bkmg104 business strategy 2008

Central Ostrobothnia Universityof Applied Sciences

BKMG 104 Business Strategy

Kokkola Winter 2008

Examination will be held on Tuesday 15th of May 2008 from 8.00 to 10.40.

Evaluation: Examination 70%, assignments 20% and participation and 10%

HTT & PhD Juhani Palojärvi 2

Aim of the course:

During the course, the students will develop their understanding of the role and importance of the business strategy in defining and developing a successful approach to the business, its markets and customers in changing environment. The students learn to understand the meaning of a carefully planned business strategy and the successful implementation of the strategy in order to achieve the desired business goals.

The students analyze different business strategies and discuss the components that make one business more successful than a competing business with a different strategy.

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The concept of corporate strategy was developed to help manager think about questions of this magnitude. Strategy has to do with the life and dead of firms. Whatever is precedent setting, has major impact, or affects the value and goals of firm is strategic.

In order to identify the strategy of a firm we need to answer a series of questions about products and processes: * Over the long term, what is the firm trying to accomplish?* What are the products and services that the firm sells?* To which markets does it sell them?* What is the operational model of the firm?* What is the economic model?

1 What is Strategy?

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“In warfare, strategy is the science or art of employing all the military, economic, political, and other resources of a nation to achieve the objects of war”

“Strategy is a business plan to gain sustainable competitive advantage and to generate above-average returns”

“A strategy is the pattern or plan that integrates an organization's major goals, policies and action sequences into cohesive whole”“A well-formulated strategy helps to marshal and allocate an organization’s recourses into a unique and viable posture based on its relative internal competencies and shortcomings, anticipated changes in the environment, and contingent moves by intelligent opponents”

1 What is Strategy …?

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What are Strategy’s principal functional policies?

* R & D* Production* Marketing* Sales* Finance

What are its principal management policies?* Organization* Information* Personnel* Planning* Resource allocation

1 What is Strategy …?

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1 What is Strategy …?A strategy identifies the long run plan for a company and involves the following:

Environmental Scanning

Monitoring the businessenvironment for markettrends, threats, andopportunities

Mission:

Statement that defineswhat our business is, who are our clients are;And how our valuesdefine our business

Core Competencies:

Our unique strengthsthat help us win in the marketplace

Business Strategy:Defined long-range plan

For the company

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1.1 Basic Models of Strategic Management

EnvironmentalScanning

Strategy Formulation

Strategy Implementation

Evaluation and Control

External: General and IndustryInternal: Structure, Culture, resources

Mission, Objectives, Strategies, Policies

Programs, Budgets, Procedures

Performance


Strategic management is a combination of 1) strategy formulation and 2) strategy implementation.

Strategy formulation involves:

* Doing a situation analysis, self-evaluation and competitor analysis: both internal and external; both micro- environmental and macro-environmental.

* Concurrent with this assessment, objectives are set. This involves crafting vision statements (long term view of a

possible future), mission statements (the role that the organization gives itself in society), overall corporate objectives (both financial and strategic), strategic business unit objectives (both financial and strategic), and tactical objectives.

* These objectives should, in the light of the situation analysis, suggest a strategic plan. The plan provides the details of how to achieve these objectives.

* This three-step strategy formulation process is sometimes referred to as determining where you are now, determining

where you want to go, and then determining how to get there. These three questions are the essence of strategic planning. SWOT Analysis: I/O Economics for the external factors and RBV for the internal factors.

The Resource-Based View (RBV) is an economic tool used to determine the strategic resources available to a firm. The fundamental principle of the RBV is that the basis for a competitive advantage of a firm lies primarily in the application of the bundle of valuable resources at the firm’s disposal.

To transform a short-run competitive advantage into a sustained competitive advantage requires that these resources are heterogeneous in nature and not perfectly mobile.

* Allocation of sufficient resources (financial, personnel, time, technology support)

* Establishing a chain of command or some alternative structure (such as cross functional teams)

Strategy implementation involves:

* Assigning responsibility of specific tasks or processes to specific individuals or groups

* It also involves managing the process. This includes monitoring results, comparing to benchmarks and best practices, evaluating the efficacy and efficiency of the process, controlling for variances, and making adjustments to the process as necessary.

* When implementing specific programs, this involves acquiring the requisite resources, developing the process, training, process testing, documentation, and integration with (and/or conversion from) legacy processes.


1.2 Strategy Concept map

What is Strategy?

* Development* Three views* Five Force Model

Strategy in Operations

* Competitive Priorities* Design Effectiveness* Trade-offs Role of Productivity

* Importance* Measurements

Competing through Operations

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1.3 Strategic focus has changed over the timeThree Issues

1. Planning (1970s): a predictable future is based upon analysis of the probable.

2. Visioning (1980s): an unpredictable future is based upon imagining the possible.

3. Learning (1990s): an unknown future is encountered and adaptations occur based on the actual.

4. Timing? (2000s) is important in hectic business world.

This might be the most important in issue in the future. How fast we can act when we recognized week signals.


1.4 Three Current Approaches

1 Michael Porter: Strategy as design

* Strategy is about being different: differentiations is the essence.

* Operational effectiveness is not strategy.

* The key is strategic positioning.



2 Henry Mintzberg: Strategy as evolution

* Strategy is more a craft than a well executed plan.

* Strategies emerge out of the firm’s confrontation with its market and environment.

* Strategy involves both future plans and past patterns.



3 Carry Hamel: Strategy as revolution

* Strategy involves forms of creative destruction, not simply

incremental change* Companies follow one of three paths:

1. Rule Maker

2. Rule Taker

3. Rule Bakers

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1.4.1 Strategy is Powerful* Understanding Strategic Possibilities:

* Strategy is Like a Came:

¤ Man can engender / smother the industry

¤ Man can dominate the certain industry very widely

¤ Man can change the structure of industry

¤ moves

¤ players, pieces, gaming table, rules partly known, partly unknown¤ visible / use of influential person

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Strategic analysis is concerned with understanding the strategic position of the organization. It means that you must answer questions like these:

* What changes are going on in the environment and how will they affect the organization and its activities?

* What is the recourse strength of the organization in context of these changes?

* What is it that those people and groups associated with the organization- managers, shareholders or owners, union and so on – aspire to and how do these affect the present position and what could happen in the future?

1.4.2 Strategic Analysis

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Thus the aim of strategic analysis is to form a view of the key influences on the present and future well-being of the organization and therefore on the choice of the strategy.

These influences will be from many sources but they are summarized in figure below:

Values andobjectives

Theenvironment

Strategicrecourses

Resources

Figure. Aspects of strategic analysis

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The organization exists in the context of a complex commercial, economic, political, ethical and social world. This environment changes and is more complex for some firms than for others.

The historical and environmental effect on the business must be considered, as well as the present effect and the expected changes in environmental variables.

Many of those variables will give rise to opportunities of some sort and many will exert threats upon the firm. The two main problems have to be faced are, 1) to distill out of this complexity an analytically based view of the main or overall environmental impacts for the purpose of strategic choice, 2) the fact that the range of variables is so great that it may not be possible or realistic to identify and analyze each one.

1.4.3 The environment.


1.4.3.1 Steps in Environmental Analysis

Strategic Position

Identify key opportunitiesand threats

Identify competitive position

Identify key environmental forcesthrough structural analysis

Asses the nature of the environmentAudit of environmental influence


Just as there are outside influences on the firm and its choice of strategies, so there are internal influences. A straightforward way of thinking about the internal strategic position of a firm is to consider its strengths and weaknesses (what is good or not so good at doing or where it is at a competitive advantages or disadvantage, for example).

These strength and weaknesses may be identified by considering the recourse areas of a business such as its physical plant, its management, its financial structure, and its product.

Again, the aim is to form a view of the internal influence – and constraints – on the strategic choice.

1.4.4 The Resources of the Organization


The expectations and objectives of different stakeholder groups are clearly important because they will directly affect what will be seen as acceptable in term of the strategies advanced by management. However, the beliefs and assumptions that make up the culture of an organization, through less explicit, will also have an important influence.

The environmental and resource influences on an organization will be interpreted through these beliefs and assumptions; so two groups of managers, perhaps working in different divisions of an organization, may come to entirely different conclusion about strategy, although they are faced with similar environmental and resource implications.

1.4.5 Expectations of Different Interest Groups

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1.4.6 Strategic Decision making is:* Choice of means that enables to reach the vision of the firm * Strategic management is methodological way to manage strategic changes:

- by positioning firm into changing environment by used strategy and business plan

- by being prepared for industry-changes by managing them instead of floating downstream to rise to the challenge

- by governing systematically resistance caused by the change process * Choice of competitive edge is a strategic decision

* Choice of market segment is a strategic decision

* Remember, that you can’t correct strategic mistakes by operative diligence!


Wisdoms of 1970’s: Way of thinking in a new millennium

1.4.7 Strategic way of thinking is changing over the times:

* Growing industries * All industries has high-flyer

* An extensive Market * Create and develop segments

* Price high * Value for customer is vital

* Find a profitable business / * Don’t stay where you are, and stay there/ go to new but don’t go every industry industries

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* Employees are waiting rules * Create the Vision for the firm. and clear orders Motivate entrepreneurial attitude, and they behave like entrepreneur

* More money for stockholder * Acceptable business actions and they stay happy product, customer, personnel. If OK. Profit can be made.

* Successful manager is distant * Successful manager is keen rational and calculating about his business: feelings and intuition

1.4.7 Strategic way of thinking is changing over the times…:

Wisdoms of 1970’s: Way of thinking in a new millennium


Create situationwhere you

like to be

Be better insome issuesthan your

competitors are Be as good

as your competitors

areGrow with

competitors

Fall

1.4.8 Strategic path must be choused

Go there where others are not

1.4.9 Reasons Not to Increase Market ShareAn increase in market share is not always desirable. For example:

* If the firm is near its production capacity, an increase in market share might necessitate investment in additional capacity. If this capacity is underutilized, higher costs will result.

* A price war might be provoked if competitors attempt to regain their share by lowering prices.

* A small niche player may be tolerated if it captures only a small share of the market. If that share increases, a larger, more capable competitor may decide to enter the niche.

* Antitrust issues may arise if a firm dominates its market.


Sales may be determined on a value basis (sales price multiplied by volume) or on a unit basis (number of units shipped or number of customers served).

While the firm's own sales figures are readily available, total market sales are more difficult to determine. Usually, this information is available from trade associations and market research firms.

1.4.10 Reasons to Increase Market Share

Market share often is associated with profitability and thus many firms seek to increase their sales relative to competitors. Here are some specific reasons that a firm may seek to increase its market share:


* Economies of scale - higher volume can be instrumental in developing a cost advantage.

* Sales growth in a stagnant industry - when the industry is not growing, the firm still can grow its sales by increasing its market share.

* Reputation - market leaders have clout that they can use to their advantage.

* Increased bargaining power - a larger player has an advantage in negotiations with suppliers and channel members.

1.4.11 Ways to Increase Market Share

The market share of a product can be modeled as:

Share of Market = Share of Preference x Share of Voice x Share of Distribution

According to this model, there are three drivers of market share:

* Share of preference - can be increased through product, pricing, and promotional changes.

* Share of voice - the firm's proportion of total promotional expenditures in the market. Thus, share of voice can be increased by increasing advertising expenditures.

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Share of distribution - can be increased through more intensive distribution.

From these drivers we see that market share can be increased by changing the variables of the marketing mix. * Product - the product attributes can be changed to

provide more value to the customer, for example, by improving product quality.

* Price - if the price elasticity of demand is elastic (that is, > 1), a decrease in price will increase sales revenue. This tactic may not succeed if competitors are willing and able to meet any price cuts.

* Distribution - add new distribution channels or increase the intensity of distribution in each channel.

* Promotion - increasing advertising expenditures can increase market share, unless competitors respond with similar increases.

1.4.12 Reasons Not to Increase Market ShareAn increase in market share is not always desirable. For example:

* If the firm is near its production capacity, an increase in market share might necessitate investment in additional capacity. If this capacity is underutilized, higher costs will result.

* A price war might be provoked if competitors attempt to regain their share by lowering prices.

* A small niche player may be tolerated if it captures only a small share of the market. If that share increases, a larger, more capable competitor may decide to enter the niche.

* Antitrust issues may arise if a firm dominates its market.


In some cases it may be advantageous to decrease market share. For example, if a firm is able to identify certain customers that are unprofitable, it may drop those customers and lose market share while improving profitability.

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External Environment

Attractive Industry

Strategy Selection

Strategy Implementation

Superior Profitability

Important to remember!

Everything what we do in business is done for gaining profit.

Profit in the only thing that will guarantee the continuanceof the company. The amount of profit must satisfy the needs of owner, financier and otherinterest groups!

1.5 The Input/Output Model of Superior Profitability


* The external environment (the general, industry and competitive environments) impose pressures and constraints on the firm and determines strategies that will result in superior profitability

* Most firms in an industry (or industry segment) control similar sets of strategically-relevant recourses and therefore pursue similar strategies

* Resources used to implement strategies are highly mobile across firms

1.5.1 Assumption of the I/O model

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Resources

Capabilities

SustainedCompetitive Advantages

Strategy Selection andImplementation

Superior Profitability

All these issues vary really much between firms!

1.6 Resource-Based Model of Superior Profitability


* Each firm is a collection of unique resources and capabilities that provide the basis for its strategy and is the primary source of firm profitability

* Over time, firm acquire different recourses and development different capabilities

* Resources may not be highly mobile across firms

1.6.1 Assumptions of the Resource-Based Model


1. Functional Strategy

2. Business Unit Strategy

3. Corporate Strategy

4. Enterprise Strategy

5. Cooperative Strategy

6. Hypercompetitive Strategy

1.7 Levels of Strategy by Wiggins


Strategic Business Unit

R & D Finance

Production Inventory Marketing /Sales

Purchasing How do we coordinate?

1.7.1 Functional Strategy


1.7.1 Functional Strategy …

Production Manager

* Product Design* Models* Production Run* Produce to:


1.7.2 Functional Strategy …

Marketing / Sales Manager

* Product Design* Models* Production Run* Produce to:

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How do we compete?

Price?Quality?Service?

Strategic Business

Unit

M A R K E T

Competitor

A

Competitor

B

Competitor

C

1.7.3 Business Unit Strategy by Wiggins

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Value creation aspirations“determine what needs to happen”

BU operatingeffectiveness BU strategy Portfolio

strategy

Management practice“enable what actually happens”

Capabilities Culture

1.7.4 Business Unit Strategy by BCG

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Understanding customer needs and dissatisfactionsis key to create new businesses

Breakthroughs are achieved by identifying and meeting unmet needs breaking compromises.

An understanding of the

source of sustainedcompetitive advantages is fundamental to strategy thinking.

Breakthroughs can beachieved by identifyingdriving and capitalizingon the evolution of advantages.

Understanding businesssegmentation requiresdeep knowledge of business economics.

Breakthroughs areachieved by identifying,driving and capitalizingon segment evolution.

Customer needs

Com

parative needs

StrategyDevelopment

Business segm

entation

Segment growth

Growth rate of business segments with BU operates will impact its ability to build competitive advantage.Breakthroughs are achieved by identifying or creating high growth segments and building position and capabilities accordingly.

1.8 Business Unit Strategy: How to Win in this Business?

Where do we compete?

CorporationStrategicBusinessUnit # 1

StrategicBusinessUnit # 2

StrategicBusinessUnit # 3

Market Market Market

Com

petit

orA

Com

peti t

orB

Com

petit

orA

Com

petit

o rB

Com

petit

orC

Com

petit

orC

Com

petit

orA

Com

petit

orB

Com

petit

orC

1.9 Corporate Strategy by Wiggins

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Newbusiness B

Newbusiness E = Revenue

(MEUR)Division P

Division I

Division A Division CDivision

JDiv KDiv

M

D L

D O

Division G

Division D

1.10 Portfolio Strategy: What Businesses Should we Pursue?


How do we assure legitimacy?

The Media Corporation GeneralSociety

PublicInterestGroup

Government Academia

1.11 Enterprise Strategy


With whom do we form alliance?

Customers Corporation Suppliers

Government

Competitors Non-Profits

Academia

1.12 Cooperative Strategy


How do we disrupt the markets?

Rules of the Game

Competitors

Corporation

€

1.13 Hypercompetitive Strategy

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Mission

Business idea

Operational environment:* Analyses* Scenario

Strategy business units:

* Success of a industry

Inter-companyefficiency:* Organization* Operations* Economy

Synthesis:* Core qualifications tree* SWOT

Strategy objectives

Plan of actions

Choice of Strategy

Long-term Budgets

Ensuring Strategy implementation

Vision1.14 Business strategy architecture


1.15 Strategy in Operation

A key question is just how the firm expect to compete.

* The firm must identify the competitive priorities required to support the business strategy: Some common priorities are:

- Cost

- Quality

- Time

- Flexibility

- Service

Recall:Value is equal to performance dividedby cost.

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1.15 Strategy in Operation …

The design of operations limits or expands the competitive operations

* Structure:

- Facilities - Flow of work - Technology

* Infrastructure: - Planning & control systems - Work design & compensations

1.15 Strategy in Operation …Operation decisions always involve trade-offs: consider a Pizza producer.

Exp

ress

ive

Ingr

edie

nts

CostFresh, naturalIngredients

Quality

S

low

to C

ook

Time

Toppings &C

rust Choice

Low

Vol

ume

Ove

ns

Quality & DesignFlexibility

VolumeFlexibility


1.15 Strategy in Operation …Operations decisions must include knowledge of customer qualifies and winner.

* Order Qualifiers:

- Competitive priorities that a product must meet to even be

considered for purchase- Generally, represented by features shared by all competitors in a given market niche

* Order Winners:

- Competitive priorities that distinguish the firm’s offering

from competitors & ultimately win the customer’s order

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1.15 The Role of Productivity OutputProductivity = --------- Input

Productivity measureshow efficiently a firmconvert inputs into outputs

* Partial Measures:

- A ratio of outputs to only one input (e.g.: labor productivity, machine utilization, energy efficiency)

* Multifactor Measures:

- A ratio of outputs to several, but not all, inputs

* Total Productivity Measures:

- The ratio of outputs to all inputs

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1.15 The Role of Productivity …Computing productivity

Example:

- Assume two workers paint twenty-four tables in eight hours:

- Inputs: 16 hours of labor (2 workers x 8 hours)

- Outputs: 24 painted tables

Outputs 24 tables---------- = ----------- = 1.5 tables / hourInputs 16 hours

Partial Productivity

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1.15 The Role of Productivity …Computing Productivity

Example:

- 200 units produced sell for €12.00 each

- Material cost €6,50 per unit

- 40 hours of labor were required at €10 an hour

200 units x €12/unit €2400------------------------------------------------------- = --------- = 1.41(200 units x €6,50/unit) + (40 hours x €10/hour) €1700

MultifactorProductivity

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1.16 The Role of Productivity …Interpreting Productivity Measures

* Is the productivity measure of 1.41 in the previous example good or bad?

* Can’t tell without a reference point

* Compare to previous measures (e.g.: last week) or to another benchmark

* Might be useful to measure growth

P2 - P1

Growth Rate = ----------- P1

The growth rate providesinformation on progress relative to our competitive priorities

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2.1 Ownership and Managerial Control* Shareholders

- Invest in stock entitling them to profits- Accept the risk that there may be no profit- Growth may require additional capital

# Long-term debt# Additional equity (dilution)

* Managers- Contract to manage the firm- Are compensated for their service- Do not bear the risks of the firm

2 Corporate Governance and Social Responsibility


Demographic

Sociocultural Political/Legal

TechnologicalMacroeconomic

Global

2.2 The General environment


* Population size

* Age structure

* Geographic distribution

* Ethnic mix

* Income distribution

* Education levels

2.2.1 Demographic


* Women in work force

* Work force diversity

* Quality of work life

* Environmental concern

* Work/career preferences

* Product/service preference

* Religious influence (or lack thereof)

* Crime rates

2.2.2 Sociocultural Segment

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* Anti-trust laws

* Tax laws

* Deregulation

* Labor laws

* Educational policies

* Political action committees

* Term limitations

* Balanced budgets

2.2.3 Political / Legal Segment


* Inflation rates

* Interest rates

* Trade deficits / surpluses

* Budgets deficits / surplus

* Personal Business saving rates

* Gross Domestic product

2.2.4 Economic Segment


* Product innovations

* Process innovations

* Applications of knowledge in new areas

* R & D investments

* Communication technologies

2.2.5 Technological Segment


* Local business has global markets

* Competition is global for all businesses

* Global Villages

* Profitable growth now – not: growth now, profitability later* Global capitalism is not homogenizing it is more dividend New York, London and Tokyo are financial centers

2.2.6 Global Segment


* Based on the I/O Model

* Harvard 1980 and on

* Boston Consulting Group

* All U.S MBA curricula

* Recruiters

* Common language

2.3 Porter’s 5 Forces Model


PotentialEntrants

IndustryCompetitors

Rivalry AmongExisting Firms

Substitutes

Suppliers Byers

Treat of new entrance

Threat of Substitute Products or Services

Bargaining Power

ofByers

BargainingPower

OfSuppliers

Porter’s 5 Forces Model


* Barriers of new entry

- Economies of Scale- Product Differentiation- Capital requirements- Switching Costs- Access to Distribution Channels- Government Policy

* Expected retaliation

* Entry Deterring Price

2.3.1 Threat of New Entries


* Dominated by a few large companies; more concentrated than buyer industry

* Substitute products unavailable

* Buyers not significant customers

* High switching costs

* Credible threat of forward integration

2.3.2 Bargaining Power of Suppliers


2.3.2 Bargaining Power of Byers

* Purchase a large portion of industry’s total output

* Product accounts for a large portion of the buyer’s costs

* Low or no switching costs

* Product undifferentiated or standardized

* Credit threat of backward integration


* Subject to trends improving price-performance tradeoff

* Produced by an industry earning high profits

2.3.3 Threat of Substitute Product


* Numerous or balanced competitors

* Slow industry growth

* High fixed or storage costs

* Product undifferentiated or standardized

* Credible threat of backward integration

2.3.4 Intensity of Rivalry


PureMonopoly

AvoidedCompetition

Hyper-competition

PerfectCompetition

2.4 Competition Continuum


* The Industry’s Structure* The possibility for Implicit Collusion* The Sustainability of competitive advantages

* The Stability of the Environment* The Strategies Pursued

Tendency TowardAvoided Competition

The Emphasis Observed in

Any ParticularMarket

Tendency TowardHyper competition

2.4.1 Facts Affecting Rivalry

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2.5 The BC Matrix and the Portfolio School

R e l a t i v e M a r k e t S h a r e large small

Stars

Modest Cash Flow + or –

Question Marks?

Milk Cows

Great Positive Cash Flow

Dogs

Modest Cash Flow + tai – M

a r

k e

t G

r o

w t

h large

small

Optimal C

ash FlowGreat Negative

Cash Flow


2.6 Porter’s Basic Strategy

Cost Efficiency Specialization

or Differentiation

W i d e T a r g e t G r o u p

N a r r o w T a r g e t G r o u p

Concentration on Concentration on Cost Differentiation


2.7 Porter’s Value Chain

SupportActivities

Firm infrastructure M a r g i n

M a r g i n

Human resource management

Technological developmentProcurement

Inbo

und

logi

stic

s

Op e

ratio

n s

Ou t

b oun

dlo

g is t

i cs

Mar

ketin

g

Serv

ice

Primary Activities

Strong

Week

Degree of Differentiation /segmentation Low High

Small market shares needed that

the industry is stable

Great market shares needed that the

industry is stable

In differentiation remember, that:

2.8 Differentiation –and segmentation Strategy

* Firm must be unique in some issues which has great value for its customer.* Other differentiation do not give any advantages on marketing.

Kompetitors


Fragmented Consolidated

GrowthEmerging Industries

GrowthIndustries

MatureIndustries

Time

2.9 Competition and industry Life Cycle


* Groups of firms in an industry following the same or similar strategies

* Analytical tool

* Strategic dimensions important

2.10 Strategic Groups


* Cadillac DeVille* Buick * Oldsmobile

* Mercedes*Porsche * Lincoln

* Toyota * Chevrolet* Dodge

* Nissan * Pontiac

Price

High

Low

Family-Oriented Conservative

Sporty-Oriented Expressive

2.10.1 Example of Strategic Group

* CadillacSTS


Merrill LynchSmith BarneyPaine Webber

Bear StearnsGoldman SachsSalomon Bros.

Charles SchwabQuick & ReillyA.G. Edwards

Service

Price

2.10.2 Example of Strategic Group

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2.11 Bargaining PowerProducer’s bargaining power:

* concentration of producers

* size of producers

* possibility to use substitute products

* real differentiations in products

* costs of changing producer

* producer’s integration threat into our line of industry

Purchaser’s bargaining power:

* concentration of purchases

* size of purchases

* alternative producers

* purchaser’s share from total costs

* real differentiations in products

* purchaser’s know-how* importance of quality

* profitability of purchasers * strategy of purchaser

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2.12 Substitute products:* Satisfy the same need

* Must be analyzed on product level: - decreasing of products usage - replace ability of our products - integration forwards - integration backwards

* Threat depends on from: - value / price of the product - expenses to change supplier - buyer's willingness change to new product - renew time table of technology

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2.13 McKinsey’s relative competitive position * profitability* possibility to rise productivity * competition power

Great Moderate Weak STRATEGIG POSITION * profitability

Great

Weak

= size of turnover

SBA I

SBA II

SBA III

SBA V

SBA IV

SBA VI

SBA VII

Moderate

Attractiveness of industry

Depends on:

* growth * risk* size* solvency* competition


2.14 Development trend solution by + / – matrix

narrower present larger selection selection selection

Firm now

narrowercustomers

present customers

large customers

P R O D A C T

M

A

R

K

E

T

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Theenvironment

Expectations.Objectives

andpower

Generationof options

Strategicchoice

Evaluationof options

Strategicanalysis

Strategyimplementation

Selectionof strategy People and

systemOrganization

structure

Resources

Resourceplanning

analysischoiceimplementation

STRATEGIC MANAGEMENT

By Johnson & Scholes

A summary model of the elements of strategic management

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2.16 Critical Success Factors in the Different Growth Situations

Growth

Maturity

Close- down

Ability to conquer markets

Entrepreneurship

Right timing

Ability to innovate

Ability to take risk

Difference

Sufficiency investments

PriceTrustworthiness

Know-how in production

Know-how in logistic

Patents and other, technical protections

Recognition of needs

Image of business and products

Marketing know-how

Resource control

Minimizing expenses

Timing of closedown

Extending Life Cycle of products by changing materials and baggage

Most important measure of success in different situationsCreating new Growth Profitability Cash Flow

2.17 Development as a Manager and Strategy Education

4. Manager, who is able to manage those changes

3. Manager, who notice the changes and understand why changes are happening

2. Manager, who notice changes, but doesn't understand why changes are happening

1. Manager, who doesn't really notice that something really important is happening

Steps taken in management development– one way of thinking


2.18 Eight Basic Principles to stay on top of the heapOne: A boas for action: a preference for doing something-

anything- rather than sending questions through cycles and cycles of analyses and committee reports.

Two: Staying close to customer – learning his preferences and catering to them.

Three: Autonomy and entrepreneurship – breaking the corporation into small companies and encouraging them to think independently and competitively

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Four: Productivity through people – creating all employees the awareness that their best efforts are essential and that they will share in the rewards of the company’s success.

Five: Hands-on, value driven – insisting that executives keep in touch with the firm’s essential business.

Six: Stick to the knitting-remaining with the business the company knows best.

Seven: Simple form, learn staff – few administrative layers, few people at the upper levels.

Eight: Simultaneous loose-tight properties - fostering a climate where there is dedication to the central values of the company combined with tolerance for all employees who accept those values.

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2.19 Different Viewpoint of

Manufacturing process

Factors of production

Manufacturing process

Usage of products by customers

Product

Firm

FirmNew viewpoint of manufacturing process

Usage of products by customersManufacturing

process

Old

Factors of production

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2.20 Usual Situations in Development Process of Products and Business Idea

Growth

Maturity

Closedown

Development graph of cash flow

Development graph of sales

Birth Growth

Maturity

Closedown

Growth

Maturity

ClosedownProduct development graph

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2.21 Development of Society from Situation to another

Management Society Entrepreneur Society (Drucker)

Management Leadership (Bennis)

Industrial Society Informational Society (Naisbitt)

Official, formal Unofficial influencingauthority (Kotter)

Bureaucratic systems KISS Back to Basics Business (Peter)Hierarchy Networks (Miles)

Strategic design Strategic management (Ansoff)

Controlling structures Creating new culture and and processes ja management (Schein)


* Dealing with uncertainty

* Planning tool

* Creating internally consistent view of what the future may bring

2.22 Scenario Analysis


* Identify Uncertainty

* Determine causal factors

* Make range of plausible assumption

* Combine assumption into scenarios

* Analyze industry behavior under each scenario

* Determine strengths / weaknesses under each scenario

* Predict competitor behavior

2.22.1 Scenario Analysis Process

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Table 1: Driving Industry Structural Change

Long-run changes in growthChanges in Byers segments servedBuyer learningReduction of uncertaintyDiffusion of proprietor knowledgeAccumulation of expenseExpansion (or contraction) in scaleChanges in input and currency costsProduct innovationMarket innovationStructural change in adjacent industriesGovernment policy changeEntries and exits

2.22.2 Chain Saw Industry Scenario Analysis


* New Entrants

* Buyer power

* Rivalry

* Substitute Products

* Supplier Power

Table 2: Uncertain Elements of Structure in the Chain Saw Industry


Buyer Power

* What will causal user demand be?

* What will professional/farm demand be?

* What will be the mix of dealer versus nonreader sales?

* How significant will private labeling be outside of the serving dealer channel?

* Will distribution be direct or through distributors?

* How price sensitive will buyer be?

2.22.3 Uncertain Elements of StructureU.S. Chainsaw Industry


Rivalry

* What will be the shape of the causal user penetration curve?

* How will traditional competitors behave?

* Will additional foreign be attracted to U.S Industry?

* How high will fixed costs be?

* How committed is each competitor to chain saws?

2.22.4 Uncertain Elements of Structure U.S. Chainsaw Industry


* Most Important Scenario variables

- Level of causal used demand

- Shape of causal user penetration curve

- Mix of dealer versus non-dealer sales

- Extent of private label versus branded sale through nonreaders

* Less Important Scenario Variables- Professional and farm demand

- Penetration of eclectic saws

Table 3: Scenario Variables in Chain saws?


Scenario Variables

* Level of causal user demand* Shape of the causal user penetration curve* Mix of dealer versus non-dealer sales* Extent of private label versus branded sales through non-dealers

Causal Factors

* External: Social trends* Internal: Product changes* External: Energy Prices* Internal: Marketing activity* External: Channel product line* Internal: Channel policies* External: Channel/branding* Internal: Branding policies

2.22.5 Causal Factors Determining Uncertainties in Chainsaw

104

Causal factors

ScenarioVariables

DependentElements

of structure FutureIndustryStructure

PredeterminedStructural

Change

Constant Elementsof Structure

2.22.6 Determinants of Future Industry Structure


Scenario Variables

Level of causal unit demand

Assumption

Low Medium High

Shape of causal user penetration curve

Steadyincrease

Peaked

Mix of dealer versus nonreader sales

Dealerdominate

HighNonreaderShare

Short-term shiftto non-dealers,with return to dealers in the long term

Extent of private label versus branded sales through nonreaders

High percentbrand

Highpercentprivatelabel

Table 4: Range of Assumptions


Causal User Demand

Shape ofthe CausalUserPenetrationCurve

SteadyRise

Peaked

Low Medium High

Consistency: Eliminating Implausible Scenarios


Causal User Demand/Penetration

ChannelMix

Low/Steady

Medium/Steady

High/Steady

High/Peaked

DealersDominant

High Non-DealerShare

Short.termShift toNon-Dealers

Consistency: Eliminating Implausible Scenarios


Causal User Demand/PenetrationLow/Steady

Medium/Steady

High/Steady

High/Peaked

High PercentBranded

HighPercentPrivateLabelHigh PercentBrandHighPercentPrivateLabel

DealersDominate

High Non-DealerShare

Short-termShift toNon-dealers

1 2

7

10

9

8

53

6

4

Consistency

Analysis of Chain Saw

Future industry Structure

Structural Attractiveness

Sources of CompetitiveAdvantage

Scenario 1 Scenario 7

“Causal User Market NeverMaterialized” “Private Label Dominants”

Same as Currently

Entry barriers shift towardscale economies and absolutecost advantagesChannels increase in power andprice senility

Rivalry pressure increases

Electric saws become a major product lineMediocre on average, though aleader can be profitable

Market share of causal units

Low-cost product designScale economies in advertisingAutomated plants in low-laborcost areas or Extreme Strengthin professional/farm segment toinsulate a firm from the battle inthe causal user segment

High

Basically unchanged


Scenario 1 Scenario 7

“Private Label Dominants”

Homelite seeksleadership in all causal segments

How will HomeliteBehave?

Homelite retreats totraditionalsegments

Will McCulloch andBearid-Poulan react

correctly?

Invest inthe causaluser marketanyway

MaintainCurrentSegments

“Causal Markets NeverMaterializes”

KeyUncertaintyin CompetitorBehavior

AlternativeCompetitiveBehavior

Competitor Behavior

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Industry Scenario and Competitive Strategy under UncertaintyScenario 9 “Causal user Saws Are A fad”

FutureIndustryStructureStructuralAttractiveness

Source ofCompetitiveAdvantages

CompetitiveBehavior

Entry barriers shift but not to the extent of Scenario 7Buyer power varies over time as the mix of channel shiftsRivalry become vicious after the growth spurt is overModerate in the long term

Capacity to reap short-term profits on causal sawsBrand awareness with professional usersLow cost position to cope with rivalryMaintaining dealer loyaltyAvoiding excess capacityMaintaining traditional strength

How aggressively will McCulloch and Beaird-Poulan invest?

Aggressive Caution

Analysis of an Intermediate Chain Saw industry Scenario

Scenario 1 Scenario 7 Scenario 9

“Causal User marketNewer Materializes”

“Private LabelDominates”

“Causal Users SawsAre a Fad”

OptImal

Strategy

Stay the course

Signal to avoidmistaken movesby competitors

Strategy TotallyInconsistent forLeaders

Strategies Largelyinconsistent

Aggressively seekcost leadership

Early entry intonew channels

Emphasize directsales

Follower mustchoose focusstrategies ordisinvest

First moveradvantagesmake timingimportant

Do not overreact to thecausal segment

Avoid alienating dealers or erodingreputation/franchisewith professionaluser

Pick up dealersalienated bycompetitors

Reduce costs to defendagainst price competitionby firms who investedin the causal segment


3.1 External and Internal Analysis

By studying theexternal environmentfirms identify

* What they might Choose to do

By studying theinternal environment,Firm determine

* What they can do

3 Internal Scanning: Organizational Analysis


Resources* Tangible* intangible Capabilities

* Terms of recourses Core

Competencies* Sources of competitive advantages

SustainableCompetitiveAdvantage* Gained through core competencies

Strategic Competitiveness* Above- average profits

The source of

The source of

The foundation for

The pathway to

3.2 Components of Internal Analysis

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Condition Uncertainty

regarding characteristics of the general and the industry environments, competitors’ actions, customers’ preferences

Condition Complexity

regarding the interrelated cause shaping a firm’senvironments and perceptions of the environments

Condition Intraorganizational Conflicts

among people making managerial decisions andthose affected by them

3.3 The Challenge of Internal Analysis


3.4.1 Tangible resources* Financial Recourses

- Internal cash flow- Borrowing capacity

* Physical recourses

- Plant and equipment- Raw material

* Human Recourses

* Organizational resources

3.4 Types of Resources


3.4 Types of Resources …

3.4.2 Intangible resources* Technological Resources

- Patents, trademarks, copyrights, trade secrets- Knowledge to leverage the above

* Resources for innovation- Technical employees- Research facilities

* Reputation

- With customers (brand names)- With suppliers


Easy to imitate:* Cash* commodities

Can Be imitated (but may not be): * Capacity Preemption* Economies of Scale

Difficult to Imitate:* Brand loyalty* Employee satisfaction* Reputation

Cannot Be Imitated:* Patents* Unique Location* Unique assets

3.5 Resource Immutability


* Firm’s capacity to deploy integrated resources

* Primary basis skills and knowledge of employees

* Typically developed in functional areas

- Manufacturing

- Research and development

3.6 Capabilities


* Based on the I/0 Model


* All U.S. MBA curricula

* Recruiters

* Common language

3.7 Porter’s Value Chain


* Causal Ambiguity

* Benchmarking

* Experimentation

* Outsourcing

3.8 Value Chain Analysis


Your Organization

Supplier’s Organization

Customer’sorganizations

CapitalResourcing

InformationResourcing

Human Resourcing

Product Development Process

Demand Management Process

Order Fulfillment Process

Control System

3.9 Generic Model of Core Processes and Systems


FunctionsProvided

TechnologyEmployed

CustomersServed

Supply Perspective

The goods and servicesprovided by the business

The means by whichgoods and servicesare provided

The market segments(s)targeted by the businessmarketing strategy

The customer’s needsmet by the business

The functions andprocesses that intermeshwith those of customersto meet their needs

The customers who haveneeds potentially met by the business’s goods andservices

Demand perspective

3.10 Defining the Scope of a Business

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Sears

Service

Manufacturing

H & MMaytag General Electric

and Whirlpool

SingleLine Product Line Breadth Multi

Line

3.11 Product Space MappingVertical

Scope


How?(Technology)

Who?(Customers)

NewManufacturing Technology(Minimills)

What ?

(Products/Services)

Nucor Steel

3.12 Competitive Space


3.12 Competitive Space

How?(Technology)

Who?(Customers)

NewManufacturing Technology(Minimills)

What ?

(Products/Services)

Nucor Steel

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External Strategic factors Weight RatingWeightedScore

Opportunities* economic integration of European Community .20 4 .80 Acquiring of Hoower

•Demographic favor quality Appliance .10 5 .50 Maytag quality* Economic development of Asia .05 1 .05 Low Maytag presence * Opening of eastern Europe .05 2 .10 Will take time* Trend to “Super Store” .10 2 .20 Maytag week in this channelThreats* Increasing government regulations .10 4 .40 Well positioned* Strong U.S competition .10 4 .40 Well positioned* Whirlpool and Electrolux strong globally .15 3 .45 Hoower weak globally* New product advance .05 1 .05 Questionable* Japanese application companies .10 2 .20

Total Scores 1.00 3.15 === ===

Comments

3.13 External Factor Analysis Summary for Maytag

Internal factors Weight Rating WeightedScore Comments

Strength

* Quality Maytag culture .15 5 .75 Quality key to success* Experienced top management .05 4 .20 Know appliances* Vertical integration .10 4 .40 Dedicated factories* Employee relations .05 3 .15 Good but deteriorating* Hoover’s international orientation .15 3 .45 Hoover name in cleanerWeaknesses* Process-oriented R & D .05 2 .10 Slow on new products* Distribution channels .05 2 .10 Superstore replacing

small dealers* Financial position .15 2 .30 High dept load* Global positioning .20 2 .40 Hoover weak outside the United Kingdom

and AustraliaManufacturing facilities .05 4 .20 Investing nowTotal Score 1.00 3.15 Australia

3.14 Internal Factor Analysis Summary: Maytag as Example


4 Strategy Formulation: Situation Analysis and Business Strategy

4.1 Porter’s Generic Strategy

* Based on the I/O Model


* All U.S. MBA curricula

* Recruiters

* Common language


4.2 Business-Level strategiesCompetitive Advantage

CostLeadership Differentiation

FocusedLow-Cost

FocusedDifferentiation

Cost Uniqueness

BroadTarget

NarrowTargetC

ompe

titiv

e Sc

ope


4.3.1 Cost Leadership

* “No-frills” Product

* Long Production Run

- Economies of scale

- Economies of scope

* Uniform package

* Less R & D

* Large target markets


4.3.1.1 Risk of a Low-Cost Strategy

* All or nothing strategy

* May lead to loss of attributes important to customers

* May be easily duplicated

* In mature markets cost differences decline

* May limit firm’s ability to compete in other ways by focusing on just costs


4.3.2 Differentiation: “Uniqueness” Strategy

* Product Features

* After-Sale Service

* Desirable Image

* Technological Innovation

* Firm Reputation

* Manufacturing Consistency

* “Different”


4.3.2.1 Risks of Differentiation Strategy

* Copying by competitors leads to everyone becoming average

* Adding features that are not valued

* Competitors may differentiate even more on regional basis

* Customer learning may reduce the customer’s perception of the value of the firm’s differentiation


4.3.3 Focus Strategies: Serving Smaller Market Segments* Can be more efficient that industry wide competition

* Can meet specialized needs, serve ignored segment

* Narrow segment may be poorly served

* May have unique ability to serve narrow segment

* Focused Low cost strategy - Target smaller volume buyers in the industry - Example: Cooper Tires

* Focused Differentiation Strategy - Customized product for limited market segment - Example Aircraft kits


4.3.3.1 Risk of Focused Strategies

* Smaller competitors may “outfocus” or concentrate on the most lucrative portion of the segment

* An industry wide competitor may compete in the segment

* Preferences within the segment may become homogenized with the larger market


4.4 Integrated Low-Cost/ Differentiation Strategy

* Hybrid Strategy Lets Firms:- Adapt more quickly to environmental changes - Learn new skills and technologies

- More effectively leverage competencies across business unit and product line

* Mechanism- Flexible manufacturing Systems- Information Network Across Firms- TQM Systems


4.4.1 Risk of Integrated Low-Cost/ Differentiation Strategy

* Firm must simultaneously:

- Focus on consistently reducing cost, and

- Add valuable differentiated features, and

- Avoid becoming stuck in the middle by doing neither well

* Very difficult to successfully implement this strategy


4.5 Quick Response Strategy

* Innovation of new products

* Products customized for individual needs

* Incremental product innovation

* Delivery speed of ordered products

* Responding to market reaction

* Customer inquiries


4.5.1 Risk of a Quick Response Strategy

* May not be compatible with technical or human systems available

* Speed is not equally important to all markets or customers

* Speed can create stress and uncertainty


4.6 Primary Factors for Changes in the Competitive Environment

* Increasing emphasis on globalization

* Advances in communication technology

* Technology and innovation have helped smaller firms become competitive

* National barriers are falling (GATT; NAFTA;EEC)


4.7 Competitive Dynamics and Competitive Rivalry

* Competitive Rivalry

- Strategies are not implemented in isolation

- Actions and reactions

* Competitive Actions

- Strategic

- Tactical


4.7.1 Tactics in Business

In business there are usually seven plans: How to remember these =

A Marketing plan = MarkB Production plan = ProdC Finance plan = FinD People plan = PE Outsider plan = OF Selling plan, and = SG Time plan. = T


A Marketing PlanFind a need and fill it – Peter Small

A marketing plan is a written set of statements for efficiently moving those things to the user. A plan is a blueprint and a picture of your success.

When you make a good marketing plan, you enjoy several important benefits:

1) And perhaps most important, you get a higher result on investment. You make your Euro work harder towards building increased sales profits that that same Euro would work if it were invested without plan.


2) you cut waste

3) you build efficiency because you know what to do next

4) you unify your team. All become involved and participate as part of the program

5) you minimize risk, mistakes and failures

6) you improve your company’s progress and prestige-as well as your own. You build a feeling of confidence and personal support among your managers, Bankers, and owners (and even among your suppliers and dealer network)

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B Production PlanningIdeas rule the world - Emerson

Your level of skill, efficiency, and design of goods and services often decides your survival. Your plan is what determines and controls your efficiency and design. Without careful planning, today’s high speed machinery can turn out bad product at an alarming rate!

You benefit greatly from a good plan by avoiding both flawed or defective products (as well as avoiding production of the wrong or unusable products). It also prevents producing products or services at excessive and disastrously high cost, which simply can’t be recovered by selling price.


Our economy is market driven, as is increasingly true throughout the world. Customers will not pay more for a brand that is virtually identical to lower-priced competitors. A moderate premium for a much-superior products, yet. But otherwise, customers are highly price conscious.

The aim here is to give you some useful production planning guidelines. I will discuss and explain them, demonstrate them, and then provide a practical production planning form.

The two keys to successful production planning have already been mentioned: the right product or service and the right price. Or in differen words, the proper design procured efficiently at low cost so a market price can cover costs and show a profit.


Efficiency. Since our economy is market driven, we prosper and are rewarded when we satisfy the customer at a reasonable price. Is a production planner and manager can produce a product so efficiently that it can be priced lower than the competition, customers will reward that producer by buying the product. Clearly the action word is efficiency (meaning more or better goods or services are produced per Euro or per hour). Costs per unit are less.

Rewards. Some producers cry, “I don’t see how my competitors can sell their products so sheep! They must be sheeting!” Probably not. More likely, they have simply used good production planning and systems to operate more efficiently. Their costs are less. Their price is less, and they grab the market. That’s good old human ingenuity and free enterprise at work.


Efficiency is rewarded. If a manager or owners are willing and able to operate on a smaller profit margin than the competitors, they are able to price lower and win the market. (Discount stores and supermarkets are good examples).

To design a product that customers want and will buy, consider these steps:

* Check your sales, advertising and marketing people. They often know their customers well.

* Check customers opinions, likes, and dislikes. Design products customers wants, not what you want.

* Check competitors. What do they sell most? Least? Avoid the bombs. Improve on the winners.

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Check your dealers. What do they recommend? They see the prospects and competitors every day, and they knows what sells. They aren’t always right, but they usually are well-informed.

Check your suppliers. They often have large research and development staffs who have improved products, materials, suppliers, packages. Often this grows out of customers surveys and is checking with prospects. Suppliers are rewarded for generating improvements. And this costs you little or nothing.

Check independent research and design services. They can often improve your products or service cheaper than you could do it yourself. They may even have something at a bargaining price, or be able to suggest low-cost improvements.


Scheduled production to match the marketing program. For example, product A might be set for promotion in months two and three. Thus you may want production and inventory to build up during months one and two, perhaps at the rate of ten thousand each month. Other product may have different time and volume patterns.

Cost volume, cost, and inventory. Clearly, as production volume goes up, some economies of quality set in, and unit cost usually drops sharply. The cost per unit is less when a hundreds are made than when only ten are made. But three other factors rice costs.

1. Total costs are more to make large volume as 100 than to make 10.

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2. The large volume must be handled, moved, and stored, which takes time, equipment, space, people, and money.

3. Capital funds are now tied up in inventory. Those funds, if borrowed, have an interest expense. They also might be more profitably used elsewhere.

The point is that you should calculate volume savings, but you must also measure those other costs of large quantities. When you add it all up, they will reduce expected savings on volume production. Ignoring this is a mistake amateur planners often makes.

Use just-in-time delivery and inventory control. If you plan your volume by product and date with care and accuracy, you can enjoy added savings.


Thoughtful plans replace cash expense. You can and cloud schedule supplies to arrive “right on time” to be used in production. This minimize the surprisingly high costs of trying money up in materials inventory. The key here is to work closely with a good supplier who can deliver proper amounts at a precisely scheduled time. Suppliers, too, are watching their inventory.

Quality control is a vital part of production planning. First, have detailed and accurate knowledge of the product specifications.

Second, be sure that the procedures according to those specs exactly. Make small test runs if this is practical. Third, review and track down points where flaws are likely.

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Fourth, review customer complaints and returned products to identify needed corrections. Fifth, make extra efforts to prevent flaws from occurring. Sixth, arrange for inspection points and sampling. Seventh, give quality control a very high priority. Low performance in this area by many companies has caused serious loss of market chare, sales, and jobs.

Material handling is a source of high cost when done improperly, but of major savings when done correctly. An easy way to plan good, efficient methods at little or no cost is to talk to your material suppliers. Often, they will gladly tell you how your competitors do it!

Also, material handling equipment sellers will be glad to recommend various systems. But be careful: don’t buy fancy equipment that performs beyond your needs. In a small firm, simple methods and equipments usually do the job best.


Storage, pacing, and shipping plans are also major sources of cost or savings. Good programs can be obtained from the sources just mentioned, often at no cost. The several methods and consider suggestions by the plant people who perform the functions every day. Offer a small incentive on volume handling and you will be amazed at people’s ingenuity!

Production plan volume

By Product and Month

Product Jan Feb Mar Apr May Jun Jul Aug Oct Now Dec

______ ___ ___ ____ ____ ____ ____ ___ ____ ___ ____ ____

______ ___ ___ ____ ____ ____ ____ ___ ____ ___ ____ ___

______ ___ ___ ____ ____ ____ ____ ___ ____ ___ ____ ___


Overall Production Plan

STEPS TIME (Weeks or Monthd) 1 2 3 4 5 6 7 8 9 10 11 12 Design surveyed xxDesign tested xx Lab test xxUser test xx Blueprints, specs xxEquipment ordered xxSupplies ordered xxEquip. installed xxEquip. installed xxSupplies arrive xxSupplies stored xxProduction run xxProduction inventory xxProduct sold/shipped xx

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Note: The xx’s might be specific dates and names of people doing these things. Notice how we ease into the production phase. A common error is to rush into manufacturing too quickly, before the homework is done.

Result: lots of useless product. This can damage or destroy an operation. Note also that once all the pieces are in place, a number of steps can be taken concurrently. And finally, note that your product or service planning should probably cover those or similar points even if you have no manufacturing plant.

Here are two practical project forms for you to use. Other might include list of your suppliers, equipment, sill people, outside support people, and inventory space by capacity for both raw supplies and finished product.

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The system applies to the service business, too, a little modification is necessary. The steps might read: service designed, surveyed, use tested, support material prepared, service personnel recruited, trained, moved into test market, expanded into other markets, service modifications noted, modifications made, and tested.

The key is orderly planning. First, carefully integrating and considering steps that needs to be taken. Second, putting these in the right order; steps taken prematurely or too late can generate waste. Third, recognizing steps that can be done concurrently, avoiding time loss. Fourth, avoiding too many actions at once, which can cause inefficiency. Fifth, integrating the production with the marketing action. Sixth, always relating action to time. And finally, putting the program into a few simple charts or tables that everyone can understand, again raising efficiency.


C Financial Analysis: Planning for ProfitsCommon sense is the measure of the possible. - Amiel

“Control your business, or it control you,” said Andrew Carnegie. When you use a few simple financial tool to analyze your business, you build both a plan and the control to work your plan.

The purpose of this section is to explain some of these tool, demonstrate their use, and then give you some practical projects forms to use. We will also look at some important documents that can help you to gain approval on a loan.

There are three bacic financial documents that permit you to analyze, control, and plan. The first is the balance sheet.


Balance sheet simply shows you what assets the company owns and what liabilities it has. Liabilities include what the company owes to banks and to owners. The second document is the income statement. This shows what sales income the company enjoyed, less all costs and then, what’s left – a profit or a loss.

The third key document is the break-even or payout and cash-flow chart. This is running income statement. Often it shows loses in early periods, them a break-even period and, eventually periods of profit. Documents that help you get debt financing (a loan) or equity financing (by sales of stock) include a realistic forecast, expense forecast, list of suppliers, and repayment schedule.


Your balance sheet outlines your financial strength and health. Normally, the left side of the document lists the company assets. The right side shows what the company owes to the bank (debts) as well as what the company owes to the owners like you (stock value or net worth).

Here’s a very simple balance sheet for Company A. It contains only three separate items in each category. This should help you get the feel of document: what it looks like, what it means.

(Many managers go through mush of their career making many mistakes because they balance sheet illiterates. Don’t be one of them. This tool is not tough to understand, and it is extremely important).


Company A

Assets Owned (in thousands €)

Intangible assets 10

Fixed assets building, equipment 60

Current assets cash etc. 50

Total 120

Liabilities Owed (in thousands €)

Shareholders’ equity 50

Long term liabilities 50

Short-term liabilities 20

Total 120

Notice that assets equal the liabilities; that’s called a balance sheet. What the company owns equals what the company owes. Another way of saying it is that whether a company owns, it also owes, either to a lender or the owner. Total debt, long and short (70 €), is subtracted from the total assets of 120 €. Whatever is left (50 €) become net worth. This is usually equity ownership investment (stock) plus earnings generated.


In other words, this company is worth something. Sadly, this is not always true, as well se in a moment. Intangibles are things of value, but not cash in hand, such as goodwill generated by investments in time, money, and effort.

This balance sheet tell you that Company A is in fair condition. It has enough cash (50 €) to more than its short-term loans (20 €), which could come due any day now.

Company B

Assets Owned (in thousands €) Intangible assets 40 Fixed assets building, equipment 25 Current assets cash etc. 5 Total 70

Liabilities Owed (in thousands €)

Owners equity -40

Long term liabilities 60

Short-term liabilities 50

Total 120


Company B has world of hurts. When you look at the figures, you easily can see why. Their current assets (5 €) cannot begin to pay off the short term loans (50 €). Their short-term debts is far too high. Worse that that, even if they used all their assets (70 €) they couldn’t repay their total long- and short-term debts (110 €).

This makes their net worth minus 40 €. This company is technically bankrupt. They can’t pay their bill. This may be only a temporary situation, but right now, it is the rarely the owners must confront. This is a picture you want to know, understand, and avoid.

The Income StatementThe purpose of the Income Statement is to do just that; show profits or loses. The idea is to show sales and other income, then subtract major costs such as product, administration, selling expenses, taxes, and other expenditures. What’s left is final or net profit. When we take income and subtract just the cost of goods sold, what's’ is left is called gross profit.This is very important item, as you can see. It’s called gross because all other operating expenses must be taken out of it to get net profit. Naturally, the higher the gross profit, the more money is left to cover those other expenses. Like salaries. Your salary. Do you see why gross profit is so important. Examples: Some companies have high product costs, so a very low gross profit remains. Other companies with about the same total sales, have only moderate product costs. That leaves a medium gross profit. Still other firms with the same sales, have very low product cost, leaving high profit.

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Break-even analysis Explanation

Your break-even cash-flow or payout chart is one of your most important and useful financial tools. It helps you plan, control, and even secure equity (investment) financing, or debt (loan) financing.

Cos

t €

Volume of activity (units of output)0

Fixed costs

Variable costsTotal cost

Total sales revenue

F

Break-even point

Profit

Figure 6. Break-even point

LossLoss


The break-even chart is simply a device showing estimates of income compared to expenses at different times. It is a sot of sliding Income Statement, moving along a timelines.

The purpose of the break-even chart is to show you when you can reasonably expect to break-even. In other words, when your total or accumulated income will exceed costs and you will show a steady or growing profit.

The key difference between a break-even chart and Income Statement are first, the break-even chart shows not one, but a series of income versus cost pictures. And second, the break-even chart shows cumulative income and compares this to cumulative expenses.


D People Plan for a Winning team

Morale is the soul of victory. - Napoleon

“Does your executive candidates get on well with people?” is a question usually asked early in a selection process. The reason: people are often the most important single recourse in business.

We will explain and demonstrate ways to plan a skills inventory, set up an organization chart, set job descriptions, establish an effective compensation and benefits statement, and use fourteen magic motivation methods. We’ll also share some practical forms you can use to do all this.

Why are people so important?


1. Action. Without people, nothing much happens, even with lots of equipments. With people, a lot can happen, even with very little equipment. People make the difference, today more than ever because of much higher skill requirements.

2. Budget. Both today and tomorrow, they will cost more, so they are a large budget items. But it’s more than just budget and action.

3. Skills and abilities. “Of all the business failures totaling over 80% were caused, not by inadequate capital, not obsolete equipment or products – but by poor management,” observes Dunn & Bradsttreet. Poor performance. If you improve performance, you increase your company’s chances for success.

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4. Quality of life. Good people management increases morale, spirit, and enthusiasm, so that one’s career become part of one’s quality of life. This stimulates productivity, action, creativity, and progress.

5. Development potential. Surveys show people seldom use a fifth of their abilities. Most people are underutilized! Good management recognizes this as an opportunity for everyone. Good procedures can bring out talents that even the individual didn't know they had. Result: Even low-cost people are more valuable because they do more and enjoy doing it.

An inventory of human recourses is a wise planning step. It makes as much sense as an inventory of equipment and supplies, time and finance, since all these together represent your weapon or tools for progress.


A simple organizational chart is also wise element in your people plan. It clarifies lines of communication and authority, and shows who reports to whom. People who can’t draw such a chart are penalizing themselves and their group by making relations vague and uncertainty. Good companies have a clear picture of the their organization , one way or another. Photo charts are especially effective.

Next slide include simple chart for an company of about fifty people. This one indicates the person, the basic duties and the size of staff. “Other jobs” means there might be other, miscellaneous occasional duties. The chart also identifies a part-time opening, for an exported person. This might be filled by one of the marketing staff, other officers, or staff members.

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Dr. APresident

Ms. BSectary/Assistant

Ms. CMarketing

Mr. DProduction

Ms. EAcct/Fince

Ms. FPersonnel

Mr. GTech

?Export

SalesPeople

PlantPeople

RecordsPayables

Employeerecords

LabAlso

(opened)

AdvertisePublicityComplaintOther jobs

WarehouseInventoryRecordsOther jobs

ReceivesInventoryControlOther jobs

ProcessOrientTrainOther jobs

AssistantPlantMgr.Other jobs

½time

Staff of25 people

Staff of15 people

Staff of1 clerk

Staff of1 clerk

Staff of 1 assistant

Staff?


Job descriptions are a wise portion of the people plan. They should be prepared by the key personnel person, but cleared with the CEO and supervisor. The advantages are that employees, supervisor, and every else knows what the person supposed to do. Major mistakes in this area include:

1. Preparing no job description at all,

2. Making it too long, and including so many duties that these would be impossible for any one person to accomplish,

3. Using terms almost no one understand, even the writer, and sometimes appearing to be deliberately vague,


4. making no provision for new, unusual, collateral, or unexpected duties. Result: people say (or feel) “That’s not in my job description, so I shouldn't be asked to do it.”

5. Relaying on the job description to cover every tiny detail, as well as to serve as a substitute for s supervisor as a motivator.

6. Failing to get input from the applicant, incumbent, or supervisor.

These guidelines are based on my long experience as a business consultants, and therefore they important to understand.


Individual Skill Inventory form

Name and Service Time ____________________________________Brief personal history _______________________________________________________________________________________________________________________________________________________Education ________________________________________________Business experience ________________________________________Management experience ____________________________________On-the-Job Training ________________________________________Experience here ___________________________________________Personal goals ____________________________________________Hobbies _________________________________________________Unused skills _____________________________________________Health cautions ___________________________________________


Job Description form

Title: ________________________________________Reports to: ___________________________________Supervise: ____________________________________Relates to others: ______________________________Key objectives: ________________________________Duties and responsibilities: ________________________________________________________________________________________________________________Other projects as needed: ________________________

Remarks: ____________________________________

People Motivation PlanChallenges: ___________________________________________________Self-set goals: _________________________________________________Fear elimination: _______________________________________________Psychological strength: __________________________________________Respect shown: ________________________________________________Meet/work together: ____________________________________________Work to your goal: _____________________________________________Stimulate heart: ________________________________________________Delegate: _____________________________________________________Coach: _______________________________________________________Communicate: _________________________________________________Your own project: ______________________________________________Recognition: __________________________________________________

Remarks: _____________________________________________________

Use this strategic people plan steps forms to help generate a dynamite organization. You will find you can move far ahead of your competitors, at little or no extra cost!

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E Outsider Plan Providence favors those with the most resources. - Napoleon

We all depend upon others outside our own group. Outsiders have certain skills and abilities that we do don’t have, and the fee is often worth the value provided. We all freely use the services of a teacher, clerk, barber, dentist, doctor, mechanic, banker, plumber, pilot. Trash man, and many other without giving second thought.

Yet many managers forget that there are dozens of business professionals available to help-and most of these are either free of low in cost. Manager who make good use of available, economical resources save themselves from expense, stress, and mistakes. They often gain major advantages over their competition.


Here are some general guidelines, that apply to almost any recourse you might use. Employ these and you will generally get high value per Euro or hour invested.

1. Recognize that those resources are usually readily available. Know where the nearest ones are.

2. Know their approximate range of abilities and stay in that area. Ask a banker for advice on finance, not on marketing.

3. Don’t be afraid to contact the recourse. It cost nothing to ask. A short phone call may do it. These person may not be able to help you, but might know who can help. That’s valuable.


4. When you visit, clearly define both your problem and your goal. This will save a lot of time and get you faster result.

5. Try to cover the who, when, where and why in their response. The 5 Ws. The fee. Sometimes the how.

6. Remember that the real cost of using these outsiders is their fee plus you time plus the cost of mistakes from poor advice; use your resources with some reservation and with care.

Your accountant or auditor is, according to recent surveys, the one outsider used more frequently than any other. Some firms visit with their accounting service personal every week or so.


Managers make two common mistakes in working with this recourse. First, they forget that the accountant often recognizes thinks in the figures that point to dangers or opportunities-places to economize or step towards greater progress. Too often manager looks on the accountant as purely a number cruncher. The manager should ask the accountant if he or she sees any clues that would help improve profits or management efficiency.

The second error is the flip side of this-expecting too much from the specialist. Few accountants are executive or management experts, and don’t pretend to be. Keeping records and counting numbers is one thing, managing resources efficiently is quite another.

182

Outsider Help FormAccountant: _______________________________________Lawyer: __________________________________________Banker: ___________________________________________Suppliers: _________________________________________Business friends: ____________________________________Technicians: _______________________________________Advertising agency: _________________________________Local chamber of Commerce: _________________________Management consultant: ______________________________Tax service: _______________________________________Board of directors: __________________________________Trade Associations: _________________________________Service clubs: ______________________________________Realtors: __________________________________________SBA: _____________________________________________Score: ____________________________________________SBI: _____________________________________________SBDS: ___________________________________________Seminars: _________________________________________Books: ___________________________________________College professors: _________________________________Credit rate: ________________________________________Publicity agency: ___________________________________Employment agency: ______________________________Travel agency: ____________________________________


F Time PlanThey’ll forgive you for being late before they will for being wrong. - Kettering

Time is one of the most valuable recourses, and sometimes the most valuable one. Occasionally, timing is everything. Yet few managers know the many tricks for using good planning to put time on their side. Such planning can double your effectiveness per day and help your plan.

Here we look at time as a resource, hoe to plan it, and how to find more of it to produce profits or just enjoy.


We will see that time is vital. Management of the past and present often become almost obsessed with it. A sense of time can motivate, focus efforts, and get more done per hour. Scheduling with a time plan can boost employees output, favorable impress investors, and increase company efficiency and profits.

All this often begins with setting priorities, as well as knowing how to time or coordinate so that action occurs at the right moment. You will see a set of timely tips plus a time planning form that can use.

Situation: Time is vital and critical to you for several reasons. First, as Ben Franklin said, “If you value life, then value time, for that is what your life is made of.” Your time is your life, to use or enjoy.


Second, time is a major function of your career. Almost no one is an instant success. As singing star Tony Bennett put it, “After working hard for twenty years, all of a sudden I was an overnight success!” Time plays major role in your progress and your prosperity. It can play a bigger role if you know how to use it.

Third, time is a major corporate resource. You pay people by the hour, week, or month. You are also selling or investing your own time. But, no matter how skilled a person may be, it is all for naught if time is managed poorly.

Fourth, time is vital because you not only schedule it daily on your desk pad, but you can also use it as a business management strategic plan that coordinates and unifies internal action and gets more done per day.

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Fifth, good time management, planning, and scheduling impresses prospective investors (such as lenders or stock buyers). They usually have a keen awareness of time. After all, interest rates or profits mean nothing unless expressed in terms of time. A thousand Euro profit is not much if we are talking about a year. But, per minute or even per day, it begins to look like real money.

Here is a practical time schedule plans from that should be part of the strategic business plan you give to employees or investors

Time Plan: Next Three Steps

Who Does What When1. ______________ ________________ __________2. ______________ ________________ __________3. ______________ ________________ __________


4.8 Competitive Actions* Strategic Actions

- Less frequently employed- Significant commitments of resources- Difficult to implement- Difficult to reverse

* Tactical Actions

- More frequently utilized- Involve fewer recourses- Relatively easy to implement- Relatively easy to reverse


4.9 Likelihood of Competitive Response

* Type of Action

* Reputation of Actor- Market leaders => more responses- Successful firms => more responses- Risk-avoiders => more responses

- Price predators => fewer responses

* Dependence on the Market

* Competitor Resources

4.10 Four Categories of Tactics

AnticipatoryTactics

Tactics ofEngagement

OffensiveTactics

DefensiveTactics

Preemption

* Pioneering* Intimidation* Capture

Deterrence

* Structural Barriers* Expected Retaliation* Lowering Inducement for Attack* Diplomatic Peacekeeping

Attack

* Frontal Assault* Flanking Maneuver* Guerrilla Warfare

Response

* Counterattack* Fast follower* Retrenchment* Withdrawals

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4.11 Timing and performance Effects of

Competitive Actions and Responses

Averagefirm

performance

First Moves

* Fast Second Movers

* Average Second Movers

* Late Movers

Timing of action response


4.12 Other Factors Affecting Rivalry and Competitive Dynamics

* Firms Size

* Speed of Competitive Actions and Competitive Responses

- Cross-functional teams

* Innovations

* Quality


4.13 Product and Service Quality Dimensions

Product Quality Dimensions

* Performance

* Features

* Reliability* Durability* Conformance (standards)

* Serviceability* Aesthetics (look & feel)* Perceived quality (product image)

Service Quality Dimensions

* Timeliness* Courtesy

* Consistency

* Convenience

* Completeness* Accuracy

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4.14 Effects of Firm Size, order of Decisions / Actions, Innovation and

Quality of Firm performance

Firm Size

FirmPerformance

+ (market power)- (Bureaucratic rules)

Order + (Speed)

Innovation+ (Market leadership)

Quality+ (TQM)

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4.15 The Cycle of experience effects

High Market Share

HigherRelative

Sales Volume

HigherRelative

ProductionVolume

More Rapid Gains in Experience

FasterProgress Downthe Experience

Curve

LowerRelativePrices

LowerRelative

Costs

GreaterRelative

Sales


4.16 Competition and Industry Life Cycle

GrowthEmerging Industries

GrowthIndustries

MatureIndustries

Time

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4.17 Reasons for Strategic Alliances

* Gain access to new markets

* Enter new business

* Introduce new business

* Overcome trade barriers

* Avoid predatory competition

* Gain access to complementary recourses

* Achieve economies of scale

* Pool resources, skills and risk capital to share R & D and risk of innovation


4.17.1 Types of Strategic Alliances

* Service alliances

* Opportunistic alliances

* Stakeholder alliances


4.17.2 Benefits of Strategic Alliances

* Cooperating with a partner to push the limits of technology

* Combining resources and capabilities

* Providing access to additional capital

* Gaining access to greater management capabilities

* Increasing opportunities for mutual success


4.17.3 Successful Strategic Alliances

Gaining Competitive Advantages

Partner Partner

Understandingpartner’s

strategic orientationand interest

Cooperation


4.18 SWOT Analysis

Internal Environment

* Strength* Weaknesses

External Environment

* Opportunities* Threats

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SWOT works particularly well, because it is easy to understand. It’s practical and uses common cense. Without even thinking it, we SWOT our problems every day.

We know where we are and what our goals, recourses, and tactics are. SWOT is also easy to explain to others. They tend to accept it and like it.

SWOT has been used by the ancients in military strategy long before Christ, and today is used by modern armies. It was also used by prehistoric and modern governments. Today the best managed companies in the world, such as Proctor & Gambel, Merek, Kraft, IBM, 3M, Sony, Rubbermaind, Datson, Suzuki, Liz Clairbone and Disney(to name but a few) use this sort of planning. And they get excellent results.

4.19 Strategic Factor Analysis Summary: Maytag as Example

Kay Strategic Factors

(Select most important Duration opportunities/threats from the Weightin chapter 3. Weight Rating Score S I L Comments

S1 Quality Maytag Culture (S) .10 5 .50 x Quality key to success S3 Hoover’s international .10 3 .30 x Name recognition orientation (s)W3 Financial position (W) .10 2 .20 x High debtW4 Global position (W) .15 2 .20 Only in N.A., UK., and AustraliaO1 Economic integration of European Community (O) .10 4 .40 x Acquisition of HooverO2 Demographics favor quality (O) .10 5 .50 x Maytag qualityO5 Trend to super stores (O+T) .10 2 .20 x Week in this channelT3 Whirlpool and Electrolux (T) .15 3 .45 x Dominate industryT5 Japanese appliance companies (T) .10 2 .20 x Asian presenceTotal Score 1.00 3.05


4.20 T.O.W.S. MatrixInternalfactors (IFAS)External

factors(EFAS)

Strength (S)

List 5 –10 internalstrengths here

Weaknesses (W)List 5 –10 internalweaknesses here

Opportunities (O)

List 5 –10 internalopportunities here

Threats (T)List 5 –10 internalthreats here

SO StrategiesGeneral strategies herethat use strength to takeadvantages of opportunities

WO StrategiesGenerate strategies herethat take advantages of opportunities byovercoming weaknesses

ST Strategies Generate strategies herethat use strength toavoid threats

WT StrategiesGenerate strategies herethat minimize weaknessesand avoid threats

4.21 T.O.W.S Matrix: Maytag as exampleInternalfactors (IFAS)External

factors(EFAS)

Strength (S)S1 Quality Maytag CultureS2 Experience top managementS3 Vertical integrationS4 Employee relationsS5 Hoover’s international. orientation

Weaknesses (W)W1 Process-orientedW2 Distribution channelW3 Financial positioningW4 Global positioningW5 Manufacturing facilities

Opportunities (O)O1 Economic integration of European communityO2 Demographics favor qualityO4 Economic development, AsiaO5 Trend towards super stores

Threats (T)T1 Increasing government regulation T2 Strong US competitionT3 Whirlpool & Electrolux positioned for global economyT4 New product advancesT5 Japanese competition

SO Strategies* Use worldwide Hoover distribution channels for Hoover and Maytag

* Find joint venture partners in Eastern Europe & Asia

WO Strategies* Expand Hoover’s presence in Continental Europe by improving quality & reducing costs

* Emphasize superstore channel

For non-Maytag brandsST Strategies * Acquire Raytheon’s appliance Business* Merge with major Japanese home appliance company* Sell off non-Maytag brands; defend Maytag’s US niche

WT Strategies* Sell off Dixie-Narco division to Reduce debt* Emphasize cost reduction to reduce break-even point* Sell out to Raytheon or a Japanese firm


5 Different Organizational Structures

5.1 Functional Structure for Cost- Leadership Strategy

Office of thePresident

Centralized Staff

Engineering Marketing Operations Personnel Accounting


5.2 Functional Structure for Differentiation Strategy

President andlimited staff

R & D Marketing

New ProductR & D Operations Marketing Human

Resources Finance


5.3 Cooperative Multidivisional Structurefor Related-Constrained Strategy

President

GovernmentAffairs

Legal Affairs

Corporate R & D Lab

StrategicPlanning

CorporateHR

CorporateMarketing

CorporateFinance

Production Division

Production Division

Production Division

Production Division

Production Division

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5.4 SBU Multidivisional Structurefor Related-Linked Strategy

President

CorporateR & D

Corporate Finance

StrategicPlanning

CorporateMarketing

CorporateHR

StrategicBusiness

Unit

StrategicBusiness

Unit

StrategicBusiness

Unit

Division Division Division DivisionDivision Division DivisionDivisionDivision


5.5 Competitive Multidivisional Structurefor Unrelated Strategy

Headquarters office

President

LegalAffairs Finance Auditing

Division Division Division Division Division

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6 Decision-making Tools6.1 Manager as Decision MakerTo achieve the goals of their organizations, managers must understand how decisions are made and know what decision-making tool to use.To a great extent, the success or failure of people and companies depends on the quality of their decisions.

In decision-making process a model is a representation of reality. It can be a physical model, such as a scale model of a factory or a model of an car for use in a wind tunnel. Or it can be mathematical model, which is even more common.

One simple mathematical model you learned in geometry is the formula Area = length x with.

6.2 The Analytic Decision Process

What makes the difference between a good decision and a bad decision? A “good” decision, using analytic decision making, is based on logic and considers all available data and possible alternatives. It also follows these six steps:

1. Define the problem and the factors that influence it. The problem to be decided must be started clearly and concisely, which in many cases is the most important and difficult step.

Decision-making has been approached through history from a number of viewpoints, and it is possible to identify at least the following six specific methods:

1. Appeal to the supernatural2. Appeal to world authority – the older the better3. Intuition 4. Common sense 5. Pure logic6. The scientific method.


3. Formulate a model or relationship between goals and variables.In other words, we want to develop a representation of the situation-a model. Most models presented in this lecture contain more than one variable. A variable, as the name implies, is a measurable quantity that may vary or is object to change.

4. Identify and evaluate alternatives. Managers need to generate as many solutions to the problem as possible (and usually quickly). Most managers like to have a range or set of options so they can evaluate each option for its merits and drawbacks.

2. Establish decision criteria and goals. Managers must develop specific and measurable objectives. Most firms have more than just a goal of maximizing profit.


6. Implement the decision. Putting into action the steps of chosen alternative can be the most difficult phase of decision making. Implementation involves making task assignments and a timetable for their competition.

I like to point out that these steps do not always follow one other without some looping back to an earliest step. Modifying one or more steps before the final result are implemented is not unusual. Still, “good” decision in operating problems means performing all six steps.

5. Select the best alternative. This is the alternative that best satisfy and is most consistent with the started goals.

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6.3 Decision TheoriesDecision theory, an analytic approach to choosing the best alternative or coerce of action, is one of the most widely used and useful of all decision-making tools. Decision theory can be separated into decision models. These are based on the degree of certainty of the possible outcomes or consequences facing the decision maker. The three types of decision models are as follows:

1. Decision making under certainty-the decision maker knows with certainty the consequence or outcome of any alternative or decision choice. For example, a decision maker knows with complete certainty that €100 deposit in a checking account will result in an increase of €100 in the balance of that account.


2. Decision making under uncertainty-the decision maker does not know the probability of occurrence of the outcomes for each choice. For example, the probability that the Finnish Postal Service will be replaced by home-to-home computer networks is unknown.

3. Decision making under risk-the decision maker knows the probability of occurrence of the outcomes or consequences for each choice. For instance, Chrysler may not know how many of its successful minivans it will sell next year, but the probability of selling more than 450.000 is 0.30.

6.3 Decision Theories …

6.3.1 Decision Making Under Certainty

The Getz product Company is investing the possibility of producing and marketing backyard storage sheds. Undertaking this project would require the construction of eight a large or a small manufacturing plant. The market for the product produced-storage sheds-could be either favorable or unfavorable. Getz, of course, has the option of not developing the new product line at all. With a favorable market, a large facility would give Getz Products a net profit of €200.000. If the markets is unfavorable, a €180.00 net loss would occur. A small plant would result in a net profit of €100.00 in a favorable market, but a net loss of €20,000 would be encountered if the markets was unfavorable. The following table shows the decision table based on this information.

Decision table with conditional values for Getz Product

Example S1

States of NatureAlternative Favorable Market Unfavorable market

Construct large plant €200,000 -€180,000Contract small plant €100,000 -€ 20,000Do nothing €0 €0

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6.3.1 Decision Making Under Certainty …This is the easiest situation a manager can face. If, for example, Getz Product company knows that the market for storage sheds will be favorable, the firm will build a large plant. If the firm is certain the market will be unfavorable, it will do nothing.

Decision is made under conditions of certainty when each alternative is known to lead always to a certain outcome, and crystallized such decision-making as being”Given a set of possible acts, to choose one (or all) of those which maximize (or minimize) some given index”.

A decision can be regarded as having made under condition of certainty in the case of a problem for which we are able to indicate exhaustively all the alternatives available and all the consequences of those alternatives.

218

6.3.1 Decision Making Under Certainty …As a mean to increase certainty in a decision-making has been seen management accounting. Management accounting systems are viewed as a ways to collect, classify, summarize, analyze, and report information that will assist manager who makes decisions and control taken activities.

There are accounting systems that provide ways in which managers can obtain new insight into their business. The management accounting reports are intended to summarize the financial effects of the action taken. Also it should summarize the events that occurs during the accounting period of each year.

Therefore, it is important to define what kind of information systems the organization should have, what data should it make available, in what format and to whom.


6.3.2 Decision Making Under Uncertainty

When there is complete uncertainty as to which state of nature in a decision table may occur (that is, when we cannot even asses probabilities for each possible outcome), we rely on three decision methods:

1. Maximax-this methods finds an alternative that maximizes the maximum outcome for every alternative. First, we find that maximum outcome within every alternative, and then we pick the alternative with the maximum number. Because this decision criterion locates the alternative with the highest possible gain, it has been called an “optimistic” decision criterion.

6.3.2 Decision Making Under Uncertainty

2. Maximin-this methods finds the alternative that maximizes the minimum outcome for every alternative. First, we find the minimum outcome within every alternative, and then we pick the alternative with the maximum number. Because this decision criterion locates the alternative that has the least possible loss, it has been called a “pessimistic” decision criterion.

3. Equally likely-this method finds alternative with the highest average outcome. First, we calculate the average outcome for every alternative, which is the sum of all outcomes divided by the number of outcomes. We then pick the alternative with the maximum number. The equally approach assumes that each state is equally likely to occur.


Example S2

Given Getz’s decision table of Example S1, determine the maximax, maximin and equally like decision criteria.

1. The maximax choice is to construct a large plant. This is the maximum of the maximum number within each row, or alternative.

2. The maximin choice is to do nothing. This is the maximum of the minimum number within each row, or alternative.

3. The equally likely choice is to construct a small plant. This is the maximum of the average outcome of each alternative. This approach assume that all outcomes for any alternative are equally likely.

States of Nature

Favorable Unfavorable Maximum Minimum RowAlternatives Market Market In Row In Row Average

Construct largeplant €200,000 -€180,000 €200,000 -€180,000 €10,000

Construct smallplant €100,000 -€20,000 €100,000 -€20,000 €40,000

Do nothing €0 €0 €0 €0 €0

Maximax Maximin Equally likely

Uncertainty in cognitive structure (factual uncertainty) is the most common extensive type of uncertainty, in which the individual is uncertain of whether his factual mapping as a whole provides a correct picture of the reality.

Decision maker may not be sure whether the elements he observes in fact are the most important ones or whether his assumptions of causal relations are right.An extreme manifestation of uncertainty in cognitive structure is when the individual is almost completely lacing in such a structure, I.e. he is faced with such a new, unknown situation that he finds it impossible to make even a faint quess at what is important or what will happen.

An important viewpoint is estimation uncertainty. The individual may in the end be uncertain of the correct evaluation of a given descriptive element in his cognitive structure. An investor, for example, may be convinced that the market for a product constitutes an important factor and may experience no difficulties in comparing market aspects and investment cost, but he may be uncertain of whether to invest or not if he is uncertain of the future extent of the market.

6.3.3 Decision Making Under Risk

Decision making under risk, a more common occurrence, relies Decision making under risk, a more common occurrence, relies on probabilities. Several possible states of nature may occur, on probabilities. Several possible states of nature may occur, eash with an assumed probability. Given a decision table with eash with an assumed probability. Given a decision table with conditional values and probability assessment for all states of conditional values and probability assessment for all states of nature, we can determine the nature, we can determine the expected monetary valueexpected monetary value (EMV) (EMV) for each alternative. for each alternative.

EMV figure represents the expected value or average return for each alternative if we could repeat the decision a large number of times. Picking the alternative that maximum EMV is one of the most popular decision criteria.

The EMV for an alternative is the sum of possible payoffs of the alternative, each weighted by the probability of that payoff occurring.


EMV (Alternative I) = (payoff of 1st state of nature) x (probability of 1st state of nature)

+ (payoff of 2nd state of nature) x (probability of 2nd state of nature)

+ …+ (payoff of last state of nature) x (probability of last state of nature)

6.3.3 Decision Making Under Risk …

Example S3Getz Products’ manager believes that the probability of a favorable markets is exactly the same as that of an unfavorable markets. This is, each state of nature has a 0,50 chance. We can now determine the EMV for each alternative (see the following table).

States of Nature Alternative Favorable Market Unfavorable Market Construct large plant €200,000 -€180,000Construct small plant €100,000 -€20,000Do nothing €0 €0Probabilities 0,50 0,50

1. EMV (large plant) = (0.5) (€200,000) + (0.5) (-€180,000 = €10,000

2. EMV (small plant) = (0.5) (€100,000) + (0.5) (-€20,000 = €40,000

3. EMV (do nothing) = (0.5) (€0) + (0.5) (€0) = €0

The maximum EMV is seen in the second alternative, constructing a small plant. Thus, according to EMV decision criterion, we would build the small facility.


Expected Value of Perfect Information EVPI)

If a manager were able to determine which state of nature would occur, then he or she would know which decision to make. Once a manager knows which decision to make, the payoff increases because the payoff is now a certainty, not a probability.

Because the payoff will increase if we know which state of nature will occur, this knowledge, or “perfect information,” has value. We call this difference between the payoff under certainty and the payoff under risk the expected value of perfect information (EVPI).

EVPI = expected value under certainty – minus maximum EMV


Expected value under certainty = (best outcome or consequence for 1st state of nature) x (probability of 1st state of nature) + (best outcome for 2nd state of nature) x (probability of 2nd state of nature) + … + (best outcome for last state of nature) x (probability of last state of nature)

In Example S4, I use the data and decision table from Example S3 to examine the expected value of perfect information.

229

Example S4

Suppose Getz Products’ manager has been approached by a marketing research firm that proposed to help him make the decision about whether or not to build the plant to produce storage sheds. The marketing research claim that their technical analysis will tell Getz with certainty whether or not the market is favorable for the proposed product. In other words, it will change Getz’s environment from one of decision making under risk to one of decision making under certainty. This information could prevent Getz Products from making a very expensive mistake. The marketing research firm would charge Getz €65,000 for the information. What would you recommend to Get? Should manager hire the firm to make marketing study.? Even if the information from the study is perfectly accurate, is it worth €65,000? What would it be worth? Determining the value of such perfect information can very useful. It places an upper bound on what Getz would be willing to spend on information.

By referring to the table in Example S3, Getz’s manager can calculate the maximum that he would pay for information, that is, the EVPI. First, he computers the expected value under certainty. Then, using this information, he calculates the EVPI. The procedure is outlined follows.

1. The best outcome for the state of nature “favorable market” is “build a large facility” with a payoff of €200,000. The best outcome for the state of nature “unfavorable markets” is “do nothing” with a payoff of €0.

Expected value under certainty = (€200,000) (0.50) +(€0) (0.50) =€100,000.

Thus, if we had perfect information, we would expect (on the average) €100,000if the decision could be repented many times.

2. The maximum EMV is €40,000, which is expected outcome without perfect information.

EVPI = expected value under certainty – maimum EMV = €100,000 – €40,000 = €60,000

Thus, the most Getz Products should be willing to pay for perfect information is €60,000. This, of course, is again based on the assumption that the probability of each state of nature is 0.50.

231

6.4 Decision TreesAny decision that can be placed in a decision table can also be placed in a decision tree. A decision tree is a graphic display of the decision process that indicates decision alternatives, states of nature and their respective probabilities, and payoff for each combination of alternative and state of nature. Decision trees are most useful for problems that include sequential decision and states of nature. When later decision depend on the outcomes of prior ones, decision tables are too difficult to structure. Decision trees are much easier to visualize.

Two symbols are used in decision trees:1. - a decision node from which one of several alternatives

may be selected

2. - a state of nature node out of which one state of nature will occur.

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In constructing a decision tree, we must be sure that all alternatives and states of nature are in their correct and logical places and that we include all possible alternatives and states of nature.

Example S2.1 presents a decision tree for Getz Product, using the symbols just introduced.

Example S5

A Decision node

Do nothing

2Constructsmall plant

1Constru

ct

large p

lant

State of nature nodeFavorable markets

Unfavorable market

Favorable market

Unfavorable market

Although all previously discussed decision criteria apply to decision trees, expected monetary value (EMV) is the most commonly used the most appropriate criterion for decision-tree analysis. Early steps in the analysis are to graph the decision tree and to specify the monetary consequences of all possible outcomes on the tree for a particular situation.Analyzing problems with decision trees involves five steps:1. Define the problem2. Structure or draw the decision tree3. Assign probabilities to the states of nature 4. Estimate payoffs for each possible combination of

alternatives and states of nature5. Solve the problem by computing monetary value (EMV) for

each state of nature mode. This is done by working backward, that is, starting at right of the tree and working back to decision nodes on the left.

234

Example S6

I present a completed and solved decision tree for Getz Production in Figure S2.2. Note that the payoffs are placed at the right-hand side of each of tree’s branches. The probabilities (first used by Getz in Example S3) are placed in parentheses next to each state of nature. The expected monetary values for each state of nature node are then calculated and placed by their respective nodes. The EMV of the first node is €10,000.

This represent the branch from the decision node to construct a large plant. The EMV for node 2, to construct a small plant, is €40,000. Building no plant or doing nothing has, of coerce, a payoff of 0€. The branch leaving the decision node to the state of nature node with the highest EMV will be chosen. In Getz’s case, a small plant should be build.


Do nothing

2

1

EMV for node 1= €10,000 = (.5) (€200,000) + (.5) (-€180,000)

PayoffsFavorable market (.5) €200,000

Unfavorable market (.5) -€180,000

Favorable market (.5)

Unfavorable market (.5)

EMV for node 2= €40,000

€100,000

-€20,000

€0


6.5 Stages in the Decision-Making Process

Problem

C u l t u r e

individual / organizationalculture / values

institutionalhierarchy

choice /decision-makingsituation

choice /decisionprocess

choice /decision

implementationprocess

actual decision

Feedback from implementation problem

Palojärvi 2000, 4

bkmg104 business strategy 2008

Documents

business business strategy

planned business strategy

business plan

concept of corporate

business environment

wellformulated strategy

objects of war strategy

competing business