Appunti business policy and strategy execution

The expense centers, the mission, the emergent strategy domande fatte a settembre

strategic targets

In you have to consider in term of long run : workers, costumers, society itself and

shareholder. The idea is sustainable in financial term over the short run?

in short run transform the strategic target into financial measurements.

To survive you need to So you

define the financial goals in short run,

have to for example the cash outflow to cover an expense(una

If something doesn’t work you have to change something in strategic target

spesa) of long run. variance analysis,

Analyse profit, revenues, costs, also called is necessary to verify if all work fine or not.

Variance analisy gives a feedback about the target that the firm will assume next year, for example if it’s

necessary change raw materials because they cost too much or other aspects. So it’will be a changement

on strategic targets.

It’s a circular scheme, you start with 1. strategic targets, then 2.transformation into financial measurement.

If the strategic target is not correct in short run, for example it’s not profitable, you have to turn on

strategic target and change some aspects for the next year. In the end we have 3. Variance analysis

Explosion of the general financial targets. First step is define the strategic target then you define the finacial

target in short run,and you define the components of revenues and cost, and assign every part of revenues

and cost to an area. Every area is composed by unit, so every unit have a sub - target .

responsibility center

If you have a big firm, with a lot of employees is necessary to have in order to have

one direction and coordination, because the top management can’t watch the work of every employee and

talk with everyone. You have to divide the initial target, for example sell 200 products, into the different

center of the company in small target.

In production, financial and r&d unit you don’t have revenues, but costs. So you have to assign a cost target

to the head of every unit before cit. differently, if you have marketing area you can assign a reveneus target

to it.

In production area you can have several unit. Each unit produce a working product and the the last unit

produce the final product. For every unit you have a sub-target, that contribute to the initial target of the

production area, that contribute to the target of the entire firm.

It’s important define a profitability target and split it in sub-target to give to every unit.

Limits of the traditional tools. Tools help to improve strategy. New tools help to fix the problem that the

traditional tools don’t solve. New tools are important for the strategy and satisfy stakeholders. strategic

It’s all about target and then split it in sub-target. When you define a target you have to consider

risk. The risk is the sum of damages x the probability of each one of these damages.

Drivers are events which make strategy implementation impossible. So how to remove the effect of drivers,

or drivers theirself? To reduce the probability of a damage you can use some tools.

Uses/levers of control: diagnostic control systems, interactive control systems, beliefs system, boundary

siystem.

To reduce risk you have to create boundaries for your business. If your boundaries are too stricht you can

loose market opportunity.

Every level of Management have to formulate and to control the target, also implementation. Management

is helped by finance area to build the management control systems.

Management consultes strategy and accounting firm. They check the balance of company to verify if it’s

correct

1 . STRATEGY FORMULATION

Business policy is essentially business strategy. Corporate level strategy

In business strategy we have 2 levels: corporate level and business level. is about

industries . there are market segments in industry. You need to choose your position, which segment?

3 strategic business area:

Corporate strategy have dimension, the

In an industry is important define the material that the company use.

In car industry they use the same 1)technology = material used and how it is combined.

The material they use and how they combine it is not enough to define the strategy.

You can provide a car very fast, an other car good for family, another car very huge, so you have different

2)functionalities.

The same technology and the same material could use for different functionalities in the same industry.

Renault provide custom good for the comfort of a family. Mercedes is comfort, safe, status symbol. If you

are ferrari you don’t focus on renault or mercedes because they are not you’re competitors. The top team

of ferrari will focus on porche for example because it’s in the same segment, and porche and ferrari provide

the same functionalities.

If you dont’ define your functionalities you don’t understand your competitors.

The third dimension is the 3)group of clients. The ferrari target are very rich people, renault target is the

middle class. Profile of ferrari’s client is completely different from renault’s client. So the top team of ferrari

have to think about his target of client, so you can achieve their interest and what they desire.

If you don’t define the group of clients You can not follow their needs.

Divisions are organization unit that manage a strategic business area. Each division manages a market

segments. The corporate level strategy try to create synergies among the divisions.

For example Fiat has different product as lancia. They can share the same technology or similar for different

type of products.

If you use one technology you have invest in only one, so you save money.

If you want develope more technology you have to spend more money in r&d

business level strategy

Then we have the that is so connect with the corporate level strategy.

Business level Try to define the formula to win the competition versus other companies in strategic

business area. porter’s five forces:

The business level do strategic analysis through suppliers of input and resource,

existing competitors, substitute product or service, clients and buyer, new entrance(potential entrants to

the market)

1-suppliers are competitive force because of the price of my company. If a buy materials at an high cost, my

cost became higher and the margine of profit reduce.

2-Clients. If you sell your product at a higher price you can have an higher margine and viceversa

3-Competitors are a competitive force because they share with my company the same market. They try to

increase their market volume, so they reduce my clients and profit. The profit is a competitive advantage

If you want increase your competitive advantage you have to increase your volume and your selling at an

higher price and buy from suplliers the material at a lower price.

4-New entrance are new competitors, maybe they came from other industries or other market segment or

they are start up. They try to reduce your volume, and steal your client. And if they do that your profit will

reduce.

If someone else enter in your business strategic area, - i can create an enter barrier like a brevetto(patent)

for one of my technology, - i can invest, so increase my fixed cost, so is more challenging compete with me,

so it scourage the new entrance to enter in my segment, because it need time to transform the investment

in revenues. - You can improve your products so the client are completely satisfied or create new products

These strategies are all expensive. So a way, not expensive, to descourage a new entrance is reducing price.

5-Substitute product satisfied the same needs but they are create with different technology. For example

we can listen music with smartphone, but years ago it was possibly just by radio. Analogic camera was

destroyed when digital camera was introduce.

Resource based view.

until 1990 people think that the company hadn’t anything important inside and it was simply replicable, but

really it isn’t in this way, if you develop good resource inside.

Resource based view use the porter model to understand the resource important to win the competition.

Resource analisys, analisy of what you have inside industry. We have resources registered by the

accounting system for the balance sheet. When you buy a product with a price, you pay by a transaction,

and that price, that is the value, goes on balance sheet and accounting system.

In 1)Liquidity criteria we have current assets that are - cash and - other resources becoming cash in one

year or so (such as inventory). This is important because of relevance of cash for investments, so the firm

can change and develop itself. Cash permit firm’s elasticity, so it can change.

Is important adopt liquidity criteria to identify the current assets, so you can define if your company is

elastic or not.

We have another criteria: 2)physical consistency criteria. You can have a patent, althought you can’t touch

it, that’s not mean that is not important. So you have some resource that you don’t see e don’t touch but

are important.

There are intagible resources that are unregistered by the accounting system because they don’t came by a

transaction and it’s not possible to see them in the balance sheet. For example ferrari’s importance is

created by what they did in past and now it has created a resource intangible, his value created by years.

Intangible resources are a competitive vantage ≠

Intangible assets are in balance sheet, but you can’t touch or see, for example patent. You have a

transaction, you have a price and a value that you put on the balance sheet

In intangible resources we have:

-capabilities

Company very succesfull in product development and production is because they are organized internally in

-functional units, they create a functional routine.

-customer

-Embedded assets you bought a resource, for ex. Building, and you start an hotel and it becomes very

famous, so the actual value is superior than its historical cost. it’s determined buy the historical event that

happen around, the situation ecc… the higher value is not due to the fact that you bought the building.

-Time, resource that you can’t buy. Resource are connected by time, because it takes time develop

resources.

Intangible resources ●came from a path: choices of manager, efforts put in actions… it’s not something you

develop in a certain moment. For example coca cola, invest in advertise over several generation.

Intangible resources are ●very difficult to replicate because the other companies to achive your position

should invest the same time, do the same path, but it’s impossible because that path is happened in the

past so is not replicable

Intangible resource which came ●first mover opportunity. When you are first mover you’re a market leader

and you don’t have entry barriers. For instance, trenitalia is the first mover in train transport in italia. So if

you want create a train company you also need buy infrastructure, but trenitalia, because of was the first

mover, develop infrastractures. They increase their value because they are able now, for a long time, to

have a profit buy this infrastructures. So Trenitalia in this way has created entry barriers because it’s too

difficult replicate what trenitalia has done.

The traditional control system and the financial control system are based on accounting system, so they

capture the same value of accounting system, so it’s limited, because it doesn’t capture the value of

intangible resource. Accounting system Identify resource and their value, and you can check the resource

avalaible and make decision.

Financial system permit to relevate monetary value of resources.

Management has need to know that the intangible resources exist, so Modern control system try to

consider the intangible resources and competitive adavantage achieved using them.

In intagibles we have :

-brand/reputation. It permit to have investitors too, because the investitors know your reputation and trust

in you.

- networks of suppliers. What they sell is very rare, so is important to estabilish a connection. A suppliers is

important if they have not substitute component in the market. Suppliers are importanti if their product is

a Key to get the market share. Suppliers are important if buy from new suppliers made an extra costs. In

the end a supplier is important because it can create co-development of new products.

-network of clients. Client dependence, if you sell your product only to one firm, that firm that is your client

is very important for you. It’s hard to differentiate the products, so the client is loyal to you because you

have instaured a connection. Small extra costs to buy from competitors, a client is very close to your

company but he’s close to another company too, so it is easy for the client switch to the other company, so

it’s important a good connection with the client so he doesn’t go to the other company, that is near to him

too. Co-development products because a client show his idea, his need that could be important for the

company to define better their product

In the group of clients we have customer but also Business clients, that are clients that buy from your

company and then they resell to another company.

-distribution channels as a key for success if you have good connection with distribution channels, it can sell

your product in a very efficient way, althought your product is not perfect.

-IT partnership , for instance building a website to sell your product. In this way there is Supplychain the

chain from first raw material, to the final product, by stages of production. So there is connection between

raw materials and customers. If you want run the company properly you need have your input in the right

time, so if you have a IT partnership with suppliers you can easy communicate with him your need, so you

have the input ready in the exactly moment you need it.

You can stock a lot raw material in warehouse(magazzino), but it’s very expensive because in warehouse

≠

you have employees, energy, rented… so the second choice is to have a supplychain that when you need

a raw materials you communicate it to suppliers and they came with the raw materials you need. This

second approach is called JIT production.

In intangibles we have IT partner ship. If we are between suplliers and clients, so in the middle of

supplychain. If we are very connected to suplliers and clients the production is very efficient, for example

through JIT: A partnership with clients is necessary because when they need products you start production

when they communicate that and you ask to suppliers the materials, so you don’t need to stock the

materials. So IT partnership permit you to Reduce the cost and run production in JIT.

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SWOT ANALYSIS

If you combine What you hold inside the company and what run outside the company you have SWOT

analysis.

●Strenghts came from analysis of your internal resources

●Weakness You don’t have enought capability to sell your product, the weakness of your product

●Opportunities in market for example if the clients have a new need

●Threat for example if a supplier get stronger and stronger or a new suppliers enter in your market, so you

need to became more strenght. We know threat from analysis of environment, the porter’s 5 force.

Output of SWOT ANALYSIS is strategy, infact SWOT helps to formulate the strategy in particulary 4 aspects

/interpretations of strategy: build mission, define company’s position among the competitors, formulate

plans and budgets, run actions

Mission explains the 1. committent (impegno) to stakeholders’ needs, so the needs of customers, suppliers,

employees, shareholder and society. So mission define what you want satisfy for the different stakeholder.

Mission also explain the 2. main target in innovation, for example create innovative product, in natural

environment safeguard, in growth (for example increase the revenues, in s financial stability ( because it

permits to go ahead and growth), in risk propensity (for example propensity for challenge, if they don’t risk

they have no opportunity to grow) , in take their own responsibility (employees are responsible of what

they do).

Mission define 3. boundaries, what people can do and what no, so it defines --

-behaviour that people have to have, so employees usually know this aspect.

-How to make decision, so for example how take risk.

So mission in one hand Stimulate the decision making process, but at the same time it constrains, because

for example define what they cannot do

Mission statement is quite general because is made by principles that you can noticed in different context, it

inspired behaviours in different area. Mission is also quite elastic, infact cause it is general it allows to

change a behaviour over time and adapt it to different situation.

You can have different level of details when you define mission. If you provide more details you better

control what the different areas supposed to do, differently if you have a little details you work better

because your mission is more elastic and general. So you have balance of quantity of details with elasticity

and generality

Johnson & johnson credo. – mission statement

Talk about their customers: doctors, nurses, patients and mothers and fathers too. They don’t talk which is

their first responsability, is a general responsability.

High quality is general because it doesn’t define which quality.

They want mantain Reasonable price so they have to reduce cost

It’s not enought sell product with high quality an low cost, but they need to give in time the product.

Their target is making profit

The first category of stakeholder in their Credo is employees

The text Provide more details about how they make their employees happy. Focus on employees, so they

put more enphasys on this category of stakeholder.

Management should be inspire by ethical principles/issues

They say that are responsible for the society.

Taxes are the mechanism through which the companies share their profit to the society.

General principle about environment and natural resources

On the one hand they said that they want take risk with innovative programs, but, in case, they will paid for

your mistakes.

Reserves protect the stockholder i