Embed Size (px)
Citation preview
© F.ATEYA CORPORATE STRATEGY AND PLANNING HAND-OUTInternal Appraisal Process
THE PROCESS OF INTERNAL ENVIRONMENT APPRAISAL
ORGANISATIONAL APPRAISAL
Introduction
The process of observe an organizational internal environment to identify the strengths and weaknesses that may influence the organization's ability to achieve goals.
A firm can exploit its opportunities successfully, depending on its corporate strengths.
It can be said that the corporate capabilities of the firm become the focal point for its performance and survival.
They play a crucial role, both in identifying the strategy and its success. Corporate capabilities go beyond sales, profit and net worth. It is concerned with
the state of mind and outlook of the firm. Corporate strategy ultimately means a matching game between environmental
opportunities and organizational strengths to gain competitive advantage. Assessment of organization's strengths and weaknesses is also known as
Corporate Appraisal. The internal environment of an organization includes forces that operate inside
the organization with specific implications for managing organizational performance.
Internal environmental factors, unlike external environmental factors come from within.
These factors, collectively defined both trouble sports that need strengthening and the core competencies that the firm can build.
An organization can better analyze how much activity might and value or contribute significantly to shape an effective strategy by systematically examining its internal environment.
MEANING OF STRENGTHS & WEAKNESSES:
Organizational analysis requires data and information about the internal environment.
SWOT analysis refines this information by applying a general framework for understanding and managing the environment under which a company operates.
SWOT analysis consists of evaluating a company's internal strengths and weaknesses and its external opportunities and threats.
SWOT analysis underscores the basic point that strategy must produce a good fit between a firm's internal capabilities.
Organization strengths and weaknesses are a matter of interpretation.
© F.ATEYA CORPORATE STRATEGY AND PLANNING HAND-OUTInternal Appraisal Process
1
© F.ATEYA CORPORATE STRATEGY AND PLANNING HAND-OUTInternal Appraisal Process
Though, no definition may ever be complete, we would define strengths and weaknesses as follows:
Corporate Strengths:
A strength is a strong point for the company i.e., something a company is good at doing or characteristic that gives it an important capability.
Strength can be a skill, a competence, a valuable organizational resource or competitive capability or achievement that gives that company an advantage.
It refers to competitive advantages and other distinct competencies which a company can exert in the market place.
The management and performance of organization can also be analyzed with the help of ‘7-s' Framework, developed by McKinsey and co., a leading consulting firm of USA.
According to this framework, strategy is only one element that determines the performance.
The first three elements: strategy, structure and systems are consider the ‘hard' elements and the next four shared values, skills, staff and style are considered as the ‘soft' elements.
With the help of this framework a competitive competitor analysis can provide deep insight on the strengths and weakness of the competitors.
Corporate Weakness:
It refers to constraints or obstacles which check movement in certain desired direction, and may also inhibit organization in gaining a distinctive competitive advantage.
A weakness is something the company does not have or does poorly or a condition that outs it at a disadvantageous positions.
A weakness may or may not make an organization competitively vulnerable on how much it matters in the competition battle.
THE CRITERIA FOR DETERMINING STRENGTHS AND WEAKNESSES:
A major problem which must be resolved prior to any analysis of corporate capabilities is the criteria that would determine whether an element under examination is a strength or a weakness.
© F.ATEYA CORPORATE STRATEGY AND PLANNING HAND-OUTInternal Appraisal Process
2
© F.ATEYA CORPORATE STRATEGY AND PLANNING HAND-OUTInternal Appraisal Process
Four types of criteria have been suggested to classify an element into strength or weakness. These are: i. Historical; ii. Normative; iii. Competitive parity; and iv. Critical Factors for Success.
1. THE HISTORICAL CRITERION
Here, the analyst compares the characteristics under examination with past performances. An improvement over the past performance may be seen as strength, and a decline a weakness. Before, arriving at such conclusion, it is always advisable to check the reliability of the ‘past' in future. In a large number of situations ‘past' may not be valid for future and this would certainly invalidate our assessment or judgment.
2. THE NORMATIVE CRITERION
Here, the basis of judgment is ‘what ought to be' the level of performance to classify a particular element into a strength or a weakness. Thus, based on theory, expert opinion, industry practices or personal opinions, one can develop ‘norms' for evaluation.
3. THE COMPETITIVE PARITY CRITERION
As its basis for judgment, this criterion utilizes the action successful direct competitors or potential competitors. It is based on the premise that a firm must, at the minimum, meet the actions of the competitors. Thus, if the industry practice of providing 60 days credit to the trade is not followed, it may be considered a weakness.
4. THE CRITICAL FACTORS FOR SUCCESS CRITERION
Each business, in some sense, is unique. It requires a set of minimum performance standards and hence capabilities. This criterion helps to examine the strengths and weakness in the context of meeting the minimum requirements for success.
One criterion is seldom sufficient for a complete evaluation of a firm. Some elements like ‘financial strengths' may be evaluated better on ‘historical' and ‘competition' criteria; and ‘marketing' may be best evaluated on the basis of ‘competition' and ‘critical factors for success criterion.
MEASURING STRENGHS AND WEAKNESSES:
Strengths and weaknesses may exist in varying degrees. Some may view an organisation as very strong which others may consider it not that strong. The same may apply to its
© F.ATEYA CORPORATE STRATEGY AND PLANNING HAND-OUTInternal Appraisal Process
3
© F.ATEYA CORPORATE STRATEGY AND PLANNING HAND-OUTInternal Appraisal Process
weaknesses. This would call for measurement of strengths and weaknesses. There are three measures 1. Attribute Measures, 2. Effectiveness Measures and 3. Efficiency Measures.
1. Attribute Measures
This statement is developed to identify or list a characteristic or quality which an organisation possesses or is expected to possess in the near future. Thus, leaving the analysis only at the ‘attribute statement' level may be incomplete and inadequate. In many situations it may however, be the only alternative to express one's strengths or weaknesses.
2. Effectiveness Measures
In this approach, a characteristic is represented by a statement that identifies a capability of an organisation that will help in the accomplishment of a particular task or objective.
3. The Efficiency Measures
As the word ‘efficiency' suggests, it measures the productivity of an organisation in converting inputs into desired outputs. Apparently efficiency measure is implementable only in quantifiable situation.
The use of three types of the measurements is a function of the degree of specificity possible for a given element or characteristic. Attribute measurement is simply a listing of the capabilities of an organisation; an effectiveness measure relates to the abilities of an organisation to achieve objectives; and an efficiency measure is concerned with the optimum conversion of firm's resources into desired output. The type of measurement a firm would employ will be a function of - the characteristic which is being measured and the level within the organisation which is to utilize the measurement.
ANALYSIS OF STRENGTHS AND WEAKNESSES:
A comprehensive and objective analysis of strengths and weaknesses may be facilitated by the use of a format or a framework. In this section we will study a few of such formats or frameworks.
The Check List
Some writers have suggested the use or organisational checklists to evaluate organisational capabilities and weaknesses. One such checklist contains 446 checkpoints. Pearce and Robinson suggest the following checklist.
Marketing
1. Firm's products/services; breadth of product line.
© F.ATEYA CORPORATE STRATEGY AND PLANNING HAND-OUTInternal Appraisal Process
4
© F.ATEYA CORPORATE STRATEGY AND PLANNING HAND-OUTInternal Appraisal Process
2. Ability to gather needed information about markets. 3. Market share of submarket shares. 4. Product/service mix and expansion potential; life cycle of key7 products;
profit/sales balance in produce/service. 5. Channels of distribution. 6. Effective sales organisation; knowledge of customer needs. 7. Concentration of sales in a few products or to a few customers. 8. Product/service image reputation, and quality. 9. Imaginative, efficient, and effective sales promotion and adverting. 10. Pricing strategy. 11. Producers for digesting market feedback and developing new products/service or
markets. 12. After sales service and follow-up.13. Goodwill/ brand loyalty.
Finance and Accounting
1. Ability to raise short-term capital. 2. Ability to raise long-term capital; debt, equity. 3. Corporate-level resources (multibusiness firm). 4. Cost of Capital relative to industry and competitors. 5. Tax considerations. 6. Relations with owners, investors, and stockholders. 7. Leverage position: Capacity to utilise alternative financial strategies such as lease
or sale and leaseback. 8. Cost of entry and barriers to entry. 9. Presence of financial planning and budgeting practices. 10. Working capital. 11. Effective cost control; ability to reduce cost.12. Financial size. 13. Efficient and effective accounting system for cost, budget and profit planning.
Production/Operations/Technical
1. Raw materials cost and availability. 2. Inventory control systems. 3. Location of facilities. 4. Layout and utilisation of facilities. 5. Technical efficiency of facilities and utilisation of capacity. 6. Effective use of subcontracting. 7. Degree of vertical integrations: value added and profit margin. 8. Efficiency and cost/benefits of equipment. 9. Effective operation control procedures: design, scheduling, purchasing, quality
control and efficiency. 10. Costs and technological competencies relative to industry and competitors. 11. Research and development/technology/innovation.
© F.ATEYA CORPORATE STRATEGY AND PLANNING HAND-OUTInternal Appraisal Process
5
© F.ATEYA CORPORATE STRATEGY AND PLANNING HAND-OUTInternal Appraisal Process
12. Patent, Trademarks, and similar legal protection.
Personnel
1. Management personnel. 2. Employees skill and morale. 3. Labour relations/costs compared to industry and competition. 4. Efficient and effective personnel policies. 5. Effective use of incentives to motivate performance. 6. Ability to level peaks and valleys of employment. 7. Employee turnover and absenteeism. 8. Specialised skills. 9. Experience.
Organisation/General Management
1. Organisational structure. 2. Firm's image and prestige.3. Firm's record for achieving objectives. 4. Organisation communication system. 5. Overall organisational control system effectiveness and utilisation. 6. Organisational climate. 7. Use of systematic procedures and techniques in decision making. 8. Top management skill, capabilities and interest.
The Conceptual Approach:
Bates and Eldredge have suggested what has been described as conceptual approach to analyse strengths and weaknesses.
According to them, the format for analysis can be divided into three dimensions : Management, Operations, and Finance.
These three dimensions would be common for a majority of the organisations. '‘Management''dimension covers top management functions and broader issues
encompassing the total organisation. Some of these could be strategic planning processes and systems, organisation climate and culture, managerial succession, top management values etc.
‘Operations' dimension includes resource conversion and distribution functions like production, material management design, marketing, etc. ‘Finances' include issues like capital structure, working capital, credit policies etc.
Analysis of Management Dimension:
At the corporate level, i.e. at the level of corporate strategy, the strategist must begin the assessment of organisational strengths and weaknesses with an analysis of firm's management.
© F.ATEYA CORPORATE STRATEGY AND PLANNING HAND-OUTInternal Appraisal Process
6
© F.ATEYA CORPORATE STRATEGY AND PLANNING HAND-OUTInternal Appraisal Process
To a large extent, the quality of top management determines and affects corporate strengths and weakness, not only the current but the ‘potential' strengths as well.
As an illustration, Bates and Eldredge have suggested the following dimensions to evaluate the strategic planning system of a firm.
Critical Factors: Identification of the present and future conditions having a bearing on the achievement of objectives.
Resources: Identification and provision for resources required to meet present and future conditions for achieving objectives.
Objectives: Clearly spelt out results and details of the means to be used to measure accomplishment.
Appraisal: Comparing actual with expected performance that results in timely /corrective action.
Deployment of Resources: Establishing and delegating areas of responsibility and authority for critical factors. For its strategic planning system, a firm's strengths and weaknesses can be evaluated on the above dimensions.
Analysis of ‘Financial' Dimension
A firm's performance is largely determined through its financial performance like sales revenue, profits net worth, divided pay out, etc. A number of dimensions within finance viz., capital structure, capital budgeting, dividend policy, debt policy, interest cost, credit policies, management of working capital etc., need to be examined to assess a firm's strengths and weaknesses.
Analysis of the ‘Operations' Dimensions
The resource conversion process requires operational arrangements.
The efficiency of the ‘conversion' process reflects strengths or weaknesses. Besides conversion, the organisation also needs to transform the products and
services through the process of marketing and distribution into liquid or cash resources which are then recycled.
Organisational audit, therefore, must include the assessment of corporate strengths and weaknesses in each functional area.
In the area of marketing, this may mean assessment of factors like familiarity with the industry breadth of the products/services offered, quality of the marketing research, customer pre and after sales service, consumer, loyalty, etc.
Strengths and Weaknesses Profile:
© F.ATEYA CORPORATE STRATEGY AND PLANNING HAND-OUTInternal Appraisal Process
7
© F.ATEYA CORPORATE STRATEGY AND PLANNING HAND-OUTInternal Appraisal Process
After the corporate audit on three dimensions: management, finance, and operation have been done. Bates and Eldredge suggest consolidation of all these dimensions to develop a profile. This is shown below:
Strengths and Weaknesses Profile
Dimension
Basis of Comparison
Ranking
Existing
Strengths of weaknesses
Management
Financial
perations
The purpose is to ensure that the strategist is aware of a basis of comparison and its appropriateness to the factor under assessment.
Ranking indicates degree of importance of the factor under assessment to the orgnisation's success.
All critical factors should have a ranking in one in their respective dimensions. A brief description of what exists.Strengths or weaknesses are coded as follows:
0- neutral; +=strength, and the more pluses, the greater the strength; -weakness and the more minuses, the greater the weakness.
The profile gives a quick view of the total situation as well as the criteria which an analyst has used to arrive at conclusions. By ranking, it also helps in focusing attention on more important rather than less important factor.
The Grid Approach:
The earlier framework of Bates and Eldredge suggested a diagnosis around three dimensions: Management, Finance, Operations. Almost a similar approach has been suggested by Ansoff. This is shown below:
GRID for Organization Audit
© F.ATEYA CORPORATE STRATEGY AND PLANNING HAND-OUTInternal Appraisal Process
8
© F.ATEYA CORPORATE STRATEGY AND PLANNING HAND-OUTInternal Appraisal Process
Facilities Equipment
Personnel Skills
Organisational capabilities
Management capabilities
General Management & Finance
R&D
Operations
Marketing
Warehousing Retail outlets Sales Offices Transportation equipment Training facilities for sales staff Data processing equipment
Door-to-Door selling Retail selling holesale selling Direct industry selling Dept. of Defense selling Cross-industry selling Applications engineering Advertising Sales promotion Servicing Contract administration Sales analysis Data analysis Forecasting Computer modelling Product Planning Background of people Corporate culture
Direct sales
Distributor chain Retail chain Consumer service organisation Industrial service organisation Dept. of Defense product support Inventory distribution & Control. Ability to make quick response to customer requirements Ability to adapt to socio-political upheavals in the market place Loyal set of customers Cordial relations with media and channels Flexibility in all phases of corporate life Consumer financing Discount policy Team work Product quality.
Industrial marketing Consumer merchandising Dept. of Defense marketing State and municipality marketing Well-informed and respective management Large customer base Decentralized control. Favorable public image Future orientation Ethical standards.
The ‘rows' contain various functions and the ‘columns' capabilities. With the help of comprehensive checklist, you can identify the relevant characteristics for a firm vis-à-vis various functions.
The 7 'S' Framework:
The 7 ‘S' framework can be used both all the corporate level as well as at the functional level. One such matrix for the corporate level is shown below:
© F.ATEYA CORPORATE STRATEGY AND PLANNING HAND-OUTInternal Appraisal Process
9
© F.ATEYA CORPORATE STRATEGY AND PLANNING HAND-OUTInternal Appraisal Process
The 7 ‘S' Framework Functions
Dimension
Marketing
Finance
Human Resources
Production
1. Strategy
2. Structure
3. Systems
4. Shared Values
5. Skills
6. Style
7. Staff
a)The level at which the exercise of corporate audits (strengths and weaknesses) is being performed.
b)The ‘characteristics' which are being examined i.e. approach to planning, management culture, marketing management, distribution system etc.
c)The ‘use' which management wants to make of the strengths and weaknesses analysis. If the idea is to reformulate a corporate strategy, management may employ two or three frameworks to have different viewpoints for the total organisation. If the use is ‘gap analysis' in some specific functional area, it may confine to only one framework, using the various ‘measures' to come to sound decisions.
The framework suggests that there is a multiplicity of factors that influence an organisation's ability to change and its proper mode of change. Because of the interconnectedness of the variables it would be difficult to make significant progress in one area without making progress in the others as well. Organisational change may be understood to be a complex relationship between strategy, structure, systems, style, skills, staff and superordinate goals.
© F.ATEYA CORPORATE STRATEGY AND PLANNING HAND-OUTInternal Appraisal Process
10
© F.ATEYA CORPORATE STRATEGY AND PLANNING HAND-OUTInternal Appraisal Process
1. Strategy and Super ordinate Goals- The concept of strategy includes purposes, mission, objectives, goals and major action plans and policies. Super ordinate goals may be considered to be the equivalent of the term organisational purposes. Super ordinate goals refer to a set of values and aspirations that goes beyond the conventional formal statement of corporate objectives. Superordinate goals are the fundamental ideas around which a business is built. They are its main values.
2. Structure- The design of organisation structure is a critical task of the top management of an organisation.Organisational structure refers to the relatively more durable organisational arrangements and Relationships. It prescribes the formal relationships among various positions and activities.
3. Systems- refers to all the rules, regulations and procedures, both formal and informal that complement the organisation structure. This includes production planning and control systems, cost accounting procedures, capital budgeting systems, recruitment, training and development systems, planning and budgeting systems, etc.,
4. Style- The style of an organisation becomes evident through the patterns of actions taken by member of the top management over a period of time. The aspects of business most emphasised by members of the top management tend to be given more attention by people down in the organisation.
5. Staff- is the process of acquiring human resources for the organisation and assuring that they have the potential to contribute to the achievement of the organisation's goals.
6. Skills- is one of the most crucial attributes or capabilities of an organisation. The term skills include those characteristics which most people use to describe a company. These are developed over a period of time and are a result of the interaction of a number of factors: performing certain tasks successfully over a period of time, the kind of people in the organisation, the top management style, the organisation structure, the management systems, the external environmental influences etc., Hence, when organisations make a strategic shift it becomes necessary to consciously build new skills.
MATCHING STRENGTHS AND WEAKNESSES:
The purpose is to arrive at a ‘match' between corporate strengths and environmental opportunities for competitive advantage. The purpose is to improve corporate performance. A simple but powerful question to keep us on the right track, lest the exercise becomes unwieldy and an end in itself is to ask: ‘so what'?
SUMMARY:
The analysis of corporate capabilities and weaknesses becomes a pre-requisite for successful formulation and reformulation of corporate strategies.
This analysis can be done at various levels: functional, divisional and corporate.
© F.ATEYA CORPORATE STRATEGY AND PLANNING HAND-OUTInternal Appraisal Process
11
© F.ATEYA CORPORATE STRATEGY AND PLANNING HAND-OUTInternal Appraisal Process
The classification of an item or characteristic in terms of strength and weakness can be done on the basis of some criteria like historical criterion, normative criterion, competitive parity criterion and the critical factor of success criterion.
In order to measure the degree of strength or weakness, we can use three measures: attribute measures, effectiveness measures and efficiency measures.
A format like a 'checklist', a grid or a matrix helps in making a comprehensive analysis.
It also helps in consolidating the analysis on corporate audit. While performing the audit, it is important to remember than in the ultimate analysis, it is the entrepreneurial viewpoint of strengths and weaknesses which can make or break a company.
In this view, the concept of synergy holds the key to enhance the pay offs from the existing corporate capabilities.
A strong mind, even with limited capabilities, may build a giant organization and a weak mind may cripple a sound organization by magnifying the minor weaknesses.
The frame of mind, thus may appeal to be a more important intangible strength than all the tangible assets.
TECHNIQUES OF ANALYSING CORPORATE RESOURCES
They are basically four,namely:
1) Value Chain Analysis;2) Value Network Analysis;3) Benchmarking; and4) Portfolio Analysis: The BCG Model
© F.ATEYA CORPORATE STRATEGY AND PLANNING HAND-OUTInternal Appraisal Process
12
© F.ATEYA CORPORATE STRATEGY AND PLANNING HAND-OUTInternal Appraisal Process
VALUE CHAIN
Popular Visualization
The value chain, also known as value chain analysis, is a concept from business management that was first described and popularized by Michael Porter in his 1985 best-seller, Competitive Advantage: Creating and Sustaining Superior Performance.
Firm Level
A value chain is a chain of activities for a firm operating in a specific industry. The business unit is the appropriate level for construction of a value chain, not the divisional level or corporate level.
Products pass through all activities of the chain in order, and at each activity the product gains some value.
The chain of activities gives the products more added value than the sum of the independent activity's value.
It is important not to mix the concept of the value chain with the costs occurring throughout the activities.
A diamond cutter, as a profession, can be used to illustrate the difference of cost and the value chain.
The cutting activity may have a low cost, but the activity adds much of the value to the end product, since a rough diamond is significantly less valuable than a cut diamond.
Typically, the described value chain and the documentation of processes, assessment and auditing of adherence to the process routines are at the core of the quality certification of the business, e.g. ISO 9001.
© F.ATEYA CORPORATE STRATEGY AND PLANNING HAND-OUTInternal Appraisal Process
13
© F.ATEYA CORPORATE STRATEGY AND PLANNING HAND-OUTInternal Appraisal Process
Activities
The value chain categorizes the generic value-adding activities of an organization. The "primary activities" include: inbound logistics, operations (production), outbound logistics, marketing and sales (demand), and services (maintenance). The "support activities" include: administrative infrastructure management, human resource management, technology (R&D), and procurement. The costs and value drivers are identified for each value activity.
Industry Level
An industry value chain is a physical representation of the various processes that are involved in producing goods (and services), starting with raw materials and ending with the delivered product (also known as the supply chain).
It is based on the notion of value-added at the link (read: stage of production) level.
The sum total of link-level value-added yields total value.
The French Physiocrat's Tableau économique is one of the earliest examples of a value chain.
Wasilly Leontief's Input-Output tables, published in the 1950s, provide estimates of the relative importance of each individual link in industry-level value-chains for the U.S. economy.
Significance
1) The value-chain concept has been extended beyond individual firms. It can apply to whole supply chains and distribution networks. The delivery of a mix of products and services to the end customer will mobilize different economic factors, each managing its own value chain. The industry wide synchronized interactions of those local value chains create an extended value chain, sometimes global in extent. Porter terms this larger interconnected system of value chains the "value system." A value system includes the value chains of a firm's supplier (and their suppliers all the way back), the firm itself, the firm distribution channels, and the firm's buyers (and presumably extended to the buyers of their products, and so on).
2) Capturing the value generated along the chain is the new approach taken by many management strategists. For example, a manufacturer might require its parts suppliers to be located nearby its assembly plant to
© F.ATEYA CORPORATE STRATEGY AND PLANNING HAND-OUTInternal Appraisal Process
14
© F.ATEYA CORPORATE STRATEGY AND PLANNING HAND-OUTInternal Appraisal Process
minimize the cost of transportation. By exploiting the upstream and downstream information flowing along the value chain, the firms may try to bypass the intermediaries creating new business models, or in other ways create improvements in its value system.
3) Value chain analysis has also been successfully used in large Petrochemical Plant Maintenance Organizations to show how Work Selection, Work Planning, Work Scheduling and finally Work Execution can (when considered as elements of chains) help drive Lean approaches to Maintenance. The Maintenance Value Chain approach is particularly successful when used as a tool for helping Change Management as it is seen as more user friendly than other business process tools.
4) Value chain analysis has also been employed in the development sector as a means of identifying poverty reduction strategies by upgrading along the value chain. Although commonly associated with export-oriented trade, development practitioners have begun to highlight the importance of developing national and intra-regional chains in addition to international ones.
BENCHMARKING
Benchmarking
Introduction
is the process of comparing one's business processes and performance metrics to industry bests and/or best practices from other industries.
Dimensions typically measured are quality, time and cost. Improvements from learning mean doing things better, faster, and cheaper.
Benchmarking involves management identifying the best firms in their industry, or any other industry where similar processes exist, and comparing the results and processes of those studied (the "targets") to one's own results and processes to learn how well the targets perform and, more importantly, how they do it.
The term benchmarking was first used by cobblers to measure people's feet for shoes.
They would place someone's foot on a "bench" and mark it out to make the pattern for the shoes. Benchmarking is most used to measure performance using a specific indicator (cost per unit of measure, productivity per unit of measure, cycle time of x per unit of measure or defects per unit of measure) resulting in a metric of performance that is then compared to others.
© F.ATEYA CORPORATE STRATEGY AND PLANNING HAND-OUTInternal Appraisal Process
15
© F.ATEYA CORPORATE STRATEGY AND PLANNING HAND-OUTInternal Appraisal Process
Also referred to as "best practice benchmarking" or "process benchmarking", it is a process used in management and particularly strategic management, in which organizations evaluate various aspects of their processes in relation to best practice companies' processes, usually within a peer group defined for the purposes of comparison.
This then allows organizations to develop plans on how to make improvements or adapt specific best practices, usually with the aim of increasing some aspect of performance. Benchmarking may be a one-off event, but is often treated as a continuous process in which organizations continually seek to improve their
The Following Is An Example Of A Typical Benchmarking Methodology:
1. Identify your problem areas - Because benchmarking can be applied to any business process or function, a range of research techniques may be required. They include: informal conversations with customers, employees, or suppliers; exploratory research techniques such as focus groups; or in-depth marketing research, quantitative research, surveys, questionnaires, re-engineering analysis, process mapping, quality control variance reports, or financial ratio analysis. Before embarking on comparison with other organizations it is essential that you know your own organization's function, processes; base lining performance provides a point against which improvement effort can be measured.
2. Identify other industries that have similar processes - For instance if one were interested in improving hand offs in addiction treatment he/she would try to identify other fields that also have hand off challenges. These could include air traffic control, cell phone switching between towers, transfer of patients from surgery to recovery rooms.
3. Identify organizations that are leaders in these areas - Look for the very best in any industry and in any country. Consult customers, suppliers, financial analysts, trade associations, and magazines to determine which companies are worthy of study.
4. Survey companies for measures and practices - Companies target specific business processes using detailed surveys of measures and practices used to identify business process alternatives and leading companies. Surveys are typically masked to protect confidential data by neutral associations and consultants.
5. Visit the "best practice" companies to identify leading edge practices - Companies typically agree to mutually exchange information beneficial to all parties in a benchmarking group and share the results within the group.
6. Implement new and improved business practices - Take the leading edge practices and develop implementation plans which include identification of specific opportunities, funding the project and selling the ideas to the organization for the purpose of gaining demonstrated value from the process.
Costs
© F.ATEYA CORPORATE STRATEGY AND PLANNING HAND-OUTInternal Appraisal Process
16
© F.ATEYA CORPORATE STRATEGY AND PLANNING HAND-OUTInternal Appraisal Process
The three main types of costs in benchmarking are:
Visit Costs - This includes hotel rooms, travel costs, meals, a token gift, and lost labor time.
Time Costs - Members of the benchmarking team will be investing time in researching problems, finding exceptional companies to study, visits, and implementation. This will take them away from their regular tasks for part of each day so additional staff might be required.
Benchmarking Database Costs - Organizations that institutionalize benchmarking into their daily procedures find it is useful to create and maintain a database of best practices and the companies associated with each best practice now.
The cost of benchmarking can substantially be reduced through utilizing the many internet resources that have sprung up over the last few years. These aim to capture benchmarks and best practices from organizations, business sectors and countries to make the benchmarking process much quicker and cheaper.
Types
Process benchmarking - the initiating firm focuses its observation and investigation of business processes with a goal of identifying and observing the best practices from one or more benchmark firms. Activity analysis will be required where the objective is to benchmark cost and efficiency; increasingly applied to back-office processes where outsourcing may be a consideration.
Financial benchmarking - performing a financial analysis and comparing the results in an effort to assess your overall competitiveness and productivity.
Benchmarking from an investor perspective- extending the benchmarking universe to also compare to peer companies that can be considered alternative investment opportunities from the perspective of an investor.
Performance benchmarking - allows the initiator firm to assess their competitive position by comparing products and services with those of target firms.
Product benchmarking - the process of designing new products or upgrades to current ones. This process can sometimes involve reverse engineering which is taking apart competitors products to find strengths and weaknesses.
Strategic benchmarking - involves observing how others compete. This type is usually not industry specific, meaning it is best to look at other industries.
Functional benchmarking - a company will focus its benchmarking on a single function to improve the operation of that particular function. Complex functions such as Human Resources, Finance and Accounting and Information and Communication Technology are unlikely to be directly comparable in cost and efficiency terms and may need to be disaggregated into processes to make valid comparison.
Best-in-class benchmarking - involves studying the leading competitor or the company that best carries out a specific function.
© F.ATEYA CORPORATE STRATEGY AND PLANNING HAND-OUTInternal Appraisal Process
17
© F.ATEYA CORPORATE STRATEGY AND PLANNING HAND-OUTInternal Appraisal Process
Operational benchmarking - embraces everything from staffing and productivity to office flow and analysis of procedures performed.[4]
Energy benchmarking - developing an accurate model of a building's energy consumption with the purpose of measuring reductions in usage.
PORTFOLIO ANALYSIS: THE BOSTON CONSULTING GROUP
Growth-share matrix
Introduction
The BCG matrix (aka B.C.G. analysis, BCG-matrix, Boston Box, Boston Matrix, Boston Consulting Group analysis, portfolio diagram) is a chart that had been created by Bruce Henderson for the Boston Consulting Group in 1968 to help corporations with analyzing their business units or product lines. This helps the company allocate resources and is used as an analytical tool in brand marketing, product management, strategic management, and portfolio analysis.
© F.ATEYA CORPORATE STRATEGY AND PLANNING HAND-OUTInternal Appraisal Process
18
© F.ATEYA CORPORATE STRATEGY AND PLANNING HAND-OUTInternal Appraisal Process
Chart
BCG Matrix
To use the chart, analysts plot a scatter graph to rank the business units (or products) on the basis of their relative market shares and growth rates.
Cash cows are units with high market share in a slow-growing industry. These units typically generate cash in excess of the amount of cash needed to maintain the business. They are regarded as staid and boring, in a "mature" market, and every corporation would be thrilled to own as many as possible. They are to be
© F.ATEYA CORPORATE STRATEGY AND PLANNING HAND-OUTInternal Appraisal Process
19
© F.ATEYA CORPORATE STRATEGY AND PLANNING HAND-OUTInternal Appraisal Process
"milked" continuously with as little investment as possible, since such investment would be wasted in an industry with low growth.
Dogs, or more charitably called pets, are units with low market share in a mature, slow-growing industry. These units typically "break even", generating barely enough cash to maintain the business's market share. Though owning a break-even unit provides the social benefit of providing jobs and possible synergies that assist other business units, from an accounting point of view such a unit is worthless, not generating cash for the company. They depress a profitable company's return on assets ratio, used by many investors to judge how well a company is being managed. Dogs, it is thought, should be sold off.
Question marks (also known as problem child) are growing rapidly and thus consume large amounts of cash, but because they have low market shares they do not generate much cash. The result is a large net cash consumption. A question mark has the potential to gain market share and become a star, and eventually a cash cow when the market growth slows. If the question mark does not succeed in becoming the market leader, then after perhaps years of cash consumption it will degenerate into a dog when the market growth declines. Question marks must be analyzed carefully in order to determine whether they are worth the investment required to grow market share.
Stars are units with a high market share in a fast-growing industry. The hope is that stars become the next cash cows. Sustaining the business unit's market leadership may require extra cash, but this is worthwhile if that's what it takes for the unit to remain a leader. When growth slows, stars become cash cows if they have been able to maintain their category leadership, or they move from brief stardom to dogdom.
As a particular industry matures and its growth slows, all business units become either cash cows or dogs. The natural cycle for most business units is that they start as question marks, then turn into stars. Eventually the market stops growing thus the business unit becomes a cash cow. At the end of the cycle the cash cow turns into a dog.
The overall goal of this ranking was to help corporate analysts decide which of their business units to fund, and how much; and which units to sell. Managers were supposed to gain perspective from this analysis that allowed them to plan with confidence to use money generated by the cash cows to fund the stars and, possibly, the question marks. As the BCG stated in 1970:
Only a diversified company with a balanced portfolio can use its strengths to truly capitalize on its growth opportunities. The balanced portfolio has:
stars whose high share and high growth assure the future; cash cows that supply funds for that future growth; and question marks to be converted into stars with the added funds.
© F.ATEYA CORPORATE STRATEGY AND PLANNING HAND-OUTInternal Appraisal Process
20
© F.ATEYA CORPORATE STRATEGY AND PLANNING HAND-OUTInternal Appraisal Process
Practical Use of the BCG Matrix
For each product or service, the 'area' of the circle represents the value of its sales. The BCG Matrix thus offers a very useful 'map' of the organization's product (or service) strengths and weaknesses, at least in terms of current profitability, as well as the likely cashflows.
The need which prompted this idea was, indeed, that of managing cash-flow.
It was reasoned that one of the main indicators of cash generation was relative market share, and one which pointed to cash usage was that of market growth rate.
Derivatives can also be used to create a 'product portfolio' analysis of services.
So Information System services can be treated accordingly.
Relative Market Share
This indicates likely cash generation, because the higher the share the more cash will be generated.
As a result of 'economies of scale' (a basic assumption of the BCG Matrix), it is assumed that these earnings will grow faster the higher the share.
The exact measure is the brand's share relative to its largest competitor.
Thus, if the brand had a share of 20 percent, and the largest competitor had the same, the ratio would be 1:1.
If the largest competitor had a share of 60 percent; however, the ratio would be 1:3, implying that the organization's brand was in a relatively weak position.
If the largest competitor only had a share of 5 percent, the ratio would be 4:1, implying that the brand owned was in a relatively strong position, which might be reflected in profits and cash flows.
If this technique is used in practice, this scale is logarithmic, not linear.
On the other hand, exactly what is a high relative share is a matter of some debate.
© F.ATEYA CORPORATE STRATEGY AND PLANNING HAND-OUTInternal Appraisal Process
21
© F.ATEYA CORPORATE STRATEGY AND PLANNING HAND-OUTInternal Appraisal Process
The best evidence is that the most stable position (at least in Fast Moving Consumer Goods FMCG markets) is for the brand leader to have a share double that of the second brand, and triple that of the third.
Brand leaders in this position tend to be very stable—and profitable; the Rule of 123.
The reason for choosing relative market share, rather than just profits, is that it carries more information than just cash flow.
It shows where the brand is positioned against its main competitors, and indicates where it might be likely to go in the future.
It can also show what type of marketing activities might be expected to be effective.
Market Growth Rate
Rapidly growing in rapidly growing markets, are what organizations strive for; but, as we have seen, the penalty is that they are usually net cash users - they require investment.
The reason for this is often because the growth is being 'bought' by the high investment, in the reasonable expectation that a high market share will eventually turn into a sound investment in future profits.
The theory behind the matrix assumes, therefore, that a higher growth rate is indicative of accompanying demands on investment.
The cut-off point is usually chosen as 10 per cent per annum.
Determining this cut-off point, the rate above which the growth is deemed to be significant (and likely to lead to extra demands on cash) is a critical requirement of the technique; and one that, again, makes the use of the BCG Matrix problematical in some product areas.
What is more, the evidence, from FMCG markets at least, is that the most typical pattern is of very low growth, less than 1 per cent per annum.
This is outside the range normally considered in BCG Matrix work, which may make application of this form of analysis unworkable in many markets.
© F.ATEYA CORPORATE STRATEGY AND PLANNING HAND-OUTInternal Appraisal Process
22
© F.ATEYA CORPORATE STRATEGY AND PLANNING HAND-OUTInternal Appraisal Process
Where it can be applied, however, the market growth rate says more about the brand position than just its cash flow.
It is a good indicator of that market's strength, of its future potential (of its 'maturity' in terms of the market life-cycle), and also of its attractiveness to future competitors. It can also be used in growth analysis.
Critical Evaluation
The matrix ranks only market share and industry growth rate, and only implies actual profitability, the purpose of any business.
(It is certainly possible that a particular dog can be profitable without cash infusions required, and therefore should be retained and not sold.)
The matrix also overlooks other elements of industry.
With this or any other such analytical tool, ranking business units has a subjective element involving guesswork about the future, particularly with respect to growth rates.
Unless the rankings are approached with rigor and scepticism, optimistic evaluations can lead to a dot com mentality in which even the most dubious businesses are classified as "question marks" with good prospects; enthusiastic managers may claim that cash must be thrown at these businesses immediately in order to turn them into stars, before growth rates slow and it's too late. Poor definition of a business's market will lead to some dogs being misclassified as cash cows.
As originally practiced by the Boston Consulting Group, the matrix was undoubtedly a useful tool, in those few situations where it could be applied, for graphically illustrating cashflows.
If used with this degree of sophistication its use would still be valid.
However, later practitioners have tended to over-simplify its messages.
In particular, the later application of the names (problem children, stars, cash cows and dogs) has tended to overshadow all else—and is often what most students, and practitioners, remember.
This is unfortunate, since such simplistic use contains at least two major problems:
'Minority applicability'. The cashflow techniques are only applicable to a very limited number of markets (where growth is relatively high, and a definite pattern of product life-cycles can be observed, such as that of ethical pharmaceuticals). In the majority of markets, use may give misleading results.
© F.ATEYA CORPORATE STRATEGY AND PLANNING HAND-OUTInternal Appraisal Process
23
© F.ATEYA CORPORATE STRATEGY AND PLANNING HAND-OUTInternal Appraisal Process
'Milking cash cows'. Perhaps the worst implication of the later developments is that the (brand leader) cash cows should be milked to fund new brands. This is not what research into the FMCG markets has shown to be the case. The brand leader's position is the one, above all, to be defended, not least since brands in this position will probably outperform any number of newly launched brands. Such brand leaders will, of course, generate large cash flows; but they should not be `milked' to such an extent that their position is jeopardized. In any case, the chance of the new brands achieving similar brand leadership may be slim—certainly far less than the popular perception of the Boston Matrix would imply.
Perhaps the most important danger is, however, that the apparent implication of its four-quadrant form is that there should be balance of products or services across all four quadrants; and that is, indeed, the main message that it is intended to convey. Thus, money must be diverted from `cash cows' to fund the `stars' of the future, since `cash cows' will inevitably decline to become `dogs'. There is an almost mesmeric inevitability about the whole process. It focuses attention, and funding, on to the `stars'. It presumes, and almost demands, that `cash cows' will turn into `dogs'.
The reality is that it is only the `cash cows' that are really important—all the other elements are supporting actors. It is a foolish vendor who diverts funds from a `cash cow' when these are needed to extend the life of that `product'. Although it is necessary to recognize a `dog' when it appears (at least before it bites you) it would be foolish in the extreme to create one in order to balance up the picture. The vendor, who has most of his (or her) products in the `cash cow' quadrant, should consider himself (or herself) fortunate indeed, and an excellent marketer, although he or she might also consider creating a few stars as an insurance policy against unexpected future developments and, perhaps, to add some extra growth. There is also a common misconception that 'dogs' are a waste of resources. In many markets 'dogs' can be considered loss-leaders that while not themselves profitable will lead to increased sales in other profitable areas.
Alternatives
As with most marketing techniques, there are a number of alternative offerings vying with the BCG Matrix although this appears to be the most widely used (or at least most widely taught—and then probably 'not' used). The next most widely reported technique is that developed by McKinsey and General Electric, which is a three-cell by three-cell matrix—using the dimensions of `industry attractiveness' and `business strengths'. This approaches some of the same issues as the BCG Matrix but from a different direction and in a more complex way (which may be why it is used less, or is at least less widely taught). Perhaps the most practical approach is that of the Boston Consulting Group's Advantage Matrix, which the consultancy reportedly used itself though it is little known amongst the wider population.
Other Uses
© F.ATEYA CORPORATE STRATEGY AND PLANNING HAND-OUTInternal Appraisal Process
24
© F.ATEYA CORPORATE STRATEGY AND PLANNING HAND-OUTInternal Appraisal Process
The initial intent of the growth-share matrix was to evaluate business units, but the same evaluation can be made for product lines or any other cash-generating entities. This should only be attempted for real lines that have a sufficient history to allow some prediction; if the corporation has made only a few products and called them a product line, the sample variance will be too high for this sort of analysis to be meaningful.
INTERPRATING INTERNAL ANALYSIS
SWOT ANALYSIS
Introduction
SWOT analysis is a strategic planning method used to evaluate the Strengths, Weaknesses, Opportunities, and Threats involved in a project or in a business venture. It involves specifying the objective of the business venture or project and identifying the internal and external factors that are favorable and unfavorable to achieve that objective. The technique is credited to Albert Humphrey, who led a convention at Stanford University in the 1960s and 1970s using data from Fortune 500 companies.
A SWOT analysis must first start with defining a desired end state or objective. A SWOT analysis may be incorporated into the strategic planning model. Strategic Planning has been the subject of much research.
Strengths: characteristics of the business or team that give it an advantage over others in the industry.
Weaknesses: are characteristics that place the firm at a disadvantage relative to others.
Opportunities: external chances to make greater sales or profits in the environment.
Threats: external elements in the environment that could cause trouble for the business.
Identification of SWOTs is essential because subsequent steps in the process of planning for achievement of the selected objective may be derived from the SWOTs.
First, the decision makers have to determine whether the objective is attainable, given the SWOTs. If the objective is NOT attainable a different objective must be selected and the process repeated.
The SWOT analysis is often used in academia to highlight and identify strengths, weaknesses, opportunities and threats.It is particularly helpful in identifying areas for development.
© F.ATEYA CORPORATE STRATEGY AND PLANNING HAND-OUTInternal Appraisal Process
25
© F.ATEYA CORPORATE STRATEGY AND PLANNING HAND-OUTInternal Appraisal Process
Matching and Converting
Another way of utilizing SWOT is matching and converting. Matching is used to find competitive advantages by matching the strengths to
opportunities.
Converting is to apply conversion strategies to convert weaknesses or threats into strengths or opportunities.
An example of conversion strategy is to find new markets.
If the threats or weaknesses cannot be converted a company should try to minimize or avoid them.
Evidence on the Use Of SWOT
SWOT analysis may limit the strategies considered in the evaluation. J. Scott Armstrong notes that "people who use SWOT might conclude that they
have done an adequate job of planning and ignore such sensible things as defining the firm's objectives or calculating ROI for alternate strategies.
Findings from Menon et al. (1999) and Hill and Westbrook (1997) have shown that SWOT may harm performance.
As an alternative to SWOT, Armstrong describes a 5-step approach alternative that leads to better corporate performance.
Internal and External Factors
The aim of any SWOT analysis is to identify the key internal and external factors that are important to achieving the objective. These come from within the company's unique value chain. SWOT analysis groups key pieces of information into two main categories:
Internal factors – The strengths and weaknesses internal to the organization.
External factors – The opportunities and threats presented by the external environment to the organization. -
The internal factors may be viewed as strengths or weaknesses depending upon their impact on the organization's objectives.
What may represent strengths with respect to one objective may be weaknesses for another objective.
The factors may include all of the 4P's; as well as personnel, finance, manufacturing capabilities, and so on.
© F.ATEYA CORPORATE STRATEGY AND PLANNING HAND-OUTInternal Appraisal Process
26
© F.ATEYA CORPORATE STRATEGY AND PLANNING HAND-OUTInternal Appraisal Process
The external factors may include macroeconomic matters, technological change, legislation, and socio-cultural changes, as well as changes in the marketplace or competitive position.
The results are often presented in the form of a matrix.
SWOT analysis is just one method of categorization and has its own weaknesses.
For example, it may tend to persuade companies to compile lists rather than think about what is actually important in achieving objectives.
It also presents the resulting lists uncritically and without clear prioritization so that, for example, weak opportunities may appear to balance strong threats.
It is prudent not to eliminate too quickly any candidate SWOT entry.
The importance of individual SWOTs will be revealed by the value of the strategies it generates.
A SWOT item that produces valuable strategies is important. A SWOT item that generates no strategies is not important.
Use of SWOT Analysis
The usefulness of SWOT analysis is not limited to profit-seeking organizations. SWOT analysis may be used in any decision-making situation when a desired end-state (objective) has been defined. Examples include: non-profit organizations, governmental units, and individuals. SWOT analysis may also be used in pre-crisis planning and preventive crisis management. SWOT analysis may also be used in creating a recommendation during a viability study/survey.
SWOT - landscape Analysis
The SWOT-landscape systematically deploys the relationships between overall objective and underlying SWOT-factors and provides an interactive, query-able 3D landscape.
The SWOT-landscape grabs different managerial situations by visualizing and foreseeing the dynamic performance of comparable objects according to findings by Brendan Kitts, Leif Edvinsson and Tord Beding (2000).
Changes in relative performance are continually identified. Projects (or other units of measurements) that could be potential risk or opportunity objects are highlighted.
© F.ATEYA CORPORATE STRATEGY AND PLANNING HAND-OUTInternal Appraisal Process
27
© F.ATEYA CORPORATE STRATEGY AND PLANNING HAND-OUTInternal Appraisal Process
SWOT-landscape also indicates which underlying strength/weakness factors that have had or likely will have highest influence in the context of value in use (for ex. capital value fluctuations).
Corporate Planning
As part of the development of strategies and plans to enable the organization to achieve its objectives, then that organization will use a systematic/rigorous process known as corporate planning. SWOT alongside PEST/PESTLE can be used as a basis for the analysis of business and environmental factors.
Set objectives – defining what the organization is going to do Environmental scanning
o Internal appraisals of the organization's SWOT, this needs to include an assessment of the present situation as well as a portfolio of products/services and an analysis of the product/service life cycle
Analysis of existing strategies, this should determine relevance from the results of an internal/external appraisal. This may include gap analysis which will look at environmental factors
Strategic Issues defined – key factors in the development of a corporate plan which needs to be addressed by the organization
Develop new/revised strategies – revised analysis of strategic issues may mean the objectives need to change
Establish critical success factors – the achievement of objectives and strategy implementation
Preparation of operational, resource, projects plans for strategy implementation
Monitoring results – mapping against plans, taking corrective action which may mean amending objectives/strategies.[8]
Marketing
Marketing management
In many competitor analyses, marketers build detailed profiles of each competitor in the market, focusing especially on their relative competitive strengths and weaknesses using SWOT analysis. Marketing managers will examine each competitor's cost structure, sources of profits, resources and competencies, competitive positioning and product differentiation, degree of vertical integration, historical responses to industry developments, and other factors.
© F.ATEYA CORPORATE STRATEGY AND PLANNING HAND-OUTInternal Appraisal Process
28
© F.ATEYA CORPORATE STRATEGY AND PLANNING HAND-OUTInternal Appraisal Process
Marketing management often finds it necessary to invest in research to collect the data required to perform accurate marketing analysis. Accordingly, management often conducts market research (alternately marketing research) to obtain this information. Marketers employ a variety of techniques to conduct market research, but some of the more common include:
Qualitative marketing research, such as focus groups Quantitative marketing research, such as statistical surveys Experimental techniques such as test markets Observational techniques such as ethnographic (on-site) observation Marketing managers may also design and oversee various environmental
scanning and competitive intelligence processes to help identify trends and inform the company's marketing analysis.
Using SWOT to analyse the market position of a small management consultancy with specialism in HRM.[8]
Strengths Weaknesses Opportunities ThreatsReputation in marketplace
Shortage of consultants at operating level rather than partner level
Well established position with a well defined market niche
Large consultancies operating at a minor level
Expertise at partner level in HRM consultancy
Unable to deal with multi-disciplinary assignments because of size or lack of ability
Identified market for consultancy in areas other than HRM
Other small consultancies looking to invade the marketplace
STRATEGIC FIT
Strategic fit express the degree to which an organization is matching its resources and capabilities with the opportunities in the external environment.
The matching takes place through strategy and it is therefore vital that the company have the actual resources and capabilities to execute and support the strategy.
Strategic fit can be used actively to evaluate the current strategic situation of a company as well as opportunities as M&A and divestitures of organizational divisions.
Strategic fit is related to the Resource-based view of the firm which suggests that the key to profitability is not only through positioning and industry selection but rather through an internal focus which seeks to utilize the unique characteristics of the company’s portfolio of resources and capabilities.
© F.ATEYA CORPORATE STRATEGY AND PLANNING HAND-OUTInternal Appraisal Process
29
© F.ATEYA CORPORATE STRATEGY AND PLANNING HAND-OUTInternal Appraisal Process
A unique combination of resources and capabilities can eventually be developed into a competitive advantage which the company can profit from.
However, it is important to differentiate between resources and capabilities.
Resources relate to the inputs to production owned by the company, whereas capabilities describe the accumulation of learning the company possesses.
Resources can be classified both as tangible and intangible:
Tangible:
Financial (Cash, securities) Physical (Location, plant, machinery)
Intangible:
Technology (Patents, copyrights) Human resources Reputation (Brands) Culture
Several tools have been developed one can use in order to analyze the resources and capabilities of a company.
These include SWOT, value chain analysis, cash flow analysis and more. Benchmarking with relevant peers is a useful tool to assess the relative strengths of the resources and capabilities of the company compared to its competitors.
Strategic fit can also be used to evaluate specific opportunities like M&A opportunities.
Strategic fit would in this case refer to how well the potential acquisition fits with the planned direction (strategy) of the acquiring company.
In order to justify growth through M&A transactions the transaction should yield a better return than Organic growth.
The Differential Efficiency Theory states that the acquiring firm will be able increase its efficiency in the areas where the acquired firm is superior.
© F.ATEYA CORPORATE STRATEGY AND PLANNING HAND-OUTInternal Appraisal Process
30
© F.ATEYA CORPORATE STRATEGY AND PLANNING HAND-OUTInternal Appraisal Process
In addition the theory argues that M&A transactions give the acquiring firm the possibility of achieving positive synergy effects meaning that the two merged companies are worth more together than the sums of their parts individually.
This is because merging companies may enjoy from economics of scale and economics of scope.
However, in reality many M&A transactions fails due to different factors, one of them being lack of strategic fit.
A CEO survey conducted by Bain & Company showed that 94% of the interviewed CEO’s considered the strategic fit to be vitally influential in the success or failure of an acquisition.
A high degree of strategic fit from can potentially yield many benefits for an organization.
Best case scenario a high degree of strategic fit may be the key to a successful merger, an efficient organization, synergy effects or cost reductions.
It is a vital term and it should be taken into consideration when evaluating a company’s strategy and opportunities.
© F.ATEYA CORPORATE STRATEGY AND PLANNING HAND-OUTInternal Appraisal Process
31
