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STRATEGIC MAGEMENT3. Technics of strategic planning

Second partStrategic planning in Hungary

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Information base of planning

There are many tools which can help the data collection for the planning. Of course, the traditional information sources, like statistics, accounting, internet (photo), etc. can be useful for it. Similar, but more sophisticated techniques are the Balanced Scorecard, SAP.

Some methods serve information first of all for the analysis of the firm’s past and present situation. Others (e.g. extrapolation, brainstorming, benchmarking) can help the forecasting as well.

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33Source: www.gt2006.freeblog.hu/albumunk/mexiko - Chichén Itza

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Balanced Scorecard (BSC) is an information base which helps all processes of strategic management. During the planning (e.g. working out of the strategy) BSC adaptors create a system of indices which characterises the expected development of the company. Then they monitor permanently, how the goals are realised. If, based on the experiences, they stated the necessity to change the strategy, they do it.

The main topics of indices are /1/ the financial aspect, /2/ the satisfaction of customers’ needs, /3/ the efficiency of business processes and /4/ the aspects of learning and development.

Source: Kaplan-Norton 4

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The financial BSC indices are traditional ones, they evaluate the volume of (net) income, value added and equity with the help of ROA, ROI etc.

The satisfaction of the customers can be analysed by evaluating the products’ features, the customer relation (e.g. the execution time of orders) and the firm’s image.

The criteria of the efficiency of business processes monitor the processes of production, services, purchasing.

In the framework of the learning and development aspects, innovation, the skills of employees, the possibilities of firm’s ICT and the motivation system are evaluated. 5

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Tasks of building a BSC system are the following:• Creation of the BSC respective the strategy.• Firm’s transformation (creation of the

organisational frameworks to the adaptation).• Communication (information of all employees

on BSC goals and indices, by which their performance is evaluated).

• Development of a business (operative) plan based on the fixed long-term BSC goals and indices.

• Monitoring and feedback (learning).

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Brainstorming is a process of collecting ideas. The organizer brings people together and encourages their free and open discussion on the creative solution of a problem. During the process no idea can be rejected.

Benchmarking is an effective tool of the evaluation of the situation. It compares the company’s performance to that of the best ones and state the methods of „best” practice.

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Delphi method is an other collective method of analysis (used first of all in forecasting). In the beginning a panel of experts is asked to form their views on the analysed question (e.g. make predictions). Then experts can compare their responses with that of the rest of the panel, and can modify their statements. The process is repeated and after some steps usually a consensus (e.g. a common forecast often with scenarios) emerges.

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Analyse of uncertaintyThe future being uncertain, the planners have to

analyse the risks coming from this situation. Uncertainty: if the manager does not know the coming events,

the variants of his future (possible) actions and/or their results. In some cases he can estimate the probabilities of the probable events, in others not.

Expected value is a mathematical estimation of an uncertain data, of which we know the possible values and the probability of their realisation.

E = Σ (ai • pi ), where

ai are the possible values of the forecasted data,

pi are the probabilities of the future value of this data,

and i are the set of possible outcomes (or years). 9

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ExerciseWe receive an offer to buy a share. According to

our evaluation its possible value may be 100 euros with 30 % probability, 110 euros with 50 % probability, and 120 euros with 20 % probability . How many is the expected value of this share?

E = 0,3 • 100 + 0,5 • 110 + 0,2 • 120 = 109

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The traditional method to mark, that a data is uncertain is the indication of the interval, in which we wait its realisation.

In an uncertain situation EU recommends for planners the scenario development (description of the external and internal factors of the future with different suppositions). The more important scenarios can be determined by the analysis of the „driving forces” and the „axes”. Driving forces are the main factors which cause the uncertainties, axes can be formed by the possible outcomes of these factors.

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Example:In a company the next year’s revenue is uncertain

because of the uncertain growth of sales and prises. Experts forecast, that the sales’ volume can stagnates but can also grows with 5%; and the inflation can be 3, or 5%.

In this case the driving forces can be the sales’ volume and the inflation, the axes are the stagnation and growth of sales, and the low or higher inflation.

So, planners have to analyse the four scenarios, in which /1/sales stagnate and the inflation is low or /2/ higher, and /3/ sales are growing and the inflation is low or /4/ higher. 12

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Competition strategy

A competition strategy of a company has to determine the actions which protect and develop the market of their products.

Firms can influence the demand of their products with the help of the so called marketing mix, especially the 4 P (product, price, place, promotion) first of all. So, the competition strategy has to determine, how the company wants develop its marketing mix.

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The GE Nine-Cell matrixAlthough the BCG matrix is a good tool of product

strategy building, it has some limitations. It is based upon the hypothesis that business strengths of a product can be described by market share, and its market opportunities by growth – but these relationships are debatable. In addition, the putting the products to four cells (distinction only four product groups) simplifies the description of the possible strategies.

So GE offers to develop a nine-cell business strength-industry attractiveness matrix („grid”).

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The recommendations based on the GE matrix

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Competitiveness

Selection

Selective growth

Investments

Harvest or liquidation

Selection

Selective growth

Liquidation

Harvest or liquidation

Selection

0 Market attractiveness

Source: own figure based on many publications

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The GE matrix classifies products (businesses) in accordance of their competitiveness and market attractiveness. Both criteria are measured trough experts’ evaluation. The examinations’ results are put into three - low, medium and high - classes.

The main problem of developing the GE matrix is the subjectivity of the experts’ evaluation. So, if the variables’ evaluation is correct, the analyses can be very effective. But in case, if the fidelity of this evaluation can be debatable, it would serve better the computation of a BCG matrix.

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Marketing strategies

The usual price strategy maximise the reesult of multiplication of the unit price and the sale’s volume of a product. Other strategy is the fixation of a dumping price.

The good sale’s channel strategy of mass products’ sale can be the diversification, the creation of more channel. In case of a niche product often the good strategy is the sale in a specialised shop-chain.

The best promotion strategy of some consumer’s consumption goods is the publicity. But in case of capital (investment) goods the use of the direct marketing can be better.

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Business plan of a small firm

Small firms should elaborate business plan /1/ before the foundation, /2/ at the beginning of a year, /3/ in case of credit application etc.

Business plans which are developed at the time of foundation should describe the main planned processes of production or services and analyse their future competitiveness as well (photos).

Business plans which are developed at the beginning of a year should analyse first of all the business opportunities (the possible receipts/turnover) and should review the expected expenses (costs).

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Source: www.gt2006.freeblog.hu/albumunk/mexico - flamingos in Rio Lagartos

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Source: www.gt2006.freeblog.hu/albumunk/peru - seals in Ballestas Islands

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Strategic planning in a large firmIn case of a complicated decision planners can use the

Analytic Hierarchy Process (AHP), which is a system (a decision tree) for the development of the goals, scenarios, alternative programs, success-criteria of a strategy. In the first step the main goals and scenarios are fixed. Then those decision-makers and their decision criteria are mapped, who are responsible for the details. The alternatives are compared pair-wise. After that the planner can determine the decision which fulfils the goals and is acceptable for all interested parties (see next slide).

Source: Saaty21

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Goals

Scenario I.

Scenario II.

Decision maker A and his criteria

Decision maker B and his criteria

Decision maker A and his criteria

Decision maker B and his criteria

Alternative 1.

Alternative 2.

Alternative 1.

Alternative 2.

Alternative 3.

Alternative 4.

Alternative 3.

Alternative 4.

Structure of AHP

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In a well organised corporation managers protect not only own interests, but interests of owners as well, and in their plans they fix indexes which create possibilities to control (monitor) the fulfilment of the goals as well.

To create good conditions of monitoring, some formal recommendations on corporate governance were developed. Recruitment of external members of board, written minutes of board’s meetings, external auditing, publication of balance sheets and firm’s policy etc. are highly recommended.

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Strategic planning in Hungary

In Hungary the practice of strategic planning was analysed by researches.

More than one third of the firms prepare long-range plans. The yearly (business) plans are almost general. Plans on investments, sales and liquidity are the most frequent ones. Quality and customers’ satisfaction are analysed only by one third of the firms.

The arsenal of planning methods is not too rich. Many firms calculate financial indices, prepare cash-flow reports, SWOT and break-even analysis. Application of other tools, e.g. BSC, PERT is rare. (See the next slides.)

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Proportion of firms (%) having the given behaviour

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Firms’ behaviour Developed countries

Hungary

Develops long-range plans minimum on 3 topics

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Develops long-range plans on 1-2 topics

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Develops only yearly plans 31 44 Does not develop formal plans 27 18 Total 100 100

Source: Barakonyi

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Proportion of firms (%) adapting the given method

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Permanent Occasional Methods application

SWOT analysis 44 27 Development of scenarios 14 27 Portfolio-analysis 27 26 Value-chain analysis 17 16

Source: Chikán – Czakó - Zoltayné

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Source: www.gt2006.freeblog.hu/albumunk/mexico - Sumidero canyon

Reward

Thank you for your attention!

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