Organisational CapabilityAnalysisDr. M. ThenmozhiProfessorDepartment of Management StudiesIndian Institute of Technology MadrasChennai 600 036E-mail: email@example.com
ORGANIZATIONAL APPRAISAL•Internal Environment - strength & weakness in differentfunctional areasOrganization capability- Capacity & ability to use distinctivecompetencies to excel in a particular field- Abilty to use its ‘S’ & ‘W’ to exploit ‘O’ &face ‘T’ in its external environmentOrganization resources- Physical & humancost, availability - strength / weakness
ORGANIZATIONAL APPRAISALOrganization behaviourIdentity & character of an organizationleadership, Mgt. Philosophy, values, culture, Qlyof work environment, Organization climate, organizationpolitics etc.Resource BehaviourDistinctive competence - Any advantage a company hasover its competitor - it can do something which theycannot or can do better - opportunity for an organizationto capitalize - low cost, Superior Quality, R&D skillsetc.
METHODS & TECHNIQUES USEDFOR ORGANIZATIONALAPPRAISALComprehensive, long termFinancial Analysis - Ratio Analysis, EVA, ABCKey factor rating - Rating of different factors throughdifferent questionsValue chain analysisVRIO framework
SWOT ANALYSIS• Identify & classify firm’s resources-S&W• Combine firm’s strength into specific capabilities –Corporate capability- may be distinctive competence• Strategy that best exploits the firms resources• Identify resource gaps & Invest in upgrading
EXAMPLES OF ORGANIZATIONALCAPABILITY PROFILEFinancial CapabilityBajaj - Cash ManagementLIC - Centralized payment, decentralized collectionReliance - high investor confidenceEscorts - Amicable relation with FisMarketing CapabilityHindustan Lever - Distribution ChannelIDBI/ICICI Bank - Wide variety of productsTata - Company / Product Image
EXAMPLES OF ORGANIZATIONALCAPABILITY PROFILEOperations CapabilityLakshmi machine works - absorb imported technologyBalmer & Lawrie - R&D - New specialty chemicalsPersonnel CapabilityApollo tyres - Industrial relations problem
EXAMPLES OF ORGANIZATIONALCAPABILITY PROFILEGeneral management capabilityMalayalam Manaroma - largest selling newspaperUnchallenged leadership - Unified, stableBest edited & most professionally produced
VRIO FRAMEWORKResource- asset, competency, skill,knowledgee.g. patents, brand name,• Value : Does it provide competitive advantage?• Rarity: Do other competitors possess it?• Imitability: Is it costly for others to imitate?• Organisation : Is the firm organised to exploit theresource?
VRIO FRAMEWORK . . .• A resource is an asset, skill, competency orknowledge controlled by the corporation.• A resource is a strength if it provides competitiveadvantage• e.g. patents, brand name, economies of scale, idea-driven, standardised mass production
VRIO - STEPS• Identify firms resources- S&W• Combine firms strength into specific capabilities• Appraise- profit potential, sustainable competitiveadvantage, ability to convert it to a profitableproposition• Select strategy - firm’s resources& capabilityrelative to external opportunity• Identify resource gaps and invest in upgradingweaknesses
Balanced ScorecardBalanced ScorecardBalanced Scorecard – A model integrating financialand non financial measures. (Kaplan & Norton 1996)Causal link between outcomes and performancedrivers of such outcomesTranslates the vision and strategy of a business unitinto objectives and measures in 4 distinct areasFinancialCustomerInternal Business processLearning and growth
The Balanced ScorecardPurpose of Balanced Scorecard:A method of implementing a business strategy bytranslating it into a set of performance measuresderived from strategic goals that allocate rewards toexecutives and managers based on their success atmeeting or exceeding the performance measures.
The Balanced Scorecard(Source: Kaplan & Norton, 1996)Reasons for the Need of a BalancedScorecard1. Focus on traditional financial accountingmeasures such as ROA, ROE, EPS givesmisleading signals to executives with regards toquality and innovation. It is important to look atthe means used to achieve outcomes such asROA, not just focus on the outcomesthemselves.
The Balanced Scorecard(Source: Kaplan & Norton, 1996)Reasons for the Need of a BalancedScorecard2. Executive performance needs to be judged onsuccess at meeting a mix of both financial andnon-financial measures to effectively operate abusiness.
The Balanced Scorecard(Source: Kaplan & Norton, 1996)Reasons for the Need of a BalancedScorecard3. Some non-financial measures are drivers offinancial outcome measures which givemanagers more control to take corrective actionsquickly.(Example: controls in jet cockpit for pilot)
Reasons for the Need of a BalancedScorecard4. Too many measures, such as hundreds ofpossible cost accounting index measures, canconfuse and distract an executive from focusingon important strategic priorities. The balancedscorecard disciplines an executive to focus onseveral important measures that drive thestrategy.The Balanced Scorecard(Source: Kaplan & Norton, 1996)
FinancialPerspectiveHow do we look toour Shareholders?CustomerPerspectiveHow do our customerslook at us?Learning and GrowthPerspectiveHow can we continue toimprove?Internal BusinessPerspectiveWhat we must excelat?Casual link between the measuresCasual link between the measures
Linking BSC and StrategyLinking BSC and StrategyStrategicStrategicInitiativesInitiativesLearning & GrowthLearning & GrowthDriversDrivers OutcomesOutcomesInternal ProcessInternal ProcessDriversDrivers OutcomesOutcomesCustomer PerspectiveCustomer PerspectiveDriversDrivers OutcomesOutcomesFinancialFinancialGoalsGoals
Balanced Scorecard: AnExperience of ICICI Bank(source: icici website)
Key challenges• Rapid growth in employee base – fresh and lateralrecruits– Building knowledge and skill base– Ensuring adequate focus on multiple perspectives• Growth, profitability, service levels, building talent• Ensuring consistent implementation of strategy acrossthe organisation– Aligning organisational, business-level and individualgoals– Incentivising achievement of the goals setWe were seeking a strategic frameworkthat would enable this…..
Earlier performancemanagement framework• Primarily focused on financial aspect– Other perspectives covered qualitatively– “Input” rather than “output” based: focus on “workdone” rather than “goals achieved”• Did not meet the need for additional perspectives– Retail strategy required service focus– Wholesale banking required focus on transactioncapabilities and quality of credit origination
Balanced scorecard at ICICIBank - Stage I• Re-defined and expanded financial perspective– Growth, market share, profitability and credit costs• Introduced customer perspective: concept of servicelevels as an area of performance evaluation– Customer satisfaction scores• Introduced process perspective: focus on building aprocess orientation in the organisation• Learning perspective: focus on re-skilling for existingemployees and speed-to-job for new recruits
Balanced scorecard at ICICIBank - Stage II• Further development and detailing of customer serviceand process perspectives• Specific measures of performance introduced– Branch service quality scores– Turn around time (TAT) benchmarks– Good order index for client bankers– 5S achievement• Focused measures served as enablers for meetingfinancial goals
Balanced scorecard at ICICIBank - Stage III• Learning and development perspective– So far focused primarily on business skills– Commenced activity on building leadership pool• Reducing the number of scorecard templates– Already reduced from 750 to 230 in two years– Planned reduction to about 150• New challenges– Scorecards for operations in new geographiesoutside India
Lessons from ICICI Bankexperience• Performance measures should be output rather thaninput based– People should be assessed on goals not ontransactions– Removes ambiguity from performancemanagement• Scorecard need not be balanced for individuals butfor business unit as a whole– All perspectives may not apply to all people• Need for scorecard templates– Ensures consistency– Number of templates should be rationalised basedon number of different job descriptions
Lessons from ICICI Bankexperience…• Banks, like other business organisations, are operatingin an increasingly complex environment• In this competitive paradigm, optimally directing allresources towards organisational goals in a focusedmanner is the key to access– Having a strategy is not good enough– The strategy must be• Articulated• Understood• Executed• The balanced scorecard is a tool that helpscommunicate strategy and goals across theorganisation
Lessons from ICICI Bankexperience…• The balanced scorecard at ICICI Bank has helpedachieve:– Rapid business growth– Strategic consistency despite growing scale anddiversity– Systematic and objective performance evaluation• The balanced scorecard can help to build a platform forsustained future growth and value creation
FINANCIAL ANALYSIS• Ratio Analysis• Economic value added – NOPAT-WACC• Activity Based Costing– activity in Value chain_ specific activities
COMPETITIVE ADVANTAGEPROFILE: A Case of Berger PaintsMarketing FactorsMarket leader - 35% share in organized sectorClosest competitor - less than half of AP’s marketshare>20 yrs - leaderWidest product range - product shades, pack sizes40 different decorative paints - 150 shades, 8 differentsizes in packing, no. of brands - all segmentsBrands - quite powerful
COMPETITIVE ADVANTAGE PROFILEMarketing Factorshigh quality MR & MIS , 90% accuracy in forecasting,100 fastest moving Stock Keeping Units,monitored dailyCountrywide distribution - 13000 dealers (comp-<8000) - large network- regional offices, companydepotsPhysical distribution far superior to competitorsstrong in inventory control (28 days) of sales (industryavg. 51 days, service level - high, credit o/s - <25days (comp 40 days)
COMPETITIVE ADVANTAGE PROFILEManufacturing/Operations factorsSize advantage in relation to competitorsFinesse in production planning, scheduling, matchingwith marketing requirementsIn – house production - no outsourcing - highreliability suppliers - superior quality assuranceFour production location - spread benefitsHuman ResourcesHigh caliber HRProfessionals - MBAs more
COMPETITIVE ADVANTAGE PROFILEFinance factorsLeader in profits & operating margins, ROI 40%, restof industry 22%, Networth 204 cr, 58 cr - Nerolac,41 cr - BergerCash richCorporate factorsAwardsHigh profile corporate imageEnviable track record in breaking away the position ofMNCs in the Indian paint Industry
PORTFOLIO ANALYSIS27% of fortune 500 companies use it in strategyformulationTop management views its product lines andbusiness units as a series of investment returnProduct lines/Business units - a portfolio ofinvestment - company constantly juggle - to get yield
STRATEGIC ADVANTAGE PROFILE(SAP)A picture of the more critical areas which can have arelationship of the strategic posture of the firm in thefuture.Capability Factor Competitive strengths / Weakness•Finance High cost of capital, reserves & surplus•Marketing Fierce competition, company positionsecure•Operational P&M - excellent - parts & componentsavailable
STRATEGIC ADVANTAGE PROFILE(SAP)Capability Factor Competitive strengths / Weakness•Personnel Quality of management & personnelpar with competition•General High Quality experienced topmanagement - take proactive stance
BCG GROWTH - SHARE MATRIXMatrix of- Growth rate of the industry - % ofincrease in sales- Market shareRelative market share of a firm = Market share inindustry/market share of the largest other competitor• > 1 indicates market leaderAssumption : Other things equal - growing market isattractive
BCG GROWTH - SHARE MATRIXLine separating high & low competition position set at 1.5times (needed to have dominant position & to be called asstar/cash cow), <1 times - dog statusA product Area of circle significance to company- in terms of assets used/salesSimilar to product life cycle
BCG GROWTH - SHARE MATRIXStar - Market leader, peak of product life cycle, enough cashto maintain high share (market),Growth rate slow - becomes cash cows,More resources - investment to support high growthNo immediate profits - great potential - futureMedium risk categoryQuestion Marks - (Problem children/wild cats) - Newproducts with potential for success - More resources bitfuture uncertain - high risk categoryMoney taken from mature products & spent on ?Slow growth dogs
BCG GROWTH - SHARE MATRIXCash cows - more money than needed for maintainingmarket share - Declining stage of life cycleCash milked from for investment in ?Higher profitDogs - Weak market share, low growth market cash trapof the companyIdentify Issues - current position & future positionwithout change in the strategyGoal - Maintain balanced portfolio - self sufficient in cashLimitations - Low share business may also be profitablemarket share - relative to one (market leader/competition)other factors that determine success
GE PORTFOLIO MATRIXIndustry attractivenessCompany’s business strengths/Competitive positionIndustry attractiveness - market growth rate, industryprofitability, size, pricing practices, opportunities/ threatsscale 1 - 5 Very unattractive to very attractiveBusiness strengths - Market share, technological position,profitability, size, strengths & weaknessscale 1-5, 1- very weak, 5 - very strongProduct line - a letter, circle - area - (size - scales) pie -market shareIdentify performance group - current & projected portfoliowithout any change in strategy
GE PORTFOLIO MATRIXCHigh Winners Winners QuestionA B MarksIndustry Winners DAttractiveness Avg.BusinessMedium E F LosersProfit Losers HLow producersG LosersCompetitive strong Average Weakposition
PIMS•Profit Impact of Market Strategy (PIMS) was started atGeneral Electric, and was later used by Strategic PlanningInstitute (SPI).•SPI uses multi dimensional cross-sectional regressionstudies of profitability of more than 2000 businesses. Itthen develops industry characteristics, Business AverageProfitability, and compares it with performances in theconcerned company•Profitability is closely linked with market share. A 10%improvement in profitability is linked with 5%improvement in Return on Investment
MCKINSEY’S 7S FRAMEWORKTo diagnose causes of org problem & formulate programStructureSuperordinateGoalsStrategySkillsSystemStyleStaff
MCKINSEY’S 7S FRAMEWORKStyleOne of the seven levers which top management canuse to bring about organization ChangeWith change of systems & procedures- style of functioning changes- Culture of organization changesStaffUpdate knowledge & skills to keep pace withchange
MCKINSEY’S 7S FRAMEWORKStrategyIncludes purpose, mission, objectives, goal, action plans& policies7S model emphasize - Development easy – executionSystemsProcedures & methods framed by organization &followed by operational personnel in the respectivefunctional areaTraditional systems Change in view of advancedtechnology & processes developed
MCKINSEY’S 7S FRAMEWORKStructurerelationship between/among various positions andactivitiesDesign of structure - critical task for top mgmt.Need based structural changes - to cope with specificstrategic tasks without abandoning basic structuraldivisions throughout the organizationsSkillsAcquainted with state of the art technology &improvised methods & practices
MCKINSEY’S 7S FRAMEWORK - SKILLSProcter & Gamble - Best known - Skills in productmanagement• Hindustan Lever & Richardson Hindustan -Marketing skills• BHEL, TELCO, L&T - Engineering skills• DCL, Mecon & M.N. Dastur & Company - projectconsulting skills• Dominant Skill in an organization - Part oforganization acquired through continuous effortOrganization change - acquire & develop new skills
MCKINSEY’S 7S FRAMEWORKSuperordinate GoalsFundamental ideas of businessMain valuesBroad notions of future directions
MCKINSEY’S FRAMEWORK“A set of values and aspirations that goes beyond theconventional formal statement of corporate objectives.All targets and attention of all activities and exercise ofthe other six levers of any organization should be directedtowards accomplishment of the best possible goals”- the ultimate & terminal point - where organization willhave to reachEffective organizational change- May be understood as a complex relationshipbetween 7Ss.
INTERNAL FACTORS ANALYSIS SUMMARYInternal factors weight rating weighted CommentsscoreStrengthsQuality .20 4 .80 Important to success ofproductsTop management .10 5 .50 Generally well versed withthe local conditionsProcess engg .05 1 .05 Lack of innovative thinkingengineersEmployee skills .05 2 .10 Has to improve multi culturalskilled work force
Cont….Internal factors weight rating weighted CommentsscoreWeaknessesR&D .10 4 .40 Improve the quality of itsR&D work forceAcquisition of .10 4 .40 Must improve negotiatingCapital skills with financialinstitutions…Retailing .15 3 .45 Improve retailinginfrastructureAdvertising .05 1 .05 Improve brand imageTime to market .10 2 .20 Improve speed of decisionmakingTotal 1.00 3.15
TOWS MatrixInternalExternal(S)List 5-10Internal strengths(W)List 5-10InternalWeakness(O)List 5-10ExternalOpportunities(T)List 5-10External ThreatsSO StrategiesUse ‘S’ to takeadvantage of ‘O’WO StrategiesTake advantageof ‘O’ byovercoming ‘W’ST StrategiesUse ‘S’ to avoid‘T’WT StrategiesMinimize ‘W’ andavoid ‘T’- Generate Alternative Strategies