is information on inputs required to produce the order made available? Examples activities: Developing systems and procedures, Communicating. Financial and physical assets: Is the information needed to perform the task generated? Examples activities: Designing cost and general accounting systems, Calculating and using standard costs. Networks and relationships: Are my standard costs competitive? Example activity: Establishing association and society relations (international associations regularly publish standard costs).

14 INCOTERMs are also relevant to quoting and negotiations. 15 The interested reader is referred to the publications of the International Chamber of Commerce (ICC), the copyright holder on INCOTERMs described at: http://www.iccbooks.com/.


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You should be able to follow the same process of defining content and management for the remaining production level tasks. Dispatching Work: This task is defined as setting into motion production activities with a job order authorizing operations, and material and tool movement orders for movements from stores to processing departments or from process to process for a given order. Once the operations needed to complete a product are determined and machine and labour loads are fixed, this information must be used to execute the actual production. The movement of parts from raw material storage to finished goods inventory must be regulated, monitored and facilitated. Facilitation of production requires:

- Everyone taking part in the manufacturing of a product knowing exactly what operation will be performed, where, and by whom.

- Moving and making ready the raw materials, tools, jigs, fixtures, components to where they are needed on time. Failure to perform this task effectively leads to shop floor delays, waste and consequently increased manufacturing costs.

Dispatching work is a task that mostly requires information; it basically requires filling out forms as part of the systems and procedures. Scheduling Work and Routing: Undertaking this task serves the purpose of determining when and where each operation necessary for the manufacture is to be performed for a given order by specifying the movement through the required manufacturing processes or operations. Detailed analysis of the manufacturing requirements for a specific product is essential for accurate planning of the day-to-day operations. Determining the sequence of operations is needed to determine labour and machine loads. Once these loads are determined, another process, that of optimising machine and labour use, needs to follow. Failure to do so may lead to waste of valuable machine and labour time, unbalanced workloads, delays and increased scrap rates. Obviously, whether you are producing processed food products or leather handicrafts, before you can begin to route the product through its various production processes and schedule work accordingly, you need to have an accurate description of its constituent elements (or ingredients) as well as of the processes used to manufacture them. Let us examine the task content briefly. As new customer orders are initiated, it is necessary to assign the job to each production process or work centre to establish how much activity takes place and where during a certain planning period. Assigning the work to these work centres is known as loading. You could use a Gantt chart16 to evaluate how much load is placed on any given production process during the course of a specified time period. This graphical procedure shows, in terms of cumulative days or hours, the total estimated work load that the jobs require at all work centres.

16 The Gantt chart is a simple graphical technique used in production planning. Today, a Gantt chart can be prepared using most commercially available spreadsheet software. The Gantt charts are often used to track the progress of a project. The expected time to complete each task in a project is plotted as a horizontal bar that is coloured in gradually as the project progresses.


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Establishing the priorities for specific orders in the queues (waiting lines) as they move through the work centres is known as sequencing. Loading and Sequencing are the two sub-tasks you will have to undertake to ensure that the export order keeps moving en route to the customer. This means that rules for priority sequencing have to be formulated; these rules should be designed to minimize: • Set-up costs; • In-process inventory costs; • Idle machine time; • Idle staff time; • Number or percentage of late jobs; • Average delay time of late jobs; • Average number of jobs waiting in the queue; • Average job wait time in the queue; • Average time to complete a job. It may be difficult to balance the need to meet customer requirements in terms of on-time delivery and the need to fully utilise your human resources and physical assets to improve profitability. You will have to make choices about job assignment and sequencing rules; these choices will have an effect on the way you conduct business. If you think about the content and management of the transaction cycle tasks we have reviewed up to this point, you will realize why we said at the beginning of the chapter that it makes little difference whether you are responding to a domestic or international order in terms of these tasks. You will find below, that the last task pertaining to production, Fulfilling Freight Operations, changes significantly in content and thus in management when you operate outside your country. Fulfilling Freight Operations: This task is described in terms of scheduling freight operations to achieve distribution objectives, arranging and facilitation of the physical movement of goods from the enterprise to its customers. For exporters this task is further complicated due to documentation requirements17 and multi-modal transport requirements. Most exporters use freight forwarders for this purpose or their customers take possession of the goods at the factory gate (i.e. Ex-Factory). Even if the buyers receive the goods at the factory gate, the enterprise must carefully plan and monitor the movement of goods to maximize cost savings. Once the order is produced, your aim is to arrange for international transport, pack and mark the goods, and insure them so that they arrive safely at the buyer's preferred location. The export documents required at this stage of the export transaction are considerable and you will need to be organized so that they are available in the right form when needed.

17 Manuals on export procedures and documentation provide in depth information on this subject. While there are national variations in the various documents used, most documents nowadays are more or less universal. The interested reader is referred to a manual on Export procedures and Documentation from the national Trade Promotion Organization or the ITC publications carrying the same title.


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Distributing your products internationally brings added complications and risks to their delivery. The passage of goods across national boundaries means more legal requirements: customs clearance and compliance with the laws of the importing country. A longer time in transit means that the goods are exposed to the risk of theft, damage and delays, particularly if the goods are being transferred from one mode of transport to another. In addition, you may have to pack your goods differently to meet the size and weight restrictions imposed by different forms of international transport. Costs of physical distribution can constitute a significant portion of your cost. To be competitive, the seller must continually develop and use a physical distribution system that requires the least cost to achieve the greatest customer satisfaction in terms of the criteria of quantity, quality, time and cost. The performance of your order shipping must be evaluated and improved according to these criteria. The costs of each task must be evaluated, both in terms of preparing the order and shipping the order. Now let us take a look at the content of Fulfilling Freight Operations. Preparing the Export Order for distribution involves three sets of important activities: 1) Packing, Marking and Labelling the goods18, 2) Inspecting the goods prior to shipping19; 3) Unitising or containerising the goods for international transport. Packing is concerned primarily with protecting and containing the product during transit while packaging is concerned primarily with presenting the product so that it appeals to the customer at the time of purchase. The type of packing used will depend upon a number of factors like: Product characteristics, Mode of transport, Climatic conditions, Government regulations. Marking: Identifying the goods en route to the customer. Marks on an export shipment identify the goods to the exporter, the transport carrier, customs officials and the importer. The purpose of these marks is to aid identification, ensure that the goods arrive safely at the point of destination, and comply with government and contractual obligations. Labelling: Information on the quantity and quality of the goods and also may include the name and address of the manufacturer, the weight or volume of contents, ingredients and other relevant details. Inspection: Verification measures undertaken to ensure that the export order in question meets the exporter's government standards, specific standards demanded by the customer in the terms of sale, the legal requirements of the importing government. Inspection requirements can differ enormously from country to country and from product to product. To complicate matters further, the inspections themselves can involve a range of governmental, quasi-governmental and private inspection services.

18 For more on packing and packaging see: Packaging Design: A practitioner's manual ITC UNCTAD/WTO 2000. 19 For more on the contents of this task please see the relevant sections of the IPSM Modular Learning System on Supply Chain management, ITC UNCTAD/WTO 2001.


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Unitisation: This term describes the way small items of cargo are put together and handled as a unit of standard size, usually using mechanical equipment. The consolidation of an export order into units of a convenient form, weight or volume for transportation can offer distinct advantages to the exporter and the importer. Big savings can be made on shipping costs by choosing the right orientation of your goods in transit. Clearing Customs: There are a number of export documents and procedures that the exporter must be aware of in order to assist customs authorities to fulfil their roles. As a new exporter you must be concerned with three things in relation to complying with customs procedures: Domestic Customs procedures, Transit procedures, Import Customs procedures. New exporters should use a customs broker or customs clearing agent or rely on their importer to handle the customs clearance at the point of destination. Sometimes the freight forwarder is authorized to act as a customs clearing agent and his charges should be built into your cost to the customer. Cargo Insurance: You will need to ensure yourself against damage. What you need to know is the nature of insurance, how you get it, what it covers and how it relates to the terms of sale. You should discuss your insurance coverage with your broker to make sure that risks specific to your own circumstances (e.g. hazardous terrain) are included. Terms of Sale: INCOTERMS are relevant also in this instance. The INCOTERM you choose will determine which portions of the delivery correspond to the buyer or to the seller and thus will determine, within the context of the current order, the content of the task being discussed. We have reviewed all of the transaction cycle tasks. We have briefly looked at the content and management of those tasks related to getting the order (marketing) and fulfilling the order (production). Managing these tasks means that you make sure that you are able to plan, acquire and allocate the required resources. Like all the other tasks in the BMS both the task itself and managing them depleted your resources, especially your cash resources. The resources depleted by transactions need to be replaced. As you know by now, replenishing resources is a managerial concern. Naturally, the sensible way of replenishing the depleted resources is by Getting paid for your export orders (or your domestic orders). This is why the managerial activity “Maintaining an Adequate Level of Working capital” is an important activity of the transaction cycle.

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Chapter 26 TRANSACTION CYCLE MANAGEMENT: GETTING PAID Working capital is the capital needed to finance the operating cycle of a business. The operating cycle of a business is an important concept and is defined as the period during which raw materials or inputs are converted into finished products or outputs. In financial terms, this is the time between making expenditures on a specified unit of production and receiving cash following the sale of that unit. Working capital is in essence the oil that is required to lubricate the running of your business on a day-to-day basis. Its accounting definition is given in terms of current assets and current liabilities. In the BMS we will look into this activity in a slightly different way. Let us look at a list of the possible uses of funds related to export orders: GETTING AN ORDER 1. Participation in Trade Fairs or Trade Missions; 2. Travelling abroad to visit existing or new buyers; 3. Designing, implementing and hosting a Web-page or E-commerce facilities; 4. Producing and shipping samples; 5. Preparation of brochures, video and material for specific buyers; 6. Getting assistance for preparation of specifications, quotations, translation or negotiation; 7. Getting legal help for contract negotiations. FULFILLING THE ORDER 1. Getting technical help for product adaptation and modification; 2. Getting help for purchase of the equipment needed for a specific order; 3. Obtaining ISO certification; 4. Getting help for infrastructure and technology; 5. Buying inputs needed for the order; 6. Paying expenses needed for the order, including packing and shipping; 7. Paying for insurance. GETTING PAID 1. Paying for expenses related to Bill Discounting or Factoring facilities; 2. Getting legal expertise in case of Dispute; 3. Paying for expenses related to After Sale Service. As can be seen, at all stages of the export transaction cycle, the cash resources of the enterprise can be depleted. Naturally some of the items listed above, such as purchasing of inputs and paying for labour, are likely to be more significant than some of the others. Calculating these mostly cash outlays accurately should give you a fairly accurate response to the question “How much working capital is required?” Obviously, your answer will depend upon the length of the operating cycle and will vary from one business to another. The longer

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the operating cycle, the longer the resources of the business will be tied up in debtors and inventories. Going global is likely to extend the working capital cycle in which case it has both time and liquidity implications which need to be carefully planned for and controlled. In the domestic markets you may be selling smaller quantities more often. Export customers on the other hand may require bigger orders less frequently. In addition, it is more economic to transport larger quantities abroad than smaller quantities. As a result the manufacturing lead-time for export markets is relatively longer compared to the domestic market. This already places more of a strain on your working capital requirements, in terms of inventories and work-in-process. Other differences which extend the cycle are preparation of the export documents, the length of shipping time, additional costs in shipping (depending on the terms you sell under), and exchange rate risk if you invoice in a currency other than your own. Critical to the efficiency of the working capital cycle is the assumption that you are selling to customers who will ultimately pay you. Should some of your debtors turn out to be bad (meaning they do not pay you at all because they go out of business) or they are slow payers, then this can spell disaster. It is vitally important that rigorous credit control procedures be followed when extending credit to customers, and that you have made provisions to cover and deal with the possibility of unpaid debts. Many SMEs fail to achieve sufficient liquidity due to over-trading. The business grows too quickly and hence there is inadequate capital support for the level of sales achieved. This is a direct consequence of not controlling working capital, poor cash planning, and over-investment in the less liquid form of current assets namely debtors and inventories. SMEs must grow within their means. By now you know that exporting imposes on your business’s cash flow an additional burden that you would not face in your domestic market. Of course, receiving payments from your customers relieves this burden, and one export cycle is used to finance the next and so on. The lead-time between export cycles, as well as the delay between your production and shipment induced cash outlays and your customer payment may be long. Thus, you may need fresh monies to keep your cash balance at an adequate level. This is why many countries provide “export finance schemes.” There are basically two sources of export finance available: 1) traditional bank finance and 2) finance which is tied to confirmed export orders. Most small businesses do not have the luxury of financing their export orders through new capital raised by issuing new shares or through debentures (loans). And even if they did have that luxury, it may not be advisable since control of the company might be lost in the process, either through a dilution of the equity in the company or an unanticipated difficulty with the export order. This is particularly true in the market entry and development stage. You have two options using traditional bank finance. You can either increase your overdraft or request a short-term bank loan. If you have a strong domestic sales order book and a good relationship with the bank then these might be viable options. Your success will depend on how effectively you can build a case. The whole financial position of the company will need to be considered in both cases. As a bare minimum, the bank will want to know which market(s) you are pursuing and your company's expertise in international trade. You will be asked for a cash flow forecast for the

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export market and the business as a whole. They will also want to know who the buyers are and whether you are likely to gain repeat orders from these customers in the future. The overdraft can be an expensive and risky means of raising export finance. Overdraft interest rates can be high. Increasing your existing overdraft facility can leave the domestic business exposed should any unexpected demands for cash (e.g. capital equipment failures) arise. Although bank loans may be cheaper, the same basic risks still apply. Unless you are operating on healthy profit margins yielding substantial cash flow, you would be wise to avoid traditional bank finance as your first recourse. The second source of export finance is that which can be raised on the back of the security of confirmed export sales orders and the corresponding financial instruments attaching to the terms of payment. In fact, as we have seen, the subject of raising export finance came up at the Order Getting stage when we were trying to evaluate different methods of payment. If you recall, one of the key criteria in deciding to use one method of payment over another had to do with its cash flow advantages. To that extent, raising export finance and determining the most appropriate method of payment are part and parcel of the same discussion. There are short-term, medium-term and long-term finance options available to exporters. There are a variety of forms of export finance available for new exporters with specific needs, including arranging finance for your buyer through an export finance house, forfeiting, and securing a bank advance on the strength of an export credit insurance contract.20 For start-up exporters the perception of risk is high because of a lack of information about the conditions in the target market, the creditworthiness of the customer and the risks associated with shipping the order over long distances. You can protect your business from these risks: 1) export credit insurance to minimize the incidence of non-payment of your buyers and 2) foreign exchange risk can be minimized by managing foreign exchange operations. As with the tasks, this management activity requires you to think not only about everything that goes into it, but also about how you are going to make your enterprise ready to deal with it. If you do not plan carefully you might be able to stretch your resources and manage the cycle once or twice, but most probably if you are not making sure your resources are replenished at some point you will not be able to stretch your resources to accommodate a new transaction cycle. Due to the additional financial burdens discussed above this will happen sooner rather than later when you deal with international transactions.

20 Interested readers are referred to ITC publications on export finance.

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SUMMARY Chapter 27 THE COMPLETE BMS To finalize, let us link together strategy, capability and transactions with an example: A food and drink company “Africa Sana” defined its business as “producing natural thirst-quenching drinks (premium quality pure fruit juices from 12 native African fruits ranging from mangoes to papayas) for the health conscious younger generation”. According to its simplified strategy statement, the company wants to compete in: • The market of image conscious young people between 14 and 26; • Who are attracted by the naturalness of the product, and • The uniqueness of the fruit juices and fruit juice mixes; on the basis of: • A clearly defined African image (A Thirst for Africa); • Convenient and innovative packaging, and • Specialized distribution through secondary school and college cafeterias. This strategy of the enterprise will be used to define its critical tasks. Following is one possible way Africa Sana’s management might have decided to proceed to pursue their business objectives: Business definition

Strategy Activities

Business Functions

Capability Tasks

Transaction Tasks

Marketing

Program promotion

Prepare sales literature

Brand Image Innovative Package Unique juice mix Specialized distribution

Market Potential Study Appraisal of reactions Feasibility study Conducting basic research

Production

Develop quality standards Develop quality control procedures

Fulfil freight operations

At the strategy level, Africa Sana focuses its resources on a market study to determine the ability of the target group to buy high quality juices. This is critical, as Africa Sana needs to know if there is a sufficient number of buyers out there to create a market of optimum size.

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Next, Africa Sana wants to know whether the product attributes as positioned by the strategy (naturalness, fruit juice and fruit juice mixes, convenient and innovative packaging) would indeed be appealing to those buyers and make them switch to Africa Sana’s products. For that, they wish to conduct reactions (and attitude) appraisal surveys. To determine whether investing in new packaging equipment and juice mixers is economically sensible, Africa Sana wishes to undertake a feasibility study. Furthermore, to keep innovating natural thirst-quenching drinks they wish to institutionalise basic research. The following illustrates how the BMS is used to select critical tasks during strategy design. At the capability level, Africa Sana chooses the critical tasks to ensure proper marketing communications and quality. Since the thrust is producing natural thirst-quenching drinks for a specific segment, Africa Sana wishes to ensure quality (especially since it is for exports) and must establish quality standards and install quality control procedures. Furthermore, as the specific market segment needs to be informed about the product’s appeal, Africa Sana wishes to build its communication capabilities. For this they will invest in the management of “Programming Promotions” as a critical task. At the transaction level, management decides their greatest effort will go into developing special sales literature for distributors. Finally, since transport is key for the juices to maintain quality (in terms of time and maintenance of the cold storage distribution chain) a good deal of resources will be devoted to fulfilling freight operations. We started the first chapter saying: “the BMS is about the entire business and the way to manage it, not about the tasks of business or the activities of management. It needs to be understood and absorbed as a whole.” At this point, you probably understand much better what we meant. We have looked at management activities, we have reviewed business tasks: the BMS is not about their content, but more about how they all relate to each other. You can think about the BMS as a filing system for management. Your office is probably full of documents that contain valuable information. If you have an efficient filing system you will be able to find immediately the information you require. If you do not, you will probably find the information at one point or another, today or tomorrow if you look for it, or next month by chance... As a manager, you are probably doing some or most of the things we have discussed above, some out of common sense, some out of business sense and some by mere chance. The BMS does not aim to tell you how to do things. You know more about your business and markets than we do and you have your own management style. What the BMS can do, is provide you with a framework were you can place all the pieces of the puzzle. Hopefully it will help you do all those things in a more systematic way and cut the time to identify and improve problem areas. As a result you will react more quickly and make your company more competitive sooner rather than later.

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APPENDICES

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Appendix A THE BMS’s FAILURE MECHANISMS Running a business is so complex that a lot of things can go wrong, and then whichever business model was used gets the blame. We will show that the BMS can explain the mechanisms of business failure, in a way which is consistent with the model it proposes. As was introduced in chapter 2 and discussed in chapter 3, the ultimate goal of a business is to make as much money as possible. The concept of being able to dictate terms to customers and suppliers, i.e. “bargaining power”, is discussed in chapter 3 as being the way to increase profit. Therefore, a market situation where this can happen, i.e. a competitive monopoly, is highly desirable. A business will fail when it fails to become a competitive monopoly. The figure on the next page shows four BMS concepts and how they are cascade-linked with failure mechanisms. These mechanisms are: i. a business fails to become a competitive monopoly when it fails to achieve the generic

objectives of the production and marketing functions; ii. a business fails to achieve the generic objectives of the business functions because the

priority tasks do not produce the expected results; iii. priority tasks do not produce the expected results because they are mismanaged, i.e.

management uses the wrong management activities or doesn’t plan-execute-control well. In summary, a business fails to make as much money as possible because of management. Let us find out how this can be. The resources and management competence which exist, or are obtainable, in the enterprise should be the basis for an analysis of “alternatives.” The enterprise may change its business definition entirely if the analysis determines that the resources and management competence are applicable to another business which will yield higher returns. Enterprises should regularly check whether the business definition needs to be changed to achieve higher results, even if the current results seem satisfactory. As an example, everybody knows that Nokia is the leader in the mobile phone business but only a few remember that before that they were making tyres, and even fewer know that before making tyres they were in the wood pulp market. They were in a mature raw materials market where they had no bargaining power to dictate to their customers the Quantity, Quality, Cost and Time components of their offer, and they predictably achieved poor returns. In order to improve these, Nokia had to “think out of the boundaries” of their business and

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they entered a market where they could use their raw material and industrial process competencies. Unfortunately, that market was also mature and was very competitive with very well established leaders. One more “thinking outside the box” exercise and they applied their newly acquired design cycle management skills to practically create the mobile phone market and fuel its explosive growth. Nowadays Nokia has substantial competitors which achieved their position by sub-segmenting the market, but they still have high returns.

Business failure is measured in terms of non-achievement of its goal of making as much money as possible. The business definition leads to the business’s strategy which is designed specifically to achieve the business’s goal. We will examine how a strategy can fail. At the conceptual level, we can identify the following failure modes which pertain to the offer, the segment, or the match between offer and segment: 1) You may fail to correctly identify the needs/wants of the segment;

1 Segment Incorrect identification

2) You may fail to identify the production dimensions (Quality, Quantity, Cost, Time) which

would meet those needs/wants. Your offer misses the target segment;

2 Match Miss

Analysing Business Management Requirements

Designing General Account ing SystemsDesigning Cost Accounting SystemsAppraising React ionsCalculating and Using Standard CostsConducting Development ExperimentsConducting Market Potent ial StudiesConducting AuditsConducting Economic StudiesEvaluating MarketsForecasting SalesPreparing Internal Publications and

HandbooksPreparing Feasibility StudiesConducting Basic ResearchCommunicat ing

Developing Organizational PlansDescribing and Evaluat ing JobsInstalling Activit iesPreparing Wage and Salary

Administration PlansForecast ing Work ForceArbit ratingCollect ive BargainingCounselling PersonnelExchanging Informat ion with EmployeesConducting Management Development

ProgramsProviding Employee ServicesRecruit ingSecuring TeamworkTest ing PersonnelTrainingAppraising PersonnelRating Merit

Determining PoliciesDeveloping Systems and ProceduresPreparing Functional PlansPreparing Long Range PlansMaintaining an Adequate Level of

Working CapitalSecuring Funds for Asset ReplacementControlling BudgetsConduct ing Management ControlsReviewing Product Development

Processes

Seeking and Building Strategic Partnerships

Establishing Associat ion and Society Relations

Participating in Civic AffairsSecuring Legal/Secretarial Assistance

Human ResourcesInformation Financial and Physical Assets Networks and Relations

EXAMPLE ACTIVITIES THAT MANAGERS UNDERTAKE TO PLAN, EXECUTE AND CONTROL

Quantity

Quality

Cost

Time

Suppliers

Quantity

Quality

Cost

Time

Suppliers

Quantity

Quality

Cost

Time

Enterprise

Switch brand

Profitability

Sell more

Convert

Buyers

A COMPETI TIVE ENTERPRISE

An enterprise fails to become a competitive monopoly because of mismanagement

An enterprise fails to become a competitive monopoly because it fails to achieve the generic objectives of the production and marketing functions

Produce and deliver the desired quantities of goods and services

Produce and deliver goods and services at the desired level of quality

Produce and deliver goods and services at the desired time

Produce and deliver goods and services at an acceptable cost

PRODUCTIONSell more frequently and more to present buyers and avoid present buyers buying less

Induce brand switching into the market of the competitors and avoid switching away

Convert nonusers into users of own products and avoid its users becoming nonusers

Secure medium to long term profitability

MARKETING

An enterprise fails to achieve the generic objectives of the business functions because the priority tasks do not produce the expected results

Preparing Sales LiteratureProgramming Promot ionsProgramming AdvertisingSett ing Up the Channels of Distribut ionPrompting and Responding to Sales EnquiriesPreparing Specif ications and NegotiatingPricing and Quot ing

Determining Inventory RequirementsHandling MaterialsPurchasing and ExpeditingKeeping StockDesigning and Installing PlantEngineering Production ProcessesLocating and Evaluat ing Plant SiteToolingBalancing Production or Line SystemsDeveloping Maintenance SystemsImproving MethodsInstalling Cost Reduct ion ProgramsDeveloping Quality StandardsDeveloping Quality Control ProceduresDesigning Product Service DepartmentsEst imat ing Product ion CostsDispatching WorkScheduling Work and RoutingFulf illing Freight Operat ions

PRODUCTI ONMARKETING

Priority tasks do not produce the expected results because they are mismanaged

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3) You may fail to identify the correct critical tasks to make (capability) and deliver (transaction) the offer;

3 Offer Capability/Transaction Critical tasks Wrong tasks

4) You may fail to correctly execute the critical tasks which have been correctly identified.

This is due to an incorrect quantity, quality, allocation, and control of resources;

4 Offer Capability/Transaction Critical tasks Failed execution Resources

5) You may fail because you chose a segment which doesn’t have the optimal size for your

business. It could be too small and therefore not worth it. How can one tell when the target segment is too small? It is simple, if a better alternative exists for the business, then the selected target segment is too small. Management could have chosen another one which would have yielded a better return. This failure mechanism is related to the “natural limits of the market” as a factor preventing the business from making as much money as we want, as discussed in chapter 3;

5 Segment Target not good Too small Not worth it Better alternative

6) You may fail because you chose a target segment which is too big for the business to

achieve monopoly status simply because the segment is too big for the business’s capabilities, i.e. the business does not have the capability to serve one hundred percent of that segment;

6 Segment Target not good Too big Capability Unable to capture

7) You may fail because you chose a target segment which is too big for the business to

sustain its monopoly situation. In this case, being too big means that having even a share of that segment is still a worthwhile proposition for would-be competitors which, therefore, will very likely enter that segment. This failure mechanism is related to “future competitors” as a factor preventing the business from making as much money as we want (chapter 3).

7 Segment Target not good Too big Too attractive Competitors

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As a summary:

1 Segment Incorrect identification

2 Match Miss

3 Offer Capability/Transaction Critical tasks Wrong tasks

4 Offer Capability/Transaction Critical tasks Failed execution Resources

5 Segment Target not good Too small Not worth it Better alternative

6 Segment Target not good Too big Capability Unable to capture

7 Segment Target not good Too big Too attractive Competitors

As each of these mechanisms depend on managers’ underperformance, this BMS analysis of business failure mechanisms confirms what we stated earlier on: barring “force majeure” type events, management is always responsible for the failure of a business. As a consequence, the BMS should be valuable to you as a manager, as it allows you to be the best manager you can be.

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Appendix B SELF-ASSESSMENT The BMS is being used under many guises: as course material in universities, in part or as a whole in training programmes for managers, as a basis for the design and delivery of consulting services, and directly by companies to increase their effectiveness and efficiency. During the last decade, participants of these programmes, trainers and consultants who use the BMS to train others, and company managers have contributed significantly to the development and refinement of its paradigm. Particularly beneficial were their questions and suggestions as to how the BMS could be improved both in structure and presentation. Below are some of these frequently asked questions. Many of the answers to these questions are not found as such in this BMS Guide as they mostly relate to the conceptual and philosophical foundations of the BMS. These foundations can be found in the book: The Theory and Practice of Competitive Containment: The Business Management Grid21©®. You are encouraged to read these questions and try and answer them as a test of your comprehension of the BMS framework. For those of you who are curious, the answers to these questions can be found on ITC’s website at www.intracen.org/emds . Extra space is provided between questions for you to make notes. Question 1: One of the BMS’s failure mechanisms is defined as the captured market or segment being too small. Does this not mean that the wrong segment is selected and it is just a variation of a mistake done at the strategic level? Question 2: The assertion that an enterprise which eliminates competition or finds a market where there is no competition is, by definition, successful, is misleading. Since an enterprise can eliminate competition or find a market in which there is no competition and still lose money, should the criterion for success be based on the amount of profits an enterprise generates? Question 3: Is the concept of “the next best alternative” the same as the classical concept of “opportunity cost” in economics? Question 4: The BMS defines “competitiveness” in terms of the capability to dictate terms on quantity, quality, time and cost to its buyers and suppliers. Yet, while market domination is discussed extensively, supplier dominance is not discussed at all. Is this an omission?

21 Dr. Osman A. Ataç, The Theory and Practice of Competitive Containment: The Business Management Grid, The Association of Training Institutions for Foreign Trade in Asia and the Pacific (ATIFTAP), Manila, Philippines, 1995

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Question 5: The BMS lists a finite number of strategic options. If the strategic options were indeed finite would this not mean that “formulas” for strategies can be found and management of an enterprise can be reduced to a process of “formula selection?” Question 6: The BMS claims that dominating the suppliers and the markets is the mission of an enterprise as monopolising markets is the only way an enterprise would make “as much money as possible.” Received wisdom agrees that domination creates tension and eventually leads to unproductive relationships. How does the BMS address this concern? Question 7: The BMS suggests that, in order to monopolise a market, enterprises need to segment markets, position their products to overcome or avoid competition or innovate which make the enterprise a monopoly by definition. While this is sensible, as soon as a segment is captured a competitor immediately tries to move in and products are quickly imitated. Does this not mean that enterprise “success” cannot be sustained and that the claim made by the BMS may actually work only temporarily? Question 8: Ethics and particularly business ethics are not mentioned in the BMS as a part of managing a business. Is this an omission? Question 9: Does the BMS ignore the social responsibility of businesses in contributing to the general well-being of the society at large when it suggests that monopolising the market is its only mission? Question 10: The BMS somewhat implies that an enterprise has to make it on its own by monopolising its targeted markets or segments. Is this not in contradiction with the literature which suggests that, especially in developing countries, clusters of small and medium sized companies have a better chance of building competitiveness? Question 11: For obvious reasons strategic alliances are very important especially for developing country enterprises. How does this conform to the assertion that an enterprise has to make it on its own by monopolising its targeted markets or segments?


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Question 12: The generic objectives of the marketing function listed in the BMS suggest four objectives. While three of them are related to buyers the last one is on profitability. Does this not mean that an enterprise will always pursue at least two objectives, one of which permanently being profitability? Question 13: The BMS gives four objectives for the production function and another four for the marketing function. Is it correct to assume that the BMS treats them as independent within each function and unrelated across functions? Question 14: The BMS does not seem to emphasize the economic, social and legal environments of the enterprise although these clearly have a tremendous impact on the success of a business. Does the BMS assume that the business enterprise operates immune to the elements in its environment? Question 15: The BMS lists quite a few management activities without specifically linking them to the description of management. How are they linked? Question 16: Conventional wisdom includes finance as a business function. Why is finance considered as a part of management but not as a business function? Question 17: The BMS states that the way to make “as much money as possible” for an enterprise is either through segmentation and positioning to overcome or avoid competition or through innovation. It is however common, especially in developing countries, for enterprises to make money with money. How does the BMS explain this practice? Question 18: During BMS seminars it is often said that the heart of the BMS is “task management.” What does it mean exactly? Question 19: Does the BMS claim that an enterprise which does not have a strategy cannot make money? Question 20: The BMS asserts that management should prioritise the capabilities by identifying critical tasks. However, looking at the capabilities listed one concludes that they

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should all be identified as critical as none seem unimportant. How does one select some and not the others? Question 21: It is said in the BMS that the BMS paradigm does neither refute nor support any of the models suggested by the literature on business management. There is no discussion about how the BMS accommodates these models, for example Porter’s claim that strategy should either be based on differentiation or cost leadership? Question 22: It is said in the BMS that the BMS paradigm does neither refute nor support any of the models suggested by the literature on business management. There is no discussion about how the BMS accommodates these models, such as reengineering for example? Question 23: Is it true that only owner/managers and top executives can apply the BMS? Can the BMS be applied if only in part, by middle to lower level managers? Question 24: Why is there an appendix containing Spanish, French and English translations of BMS terms? Question 25: The BMS seems to be only applicable to the manufacturing sector. What about the services sector? Question 26: Why are the participants of the BMS seminars told that the BMS is deceptively simple? Question 27: The strategy design process described in the BMS leads one to believe that once the strategy is designed and critical tasks are selected, the enterprise is stuck with the results. From there on it is the management of tasks that counts. Is this realistic? Question 28: What are the suggestions of the BMS on when strategy should be reviewed? Question 29: What is the concept of rent creation?


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Question 30: The BMS sounds like the revival of the old management paradigm of “management by objectives.” If it is not, how is it different from it? Question 31: The BMS points out that an enterprise may have multiple businesses. What are the management implications of having multiple businesses in an enterprise? Question 32: Spin-offs or decentralization is often suggested for large enterprises and are considered not realistic for small and medium size enterprises (SMEs). Does the BMS agree that these concepts do not apply to SMEs? Question 33: It is commonly believed that monopolies are inefficient and are often ineffective. The BMS recommends that enterprises should try to be monopolies. Is this not a call for inefficiency and ineffectiveness?

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Appendix C NOMENCLATURE OF THE BUSINESS MANAGEMENT SYSTEM

Activity Groups: Activities that are cross-classified according to their basic purpose i.e., planning, execution or control; or according to the resource that they are related i.e., human, financial and physical assets, information, networks and alliances.

Activity: A specific managerial undertaking that concern the management of the business of an enterprise consisting of resource planning, allocation and control.

Analyzing and Planning (Planning): The activities directed at deciding the quantity and quality of resources needed by the business of the enterprise, where to get them and how, when and by whom.

Bargaining Power: The capability of an enterprise to dictate terms of transactions in terms of quantity, quality, time and price to its customers and suppliers.

Business of a Business: The way an enterprise defines what it produces for whom.

Business: The undertakings that concern producing and marketing goods and services.

Business Functions: Production and Marketing.

Business Capabilities: Titles of task groups related to the components of the business competencies concerning marketing and production.

Business Needs: The generic production and marketing objectives of an enterprise are used as needs that an offer must meet in business-to-business cases.

Capability Level: The stage where tasks of marketing and production are built to enable the enterprise to pursue its strategy.

Competition: Group of providers of similar offers for the same target markets.

Competitive Monopoly: An enterprise which contains its competitors by completely dominating a market segment and achieves all of its generic functional objectives through effective implementation of business strategies.

Competitiveness: Degree to which an enterprise is able to dictate terms concerning quantity, quality, time and cost of its offers to its buyers.

Competitors’ Buyers: Customers (buyers) of the competitors of an enterprise.

Consumer Needs: Universally accepted fundamental human necessities to be fulfilled at the physical or cognitive level.

Converting Non-users: Capturing potential buyers who were not yet in the market.

Cost Objective of Production: Reducing to an acceptable level the resources allocated to producing the goods and services at a given level of quality, quantity and time.

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Critical Task: Priority undertakings concerning the production or marketing functions which are absolutely necessary to implement the strategy of an enterprise. Tasks that must be in place to reach the generic objectives of the business.

Defining a Business: Describing what the enterprise is producing for whom.

Dictating Terms: The generic goal of enterprises to get its buyers and suppliers to accept its quantity, quality, time and cost conditions.

Domination: The degree to which an enterprise is able to dictate terms to its buyers.

Effectiveness: Degree to which management is able to identify and carry out the business tasks that will help the enterprise achieve its generic objectives.

Efficiency: Measure of the ability of the enterprise to manage its business tasks with the least amount of resources possible.

Frequent Buyers: Customers whose order frequency (the number of times that they place an order) is above market averages.

Generic Objectives: Objectives of business functions (marketing and production) that are not time or place dependent.

Generic (axiomatic) Paradigm: A model developed systematically from axioms to explain the working of a real or conceptual system regardless of the time, location or environment of the system.

Heavy Buyers: Customers whose average order quantity is above market averages.

Innovation: A unique positioning for a product achieved as a result of a new process, new product or new attribute that meets the needs and wants of the target market/segment better than the competitors.

Installing Activities: Develop management undertakings that are not yet present but are required to ensure the implementation of the strategy by determining who, when and how the specific management undertaking will be carried out.

Integrated Paradigm: A model which explains how the workings of the components of a real or conceptual system contribute to the working of the whole.

Internal Validity of Business Definition: The degree of “truth” of the business definition in terms of its ability to accurately reflect what the enterprise sells to whom to survive and grow.

Keeping Markets: Maintaining current clients, and prevent clients from leaving the market or going to competitors.

Levels of Business Management: Each of the cycles of the BMS paradigm extending from strategy design, to building capabilities, and managing transactions.

Management: Undertaking activities directed at analysing and planning, organizing and coordinating, monitoring and improving of the human, financial and physical asset, information, networks and relationships resources.

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Marketable Form: Products and services whose physical, extended and generic properties are determined to meet the needs and wants of a segment or market.

Monitoring and Improving (Control): Activities directed at tracking the use of resources to determine whether the tasks contribute to the achievement of the functional objectives as envisaged.

Non-Users: Potential buyers who are not yet in the market.

Offer: A product that has been positioned in a specific way to satisfy the needs and wants of a particular segment.

Optimum Market Size: A market defined in such a way that it is big enough for making profits yet small enough to avoid competition.

Organizing and Coordinating (Execution): Activities directed at acquiring the resources and allocating them to the tasks in accordance with set priorities.

Outcome: Result a client expects from the purchase, use or consumption of an offer.

Paradigm: A word from Greek meaning model.

Positioning: A deliberate manipulation of the quantity, quality, time and cost dimensions of the production function to meet the needs and wants of a segment for the purpose of domination.

Problem: A failure to correctly and efficiently determine, by engaging in the relevant managerial activities, the quantity and quality of information, human, financial and physical assets, and networks/relationships requirements, and/or a failure to acquire and allocate the said resources, and/or a failure to monitor their efficient use by the critical tasks*, leading to poor management of the said tasks and resulting in the failure of achievement of the objectives of (1) selling more frequently and more to present buyers and avoiding the opposite from happening; (2) inducing brand switching into the markets of the competitors; (3) converting non-users into users; (4) securing medium to long term profitability; (5) producing and delivering the desired quantities of goods and services with desired physical properties; (6) at the desired level of quality; (7) at the desired time and (8) at an acceptable cost, thus resulting in a failure of the enterprise to become competitive by being able to dictate terms to its buyers on quantity, quality, time and cost of the offer. * Tasks prioritized in accordance with a technically correct business definition expanded into a deliberate manipulation of the quantity, quality, time and cost dimensions of production to meet the needs and wants (benefits and outcomes expected, purchasing habits and occasions) of target markets or segments.

Process of Becoming Competitive: Managing the information, human, financial and physical assets, networks and relationships resources of an enterprise more effectively and efficiently to produce and market goods and services around a strategy.

Quality Objective of Production: Ensuring the perceived and real conformity of the product to all quality dimensions.

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Quantity Objective of Production: Delivering the number of units planned with all planned physical properties of the product.

Resources: Information, human, financial and physical asset, network and relationship inputs required to produce and market goods and services.

Segmentation: Dividing a market into smaller homogeneous groups for the purpose of domination according to needs, benefits and outcomes expected, and purchasing habits and occasions.

Strategy: Matching positioning with segmentation for the purpose of increasing the ability of the enterprise to dictate terms to buyers.

Strategy Level: The stage in which activities are undertaken to determine and verify the strategy.

Switching: A customer leaving a supplier for another.

Task: Specific undertaking that concern either producing or marketing the goods and services of a business.

Task content: The things you must do while performing a task. These are made up of processes organizing a series of steps.

Time Objective of Production: The generic objective which refers to the time required to produce and deliver the products and services.

Transaction Level: The level concerning the management of the tasks which allow the enterprise to get and fulfill orders, while still maintaining an adequate level of working capital.

User: Present customers (buyers) of an enterprise.

Wants: A composite dimension consisting of benefits and outcomes expected by buyers and their purchasing habits and occasions.

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Appendix D BMS GLOSSARY: ENGLISH, SPANISH AND FRENCH FRANÇAIS ANGLAIS ESPAGNOL Activity Groups Grupos de Actividad Groupes d’activités Activity Actividad Activité Analysing Business Management Requirements

Análisis de los Requisitos de Gestión Empresarial

Analyser les besoins de gestion d’entreprise

Appraising Attitudes Evaluación de Actitudes Évaluer les attitudes Appraising Personnel Evaluación del Personal Évaluer le personnel Arbitrating Arbitraje Arbitrer Attitude Actitud Attitude Balancing Production or Line Systems

Equilibrio en la Producción o Sistemas en Línea

Équilibrer les systèmes de production ou d’assemblage en ligne

Bargaining Power Poder de Negociación Pouvoir de négociation Benefit Beneficio Avantage Budgetary Control Control Presupuestario Contrôle de budget Business Management System (BMS)

Sistema de Gestion Empresarial Méthode de gestion d’entreprise

Brand Loyalty Lealtad a la marca Fidélité à une marque Brand Switching Sustituir una marca por otra Changer de marque Business Negocio Affaire Business Capabilities Capacidad del Negocio Capacités de l’entrepriseBusiness Management Grid Esquema de Gestión Empresarial Grille de gestion

d’entreprise Business Needs Necesidades del Negocio Besoins de l’entreprise Business of a Business Negocio de la Empresa Activité fondamentale

d’une entreprise Business Tasks Tareas del Negocio Tâches d’entreprise Capabilities Capacidades Capacités Capability Level Nivel de Capacidad Niveau de la capacité Calculating and Using Standard Costs

Cálculo y Uso de Costos Estándar Calculer et utiliser les coûts standards

Carrying on Collective Bargaining

Realizar Negociación Colectiva Conduire des négociations collectives

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Carrying out Development Experiments

Realizar Experimentos de Desarrollo

Conduire des expériences de développement de produit

Case Based Paradigm Paradigma basado en casos específicos

Paradigme basé sur l’étude de cas

Communicating Comunicar Communiquer Competition Competencia Concurrence Competitiveness Competitividad Compétitivité Conducting Audits Realizar Auditorias Conduire des audits Conducting Economics Studies

Realizar Estudios Económicos Conduire des études économiques

Conducting Market Potential Studies

Realizar Estudios de Potencial de Mercado

Conduire des études de marché

Consumer Needs Necesidades del Consumidor Besoins des consommateurs

Control Control Contrôle Converting Convertir (no consumidores en

consumidores) Convertir

Coordination Coordinación Coordination Counselling Personnel Asesorar al Personal Fournir des services

d’orientation professionnelle et d’assistance au personnel

Cost of Financing Costo de Financiación Coût de financement Critical Tasks Tareas Críticas Tâches critiques Cycle Ciclo Cycle Debt Financing Financiar deudas Financement par

emprunt Description Descripción (trabajo, tareas) Description Describing and Evaluating Jobs

Describir y Evaluar puestos de trabajo

Décrire et évaluer les postes de travail

Designing and Installing Plant

Diseño e Instalación de una Planta Concevoir et installer une usine

Designing Cost Accounting Systems

Diseño de Sistema de Contabilidad de Costos

Concevoir un système de comptabilité opérationnelle

Designing General Accounting Systems

Diseño de Sistema de Contabilidad General

Concevoir un système de comptabilité générale


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Designing Product Service Departments

Diseño de Departamento de Servicio al producto

Concevoir les département de services produit

Determining Inventory Requirements

Determinar las necesidades de inventario

Déterminer les besoins en inventaire

Determining Policies Determinación de Políticas Déterminer les politiques de l’entreprise

Developing Maintenance Systems

Desarrollo de Sistemas de Mantenimiento

Développer les systèmes de maintenance

Developing Organizational Plans

Desarrollo de Planes Organizacionales

Développer la structure de l’entreprise

Developing Quality Standards

Desarrollo de Estándares de Calidad

Développer les standards de qualité

Developing Quality Control Procedures

Desarrollo de Procedimientos de Control de Calidad

Développer les procédures de contrôle qualité

Developing Staff Desarrollo del Personal Développer le personnel Developing Systems and Procedures

Desarrollo de Sistemas y Procedimientos

Développer les systèmes et procédures

Dimensions of Positioning Posicionamiento Dimensions du positionnement

Dispatching Work Inicio y Flujo de Producción de Pedidos

Lancer et distribuer les ordres de travail de production

Dominate Dominar Dominer Dominating Markets Dominar Mercados Dominer les marchés Dominating Dominante Dominer Effectiveness Eficacia Efficacité Efficiency Eficiencia Efficience Engineering Production Processes

Proceso de Ingeniería de Producción

Concevoir l’ordonnancement de la production

Equity Financing Financiación mediante emisión de acciones

Financement par émission d’actions

Establishing Association and Society Relations

Establecer relaciones con Asociaciones y con la Sociedad

Établir des relations avec des associations et des sociétés professionnelles

Estimating Production Costs Estimar Costos de Producción Estimer les coûts de production

Evaluating Markets Evaluación de Mercados Évaluer les marchés


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Facilitating Employee Information Exchange

Intercambio de información con los empleados

Faciliter l’échange d’informations entre employés

Favourable Attitudes Actitudes Favorables Attitudes favorables Forecasting Sales Proyección de Ventas Faire des projections de

ventes Frequency of Purchase Frecuencia de Compras Fréquence d’achat Fulfilling Freight Operations Cumplir con las Operaciones de

Envío Réaliser les opérations de transport de marchandise

Function Función Fonction Handling Materials Manejo de Materiales Manipuler les matériaux Heavy User Comprador Importante Gros consommateur Implementing Management Development Programmes

Implementar Programas de Desarrollo Gerencial

Implémenter des programmes de développement du management

Improving Methods Mejoramiento de Métodos Améliorer les méthodes Inducing Brand Switching Inducir el cambio de marca Induire un changement

de marque Innovation Innovación Innovation Installing Activities Establecer Actividades Installer de nouvelles

activités Installing Cost Reduction Programmes

Establecer Programas de Reducción de Costos

Installer des programmes de réduction des coûts

Integrated Paradigm Sistema Integral Paradigme intégré Keeping Market Retener Mercados Retenir les marchés Levels of Business Management

Niveles de Gestión Empresarial Niveaux de la gestion d’entreprise

Light Users Compradores poco importantes Petits consommateurs Locating and Evaluating Plan Site

Localizar y Evaluar la ubicación de la planta

Localiser et évaluer des sites d’usine

Maintaining an Adequate Level of Working Capital

Mantenimiento de un Nivel adecuado de capital de trabajo

Maintenir un fond de roulement adéquat

Management Gestión Gestion Management Control Control Gerencial Contrôle de gestion Market Definition Definición del Mercado Définition de marché Market Segmentation Segmentación del Mercado Segmentation de marchéMarketing Function Función de Marketing Fonction marketing


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Rating Merit Evaluación de Méritos Juger le mérite des employés

Monitor Seguimiento Surveiller Monitoring Monitoreo Surveiller Need Necesidad Besoin Needs Addressed Necesidades específicas Besoins satisfait Needs and Wants Necesidades y Deseos Besoins et désirs Next Best Alternative Mejor Alternativa Meilleure alternative Non Users No usuario Non-utilisateurs Objective Objetivo Objectif Offer Oferta Offre Opportunity Cost Costo de Oportunidad Coût d’opportunité Optimum Market Size Dimensión Optima del Mercado Dimension optimale du

marché Organizing Organización Organiser Outcome Resultados Résultat Output Insumos Production, Rendement,

Résultat Participating in Civic Affairs Participar en Asuntos Cívicos Participer aux affaires

civiques Physical Dimension of Products

Dimensiones Físicas de los Productos

Dimension physique des produits

Planning Planificación Planifier Positioning Posicionamiento Positionnement Preparing Feasibility Studies Realizar Estudios de Factibilidad Préparer des études de

faisabilité Preparing Functional Plans Elaborar Planes Funcionales Préparer des plans

fonctionnels Preparing Internal Publications and Handbooks

Elaborar Publicaciones internas y Manuales

Préparer des brochures et publications internes

Preparing Long-Term Plans Elaborar Planes a Largo Plazo Préparer des plans à long terme

Preparing Sales Literature Elaborar Literatura de Ventas Préparer des brochures publicitaires

Preparing Specification and Negotiating

Preparar Especificaciones y Negociación

Préparer les spécifications produits et négocier

Preparing Wage and Salary Administration Plans

Elaborar Programas de Sueldos y Salarios

Préparer les plans d’administration de la rémunération


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Pricing and Quoting Precios y Cotizaciones Fixer les prix et préparer les devis

Product Producto Produit Production Function Función de Producción Fonction de production Profitability Rentabilidad Rentabilité Programming Advertising Programación de la Publicidad Programmer la publicité Programming Promotion Programación de Promociones Programmer les

promotions Prompting and Responding to Sales Enquiries

Promover y responder a solicitudes de ventas

Susciter et répondre aux demandes de renseignements

Providing Employee Services Proporcionar servicios a los empleados

Fournir des services aux employés

Purchase Compra Achat Purchasing and Expediting Compras y Envíos Achats et expéditions Purchasing Habits Hábitos de Compra Habitudes d’achat Purpose Propósito But Recruiting Contratación Recruter Rent Renta Loyer Resource Recurso Ressource Resources of a Business Recursos del negocio Ressources d’une

entreprise Return Ganancias Rendement Reviewing Product Development Processes

Revisar procesos del Desarrollo de productos

Passer en revue les processus de développement produit

Scheduling Work and Routing

Programación y Secuencia del trabajo

Prévoir le travail et l’acheminement

Securing Legal/Secretarial Assistance

Asegurar Asistencia Legal/Administrativa

Obtenir une assistance juridique et administrative

Securing Team Work Asegurar Trabajo en Equipo Atteindre l’objectif de travailler en équipe

Segment Segmento Segment Segmentation Segmentación Segmentation Segmentation Criteria Criterios de Segmentación Critère de segmentation Segmenting Segmentar Segmenter Stetting up the Channels of Distribution

Establecer Canales de Distribución Mettre en place les canaux de distribution


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Staffing Contratación de Personal Recruter Keeping Stock Mantenimiento de Inventarios Maintenir un stock Strategy Estrategia Stratégie Strategy Level Nivel de Estrategia Niveau de la stratégie Strategy Statement Determinación de Estrategia Énoncé de la stratégie Supply Oferta Offre Supplier Proveedor Fournisseur Task Tarea Tâche Testing Personnel Poner personal a prueba Tester le personnel Tooling Provisión de Herramientas Outiller Training Capacitación Formation Transaction Transacción Transaction Transaction Level Nivel de Transacciones Niveau de la transaction Undertaking Basic Research Realizar Investigación Básica Entreprendre de la

recherche de base User Usuario Utilisateur Users of Competitors Clientes de la competencia Clients de la

concurrence Wants Deseos Désirs Work Force Forecasting Proyección de la Fuerza Laboral Prévoir les besoins en

personnel

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Appendix E WHO IS EMDS ? The Enterprise Management Development Section (EMDS) is part of the Division of Trade Support Services (DTSS) within ITC. EMDS contributes to ITC’s mission by building sustainable local capacities in enterprise competitiveness development, in order to realise SMEs’ full potential for exports to help economic growth and poverty reduction. Working closely with local partner organisations, EMDS uses materials, tools and events to develop the skills of local professionals and encourage them to develop consulting and training services in enterprise competitiveness development targeted at SMEs. Concurrently, EMDS fosters the development of SMEs’ demand for such services so that a proper balance between offer and demand makes the availability of these services sustainable. Recognising the urgency stemming from the widening of the digital divide between the digital haves and the have-nots, EMDS has made it a priority to address the issue of e-readiness. However, based on the observation that e-commerce’s challenge is 20% technological and 80% logistical and organisational, EMDS advises enterprises not to rush into e-commerce if they do not possess the appropriate logistical capability (being export-ready), and warns them about the adverse effects of not having an adequate strategy and not managing effectively and efficiently the development of production and marketing capabilities (being management-ready). Therefore, EMDS proposes a three-stage process for partner organisations, counsellors and trainers. The first two stages are part of the Enterprise Competitiveness Programme, which draws upon a unique collection of materials, tools and events based on the Business Management System (BMS), enabling partners, counsellors and trainers to carry out competitiveness development interventions at the SME level; each intervention is based on the enterprise’s weaknesses (needs) identified during the corresponding readiness assessment activity (management- and export-readiness). The e-readiness stage is addressed by the e-Trade Bridge Programme which proposes to make enterprises e-ready by raising awareness, building knowledge and creating e-competence.

E-Trade BridgeEnterpriseCompetitiveness

ExportCompetitiveness diagnosticdiagnostic diagnostic

man

agem

ent-r

eady

man

agem

ent-r

eady

expo

rt-re

ady

expo

rt-re

ady

e-re

ady

e-re

ady

BMS:StrategyCapabilityTransaction

BMS:Export Transaction

export-readiness

assessment

e-readinessassessment

management-readiness

assessmentKick-off MeetingWinning With the WebStrategists’ Traininge-nabling SMEs

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In support of this approach, EMDS brings the following strengths and success factors:

- an understanding of importers and exporters of developing or transition economies; - experience in working with Trade Support Institutions; - experience in developing informal networks of competence;

- the practical nature of the materials, tools and events offered; - the uniqueness of the BMS framework and related tools and materials; - the variety of ways the BMS framework, tools and materials can be used by partner

organisations, counsellors and trainers. These contribute to make EMDS’s programmes very well received in the field, with more than 25 countries currently participating in the e-Trade Bridge programme and numerous enterprises, counsellors and trainers using the BMS all over the world. Some use the BMS themselves to create or manage their own business or association:

Mr Jimenez, CEO of Cocoa Producers Association of Honduras (APROCACAHO) uses the BMS to manage his association.

Others use and distribute BMS materials and tools as they are to expand their present business activities:

Three universities in Central America use BMS materials as textbooks for graduate programmes.

In 2002 alone, BMS experts in the Export Promotion Centre of Turkey have trained more than 350 managers.

75 BMS experts in Nicaragua, Guatemala, Costa Rica, and El Salvador have trained 150 enterprise managers.

8 BMS experts in the Philippines have taken the initiative to train 20 regional advisors. A group of these then trained 22 sub-regional consultants.

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Others again, adapt BMS materials for their own business purposes:

Using BMS materials and tools, Karum Consulting in Turkey has captured a niche for itself by offering consulting programmes on management development for the financial sector.

SAWIT has adapted BMS materials to develop training materials for a very successful programme for managers of SMEs in the viticulture industry in South Africa.

Others even use BMS materials and tools as a platform to develop other specific programmes:

AgriAcademy in South Africa has built a whole training programme based on BMS materials and tools.

Our Tanzanian partner used BMS materials and tools as a platform to develop sectoral programmes for honey and beeswax, leather goods, and fresh horticulture. They have also developed a post-graduate Pre-career programme.

In fact, the Enterprise Competitiveness Programme is so successful that institutions and agencies, such as the Export Promotion Centre of Turkey, the NTSIKA Enterprise Promotion Agency in South Africa, and the National SME Development Plan initiative in the Philippines, are requesting to have it locally and fund it out of their own resources.

We wish you to be as inspired as were the people involved in the examples above, and hope you will soon join their ranks.

The Business Management System A Guide on Enterprise Competitiveness Appendix F Feedback Forms International Trade Centre (ITC), 2003

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Appendix F FEEDBACK FORMS This copy of “The Business Management System: A Guide for Managers on International Competitiveness” was presented to you with the compliments of the International Trade Centre (ITC) in Geneva, your partner in trade development, located at 54-56 rue de Montbrillant. Please personalise it by inserting your name in the appropriate field at the bottom of the table of content. We, at the Enterprise Management Development Section (EMDS), have taken the greatest care in ensuring that this guide is free of errors, easy to understand, related to your personal experience and tailored to serve your needs. Knowing you better and getting your feedback ensures that we can improve this guide towards excellence and allows you to receive updates and additional materials as they become available. Please take the time to fill-in the BMS Guide Registration/Feedback Form and send it back to us. Your personal information and comments will be considered confidential. Note the following information for future reference:

Registration/Feedback Form filled-in and sent by ____________________________ on ____________________________ by mail fax email It would also be useful if you could fill-in and return a BMS Event Report Form whenever you organise a significant event or undertaking related to the use of the BMS framework or its dissemination, so that we can properly document the extent to which the BMS community grows as well as whether and how it uses the BMS framework. Should you need or prefer online versions of these forms, they can be found at www.intracen.org/emds . Should you have additional questions or comments please contact:

Enterprise Management Development Section International Trade Centre Tel. +41 (0)22/730-0199 Fax +41 (0)22/730-0576 [email protected]

BMS Guide Registration / Feedback Form v2.12

Last name: _____________________________ First name: _______________________________

Title: ________________________________________________________________________

Organisation: ________________________________________________________________________

Address: ________________________________________________________________________

Telephone: _____________________________ Mobile phone: ____________________________

Fax: _____________________________ e-mail: _________________________________

Is the content of this guide relevant to you ? (4) definitely - (1) definitely not

This guide’s pace is: (3) correct - (2) too fast - (1) too slow

Its difficulty level is: (3) correct - (2) too complex - (1) too simple

Its level of detail is: (3) correct - (2) too detailed - (1) too basic

Its length is: (3) correct - (2) too long - (1) too short

How is the organisation of its content ? (logical sequence, theory/examples mix) (4) excellent - (1) poor

Why did you decide to read this guide ? (it is possible to give more than one answer) (1) my supervisor told me to – (2) my job requires the information – (3) I’m always looking for ways to improve my business, (4) myself – (5) it was recommended by a colleague, (6) by a professor, (7) by a customer/supplier, (8) by the training department – (9) it is a required reading within my study curriculum – (10) it is part of my individual training plan – (11) I was curious – (12) other _____________________________________

Do you plan to use this guide or the BMS framework to: (multiple answers possible) (1) start-up or manage your own business or association – (2) provide management consulting or training services – (3) distribute it to your clients – (4) use it as the basis for a university course – (5) adapt it to local conditions – (6) use it as a platform to develop other products – (7) other ______________

Do you intend to introduce the BMS to: (multiple answers possible) (1) employees – (2) suppliers – (3) customers – (4) students – (5) SME managers – (6) consulting or training professionals – (7) governmental institutions representatives– (8) non-governmental institutions representatives – (9) other _____________________________________________________

Which prerequisites or follow-up reading/courses/activities would you recommend ?

Please make the comments you feel are appropriate with respect to this guide or the BMS framework, and detail the plans involving them which you might have made following this reading:

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Enterprise Management Development Section International Trade Centre (ITC) Palais des Nations 1211 Genève 10 Switzerland

Use the additional space below for your comments…

BMS Event Report Form (1) v2.12

-Not for event participants-


Title: _____________________________ Organisation: ____________________________

Address: ________________________________________________________________________

Phone: _______________ Mobile: _______________ Fax: ________________email:_______________

Event date: ____________________________ Event location: ____________________________

Event Name: _______________________________________________________________________

Event organiser:_______________________________________________________________________

Number of participants: ______________________ Total cost of the event: _____________________

What kind of event was it: (it is possible to give more than one answer)

(1) conference/speech – (2) presentation – (3) assessment – (4) training – (5) consulting – (6) company/association creation – (7) other ______________

Did you get significant funding for the event from: (multiple answers possible)

(1) government – (2) individual companies – (3) industry associations – (4) non-for-profit associations – (5) individuals – (6) ITC – (7) another United Nations related organisation – (8) another non-governmental organisation – (9) university/education – (10) other _________________________________

Did you make any money out of it ? (4) I (could) make a living out of it- (3) definitely - (2) break-even or slightly better - (1) loss

Type of participants: (multiple answers possible) (1) employees – (2) suppliers – (3) customers – (4) students – (5) SME managers – (6) consulting or training professionals – (7) governmental institutions representatives– (8) non-governmental institutions representatives – (9) other _____________________________________________________

Participants main interests: (multiple answers possible) (1) start-up or manage own business or association – (2) provide management consulting or training services – (3) distribute it to clients – (4) use it as the basis for a university course – (5) adapt it to local conditions – (6) use it as a platform to develop other products – (7) other __________________________

How well were the BMS concepts and related materials received ? (4) very well - (1) not well at all

Are the participants going to use the BMS within the context of their main interests ? (4) most likely - (1) probably not

Are you going to do a follow-up of participants ? (4) certainly - (1) probably not

Do you plan more events in the near future ? (4) certainly - (1) probably not

Are you going to need help organising or conducting future events ? Please indicate what kind of help… (4) most likely - (1) probably not

Please make the comments you feel are appropriate with respect to this BMS-related event, and detail further plans involving the BMS which you might consider as a follow-up to this event:

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Event Name: _______________________________________________________________________

Event organiser:_______________________________________________________________________















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Event Name: _______________________________________________________________________

Event organiser:_______________________________________________________________________















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Documents

The Business Management System - Portal Comerţ Exteriorportaldecomert.ro/Files/BMS_Guide_for_Managers_20092185737328.pdf · The Business Management System A Guide on Enterprise Competitiveness