Deze samenvatting is gebaseerd op het studiejaar 2013-2014.
Strategy is the way organisations achieve their goals, and is focused on the future.
There is a major difference between corporate level strategy and business level strategy. Business level strategy refers to the strategy of a single business unit. Corporate level strategy, however, refers to the strategy that is used for multiple activities or business units, and doesn’t only focus on the general strategies, but also on the way that the units should work together.
A company’s strategy always has a major financial impact, and influences the entire organisation. Operational activities are not included in a strategy, but are influenced indirectly nonetheless.
There are four major possible ways to define ‘strategy’: plan, pattern, perspective, or position.
A plan is a certain, consciously chosen set of activities meant to enable reaching a goal. This plan can be broad or very specific.
Another definition of strategy is as pattern: an organisation tends to follow a certain way of behaviour to achieve a goal, and sells certain services or goods to specific markets in a particular way.
Plan and pattern are not dependent on each other. A planned strategy can lead to a intended strategy or a unrealised strategy. The realised strategy, or the strategy which has actually been carried out, consists of the intended and emergent strategies. Emergent strategies are not planned, and usually emerge spontaneously. For example, they may appear when unexpected threats or opportunities arise, employees have innovative ideas or take autonomous decisions, or when an unit is unaware of the strategy of another unit.
With perspective is meant that the strategy is seen as the culture and goal of the organisation, and is often seen as a sort of tradition which is difficult to let go of. It looks at the way the employees and the employers of an organisation view the world, and thus looks at the inside of a company.
Strategy can also be seen as a position: a mediating variable between the organisation and its environment. An example of this approach is the ‘generic strategy’ from Porter, which states that an organisation should assume a set position in the market.
1.2 Dimensions of strategic management
Strategic management is a function in an organisation, although is often doesn’t have a recognizable department, en is the managing of strategies. Every decision an entrepreneur or an organisation takes is strategic management.
Strategic management has three dimensions: the process, the content, and the context. They’re not different parts of strategy, but aspects.
The process describes the way the formation of a strategy emerges, and how it is developed and achieved. For example: how is the strategy formulated? Who is involved? When will it be implemented?
The content is the product of the strategy, and it states what the main actions are. For example: what is the strategy of the organisation?
The context is the environment within which the strategy is developed and formulated, and focusses on the surroundings of an organisation and the situation of the organisation itself.
1.3 Schools of thought in strategic management
The schools of thought can be derived from the categories of Mintzberg, and can be divided into two groups: the prescriptive and descriptive theories.
Prescriptive theories show what managers should do to be successful, and do not describe what actually happens in organizations, while descriptive theories have been developed to describe, understand and even predict the behaviour of people in organizations.
There are three prescriptive schools of thought:
The design school focuses on finding a strategy that fits between an organization and its environment, and indicates that the internal factors of an organization must be used to utilize external opportunities in the environment as well as possible This mind set uses the SWOT analysis to formulate the strategy. It is the most influential school of thought, and comes from the universities Berkele , California, and Harvard, Boston.
A disadvantage of the design school is that it is based solely on logic and planning, and that it therefore takes no account of emerging strategies or human error.
The planning school comes from the design school, and has as a goal of the strategy the planning process itself. The focus is on making goals, and the formulation, implementation and evaluation of strategies, but not the outcome of the strategy. It makes strong use of models, techniques, and audits, and the strategy itself is very precisely made.
The disadvantage of the planning school is that it does not work well in practice and that it is not flexible.
The positioning school comes from both the design and planning school, but focuses more on the outcome of the strategy. This school of thought argues that a company must choose from one of the general strategies, such as product differentiation or low cost.
Important is the notion of structure-conduct-performance , which means that the structure of an industry has a strong influence on the behaviour of organizations, which then has influence on the performance of the industry. The structure of an industry is based, among other things, on the consumer demand, restrictions of government, and technology.
There are six descriptive theories:
The entrepreneurial school suggests that individual, talented leaders are the ones who set up a strategy by thinking innovatively. The key terms in this mind set are leadership, vision, and creative destruction. Creative destruction means that change is the only way to keep a company stable and is a term first introduced by Schumpeter.
The cognitive school is concerned with the way a strategy is created by analysing the manner in which strategists think and make decisions. The focus is on the way people process information and organize, and how they use this information to make reviews, and especially the shortcomings of this system. Bounded rationality is the acceptance of the fact that people cannot process all the information well and that they make mistakes. This school comes from the work of Herbert Simon.
The learned school simply states: learning from mistakes. The mind-set assumes that an organization is too complex to allow a strategy to be developed at once, and that each time adapted or new strategies emerge. An important term is logical incrementalism, which means that a strategy is created and improved step by step with the help of logic.
The political school focusses on the social life of people, and that employees often have their own goals. Politics is a way to achieve a goal without confrontation. Micro power issue is politics within an organization, macro politics are the considerations of the interests and goals of people by the organization. Groups of people with similar interests often form a coalition.
So the political school does not only focus on logic but also takes into account the various coalitions and their interests, and the relationships of different parties.
The cultural school sees the formulation of a strategy as a collective process that is shaped by the culture of the organization and its employees.
The ecological school is concerned with the environment of the organisation and the external factors affecting the organization. The main movement of this mind set is the approach of the ecological system, which states that an organization will not make it if it does not consider its environment.
1.4 The structure of a plan
A plan begins by examining a company in the field of history, important facts, and organizational structure. After which the mission, strategy, and problems of the organization will be analysed. Thirdly, a SWOT analysis is performed. The internal factors are strengths and weaknesses, external factors are the opportunities and threats. After the various strategic options have been considered, a strategy can be developed.
2.1 The profile of an organization
The profile of an organization consists of:
The history and current situation. Important: the founders, the profit growth, the general timeline of financial ups and downs, influential and important decisions, and changes in the environment of the organization.
The main performance figures
The legal status
The business process, in particular the input, output, and the transformations.
The structure and resources (material, human, and organizational).
The products and/or services it provides, why consumers buy these products, and how the profit is distributed between different products.
The ownership (shareholders) and management.
2.2 The mission, goals, and strategies
The mission of the organization is a statement of the purpose of an organization. Often the mission is not to make a profit, although this is important, but a goal that can provide a positive attitude among employees, and is what connects people to each other.
An effective mission statement:
Gives focus to the activities of the organization.
Does not limit the activities of the organization too much.
Is distinctive and comprehendible.
Allows to formulate objectives.
A strategy can be divided into strategic objectives: specific, measurable targets to be achieved within a certain time. The objectives are to ensure:
The ability to evaluate with respect to certain criteria, in order to allow the best strategy to be found and carried out.
Motivation of the employees of the organization
The communication of key issues and clarify the mission.
Different departments may have their own objectives. It may be confusing, however, and it can make possible that two objectives clash with each other.
Objectives can be formulated by:
Researching the preferences and needs of the customers and to explore the market.
Investigating the interests of the stakeholders.
Problems that arise and the achievement of the mission in the way called strategic issues. They both appear in the environment and in the organization itself , and can be very specific or very general.
The business environment (context ) contains the external factors that affect the decisions made by a company, but which the company has no control over. The business environment can create threats, which may stand in the way of achieving your goal, and opportunities, which make it possible to reach your goal. A development in the environment can both an opportunity and a threat, for example as globalization.
3.1 The SEPTEmber analysis
The biggest area around an organization is the macro environment , and consists of the powers which the organization has no influence over. This environment can have a severe impact on the organization, although it is far away, and it is therefore important to analyse the macro environment. Especially changes are important.
The SEPTEmber analysis divides the macro environment in five parts:
The sociocultural part refers to trends or factors that may impact consumers and their behaviour. For example: demographics, education.
The economic part is concerned with the economic influences that may affect the organization. For example: income, interest , unemployment.
The political - legal part consists of the decisions of the government and political conditions that affect the organization. For example: tax, political stability and ideology.
The technological part is concerned with the scientific and technological developments that may cause the need to change strategies, products or processes in order to keep up with the market. For example: new technology, ecommerce.
The ecological part focuses on the natural resources of the company and their condition, as well as the behaviour of environmentalists and society in relation to the environment that the organization uses. For example: risk of natural disasters, availability of raw materials.
These results of this analysis are often more apparent in conjunction with the other, more detailed analyses.
3.2 The industry
The circuit between the macro environment and the market is the industry. The lifecycle of the industry is important to the growth of an organization. It is often influenced by the demands and needs of consumers, and the trends and attitudes at the time.
The life cycle consists of four phases.
Initiation: when a product is released. Research and development (R&D) will cost much at this stage. It is important phase to be ahead of the competition in terms of R&D.
Growth: In this phase there is more interest in the product , and sales and profits will increase. The gains made in this stage, reimburse the costs of development. It is possible to ask a high price from consumers, or a low price to acquire more customers.
Maturity: When the product produces a steady cash flow, in this stage the product may be called a cash cow. The downside is that there only little growth is possible.
Decline: In this stage, the product is replaced by better products, and will make little profit anymore. It is difficult to enter a market in the decline phase.
An important term is the experience curve , which is an estimate of the amount that is learned after repeating a certain activity. It states that when an organizations cumulative production doubles, costs reduces by a fixed percentage.
The experience curve can cause entry barriers to arise, which is the reason why latecomers with less experience can experience difficulty to produce efficiently. Entry barriers are the difficulties that an organization will encounter when they attempt to enter the market.
Competition may determine the profit potential in an industry, and it is important to decide whether a market is appropriate. Porter 's five forces model consists of four forces that each have relative impact on the competition, which in itself is a force. Each force is measured as low, medium, or high. This enables the ability the analyse industries to see if they are suited.
The threat of new entrants is measured by the height of the entry barriers. A entry barrier can be, for example, the specific knowledge needed for the industry, or large capital investments. Newcomers appear as the market or the product expands, consumers start to produce their own products (backward integration) , and as suppliers to produce their own products (forward integration).
The threat of substitutes. Substitutes are products or services that may be slightly different, but that still meets the needs of consumers in a similar way. It can cause that an organization must remain below a certain price, or that a product is completely replaced.
The bargaining power of consumers is the degree to which the customers have a choice between different manufacturers, and to what extent they can use this power, for example by instigating a price war.
The bargaining power of suppliers is the amount of power that the suppliers have. For example their ability to raise prices or introduce witching costs. The negotiating power is high when there are few alternatives, and if there are trade unions in the service sectors, for example.
Rivalry between organizations. Rivals are fierce competitors, who often fight for the loyalty of their customers. The strength of the competition is determined by the extent by which the organizations focus on certain niches, and how their products are differentiated.
Stakeholders are individuals or organizations (social factors) who have an interest or stake in the company. They often have conflicting interests, for example, customers who want a lower price, but employees who want to be paid more, and it is important to manage these interests in order to maintain the organization. Stakeholders can also be non-social entities, such as the natural environment.
Primary stakeholders (market environment) are those who have a direct link with the organization, and are crucial for the organization in order to achieve their goals.
Secondary stakeholders (non-market environment) have an indirect impact on the organization, such as the media, the government, and environmentalists.
The organization and stakeholders are interdependent. Stakeholders have an interest in the organization, since decisions in the organization affect them, but the organization itself is also affected by the actions of the stakeholders. Therefore it is important to include them in an external analysis. This can be done by placing the stakeholders power matrix:
Difficult: keep satisfied
Possible ally: keep informed.
3.3 The market
A market is where consumers seek products or services that meet their needs. The difference between an industry and a market is that the industry supplies products/services, and that the market demands products/services.
It is important for an organization to provide for the needs of the customer in a better way than the competitor. One way to do this is marketing, which means that a solution must be found to meet the needs of consumers after which this solution must be sold as well as possible. It is important to know the consumer and the market, as well.
When forming a market profile, it is determined which markets are best for the organization by, for example, looking at the size of the market and the opportunities to grow. Market segmentation is dividing a market into segments or niches, which consist of groups of consumers who respond differently to products and different needs. It is also possible to divide the type of consumer (Business-to-business, business- to-customer).
Important questions when studying consumers:
How do consumers attach value to a product, service, or organization?
How consumers choose between different offers?
What are the needs of consumers?
How does their behaviour influence their choice?
The purpose of the analysis of the needs of consumers is to understand the needs that supply the base for the products and services of the organization, and to find out whether they can be made better. It is also important to examine the un-met needs that could exist , since consumers are not always aware of the possibilities.
The difference between the end consumer and business customers is that business customers often associate with the organization for a long time, and are often larger. Also, the professional buyers possess better knowledge and understanding of the product. Individual approaches to these customers work better than mass marketing.
The critical success factor (CSF) analysis helps to determine the best ways to get a competitive edge and see where the organization stands in the market. Critical success factors can identify factors an organization must improve on and maintain to be and remain successful. The minimal success factors, are the minimum amount that is required to be able to participate in the market. Key success factors are factors to which consumers attach values, and how an organization can differentiate itself. Finding these factors can be done by asking why consumers buy the product.
The success factors emerging from the SCF analysis can be compared to the success of organizations that are best in that area. This is called benchmarking.
The market can also be analysed by studying the competition. The weaknesses of the competition, for example, offer an option to place a strategic strike.
From the consumer point, the competitors of the organizations are the companies that sell similar or substituting products/services. For example icecream that can be replaced with pudding for dessert, or fruit.
From the industry point of view, the best way to explore is by strategic groups. The strategic group is a group of organizations that have similar suppliers, products, and strategies to use.
After identifying the competition is important to determine how motivated the competition is.
Internal analysis looks at the different properties on the inside of an organization.
4.1 Organization design
The structure of an organization is the formal and informal system of relationships that a company possesses, and is an important part of the design. It consists of the lines of authority, responsibility, communication, and tasks in an organization. Chandler states that the structure is mainly determined by the strategy, but in practice it often appears that the strategy follows structure instead. A structure can motivate people, and helps to coordinate and distribute tasks.
There is a long battle between hierarchy, a bureaucratic, centralized system, and autonomy, which is a decentralized, autonomous system. Nowadays, many companies choose a middle way. A number of structures are:
The simple form: the most simple organization where employees have multiple jobs, and there is often no formal line. This occurs in small or start-up companies.
The functional form: This form will organize activities in lines of tasks and functions, and functional organizations may act by hiring managers. The advantage is that it can provide specialization and it is easy to control. The downside is that there are conflicts may arise because different departments have responsibility for the same product.
The division form: the form is used for the larger companies, and has a structure that is organized in ways other than by function, for example by product. Some departments may remain centralized. The disadvantage of this form is that it is often very centralized , and thus less flexible.
The matrix form, is a structure which consists of the traditional functional forms, in which groups can be formed by division. This ensures that the company can react better, but it can also be confusing for employees as they have two superiors.
The culture of an organization is also seen as the informal structure, and may have more influence than the formal structure as it has an impact on employees in terms of motivation and behaviour. The management style is a 'soft' parameter that affects the motivation of employees. The culture and management style often do not change, or only very slowly.
The corporate culture is the set of norms, values, beliefs, and assumptions that are prevalent among the employees of an organization. The culture often ensures that employees are motivated, but it can hinder innovation and growth.
The reason for doing an analysis of the business culture is to see if the strategy fits with the environment and the organisational culture. The cultural web helps when observing the behaviour of an organization, and consists of seven sections. The paradigm is the set of underlying assumptions associated with the cultural sections.
Routines: the way that things are done in an organization. The questions that are to be asked include whether it is possible to break the routine and whether new ideas are welcome.
Rituals: special occasions that reinforce the culture of the organization, formal or informal.
Stories about the history, major events, successes and losses, or those who deviated from the company standard, or just had great success within the company.
Symbols: the visual representation of the company, for example, the logo, the office, the clothing, and how language used.
Power Structure: how the culture is divided amongst the different levels within the organisation.
Control systems: the reward system which indicates what is seen as important in an organization.
Organizational structure: the structure of power and relationships.
Hardy developed four categories of corporate cultures , and how they could make strategic changes:
Role cultures: the organization depends on committees, analysis and structure, and the decisions are made by older managers who depend on procedure. Strategic change: this culture will react slowly.
Task Cultures: focus on tasks and projects, and are very flexible. Strategic change: fast when necessary, but this depends on the situation.
Power Cultures: the organization revolves around one person or a small group. Strategic change: can be fast or slow depending on the management style.
Personal cultures: individual employees have only their own goal, and see the organization as a useful structure that help them achieve their goal. Strategic change: can be very fast if a person sees his/her chance.
Organizations often have subcultures, which are formed by the functional departments or professions, for example. Subcultures can create barriers between people, deteriorating communication.
The financial statement of a company provides the financial information of a business. The balance sheet is a snapshot of the assets and liabilities of a company, the income and cash flow indicate in a period between two snapshots. The balance sheet provides information about the capital structure, while the cash flow provides information about financial performance.
A company often takes on debt in order to finance activities. Small businesses often seek private loans because banks refuse to provide them a loan. Debt can yield tax benefits when paying interest. This is called leverage. However, if a company cannot pay their debts a bank can apply for bankruptcy. It is therefore important to remain solvent (to remain able to pay debts).
Current liabilities are debts that must be paid within the coming year, while long-term debts are to be paid after more than a year. Fixed assets are difficult to convert into cash, and can’t be used to pay debts, but current assets are liquid, and can thus can be used to pay short term debts.
The solvency ratio (long-term) is total assets divided by total debt.
The current ratio (short term) is the total current assets divided by current liabilities.
The quick ratio (cash variation of the current ratio) is the liquid assets (current assets minus assets) divided by total debt.
The financial performance of a company is an important factor in making decisions, and many objectives are formulated in a financial way. The financial performance can be made up from the financial statement. The income statement is a statement of the finances of a company between two snapshots, and presents an overview of the revenue, the gross profit and operating expenses deducted from it, and the net income before tax, after which the end result is the net income. Cash flow is the money that flows into and out of the business.
To measure the profitability usually the return on investment (ROI) is used: the net income divided by average total assets. Other ways are the return on equity (net income divided by average shareholders' equity) and return on sales (net income divided by total revenues).
If an organisation is not doing well financially, this may be due to the functional departments, and it is important to systematically check them. This can be done by, among other things, the SWOT analysis.
Formulating strategy is the development of the strategy itself, and how an organization will implement the strategy with an eye on the mission and objectives.
5.1 The SWOT analysis
What strengths can use the organization to fully exploit the opportunities?
What weaknesses can improve the organization to fully exploit the opportunities?
What strengths can use the organization to keep the threats away?
What weaknesses should improve the organization to keep threats away?
5.2 Strategic options
The questions in the table can be used to formulate a strategy, which then form strategic options. A gap analysis compares the goals of a company with the expected performance. If there are differences, the strategy should be adjusted. Even if there are no strategic changes are needed , the company can implement improvements.
A few basic strategic options:
No strategic change.
Business divestiture, or selling part of the company to a buyer who may have a better position in the market, may be of benefit to the company.
If a new strategy is required, this can be done by choosing an general strategy or by formulating a specific strategy.
Porter believes that a strategy is finding and keeping a good position in the industry, and that there are three general strategies:
Cost leadership strategy is to have the lowest cost compared to the competitors in the industry, which they achieve through efficiency. They often have little or standard service and their product is not differentiated: they go for the minimum needs of the consumer. They produce mass products because it is cheaper to produce on scale.
In differentiation strategy in terms of differentiating a product or service from other products, and thus making it seem more valuable. This can be done by the brand, but also reliability, or by design. This strategy works best in a market with different consumer needs.
The focus strategy focuses on niches, or small groups with specific needs. An organisation uses the strategy of cost leadership or differentiation, but for a more targeted market.
A general strategy can be chosen by looking at the market and whether it is possible for the organization to differentiate the product.
A strategic statement complements the overall strategies, and provides more details. It consists of three elements:
Objective: a strategic statement is the main objective taken and developed , and the organization follows this target in the next period.
Scope: indicates what the organization will focus on, for example the customer group and product types. It is also important to determine the customers that will not be focused on.
Competitive advantage: what the organization does or can do better than the competition in order to achieve the goal. It consists of the value of the organization/product and the activities that an organization does to deliver this value.
The value range is directly linked to the overall strategies. The results of the internal analysis will help to formulate the value proposition.
To be in the good position to implement the strategy, it may be necessary to make a strategic step. A few common steps are:
Backward integration: when customers become their own suppliers. This can be a threat for the company, but they can also use this technique themselves. (This also applies to forward integration, namely as suppliers produce their own products).
Horizontal integration: involves merging two or more companies to benefit (for example, by sharing resources) of each other. It can also ensure growth of the market share.
Mergers and acquisitions: is a faster way to obtain new resources and skills, and makes the above integrations possible. However, they can be costly.
A strategic alliance is an agreement between companies to achieve a common goal. It may also be that a joint venture is formed, meaning the creation of a new legal entity formed by two ' parent' companies.
5.3: Evaluation of strategic options
The selection of strategies can be helped by looking at the following three criteria:
Suitability: whether it meets the requirements of the environment , and whether it is appropriate for the organization.
Feasibility: whether it is applicable to the practice , and whether it is possible to carry it out. These criteria have to do with the input of the organization.
Acceptability: whether it will be accepted by the stakeholders of the organization.
The first two criteria relate to decisions for the investment budget in the long term, while the third criteria is directed towards the stakeholders. It is also important to consider the impact it may have on stakeholders.
6.1: Strategic goals
Before a strategy is entered, it is important that all individuals know of the strategy, and how it can be carried out. The strategy can be made by dividing it into concrete objectives. There are two types of objectives:
Strategic goals come directly from the strategy, are specific and time-bound, and can be measured.
Functional objectives make clear how the various functional departments contribute to the achievement of the strategic goals.
6.2: Changes in the organization
A new strategy brings many changes with it.
Firstly , there are changes in the resources that are needed. It could be that more material resources are needed, meaning investments must be made. If a company is growing it is often necessary to make changes to the human resources. It may also be that people need other skills , which means hiring new employees, but also to training and development. The organization resources could also be adapted.
Second, there are changes in the structure. Often these are not drastic changes since the strategy was chosen because it fits the structure of the organization, but small changes are possible. An example of this is the functional structure, which often can cause problems with the implementation of a strategy.
Finally, there is a change made in the culture of the organization, but this depends on the properties of the culture. If it is flexible culture they will respond faster to changes, but bureaucratic cultures often resist against change. A dedicated management team is important to get the strategy realized well.