Short Notes: Mgt 603
STRATSTRATEEGGIICC MMAANNAGAGEMENTEMENTLecture No. 23Lecture No. 23Strategy Analysis And ChoiceStrategy Analysis And ChoiceStrategic Management: Concepts and Cases. 9th editionFred R. DavidPowerPoint Slides by Anthony F. Chelte Western New England CollegeChapter OutlineChapter Outline
• The Nature of Strategy Analysis and Choice
• A Comprehensive Strategy-Formulation Framework
• The Input Stage
• The Matching Stage
• The Decision Stage
• Cultural Aspects of Strategy Choice
• The Politics of Strategy Choice
• The Role of a Board of DirectorsStrategy Analysis & ChoiceStrategy Analysis & ChoiceWhether it’s broke or not, fix it—make it better. Not just products, but the whole company if
necessary.- Bill Saporito
Strategy Analysis & ChoiceStrategy Analysis & ChoiceStrategic analysis and choice largely involves making subjective decisions based on Strategic analysis and choice largely involves making subjective decisions based on
objective informationobjective information..The Nature of Strategy Analysis and Choice –The Nature of Strategy Analysis and Choice ––– Establishing long-term objectivesEstablishing long-term objectives–– Generating alternative strategiesGenerating alternative strategies–– Selecting strategies to pursueSelecting strategies to pursue–– Best alternative to achieve mission and objectivesBest alternative to achieve mission and objectives
Alternative strategies derive from –Alternative strategies derive from ––– VisionVision
–– MissionMission
–– ObjectivesObjectives
–– External auditExternal audit
–– Internal auditInternal audit
–– Past successful strategiesPast successful strategiesParticipation in generating alternative strategies should be broad –Participation in generating alternative strategies should be broad –Stage 1: The Input StageStage 1: The Input StageStage 2: The Matching StageStage 2: The Matching StageStage 3: The Decision StageStage 3: The Decision Stage
Formulation FrameworkFormulation Framework
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Short Notes: Mgt 603
Formulation FrameworkFormulation Framework
Matching Key Factors to Formulate Alternative StrategiesMatching Key Factors to Formulate Alternative Strategies
Strategy-Formulation Analytical FrameworkStrategy-Formulation Analytical Framework
Formulation FrameworkFormulation Framework
External Factor EvaluationMatrix (EFE)
Competitive ProfileMatrix
Internal Factor EvaluationMatrix (IFE)
Stage 1:The Input Stage
SPACE Matrix
Stage 2:The Matching Stage
TOWS Matrix
BCG Matrix
IE Matrix
Grand Strategy Matrix
Resultant StrategyKey External FactorKey Internal Factor
Develop a new employee benefits package
=Strong union activity (threat)
+Poor employee morale (weakness)
Develop new products for older adults
=Decreasing numbers of young adults (threat)
+Strong R&D (strength)
Pursue horizontal integration by buying competitor's facilities
=Exit of two major foreign competitors form the industry (opportunity)
+Insufficient capacity (weakness)
Acquire Cellfone, Inc.=20% annual growth in the cell phone industry (opportunity)
+Excess working capacity (strength)
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Short Notes: Mgt 603
Input StageInput Stage
•• Provides basic input information for the matching and decision stage matricesProvides basic input information for the matching and decision stage matrices
•• Requires strategists to quantify subjectivity early in the processRequires strategists to quantify subjectivity early in the process
•• Good intuitive judgment always neededGood intuitive judgment always needed
Matching StageMatching Stage
•• Match between organization’s internal resources and skills and the opportunities and Match between organization’s internal resources and skills and the opportunities and risks created by its external factors.risks created by its external factors.
Matching Key Factors to Formulate Alternative StrategiesMatching Key Factors to Formulate Alternative Strategies
Lecture No. 24
Matching StageMatching StageTOWS MatrixTOWS Matrix
–– ThreatsThreats
–– OpportunitiesOpportunities
–– StrengthsStrengths
–– WeaknessesWeaknesses
Develop four types of strategiesDevelop four types of strategies
–– Strengths-Opportunities (SO)Strengths-Opportunities (SO)
–– Weaknesses-Opportunities (WO)Weaknesses-Opportunities (WO)
–– Strengths-Threats (ST)Strengths-Threats (ST)
–– Weaknesses-Threats (WT)Weaknesses-Threats (WT)1.1. SOSO Strategies StrategiesUse a firm’s internal strengths to take advantage of external opportunities2.2. WOWO Strategies StrategiesImproving internal weaknesses by taking advantage of external opportunities3.3. STST Strategies StrategiesUsing firm’s strengths to avoid or reduce the impact of external threats.4.4. WTWT Strategies StrategiesDefensive tactics aimed at reducing internal weaknesses and avoiding environmental threats.5.5. TOWS MatrixTOWS Matrix
Steps in developing the TOWS Matrix– List the firm’s key external opportunities– List the firm’s key external threats– List the firm’s key internal strengths– List the firm’s key internal weaknesses
TOWS MatrixTOWS Matrix
Quantitative Strategic Planning Matrix
(QSPM)
Stage 3:The Decision Stage
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Short Notes: Mgt 603
Developing the TOWS Matrix• Match internal strengths with external opportunities and record the resultant SO Strategies• Match internal weaknesses with external opportunities and record the resultant WO
Strategies• Match internal strengths with external threats and record the resultant ST Strategies• Match internal weaknesses with external threats and record the resultant WT Strategies
Lecture No, 25-26
Formulation FrameworkFormulation FrameworkSPACE MatrixSPACE MatrixStrategic Position and Action Evaluation Matrix Four quadrant framework Determines appropriate strategies
Aggressive Conservative Defensive Competitive
Two Internal Dimensions Financial Strength [FS] Competitive Advantage [CA]
Two External Dimensions Environmental Stability [ES] Industry Strength [IS]
Overall Strategic position determined by:– Financial Strength [FS]– Competitive Advantage [CA]– Environmental Stability [ES]– Industry Strength [IS]
WT Strategies
Minimize weaknesses and avoid threats
ST Strategies
Use strengths to avoid threats
Threats-T
List Threats
WO Strategies
Overcome weaknesses by taking advantage of
opportunities
SO Strategies
Use strengths to take advantage of opportunities
Opportunities-O
List Opportunities
Weaknesses-W
List Weaknesses
Strengths-S
List Strengths
Leave Blank
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Short Notes: Mgt 603
Developing the SPACE Matrix:• EFE Matrix• IFE Matrix• Financial Strength• Competitive Advantage• Environmental Stability• Industry Strength• Select variables to define FS, CA, ES, & IS• Assign numerical ranking from +1 (worst) to +6 (best) for FS and IS; Assign numerical
ranking from –1 (best) to –6 (worst) for ES and CA.• Compute average score for FS, CA, ES, & IS• Plot the average scores on the Matrix• Add the two scores on the x-axis and plot point on X. Add the scores on the y-axis and plot
Y. Plot the intersection of the new xy point.• Draw a directional vector from origin through the new intersection point.• SPACE FactorsInternal Strategic Position External Strategic PositionFinancial Strength (FS)Return on investmentLeverageLiquidityWorking capitalCash flowEase of exit from marketRisk involved in business
Environmental Stability (ES)Technological changesRate of inflationDemand variabilityPrice range of competing productsBarriers to entryCompetitive pressurePrice elasticity of demand
Internal Strategic Position External Strategic PositionCompetitive Advantage CAMarket shareProduct qualityProduct life cycleCustomer loyaltyCompetition’s capacity utilizationTechnological know-howControl over suppliers & distributors
Industry Strength (IS)Growth potentialProfit potentialFinancial stabilityTechnological know-howResource utilizationCapital intensifyEase of entry into marketProductivity, capacity utilization
SPACE Matrix
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Short Notes: Mgt 603
Lecture No. 27-28
BCG MatrixBCG Matrix
Boston Consulting Group Matrix• Enhances multidivisional firms’ efforts to formulate strategies • Autonomous divisions (or profit centers) constitute the business portfolio• Firm’s divisions may compete in different industries requiring separate strategy
Boston Consulting Group Matrix• Graphically portrays differences among divisions • Focuses on market share position and industry growth rate• Manage business portfolio through relative market share position and industry growth rate
Relative market share position defined:• Ratio of a division’s own market share in a particular industry to the market share held by
the largest rival firm in that industry.BCG Matrix
• Question Marks • Stars
FS+6
+1
+5+4+3
+2
-6
-5
-4
-3
-2
-1-6 -5 -4 -3 -2 -1 +1 +2 +3 +4 +5 +6
ES
CA IS
Conservative Aggressive
Defensive Competitive
DogsDogsIVIV
Cash CowsCash CowsIIIIII
Question MarksQuestion MarksII
StarsStarsIIII
Relative Market Share PositionHigh1.0
Medium.50
Low0.0
High+20
Low-20
Medium0
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Short Notes: Mgt 603
• Cash Cows• DogsQuestion Marks
• Low relative market share position yet compete in high-growth industry.• Cash needs are high• Case generation is low
• Decision to strengthen (intensive strategies) or divestStars
• High relative market share and high industry growth rate.• Best long-run opportunities for growth and profitability
• Substantial investment to maintain or strengthen dominant position• Integration strategies, intensive strategies, joint ventures
Cash Cows• High relative market share position, but compete in low-growth industry
• Generate cash in excess of their needs• Milked for other purposes
• Maintain strong position as long as possible• Product development, concentric diversification• If becomes weak—retrenchment or divestiture
Dogs• Low relative market share position and compete in slow or no market growth
• Weak internal and external position• Decision to liquidate, divest, retrenchment
Lecture No. 29-30
Grand Strategy MatrixGrand Strategy Matrix• Popular tool for formulating alternative strategies• All organizations (or divisions) can be positioned in one of four quadrants• Based on two evaluative dimensions:
– Competitive position– Market growth
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Short Notes: Mgt 603
Quadrant I• Excellent strategic position• Concentration on current markets and products• Take risks aggressively when necessary
Quadrant II• Evaluate present approach seriously• How to change to improve competitiveness• Rapid market growth requires intensive strategy
Quadrant III• Compete in slow-growth industries• Weak competitive position• Drastic changes quickly• Cost and asset reduction indicated (retrenchment)
Quadrant IV• Strong competitive position• Slow-growth industry• Diversification indicated to more promising growth areasStage 3: The Decision StageQuantitative Strategic Planning Matrix (QSPM)
Quantitative Strategic Planning Matrix• Only technique designed to determine the relative attractiveness of feasible alternative
actions• Tool for objective evaluation of alternative strategies
Quadrant IVConcentric diversificationHorizontal diversificationConglomerate diversificationJoint ventures
Quadrant IIIRetrenchmentConcentric diversificationHorizontal diversificationConglomerate diversificationLiquidation
Quadrant IMarket developmentMarket penetrationProduct developmentForward integrationBackward integrationHorizontal integrationStrong Postion
Concentric diversification
Quadrant IIMarket developmentMarket penetrationProduct developmentHorizontal integrationDivestitureLiquidation
RAPID MARKET GROWTH
SLOW MARKET GROWTH
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Short Notes: Mgt 603
• Based on identified external and internal crucial success factors• Requires good intuitive judgment• List the firm’s key external opportunities & threats; list the firm’s key internal strengths
and weaknesses• Assign weights to each external and internal critical success factor• Examine the Stage 2 (matching) matrices and identify alternative strategies that the
organization should consider implementing• Determine the Attractiveness Scores (AS)• Compute the total Attractiveness Scores• Compute the Sum Total Attractiveness Score
QSPMQSPMLimitations:• Requires intuitive judgments and educated assumptions• Only as good as the prerequisite inputs
Positives:• Sets of strategies examined simultaneously or sequentially• Requires the integration of pertinent external and internal factors in the decision-making
process
Lecture No. 31
Chapter OutlineChapter Outline
• The nature of Strategy Implementation
• Annual Objectives
• Policies
• Resource Allocation• Managing Conflict• Matching Structure with Strategy• Restructuring, Reengineering, and E-Engineering• Linking Performance and Pay to Strategies
• Managing Resistance to Change
• Managing the Natural Environment
• Creating a Strategy-Supportive Culture
• Production/Operations Concerns When Implementing Strategies
• Human Resource Concerns When Implementing Strategies
Implementing Strategies: Management IssuesImplementing Strategies: Management IssuesPretend that every single person you meet has a sign around his or her neck that says, “Make
me feel important.” -- Mary Kay Ash, CEO of Mary Kay, Inc.Management Issues Annual Objectives Policies Resources Organizational structure
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Short Notes: Mgt 603
Restructuring Rewards/Incentives Resistance to Change Managers & strategy Supportive culture Production/operations Human resources Downsizing
Contrasting strategy formulation and strategy implementationContrasting strategy formulation and strategy implementation– Formulation is positioning forces before the action– Implementation is managing forces during the action
Contrasting strategy formulation and strategy implementationContrasting strategy formulation and strategy implementation– Formulation focuses on effectiveness– Implementation focuses on efficiency– Formulation is primarily an intellectual process– Implementation is primarily an operational process– Formulation requires good intuitive and analytical skills– Implementation requires special motivation and leadership skills– Formulation requires coordination among a few individuals– Implementation requires coordination among many persons
Strategy implementation –Strategy implementation –
–– Varies among different types and sizes of organizations Varies among different types and sizes of organizations
Strategy implementation Actions –Strategy implementation Actions ––– Altering sales territoriesAltering sales territories
–– Adding new departmentsAdding new departments
–– Closing facilitiesClosing facilities
–– Hiring new employeesHiring new employees
–– Cost-control proceduresCost-control procedures
–– Changing advertising strategiesChanging advertising strategies
–– Building new facilities Building new facilities
Formulation to Implementation transition –Formulation to Implementation transition –
–– Shift in responsibilityShift in responsibility
•• From strategists to division and functional managers From strategists to division and functional managers 1.1. Management IssuesManagement Issues2.2. Management Issues (continued)Management Issues (continued)3.3. Annual ObjectivesAnnual Objectives
•• Decentralized activityDecentralized activity
•• Involves all managers in the firmInvolves all managers in the firm
Annual ObjectivesAnnual Objectives
•• Basis for allocating resourcesBasis for allocating resources
•• Primary mechanism for evaluating managersPrimary mechanism for evaluating managers
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Short Notes: Mgt 603
•• Major instrument for monitoring progress toward long-term objectivesMajor instrument for monitoring progress toward long-term objectives
•• Establish organizational, divisional, and departmental prioritiesEstablish organizational, divisional, and departmental priorities
•• Horizontal consistency of objectivesHorizontal consistency of objectives
•• Vertical consistency of objectivesVertical consistency of objectives
Objectives should state –Objectives should state –– Quantity– Quality– Cost– Time
PoliciesPoliciesPolicies facilitate solving recurring problems and guide the implementation of strategyPolicies facilitate solving recurring problems and guide the implementation of strategyPolicies set –Policies set –
– Boundaries– Constraints– Limits
Example Issues requiring management policy --Example Issues requiring management policy --– To offer extensive or limited management development workshops and seminars– To centralize or decentralize employee-training activities– To recruit through employment agencies, college campuses, and/or newspapers– To promote from within or hire from the outside– To establish a high- or low-safety stock of inventory– To buy lease, or rent new production equipment
Lecture No. 32
Resource Allocation –Resource Allocation –A central management activity that allows for strategy executionA central management activity that allows for strategy execution
Four types of resourcesFour types of resources – –• Financial resources• Physical resources• Human resources• Technological resources
Managing ConflictManaging Conflict
Conflict –Conflict –Disagreement between two or more parties on one or more issues
•• Conflict is not always “bad”Conflict is not always “bad”
•• Absence of conflictAbsence of conflict
–– Signal indifference or apathySignal indifference or apathy
•• Can energize opposing groups to actionCan energize opposing groups to action
•• May help managers identify problemsMay help managers identify problems
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Short Notes: Mgt 603
Conflict Management and Resolution– Avoidance– Defusion– Confrontation
Matching Structure with StrategyMatching Structure with Strategy1. Changes in Strategy 2. Changes in Structure
• Structure largely dictates how objectives and policies will be established.• Structure dictates how resources will be allocatedChandler’s Strategy-Structure RelationshipChandler’s Strategy-Structure Relationship
Lecture No. 33
Basic Forms of StructureBasic Forms of Structure1. Functional StructureGroups tasks and activities by business function2. Divisional StructureDecentralized and organized by geography, product, customer, or process 3. Strategic Business Unit Structure (SBU)Groups similar divisions; delegates authority and responsibility to SBU executive4. Matrix Structure
Most complex of all designs. Depends upon both vertical and horizontal flows of authority and communication
Lecture No. 34
Restructuring –Reducing the size of the firm in terms of number of employees, divisions, or units, and the number of hierarchical levels in the firm’s organizational structure
Also called –
– Downsizing– Rightsizing– Delayering
• Employed when ratios out of line with benchmarked competitors
• Primary benefit sought is cost reduction
New administrativeproblems emerge
New strategyIs formulated
Organizationalperformance
declines
Organizational performance
improves
New organizationalstructure is established
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Short Notes: Mgt 603
ReengineeringReengineeringInvolves reconfiguring or redesigning work, jobs, and processes to improve cost, quality, service and speed.
ReengineeringReengineering Also called –
– Process management– Process innovation– Process redesign
Concerned more with employee and customer well-being than shareholder well-being
Linking Performance and Pay to StrategiesLinking Performance and Pay to StrategiesMost companies practicing pay-for-performanceMost companies practicing pay-for-performance•• Dual bonus system becoming more commonDual bonus system becoming more common–– Based on both Based on both annual objectives and long-term objectivesannual objectives and long-term objectives•• ProfitProfit Sharing Sharing–– Incentive compensation used by 30% of companiesIncentive compensation used by 30% of companies•• Gain SharingGain Sharing–– Performance targets set for employees or departmentsPerformance targets set for employees or departmentsTests for Performance-Pay PlansTests for Performance-Pay Plans
1.1. Does the plan capture attention?Does the plan capture attention?2.2. Do employees understand the plan?Do employees understand the plan?3.3. Is the plan improving communication?Is the plan improving communication?4.4. Does the plan pay out when it should?Does the plan pay out when it should?5.5. Is the company or unit performing better?Is the company or unit performing better?
Managing Resistance to ChangeManaging Resistance to ChangeChange raises anxiety over fear of:Change raises anxiety over fear of:–– Economic lossEconomic loss
–– InconvenienceInconvenience
–– UncertaintyUncertainty
–– Break in status-quoBreak in status-quoResistance to change –Resistance to change ––– Single greatest threat to successful strategy implementationSingle greatest threat to successful strategy implementation
Change StrategiesChange Strategies
•• Force Change StrategyForce Change Strategy
•• Educative Change StrategyEducative Change Strategy
•• Rational or Self-Interest Change StrategyRational or Self-Interest Change Strategy
Managing the Natural EnvironmentManaging the Natural Environment
•• Wide appreciation for firms that conduct operations that “mend” rather than “harm” the Wide appreciation for firms that conduct operations that “mend” rather than “harm” the environment.environment.
Creating a Strategy-Supportive CultureCreating a Strategy-Supportive CultureStrategists should strive to preserve, emphasize, and build upon aspects of existing culture that
support new strategies.
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Short Notes: Mgt 603
Elements linking culture to strategy:• Formal statements of philosophy, charters, etc. used for recruitment and selection, and
socialization• Designing of physical spaces, facades, buildings• Deliberate role modeling, teaching and coaching• Explicit reward and status system, promotion criteria• Stories, legends, myths about key people and events• What leaders pay attention to, measure and control• Leader reactions to critical incidents and crises• How the organization is designed and structured• Organizational systems and procedures• Criteria used for recruitment, selection, promotion, retirement
Lecture No. 35
Production/Operations ConcernsProduction/Operations Concerns
• Production processes typically constitute more than 70% of firm’s total assets
• Decisions on:– Plant size– Inventory/inventory control– Quality control– Cost control– Technological innovation
Human Resource ConcernsHuman Resource Concerns
• Assessing staffing needs and costs
• Develop performance incentives
• ESOPs
• Child-care policies
• Work-life balance
Lecture No. 36-37Marketing variables affect success or failure of strategy implementationMarketing variables affect success or failure of strategy implementation
•• Market SegmentationMarket Segmentation
•• Production PositioningProduction Positioning
Marketing Decisions requiring polices –Marketing Decisions requiring polices –– Use exclusive dealerships or multiple channels of distribution– Use heavy, light, or no TV advertising– Limit (or not) the share of business done with a single customer– Be a price leader or price follower– Offer a complete or limited warranty– Reward salespeople based on straight commission or combination salary/commission
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Short Notes: Mgt 603
•• Subdividing of a market into distinct subsets of customers according to needs and buyingSubdividing of a market into distinct subsets of customers according to needs and buying habitshabits
•• Widely used in implementing strategiesWidely used in implementing strategies
•• Small and specialized firmsSmall and specialized firms
Market Segmentation Important Variable:• Market and product development, market penetration, and diversification require increased
sales through new markets or products• Firm can operate with limited resources. Enables a small firm by maximizing per-unit
profits and per-segment sales.• Segmentation decisions directly affect marketing mix variables:
- Product, place, promotion, and price
Marketing Mix – Component FactorsMarketing Mix – Component FactorsBases for Segmenting Markets –z Geographic Demographic Psychographic Behavioral
Geographic Basis:– Region– County Size– City or SMSA size– Density– Climate
Demographic Basis:– Age– Family Size– Family Life Cycle– Income Occupation– Education– Religion– Race Nationality
Psychographic Basis:– Social Class– Lifestyle– Personality
Behavioral Basis:– Use occasion– Benefits sought– User status– Usage rate– Loyalty status– Readiness Stage– Attitude toward product
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Short Notes: Mgt 603
Developing schematic representations that reflect how products or services compare to competitors’ on dimensions most important to success in the industry
Product Positioning based on:– Customers wants– Customers needs
Product Positioning StepsProduct Positioning Steps1. Select Key Criteria2. Diagram Map3. Plot competitors’ products4. Look for niches5. Develop Marketing Plan
Product Positioning MapProduct Positioning Map
Product Positioning Map as Strategy-Implementation Tool—– Look for vacant niche– Avoid sub-optimization– Don’t serve 2 segments with same strategy– Don’t position in the middle of the map
Lecture No. 38
Finance/Accounting IssuesFinance/Accounting Issues
Central to Strategy Implementation –Central to Strategy Implementation ––– Acquiring needed capitalAcquiring needed capital
–– Developing pro forma financial statementsDeveloping pro forma financial statements
–– Preparing financial budgetsPreparing financial budgets
–– Evaluating worth of a businessEvaluating worth of a business
Finance/Accounting IssuesFinance/Accounting Issues
LowConvenience
Firm 1•
•Firm 2
• Firm 3
Rental Car Market
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Short Notes: Mgt 603
Acquiring Capital to Implement Strategies –Acquiring Capital to Implement Strategies –
•• Basic sources of capitalBasic sources of capital ::
–– DebtDebt
–– EquityEquityDebt vs. Equity Decisions –Debt vs. Equity Decisions –
•• EPS/EBIT analysisEPS/EBIT analysis
–– Earnings per share/Earnings before interest and taxesEarnings per share/Earnings before interest and taxes
Pro Forma Financial Statements -Pro Forma Financial Statements -
•• Allows an organization to examine the expected results of various actions and Allows an organization to examine the expected results of various actions and approachesapproaches
6 Steps in Pro Forma Financial Analysis6 Steps in Pro Forma Financial Analysis•• Prepare income statement before balance sheet (forecast sales)Prepare income statement before balance sheet (forecast sales)•• Use percentage-of-sales method to project CGS and expensesUse percentage-of-sales method to project CGS and expenses•• Calculate projected net incomeCalculate projected net income•• Subtract dividends to be paid from Net Income and add remaining to Retained EarningsSubtract dividends to be paid from Net Income and add remaining to Retained Earnings•• Project balance sheet times beginning with retained earningsProject balance sheet times beginning with retained earnings•• List comments (remarks) on projected statementsList comments (remarks) on projected statements
Financial Budget –Financial Budget –Document that details how funds will be obtained and spent for a specified period of time.Document that details how funds will be obtained and spent for a specified period of time.
Types of Budgets –Types of Budgets ––– Cash budgetsCash budgets–– Operating budgetsOperating budgets–– Sales budgetsSales budgets–– Profit budgetsProfit budgets–– Factory budgetsFactory budgets–– Capital budgetsCapital budgets–– Expense budgetsExpense budgets–– Divisional budgetsDivisional budgets–– Variable budgetsVariable budgets–– Flexible budgetsFlexible budgets–– Fixed budgetsFixed budgets
Evaluating Worth of a BusinessEvaluating Worth of a BusinessCentral to strategy implementation as integrative, intensive and diversification strategies are Central to strategy implementation as integrative, intensive and diversification strategies are often implement through acquisitions of other firms.often implement through acquisitions of other firms.
Evaluating Worth of a BusinessEvaluating Worth of a Business3 Basic approaches:3 Basic approaches:1.1. What a firm ownsWhat a firm owns2.2. What a firm earnsWhat a firm earns3.3. What a firm will bring in the marketWhat a firm will bring in the market
Lecture No. 39
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Short Notes: Mgt 603
Same above given in chapter 38Same above given in chapter 38Central to Strategy Implementation –Central to Strategy Implementation –Evaluating Worth of a BusinessEvaluating Worth of a Business3 Basic approaches: 3 Basic approaches: TillTillDecisions Requiring Finance/Accounting Policies1. Raise capital w/ short-term, long-term preferred or common stock2. Lease or buy fixed assets3. Determine an appropriate dividend payout ratio4. Use LIFO, FIFO, or market-value accounting approach5. Extend time of accounts receivable6. Establish percentage discount on accounts for terms7. Determine the amount of cash kept on hand
Lecture No. 40
Systematic Review, Evaluation & Control –Systematic Review, Evaluation & Control ––– Strategies become obsoleteStrategies become obsolete
–– Internal environments are dynamicInternal environments are dynamic
–– External environments are dynamicExternal environments are dynamic
• Strategy evaluation is vital to the organization’s well-being
• Alert management to potential or actual problems in a timely fashion• Erroneous strategic decisions can have severe negative impact on organizations
3 Basic Activities –• Examining the underlying bases of a firms’ strategy• Comparing expected to actual results• Corrective actions to ensure performance conforms to plans
Strategy evaluation –Strategy evaluation –– Complex and sensitive undertaking– Overemphasis can be costly and counterproductive
In many organizations, evaluation is an appraisal of performance –In many organizations, evaluation is an appraisal of performance –• Have assets increased?• Increase in profitability?• Increase in sales?• Increase in productivity?• Profit margins, ROI and EPS ratios increased?
Four Criteria (Richard Rummelt):• Consistency
• Consonance
• Feasibility
• Advantage
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Short Notes: Mgt 603
Consistency– Strategy should not present inconsistent goals and policies.
• Conflict and interdepartmental bickering symptomatic of managerial disorder and strategic inconsistency
Consonance– Need for strategies to examine sets of trends
• Adaptive response to external environment• Trends are results of interactions among other trends
Feasibility– Neither overtax resources or create unsolvable sub-problems
• Organizations must demonstrate the abilities, competencies, skills and talents to carry out a given strategy
Advantage
– Creation or maintenance of competitive advantage• Superiority in resources, skills, or position
Difficulty in strategy evaluation –
• Increase in environment’s complexity
• Difficulty predicting future with accuracy
• Increasing number of variables
Difficulty in strategy evaluation –
• Rate of obsolescence of plans
• Domestic and global events
• Decreasing time span for planning certainty
Strategy evaluation should –
– Initiative managerial questioning
– Trigger review of objectives and values
– Stimulate creativity in generating alternatives
Lecture No. 41
Porter Supply Chain ModelThe Value Chain framework of Michael Porter is a model that helps to analyze specific activities
through which firms can create value and competitive advantage.
The activities of the Value Chain The activities of the Value Chain
• Primary activities (line functions)
• Support activities (Staff functions, overhead)
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Short Notes: Mgt 603
Primary activities (line functions)Primary activities (line functions)
• Inbound Logistics
• Operations
• Outbound Logistics
• Marketing and Sales
• Service
Support activities (Staff functions, overhead)Support activities (Staff functions, overhead)
• Firm Infrastructure
• Technology Development
• Human Resource Management
• Procurement
Creating a cost advantage based on the value chainCreating a cost advantage based on the value chain
• A firm may create a cost advantage:
• By reducing the cost of individual value chain activities, or
• By reconfiguring the value chain.
10 cost drivers related to value chain activities 10 cost drivers related to value chain activities
• Economies of scale
• Learning
• Capacity utilization
• Linkages among activities
• Interrelationships among business units
• Degree of vertical integration
• Timing of market entry
• Firm's policy of cost or differentiation
• Geographic location
• Institutional factors (regulation, union activity, taxes, etc.).
Lecture No. 42
Same in above chapterFour Criteria (Richard Rummelt):Strategy evaluation should –
Lecture No. 43
Review of underlying bases of strategy –– Develop revised EFE Matrix– Develop revised IFE Matrix
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Short Notes: Mgt 603
Review effectiveness of strategy –• Competitors’ reaction to strategy• Competitors’ change in strategy• Competitors’ changes in strengths and weaknesses• Reasons for competitors’ strategic change • Reasons for competitors’ successful strategies• Competitors’ present market positions and profitability• Potential for competitor retaliation• Potential for cooperation with competitors
Monitor Threats and Opportunities and Weaknesses and Strengths• Are our internal strengths still strengths?• Have we added additional strengths?• Are our weaknesses still weaknesses?• Have we other internal weaknesses?• Are opportunities still opportunities?• Other external opportunities?• Are threats still threats?• Are there other threats?• Are we vulnerable to a hostile takeover?
Lecture No. 44• Comparing expected to actual results
• Investigating deviations from plan
• Evaluating individual performance
Evaluation FrameworkEvaluation FrameworkI. Review Underlying Bases
Continue present course
II. Measure Firm Performance
III.Take
Corrective Actions
Differences?
Differences?
Yes
NO
Yes
NO
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Short Notes: Mgt 603
• Progress toward stated objectives
Quantitative criteria for strategy evaluation –– Financial Ratios:
• Compare performance over different periods• Compare performance to competitors• Compare performance to industry averages
Key Financial Ratios –– Return on investment– Return on equity– Profit margin– Market share– Debt to equity– Earnings per share– Sales growth– Asset growth
Qualitative evaluation of strategy -– Internal consistency of strategy– Consistency of strategy with environment– Strategy appropriate in view of resources– Acceptable degree of risk– Appropriate time frame– Workability of the strategy
Lecture No. 45
Basic requirements for effective strategy evaluation –– Economical– Meaningful– Generate useful information– Timely information– Provide a true picture of what is happening
Strategy-Evaluation Assessment MatrixStrategy-Evaluation Assessment Matrix
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Short Notes: Mgt 603
Premise of sound strategic management –– Planning to deal with unfavorable and favorable events before they occur.
Contingency Planning –– Alternative plans that can be put into effect if certain key events do not occur as
expected• Financial audits to determine correspondence between assertions based on strategic plans
and established criteria• Environmental audits to insure sound and safe practices.
Continue courseYesNoNo
Corrective actionsNoYesNo
Corrective actionsYesYesNo
Corrective actionsNoNoYes
Corrective actionsYesNoYes
Corrective actionsNoYesYes
Corrective actionsYesYesYes
Corrective actionsNoNoNo
Result
Has the firm progressed
satisfactorily toward achieving
its stated objectives?
Have major changes
occurred in the firm’s external strategic position?
Have major changes
occurred in the firm’s internal strategic position?
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