CH1 - The concept of strategy and the rational/formal approach to strategy formulation

Question 1

Cima definition of strategy?

Cima definition of strategic plan?

Answer 1

A course of action,including specification of resources required, to achieve a specific objective

strategic plan -a statement of long term goals along with the definition of the strategies and policies which will ensure achievement of these goals

Question 2

What are Druckers 5 fundamental questions a company should ask in relation to its strategy?

Answer 2

What is our mission?
Who are our customers?
What is our plan?
What are our results?
What does the customer value?

Question 3

Common themes in strategy?

Answer 3

Purpose and long term direction
Scope of organisations activities
Meeting Challenges from firms external environment
Using internal resources and competencies effectively
Delivering value to stakeholders

Question 4

Henry mintsberg definitions of strategy (5 Ps)

Answer 4

Strategy as a PLAN - direction,course of action, a path from here to there.

Strategy as a PATTERN of consistent behaviour over time, giving impression of a logically thought out strategy. E.g. High end strategy, high risk strategy

Strategy as a PLOY which can be seen as a manoeuvre in a competitive business game. E.g. Adding extra capacity just to discourage competition

Strategy as a POSITION- identifying where an organisation places itself in a market

Strategy as a PERSPECTIVE - organisations unique way of perceiving opportunities and choices. Organisations may respond to same environment in different ways.

Question 5

Define strategic management

Answer 5

Decisions organisations make about future direction

Development and implementation of strategies to enhance competitiveness.

Establishing purpose of organisation

Guiding managers how to implement strategies to achieve organisational goals

Question 6

What influences how effective an organisation will be in achieving its objectives?

Answer 6

How did they reach the situation they’re in today?
Why are they producing products/services?
How did they come to be located where they are?
Why they serving particular sector of market place?
How did they end up with their senior managers?
Why they organised the way they are?

How these decisions are made and implemented is the process of strategic management

Question 7

What are the 3 levels of strategy? (And their order)

Answer 7

Corporate strategy
Business strategy
Functional or operational strategy

Question 8

What is an SBU?

Cima key point

Answer 8

A section / division within a larger organisation that has a significant degree of autonomy, typically responsible for developing and marketing its own products and services.

Question 10

What is corporate strategy?

Answer 10

Balanced portfolio of SBU’s

Determining overall purpose and scope of organisation
What businesses is the firm in and what should it be in?

Activities need to be matched to firms environment, resource capabilities and shareholder expectations.

How integrated should these businesses be?

Question 11

What is functional strategy?

Answer 11

Balanced portfolio of resources

Looks at how different functions of the business support the corporate and business strategies.

In other words long term management policies of sales, production, purchasing, Human Resources and finance

E.g how much stock, how many staff?

Question 12

What is business strategy?

Answer 12

Balanced portfolio of products

Looks at how each SBU attempts to achieve its mission within its area of activity.
Management of SBU responsible for winning customers/ beating rivals, consequently competing strategy formulated at this level.

Which products should be developed?
What approach should be taken to gain competitive advantage?

Business strategy should be formulated with the framework of corporate centre, with the degree of autonomy reflecting the management structure of the organisation

Question 13

What is the rational approach to strategy?

Answer 13

Also known as formal, traditional or top down approach. It’s a planning process based on rational behaviour whereby planners, management and organisations are expected to behave logically. As a result predictability is expected.

Question 14

What are the 7 steps to the rational approach?

Answer 14

1. Determine mission of organisation
2. Set corporate objectives
3. Carry out corporate appraisal (SWOT) of internal and external environment.
4. Identify strategy options to achieve competitive advantage. Maximising strengths/opportunities and minimising weaknesses/threats found in SWOT
5. Evaluate each strategic option for its fit with the mission and circumstances of the business. Select best option
6. Implement chosen strategy
7. Review and control performance to determine whether objective have been achieved. Continuous monitoring- corrective action

Question 15

1st step of rational model is setting the mission. Define the mission?

Answer 15

Broad statement of overall purpose of the business. Should reflect core values. It will set out the overriding purpose of the business in line with stakeholder values and expectations.

E.g rolls Royce exits to provides small numbers of luxury high end cars.

Ford on the other hand exists to sell large volume

Question 16

What is the mission statement and what 3 questions does it address?

Answer 16

Statement in writing describing basic purpose of organisation.

Normally address 3 questions

Why do we exist?
What are we providing?
For whom do we exist?

Question 17

What are the purposes of mission statements?

Answer 17

To provide basis for consistent planning decisions

To assist in translating purpose and direction into objectives suitable for assessment and control

To provide consistent purpose between different stakeholders

To establish organisational goals and ethics

To improve understanding and support from key groups outside the organisation

Question 18

What is a vision statement?

Answer 18

Describes a picture of the preferred future. - how the future will look if the organisation achieves its mission

Question 19

In the rational approach to strategy, whats next after establishing the mission and vision?

Answer 19

Establishing goals

Question 20

How does Mintzberg define goals?

Answer 20

Mintzberg defines goals as the intention behind an organisations decisions or actions. He argues goals will frequently never be achieved and may be incapable of being measured.

Although goals are more specific than mission statements and have a shorter no of years in their timescale, they are not precise measurements of performance.

E.g. “The highest possible standard”

Question 21

What are objectives?

Answer 21

Goals expressed in a form which they can be measured. E.g. PBIT to be more than 20% of capital employed

Question 22

SMART often used when setting objectives. What does it stand for?

Answer 22

Specific- clearly expressed. Improve performance is too vague, improve operating profit is better.

Measurable- quantifiable. Improve image not measurable. Increase profit to 20% of turnover is.

Achievable - to those responsible for achieving, so as not to demotivate.

Relevant - linked to the goals of the business. If goal is to increase customer satisfaction then the objective to increase customer satisfaction by 5% is relevant.

Timely - timescales have to be set if the objective is ever to be achieved.

Question 23

Objectives form a number of functions recalled using the acronym PRIME. What does it stand for?

Answer 23

Planning- objectives provide framework for planning. They are targets the plan is supposed to reach.

Responsibility- objectives given to managers. This communicates to them the activities they are responsible for, the types of output required and the level of output required.

Integration- objectives are how senior management coordinate the work of the company. If the objectives handed down are internally consistent, it should ensure goals congruence between managers of divisions.

Motivation- managers will be motivated to reach objectives in order to impress superiors or earn bonuses. Objectives therefore must cover all areas of the mission otherwise some areas may be ignored.

Evaluation - senior management control business by evaluating the performance of managers responsible for each of its divisions. Objectives therefore must be capable of being evaluated.

Question 24

What does the goal structure consist of?

Answer 24

Once mission,goals and objectives have been set these can be broken down into-

Critical success factors- must go right for objectives and goals to be achieved.

Each CSF must have a key performance indicator- to allow it to be measured

KPI’s can be further broken down into individual performance targets

Question 25

What 3 levels do objectives exist at?

Answer 25

STRATEGIC objectives are reached by following the set strategies.

These are communicated to management as numerous TACTICAL objectives, which in turn are implemented and reviewed by setting a large number of OPERATIONAL objectives

In turn, operational objectives may be communicated to mangers and staff responsible through their CSF’s KPI’s and individual performance targets.

Question 26

What is a SWOT analysis?

Answer 26

Corporate appraisal undertaking internal and external analysis. Usually: Internal - strengths and weakness, using resource audit and porters value chain. External - opportunities and threats, using PESTLE and porters five forces.

Question 27

How do you carry out a good SWOT analysis

Answer 27

Strengths - things we do well, thing we do our competitors don't, major successes. Weaknesses- things we do badly, things were not doing but should be, major failures. Opportunities - events/ changes in the internal environment that can be exploited. Things likely to go well in the future. Threats- events/ changes in the internal environment that we need to protect from. Things likely to go badly in the future. Suggest how to convert weaknesses to strengths Advise how to remove weaknesses that leave us exposed to threats Match strengths to opportunities If something is a threat to us it's also likely a threat to rivals. Can we exploit this?

Question 28

What is strategic choice?

Answer 28

Process of choosing the alternative strategic options generated by the SWOT analysis. Involves making decisions such as On what basis should we compete? What alternative directions are available and which markets or products should we enter or leave? What alternative methods are available to achieve the chosen direction?

Question 29

What is the Ansoff matrix used for?

Answer 29

Showing alternatives for strategic direction to help decide how an organisation might develop in the future to exploit strengths and opportunities and minimise threats and weaknesses.

Question 30

How is the ansoff matrix set out?

Answer 30

(Product) Current New Market penetration Product development (Market) Current New Market development Diversification

Question 31

In the ansoff matrix, one of the quadrants is diversification. What are the different types of diversification.

Answer 31

Related diversification- known as horizontal diversification. Refers to development into activities that are competitive with or directly complimentary to, a company's present activities. Unrelated diversification-known as conglomerate diversification. Refer to diversifying into completely unrelated business. Diversification may involve vertical intergration. Backwards vertical - taking over supplier, or forwards vertical- taking over a customer.

Question 32

As well as considering "basis to compete" and strategic direction, what methods could a company use in strategic development?

Answer 32

Internal development- using internal resources to pursue strategy. May involving building a business from scratch. Takeovers/acquisitions. To acquire knowledge of a product or market area. To obtain new product range or market presence to eliminate competition. Strategic alliances - increasing exposure to potential customers, gaining access to technology.

Question 33

What's happening at the evaluation stage of the rational model?

Answer 33

Each strategic option considered in detail for fit with mission and circumstances of the business. Management ends up with shortlist of options to improve competitive position of the business

Question 34

What's happening at strategy implementation stage?

Answer 34

Drawing up of detailed plans, policies and programs necessary to make the strategy happen. Obtaining necessary resources to commit to strategy. Commonly called tactical and operational decisions Tactical programmes and decisions - medium term policies designed to implement key elements of the strategy e.g developing new product, recruitment or downsizing etc. Project appraisal and management invaluable at this level. Operational programmes and decisions cover routine day to day matters- meeting production, cost and revenue targets. Budgetary control important factor in controlling these matters.

Question 35

How does Johnson, Scholes and Whittington model of strategic planning differ to rational model

Answer 35

Consist of 3 elements- analysis choice and implementation. Instead of presenting linearly, recognises interdependencies. E.g. It might be at the implementation stage that an organisation discovers something that sheds light on its strategic position. Argues that strategic planning can start at any point. E.g. Company might decide to launch an internet sales division without first carrying out any strategic analysis or choosing how the strategy might compete.

Question 36

Last step in rational model is review and control. What is this?

Answer 36

Continuous process of reviewing both the implementation and continuing suitability of the strategy. Does performance of strategy still put the business on course to achieve its strategic objectives? Are the forecast of the environment on which the strategy was based still accurate?or have unforeseen threats or opportunities arisen? This may make a change of strategy necessarily.

Question 37

Although not part of rational strategy model, stakeholder analysis is a key stage in strategy development. When should this happen? And why?

Answer 37

When setting mission, vision and objectives of the company. 1 - Because of stakeholder power- stakeholders can affect the success of the strategy whether they support or oppose it. E.g. Customers refusing to buy products, staff striking etc 2. Organisational legitimacy- companies are required to be good citizens to be accepted by society. Must not abuse the power they have. Although working primarily for shareholder, management must ensure that its decisions don't ignore other stakeholders.

Question 38

What are the different classifications of stakeholder (with examples)

Answer 38

Internal - employees and management Connected - shareholder, customers, suppliers External - government, community, pressure groups Primary - stakeholders have formal contractual relationship in a strategy or project Secondary - stakeholders have no formal relationship

Question 39

What is the mendelow matrix?

Answer 39

Helps a company recognise objectives of each group of stakeholders. Process for managing stakeholders is: Identify stakeholder and determine each groups objectives. Analyse the level of interest and power of each group. Place each stakeholder in appropriate quadrant of mendelow matrix Use matrix to assess how to manage each group.

Question 40

What does mendelow matrix look like?

Answer 40

Level of interest Low. High Level. MINIMAL EFFORT KEEP INFORMED Of. Likely to accept present strategy as Power. whatever told. Rational to prevent them joining powerful dissenters Low KEEP SATISFIED KEY PLAYERS Assure of likely outcomes Can be major drivers or of strategy well in advance opponents to change. Need High. assurance that change is necessary

Question 41

What must you consider when assessing the power of stakeholders?

Answer 41

STATUS - their place in organisational hierarchy, relative pay,reputation and social standing CLAIM ON RESOURCES- size of budget, number and level of staff employed, volume of business transacted with them, % of workers they speak for (e.g. Trade union) FORMAL REPRESENTATION IN DECISION MAKING PROCESS- level of management where they are represented, committees they have representatives on, legal rights (e.g. Shareholders, planning authorities)

Question 42

What must you consider when assessing the interest of stakeholders?

Answer 42

2 factors 1. Where their interest rests- assume powerful stakeholders pursue self interest. Consider what they wish to achieve. E.g. Mangers- further interests of their departments as well as pay and own careers. Employees require higher pay, job security, good working conditions Customers want fair prices, reliable supply, reassurance about their purchases. Supplier want fair prices, prompt payment. Local gov want jobs, contribution to to local community life and consulting on expansions etc. 2- how interested are they. Not all stakeholders have the time or inclination to follow management decisions closely. E.g high personal financial or career investment in what the business does. Absence of alternative. Potential to be called into account for failing to monitor High social impact of the company

Question 43

Similar to mendelow, what do Johnson and Scholes suggest as a strategy for dealing with stakeholders?

Answer 43

Low interest - Low power: direction Lack of interest and power makes them open to influence. More likely to accept what their told and follow instructions. High interest - Low power: education/communication Management need to convince opponents to strategy that plans are justified otherwise they may try gaining power by joining with more powerful parties. Low interest-High power: Intervention Keep stakeholders satisfied to avoid them gaining interest. Could in involve reassuring of outcomes of strategy well in advance. High interest-High power: Participation Stakeholders are major drivers of change and could stop management plans if not satisfied. Management therefore need to communicate plans and discuss implementation issues.

Question 44

Give 7 examples of the main stakeholder groups and their concerns/ objectives

Answer 44

Shareholders - steady flow of income, capital growth, continuation of business. Directors/managers - pay and status, job security, individual performance measures. Manager of a branch would object to plans for closing down/ scaling back their department Employees - Job security, pay and conditions, job satisfaction. Trade unions- problems of employees, taking part in decision making process. If a strategy results in department being closed, trade unions will want to be consulted and won't be happy if there is no scheme to help employees find alternative employment Customers - receiving goods/services of reasonable quality at a reasonable price. Suppliers - prompt payment, receiving regular capital repayments (e.g. Bank loans) e.g. A strategy that involves improving working capital by paying suppliers late, existing suppliers may decide to stop supplying the organisation. Government pressure groups/general and local public. Organisation is meeting legal requirements, organisation does not harm the environment

Question 45

What techniques do Cyert and March suggest for dealing with stakeholder conflict?

Answer 45

Satisficing- usual by negotiating, keep most and not necessarily all powerful stakeholders happy. Sequential attention- giver stakeholders turns to realise their objectives. E.g. Pay rise every 3 years, but in between pay is static so dividends can be paid. Side payments - compensation given for not addressing a particular stakeholders objectives. E.g. Community may have a leisure centre built by a company whose new superstore will increase noise and traffic in the area. Exercise of power- where deadlock is overcome by powerful figures forcing through their preferred strategic option.

Question 46

What other techniques can be used to deal with stakeholder conflict?

Answer 46

Prioritisation- management can specify that a strategy must at a minimum satisfy one or more specific objectives before thy will consider. Weighting and scoring objectives in terms of importance. Weighting (relative importance to organisations) x scoring (how well strategic option satisfies its objective) = highest overall option accepted Creation of a wider balanced scorecard set of performance measures.