mergers and acquisitions of firms offering similar products and services. A firm may diversify by growing horizontally into unrelated businesses.
COOPERATION: STRATEGIC ALLIANCES, MERGERS:
Alliances and Joint Ventures
Alliances and joint ventures take many forms, including licensing agreements, franchise agreements, relational contracting, relational management, consortia, virtual corporations, virtual functions and joint ventures. It is not the details of these which are important as much as the underlying rationale for strategic alliances in the first place. The success rate of mergers and take-overs has been low; it is therefore important to determine whether or not this form of cooperative action leads to better results. Although in Porter’s study the rate of divestment of joint ventures was lower (50 per cent compared with 75 per cent), other research has found no significant long term effects of joint venture activity on profitability in any industrial sector. Given this, the real issue is why companies should choose an arm’s-length contract rather than entering into a full merger.
A corporate merger is the combination of the assets and liabilities of two firms to form a single business entity. In a merger of firms that are approximate equals, there often is an exchange of stock in which one firm issues new shares to the shareholders of the other firm at a certain ratio. For the sake of this discussion, the firm whose shares continue to exist (possibly under a different company name) will be referred to as the acquiring firm and the firm whose shares are being replaced by the acquiring firm will be referred to as the target firm.
Excluding any synergies resulting from the merger, the total post-merger value of the two firms is equal to the pre-merger value. However, the post-merger value of each individual firm likely will be different from the pre-merger value because the exchange ratio of the shares probably will not exactly reflect the firms’ values with respect to one another. The exchange ratio is skewed because the target firm’s shareholders are paid a premium for their shares.
Synergy takes the form of revenue enhancement and cost savings. When two companies in the same industry merge, combined revenue tends to decline to the extent that the businesses overlap in the same market and some customers become alienated. For the merger to benefit shareholders there should be cost saving opportunities to offset the revenue decline; the synergies resulting from the merger must be more than the initial lost value.
To calculate the minimum value of synergies required so that the acquiring firm’s shareholders do not lose value, an equation can be written to set the post-merger share price equal to the pre-merger share price of the acquiring firm as follows:
The above equation then can be solved for the value of the minimum required synergies.
The success of a merger is measured by whether the value of the acquiring firm is enhanced by it. The practical aspects of mergers often prevent the forecasted benefits from being fully realized and the expected synergy may fall short of expectations.
The implementation stage is visualised as starting after the choice of strategy has been made. Once implementation gets under way it is to be expected that there will be a constant process of feedback with earlier stages. As resources are mobilised it may become apparent that the original objectives are unattainable, that predicted costs were too low, that likely competitive reaction was overestimated and that the full range of strategy choice was not realised. This may make it difficult to isolate implementation as an independent activity in practice. However, by treating implementation as an independent part of the strategy process, the manager is forced to recognise that no matter what sophisticated analysis has been undertaken to arrive at a strategic choice, at the time the choice is made it is possible that nothing has been produced and nothing has been sold. In other words, choosing strategy is not an end in itself; unless there is a mechanism for making it happen it is a somewhat pointless activity.
The process of strategy implementation involves:
A. Resource Planning:
If the company is ever going to achieve a competitive advantage, it must set up procedures to ensure that resources are used efficiently. Inter-functional coordination is critical to fulfilling the needs of customers. Resource planning has implications for all aspects of company’s performance.
The problem of allocating budgets is encountered at many levels, but for strategy purposes these can be reduced to two: the corporate and SBU or functional levels. At the corporate level the overall budget is rationed among competing alternatives, typically on the basis of proposals submitted by SBUs. At the SBU or functional level it is necessary to allocate funds to individual managers so that they can carry out the tasks which are required to achieve the objectives of each investment; the investment appraisal which revealed that the net cash flows generate a positive NPV does not usually take into account uncertainty as to how costs will actually be incurred and resources deployed.
There are many reasons why a company may be unable to raise money on the market to finance investments. The most obvious one is when the market does not agree with the company’s estimate of future returns; the track record of the company’s managers may be such that the market views their plans with considerable reserve. Another reason is that the company may be unwilling to reveal its intentions to competitors. The desirability of an investment may depend on achieving a competitive advantage which would be impossible if competitors knew what the company’s strategy was likely to be. In fact, strategic options are often difficult to define with tile precision which will attract investors. It is one thing to use investment appraisal to attempt to estimate the relative value implications of alternative strategies, but it is quite another to translate this into a convincing investment plan.
It therefore seems likely that the company will be faced with a budget constraint when allocating available funds among competing investments. The theory of finance can provide a solution to the capital rationing problem of determining which combination of investments will add most to shareholder wealth within the context of the chosen strategy. However, the application of sophisticated capital rationing techniques does not necessarily resolve the budget allocation problem. This is because the formal capital rationing solution is in terms of a combination of investments, and may exclude some investments with higher NPVs than those included. It may be difficult to explain to an SBU manager that his proposed investment, with a relatively high NPV, has been excluded because of the application of an obscure financial technique. It is obviously important to use appropriate financial techniques to identify the most profitable budget allocation; whether it is feasible is another matter.
One way to avoid the difficulties associated with capital rationing is to set across-the-board budget limits; this has the advantage that all SBUs are treated in the same way, and in turn the SBUs can set across-the-board limits, since this is consistent with corporate policy. However, such an approach is inconsistent with principles of efficient resource allocation. The whole emphasis of the strategic planning process has been on the identification of activities with different potential pay-offs and directing resources accordingly. For example, if the objective were to increase the market shares of products currently being produced, it would make little sense to increase the research budget at the same time simply because the marketing budget was to be increased. On the other hand, if there is no sensible budgetary control, when companies are faced with adverse market conditions and decide to follow a retrenchment strategy the first thing that is usually done is to cut back on those budgets which can be manipulated without affecting current performance. Training, research and maintenance budgets are often pruned to achieve an immediate increase in ROI without proper consideration of the overall resource allocation implications. This is often justified by senior management on the grounds that survival is the primary concern and refinements can come later. This reaction is probably inevitable when senior management concentrates attention on short term cash flows rather than on the concept of shareholder wealth, which puts short term cash flows into context.
At the functional level the SBU manager is confronted with many imponderables. If a new market is being entered he has to decide how much to allocate to marketing and over what period. The marketing manager has to decide how much to allocate to market research, advertising, promotions and so on. By the time the original funds have been parcelled up and allocated to the various functions, it may be difficult to identify specific expenditure with the original project. The original investment appraisal assumed that the cash would be used efficiently at the functional level. The management problem at this level is to ensure that this happens, but there may be relatively few guidelines to assist managers who are in the front line. An ostensibly attractive strategy may flounder because budgets are disseminated throughout the organisation in a haphazard fashion.
C. Recruitment and selection:
Company conducts recruitment and selection of people who have the aptitude and motivation for success.
D. Training and development:
Training programmes such as on-the-job training as well as formal training courses (both in-house and at other institutions) must be arranged to develop personnel.
E. Organisational Structure:
Coordination of activities vertically in a top down or bottom up fashion or both.
THE MEANS OF VERTICAL COORDINATION:
A. The Chain of command: The unbroken line of authority that ultimately links each individual with the top organizational position thorough a managerial position at each successive layer in between.
The Concepts in chain of command:
1. Unity of command: Every employee has only one boss (example, marketing manager reports to marketing director)
2. Scalar principle: Every employees report to their bosses in a linear fashion (example, marketing manager reports to marketing director, marketing director reports to the managing director)
B. Span of management or span of control:
Span of control is the number of subordinates who report directly to a specific manager.
Spans of management or control determine the number of hierarchical levels in an organization.
The effects of very tall organization structure: Very tall organizations raise administrative overhead, slow communication and decision making, make it more difficult to pinpoint responsibility for various tasks, and encourage the formation of dull, routine jobs.
Ways to resolve the problem with tall structure:
In two ways:
a. Downsizing is the process of significantly reducing the layers of middle management, expanding the spans of control, and shrinking the size of the work force.
b. Restructuring is the process of making a major change in organization structure that often involves reducing management levels and also possibly changing some major components of the organization through divestiture and/or acquisition.
Delegation is assignment of part of manager’s work to others along with responsibility and authority.
What is delegated by managers?
1. Responsibility is the obligation or expectation to perform and carry out duties and achieve goals related to a position.
2. Authority is the right inherent in a managerial position to tell people what to do and to expect them to do it, right to make decisions and carry out actions to achieve organizational goals.
While part of a manager’s work may be delegated, the manager remains accountable for results.
The types of authority
a. Line authority and b. Staff authority.
The differences between the Line authority and staff authority:
The result of delegation:
Managers delegated with authority and responsibility become accountable to the senior managers.
Accountability is the requirement of being able to answer for significant deviations from duties or expected results.
How much authority should a firm delegate?
This is determined by extent of centralization or decentralization
a. Centralization is the extent to which power and authority are retained at the top organizational levels.
An organization is centralized if decisions made at lower levels are governed by a restrictive set of policies, procedures, and rules, and if situations not explicitly covered are referred to higher levels for resolution.
b. Decentralization is the extent to which power and authority are delegated to lower levels.
An organization is decentralized to the extent that decisions made at lower levels are made within a general set of policies, procedures, and rules, with decisions not covered left to the discretion of lower-level managers.
Centralization offers advantages.
a. It is easier to coordinate the activities of various units and individuals.
b. Top managers have more experience and may therefore make better decisions.
c. Top managers have a broader perspective on decision situations.
d. Duplication of effort by various organizational units can be avoided.
e. Strong leadership is promoted.
Decentralization offers advantages.
a. Top managers can concentrate upon major issues.
b. The jobs of lower-level employees are enriched by the challenge of making decisions.
c. Decisions can be made faster.
d. Individuals at lower levels may be closer to the problem and may be in a better position to make good decisions.
e. Relatively independent units emerge as divisions, with more easily measured outputs.
Organizations should move toward a decentralized structure when:
a. The organization is so large that top managers do not have the time or the knowledge to make all the major decisions.
b. Operations are geographically dispersed.
c. Top managers cannot keep up with complex technology.
d. The environment is increasingly uncertain.
Coordinating activities across the departments of an organization.
The means of horizontal coordination:
Organization chart or organogram:
Organization chart or organogram is a line diagram that depicts the broad outlines of an organization’s structure. While varying in detail from one organization to another, typically organization charts show the major positions or departments in the organization, the way positions are grouped together, reporting relationships for lower to higher levels, official channels for communications, and possibly the titles associated with major positions in the organization.
THE MAIN ORGANISATIONAL STRUCTURES:
Four main structures:
1. Functional; 2. Divisional; 3. Hybrid; and 4. Matrix structures.
Functional structure is a type of departmentalization in which positions are grouped according to their main functional (or specialized) area.
The functional form of organization has several major advantages.
a. In-depth development of expertise is encouraged.
b. Employees have clear career paths within their function.
c. Resources are used more efficiently.
d. Economies of scale may be possible because of specialized people and equipment.
e. Intradepartmental coordination is facilitated.
f. Specialized technical competencies may be developed and may constitute
a competitive advantage.
The functional form of origination has several disadvantages.
a. Response time on multifunctional problems may be slow due to coordination problems.
b. Major issues and conflicts between departments may have to be resolved by top management, with resultant delays.
c. Bottlenecks due to sequential tasks.
d. Over specialization may lead to a restricted view of the department’s and the organization’s needs.
e. Performance may be difficult to measure because several functions are responsible for organizational results.
f. Managers may be trained too narrowly in a single department.
The functional form of departmentalization is more appropriate under certain circumstances.
a. The organization is small or medium-sized.
b. There is a limited number of related products or services, or a relatively homogeneous set of customers or clients.
c. The organization is large and diverse, but the environment is stable.
B. A Divisional structure:
Divisional structure is a type of departmentalization in which positions are grouped according to similarity of products/services, or markets.
Types of divisional structure:
a. Product/service divisions are divisions created to concentrate on a single product or service or at least a relatively homogeneous set of products or services.
b. Geographic divisions are divisions designed to serve different geographic areas.
c. Customer divisions are divisions set up to service particular types of clients or customers.
Di.visional structure has several major advantages
a. Divisions can react quickly to changes in the environment.
b. Coordination across functions is simplified.
c. Each division can focus upon serving its customers.
d. The division’s goals can be emphasized.
e. Performance is more easily measured.
f. Managers can be trained in general management skills.
Divisional structure has several disadvantages.
a. Duplication of resources in each division often occurs.
b. In-depth expertise may be sacrificed.
c. Divisions may compete for limited resources.
d. Expertise across divisions may not be shared.
e. Innovations may be restricted to single divisions.
f. Divisional goals may take priority over overall organizational goals.
The divisional structure is likely to be used in large organizations where substantial differences exist among products or services, geographic areas, or customers served.
C. Hybrid structure is a form of departmentalization that adopts parts of both functional and divisional structures at the same level of management.
Hybrid structures are adopted by large organizations to gain the advantages of functional and divisional structures.
a. Functional departments are created to take advantage of resource utilization efficiencies, economies of scale, or in-depth expertise.
b. Divisional departments are usually created to benefit from a stronger focus on products, services, or markets.
The hybrid structure has several advantages.
a. Corporate and divisional goals can be aligned.
b. Specialized expertise and economies of scale can be achieved in major functional areas.
c. Adaptability and flexibility may be achieved in handling diverse product or service lines, geographic areas, or customers.
The hybrid structure has several disadvantages.
a. Conflict may arise between departments and divisions.
b. Hybrid organizations tend to develop excessively large staffs in the corporate-level functional departments.
c. There may be a slow response to exceptional situations requiring coordination between a division and a corporate functional department.
The hybrid structure is best used under particular conditions.
a. The organization faces environmental uncertainty best met by a divisional structure.
b. The organization requires functional expertise and/or efficiency.
c. The organization has sufficient resources to justify the structure.
D. A matrix structure
A matrix structure is a type of departmentalization that superimposes a horizontal set of divisional reporting relationships onto a hierarchical functional structure.
Characteristics of a matrix structure:
1. An organization with a matrix structure has a functional and a divisional structure at the same time.
2. Employees who work in a matrix organization report to two “bosses,” thus, the unity-of-command principle is violated.
3. Organizations that adopt a matrix structure usually go through several identifiable structural stages:
a. Stage 1 is a traditional structure, usually a functional structure, which follows the unity-of-command principle.
b. Stage 2 is a temporary overlay in which managerial integrator positions are created to handle issues of finite duration that involves coordinating across functional departments.
c. Stage 3 is a permanent overlay in which the managerial integrator positions become permanent.
d. Stage 4 is a mature matrix, in which matrix bosses have equal power.
4. As an organization passes through the matrix stages, horizontal integration increases at the cost of greater administrative complexity.
The matrix form of organization has several advantages.
a. Decision making can be decentralized.
b. Horizontal coordination is strengthened.
c. Environmental monitoring is improved.
d. Responses to environmental changes are quickly made.
e. Functional specialists can be added to or resigned to projects as needed.
f. Support systems can be allocated to projects as needed.
Matrix designs have several disadvantages.
a. Administrative costs are increased.
b. Lines of authority and responsibility may not be clear to individual employees due dual authority.
c. Possibilities of conflict are increased.
d. Individuals can become preoccupied with internal relations at the expense of clients and project goals.
e. All decisions may become group decisions, leading to gross inefficiency.
f. Reactions to change may be slowed if interpersonal skills are lacking or top management fights for control.
Matrix designs are usually appropriate when the following three conditions are met:
a. The considerable pressure from the environment that necessitates a simultaneous and strong focus on both functional and divisional dimensions.
b. The demands placed on the organization are changing and unpredictable, making it important to have a large capacity for processing information and coordinating activities quickly.
c. There is pressure for shared resources.
Research indicates some of the factors that may be necessary to the success of a matrix system
a. The organizational culture may need to be changed to support collaboration.
b. Managers may need special training, especially in interpersonal relations.
E. Of particular interest are two new types of organizational structure that have recently emerged: the process structure and the networked structure.
1. A process structure is a type of departmentalization which groups positions into process team which are given beginning-to-end responsibility for that process or that specified work flow. The process structure is sometimes called the horizontal organization.
2. The networked structure is a form of organizing in which many functions are contracted out to other independent firms and coordinated through the use of information technology networks. Sometimes the networked structure is called the virtual corporation because it performs as virtually one corporation.
STRATEGIC IMPLEMENTATION: SOME BROAD STRATEGIES
USING McKinsey’s 7’s as a guide implementation:
McKinsey and Company have developed a model known as, “the seven elements of strategic fit,” or the “7-S’s.”
1. strategy (the coherent set of actions selected as a course of action);
2. structure (the division of tasks: the organization structure/chart);
3. systems (the processes and flows that show how an organization gets things done: chain of command, delegation, communication etc.);
4. style (how management behaves);
5. staff (the people in the organization);
6. shared-values (values shared by all in the organization); and
7. skills (capabilities possessed by the organization).
The underlying concept of the model is that all seven of these variables must “fit” with one another in order for strategy to be successfully implemented.
However, shared values (based on common purpose) are central to the framework because they pull the hearts and the minds together.
THE FIVE APPROACHES TO IMPLEMENTATION:
1. The Commander Approach
The strategic leader concentrates on formulating the strategy, applying rigorous analysis. The leader either develops the strategy himself or supervises a team of planners charged with determining the optimal course of action for the organization. He typically employs such tools as experience curves, growth/share matrices, and industry and competitive analysis.
This approach addresses the traditional strategic management question of “How can I, as the strategist, develop a strategy for my business which will guide day-to-day decisions in support of my longer-term objectives?” Once the “best” strategy is determined, the leader passes it along to subordinates who are instructed to execute the strategy.
The leader does not take an active role in implementing the strategy. The strategic leader is primarily a thinker/planner rather than a doer.
Three conditions must exist for the approach to succeed:
•The leader must wield enough power to command implementation; or, the strategy must pose little threat to the current management, otherwise implementation will be resisted.
•Accurate and timely information must be available and the environment must be reasonably stable to allow it to be assimilated.
•The strategist (if he is not the leader) should be insulated from personal biases and political influences that might affect the content of the plan.
A drawback of this approach is that it can reduce employee motivation. If the leader creates the belief that the only acceptable strategies are those developed at the top, he may find himself in an extremely unmotivated, un-innovative group of employees.
However, several factors account for the Commander popularity. First, it offers a valuable perspective to the chief executive. Second, by dividing the strategic management task into two stages -“thinking” and “doing” -the leader reduces the number of factors that have to be considered simultaneously. Third, young managers, in particular, seem to prefer this approach because it allows them to focus on the quantitative, objective elements of a situation, rather than with more subjective and behavioural considerations.
Finally, such an approach may make some managers feel as an all-powerful hero, shaping the destiny of thousands with his decisions.
2. The Organizational Change Approach:
This approach starts where the Commander Approach ends or is not appropriate. The organizational Change Approach addresses the question “I have a strategy – now how do I get my organization to implement it?” The strategic leader again decides major changes of strategy and considers the appropriate changes in structure, personnel, and information and reward systems if the strategy is to be implemented effectively.
The most obvious tool for strategy implementation is to reorganize or to shift personnel in order to lead the firm in the desired direction. The role of the strategic leader is that of an architect, designing administrative systems for effective strategy implementation.
The Change Approach is often more effective than the Commander Approach and can be used to implement more difficult strategies because of used the several behavioural science techniques. This technique for introducing change in an organization includes such fundamentals as: using demonstrations rather than words to communicate the desired new activities; focusing early efforts on the needs that are already recognized as important by most of the organization; and having solutions presented by persons who have high credibility in the organization.
However, the Change Approach doesn’t help managers stay abreast of rapid changes in the environment. It can backfire in uncertain or rapidly changing conditions. Finally, this approach calls for imposing the strategy in a “top-down” fashion and is subject to the same motivational problems as the Commander Approach.
3. The Collaborative Approach:
This approach extends strategic decision-making to the organization’s top management via the question “How can I get my top management team to help develop; and commit to a good set of goals and strategies?”
The lower level manager/leader and his senior manager (divisional heads, business unit general managers or senior functional managers) meet for lengthy discussion with a view to formulating frameworks for strategy implementation.
In this approach, the leader employs group dynamics and “brainstorming” techniques to get managers with differing points of view to contribute to the strategic management and implementation process.
The Collaborative Approach overcomes two key limitations inherent in the previous two. (i) It can increase the quality and timeliness of the information incorporated in the strategy by capturing information contributed by managers closer to operations. (ii) It improves the chance of efficient implementation since the greater degree of staff participation enhances their commitment to the strategy.
Although the Collaborative Approach may gain more commitment than the previous approaches, it may also result in a poorer outcome.
The negotiated aspect of the process brings with it several risks that the strategy will be more conservative and less visionary than one developed by a single person or team. And the negotiation process can take so much time that an organization may miss out on opportunities and fail to react adequately to changing environments.
F. Motivation and compensation:
Design of an attractive compensation and reward package is needed to attract, retain and obtain substantial effort from good personnel. To accomplish this, the company needs to decide the following:
Ideally, incentives should be related to the value creating activities of the company; in other words, the incentive system should reward individuals for adding value. But, given the difficulty of determining value for the company as a whole, it is clearly impossible to parcel out the components of added value to managers and employees. On the other hand, it should be possible to recognise when the incentive system is at odds with the value creation objective. For example, a production manager who is rewarded for minimising inventories can cause havoc with a marketing strategy aimed at achieving an increased market share.
It is important for managers to recognise that the incentive system may be at fault when the performance of individuals does not match expectations. In fact, one of the barriers to change is that incentive systems are not reviewed to ensure that they are consistent with revised company and individual objectives; what is perceived as being unwillingness to change may be partly due to the fact that individuals can see that a proposed change is not to their advantage given the existing system of incentives. It is a basic fact of life that managers and employees will be unwilling to change their behaviour if the benefits of doing so are perceived as being lower than the costs to themselves. A change in the incentive system can go a long way towards easing the implementation of change.
G. Setting Targets:
The allocation of resources to selling is a basic determinant of strategic success, given that the mechanism by which target market share is achieved is by setting targets to SBUs and to individuals. Companies use sales targets to give the employees an idea of what is expected of them, and to serve as part of an incentive system. But what criteria can be used to determine what the target market share should be, or how many units should be sold by a particular sales group in a particular segment of the market? Attention is usually not directed towards how much should be sold, but on how much can be sold; however, concentrating on the maximisation of sales with existing sales resources does not address the underlying resource problem. The resource allocation question can be trained in the following fashion using the concept of marginal analysis:
Is Marginal Revenue > Marginal Cost?
If the additional revenue associated with the last unit sold is greater than the additional cost incurred in making the sale, then it is worthwhile aiming for that level of sales. While it is important to bear this principle in mind, it is difficult to apply in practice because the information available is in terms of expectations of revenues and costs:
Is Additional Expected Net Revenue > Additional Expected Cost?
Furthermore, the evaluation cannot be made simply in terms of the price versus the unit cost because an increased sales effort which results in a higher market share can contribute to long term competitive advantage. For example, a higher market share could lead to the ability to set higher prices in the future, and to a lower unit cost because of economies of scale and experience effects. While the expected revenues and costs are difficult to estimate with precision, it is useful to attempt an approximation which will make explicit how the sales target fits into the general goal of value creation. In the absence of information on expected revenues and costs many managers set the objective of maximising sales as a second best; this may be a reasonable basis for ongoing decisions on sales, but it has the potential to promote a serious misallocation of resources.
The trade-offs can be put in context in a similar fashion to the determination of target market share by applying the basic income and cost model:
Net Income = Total Market x Market Share X (Price – Unit Cost)
Sensitivity analysis can be used to project different scenarios over the product life cycle; the discounting approach can be used to evaluate different scenarios in NPV terms. This can help indicate the appropriate level of sales, and provide managers with a degree of confidence that the revenue from selling the last unit is at least as high as the cost of producing and selling it.
A further dimension of marginal cost relates to the opportunity cost, rather than the financial cost, of additional sales when the product is sold in a number of segments. If the resources available to allocate to selling the product are limited, they should be allocated among different segments of the market such that the marginal benefit equals the marginal cost in the different segments. If this condition did not hold, net revenue could be increased by allocating resources from those activities where marginal cost was greater than marginal benefit to those where marginal cost is less than marginal benefit.
When the marketing plan is implemented it is necessary to measure and evaluate actual performance to find out if the expectations are being fulfilled. When the component parts of the plan have been made explicit, the plan provides a benchmark against which actual outcomes can be compared, so that when variations between expected and actual outcomes occur their causes can be investigated. For example, it may be found that the net contribution from a particular product is lower than anticipated in the plan; this could occur for a variety of reasons, for example because the selling price turned out to be lower than predicted, or because productivity was lower, or because market share turned out to be harder to win. The reason for the shortfall will suggest whether action should be taken to achieve the original objectives, or whether the plan itself needs revision in the light of events; it is essential to identify whether the deviation from the plan is due to causes within the control of the company. This process contributes to the conversion of the plan from wishful thinking to a means by which the company is helped to exert control over its performance.
The steps in evaluation and control are:
1 Decide what is to be measured.
2 Decide how it is to be measured.
3 Interpret the outcomes.
4 Convert into policies.
Potentially effective control methods were identified in a survey of major British companies; the study attempted to isolate those factors which make it possible to exercise strategic control. The general conclusions were as follows:
• The first stage in the control process should involve the selection of relatively few appropriate objectives.
• From these objectives suitable targets can be derived so that pressure can be created for effective strategic performance, but without setting up a bureaucracy to achieve it.
• A series of milestones can be identified which are tracked over time; these serve as benchmarks for evaluating strategic performance, and provide early warning of deviations from expected outcomes.
• A narrow set of financial measures cannot provide the overall strategic view which is necessary; on the other hand, many of the objectives and targets cannot be measured with accuracy, and a great deal of subjective evaluation is necessary.
Monitoring Market Performance:
The marketing department’s objective is to achieve sales in accordance with the plan, but as events unfold it is likely to be found that the costs and benefits of attempting to perform strictly in accordance with the plan’s objectives will change significantly. For example, at the outset it will be decided that achievement of a 12 per cent target market share requires a particular combination of increases in marketing expenditure and price reductions; as time progresses experience will tell whether the marketing effort has been effectively directed, and whether prices have been set low enough. It may turn out that the strategy was correct in its general approach, but that market share is currently 10.5 per cent and a much more aggressive pricing policy is necessary to achieve the planned objective of 12 per cent. Should the plan now be revised in the light of events?
The issue can be put in perspective by recourse to the basic income and cost model, which can be set out as:
Net Income = Total Market x Market Share
X (Price – Unit Cost)
– Marketing Expenditure
It is then a relatively simple matter to investigate different scenarios of the impact of variations in price and marketing expenditure on net income streams. This type of scenario evaluation would already have been carried out during the strategy choice stage, and it is now possible to update the scenarios on the basis of additional market information.
There are many ways of measuring the profitability of a company, and different answers can be obtained depending on which approach and which set of conventions is used. It would clearly be folly to track a profitability measure which generated misleading information on company performance. On the other hand, profit measures should not be discarded just because they are imperfect; each profit measure conveys a different set of information.
What is meant by profit in practice? The accounting definition concentrates on the difference between income from sales and costs of production. There are many ways of arriving at the accounting figure, depending on what is included in production costs. For example, some methods allocate overheads according to the value of sales, and others according to wage costs; machinery costs may be allocated over time by straight line depreciation, or by using a decay curve. Thus the profit calculated for a particular SBU depends on how such costs are calculated.
Since there is considerable discretion involved in arriving at a profit figure, trends in profit may be of limited use as a performance measure if arbitrary cost allocation is involved in the calculation. There is very little point in managers attempting to maximise a profit measure which is generated by obscure accounting conventions and which conceals rather than reveals company performance.
One of the simplest measures of product performance is net contribution (also known as gross profit), which is defined here as:
Net Contribution = Sales Revenue – Cost of Goods Sold
= Total Market x Market Share x Price
– Unit Cost x Sales
Net contribution is an indicator of how effectively inputs are being converted into outputs. However, it may not be a good indicator of cash flows from current production. This is because not all output is necessarily produced in the period in which it is sold. For example, a large proportion of sales in a period may be from inventory, and despite the fact that net contribution may be low, actual cash flows could be much higher because the costs were actually incurred in previous time periods. It is unlikely that output and sales will be perfectly matched in a particular period; this is because of the difficulties of controlling production and estimating demand.
But even if output and sales are reasonably well correlated over a period, net contribution on its own cannot be used to decide whether or not to abandon a product. For example, net contribution can be expected to vary over the product life cycle, as demand for the product increases and decreases, and as the company moves up the experience curve.
The cash flows show how the company’s resources might be allocated to maintain and develop its portfolio. This, of course, has to be viewed in the light of the company’s access to capital markets, dividend policy, and gearing.
Cash flow is an aggregate view of profitability which looks at all inflows and outflows. In principle, the calculation of cash flow takes into account only actual income and expenditure, does not impute profitability by allocating costs, and ignores the net contributions of individual products.
Cash Flow = Total Income – Total Expenditure
Income includes sales of assets and new debt, and expenditure includes capital equipment and the repayment of debt; cash flow could therefore be dominated in some periods by changes in the company’s portfolio of assets. If cash flow is positive then reserves are increased and/or net debt decreased. If cash flow is negative, it stands to reason that reserves are decreased and/or net debt increased, if a strategy involves a period of expansion during which cash flows are expected to be negative, steps must be taken to ensure that finance in the form of reserves and/or borrowing will be available. The ultimate constraint on a company’s operations is the availability of cash; if the business is not able to generate cash in the form of earnings or borrowing it will come to a grinding halt. There are numerous examples of companies which have run into problems because they have not monitored and predicted cash flow implications. When the market disagrees with the company about the desirability of an investment programme, it follows that the company will have to finance it from internal cash; if this cash runs out the market has even more justification for not lending to the company, because of the poor foresight of its managers in the face of market scepticism.
Brand evaluation is vital to the success of the brand. It enables brand owners to see where the brand’s strengths and weaknesses lie and what forces are driving these, which in turn points to the nature and level of investment needed to fulfil the brand’s potential. Measuring brand performance is an integral part of brand management.
A thorough evaluation looks not only at the financial value of the brand but also at the brand equity – the intangible elements of a brand that distinguish it in the mind of the consumer. But how is something as intangible as brand value actually measured?
>Business value is increasingly driven by intangible assets such as brands. There has been a marked shift from a manufacturing economy towards a service economy and then to an information economy.
>Brands are a key element, along with other intangibles such as intellectual property and staff skills and commitment. Often 40-75% of a company’s assets may be attributed to brands.
¯ Evaluation based on Brand equity:
“The most valuable part of the brand … the added value bit … the bit that protects respectable margins and fills up the reservoirs of future cashflow … the bit that distinguishes a brand from a mere product … doesn’t belong to it. It belongs to the public.” [Jeremy Bullmore, British Brands Group, 2001]
Brand equity is defined as the sum total of learning about the brand by all stakeholders, including consumers, shareholders and employees. It includes all that people feel and think about the brand as a result of direct experience, word-of-mouth; moments-of-truth with the brand and the brand’s marketing activities. It constitutes a storehouse of future cash-flow and profits.
Good measures of brand equity can give indications as to the future profit trends. If brand equity is falling, you’re storing up trouble for yourself. If brand equity is rising, you’re investing in future performance, even if it’s not showing through in profits today.
w Four properties of brand equity:
Figure: Brand equity properties:
Brand awareness is an often undervalued asset; however, awareness has been shown to affect perceptions and even taste. People like the familiar and are prepared to ascribe all sorts of good attitudes to items that are familiar to them. The Intel Inside campaign has dramatically transferred awareness into perceptions of technological superiority and market acceptance.
Perceived quality is a special type of association, partly because it influences brand associations in many contexts and partly because it has been empirically shown to affect profitability (as measured by both ROI and stock return).
Brand associations can be anything that connects the customer to the brand. It can include user imagery, product attributes, use situations, organisational associations, brand personality and symbols. Much of brand management involves determining what associations to develop and then creating programs that will link the associations to the brand.
Brand loyalty is at the heart of any brand’s value. The concept is to strengthen the size and intensity of each loyalty segment. A brand with a small but intensely loyal customer base can have significant equity.
Brand equity determines a brand’s health and strength as well as its financial value. Consistent measures of brand equity can help understand a brand’s progress towards its goals. Although these measures need to be adapted to a particular business context and reflect the brand’s strategic milestones, a mix of the following approaches is recommended:
Inputs: the amount of advertising and communication spend as a percentage of sales. For many industries this is a prime driver of brand equity. This category can also include other internal measures, such as ‘innovation support’ and other cultural attributes.
Intermediate measures: these try to uncover the stakeholders’ awareness and perception of the brand as well as their attitude towards it, relative to competitors. Uncovering issues, such as consumer satisfaction or perceived quality, through qualitative research can help the brand owner understand consumer motivations (or lack thereof) to purchase.
Behaviour: how stakeholders actually behave. Sales are a key metric here, alongside market share, customer retention, loyalty and frequency of purchase.
Evaluating the brand’s equity is essential to defining efficient and effective:
>Consumer strategies: which markets provide most potential?
>Marketing strategies: which aspect of the marketing mix needs more focus?
>Budget allocation: how much to invest and in what?
>Performance tracking: how are we performing over time and in relation to competitors?
By understanding the strength of the consumer relationship with the brand, one can start to gauge how vulnerable the brand is to new entrants or to short-term promotions, as well as how much can be changed without ‘alienating’ loyal customers.
wAlternative brand equity measures
Several proprietary models based on worldwide market research have been developed to measure brand equity.
1. The Brand Asset Valuator framework (Figure below) is based on consumer perceptions using a consumer questionnaire that measures four main areas.
Figure: The Brand Asset Valuator framework:
Differentiation: how distinctive is the brand in the marketplace?
>Relevance: how relevant is the brand to the consumer?
>Esteem: how highly does the consumer regard the brand?
>Knowledge: how well does the consumer understand what the brand stands for?
Scores against the first and second dimensions are multiplied together to produce a measure of ‘brand strength’. Scores against the third and fourth dimensions are multiplied together to produce a measure of ‘brand stature’. This approach concentrates on the consumer, at the expense of more business-orientated measures such as market share or sales trends.
2. Brand Equity Ten
David Aaker [IPA, 1996] put forward this approach which scores brands against the following:
1. Price premium
Perceived quality/leadership measures
3. Perceived quality
5. Perceived value
6. Brand personality
7. Organisational associations
8. Brand awareness
Market behaviour measures
9. Market share
10. Market price/distribution coverage
This list includes a balance of attitude, behavior and marketing measures with no prescribed weighting on each element. Aaker recommends tailoring this approach to each brand’s specific circumstances.
CHAPTER 5: STRATEGIC PLAN:
United Hospital should go for frontal attack by increase the promotional activities to attract more customers. They have to take initiatives to recognize their brand to the people. In the promotional activity they should use emotional appeal or slice of life, so that people will relate their want with the promotion of United Hospital and they will buy their medical service.
United Hospital should first retain the position in the market. They should follow defense strategy to defend their existed service.
United Hospital can go for a strategic alliance with the medical colleges in Bangladesh to provide them with best doctors graduated from these colleges.
They can make alliances with the foreign medical societies. It will ensure that foreign qualified doctors will come to United Hospital and provide them services.
Telecommunication and use of internet has become very easy to access. Bangladesh governments aim is to make digital Bangladesh. United Hospital can take this opportunity making alliances with foreign reputed hospitals. UHL can arrange a teleconference session for the patients with foreign specialist. It will help both parties. United Hospital will gain profit by arranging the service and foreign hospital will gain profit by providing the service to the patient. The patients’ will be benefited as it will reduce the cost of the service.
United hospital should increase their promotional activities to increase their Brand recognition. Brand recognition will help United Hospital by leaning people toward their hospital while health problems arise.
Top level management of united hospital must recognize the importance of brand recognition. To have an effective promotional campaign they could hire ad agency.
To capture most of the market share higher brand recognition is must. Brand which has higher recognition can sell them. Like other success factors brand recognition is also started with recognizing customer’s demand. What services really the target customers want to united hospital. Also selecting the target customers are also important in this process.
Commitment of the customers to united hospital is significantly low. Therefore, retention rate is also low. To keep the profitability higher customer retention is an important factor.
Higher customer retention will improve brand image. With higher retention rate will help united hospital to enjoy consistence profitability in the short term as well as in the long term. This will also attract new customers by generating positive word of mouth by the existence customers.
Top level management has to develop a framework and according to that they should conduct research time to time also they could look out for competitors success factors. They also could take expert help from outside their hospital to conduct such research.
Moniruzzaman, M. (2006), Strategic marketing: Strategic analysis
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