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    882.doc 882.doc Document Transcript

    • Accounting Reform II This project is funded by the European Union METHODOLOGICAL GUIDELINES MANAGEMENT ACCOUNTING
    • Accounting Reform II TABLE OF CONTENTS 0. Introduction.................................................................................................................................3 1.Current Objectives and Strategies of the Company......................................................................6 2.Situation Audit............................................................................................................................10 3.Future Position............................................................................................................................27 4.Future Directions........................................................................................................................34 5.Segment & Functional Strategies...............................................................................................40 6.Strategy Implementation Plan.....................................................................................................51 7.Internal Strategy Development Capability.................................................................................54 Appendix A....................................................................................................................................57 Appendix B....................................................................................................................................58
    • Accounting Reform II Strategic Planning 0. INTRODUCTION The target audience of this report are managers responsible for development, implementation and monitoring of business strategies. Objectives of the Guideline: The guideline provides these managers with the following tools: • A template outline of a business strategy • Practical advice on how to develop individual elements of the strategy • Recommendations on how to implement, monitor and review strategy DEFINITION A “Business Strategy” is defined as a Company’s decisions in relation to • What products and services the Company plans to develop and provide • To Whom Which segments the products and services are offered to • Where Geographically where which segments are served • How Through which sales channels Introduction to Strategy Development An enterprise’s • financing arrangements, • products and services offered, and • underlying capabilities are intimately related and jointly affect its future. Financing fuels the capabilities used to create products and services; and the competitive offering of products and services generates the financial returns needed to induce investment in the enterprise. Separately, financing, capability, or competitive difficulties can retard the progress of an enterprise, and together such difficulties may prove calamitous. On the other hand, strengths in one or another of these areas may provide a platform for the future, with the joining of strengths across the three areas providing a platform for future success. FUTURE The future provides opportunities and hazards for enterprises, conditioning the directions they might take. But such directions are conditioned equally by an enterprise’s present situation and what it can bring to the future. Moreover, both the future and an enterprise’s present situation may be well or imperfectly understood. surprise chance Deficiencies in such understanding open up an enterprise’s future to chance, while enhanced understanding is likely to provide a firmer grounding for future directions. Better understanding of the future and an enterprise’s situation cannot guarantee success, but it is likely to limit misdirection and SETTING unforeseen or unnecessary failure. FINANCING STRATEGIC DIRECTIONS BUSINESS POSSIBILITIES Bringing together an enterprise’s financing arrangements, products and services offered, and underlying SERVICES capabilities is said to be ‘strategic’. An enterprise’s directions will depend on such strategic joining. The following diagram illustrates the idea. understanding intention 3 ENTERPRISE CAPABILITIES
    • Accounting Reform II Strategic Planning FUTUR This guideline explores: • the relationships between the financial and business objectives of the company, • the financial and business strategies through which such objectives are pursued, and • the organisational capabilities underlying the realisation of strategies. The explorations deal with both a company’s present situation and its possible future across the following three dimensions of its functioning: • within the organisation overall; • in different customer segments; and • for different functional areas within an organisation. The result should provide a carefully-examined foundation for the Company’s directions (set in terms of objectives and strategies) and their pursuit (in terms of internal capabilities and actions). Overview of this guideline This guideline has been organised around the format of a standard business strategy. Each section (from 1-6) describes one stage in the strategy development process. The order of the sections also reflects the typical logical chronological flow of stages of the strategy development process. Section 1 outlines the process to understand current objectives (both business and financial objectives) and strategies of the company, and also includes the recording of the company’s mission and core values. Section 2 describes how to perform a situation audit of the company, i.e. how to understand the present situation of the company both from an internal and external point of view. The internal analysis results in an assessment of the company’s organisational performance (regarding organisational structure, business processes, people and culture, and technologies) while the external analysis results in an assessment of the company’s competitive position in relation to its markets. This would include an understanding of the markets and segments, products of services, as well as competition and suppliers. Section 3 deals with the process of reviewing the company’s present situation in the light of future possibilities. There are 3 steps in the process: Firstly, to establish an agenda of strategic issues facing the organisation, after reviewing its present situation in the light of future possibilities; secondly, to develop alternative courses of action that would address issues on the strategic agenda; thirdly, to evaluate and select strategic alternatives to create future directions for the organisation. 4
    • Accounting Reform II Strategic Planning Section 4 is based on the above revised understanding of the organisation and the issues it faces, and the purpose is to confirm or redefine the organisation’s financial and business objectives (what the organisation seeks to achieve in the future). In addition, the purpose is to confirm or redefine the company’s financial and business strategies (how the organisation’s objectives are to be pursued in the future). Section 5 describes how to - having set business strategies for the company in Section 4 - reflect the strategies in specific segment strategies and the internal functional areas. These strategies have a dual focus. On one hand, they set out how customers are to be served in the face of competition, which provides a product/service market perspective (segment strategies). On the other hand, they define how the product/service offerings for the segment are to be produced, providing an organisational perspective on the processes and resources involved (functional strategies). Section 6 outlines the format of the Strategy implementation plan. It is of crucial importance that any business strategy is accompanied by a strategy implementation plan. It is a quite simple thing to do, but critically important for the success of the strategy. Based on an analysis of all segment and functional strategies, all action items are identified, and grouped together in projects. Each of these sections is structured the following way: I. Definition of the elements involved; II. Description of what the strategy should encompass; III. Practical advice on how to manage the process, mainly in the format of practical template forms outlining the data and information required, and how to structure it. An overview of the headlines of a standard business strategy can be found in Appendix A. Section 7 contains a number of recommendations in relation to the internal capabilities required in an organisation in order to develop, implement and update a business strategy. 5
    • Accounting Reform II Strategic Planning 1. CURRENT OBJECTIVES AND STRATEGIES OF THE COMPANY The first step in a strategy development process is to understand the current strategy of the company. This can be done • firstly, by examining the existing strategy document (very often it actually does not exist), and • secondly, through a number of interviews with senior or middle management. Workshop Instead of interviews, a fact-finding workshop may be organised. The advantage of the workshop is that it will also facilitate communications and discussions. The workshop may actually be considered the first step in the development process of the new strategy. The company could consider having an external consultant facilitate the workshop. You can explore and clarify the organisation’s present directions by answering two critical questions: • What has the organisation sought to achieve? • How have these achievements been pursued? In some cases, the answers will be readily available or documented. In other cases, they may need to be reconstructed by reviewing the organisation’s history. 1.1 Financial and Business Objectives The first question, “what,” relates to the organisation’s objectives, which may be explicit or implicit. An organisation has two types of objectives, business and financial, as defined below. Business Objectives What position does the organisation wish to attain in its product/service markets, in terms of the customer value it generates? This position may be expressed by market share attained, customer retention or acquisition, or customer preference for the organisation’s products/services relative to other products/services. HOW to… Questions to ask to understand Business objectives: • What types of product/service market (or industry) do we seek to be in? • What makes these markets or industries attractive to us? Consider size, degree of segmentation, growth rate, pricing structures, nature of competition, levels of business risk, profitability, etc. • How do we want customers to view our organisation and our products/services? • How do we seek to offer value to our customers, and become their preferred provider of products and services? • What are our growth aspirations in each product/service market segment (e.g., in terms of sales volumes)? • What growth rates have we achieved in each segment over the past three years? • What are our competitive goals in each product/service market segment (e.g., in terms of market share or competitive position)? • How have our market shares/competitive position in each market segment changed over the past 6
    • Accounting Reform II Strategic Planning Financial Objectives What return is the organisation seeking on capital used, in terms of owner value generated? This return may be expressed through profitability and asset growth relative to debt, liquidity, and dividends that the organisation wishes to sustain. HOW to… Questions to ask to understand financial objectives: • What rate of return are we seeking on capital employed? • What rates of return on capital employed have we achieved in each of the past three years? • What rate of return are we seeking on assets? • What levels of asset growth are we seeking? • What levels of asset growth have we achieved in each of the past three years? • What levels of dividend are we seeking? • What levels of dividend have we achieved in each of the past three years? 1.2 Financial and Business Strategies The second question, “how,” relates to an organisation’s strategies, which also may be explicit or implicit. An organisation has two types of strategies that match its objectives, as explained below. Business Strategies How has the organisation sought to attain its business objectives through the scope and scale of the products/services it offers or the use of distinctive capabilities that give it a competitive advantage? HOW to… Questions to ask to understand business strategies: • What range of products/services have we had in each market segment over the past three years? What is the scope of the organization’s product/service portfolio? • What volume of products/services have we offered in each market segment over the past three years (e.g., in terms of unit sales volumes, and perhaps sales dollars)? • Which sales channels have we utilised for different segments and geographies? • How has the range, and volume mix, of products and services varied over the past three years? • Were the planned, or targeted range, and volume mixes achieved? • Did these competitive advantages flow from targeting customer needs, from gaining advantages over competitors, or from both? Which needs? Which competitors? • Which distinctive competences did we use in trying to meet our targeted range and volumes of products/services? • What synergies in organisational functioning did we use in trying to meet our targeted range and volumes of products/ services? • To what extent were shifts in the range or volume of products/services, over the past three-to-five years, the result of the investment of new resources? To what extent were they the result of shifts in internal patterns of resource allocation? For example, compare investments in technology or product development, or operational budget allocations over this period. • Were these investments, or shifts in resource allocation, planned across the period? 7
    • Accounting Reform II Strategic Planning Financial Strategies How has the organisation generated and managed its finances, and resourced its business strategies, to attain its financial objectives? HOW to… Questions to ask to understand Financial Strategies: • What financing strategies have we used over the past three-to-five years? Consider this in terms of retained funds, equity funds raised from owners/shareholders, or debt funds raised through borrowing. • What patterns of financial leverage or gearing have we utilized or sought over the past three-to-five years? For example, consider debt/equity ratios over the period. • What was the average cost of funds or capital in each of the last three-to-five years? Consider, for example, the average of cost of debt (interest) and cost of equity (dividends or shareholder return expectations). • How does this cost of capital compare with the rates of return sought on capital employed? (See financial objectives, above.) • What targets have been set over the past three-to-five years for cost reduction that support strategies through changes to operations or divestment of assets, etc.? • Have these targets been achieved? • What criteria or targets have we used to manage working capital, for example to minimise surplus cash, reduce inventories, turn over accounts receivable faster, and use accounts payable as a source of short-term funding? • Have these criteria or targets been achieved? • What approaches have we taken to manage cash flow requirements and imbalances, for example through use of short-term or standby facilities, accelerating inflows/returns from operations, deferring nonessential outflows, etc? • Have these approaches been successful? Mission, Vision and Values The combination of objectives and strategies is expressed as the ‘mission’ of the organisation. The mission should clearly and concisely communicate the purpose of an organisation’s objectives and strategies, taken together. It will then be elaborated in a more detailed statement of objectives and strategies. Consider the following example of a mission statement: To secure superior returns for owners/shareholders1 and offer a range of products/services that win customer preference,2 by harnessing and investing resources3 in organisational technologies and competencies that enable a sustained competitive advantage.4 1 Financial objective, 2Business objective, 3Financial strategy, 4Business strategy The diagram illustrates the parameters of an organisation’s direction established by asking the two critical “what” and “how” questions; the directions taken by an organisation are indicated by its objectives and its strategies. Shifts in objectives indicate a change in an organisation’s directions, but so do shifts in its strategies. Thus, a shift in any of the variables in the diagram indicates a shift in an organisation’s direction. 8
    • Accounting Reform II Strategic Planning FINANCIAL BUSINESS OBJECTIVES OBJECTIVES · What? · Share Profitability/ Owner Customer of market growth value value · · Policy ORGANISATIONAL Customer parameters MISSION Segments Resource Competitive · · management How? advantage Scope/scale Financing · · FINANCIAL BUSINESS STRATEGIES STRATEGIES For any organisation the critical question is: What value does it seek to create for customers or owners, through effective resource management and sustained competitive advantage in relevant markets? An answer to this question should offer sharp insight into the directions pursued by an organisation. HOW to… Understand current mission? Summary of Section 1 An organisation’s mission can be in different forms. In many cases, the organisation’s mission is not documented in writing. If it is notof the Companyis recommended to write it down during this Current Objectives and Strategies documented, it Once this stage of the strategy development process has been a number of should have stage of the project. Usually, the information is collected throughcompleted, youinterviews witha clear understanding of the senior management. company’s current objectives (both business and financial objectives) as well as strategies, and have recorded the company’s mission and core values. In many cases, this information has not been formally documented earlier in the company, so the process A documenting current objectives is important. It constitutes the baseline and the foundation, on which to of real example… of a Mission Statement Ведущий (в отрасли) build the new strategy. Also, it is an important communication tool when highlighting aspects of the new Кем мы хотим стать process. strategies later in the Мы хотим стать ведущей компанией по (продукты и сегменты) Мы считаем, что основной стратегической целью компании по (напрвлению) завоевание в течение ближайших пяти лет ХХ%(?) доли на российском рынке (отрасль) и рост капитализации компании. Зачем мы существуем Мы создаем компанию, чтобы удовлетворять нужды и потребности нашего главного акционера и других корпоративных клиентов по (продукт), связанных с имущественными интересами и здоровьем сотрудников, предоставляя им страховую защиту на уровне мировых стандартов. За счет использования наших услуг наши корпоративные клиенты смогут улучшить свои программы по (продукт) Как мы этого достигнем Мы разработаем для наших клиентов эффективную программу (продукт), одним из основных элементов которой станут (продукты1,2,3) Мы будем предоставлять услуги по (продукт) не только в России, но и за рубежом. Мы будем активно работать с компаниями, (сегменты) Мы будем оказывать услуги сотрудникам корпоративных клиентов по (продукт), используя не только административный ресурс, но и новые информационные технологии по продаже услуг и послепродажному обслуживанию. Наша компания будет обладать оптимальной организационной структурой, эффективными бизнес процессами, информационной системой, создаст систему сбалансированных показателей по контролю за деятельностью подразделений компании, будет развивать сеть продаж и создавать конкурентоспособные продукты. Мы создадим эффективную внутреннюю организацию, ориентированную на потребителя и устанавливающую конкурентоспособные цены, способную быстро реагировать на изменения на рынке. Мы создадим единую корпоративную культуру, основными ценностями которой станут профессиональные знания и умения, ориентированность на клиента и командный стиль руководства. Чем мы отличаемся от наших конкурентов Мы – профессионалы, которые обладают уникальными знаниями о (отрасль) и имеют большой опыт работы по (продукты) Финансовые возможности и наличие административного ресурса позволят нам достичь поставленных целей. Имидж надежности и солидности, приобретенный в течение десяти лет успешной работы на российском (отрасль) рынке, позволит нам привлечь новых клиентов. 9
    • Accounting Reform II Strategic Planning 2. SITUATION AUDIT A strategic audit is a structured way of elaborating on the questions you’ve asked about an organisation’s present directions. A strategic audit typically has two dimensions – the internal and the external: Criteria Competitive Organisational Position Performance - External Markets ü - Customers External - Products & Services ü ü Focus - People & Culture ü - Business Processes ü Internal - Organisational structure ü - Information Technologies ü People and Culture Structure Processes and Systems Technology Markets and Products and Custom ers Services These external and internal dimensions will be described in detail below. Also please have a look at Appendix B, containing a large number of questions related to the strategic audit. 1.3 External Assessment The aim of the external analysis is to assess the competitive position of the organisation in external markets. 10
    • Accounting Reform II Strategic Planning 1.3.1 Products and Services, Markets and Segments Identify the market(s) in which the organisation sells products or services. Focus on descriptions of customers: • Who are they? • What do they purchase and when? • How do they purchase and where? • Why do they purchase, and what do they value most highly? Do not focus on the physical features of products or services, or on how they are produced. The important factor is how customers view what the organisation offers. This is what they pay for. In particular, you should try to understand the product/service mix that customers purchase and demand. The organisation may see itself as a supplier of products, but customers see the service provided as an integral component of the product. For that reason, existing services could be accentuated with advantage. If the organisation is a service firm, you may try to probe customers’ needs or perceptions to assess whether there is a hidden product component in their purchases. How to… Produce a Customer Analysis Identify the markets in which you sell products or services in terms of major classes of customers (segments). For each class of customer try to define the following: • Who are they? • What needs do they have? • Why do they purchase from us? • What do they value most highly? • How do they purchase from us? • What do they purchase from us? • When do they purchase? • Where do they purchase? • What product/service mix is attractive to them? • Why do they prefer us to our competitors? Your organisation may supply products to other organisations, which then add service to the products in supplying its customers. Under these circumstances, your organisation may be vulnerable to service deficiencies of your customer in supplying its customers. For this reason, you may need to probe and describe the full value-chain from your organisation to the end-customer, seeking to uncover needs or perceptions at each stage, as well as the “value-added” at each stage of the chain. These descriptions should give you insight into how the organisation’s product/service markets are segmented. Different categories of customers may be buying different products or services or different product/service mixes, in varying frequencies and amounts. Try to estimate the size of each product/service market, in terms of both volume (number of units sold) and finances (sales dollars and perhaps profit per segment). The resulting descriptions of product/service market segments could include: retail, wholesale, and export; large and small customers; frequent and infrequent customers; customers categorised in terms of product/service mix; and so on. 11
    • Accounting Reform II Strategic Planning How to… Create a Market Segmentation Describe distinctive segments in the product/service markets you supply. Try to identify the size of each segment, in sales dollars or volume terms, and your share of the market. Segment $ Size of Segment Sales Volume of Our Share of Description (estimated total Segment Market (%) sales in $) (no. of units) $ Volume Finally, try to understand what makes each product/service market or segment attractive to your organisation. Is it - the size of the market, - the level and type of financing available to customers, - degree of segmentation, - growth rate, opportunities for differential pricing, - low levels of competition, or - high profitability? How to.. Analyse Segment Appeal What makes each class of customer (product/market segment) attractive to your organization? Attractiveness Factors Segment Growth Pricing Profitabilit Level of Other Description Rate Opportunitie y Competitio (Describe) s n Also examine some less-attractive features of each market or segment, such as • technological vulnerability, • sensitivity to economic downturns, • environmental issues, • regulatory structures, • dependency on poorly-performing intermediaries, or • exposure to competition. How to… Analyse Trends in Product/Market Segments Describe trends that are occurring across the product/service markets you supply, indicating their applicability to particular segments. • Are there changes in the composition of your customers? • Are customer needs or expectations changing? • Are substitute products or services becoming available? • Are different product/service mixes likely to be demanded? • Are pricing/profit margins trends changing? • Is the method or location of purchase likely to change? • Are there any other trends of importance? 12
    • Accounting Reform II Strategic Planning Describe the industry the organisation is in. What other companies supply the product/service markets you have described above? Consider the number and size of suppliers, the number of market segments they supply, their product/service mixes, how different their mixes are from yours and others, their distribution systems, and their pricing structures. Are there high levels of seller concentration in the industry, and how are organisations related to one another? Do suppliers operate as networks or constellations, and how is your organisation involved or dependent on such arrangements? Are there barriers to entering the industry? Is there excess capacity within the industry? How to.. Perform an Industry Analysis Who supplies the product/service market segments identified above — apart from your organisation and those with whom you are allied—and what factors govern competition within the industry? Supplier’s Size Segments Market Market Distinct Basis for Names (Sales Supplied Share (by Share Characteristic Competition $) segment) Growth of Products or (price, service, Rate Services etc.) How to … Describe Industry Trends Describe current trends in the supply of the product/service market segments you have identified above, indicating their relevance to particular markets. • Is the industry contracting or growing? Are firms entering or leaving the industry? • Is the structural basis of competition changing, through the creation of inter-organization alliances or shifts in tariffs or regulatory arrangements, for example? • Are profitability patterns changing? • Is the intensity of rivalry within the industry changing? • Are there any other trends? 1.3.2 Competitors -What trends can you discern within the industry? -Are organisations entering or leaving the industry? -Are external factors affecting whether competition is changing, through shifts in tariffs, regulatory arrangements, economies of scale, barriers to entry, takeovers/mergers, the creation of networks or alliances, or other factors? -Is the industry contracting or growing? -Are profit patterns changing? -Are the bases of profitability changing, due to the lowering of costs or the differentiation of products/services, for example? -Within the industry, who are your organisation’s major competitors? -On what basis did you identify this group? -Does your organisation have allies within the industry? Now describe attributes of each competitor. -What is their product/service range? 13
    • Accounting Reform II Strategic Planning -What are their methods of operation, such as manufacturing, and importing? -What are their methods of competing? Consider price, quality, service, terms, backup, distribution, coverage, and other factors. -What is their market image, and why do customers use them? -What capacity do they have to react to market or competitive changes? -What is their turnover and profitability? -What is their size in terms of employees and asset base? -How flexible or focused are their structures? How to… Perform a Competitor Analysis Identify and analyse your major competitors within the industry. Competitor’s Segment(s) Method of Their Customers’ Their Their name in which operation capacity image of competitive competitive they to react to them advantages disadvantages compete market changes Finally, examine each competitor’s position relative to your organisation. -What are the relative market shares in each product/service market? -Where are you positioned relative to others on competitive factors such as cost, quality, dependability, innovation, flexibility or customer service? -How do competitors’ production and operation arrangements, organisational structures, and financing methods differ from yours? -What competitive moves might they make that will affect your position? -Overall, what are the critical differences between their modes of competing and yours? 14
    • Accounting Reform II Strategic Planning How to… Perform a Competitor Positioning Our Competitor 1 Competitor 2 Competitor 3 Potential Organization Competitor Relative market shares Segment 1 Segment 2 Segment 3 Segment 4 Cost structures (low/high) Customer image generally Quality Dependability Responsiveness Flexibility Innovativeness Financing structures Organizational structures Likely competitive moves Relative competitive advantage/disadvantag 1.3.3 Suppliers Identify the key resource markets used in generating your organisation’s products/services. Typically, resource inputs might be acquired in markets for raw materials, production supplies, labour, transportation, capital equipment, intellectual property, and information technology. Describe the characteristics of each market, including supply side industry structures. What trends can be identified in each market? Describe your own position as a customer in each market. How to… Perform a Resource Market Analysis Describe characteristics of the key resource markets needed to generate your organisation's product/service. Raw Capital Intellectual Information Labou Transport Other Materials Equipmen Property Technology r t Major resources purchased Major suppliers Trends in each market - - What is your bargaining position? - How is your supply situation, relative to your competitors? - What do you seek in the products/services that you purchase? 15
    • Accounting Reform II Strategic Planning - Are you satisfied with your present arrangements, in terms of quality, cost, or responsiveness? - Can you assess the degree to which you are satisfied with each supplier? - Do you have too many suppliers? - Do you have appropriate or sufficiently binding alliances or arrangements with key suppliers? Would you be better off with fewer or single supply sources? - What arrangements would you institute if you moved in this direction? Overall, try to specify the ideal situation you could reasonably expect to achieve in each resource market. How to Describe your Positioning in Relation to Suppliers Assess your organization’s position as a customer in each major resource market. Resource Major Satisfaction Features Desired Other Issues Market Suppliers with Present Sought in Position in for Our Firm Arrangements Products/ Each Market (score 1-10) Services Purchased Raw Materials Capital equipment Intellectual property Information technology Labour Distribution/ transport Other 1.3.4 Summary of External Assessment Now it is time to assess your organisation’s position overall, and in each of the markets you have analysed. This is your ‘competitive position’. First, assess the competitive position of each of your products and services within the segments you have identified. In doing so, you might consider some of the following factors: -your share of the market, -the breadth of your product/service line, -your pricing structures, -your distribution capacities, -your sales expertise, -your vulnerability to intermediaries, -your customer's loyalty. 16
    • Accounting Reform II Strategic Planning The final assessment for each segment might be expressed as strong, average, or weak. Alternatively you may construct your own scale. Second, assess your competitive position within the industry that supplies each of your product/service markets. Consider the following factors: -your growth rates in product/service supply, -the quality of your production facilities, -the quality and appropriateness of your alliances, -staff expertise, -industrial relations situations, -profitability. Again, your final assessment for each industry segment might be expressed as strong, average, weak. Third, assess your competitive position relative to your major competitors, or even potential competitors, in each product/service segment. Draw on your analyses of the factors affecting your competitive position in product/service markets and in the industry. Also use the competitor profiles you have developed. Focus on your advantages and their advantages, your weaknesses and their weaknesses. Express the outcome of your assessment as strong, average, or weak. Fourth, assess the competitive position of your organisation in each resource market. You may use relevant factors identified in the product/service market, industry, and competitor assessments of competitive position. Express the final assessment for each resource market as strong, average, or weak. 17
    • Accounting Reform II Strategic Planning How to… Summarise Competitive Position Assess your organization’s competitive position in each of the market segments you have analysed. Use a scale of strong, average, or weak in each of the categories below. Competitive Position (strong, average, weak) Product/service markets Segment 1 Segment 2 Segment 3 Industry Segment 1 Segment 2 Segment 3 Competitors Segment 1 Segment 2 Segment 3 Resource Markets Raw materials Capital equipment Intellectual property Information technology Labour Distribution/transport Other Finally, summarise your organisation’s overall competitive position in each of these categories: -product/service markets, -the industry, -comparison to competitors (actual and potential), and - How to Summarize overall assessment Now make an overall assessment of the competitive position of your organization for each of the categories below. Use a scale of strong, average, weak. Competitive Position for the Organization as a Whole (strong, average, weak) Product/service markets Industry Competitors Resource Markets resource markets. In each case express the outcome as strong, average, weak. Note: Competitive position established is dependent on the set of factors you consider to be important for success in external markets, and the relative importance you give to the factors identified. 18
    • Accounting Reform II Strategic Planning 1.4 Internal Assessment The situation assessment now turns to your organisation’s internal functioning and capabilities, and moves towards an assessment of its performance in key functional areas and overall. These determinations of performance are then probed for their effects in terms of product/service market impacts, and their causes in terms of the impacts of past resourcing patterns. The exploration begins with a brief review of key aspects of the organisation’s functioning • staffing, • direction setting, • change management, and • resource management. The outcome sets the scene for more probing analyses and assessments. Key functional areas are then identified, together with factors crucial for successful performance in each area. Using these factors as assessment criteria, you can now rate your organisation’s performance capability against each factor in each functional area as strong, average, or weak Some key performance areas relate to your organisation overall, rather than to discrete functional areas —such as organisational structures, technology, intellectual property, management, and financial position. Factors crucial for successful performance in each of these areas can be identified, and used as assessment criteria for rating your organisation’s performance capability against each factor in each area as strong, average, or weak. At this point, you should attempt to determine the effects of your performance assessments on customer satisfaction in each product/service market segment that you supply. This proceeds factor by factor, for both functional areas and overall organisational areas. The focus is on strengths first, and then on weaknesses—and the outcome is characterized as a positive or negative effect on customer satisfaction. It is now time to probe for cumulative or countervailing effects. • Do some strengths, with positive effects on customer satisfaction, cumulate as a distinctive competency that you can label, and are some of these strengths offset by weaknesses with negative effects on customer satisfaction? • Do some weaknesses, with negative effects on customer satisfaction, cumulate as distinctive in competences that you can label, and are some of these weaknesses offset by strengths, with positive effects on customer satisfaction? • List the distinctive competences and distinctive incompetences identified and labeled, together with the customer satisfaction criteria used in making this determination. The causes of identified strengths, weaknesses, distinctive competences, and distinctive incompetences can now be explored by looking to previous investments of resources. -What previous resource investments can be attributed to a functional or organisational area and to the factors involved in each case? -Is the factor in question sensitive to the possible withdrawal or injection of resources, and at what point is it likely to change character (e.g., shift from strong to average or weak)? -Is it possible to withdraw resources up to a certain point without affecting a factor categorized as strong or a set of factors characterized as a distinctive competence—what are the dollar ($) amounts involved? --Is it possible to alleviate or remove weaknesses or distinctive incompetences by injections of financial resources—and what are the dollar ($) amounts involved? 19
    • Accounting Reform II Strategic Planning 1.4.1 Organisational Description How to.. Prepare a Brief Organisation Description Staffing • Total number of employees • Numbers of employees in direct production • Numbers in customer interface roles • Numbers in indirect support roles • Numbers in managerial roles • Describe employee morale • Describe your level of employee absenteeism: • Are employee skill levels appropriate to their work roles? • How much training is required to maintain skill levels? • Is training conducted internally or externally? • Are skilled employees easily replaceable? If so, how? • What reward systems are in place? • What levels of participation are there in the business? Direction Setting • How are objectives/strategies set? • Is product/service market success the focus of direction setting? • What time frames are used in direction setting? • How are the directions—in terms of objectives, strategies, timing—established as a focus throughout the organisation? • Who makes what decisions in direction setting? • What lines of authority have been established in relation to direction setting? Change Management • Is change consciously managed in response to the organisation taking new directions? • Who is responsible for guiding change within the organisation? • What philosophies are drawn on in guiding organisational change? • Are the outcomes of change monitored? • How is change established as a necessity or norm for the organisation? Resource Management • Is resource acquisition and use consciously managed within the organisation? • Who is responsible for guiding these processes? • Are new resource needs considered as part of direction setting? • Are new patterns of internal resource allocation considered as part of direction setting? • Are change processes designed to release resources for alternative uses? • Are change processes supported by appropriate injections of resources, such as investment in new technology or training? 1.4.2 Functional Performance Identify your organisation’s key functional areas, such as specialized processes or departments. A typical list might include: -procurement (purchasing), -production (operations), -human resources (personnel), -transport (distribution), -marketing (sales), and -finance (accounting). 20
    • Accounting Reform II Strategic Planning How to.. Rate Functional Performance Rate the performance of each of your organisation’s functional areas as strong, average, or weak relative to each factor. If applicable, identify other factors in each area that you consider crucial for successful performance. Strong Average Weak Procurement Resource availability Lines of supply Just in time possibilities Logistics of supply .................................................. Human Resources Labour availability Industrial relations Competency profiles Training capacity .................................................. Production Plant capacity Plant flexibility Maintenance/reliability Plant modernity .................................................. Transport Capacity levels Flexibility Responsiveness/speed Cost .................................................. Marketing Product Range Pricing structures/strategies Promotional strategies Distribution logistics .................................................. Finance/Accounting Working capital management Decision support capabilities Information/control systems Cash flow management .................................................. Other .................................................. 1.4.3 Organisational Performance Some key performance areas relate to the organisation as a whole, rather than just to particular functional areas. The following are examples: -organisational structure, -information technology, -business processes, -intellectual property, -management, and -financial position. 21
    • Accounting Reform II Strategic Planning How to... Rate Organisational Performance Rate the performance of areas that relate to the organisation as a whole as strong, average or weak relative to each factor identified. If applicable, identify other factors in each area that you consider crucial for successful performance. Strong Average Weak Organisational structures Division of work Integrative planning/control systems Product/service market focus Flexibility/responsiveness .......................................................... Information Technology Production support Administrative support Capacity Flexibility .......................................................... Business Processes Efficiency of Key customer processes Organisation of reengineering .......................................................... Intellectual property Legal title Extent of protection Exploitability Durability .......................................................... Management Depth of experience Innovative capabilities Team focus Assigned performance Indicators/responsibilities .......................................................... Financial Position Asset structures Debt structures Profitability/cash flow Borrowing/financing capacity ................................................. Other areas/factors .......................................................... 1.4.4 Summary of Internal Assessment - Impact on Market Segments Based on the external analysis you conducted in section 2.1, identify the criteria that seem crucial to customer satisfaction in each product/service market segment. These criteria might include -cost, -quality, -variety/flexibility, 22
    • Accounting Reform II Strategic Planning -responsiveness, -dependability/reliability, -service, and -innovativeness. Assess whether the strengths you ascribed to functions within the organisation, or at the organisational level, have a positive or negative bearing on particular customer satisfaction criteria in each market segment. Similarly, assess whether the weaknesses you ascribed to functions within the organisation, or at the organisational level, have a positive or negative impact on particular customer satisfaction criteria in each market segment. Finally, look for patterns in how you have categorised the impact of your strengths and weaknesses on criteria that affect customer satisfaction. Consider the impact across segments. For example, in relation to criteria such as cost or quality, do weaknesses negate strengths, or are there insufficient strengths across the board to have a sustained impact on a particular criterion? If, however, you consider that strengths are cumulative and weaknesses do not negate them, categorize those factors as a distinctive competency. On the contrary, you may categorise other factors as distinctive incompetences. How to.. Analyse Product/Service Market Segment Impacts Assess whether the strengths you described within functions, or at the organisational level, have a positive or negative bearing on customer satisfaction in each market segment. Function/Organization Factors Segment 1 Segment 2 Segment 3 Segment 4 Strengths** ................................. ...................... ................... .................... .................... ................................. ...................... ................... .................... .................... ................................. ...................... ................... .................... .................... ................................. ...................... ................... .................... .................... ................................. ...................... ................... .................... .................... ................................. ...................... ................... .................... .................... ................................. ...................... ................... .................... .................... * Use criteria crucial to customer satisfaction such as cost, quality, variety/flexibility, responsiveness, dependability/reliability, service, innovativeness, etc. If the impact of a factor is positive or negative, mark it accordingly in the space provided under each segment. ** You may wish to assign some factors previously scored as “average” to this category. Assess whether the weaknesses you ascribed within functions or at the organisational level have a positive or negative bearing on customer satisfaction in each market segment. 23
    • Accounting Reform II Strategic Planning Function/Organisation Factors Segment 1 Segment 2 Segment 3 Segment 4 Weaknesses** ..................................... ................... ................. .................... .................... ..................................... ................... ................. .................... .................... ..................................... ................... ................. .................... .................... ..................................... ................... ................. .................... .................... ..................................... ................... ................. .................... .................... ..................................... ................... ................. .................... .................... ..................................... ................... ................. .................... .................... ..................................... ................... ................. .................... .................... ................... ................. .................... .................... ................... ................. .................... .................... ................... ................. .................... .................... * Use criteria crucial to customer satisfaction such as cost, quality, variety/flexibility, responsiveness, dependability/reliability, service, innovativeness, etc. If the impact of a factor is positive or negative, mark it accordingly in the space provided under each segment. ** You may wish to assign some factors previously scored as “average” to this category. 24
    • Accounting Reform II Strategic Planning Look for patterns in how you categorized the impact of your strengths and weaknesses on customer satisfaction criteria. Consider the impact across segments. If a strength has a cumulative, sustained effect, classify it as a distinctive competence. If a weakness has a cumulative, sustained effect, classify it as a distinctive incompetence. Mark the effect, either positive or negative, of each distinctive competence or incompetence in the space provided under relevant customer satisfaction criteria. Function/Organisation Customer Satisfaction Criteria* Factors Cost Quality Variety Service Depend- Respon- Othe ability siveness r .................................. .............. .............. .............. .............. .............. .............. .................................. .............. .............. .............. .............. .............. .............. ........ .................................. .............. .............. .............. .............. .............. .............. ........ .................................. .............. .............. .............. .............. .............. .............. ........ .................................. .............. .............. .............. .............. .............. .............. ........ .................................. .............. .............. .............. .............. .............. .............. ........ .................................. .............. .............. .............. .............. .............. .............. ........ .................................. .............. .............. .............. .............. .............. .............. ........ .................................. .............. .............. .............. .............. .............. .............. ........ .................................. .............. .............. .............. .............. .............. .............. ........ .............. .............. .............. .............. .............. .............. ........ .............. .............. .............. .............. .............. ........ Distinctive Competence s 1. .............................. .................................. 2. .............................. .................................. 3. .............................. .................................. .................................. 4. .............................. .................................. Distinctive Incompetences 1. .............................. .................................. 2. .............................. .................................. 3. .............................. .................................. 4. .............................. .................................. 25
    • Accounting Reform II Strategic Planning Summary of Section 2 Situation Audit Once this stage of the strategy development process has been completed, you should have obtained an in-depth understanding of the present situation of the company both from an internal and external point of view. The internal analysis assesses the company’s organisational performance (regarding organisational structure, business processes, people and culture, and technologies) while the external analysis assesses the company’s competitive position in relation to its markets. This includes an understanding of the markets and segments, products of services, as well as competition and suppliers. In other words, the situation audit must provide all the hard facts, data and market information, based on which the company will make its important strategic decisions. This stage is crucial, without quality data, the wrong strategic decisions could be made. 26
    • Accounting Reform II Strategic Planning 3. FUTURE POSITION Futures assessment is an approach to reviewing an organisation’s present situation in the light of future possibilities. It acts as a basis for redirecting efforts. The aim is three-fold: a) first, to establish an agenda of strategic issues facing the organisation, after reviewing its present situation in the light of future possibilities; b) second, to develop alternative courses of action that would address issues on the strategic agenda; and c) third, to evaluate and select strategic alternatives to create future directions for the organisation. 1.5 Guessing the Future It should now be possible to supplement the situation assessment you have made through a mode of thinking known as S.W.O.T. analysis (strengths, weaknesses, opportunities, threats analysis). Recall that you have assessed the organisation’s competitive position in four areas: -in the product/service markets the organisation supplies, -within the industry, -relative to major and potential competitors, and -in the organisation’s key resource markets. Now you should identify threats and opportunities relating to each of these categories. Scan the external environment and try to look into the future. -Will there be shifts in customer demand? -Will there be new entrants to the industry (e.g., as tariff barriers fall)? -Are competitors changing their stance in relation to your organisation, and will they be equally affected by external changes, such as regulation or deregulation? -Will you find resource substitutes? -What effect will changes in technology or in the community's position on the environment or business ethics have? In identifying threats and opportunities, focus first on the category, such as product/service markets, and then on your competitive position in this category. There may be a threat to a market segment, which may (or may not) have an effect on your competitive position in this segment. For example, a shift in customer preference, for environmentally sound packaging in a market segment, may not affect your competitive position if you already use such packaging. Remember also that you have assessed your organisation's internal strengths and weaknesses. Your assessment shows their impact on market segments in terms of customer satisfaction criteria. It also shows the impact of past resourcing patterns on the existence of a strength or weakness. Also, you have examined the cumulative effects of different strengths and weakness, to identify factors as distinctive competences or distinctive incompetences. Now you should assess whether these strengths and weaknesses, particularly those categorized as distinctive competences or distinctive incompetences, confer a competitive advantage or competitive disadvantage on the organisation. Not all will! In making this assessment, draw on your external analysis of your competitors, customers, and suppliers, considering potential changes by these players in your markets. Also, refer to assessments of your competitive position and the bases for such assessments. 27
    • Accounting Reform II Strategic Planning Focus first on the product/service-related factors that confer distinctive competences or incompetences. Then examine factors at the organisational level, relating to - structures, - technology, - intellectual property, - management, and - financial condition, including the potential for generating external financial resources. Finally, scrutinise the full set of items listed. Estimate the financial resources that could be generated internally by withdrawing resources from these items without affecting their potency, or from other areas of organisational functioning. At the same time, identify the items requiring resource injections to sustain competitive advantage, remedy weaknesses or nullify competitive disadvantages. Estimate the funds required. 28
    • Accounting Reform II Strategic Planning How to.. Identify External Threats and Opportunities How to.. Identify threats and opportunities relating to each of the four areas in which you have assessed your competitive position: product/service markets, industry, competitors, and resource markets. Insert your Identify Internal Strengths and Weaknesses Assess whether the strengths and weaknesses you have and then describe relevant threats and opportunities previously determined competitive position, identified, particularly those categorized affecting it. This begins the S.W.O.T. analysis referred to above (strengths, weaknesses, as distinctive competences or threats). opportunities, and incompetences, confer a competitive advantage or competitive disadvantage on the organization. Competitive Threats Opportunities Strengths Position Weaknesses List of Factors Distinctive (strong, Competitive Distinctive Competitive Competence average, weak) Advantages Incompetences Disadvantages Product/Service Markets s Product/service related 1 Segment ......................................... Segment 2 ......................................... Segment 3 ......................................... Segment 4 Organizational structures Industry ......................................... Segment 1 ......................................... Segment 2 ......................................... Segment 3 Intellectual property Segment 4 ......................................... Competitors ......................................... Segment 1 ......................................... Segment 2 Technology Segment 3 ......................................... Segment 4 ......................................... Resource Markets ......................................... Raw materials Management Capital equipment .............................................. Intellectual property .............................................. Information technology .............................................. Labour Financial condition Distribution/transport .............................................. Other .............................................. .............................................. External finance generation potential .............................................. .............................................. .............................................. Internal finance generation potential .............................................. .............................................. Required resource injections .............................................. .............................................. .............................................. 29
    • Accounting Reform II Strategic Planning SWOT Workshop. It is recommended to organise one or more workshops to create the SWOT analysis. Participants can be middle or senior management. The workshop should be organised around brainstorming and free interaction, as it is important that as many ideas as possible are generated. Later, these ideas will be validated. Consider using external resources to facilitate the workshop(s). 1.6 Establish strategic Alternatives As a result of the explorations you have now done—the situation assessment and S.W.O.T. analysis—you should be able to establish an agenda of the strategic issues facing the organisation. This agenda may be developed and structured as follows. Strategy or performance gaps. Consider present (or possible) failures to meet financial or business objectives and strategies. Examine the impacts on present objectives and strategies of the external threats and organisational weaknesses you have identified. List strategy or performance gaps. Feasible opportunities. Examine possible relationships between external opportunities and organisational strengths, particularly distinctive competences or competitive advantages. Identify and list the opportunities that should be feasible, given the organisation's strengths. Potential difficulties. Examine possible relationships between external threats and organisational weaknesses, particularly distinctive incompetences or competitive disadvantages. Identify and list potential difficulties facing the organisation. Capability gaps. Examine possible relationships between external opportunities and organisational weaknesses, particularly distinctive incompetences or competitive disadvantages. Identify the opportunities that cannot be pursued and the capabilities the organisation needs to develop to make them accessible. List the identified capability gaps. Manageable threats. Examine possible relationships between external threats and organisational strengths, particularly distinctive competences and competitive advantages. Identify and list threats that are manageable but have not been dealt with. Emerging issues. Identify emerging issues that do not fall into the categories above because they do not require immediate attention; however, they do warrant attention or monitoring. The strategic agenda provides a basis for redirecting organisational attention by identifying new directions for the organisation and areas for change. For example: • eliminate strategy or performance gaps by setting new objectives and strategies; • take advantage of feasible opportunities by capitalising on organisational strengths; • remedy potential difficulties by investing in removing weaknesses, particularly those conferring competitive disadvantages; • remedy capability gaps by investing in removing weaknesses to make more opportunities available; • manage threats by focusing organisational strengths on forestalling or counteracting identified or emerging threats; and • monitor identifiable issues whose organisational effects are not yet clear. The collective effect of such initiatives should be to point or move the organisation in beneficial directions. Failing to address these matters is likely to threaten the organisation's viability. 30
    • Accounting Reform II Strategic Planning How to.. Establish a Strategic Agenda Develop a strategic agenda based on the assessments you’ve done so far. List agenda items on the left of the following table under the relevant heading. Strategic Agenda Strategic (list) Alternatives Performance/ Strategy Gaps Feasible Opportunities Potential Difficulties Capability Gaps Manageable Threats Emerging Issues 1.7 Evaluate strategic alternatives While the strategic agenda suggests a number of directions for concerted action, it is not specific about which actions could, or should, be taken. Each item on the agenda could be addressed by more than one action. For example, to expand, you could promote existing products in new markets, or develop new products for existing markets. To acquire expertise, you could hire staff or engage outside contractors. Also, each possible action might serve more than one item on the agenda. Increasing the depth of marketing expertise, for instance, might permit a movement into new markets and focus new product development. Brainstorm… This is a time to brainstorm, gather advice, and let your team interact. Be imaginative! But deal with all items on the agenda. Stop only when you have exhausted all possible alternative actions for each item. Once a list of strategic alternatives is developed, the next problem is selecting from the list. -Which of the action alternatives should be implemented? -In what order of priority? -In what time frames? -Should there be a sequence of implementation? The answer to these questions depends on the criteria that bear on the alternatives. The following criteria might be used. 31
    • Accounting Reform II Strategic Planning Strategic coherence. -Is an alternative consistent with other alternatives being considered and with existing strategies? -Does it capitalise on distinctive competences/competitive advantages? -Will there be a synergy when the alternative combines with others? -Does the alternative, along with others, establish a coherent strategy for the organisation? Consider this in terms of the scope of product/service market offerings and the scale of particular offerings (e.g., in terms of growth, reduction in volumes, and so on). Outcome likelihood/risk. -What is the likelihood that the outcomes of each alternative will be achieved? -Is there a high or low risk of outcome failure, and what are the consequences to the organisation? Threat/capability exposure. -What external threats does an alternative face? -Is the exposure to threats high or low? -What additional capabilities does an alternative require? -Is the capability gap to be overcome high or low? Advantages/disadvantages. -What advantages or disadvantages are associated with an alternative? -Are there few or many? -Are they consequential or inconsequential? Assumption failure. -What are the key assumptions in an action alternative? -What alternative or counter-assumptions are possible? -What is the likelihood of the assumption failing? -What is the risk, in terms of possible consequences, of the assumption failing? Resource implications. -What resources does an action alternative entail? Alternatives might be ranked in terms of the resources they require. Their feasibility might be assessed against known, or assumed, availability of resources. How to.. Develop Strategic Alternatives Collaboratively develop as many alternatives as possible for addressing each item on the strategic agenda. List the alternatives developed on the right side of the above table. To analyse the merits of each alternative, you may apply each criterion equally to each alternative. The outcomes can be treated as data for a composite evaluation. Alternatively, you can assign relative weights to each criterion as part of a composite evaluation. Or you may give priorities to different criteria in a sequential screening process. In this case, some alternatives will be eliminated as they fail the first criterion, others will not work with the second, and so on. Play with the possibilities, not only as a way of evaluating or ranking alternatives, but to discover what is important to your organisation. -How entrepreneurial is it? -How much is it wedded to change? -How risk averse is it? -How confident are you in your analysis? After establishing the organisation’s present directions, and reviewing them in the light of future possibilities, you are in a position to establish the directions that will be pursued in the future and organisational actions or changes that will be necessary as a result. 32
    • Accounting Reform II Strategic Planning How to.. Evaluate Strategic Alternatives Evaluate the merits of each alternative action to determine which ones should have greater priority. Use each of the criteria listed for each alternative. Then come to a composite evaluation of each alternative, possibly giving it a score. Your scoring system should indicate your relative preference for an alternative, say on a scale of 1-10. Strategic Evaluative Criteria Composite Alternative Evaluation (indicate) (score) Strategic Likelihood/ Resource Threat/ Advantages Assumption Coherence Risk Implications Capability / Failure Exposure Dis- advantages Summary of Section 3 Future Position Once this stage of the strategy development process has been completed, you should have evaluated and selected strategic scenarios. This stage goes through an important, creative process. Firstly, you must identify the strategic issues facing the organisation, secondly, you must develop alternative courses of action to address the issues; thirdly, you must evaluate and select strategic alternatives to create the future directions. As mentioned above, this stage of the process is very much about creativity. The basic facts are available, and based on these facts strategic alternatives must be developed and evaluated. Without comparing alternative scenarios and instead just selecting the obvious ones, there is a high risk that not all important potential business opportunities are identified and evaluated, and that the selected scenarios are not the optimal ones. 33
    • Accounting Reform II Strategic Planning 4. FUTURE DIRECTIONS Based on your revised understanding of the organisation and the issues it faces, you should be able to confirm, or redefine, the organisation’s financial and business objectives—what the organisation seeks to achieve in the future. Also, you should be able to confirm, or redefine, the organisation’s financial and business strategies—how the organisation’s objectives are to be pursued in the future. 1.8 Objectives 1.8.1 Financial Objectives & Strategies Define the strategies to be used in generating finance and allocating it to support business strategies How to.. Record Future financial strategies How finance is generated Owners/shareholders: Year 1: Year 2: Year 3: Debt: Year 1: Year 2: Year 3: Retained earnings: Year 1: Year 2: Year 3: Average cost of funds sought: Year 1: Year 2: Year 3: Investment hurdle rates: Year 1: Year 2: Year 3: Investment levels: Year 1: Year 2: Year 3: Asset reduction ($): Year 1: Year 2: Year 3: Cost reduction ($): Year 1: Year 2: Year 3: Cash balances (min.) Year 1: Year 2: Year 3: Standby facilities (min.) Year 1: Year 2: Year 3: 1.8.2 Business Objectives and Strategies How to.. Record Future business objectives Product/service market 1. , segments 2. (identify/describe) 3. 4. Types of customer value/ experience: Sales volume growth by 1. , segment 2. 3. 4. Share of market by 1. , segment 2. 3. 4. 34
    • Accounting Reform II Strategic Planning How to.. Record Future business strategies Define your future business strategies in terms of: • the product/service range to be maintained by market segment, and the product volumes to be offered; • the competitive advantages and distinctive competences to be used in competing; • the synergies sought and productivity improvements to be made as a basis for competing; and • investments to be made to support business strategies, and to build a platform for future competing. Product/Service Range Segment Segment Product/service range Description 1 1. , 2. 3. 2 1. , 2. 3. 3 1. , 2. 3. 4 1. , 2. 3. Product Service Volumes Segment Segment Description Product/service Volumes 1 2 3 4 Competitive advantages, Synergies, Investments Competitive Advantages sought and used Customer Related Competitor Related Organization related Distinctive competences used Functional Organization level Synergies sought Product/service market related Resource market related Within the organization With other organization alliances Productivity/continuous improvement Types of gain sought Organizational areas Methods of pursuit Investments Product/service development Intellectual property Technology: 1.9 Mission & Vision At this point, it should be possible to reaffirm or adjust your organisation’s mission statement, along the lines indicated in Section 1. This statement should clearly and concisely communicate the purpose of the organisation’s objectives and strategies, taken together. 35
    • Accounting Reform II Strategic Planning The diagram below illustrates the parameters of organisational direction that can now be established. • Return FINANCIAL BUSINESS on equity OBJECTIVES OBJECTIVES • Asset growth Owner What? Customer • Product/ • Value Value service market Debt/equity ORGANISATIONAL segments • MISSION • Values offered Resource Competitive Management Advantage • Sales How? volume growth • Share of • market • FINANCIAL BUSINESS Scope/scale by Financing mix STRATEGIES STRATEGIES segment • Cost of • capital Competitive • advantages sought/ Investment of used funds • • Cost Distinctive competencies used • Synergies sought 1.10 Key Performance Measures and Targets for objectives Given this level of definition of business and financial objectives and strategies, you should be able to establish key performance indicators that you wish to monitor. Obviously they will relate to the organisation overall and, in addition, will provide the framework for a hierarchy of objectives and performance indicators within the organisation. Some of the performance indicators are measured more easily than others, but even qualitative indicators are important, as they focus attention on critical issues. How these key performance indicators relate to and assist the organisation to focus on its future directions is illustrated in the following diagram. • Product/ • Return FINANCIAL BUSINESS service market on equity OBJECTIVES OBJECTIVES segments • Asset • Values growth Owner What? Customer offered • Value Value • Sales Debt/equity ORGANISATIONAL volume growth • MISSION • Share of Resource Competitive market Management How? Advantage • • FINANCIAL BUSINESS Scope/scale by Financing mix STRATEGIES STRATEGIES segment • Cost of • capital KEY Competitive • PERFORMANCE advantages sought/ Investment of INDICATORS used funds • • Cost Distinctive competences used FINANCIAL ORGANISATION MARKET • Synergies sought • Sales by • New • Sales volumes segment product/service by segment • Segment development • Share of profitability • market by segments • Return on Product/service • equity enhancement Product/service expansion • Debt • Technology by segments reduction/retirement improvements • Customer • Asset • Process satisfaction levels improvements • Competitive • Competence position development 36
    • Accounting Reform II Strategic Planning Note: These performance indicators reflect the financial and business strategies of the organisation, as well as its financial and business objectives. They also constitute a “balanced scorecard” for the organisation, balancing a concern for financial and market performance with a concern for organisational improvements (product/service enhancements, technology improvements, process improvements) and the development of organisational capabilities (new product/service development, product/service enhancement, competence development, synergy gains). For the organisation as a whole, the following types of performance indicators might be developed: 1.10.1 Financial Performance Measures How to Record Financial Measures Target Achieved Sales ($) by segments: 1. 2. 3. Segment profitability: 1. 2. 3. Return on capital employed Period 1. 2. 3. Debt reduction/retirement Period 1. 2. 3. Asset reduction: Period 1. 2. 3. Cost reduction: Period 1. 2. 3. Cash balances: Period 1. 2. 3. Other 37
    • Accounting Reform II Strategic Planning 1.10.2 Business (Markets and Products) Performance Measures How to Record Product/Service Markets and Customers In the following table, clearly indicate the period covered: Planned Achieved Sales volumes by Segments/period: 1 2 Period ………. Segment 3 4 Planned Achieved Share/market by segments/period: 1. 2. Period ……….Segment 3 4 Planned Achieved Product/service expansion by segments/ period: 1. 2. Period ……….Segment 3. 4. Planned Achieved Customer satisfaction indicators: Our image generally Quality Service Responsiveness Dependability Flexibility 1.10.3 Organisational Performance Measures How to.. Record Organizational Measures Planned Achieved Product development. Technology improvements Process improvements Competence development 38
    • Accounting Reform II Strategic Planning Summary of Section 4 Future Directions Once this stage of the strategy development process has been completed, you must have confirmed or redefined the organisation’s financial and business objectives (what the organisation seeks to achieve in the future). In addition, you must have confirmed or redefined the company’s financial and business strategies (how the organisation’s objectives are to be pursued in the future). Also as a result of this stage, you will update the company’s mission statement. However, often companies do not continue the strategy development process beyond this stage, thus leaving the strategy as a number of statements, without the necessary level of detail (section 5) and without any specific actions planned (section 6). With this limited approach, the strategy cannot be implemented; it will just serve as an internal and external communication tool. 39
    • Accounting Reform II Strategic Planning 5. SEGMENT & FUNCTIONAL STRATEGIES 1.11 Segment strategies Market and Organisational Perspectives The business strategies of an organisation relate to its overall portfolio of product/service offerings. It is usual to group these offerings if they are numerous, and grouping them will make it easier to manage performance. A grouping by the market segments served has the advantage of focusing attention on customer satisfaction and market success—factors underlying the viability of business strategies. The following diagram illustrates this idea. SEGMENT SEGMENT SEGMENT SEGMENT SEGMENT 1 2 3 4 5 Product/Service Product/Service Product/Service Product/Service Product/Service Group Group Group Group Group PRODUCT/SERVICE PORTFOLIO BUSINESS STRATEGIES Business strategies define what is in the portfolio, and what emphasis is to be given to each of its components. What is the scope of the portfolio, and how will a particular emphasis on the scale of activity—on growth, reduction, etc.—set the direction for the organisation? Together, these decisions define how an organisation will pursue its business objectives. Having set business strategies for the organisation, it is possible to reflect them in strategies relating to each segment. These segment strategies have a dual focus. On one hand, they set out how customers are to be served in the face of competition, which provides a product/service market perspective. On the other hand, they define how the product/service offerings for the segment are to be produced, providing an organisational perspective on the processes and resources involved. Segment strategies set parameters on these two perspectives and the practice that results. The following diagram illustrates this. CUSTOMERS COMPETITORS   MARKET  SEGMENT STRATEGIES  ORGANISATION   PROCESSES RESOURCES 40
    • Accounting Reform II Strategic Planning Segment strategies should define: • the products/services to be made over the period; • the profitability/rate of return sought from the segment's products/services; • the types of value/experience to be delivered to customers, to become their preferred choice; • the sales sought over the period in both volume and dollar terms; • the types of competitive advantage being pursued, such as low cost/pricing, niche offerings, service/responsiveness; • the market share being sought; • the distinctive competences to be capitalised on, in the processes supporting the segment's products/ services; • the synergy sought within these processes, and in relation to other organisational processes; • the productivity/continuous improvement gains sought within these processes, and resource recoveries through cost or asset reduction; and • the types and levels of investment to be made in process development, including investments in technology, product/service development, and key competences. Note: Segment strategies have both business and financial dimensions, and how they focus work processes and resource deployments to support organisational level strategies. Segment Strategy Definition In specifying the content of segment strategies, refer to the data and analyses developed in the strategic audit (see Section 2). For each of the product/service markets engaged by the organisation, use the template provided to outline the components of the segment strategy. Describe both outcomes sought and the competitive bases on which the strategy is to be pursued. Fill in as many templates as necessary to reflect the organisation’s product/service portfolio completely (Part 1, Section 4). Desirably, define each component of a segment strategy so that it targets actions. These targets can then be used as performance indicators, with results of actions being compared to targets. Note: Segment strategies have financial, product/service market, and organisational capability dimensions. How to.. Describe Segment Strategy Definition / Description of Segment Product/service range: Sales targets (volume) Year 1: Year 2: Year 3: Share of market - Targets Year 1: Year 2: Year 3: Sales targets ($): Year 1: Year 2: Year 3: 41
    • Accounting Reform II Strategic Planning Segment Profitability Targets Year 1: Year 2: Year 3: Customer satisfaction Targets Quality Service Responsiveness Dependability Flexibility Other Competitive advantage Targets Customer related Competitor related Organisation related Competencies Distinctive competences to be capitalised on: 1 2 3 Synergy targets: Within segment support processes: 1 2 Within cross-organisational functioning 3 4 Productivity/continuous improvement targets: Process improvement targets: 1 2 Cost recovery targets: 3 4 Asset reduction targets: 5 6 42
    • Accounting Reform II Strategic Planning Investment targets: Technology related: 1 2 Product/service development: 3 4 Competency development: 5 6 1.12 Key performance indicators and targets for segment strategies It is possible to define segment strategies so that they target actions. These targets can be used as performance indicators, when results of actions are compared to targets. All staff with segment responsibilities should be involved in establishing these performance indicators/targets. Performance indicators relevant to segment strategies are illustrated in the following diagram. • Product/ • Return FINANCIAL BUSINESS service market on equity OBJECTIVES OBJECTIVES segments • Asset • Values growth Owner What? Customer offered • Value Value • Sales Debt/equity ORGANISATIONAL volume growth • MISSION • Share of Resource Competitive market Management Advantage How? • • FINANCIAL BUSINESS Scope/scale by Financing mix STRATEGIES STRATEGIES segment • Cost of • capital Competitive SEGMENT • advantages sought/ STRATEGIES Investment of used funds • • Cost Distinctive competencies used • • PERFORMANCE • Product/ Synergies sought Segment sales INDICATORS services • AND TARGETS (scope/scale) Segment • profitability Customer value • Cost drivers reduction • Share of market • Competitive advantages used • Distinctive competences used • Note: These performance indicators have financial and business dimensions and that they deal with both product/service market and organisational issues. The performance indicators provide a “ balanced scorecard” for the organisation at the segment level, balancing a concern for financial performance (segment sales, segment profitability, cost reduction, asset reduction, and investment in segment processes/development), market performance (scope/scale of products/services offered, types of customer value to be supplied, share of market sought), with organisational improvement/development (productivity/improvement targets, synergy targets, investment targets) and the use of organisational capabilities (competitive advantages used, distinctive competences used). 43
    • Accounting Reform II Strategic Planning 1.13 Functional strategies Each segment strategy will be supported by distinctive processes, involving distinctive mixes of activities. Each process will be guided by performance indicators (PI’s, $), established at the segment level. Many of the activities identified will be involved in more than one process, even if they are used in different ways and to different extents. Commonly-used activities can be grouped as speciality areas, or functions within the organisation. The following diagram illustrates this. The size of the activity boxes, marked A, within each segment’s process, indicates the extent to which a functional speciality is drawn on. Products/Service Markets SEGMENT SEGMENT SEGMENT SEGMENT SEGMENT Organisational 1 2 3 4 5 Functions Pl's $ Pl's $ Pl's $ Pl's $ Pl's $ Marketing A A A A A A A A A A Production Information Technology A A A A A Human Resources A A A A A A A A A A Procurement A A A A A Finance/Accounting Organisational A A A A A Structures Management A A A A A Processes Other A A A A A This diagram shows that the functional demands of different segments/processes will vary. Some segments will require extensive marketing efforts, and others will not. Some will need major production effort, or will be labour-intensive, while others will not. Segment strategies are likely to have a significant effect on the extent of activity in each segment. Thus, they are likely to define how the processes supporting segments are focused, in terms of customer support, process improvement, cost reduction, investment in technology or competence development. Similarly, the financial resources that functional areas can use will be determined by allocations made as part of segment funding/resourcing arrangements. The allocations will, however, be modified by targeted cost/asset reductions, or investments focused on segment processes and the functional activities involved in them. Hence, the financial resources available to marketing, for example, will be defined by the sum of the allocations made to marketing activities in each process, minus cost reductions expected from these activities through across-the-board process improvements. To this amount should be added investments designed to enhance these activities in particular segments, or in processes throughout the organisation, such as the enhancement of marketing technologies or competences. 44
    • Accounting Reform II Strategic Planning Within this framework, functional strategies can be established for each key function within the organisation. These strategies will reflect, support, and help achieve segment strategies. In defining functional strategies, it is useful to refer to performance indicators used to focus segment strategies, in two areas. First, the external concerns of segment management, such as customer satisfaction targets and competitive advantage targets, should be reviewed. Second, the internal organisational resources or requirements for the pursuit of segment strategies should be considered. This review will inform function management about product/service market priorities, key expectations about organisational capabilities, and changes involved in segment strategy definitions. Each set of function strategies should define the following, in relation to each segment served: • customer satisfaction targets established for each segment; • competitive advantage targets set for each segment that are to be pursued through the function (these may be customer, competitor, or organisation related); • distinctive competences to be capitalised on, within the function by each segment, together with others to be drawn from the organisation; • synergy targets to be pursued within the function for each segment, along with others to be pursued in the organisation; • productivity/continuous improvement targets for the function expected by each segment, in terms of cost recovery and asset reduction; and • investment targets established for each segment and relevant to the function, which may be related to product/service developments, technology, or development of competences within the function. By utilising segment performance indicators in defining function strategies, each function sustains a focus on the enhancement and realisation of segment strategies. Thus, a basis is established for the ongoing relevancy of a function to an organisation, in terms of its support for these strategies. If the organisation has more than one segment strategy, then functional strategies will need to: (i) support each segment strategy; and (ii) determine how support is to be provided with appropriate focus, and balance to each segment strategy. For this reason, each functional strategy begins with an affirmation of the customer satisfaction, and competitive advantage targets sought in each product/market segment. The purpose of each functional strategy is to focus the contributions of the functional area on attaining these targets. Each functional strategy then establishes: (i) the distinctive competences to be capitalised on by the function, in providing support to segments, and (ii) the synergy gains that should be sought in providing support across segments. These distinctive competences and synergy targets can be related to those specified in segment and organisation level strategies. To put it another way, segment strategies presume these components of functional strategies, as does the organisation’s business strategy. Functional strategies also specify how each function will contribute to: (i) the productivity/continuous improvement targets, and (ii) the investment targets established in segment strategies, organisation level financial and business strategies. Functional strategies might be established in the following areas (or in any functional grouping that is suitable to an organisation): • marketing; • production; • procurement; • information technology; • finance/accounting; • human resources; 45
    • Accounting Reform II Strategic Planning Functional strategies should be defined so they target actions. These targets can be used as performance indicators, when results are compared to targets. The templates provided below should assist in the focusing and definition of functional strategies. Marketing Strategies SEGMENT 1 2 3 4 5 Customer satisfaction targets: Quality Service Responsiveness Dependability Flexibility Other Competitive advantage targets: Customer related (e.g., positioning, innovation) Competitor related (e.g.; cost/pricing, product range) Organisation related (e.g., flexibility, technology) Distinctive competences to be capitalised on: Within marketing function: Within organisation: Synergy targets Across segments in marketing function: Within the organisation: Productivity/continuous improvement targets Within marketing function Cost recovery targets Asset reduction targets Investment targets Technology related Product/service development Competency development Production Strategies SEGMENT 1 2 3 4 5 Customer satisfaction targets: Quality Service Responsiveness 46
    • Accounting Reform II Strategic Planning Dependability Flexibility Other Competitive advantage targets: Customer related (e.g.; product functionality, quality) Competitor related (e.g., cost/pricing, product range) Organisation related (e.g., plant capacity, modernity) Distinctive competences to be capitalised on: Within production function: Within organisation: Synergy targets Across segments within production function: Across the organisation: (e.g., procurement) Productivity/continuous improvement targets Within production function Cost recovery targets Asset reduction targets Investment targets Technology related Product/service development Competency development Procurement Strategies SEGMENT 1 2 3 4 5 Customer satisfaction targets: Quality Service Responsiveness Dependability Flexibility Other Competitive advantage targets: Customer related (e.g., resource availability, quality) Competitor related (e.g., secure lines of supply,) Organisation related (e.g., cost of supply) 47
    • Accounting Reform II Strategic Planning Distinctive competences to be capitalised on: Within procurement function: Within organisation: Synergy targets Across segments within proc. function: Within the organisation: Productivity/continuous improvement targets Within procurement function Cost recovery targets Asset reduction targets Investment targets Technology related Product/service development Competency development Information Technology Strategies SEGMENT 1 2 3 4 5 Customer satisfaction targets: Quality Service Responsiveness Dependability Flexibility Other Competitive advantage targets: Customer related (e.g., responsiveness, coverage) Competitor related (e.g., cost, coverage) Organisation related (e.g., flexibility, capacity) Distinctive competences to be capitalised on: Within IT function: Within organisation: Synergy targets Across segments within production function: Within the organisation: Productivity/continuous improvement targets Within IT function Cost recovery targets Asset reduction targets Investment targets Technology related Product/service development Competency development Finance/Accounting Strategies SEGMENT 1 2 3 4 5 Customer satisfaction targets: 48
    • Accounting Reform II Strategic Planning Quality Service Responsiveness Dependability Flexibility Other Competitive advantage targets: Customer related (e.g., financing support, procedural simplicity) Competitor related (e.g., asset/cost structures) Organisation related (e.g., decision support, cash flow man.) Distinctive competences to be capitalised on: Within accounting/finance function: Within organisation: Synergy targets Across segments in Accounting/finance function: Within the organisation: Productivity/continuous improvement targets Within the accounting/ finance function Cost recovery targets Asset reduction targets Investment targets Technology related Product/service development Competency development Human Resource Strategies SEGMENT 1 2 3 4 5 Customer satisfaction targets: Quality Service Responsiveness Dependability Flexibility Other Competitive advantage targets: Customer related (e.g., service orientation, skill) Competitor related (e.g., labour availability, industrial relations)) Organisation related (e.g., training capacity, manpower development) Consolidated functional demands: Function Human Resources Requirements 49
    • Accounting Reform II Strategic Planning Marketing Production Procurement Information technologies Finance/accounting Human resources Organisation structuring Management processes Other Distinctive competences to be capitalised on: Within human resources function Within organisation Synergy targets Across segments in HR function: Across functions within the organisation: Productivity/continuous improvement targets Within the human resource function Cost recovery targets Asset reduction targets Investment targets Technology related Product/service development Competency development Summary of Section 5 Segment & Functional Strategies Once this stage of the strategy development process has been completed, you must – based on the objectives and strategies developed during stage 4 – have developed strategies for specific segments and for the internal functional areas. These strategies, on one hand, they set out how customers are to be served in the face of competition, which provides a product/service market perspective (segment strategies). On the other hand, they define how the product/service offerings for the segment are to be produced, providing an organisational perspective on the processes and resources involved (functional strategies). The segment and functional strategies are important; this is where the strategies get concrete and actionable, and responsibilities for strategies can be assigned to specific departments. 50
    • Accounting Reform II Strategic Planning 6. STRATEGY IMPLEMENTATION PLAN It many cases, companies spend a lot of resources – financial and people – in order to develop a thorough, well-thought-of business strategy. And then it collects dust on the shelves. It is of crucial importance that any business strategy is accompanied by a strategy implementation plan. It is a quite simple thing to do, but critically important for the success of the strategy. Based on an analysis of all segment and functional strategies, all action items are identified, and grouped together in projects. Definition Project A project is defined as a one-off activity, which has a specific starting point and a specific ending point. Usually, the project is initiated in order to achieve specific goals to improve the business. By experience, a typical strategy implementation plan will consist of 20-60 projects. The Strategy Implementation plan consists of the following items: i) a description of each project ii) a list of all projects required to implement the strategy iii) a description of the organisational structure responsible for the overall implementation of the strategy, its responsibilities and which processes it supports. Item i) and ii) are described below, Item iii) is described in detail in Section 7. 1.14 Description of projects All staff with segment or functional responsibilities should be involved in developing projects (action plans). In this process, you will need to address the following questions: • What specific actions/tasks need to be undertaken to implement a segment or functional strategy? • Who is responsible for implementing each action? • Do they have the authority and resources to achieve results? • What is the deadline for the implementation of each required action? • What targets/performance indicators should be associated with each action plan? • How will progress on the implementation of action plans be reviewed? • What evaluation process will be used to measure and adjust segment or functional strategies? Each project may be described according to the below template. The following important comments may be made: Objectives Effected is the key information. It must be very concretely recorded for which specific strategies (financial, business or segment) the current project is required. If possible, it should also be noted which specific effect the project has on the each objective. Project Specific Measures and Targets. It is important to define how the measure the results of the implementation of each project, and the target value for each should also be defined. Dependencies to other projects. Precedent projects and projects depending on the completion of this project must be defined here. 51
    • Accounting Reform II Strategic Planning How to.. Prepare a project description Project Number Name Project Sponsor Project Manager Project Budget - $ - People Resources Start Date Completion Date Objectives Effected Financial 1 2 3 Business 1 2 3 Segment 1 2 3 Project Specific Measures Measure Target and Targets 1 2 3 Dependencies to other Project Type of dependency projects 1 2 3 Description of Project Major Milestones Milestone Date 1 2 3 Recommendation Project Management Methodology and Project Charter 1.15 L It is recommended that organisation implements a specific, mandatory project management i methodology, including the standard requirements to a project charter. This will ensure s improve project monitoring possibilities, and ensure a higher quality in project delivery. t of projects The list of projects is an important tool for the strategy programme manager (see below). The list ensures the overview and planning capabilities for the strategy implementation. Project Name Project Project Start Milestones End Code Manager Date Date 1 2 3 4 52
    • Accounting Reform II Strategic Planning 5 6 Summary of Section 6 Strategy Implementation Plan Once this stage of the strategy development process has been completed, you must be in possession of a detailed implementation plan for your whole strategy. This should include a number of specific projects defined in detail, including accountability, reporting, timelines, costs/resources, interdependencies, etc. Also in this stage, important decisions on how the strategy will be implemented are made, i.e. the overall management structure for the implementation. This stage is a quite simple thing to do, but critically important for the success of the strategy. Many companies do not make an implementation plan like this, and it means that in the worst case they do not get the strategy implemented, it remains on paper. In the best case, they do not know the status and the results of the strategy implementation. 53
    • Accounting Reform II Strategic Planning 7. INTERNAL STRATEGY DEVELOPMENT CAPABILITY A lot of people resources are required to develop, implement and monitor a business strategy. The company can choose between two approaches to these activities: i) See these activities as a “project”, and use ad hoc resources from different departments (or use an external consultant to perform the whole, or parts, of the task). ii) Build a small organisational unit within the company, responsible for these processes (potentially with the support of a consultant or other external resource) Recommendation Experience in Russia shows that for most companies (excluding the very small), approach ii) is the most useful. Very often, approach i) results in the fact that the people involved in the work will not have enough time to dedicate to the strategy processes. Below, we describe in detail how this organisational unit (further: Strategy Unit) could look, and which processes it will support. 1.16 Organisational Structure of the Strategy Unit The Strategy Unit most often reports directly to the CEO, but sometimes it may also be found reporting to the head of the Administration department. This difference may express the perceived importance of the unit within the organisation. The strategy unit may typically consist of 1-4 people – depending of the size of the organisation. The following skills should be available in the unit: • Knowledge of strategy development methodologies • Experience in strategy development • Experience in information collection and analysis • Experience in working with performance measures • Programme management skills • Experience in facilitation of meetings and workshops 1.17 Business processes of the Strategy Unit A Strategy Unit would be responsible for a number of business processes. Below, please see a description of the basic processes. 1.17.1 Strategy Development The Strategy Unit is responsible for the overall project of strategy development, as described above in the Sections 1-6. This means that the Strategy Unit manages the whole process – using the resources of the business and financial departments. Without the active participation of the people who have the real and concrete knowledge of the business and the financial aspects, the project will never be successful. The roles and responsibilities of the Strategy Unit would include the following • Develop and manage the strategy development plan 54
    • Accounting Reform II Strategic Planning • Agree financial resource requirements for the strategy development project with senior management • Agree required people resources with each department • Decide on approach to data collection (research, analysis of existing data, interviews, workshops) • Decide on approach for assessment of data and information • Organise workshops and facilitation of the process of developing future position and future directions • Develop strategy implementation • Collect all project documents and prepare final strategy document TIMELINE A typical aggressive timeline for the strategy development process will look like this: 1. Current objectives and strategies of the company: 2 weeks 2. Situation audit: 4 weeks 3. Future position; 4 weeks 4. Future directions: 8 weeks 6. Development of Strategy implementation plan: 4 weeks TOTAL 22 weeks Note: Very often the Segment and Functional Strategies described in section 5 are developed as part of the Strategy Implementation plan, i.e. they are seen practically as part of the implementation stage Therefore they are not included in the above timeline. The strategy implementation time will obviously depend on the duration specific action items and projects defined, see Section 6. Often, the implementation time is more than a year. A typical business strategy is made for a period of 3-5 years. 1.17.2 Strategy Implementation Monitoring Once the strategy has been formally approved by the organisation, implementation starts. The Strategy Unit is responsible for the overall implementation of the strategy program (i.e the sum of all projects in the implementation plan) This means that the Unit will have the following tasks: • Develop and implement procedures for monitoring and documenting progress compared to plan • Oversee progress on individual projects (e.g. 6.2) • Oversee coordination between projects and interdependencies • Oversee progress on strategy targets • Oversee overall strategy implementation budget • Report to Strategy Sponsor 1.17.3 Review and Update Strategy The Strategy Unit must establish procedures to monitor the general progress of the strategy. This should include the gathering of internal and external information, and analysing whether any basic assumptions of the strategy have changed. As particular task in this business process is the collection data in relation to competitor benchmarking, and comparing the information to the company’s strategic performance. 55
    • Accounting Reform II Strategic Planning 1.17.4 Strategy Performance Monitoring An important part of all strategies is to define the targets for all objectives (financial, business, segment). The “sum” of the status of all targets will give an overview of the general performance of the strategy. The Strategy Unit must establish procedures to collect and analyse this information. In exercising such control, information generated at all organisational levels can be used. Some information may arise from pursuing action plans relating to segments and functions, and some may arise at the organisational level as progress towards business and financial objectives is assessed. Often a system like this is characterised as a KPI system - Key Performance Indicators. The information generated within the organisation should be structured so that it focuses on key targets/ performance indicators, and is produced in a timely and efficient manner. It is important that effort and resources be invested only in producing information that is needed to drive or guide the organisation in the directions chosen; producing unnecessary information is wasteful. Often a computerised system is implemented to automate part of the data gathering and information analysis. If targets and plans fail to be realised, it may be necessary to adjust plans and strategies. The Strategy Unit should have the competency to raise a warning flag when there is a need to revise basic strategies. 56
    • Accounting Reform II Strategic Planning APPENDIX A Summary Outline of Strategy TEMPLATE 1. Current Objectives and Strategies of the Company 1.1. Mission 1.2. Objectives 1.2.1.Financial 1.2.2.Business 1.3. Strategies 1.3.1.Financial 1.3.2.Business 2. Situation Audit 2.1. External Assessment 2.1.1.Products and Services, Markets and Segments 2.1.2.Competitors 2.1.3.Suppliers 2.1.4.Summary of External Assessment 2.2. Internal Assessment (including Internal Strengths and Weaknesses analysis, sourcing situation) 2.2.1.Organisational Description 2.2.2.Functional Performance 2.2.3.Organisational Performance 2.2.4.Summary of Internal Assessment - Impact on Market segments 3. Future Position 3.1. Guessing the future 3.2. Establish strategic alternatives 3.3. Evaluating strategic alternatives 4. Future Directions 4.1. Objectives 4.1.1.Financial Objectives and Strategies 4.1.2.Business Objectives and Strategies 4.1.3.Organisational 4.2. Mission & Vision 4.3. Key Performance Measures and Targets for objectives 4.3.1.Financial Performance Measures 4.3.2.Business Performance Measures (Markets and Products) 4.3.3.Organisational Performance Measures 5. Segment & Functional Strategies 5.1. Segment strategies 5.2. Key performance indicators and targets for segment strategies 5.3. Functional strategies 6. Strategy Implementation Plan 6.1. Description of projects 6.2. List of projects 57
    • Accounting Reform II Strategic Planning APPENDIX B 198 Situational Strategy Questions A. Ten Thinking-Outside-the-Box Questions B. General Strategy C. Business Unit Strategy D. Scanning and Monitoring E. Forecasting F. Assessing G. Generating Differentiation Alternatives H. Questioning the Strategic Fundamentals I. Assessing Organisational Readiness J. Some “Friendly Sceptical” questions to appraise a Strategic Plan 58
    • Accounting Reform II Strategic Planning A. Ten Thinking-Outside-the-Box Questions 0. What conventional wisdom from our industry, markets and our business constrains our ability to change? 0. If we were starting from scratch, how would we do things differently? 0. If we were to be taken over - what would our new owner change significantly? 0. What are the assumptions we have about ourselves that prevent us from changing? 0. If we were doing this with our own money, would we be spending it this way? 0. What are the things that are impossible today, but that we must do in the future? 0. What short term actions can we take that are consistent with our longer term view of what we want to be? 0. What are the strengths we have today that we must not lose in the future? 0. If we could do only three strategic things well over the next 2 years, what would they be? 0. What are the three core values/beliefs of the organisation that we need everyone to have? B. General Strategy 0. Which business areas confront the greatest opportunities in the form of potential new business? 0. What emerging or potential opportunities might not be exploited, given the present configuration of business areas? How might the business areas be realigned to pursue these opportunities? 0. Which business areas can take existing products to new types of customers or to customers in new geographic regions? 0. What new opportunities might be created by linking products, skills, and competencies from two or more business areas? 0. What are our unique resources? 0. What are our distinctive capabilities? 0. What other companies would want to merge, acquire, or enter into a strategic alliance? 0. In what product markets can these resources or capabilities be leveraged? 0. What complementary resources or capabilities are needed? C. Business Unit Strategy Defining the Scope of the Business Unit 0. Who are our target customers? 0. What customer needs are we trying to fulfill? 0. What competencies will serve as the core of how we fulfill the targeted customer needs? Setting Business-Unit Goals 0. What financial goals (e.g., return on assets) are we pursuing? 0. What market position and customer satisfaction goals (e.g., market share) are we pursuing? 0. What internal business goals (e.g., employee retention, cycle time reduction) are we pursuing? 0. What innovation and learning goals (e.g., percent of sales from new products) are we pursuing? Defining the Intended Bases for Competitive Advantage 0. Along which dimensions do we intend to become and remain superior to competitors? 0. Along which dimensions will we accept the possibility of being at par with competitors? Why? 0. Along which dimensions will we accept the possibility of being at a disadvantage with respect to 59
    • Accounting Reform II Strategic Planning competitors? Why? Designing the Value Equation 0. Which customer-relevant activities should we perform ourselves? 0. Which customer-relevant activities should we source from business partners (including the option of forming alliances or joint ventures with them)? 0. How will we reduce/eliminate the risks of “non-performance”, “profit skimming”, and “elimination” by our business partners? Managing the Value Chain 0. For each activity in our value chain, what are the drives of customer value, cost structure, and asset investment? 0. How will we manage each value, cost, and asset driver for competitive superiority? 0. How will we ensure high integration across the various value-chain activities, including those performed by our business partners? D. Scanning and Monitoring 0. What are the relevant segments of the macro environment? 0. Which segments are most important? 0. Which areas within each segment are most important? 0. What are the current and emerging trends? 0. What is each trend? 0. What are the emerging trends? 0. What are the current and emerging patterns? 0. What are the specific patterns? 0. What trends contribute to each pattern? 0. What patterns seem to be on the horizon? 0. What are the indicators of these trends and patterns? 0. What indicator is associated with each trend? 0. Are two or more indicators related to a specific trend? 0. What is the historic evolution of these trends and patterns? 0. How has each indicator changed over time? 0. What is the time period? 0. What is the degree of change within these patterns? 0. Is the degree of change minor or major? 0. How different is the expected change from the present state or a past state? E. Forecasting The Social Environment 0. How will the demographic structure (that is, the number of people in different age groups) shift over the next 20 to 40 years? 0. What life-style shifts might occur as those presently in the age group 25 - 40 move into the age group of 40 - 55? 0. How will the compositions of their households change? 60
    • Accounting Reform II Strategic Planning 0. How will their consumption patterns change? 0. How will their work patterns change? 0. What changes will occur in how they use their leisure time? 0. How will social values change? 0. Will there be an increase in political conservatism? 0. Will more people manifest agreement with a reduction in military spending? 0. Will people be more or less willing to bear the costs of curtailing and eliminating pollution? The Economic Environment 0. What will be the level of inflation over the next three years? 0. Will GNP increase or decrease over the next five years? 0. Which service industries will grow and decline in the next decade? The Political Environment 0. Which political parties will gain/lose strength in the next two or three elections? 0. What significant shifts will occur in governmental policies, laws, and regulations pertaining to specific industries? 0. What decisions might different levels in the judicial system make that could affect different industries? 0. Will existing social/political movements such as consumerism and environmentalism gain or lose public support? The Technological Environment 0. When and how might recent breakthroughs in basic research lead to commercial products? 0. What linkages among which technologies would have to occur before a specific technological event or breakthrough occurs (such as high definition TV)? 0. What might be some new applications of currently available technologies? F. Assessing How might each change affect the organisation’s industry? 0. General expectations about the industry? 0. Emergence of new products? 0. Sales of existing products? 0. Entry and exit of competitors? 0. Emergence of new suppliers? 0. Entry and penetration of substitute products? 0. How might each change affect the organisation’s more immediate task environment? 0. Demand by existing customers? 0. Changes in existing competitors’ strategies? 0. Changes in suppliers’ strategies? 0. What might be the implications of each change for the organisation’s current strategies? 0. Change in existing products? 0. Change in existing target market segments? 0. Change in how the firm competes? 61
    • Accounting Reform II Strategic Planning 0. Change in the firm’s current goals? 0. How might each change affect the organisation’s future strategy choices and their execution? 0. Potential new products? 0. Potential new customers? 0. Potential new ways of competing? 0. Change in strategy choice criteria? 0. Need for new organisation structure? 0. Need for new operating processes? G. Generating Differentiation Alternatives 0. What are our current customers’ needs and wants? 0. How do they appear to be changing? 0. What might they be in two, three or five years? 0. What are the needs and wants of our competitors’ customers? 0. How are they changing? 0. How different are they from those of our current customers? 0. What are the needs and wants of our substitute competitors’ customers? 0. How different are they from our customers? 0.To what extent are customers falling into clearly identifiable segments based on buying behaviors, volume of purchases, demographic considerations, or other criteria? 0. What are some of the key trends in customers’ buying behaviors? 0. What opportunities might be suggested by these needs and wants? Given answers (however tentative) to the above questions, how might the firm differentiate itself in terms of: 0. Product line width? 0. Product features? 0. Functionality? 0. Service? 0. Availability? 0. Image and reputation? 0. Selling and relationship? 0. Price? H. Questioning the Strategic Fundamentals Test One: How attractive is the market opportunity? 0. How big is the market? 0. How fast will it grow? 0. How intense will competition become? Test Two: How sustainable is the competitive advantage? 0. What target market segments will be served? 0. What advantages will be achieved in these segments? 62
    • Accounting Reform II Strategic Planning 0. What are the outcomes of these advantages? 0. How long can they be sustained? Test Three: What are the prospects for successful implementation? 0. Feasibility: Do we have the necessary skills and resources? If not, can they be obtained in time? 0. Consistency: Does the strategy hang together? 0.Supportability: Do the key implementers understand the premises and the strategy? Are they committed to it? 0. Does the plan address the major issues? Test Four: Are the risks acceptable? 0.How vulnerable are the forecast results if pivotal assumptions are wrong or critical tasks are not accomplished? What actions can be taken to minimize the exposure to the risks? 0. How robust is the strategy? Test Five: Will the forecast financial results be achieved and increase shareholder value? 0. How sensitive are the results to changes in the forecasts? I. Assessing Organisational Readiness Stakeholder Outcomes 0. How adequately is the organisation meeting the needs of all of its stakeholders - customers, employees, and shareholders? Strategic Tasks 0. What are the strategic tasks for the organisation? 0. Is the top team clear and in agreement with the key strategic tasks? 0. Is the rest of the organisation clear and in agreement with the strategic tasks? Organisational Capabilities 0. Does the business have the appropriate level of coordination or teamwork to accomplish the task? 0.Do the members of the organisation have the necessary technical and managerial competencies to accomplish the task? 0.Does the necessary level of commitment exist among the key functions, suppliers, and customers identified above? Organisational Levers The organisation of work 0.How does each of the following either support or hinder accomplishing the strategic task? (formal organisational structure, the presence or absence of cross-functional mechanisms such as meetings or formal teams, and the specification of individual roles, responsibilities, and relationships). Influence 0. Are decisions made with appropriate influence from relevant functions in the organisation? 0. Are decisions made with appropriate influence from all organisational levels? Personnel flows 0. Do individuals in key organisational positions have the appropriate skills and abilities? 0. What types of attitudes and behaviours does the promotion process reward? Information, rewards, and measurement systems 63
    • Accounting Reform II Strategic Planning 0.Do the information and measurement systems provide the data needed to accomplish the strategic task? 0. Do the measurement and reward systems motivate behaviour that supports the strategic task? Leadership 0.Do the actions of the general manager and his or her top team encourage and reinforce lower levels to behave in a way that supports the business’s strategic task? Information Technologies 0. Does your current IT infrastructure support your business goals 0. Do your current IT business systems support your business goals 0. Does your current IT organisational structure support your business goals Corporate Context 0. To what extent do the policies, procedures, or culture of the larger corporation make it difficult for the business unit to implement its strategy? Customer Position 0. Do you have strong brand reputation and image? Are you well thought of by buyers? 0. Is your customer base diverse and numerous? 0. Do you have special relationships with key customers? 0. Are you forward integrated (close to the end-user of your products or services)? 0. Does your organisation have people with strong marketing and sales skills? Product Position 0. Are you insulated in some way from strong competitive pressures? 0. Do you have a distinctive competence in terms of quality, service or performance? 0. Do you supply the full line of products and services in your industry? 0. Are you a recognized leader in technology? Market Share 0. Is your business an acknowledged industry leader? Is your market share increasing? 0. Do you compete in most or all the markets served by the industry? 0. Do you have the ability to raise prices? Will others in the industry follow your lead? Resource Position 0. Does your cost position provide economies of scale and cost advantages? 0. Are your facilities state-of-the-art? 0. Are you back integrated, or do you have ready and consistent access to the raw materials you need? 0. Are you able to acquire additional resources and people with the skills you need? 0. Do you have special relationships with suppliers? Growth 0. Is industry volume increasing? Does growth exceed the growth in the GNP? 0.Are your industry’s products replacing those of other industries (for example, paper milk cartons replacing glass; home video viewing replacing movie theatres)? 0. Are your products safe from being replaced by products from other industries? Competitive Environment 64
    • Accounting Reform II Strategic Planning 0. Are your competitors few in number and similar to each other? 0. Is the distribution of market share in the industry becoming more stable? 0.Will tight supply conditions result in increases in the price of your industry’s products and services? 0. Is there a boom time coming for the industry? 0. Do competitors in the industry sell their products on the basis of differentiation rather than price? Market Environment 0. Is there still room for expansion in the product lines offered by the industry overall? 0. Do you see possible extensions of the industry’s product line into new uses and markets? 0. Is there a high rate of technological change? 0. Does the industry serve numerous and diverse customers? 0. Do industry products provide good value for their price? External Factors 0. Is it difficult for new competitors to enter the industry? 0. Will a scarcity of resources drive prices up in the future? 0. Will government intervention in your industry lessen? J. Some “Friendly Sceptical” Questions to Appraise a Strategic Plan 0. What special capabilities do you plan to have that your best competitors cannot match? 0. Why can’t they match them? 0. What actions will you take to put these capabilities in place? 0. In what way are your investment priorities likely to be different from those of the competitors? 0.How do you know the clients will like what you’re planning? What field testing have you done? What client input have you obtained? 0.Who will be in charge of executing each component of the plan? 0.Who was involved in the development of this plan? Is everyone in agreement? (Who was not consulted? Do they have a role in executing the plan?) 0.On whom will you be dependent for the execution of this plan? Do they have sufficient incentive to do their part? Is it in their interests to do what you want? Do you have to modify your reward systems to make this happen? 0.Specifically, which 5 or 10 clients, by name, represent your most likely source of expanded business for the next few years? What actions do you plan to take to get closer to these clients? 0.Which new clients are at the top of your priority list? Why? What makes you think you can get their business? 0.What is the one most significant thing that each of the main competitors is doing that will affect you? What do you plan to do in response? 0.In what way do you plan to take advantage of the firm wide network? How do you plan to get the cooperation of others? 0.How do you plan to contribute to the firm wide network? How will what you are doing benefit them? 0.What are the staffing implications of your plans? Where will you get the staff from? 0.What are the main assumptions on which your plan is based? Which is the most “risky”? (i.e., if it can go wrong, where will it go wrong?) 0.How will we know if the plan is working? What indicator can we agree on, and when shall we review 65
    • Accounting Reform II Strategic Planning them? 0.What early warning signals will there be if the plan is not working? What contingencies have you put in place? 66