Strategic Management Evaluation

Strategic Management Evaluation Strategic Management Evaluation Draper IT Strategic Evaluation ModuleBusiness Innovation Management 1.Introduction In today’s marketplace, businesses are constantly under to maintain profitability and competitiveness and their success or failure can depend on the quality of the strategic thinking and strategic management undertaken by the business (Campbell et al 2002). Thus in order to participate any level of strategic thinking or strategic management and undertake a strategic evaluation it is essential to understand exactly what a strategy is. Mintzburg (1987 cited by Campbell et al 2002) suggests the ‘five Ps of strategy; A plan; A ploy; A pattern of behaviour; A position in respect to others A perspective. Adding that it is not possible to see any of these P’s in isolation. However, this is a very simplified view of strategy and perhaps a much better definition from a business perspective is given by Johnson and Scholes (1999); â€Å"the direction and scope of an organisation over the long term: which achieves advantage for the organisation through its configuration of resources within a changing environment to meet the needs of markets and to fulfil stakeholder expectations.† Thus in essence a strategy is deciding what way is best and what tactics will be employed to achieve the business goals. Naoum (2001) suggests that developing a business strategy can take seven stages; Stage 1. Strategic Analysis Stage 2. Strategy Formulation Stage 3. Evaluation Of Alternative Strategies Stage 4. Strategic Choice Stage 5. Action Plan Stage 6. Strategy Implementation Stage 7. Strategic Control And Feedback The aim of this assignment is to undertake the processes required for some of the stages for the Draper Engineering case study, notably stages 1 to 4. This will be undertaken through the completion of the tasks shown in Figure 1. A copy of the complete case study can be found in Appendix One. Figure 1 Assignment Tasks 2.Task One – Strategic Analysis Strategic analysis is define by Morris (2001, p25) as â€Å"the collection and analysis of information relevant to the long term prospects of an organisation, comprising of both external and internal analysis† which is shown diagrammatically in Figure 2 Implementation Analysis Choice External Internal Figure 2 External Internal Strategic Analysis. Morris(2001) External analysis looks outside the organisation at the competitive environment to determine future implications, whilst internal analysis looks inside the business to identify strengths and weaknesses that will affect its ability to compete in the long-term (Morris, 2001). One tool used in strategic analysis is SWOT or TOWS analysis, an acronym for Strengths Weaknesses Opportunities and Threats. It is a very powerful tool for understanding and decision-making for all sorts of business situation in order to focus on the things you do well, whilst reducing weaknesses to make the best possible advantage of opportunities available (De La Salle University, 2002). Further summary information on SWOT analysis can be found in Appendix Two A SWOT analysis was undertaken for Draper Engineering and the results are presented in Figure 3. Figure 3 SWOT Analysis For Draper Engineering Ltd 2.1Five Issues For Improvement By Draper Engineering Ltd. A Warehouse Management System (WMS) fully integrates warehouse management operations with the rest of the business, such as sales, purchase and accounts and subject to the installation the warehouse operations can be world class. However, this technology is not cheap and suitability can be dependant upon the type of solution sought, such as to build or buy (Frazelle, 2002) Draper should not consider implementing a WMS with no guarantees of the final contract as this would mean that although they would experience the benefits of the system, they would also have to shoulder the full burden of the costs with possibly no contract from either of these companies. In order to improve this situation and produce the best business solution for Draper Engineering they need to have a Service Level Agreement (SLA) with each of the companies. An SLA is â€Å"an explicit statement of the expectations and obligations that exist in a business relationship between two organisations: the service provider and the customer† Verman (1999, p1). Were Draper to agree an SLA with the other parties this could ensure that not only would they be guaranteed the contract, but that they would also have a written document of the expectations of each of the parties involved in advance of implementing the WMS. Should these expectations be unrealistic, Draper could withdraw from the negotiations and reconsider their position with respect to the WMS without having incurred any expenses. The key issue identified here, is the ageing workforce of Draper, which can be explained by the work by Warr (2000 cited by Furnham, 2005) where he poses and answers five questions on the ageing workforce and job performance. Figure 4 illustrates his findings; Figure 4 Warrs Five Questions on Job Performance and the Ageing Workforce. Warr (2000 cited by Furnham, 2005, p764-765) The implications of Warr’s (2000 cited by Furnham, 2005) findings on Draper are profound, as many of the personnel issues experienced by Draper are explained in his work. The fact that the workforce is loyal is only to be expected and other benefits careful, reliable, knowledgeable and socially skilled, but unfortunately they are less willing to change, which may be why many of the new initiatives have failed. Also, the high turnover rate in e-commerce could be linked to younger staff (though the case study does not specify this. However, to improve the personnel structure at Draper, they have a number of options available to them; Change management. It is not enough to simple understand how change is going to be administered but it is imperative that staff understand why change is happening so that they can engage with the solution and the change. As part of the change management employers need to provide support and training to encourage staff buy-in and deal with any resistance upfront (Hiatt and Creasey, 2003. Prosci, 2006) Andragogical Training directed at older learners. Warr (2000 cited by Furnham, 2005, p764-765) states that â€Å"older people are slower and have more difficulty remembering, however, training can be adapted to an older person’s limitations and expertise†. One such method is referred to as andragogy, how adults learn. If Draper developed a training scheme that implemented an andragogical approach to training that targeted the older members of staff, they could experience very positive results from their staff, in the form of learning and motivation. Incentives for younger staff to reduce absenteeism and retain staff. Although Drapers need to look after their loyal team of workers it is essential that they can actively encourage younger members to the team and reduce the turnover in this area. One such method is to introduce incentives into new contracts which actively encourages longevity of service, such incentives could include; Annual incrementing pay scales Flexi-time Annual leave rewards for zero absenteeism Team building exercises Gift vouchers Purchase schemes for personal IT equipment at corporate reductions The fact that Draper Engineering have a large product development team is a strength of the business, however, spending the majority of their time improving existing products and solving customer complaints is a fundamental weakness; Draper’s need to be looking to the future and their long term goals, which should involve new product development. To overcome this problem and move the business forward, a small working group should be set up within the department, consisting of the most motivated and technically up-to-date members of staff to brainstorm and generate project ideas that can be developed into new products. This has an added benefit of staff participation and ownership which encourages the desire to succeed as the products are their own ideas. Generally speaking the term outsourcing means to transfer previously internal products or services to an outsider provider (Roeben, 2004), which is as it suggests is where a third party carries out functions which was previous undertaken within the business. However, in the case of Draper Engineering, a medium sized IT business, it appears that they have outsourced their core competency, which is the means by which they should be able to separate themselves from their competition. The decision to outsource the IT division is a fundamental error to the business and weakens their internal and external strength, that they are particularly vulnerable from competition from Hardy’s to whom they originally outsourced. To overcome this problem and improve the company position radical action is required such as; Diversify into new areas. Insourcing Collaboration with Hardy’s for key contracts. If Drapers’ is to survive in the long term they need to resolve this fundamental issue and redefine their core competencies in order to compete effectively in the market place. In addition to outsourcing a core competency, the IT division, being a fundamental error, it is also had a negative effect on Draper’s reputation. Simply by virtue of the fact that Draper’s originally undertook this work, previous customers are making their complaints to Drapers, which indicates that customers or potential customers still make the association and are dissatisfied with the service. It is essential that Drapers rectify this problem otherwise they are likely to experience a backlash in other areas of their business. To improve the situation Drapers have two options; Act as consultants for Hardys on Draper products Instead of letting the reputation of Draper’s be damaged by Hardy’s lacklustre performance, Drapers could offer to act as consultants on the major products and services they previously provided. The benefit of this action to Drapers could be twofold, the reputation of their business would be saved and would also generate revenue for the value of the consultation work. Re-Establish IT Division If Hardy’s were unwilling to agree to a consultant agreement, it would be possible for Drapers to re-establish the IT division once again and encourage previous customers (existing Hardy’s customers) back to them through promises of commitment to service and new product development. 2.2Other Tools For Strategic Analysis. In recent years business practices have evolved in terms of thought, practice and analysis tools. Consequently there are a large set of analytical tools which provide insight, identifying capabilities and strategic options (Khosrowpour, 1998). A SWOT analysis of Draper Engineering Ltd has already been undertaken; however this does not scratch the surface of the analysis tools available. Other suitable tools for analysing Draper Engineering would be; PEST or PESTEL Analysis PEST is an acronym for Political, Environmental, Social and Technological factors whilst PESTEL is extended to include Economic and Legal factors. PEST analysis is a commonly used tool for analysing the external environmental influences on a business, Figure 5 illustrates the PEST grid and the areas that should be considered (Gregory, 2000) Figure 5 PEST Analysis Matrix. Gregory, 2000 The benefit of undertaking a PEST analysis for Draper Engineering is that it would be undertaken in addition to the SWOT analysis and give a good understanding of the global and external environment; however it is essential that Draper follow the PEST analysis with how to respond to these issues and not simply see these points in isolation. Together PEST and SWOT analysis are able to look at the global picture and then the specific detail of the business Porter’s Five Forces Another tool for analysing the external environment of a business is Porter’s Five-Force Model, it is however one of the most influential models for assessing the nature of competition. As the name suggests opportunities and threats are assessed by analysing five forces; Figure 6 illustrates the model. Porter (1980, cited by Campbell et al, 2002) suggests that the five competitive forces shown in Figure 6 determine the nature of competition within an industry. Thorough understanding of each force enables the production of a competitive strategy that embraces the forces, rather than working against them and enable the business to position themselves to take advantage of opportunities whilst minimising threats (Campbell et al, 2002) Draper Engineering would need to undertake this form of analysis in addition to SWOT and PEST to gain the most detailed picture for an effective strategy. The benefit of Porters Five Force Model is they would be able to identify who they are competing against in the marketplace, it currently appears that they are suffering threats from their customers who are refusing price increases and wanting price reductions; and Hardy’s whom Draper outsourced their IT division to are a threat either from the provision of substitute products or directly competing as a new entrant in the same field. Whilst some of these issues were covered in the SWOT analysis, Porter’s five forces views the business solely from the competition perspective that it offers a very focussed approach. Intensity of rivalry in the industry Threat of substitute products Bargaining power of buyers Bargaining power of suppliers Threat from new entrants Figure 6 Porters Five-Forces Model. Porter (1980, cited by Campbell et al, 2002) 3.Task Two – Strategic Choice Macmillan and Tampoe (2001 p132) state â€Å"choice is at the centre of strategy formulation, if there are no choices to be made there can be little value in thinking about strategy at all.† Adding that there are limitations to the range of choices such as small businesses are limited by their resources and large companies are unable to change quickly or are restricted by decisions made in their past. However, in good management the â€Å"strategic choices have to be challenging enough to keep ahead of competition but also have to be achievable† Macmillan and Tampoe (2001 p133) Akin to strategic analysis, strategic choice has a large number of tools available to help focus thinking and produce solid strategic decisions. Two such tools available to Draper Engineering Ltd are; Ansoff Matrix Porter’s Generic Strategy 3.1Ansoff Matrix Igor Ansoff was the first to suggest the diagram shown in Figure 7, for structuring choices of which products or services to offer in which markets. Present Market Need New Market Development Diversification (related or unrelated) ‘Do Nothing’ Withdraw Consolidate Market penetration Product Development PresentProduct New New Market Geography Present Figure 7 Ansoff Matrix. Ansoff (1987 cited by Macmillan and Tampoe, 2001 p137) The axes of the diagram are; Macmillan and Tampoe (2001, p135-137) Product – including services and any form of offering Market Need – any group of potential customers whether defined by their needs, inclinations or income bracket Market Geography – geographical location For the present market geography the model defines four cells, with the top left representing the present status of the business. Movement within or away from this cell represents the possible future choices about products and markets. Macmillan and Tampoe (2001, p135-137). Figure 8 summarises the strategy for each quadrant. Market Penetration Product Development Market penetration is the name given to a growth strategy where the business focuses on selling existing products into existing markets. Market penetration seeks to achieve four main objectives: Maintain or increase the market share of current products. Secure dominance of growth markets Restructure a mature market by driving out competitors. Increase usage by existing customers A market penetration marketing strategy is very much about â€Å"business as usual†. The business is focusing on markets and products it knows well. It is likely to have good information on competitors and on customer needs. It is unlikely, therefore, that this strategy will require much investment in new market research. Product development is the name given to a growth strategy where a business aims to introduce new products into existing markets. This strategy may require the development of new competencies and requires the business to develop modified products which can appeal to existing markets. Market Development Diversification Market development is the name given to a growth strategy where the business seeks to sell its existing products into new markets. There are many possible ways of approaching this strategy, including: New geographical markets; for example exporting the product to a new country New product dimensions or packaging: for example New distribution channels Different pricing policies to attract different customers or create new market segments Diversification is the name given to the growth strategy where a business markets new products in new markets. This is an inherently more risk strategy because the business is moving into markets in which it has little or no experience. For a business to adopt a diversification strategy, therefore, it must have a clear idea about what it expects to gain from the strategy and an honest assessment of the risks Figure 8 Summary of The Ansoff Matrix. Tutor2u Limited (2006) Thomas and Egan (1998) identify that the Ansoff matrix is suitable for both situation analysis, ‘Where are we now?’ and directional policy modelling, ‘where do we want to be?’, adding that it excels at profiling product/market alternatives whilst identifying the risks of different strategic options. Curtis (2006) however suggests that to use the model effectively needs the ‘X’ factor, imagination, without which it is difficult to identify what new products your existing customers may want. This tool would be particularly useful at Draper Engineering as it would identify exactly what their current market position is in terms of products and customers. It appears from the case study that whilst they currently have four major European car manufacturers and two American truck manufacturers as customers, there is no clear description of the products and services that they provide. Ansoff’s matrix would focus their attentions to what it is they produce and where they would like to go in the future, as it seems to date that although they are willing to try new strategies there is little coherence in their intensions or achievements. Additionally, whilst Draper have started developing Enterprise Resource Planning (ERP) Systems and their associated software there is little suggestion of imagination in their approach, SAP and Oracle were marketing their ERP systems in the late 90’s early 00’s and are now the principle vendors, that if Draper are to enter the market now almost 6 years later they are entering as underdogs. Such analysis using Ansoff would identify a need for greater imagination in identifying the next big trend, one in which Draper could be involved in from the outset rather than midway through the product lifecycle. 3.2Porter’s Generic Strategy. Porter (1979 cited by Gilligan and Wilson, 2003, p2) states that â€Å"a firm’s relative position within its industry determines whether a firms profitability is above or below the industry average, the fundamental basis of above average performance in the long run is sustainable competitive advantage†. Competitive advantage can be of two basic types: low cost or differentiation, which combines with the scope of activities to produce three generic strategies for achieving above average performance (University of Cambridge, 2006), illustrated in Figure 9; Cost leadership Differentiation Focus Cost focus Differentiation focus Competitive Advantage Lower Cost Differentiation Competitive Scope Broad Target 1. Cost Leadership 2 Differentiation Narrow Target 3a. Cost Focus 3b.Differential Focus Figure 9 Porters Generic Strategy. University of Cambridge (2006) 1. Cost Leadership 2 Differentiation In cost leadership, a firm sets out to become the low cost producer in its industry. The sources of cost advantage are varied and depend on the structure of the industry. They may include the pursuit of economies of scale, proprietary technology, preferential access to raw materials and other factors. A low cost producer must find and exploit all sources of cost advantage. if a firm can achieve and sustain overall cost leadership, then it will be an above average performer in its industry, provided it can command prices at or near the industry average In a differentiation strategy a firm seeks to be unique in its industry along some dimensions that are widely valued by buyers. It selects one or more attributes that many buyers in an industry perceive as important, and uniquely positions itself to meet those needs. It is rewarded for its uniqueness with a premium price. 3a. Cost Focus 3b.Differential Focus The generic strategy of focus rests on the choice of a narrow competitive scope within an industry. The focuser selects a segment or group of segments in the industry and tailors its strategy to serving them to the exclusion of others. In cost focus a firm seeks a cost advantage in its target segment Differentiation focus a firm seeks differentiation in its target segment Figure 10 Summary of Porters Generic Strategy. University of Cambridge (2006) Following a cost leadership, differentiation or focus approach has advantages to the business; however it is the strategic choice to decide which option to follow. The University of Salford (2006) identify some anticipated benefits of each of the strategic options (Figure 11); Cost Leadership Earn high profits because its costs are lower than competitors charging a similar price Charge a lower price than competitors so increasing sales and market share Enter new markets charging a lower price than competitors Differentiation Sell their products at a premium price Create a barrier to the entry of new competitors Earn above average profits by reducing elasticity of demand for the product. Focus Does not require so many resources as a broad strategy Allows specialisation Lowers the cost of entering new markets for small firms. Figure 11 Benefits Of The Strategic Options Identified In Porter’s Generic Strategy. University of Salford (2006) However, when Porter developed the strategy he argued that an organisation that did not choose between a cost leadership or differentiation would be ‘stuck in the middle’ and consequently he believed they would not achieve competitive advantage. Subsequently one of the criticisms of the model is that it is possible to have a hybrid strategy that combines low cost with differentiation. A further criticism is that low cost itself does not sell products, customers have other reasoning such as quality that affects their decision. That said in the case of Draper and many other businesses Porter’s generic strategy is a very useful tool for understanding how to achieve competitive advantage. 4.Task Three – Strategy Selection As Macmillan and Tampoe (2001, p132) state â€Å"choice is at the centre of strategy formulation†, but selecting an appropriate strategy and direction from all the available strategic choice tools can be a difficult decision. To overcome this problem and ensure that each option is fairly and equally assessed a further evaluation tool or framework may be used, examples include RACES (Haberberg and Rieple, 2001 cited by Evans et al, 2003), SCARE and CARES standing for Resources, Acceptable, Consistent, Effective and Sustainable. However a more popular framework is the SFA framework (Evans et al, 2003; Little, 2006) Suitability – does the proposal fit with the organisations strategic plan or organisational values? It is essential to identify if a particular option would make full use of an organisations strengths, whilst avoiding its weaknesses or any external factors such as changes in legislation or government policy (Butler, 2001) Feasibility – can it be carried out and will the desired results be available in the timescale? In many cases the feasibility of any option is limted by the firm’s capacity and resources (Butler, 2001) Acceptability – whilst being more subjective, relating to organisational values, this is key to whether the strategy will cause any major crises with stakeholders. Some stakeholders may find one option appealing whilst it is decried by another, this is particularly the case in partnerships and small firms where one wants to grow the business whilst the other wants to consolidate the business (Butler, 2001). To which a fourth criterion has been added; Achieving competitive advantage – this can be low cost or differentiation, as explained in Section 3.2. In order to implement this framework, it is essential to set an initial basis for comparison; for Draper like any business this could be a baseline scenario of do nothing, absolute or relative positioning or finally comparison with industry norms. Once this initial phase of preliminary analysis is complete, it is necessary to develop scenario’s within which to analyse various strategies, which are compared with the initial baseline scenario. The final stage of preliminary analysis is to narrow the range of options to a limited number of strategies in order to undertake a more detailed analysis, this can be achieved through ranking and decision trees. It only on completion of the preliminary analysis, that it is possible to undertake an in-depth assessment using the SFA framework. Based on the choice of strategies in Section 3, Ansoff Matrix and Porter’s Generic Strategy; Draper would need to collate data on their position within the industry, though they would need to decide on the basis for comparison for scenario examination. Finally, whilst there appears to