Strategic Planning in the Czech Republic

In developed market economics, well-managed businesses are expected to all have a strategic plan; whereas, in the Czech Republic (country in the middle of Europe with exciting history as well called as ‘heart of Europe’; capital Prague; population 10.5 million; area 78,864 sq km) and the rest of the post-communist countries, having such management tools in place is all too frequently overlooked and missing.

Unfortunately, the above statement about management practices in the Czech Republic is an objective description of the current state of affairs. Times are changing however and the days when running a profitable business was a relatively simple task are long gone.

This change had to come some day; but, with the arrival of the current economic crisis, this change has come about more quickly than many could have expected. Thus, the existing management and business planning practices of most Czech businesses are facing a major test. For those businesses that have entered this tougher economic environment well prepared, this could be a favorable time; but, for those businesses that have failed to modernize and update their management practices, their very survival may be at stake.

It goes without saying that back in the 1990´s, a person with an average level of education and average skills could start practically any kind of business and make money. Back then, most business plans were put together, as they say, “on the back of an envelope”; and, ignoring the less-than-legal entrepreneurial activities and the money made through them, the majority of these business startups succeeded. They usually did so without any thorough analysis of their local business environment, without any long-term vision or strategy and without many predefined (or only very few) basic business objectives or plans for their accomplishment.

I recall a story in which a colleague of mine came back from a meeting with one of our clients – a medium-sized business and the leading (or if not then the number two) service provider in that field. The company’s owner, who is emblematic of the generation of entrepreneurs that grew their businesses in the early years after the fall of communism – in other words a successful man, who is currently in his mid-50’s – and his sales manager were having a discussion where tools such as SWOT analysis, long-term business planning and corporate strategy were mentioned. I was told that both the business owner and his sales manager had a blank look on their faces when these terms were mentioned. I couldn’t believe two such successful business people were unfamiliar with these concepts. It was almost hard to believe that a business with this type of an approach to corporate management was able to do so well. From all appearances, from the outside this looked like a modern, well-run business that had no problem getting orders from both the private and public sectors. However, internally it was running by the seat of the pants, lacking any long-term planning or business strategy. It was almost too startling an encounter with the state of many Czech businesses today.

At the time, we weren’t being asked to judge how this client was running his business, which had somehow managed to do well for nearly two decades, or to tell him what to do. We did, however want to prepare them in terms of their ability to assess potential future risks to his business and help him maintain his standing on the market and continue to grow in the future. At that time, our client may not have felt the need to come to us and request the use of some of our services – however, when times get tough, with orders down and harder to come by, it is companies like the one I just described that will come to us, asking for advice. We’ve seen how a tough economy can find a company desperately trying to hang in there with hurried and impulsively made decisions, which are usually too late and ignore the long-term ‘big’ picture. Such rushed decisions, with the absence of any in-depth analysis or proper management, usually – and, in today’s environment especially – can lead to financial losses, which could have been easily prevented or at least mitigated.

The above business example is unfortunately not an isolated situation. Rather, just the opposite. But, in the sense that the glass can be half-full (rather than half-empty), the above example points out the opportunistic tools the Czech business community now has available to it to help its businesses succeed. Strategic planning and strategic management, a wide range of business analysis methodologies and approaches and market studies can all be combined with creative thinking to produce long-term visions and long-term objectives to guide the management of each and every business. Unfortunately, the use of these tools and concepts still remain confined to just a small percentage of the business community and those companies, which use them, are usually the ones that set new market trends and which are able to maintain their long-term profitability.

By taking the ‘glass half-full’ approach, Czech companies can look forward to a very successful future. Competitors operating in the same segments of an industry segments have a greater opportunity to get ahead of others and those that start to take advantage of and put to use the concept of strategic planning and related business tools can look forward to gaining a competitive advantage.

Strategic Action Plan – How to Put Yourself in the Top 5% of Marketers on the Internet

Let’s spend a few minutes focusing on perhaps the most important principle in creating a successful online business- your strategic marketing plan.  A lot of people are intimidated by internet marketing because there is so much competition in many large niches such as network marketing, coaching, consulting, and information marketing.  As an online marketing coach, I can’t tell you how many times I have heard statements like:

  • I just don’t feel like there’s any room for me.
  • Who would want to hear what I have to say?
  • I can think big, but I have no idea how to take appropriate action
  • I have a website, but only have 20 people on my list
  • I have a website; isn’t that enough?

What I am about to share with you will give you an incredible competitive advantage and will serve as the ultimate answer to every single one of these statements, so that you never feel lost in the online world again.

Yes, the internet is absolutely packed with business owners competing for valuable online real estate.  Many industries are indeed saturated with websites and blogs trying to compete for their fair share of traffic, leads, and customers.

But here is the thing you really need to understand:  Less than 5% of the entrepreneurs marketing online have a strategic marketing plan that they consistently take action on.

As internet and network marketing guru David Wood says, ‘The internet is full of people with huge dreams and little work ethic.’

Because this is true, you really have very little competition, besides the one taking place within yourself.  Your only true competition is the excuse you may be making to yourself as to why you can’t/won’t consistently take action to generate massive online exposure.  That, my friend, is what you want to expose first.  Don’t worry about your external competition in the online marketplace.  The only real issue is how willing you truly are to keep taking action until you get the results you desire.

This is why your mindset is such a critical factor that underlies your marketing plan.  Sure, you can map out a marketing strategy that looks good in theory.  But the flat out truth is very few entrepreneurs stick with their action plan.  Why is this so, especially when marketing is by far the #1 activity that leads to more money in their pockets?  Here are the big 3 that I have seen:

  • lack of immediate results– I can relate to this one, as many online marketers can.  We all want to see immediate payoff for our efforts.   In my experience, one of the highest virtues of successful entrepreneurship is the ability to keep putting in the effort without seeing the immediate return on our time and energy investment.  Call this faith, emotional maturity, or discipline-the point is that many of us weren’t taught this virtue and instead, we seek immediate gratification.  This is a killer when it comes to online marketing, as it typically does take time to see tangible results.
  • impulsive and reactive tendencies– This is often a result of not seeing immediate results.   One of the hardest things in internet marketing is that you have a lot of incredibly savvy marketers out there basically preying on your hunger for results.  They lure you to their offers and solutions, which keeps you constantly grasping for the latest and greatest product or program that will quell your frustration and feed your hope.  What ultimately results is a lack of any real consistency or rhythm, making it impossible to build any momentum in your marketing efforts.  You keep jumping from marketing strategy to new program to new idea to new guru.  This becomes a sort of addiction for many people trying to make money online-and there are many smart marketers absolutely capitalizing on this weakness.
  • lack of inspiration/laziness/disconnection from real purpose in life-– This one can take a lot of different forms, but the essence is that you lack the real drive and desire to take effective action because you aren’t clear on what you really want out of your marketing, your business, and often your life in general.  Many people turn to the internet because (I hate to say it) they have no idea what else to do with their lives.

Before you create a strategic marketing plan, you want to honestly assess if you have a tendency to be vulnerable to any of these 3 obstacles (99% of us do).  Seeing your obstacles clearly is always the first step to becoming an empowered and successful entrepreneur.  When you see your blocks as they are without judging them, a door is opened where you see that you have a choice to change anything that is holding you back.

Once you have done some of this inner work, then you will likely be able to create an external action plan that is accessible, effective, and even fun to implement.

When it comes to online marketing, what you want to do is create a marketing process that you can literally commit to just about every single day, especially in the initial phases (the first few months) of launching your product, service, or company.

Your marketing plan is determined by 3 factors:

  1. Your budget
  2. Your knowledge and skill set
  3. Your motivation

If you have a good marketing budget, then you’ll want to spend some money on online advertising, as this is the fastest way to start generating leads for your business.  Google AdWords is really the best way to start.  Depending on your business, you can also invest in classified and ezine ads, or in banner ads on other websites.  Google AdWords is a big learning process, so be sure to get the right training before you go and spend thousands of dollars (this will often turn out to be a generous donation to Google).  I recommend getting Perry Marshall’s Definitive Guide to Google AdWords as a starting point.

If you’re on a tight budget or you don’t want to learn AdWords, you’ll want to do some free marketing strategies.  Let me share with you my daily marketing process.  This should really help you see how this is done.  Keep in mind that I am very strong in factors 2 and 3 above-I have a lot of knowledge in online marketing because I have been doing it for a few years and I have a high level of motivation.  If your knowledge and/or motivation isn’t quite that high, you’ll want to just take a fraction of what my process and implement it consistently.  Bite off only as much as you can chew and be honest with yourself.

Here is my daily marketing strategy:

1.  Write a blog post (you’re reading today’s efforts)

2.  Make a video of that blog post and distribute it through a video distribution software that sends it to all of the video sharing and podcasting sites – this is an incredible online marketing tool that any serious online marketers should be using.

3.  Distribute the post to 27 social bookmarking sites.

4.  Distribute the post to 250 article directories using an article submission software.

5.  Post my blog content on ping.fm so it goes to Twitter, Facebook, MySpace, etc.

6.  If I’m really wanting to compete for a specific keyword (like for instance if I really want to get ranked for the keyword I am targeting in this post, strategic marketing plan), I will create a squidoo lens and/or a hub page.

7.  If I am so inclined, I will send an email blast to my list to let them know about the post.

I do this as often as possible because it is seriously an incredibly effective FREE way to get my content all over the internet.  Of course, this strategy is premised upon offering real value to the online community, not crap or spam.  I only send out content like I’m sharing with you here.  You only want to distribute your best stuff; don’t be like so many lame marketers and just promote your business and spam people.  Give people stuff that really makes an impact and you’ll see a big difference in your online marketing results.  

The essence of a strategic marketing plan is that it is implemented consistently over the long-term. Your goal should be to be just as methodical, inspired, passionate, and consistent about your marketing one year from now as you are in the start-up phase where it’s easy to get fired up.  It’s just like trying to lose weight and get in shape.  The first week you’re hitting the gym every day and you’re totally on fire about your commitment.  Then, for whatever reason, your enthusiasm starts to wane and other priorities take over.  Eventually, you forget all about that commitment and your mind has taken you to a new focus entirely.

In order to succeed in online marketing, you have to have that vision for what you want firmly in mind all the time and never let go.  Do you really want freedom, passive income, a huge downline, or thousands of people on your list?  Then you need to tap into the virtue of entrepreneurial tenacity.  You keep your eyes on that prize and you let nothing distract you, especially your own mind (this is the biggest danger-that you’ll convince yourself that it’s not possible or that you value something else even more).

When you implement your marketing plan consistently over the long-term, there is no competition because very few business owners actually do this. I know it doesn’t sound all romantic and hype-based like so many of the promises you hear online, but I will tell you this:  If you just stay consistent… if you remain tenacious… if you keep a clear focus on what you really want… and you take action on that every day at least a little bit… you can have it.

Online marketing can take you to that place of incredible freedom and success.  Just be willing to do what so few others are:  Let go of the hype, let go of the need for immediate gratification, and treat this as if it’s your child- daily nourishment and care.  Keep feeding your business through strategic marketing and you will-sooner or later-realize your financial goals and have a lifestyle that most can only dream of.

Franchising Strategy: Strategic Business Plan Development

As with any business, you must have a solid business plan. Do not think that you can start a franchise without a good plan. The plan is a roadmap to how you will operate, how you will reach new franchisees, how you will market your business and must have solid financials. A mistake of a single percentage point on a franchise royalty can easily cost you millions of dollars. It does not seem like a big mistake, when you have a single franchisee. It simply means that the franchisor will make $5,000 less in royalty revenues. But in franchising, we are talking about continuing growth, and this mistake might be multiplied 100 times or more. Other business decisions that a new franchisor will make that could impact long-term profitability include:

• Advertising fees

• Technology fees

• Product margins

• Type of franchise offered (individual, area development, area representative, etc.)

• Organizational structure

• Compensation structure

• Geographic growth strategy

• Territorial rights provided to franchisees

• Reservations of rights for the franchisor

• Franchise Disclosure Documents

Conflicting or ambiguous communications when a franchise is first sold can form the basis for future franchise litigation. The cost of defending any franchise lawsuit, even an inconsequential one, can be enormous. The cost of prosecuting even a “small” franchise litigation lawsuit can easily exceed $100,000 to $200,000, or more.

You must have a solid, coherent Franchise Disclosure Document. An integrated Franchise Compliance Program that stipulates rules and expectations, manages Franchise Disclosure Documents and controls the publishing of all information is extremely important. It is also one of the best investments a franchise company will ever make.

Understanding a franchise agreement

A Franchise Agreement includes all of the key facets, requirements and principles of the franchise, including the privileges and commitments of both parties, the length of time the agreement will last, the territory (if any) granted to the franchisee, and the costs involved and how they are to be calculated.

A Franchise Agreement is the foundation of your business. You must be certain that you understand it clearly before you start to build on it. The following is an outline of some of the key aspects contained in Franchise Agreements.

Every Franchise Agreement needs to be carefully read and you should therefore have your attorney review the Agreement clause by clause with you, to make certain that you understand all of its terms. Franchisees also need to be aware that, while it can be relatively simple to enter into a Franchise Agreement, it may be far more difficult to remove yourself from one. A standard Franchise Agreement is a long-term commitment to a third party (often of six to ten years in length). The Agreement will include stringent requirements which have to be complied with for the full length of the term. Failure to conform to these requirements may in many situations allow the franchisor to terminate the Agreement.

While the strict stipulations of Franchise Agreements are there to protect the interests of all parties and particularly the franchise system, from time to time Franchise Agreements can include or exclude clauses which aim to protect the franchisor.

A provision that any costs involved in defending the use of the trademark should be paid by the franchisee

Immediate rights for the franchisor to cancel without notice if the franchisee misses or delays payment of royalties

Lack of clauses regarding ongoing support, training and development of the business by the franchisor

Limitation of the franchisor’s liability to the franchisee even if the franchisor breaches their requirements to the franchisee

Widely drafted clauses undermining a franchisee’s ‘exclusive’ territory in unwarranted circumstances.

The presence of these clauses will vary between Franchise Agreements. An experienced franchise lawyer will be able to highlight them for you. Some franchisors will not be willing to make any changes to their agreements especially when there are other franchisees already in operation.

Regardless of what you may dislike about some provisions in a Franchise Agreement, it is nevertheless essential that you understand it fully and the requirements it places on you as a franchisee. Careful attention should also be paid to supplementary documents, as these may contain provisions that, if breached, constitute a breach of the Franchise Agreement.

You should also be certain that any pre-contractual statements regarding turnover or other aspects of the business that may have attracted you to the franchise are carried over into the Franchise Agreement or in some other written form.

Grant of Rights

The Grant of Rights sets out the term of the franchise and its renewal provisions. It is important to make certain that the term of the franchise is adequate to allow you to achieve a realistic return on your investment. Renewal provisions need to be looked at carefully along with any renewal fees. They may contain some or all of the following:

Notice of renewal – this is usually required within strict timeframes. If the renewal notice is not given in time, the right to do so may be lost

Payment of renewal fee

Changes to terms of the Agreement by the franchisor upon renewal

Changes to the franchise territory size by the franchisor where the particular Agreement provides exclusive rights to the franchisee

Changes, alterations and improvements to operating practices to meet competitive and other challenges

First options or first rights of refusal for additional franchises.

It is important that the franchisee understands that, more often than not, the right of renewal may in fact be a right in favor of the franchisor. The franchisor often has the ability to reject the renewal if a franchisee has not been performing to set standards.

Ongoing costs and royalties

Many Franchise Agreements include ongoing payments to the franchisor such as:

• Royalties

• Advertising levies

• Mark-ups or margins on products supplied by the franchisors

• Training fees.

There may also be requirement to attend franchise conferences and other meetings. The Agreement should clearly set out the details of what has to be paid and when, including circumstances relating to any deposits payable before securing the franchise.

For advertising and promotion costs, the Agreement should specify when the payment is to be made and to whom, including details of any special banking arrangements. Back-up assistance and assistance are essential to the operation of a successful franchise. Details of the support and training to be provided by the franchisor should be stated in the Agreement, including both initial and ongoing assistance. As well as having your attorney review the Agreement for these provisions, talk to existing franchisees about the level of support they have received.

Initial costs

The Agreement, or often an ancillary document, should set out in full all beginning costs. These may include the initial franchise fee, equipment costs, working capital requirements, fit-out costs, initial training costs and the cost of opening stock.

Premises, leases and mobiles

Lease provisions usually allow the franchisor to take over the lease at the end of the term, and also if the franchisee defaults during the term

Often the franchisor will lease the property itself and grant a sub-lease to the franchisee. You are responsible for paying the rent, so you should ensure the amount negotiated is a fair market rent

Mobile franchises usually contain terms that set out the sign writing and other décor required by the vehicles from which the business is operated, and possibly for any major items of equipment

One issue that is often overlooked is the need to ensure that the length of the franchise term coincides with the length of the lease term.

Requirements

Every Agreement should contain clauses setting out the initial and continuing requirements of both franchisor and franchisee

• Examples of franchisee requirements include minimum operating hours, insurance, engagement of staff, and uniform requirements.

• Examples of franchisor’s requirements include maintaining the manuals, providing products, and training

• Records of accounting must be up-to-date, with regular reporting and auditing

• Intending franchisees should pay careful attention to the requirements since breach of any may entitle the franchisor to terminate the franchise.

Intellectual property

Intellectual property is a key element of most Franchise Agreements, specifying legal ownership rights by the franchisor concerning patents, copyright, trademarks, designs and even operating systems. Other relevant laws include the Fair Trading Act and common law rules prohibiting the copying of a business’s identity.

Sale of the franchise

Most Agreements will allow the franchise to be sold during its term, but you should note that as a franchisee your rights to sell the business may be restricted.

• The franchisee may have to give the franchisor the right to buy the business first known as right of first refusal, which in itself can destabilize the value of that business and the goodwill for a selling franchisee

• If the franchisor chooses not to purchase, they may rigorously control the sale process

• The incoming franchisee must be approved by the franchisor

There may be a transfer approval fee, which the franchisee will need to pay to the franchisor when a sale takes place. This is designed to cover the franchisor’s costs involved in training the incoming franchisee.

In some Franchise Agreements, the term of an existing franchise for sales purposes covers only its unexpired remainder, unless the Agreement provides for the franchisor to offer a new Agreement for a full new term.

Termination

Franchise Agreements provide for circumstances in which the Agreement may be terminated in advance of the original ending date. These include:

• Bankruptcy, company liquidation or criminal conviction of the franchisee

• Termination of leases to the franchise premises (where premises retention is important).

Termination provisions should be considered carefully as they are often points of disagreement. There are frequent misunderstandings by franchisees as to what happens at the end of a term and procedures vary from one franchise system to another. However, it should also be kept in mind that if the franchise is operating well and the franchise relationship is a good one, it is likely that both franchisee and franchisor will want to renew the Agreement.

Disputes

Although disagreements between franchisors and franchisees are usually solved through discussion and negotiation, mediation and arbitration are also effective methods for working out disputes and less damaging to franchise relationships than legal proceedings.

Other terms

The Entire Agreement clause is especially important as it usually states that what is contained in the Agreement overrides anything which may previously have been promised unless it is expressly referred to in the Agreement

As a franchisee, you should be certain that anything on which you have relied in selecting your franchise is included in the Agreement in some way

The Definitions section, usually close to the beginning of the Franchise Agreement, contains key definitions. One of the most important is Gross Sales, the figure on which the franchisor’s royalty is usually based. Usually this covers substantially every type of transaction carried out by the business and almost every payment received. Often it will include sales made, whether or not payment has actually been received.

Strategic Sourcing – A Bridge Too Far?

You are missing out!

It is no secret that purchasing has a significant influence on cost. External purchases represent over half of cost in many firms. While savings of up to 40% or more can be realized on these cost [Anderson and Katz, 1998]! Most companies have spent significant energy on volume consolidation and supply base optimisation, thus realizing up to 15% savings. Good sourcing processes and sourcing as a true strategic function can help your company realize up to 25% more saving. It can even help increase revenue. Imagine, sourcing as a profit centre, not just a cost centre.

A lack of sourcing skills can have dramatic results, as the recent Dutch government construction fraud case shows. In the past years, the government paid 30% too much for its construction projects. Public opinion speaks of fraud from the construction companies. However, a good government sourcing function might have prevented this from happening. Structural supply analysis and a thorough insight in supply cost structures could have made a whole lot of difference.

Introduction

The concept of sourcing is gaining popularity and impact in both organisation and management studies. There is no argument about that. Yet sourcing is still as far away from becoming an autonomous discipline as ever. The term sourcing is used for too many different purposes. There is just not one definition. Sourcing might be used in dialog with the purchasing process, or as a part of this process. Sourcing might be used for the process of acquiring input from multiple countries. Or sourcing is used as a synonym for outsourcing. When the concept of strategy is being introduced to sourcing, the definition becomes even more confusing. How can strategic sourcing be used if there is not even common ground on what sourcing actually means? This article will first create common ground by analysing definitions in search of a common denominator in order to suggest a new definition. Secondly, it will show that strategic sourcing is, in many cases, not as strategic as it is claimed to be, and suggests how strategic sourcing should be defined. Furthermore, a conceptual framework will be presented on how sourcing can be used as a true strategic function. Sourcing has come a long way; this article tries to make a first step on an even longer road that is still ahead.

Sourcing: finding a definition

As stated earlier sourcing is becoming increasingly popular and a very relevant topic in organization and management studies. Basically, the goal of all companies is sustainable and competitive selling of goods and/or services. In order to produce these goods and services input is needed. This input can be tangible, like raw materials or employees, or intangible, like information or skills. They all originate from some source and this is were sourcing activities come into play.

Several definitions of sourcing have been given in literature. ‘Sourcing is researching the market for potential input sources, securing the continuity of these sources, searching for alternative sources and keeping the relevant knowledge up to date’ [Vollman, Berry, Whybark, 1984, p. 148; van Weele, 1994].

Sourcing Management (Kraljic, 1983) is labelled as ‘Bottleneck Supply’ and consists of supply that is also uncertain, but of relatively low importance for companies in terms of volume purchased, total purchase cost, or impact on product quality or business growth. Bottleneck suppliers can be found in Figure 1.

‘Sourcing is the way an organisation acquires its needed goods and services in such an integrated manner that functional and hierarchical organisational boundaries are permeated’ [Groeneveld, Hofstra, 1995].

‘Sourcing is the process of finding and subsequently managing a source for the input of production’ [Mol, 2001, p. 1].

Figure 1: Supply Management Model. Source Kraljic (1983)

The definitions are different but have some things in common, for example, ‘sources for the input of production’.

The definition used in this article is:

“Sourcing is the process of analysing potential input sources, choosing and securing the continuity of these sources for input of production and, subsequently, managing these sources”.

This definition is chosen for several reasons. First, for the purpose of analysis of potential sources, not just existing sources. Secondly, there is an emphasis on continuity. Thirdly, because it concerns not just closing a deal, but true management of the source. This article emphasizes both external and internal sources.

Historic overview

As can be concluded from the sourcing definition, sourcing is a specific topic but highly related to purchasing. The rise of sourcing is also related to the way we think about purchasing. For a short historic impression, some points of development of purchasing are presented here [Ellram, Carr, 1994]. In the early 1970s Ammer noted that top management looked at purchasing as playing a passive role in business organization. Ansoff supported this view, stating that purchasing could be described rather as an administrative than a strategic function. The 1973-74 oil crisis and related raw material shortages drew significant attention to the importance of purchasing and sourcing. However, in spite of the crisis, the role of purchasing and sourcing did not improve. Later on Porter, in his seminal work on forces that shape the competitive nature of industry, identified buyers and suppliers as two of five critical forces. Thus, the strategic importance of suppliers and the company as a purchasing entity (acquiring sources) began receiving recognition in main stream strategy literature. In the 1980s many authors noted the benefits of greater strategic involvement of the purchasing function. However, until late in the decade only limited gains appeared to have been made. During the early 1990s the research focus appeared to have shifted towards integration, and how the purchasing and sourcing function can become recognized as a more significant contributor to the company’s success.

Purchasing and Supply Management Trends

So the position of purchasing and sourcing in management literature changed over time. Purchasing was once regarded as a reactive activity capable of only neutral or negative contribution. Nowadays the purchasing and sourcing process at leading companies is at the forefront of responding to and creating change. The ability of purchasing and sourcing-often in collaboration with other functional groups to affect cost, quality, time, technology and ultimately customer satisfaction-is substantial.

Now what trends influenced this change in view? Based on a research survey among purchasing and sourcing executives the following categories of change and trends can be identified [Trent, Monczka, 1998]:

1. Performance improvement requirements;

2. Supplier and purchasing and sourcing importance;

3. Organization;

4. Systems development;

5. Performance measurement;

6. Supply base management;

7. Purchasing responsibilities and activities.

Performance improvement requirements

The need for continuous improvement is a widely accepted necessity. Commonly expected targets are continuous improvement of cycle time, cost, quality and delivery performance, both internally and from external suppliers. While quality and cost have always been important, time-related capabilities are rapidly becoming the next generation of ‘order winning’ characteristics.

Supplier, purchasing and sourcing importance

The shift in supplier importance is a result of at least five factors which affect most industries:

– The need to control unit cost;

– The need to reduce the total cost of acquisition;

– The increasing influence that suppliers have on the purchaser’s ability to respond to end customers particularly as it affects time-related requirements;

– An increased reliance on fewer suppliers;

– A willingness of purchasers to rely on suppliers to design and build entire subassemblies and subsystems.

Organization

The right organizational structure is essential for implementing leading-edge procurement strategies and plans. Today this often means using higher level teams to evaluate, select, manage and develop sources. Furthermore, there is a shift towards end-item focus instead of commodities, which results in hybrid structures reflecting a growing need for purchasing and sourcing to become more integrated with other parts of the organization.

System development

There is an emphasis on purchasing and sourcing systems development due to the need to co-ordinate purchasing and sourcing activities across buying locations, assuming an organizational rather than a functional perspective, and take on complex and strategic responsibilities with existing staff.

Performance measurement

Performance measurement is essential for gauging the overall effectiveness of functional and team-based strategies and plans. Specifically, purchasing and sourcing managers should rely on measurement systems to identify:

– supplier performance and opportunities for improvement;

– performance trends;

– the best suppliers to select, both for routine purchase requirements and critical items that would benefit from long-term purchase agreements;

– where to commit limited supplier/source development resources, the overall effectiveness of source management improvement efforts.

New measurement areas will emphasize purchasing and sourcing effectiveness rather than efficiency, reflecting a shift toward an increasingly strategic sourcing perspective.

Supply base management

Not long ago, it was common practice for buyers to play suppliers off against each other, switch suppliers frequently and offer only short-term contracts. Now changes are occurring in the way companies approach and manage their supply base. Most companies will continue to reduce the total number of suppliers they maintain. Another related trend is to rely on larger full-service suppliers to design and build entire subsystems, instead of many suppliers providing components of the subsystem. Many supplier base reductions involved a smaller group out of the original group of suppliers. Supply base improvements might have been greater if purchasing and sourcing had broadened their supply/source search. Supplier/source optimisation can create a foundation to pursue more complex activities that will further accelerate improvement.

Purchasing and Sourcing responsibilities and activities

If an increase in purchasing and sourcing importance is taking place, then shifting responsibilities over time should reflect this importance. A continued increase in strategic and external focus can be expected. Furthermore, a decrease in tactically oriented tasks can be expected.

Case: Siemens

In 1997, purchasing at Siemens Medical Systems was a strictly local affair [Carbone, 2001]. It was then decided that a strategic purchasing organization should be created. Its mission would be to leverage Medical Systems group material purchases with suppliers, tap into their technical expertise, and form long-term relationships with them. The idea of strategic purchasing was to reduce cost, guarantee supply and making sure Siemens had access to the latest and best technology needed for medical equipment. In order to make the reorganization a success, Siemens developed a survey in order to identify problem areas it needed to address. This survey was based on a benchmarking study of the purchasing organizations of IBM, Hewlett-Packard, ABB, Ericsson, Nokia and others. The survey was used at Siemens’ various purchasing departments at various facilities. The results were evaluated and the departments were rated to determine their strengths and weaknesses.

Strategic sourcing

So historic developments and trends all push towards a more important role for sourcing and show a need for a more cross-functional and strategic focus.

What is this new strategic role of sourcing and what sorts of strategies are possible? It appears that there are three distinct types of strategies for purchasing [Ellram, Carr, 1994] which can also be used for sourcing:

1. Specific strategies employed for the sourcing function;

2. Sourcing’s role in supporting the strategies of other functions and those of the company as a whole;

3. Utilization of sourcing as a strategic function of the company.

While these three issues are related, they are distinct areas in terms of their execution and impact on the sourcing function. At the first level sourcing draws up its own strategies and plans, while at a larger level these might prove to be dysfunctional for the organization as a whole. At the second level the sourcing strategies are drawn up to maximally support the company strategy. At the third level sourcing is an integral part of the strategic planning process of the company. One of the statements in the introduction was that strategic sourcing is in many instances not as strategic as it is claimed to be. Two gaps can be identified to explain this.

Firstly, although the sourcing function is reported to be strategic there is no empirical evidence of this.

Example: the intention gap

The purchasing function is caught in a gap between strategic intentions and tactical realities [Moody, 2001]. In a study called “Purchasing’s strategic Role and team usage” researchers looked at what purchasing leaders regard as important strategic work, applying their knowledge about suppliers and technologies to help the company make decisions on outsourcing, new product development and market planning, and compare it with what their organizations actually do. Their findings indicate a wide gap between intentions and reality. To determine purchasing’s role in strategy, the researchers asked chief purchasing officers to rate their involvement in 13 major corporate activities using a five point Likert scale. Even top-ranked outsourcing was rated at 3.46, only a moderately important level; the 13th parameter had a 2.01 standing, indicating that purchasing departments were only slightly involved in marketing planning. Clearly the buzz about strategic purchasing is supported by the data.

Secondly, while strategic sourcing or purchasing is being reported, the question is what type of strategy is being referred to.

Example: Strategic buying

An article on strategic buying [Sherer, 2000] has the subtitle: ‘nine steps for getting the right IT system for your organization’. Instead of dealing with the strategy of the sourcing function or sourcing as a strategic function, a nine-step method is being described which secures the right purchase of an information system for a healthcare organization. In light of the three strategy types, this would be at best a ‘type one’ strategy.

The authors claim that most of the employed strategies are of type one or two and that strategy of type three is still very unusual.

In this article strategic sourcing is considered to make an explicit contribution to the organizational strategy and long term success. Therefore it is either level two or three.

The definition of strategic sourcing used here is:

The process of analysing potential input from internal and external sources, choosing and securing continuity of these sources for the input of production and subsequently managing these sources in order to create sustainable competitive advantage for the organization.

This definition contains the popular activities of in- and outsourcing.

Some differences between traditional sourcing and strategic sourcing are presented in Figure 2.

Figure 2: From traditional to strategic sourcing. Source Nolan Norton Institute (1999)

Pathway to improvement

There is probably no such thing as a ‘big bang scenario’ to introduce strategic sourcing from scratch. The development of strategic sourcing within an organization is more like an evolving process. Most literature refers to several ‘phases’ or ‘stages’ sourcing must go through before it can truly become strategic in nature, and contribute to organizational strategy. This evolving process includes development of new skills for the sourcing function and a different mindset by top management and other functional areas. Sourcing must be considered an important contributor to the organizations long-term success and strategy. Now if sourcing grows in strategic posture, what kind of gains can be realized? In figure 3 several levels of procurement development are discussed. In order to achieve higher levels of development, the sourcing function must also gain in sophistication and strategic posture.

Figure 3 Source Anderson (1998)

For each level of development, higher value adding for the organization can be achieved. The first three levels are mainly focused on cost, taking a total cost of ownership (TCO) view, and furthermore on quality and making time related issues predictable. Level 4 is focussed on achieving higher extra value for the end customer, thus realizing higher revenues. Value drivers in level 4 are again cost and quality, but also shorter time to market and leverage technology and skills from the entire value chain.

Case: Siemens

Forming a strategic purchasing organization allowed Siemens to improve its purchasing coordination and streamline its logistical and information flows. This took Siemens into to the second improvement level. However, the strategic purchasing project did not stop there. Siemens formed eight material groups to handle its strategic sourcing issues. This resulted in reduced complexity and increased standardization. Furthermore, suppliers were involved in the process of new product development, thus taking Siemens into the third improvement level. All these reorganizations did not go without reward. Siemens reduced its material costs by 25% over a three year period and brought products to the market quicker.

What do these levels mean for the three types of sourcing strategy? With a specific strategy for the sourcing function an organization can reach level 1 or 2. To really make the most out of level 2 and reach level 3 the sourcing strategy must really be aligned with the organization strategy. In order to make more out of level 3 and to reach level 4 sourcing must be fully integrated within the organization’s strategic planning, thus really achieving the strategic sourcing posture.

Example: why improve?

By improving the sourcing function significant benefits can be realized. Reaching level one yields cost savings between 5-15%. Level two 5-25%. Level three varies widely and level four will increase revenue. Leaders in procurement are highly developed at the first three levels. Level four is a “new frontier”; few companies are pursuing its potential in their situation [Anderson and Katz, 1998]

Concluding Remarks

Enterprises are increasingly turning to multiple internal and external sources, making sourcing a hot topic within companies. Each company must define its intended sourcing strategy and most appropriate implementation in order to create sustainable competitive advantage for the organization. There is probably no such thing as a ‘big bang scenario’ to introduce strategic sourcing from scratch. The development of strategic sourcing within an organization is more like an evolving process.

As can be concluded, different levels of improvement in the sourcing function can be attained. Each higher level yielding an increased payoff. Attaining a higher level does also acquire a more sophisticated sourcing function. Most companies do not seem to surpass the basic cost cutting level and are losing out on additional cost savings and increased revenue. Acquiring your input for less is only the beginning. A company should assess how strategic their sourcing function really is. Changes are the sourcing strategy comes closer to transactional optimisation than a cross-functional process to attain competitive advantage. Furthermore a company should asses its sourcing goals. Most likely the goals will correspond with buying for less or taking the total cost of ownership view and thus try to buy better. Most companies do not make the most of their sourcing function and are losing out on a change to gain competitive advantage.

This article gives the initial impetus to the overview of strategy in sourcing. While the topic strategic sourcing is not a new phenomenon, much research is still needed.

As the concept of sourcing matures, a need to validate and build on sourcing concepts exists. There is still much academic work required in creating sophisticated concepts that will help organizations to actually acquire higher levels of improvement for their sourcing function.

Literature

– Anderson M., Katz P.; Strategic sourcing; 1998

– Ansoff, H. I. (1965). Corporate Strategy: An Analytical Approach to Business Policy for Growth and Expansion

– Carbone J.; Strategic purchasing cuts cost 25% at Siemens; 2001

– Carter J., Narasimhan R.; Is purchasing really strategic?; 1996

– Degraeve Z., Roodhooft F.; Determining sourcing strategies: a decision model based on activity and cost driver information; 1997

– Diromualdo A., Gurbaxani V.; Strategic intent for IT outsourcing; 1998

– Ellram L., Carr A.; Strategic purchasing: A history and review of the literature; 1994

– Ellram L., Maltz A.; The use of total cost of ownership concepts to model the outsourcing decision; 1995

– Garr D.; Inside out sourcing; 2001

– Giunipero L., Monczka R.; Organizational approaches to managing international sourcing; 1997

– Groeneveld J., Hofstra N.; Strategic sourcing; 1995

– Groot E., Leewis P.; Strategic sourcing; 1996

– Henderson J., Venkatraman H.; Strategic alignment: leveraging information technology for transforming organizations; 1999

– Laseter T.; Balanced sourcing; 1998

– McFarlan W., Nolan R.; How to manage an IT outsourcing alliance; 1995

– McIvor R., Humphreys P.; A strategic model for the formulation of an effective make or buy decision; 1997

– Mehltretter S.; Strategic sourcing means just that-sourcing strategically; 1996

– Mol M.; Outsourcing, supplier relations and internationalisation: global sourcing strategy as a Chinese puzzle; 2001

– Monczka R., Carter P.; The future of purchasing and supply : A ten-year forecast ; 2000

– Monczka R., Morgan J.; Competitive supply strategies for the 21 Century; 2000

– Monczka R., Trent R.; Worldwide sourcing : assessment and execution ; 1992

– Moody P.; Strategic purchasing remains an oxymoron; 2001

– Nooteboom B.; A balanced theory of sourcing, collaboration and networks; 2002

– Penner R.; Sourcing strategies and spatial patterns of production in the automotive industry: a dutch survey; 1990

– Oudijk, S.; Niet meer wachten op alle handtekeningen; 2000

– Quinn J.; Strategic outsourcing: leveraging knowledge capabilities; 1999

– Schorr J.; Purchasing in the 21st century: a guide to state of the art techniques and strategies; 1998

– Sherer J,; Strategic buying: Nine steps for getting the right IT system for your organization; 2000

– Sislian E., Satir A.; Strategic sourcing: A framework and a casestudy; 2000

– Trent R., Monczka R.; Effective cross-functional sourcing teams : Critical success factors ; 1994

– Trent T., Monczka R.; Purchasing and supply management : Trends and changes throughout the 1990’s; 1998

– Venkatraman N.; Beyond outsourcing: Managing IT resources as a value center; 1997

– Venkatraman N.; Five steps to a dot com strategy: How to find your footing on the web; 2000

– Weele van A.; Inkoop in strategisch perspectief; 1997

– Zee van der H., Wijngaarden van P.; Strategic sourcing and partnerships: challenging scenarios for IT alliances in the network era; 1999

– Dreyfuss C.; The promising journey towards the sourcing offce; 2002

– Da Rold C.; How good is your sourcing strategy, 2002

– Stone L.; Management update: The chief sourcing offcer- a new role and a new reality; 2002

– Harris K.; Sourcing and strategic knowledge management; 2002

– Da Rold C.; The five dimensions of strategic sourcing; 2001

– Da Rold C.; Sourcing strategies: evaluate your ability before moving; 2001

– Freling R., Romeijn E., Morales D., Wagelmans A.; A branch and price algorithm for the multi-period single sourcing problem; 1999

Introduction to Strategy and Strategic Management

What is Strategy?

We hear the term strategy almost every day in some context or the other. Business leaders lay out their strategies for the years ahead and military generals speak of strategy to contain and conquer the enemy. Even as individuals, we often use the term strategy to describe a set of actions that we would take to control the future and arrive at outcomes that are beneficial to us. Hence, strategy is an integral part of our world and it can be defined as a general, un-detailed plan of action, encompassing a long period to arrive at a complicated goal. It is also defined as the set of actions to realize intent as a ploy, part of a plan. It follows from these definitions that strategy and strategizing involve drawing up plans to arrive at a predetermined goal.

What is Strategic Management?

We have defined strategy. Turning to strategic management, it can be said that the term refers to the management of strategy by having dedicated, detailed, and descriptive plans of actions that form the strategy. It is also the field in management thought that deals with planning, executing, controlling, and closing out the strategic moves.

If a firm has a strategy in place to realize its targeted revenues and profits, the management of the process by which it hopes to realize its goals falls under strategic management. An ongoing process evaluates different sets of strategies, assesses competitor moves, sets goals and targets, and actualizes the feedback loop to incorporate learning’s into its strategies. Indeed, it can be said that strategic management identifies the purpose of the firm and helps organize the plans and actions to actualize the purpose. By definition, it is a long-term process and it is the business function that is considered the repository of the firm’s future.

Strategy/Strategic Management and their place in the Firm

The previous sections have discussed how strategy and strategy management are integral to the success of the firm. In any organization, strategic management is a level of managerial activity that is below setting goals but above tactical planning. Strategic management in a firm is thus concerned with the future direction that the firm takes and hence, it is an important function of management.

Typically, the corporate planning function in any organization draws up the strategies and sometimes-outside help from management consultants is sought in this regard. In recent years, it has become the norm in the corporate world for the senior management to get actively involved in the formulation of strategy.

Hence, it can be said that strategic management is no longer the important function but has become the most important function. This has happened because of the uncertain and unpredictable world that we live which has resulted in organizations scrambling to devise ways and means of controlling future outcomes. In this regard alone, strategic management has become a valuable function without which no organization can hope to succeed in the turbulent marketplace.

The Need For Strategic Thinking Is Critical To Effective Continuous Improvement

Strategic thinking is a mindset or way of thinking about a business or organization. It is a process whereby you learn how to make your business vision a reality by developing your abilities in team work, problem solving, and critical thinking. Strategic thinking is the process whereby you examine the implications of your choices and analyze the options available to you before making a decision.

Strategic thinking is applicable and useful in a wide range of situations, including developing strategies for a company, making a business or personal decision, or just understanding a situation. Strategic thinking is marked by beginning with a focus on the Vision and Objectives for the future and then working backwards to the present situation. Without comprehensive Strategic Thinking the organization risks making quick decisions that lack the creativity and insights derived through a Strategic Thinking process.

Purpose

The purpose of Strategic Thinking is to create a strategy that is a coherent, unifying, integrative framework for decisions especially about direction of the business and resource utilization. The main purpose of strategic thinking is about how to outmaneuver your competitors in strategic planning.

Strategic thinking is an attempt to think through as many “results” that come from our actions that defeat our actions. Strategic thinking is a process in which significant issues and decisions are considered in a special way. Strategic Thinking is a planning process that applies innovation, strategic planning and operational planning to develop business strategies that have a greater chance for success.

Process

Why is it so much easier to just do and do, manage crises, put out fires, without thinking, planning, and making everyday action purposeful?

If you aspire to improve operational performance, the process of strategic thinking must become second nature to you. Outcome-driven thinking is the process of approaching every interaction with a desired result in mind. It focuses on long term rather than short term, Involves systems thinking, and focusing on the big picture, NOT just the small one Strategic thinking focuses on identifying leverage (how can we use what we have to maximum advantage)

In its highest form, strategic thinking is a distinct perspective that helps you break down complicated processes into easily manageable pieces that can be arranged to present a clear set of alternatives. The purpose of the process is not to have you categorize thoughts you already have, but to organize them in a systematic fashion so that new thoughts can emerge.

Strategy

The word strategy is derived from the Greek strategia, which referred to that which is “general. Strategy is one of the most over-used and yet misunderstood words in business. The military theorist, von Clausewitz (1832), said strategy is “the use of the engagement (a set of actions) for the purpose of the war.

In strategy, we are trying to convert information to knowledge to a decision about a course of action in the future. Hence, even during the implementation of strategy, we cannot escape the continuing need for thinking.

Understanding the Situation

Strategic thinkers develop an understanding of what needs to be accomplished by their work teams and strive to influence the way both senior managers and line staff view work priorities. It requires patience and an understanding of organizational dynamics. In its most basic sense, strategic thinking is about analyzing opportunities and problems from a broad perspective and understanding the potential impact your actions might have on others.

Strategic thinking must be used to improve understanding of the environment and the options available to the business. It involves an understanding of how the situation will change over time and the importance of maneuvering for superior position and flexibility to deal with turbulence and to keep ahead of the competition. Gaining employee understanding of how the work they perform links to the realization of the departmental strategies and the corporate strategic plan. Working on strategy is not so very difficult if you focus on understanding what you are trying to achieve.

Conclusion

Strategic thinking is often described as reflective dialogue about the future so that one can avoid pitfalls as well as take advantage of opportunities. Strategic thinking is more about effectiveness and considers transforming change, while strategic planning centers on achieving greater efficiencies through incremental change. Strategic thinking is understood as a deliberate and creative process as well as the resulting state of mind. Strategic Thinking allows proactive thinking beyond your current activities and traditions deals with change positively by responding to it effectively involves making decisions that consider changes or anticipated changes in the environment Strategic Thinking is not a one shot deal a box of tricks or bundle of techniques a quick fix to solve immediate problems Without comprehensive Strategic Thinking the organization risks making quick decisions that lack the creativity and insights derived through a Strategic Thinking process.

Important Facts about Strategic Planning

Every person has a goal; regardless of what areas of their lives it is being associated. A goal will remain a goal unless it was successfully achieved. Many would ask why some people are successful and some are not. Well, the answer lies on strategic planning.

Strategic planning is the process of developing strategies and defining objectives to reach a particular goal or set of goals. If you labeled your planning as “strategic” then you must expect that it would perfectly operate on a grand scale. It will achieve success in a broader field.

It is very different from “tactical” planning which focuses more on individual detailed tactics of activities. “Long range” planning however projects current programs and activities into a modified outlook of the outside world where it describes the phenomenon that will likely occur.

Strategic planning is creating more desirable results in the future through influencing the external world, and adapting current actions and programs to achieve a more favorable result in the outside environment.

There are different reasons why most people are doing strategic planning.

1. To acquire the capability in obtaining the desired objectives.

2. To fit well on both the organization’s core competencies and resources, and to the external world. Make sure that your plans are appropriate and feasible.

3. To acquire the capability in providing competitive advantage that is sustainable within the organization.

4. To prove that it is flexible, dynamic, and adaptable even to changeable situations.

5. To be sufficient in providing favorable results without cross-subsidization.

These advantages will not be realized without its methodologies. Strategic planning depends on STP (three-step process) process. “S” for situation where it was been thoroughly evaluated, “T” for Target where goals and objectives are defined, and “P” for path where the routes of goals and objectives are clearly mapped.

However another alternative approach can also be used. It is known as the Draw-See-Think-Plan procedures. “Draw” creates the desired image and achievements. “See” evaluates current situation and detects gaps between ideal situation and current situation. “Think” develops specific actions that must be done to bridge the gaps between ideal situation and current situation. “Plan” lists down required resources for the execution of activities.

Strategic planning is also considered a set of creative and logical steps.

1. It clarifies the objectives to be achieved. These objectives are ranked according to the level of its importance. It can either be TRO (Top Rank Objective), 2nd Rank Objective, 3rd Rank Objective and so on. The lower rank objectives answers the “How” question while higher rank objective answers the “why” question. However TRO is exempted because the objective here is defined.

2. It gathers and analyzes the information. It includes internal assessment on resources, and external assessment which include environmental scanning. Morphological analysis is used by both internal and external assessments. SWOT analysis can also be incorporated to assess the aspects of environments and organizations that are essential in achieving the strategic plan objectives.

3. It evaluates objective feasibility in the SWOT view. SWOT is the acronyms which stands fro Strengths, Opportunities, Weaknesses, and Threats.

4. It develops strategy involving SWOT.

5. It develops action programs creating a more attractive strategy.

To summarize everything, strategic planning provides overall strategic direction on the core management of the company. It gives a more specific direction in areas such as marketing strategy, financial strategy, human resource strategy, organizational development strategy, and deployment information technology strategy to achieve success.

The Best Laid Strategic Plans

The goal of long – term planning is not to strategize but; to prepare key minds to make sound decisions.

Background.

Most companies invest a significant amount of time and effort in a formal annual strategic planning process but, many executives see little benefit from the investment. One manager told us, “our planning process is like a primitive tribal ritual; there is a lot of dancing, waving of feathers and beating of drums. No one is exactly sure why we do it but, there is an almost mystical hope that something good will come out of it.” Another said, “it’s like the old communist system. We pretend to make strategy and they

pretend to follow it.”

Management thinker Henry Mintzberg has gone so far as to label the phrase Strategic Planning an oxymoron. He notes that real strategy is made informally, in hallway conversations, in working groups and in quiet moments of reflection on long plane flights, even on the golf course but, rarely in the panelled conference rooms where formal planning meetings are held.

Our research on strategic planning supports Mr. Mintzberg’s observation. We found that few truly strategic decisions are made in the context of a formal process. We also found that when approached with the right

goal in mind, formal planning need not be a waste of time and can in fact, be a real source of competitive advantage. Companies that achieved success used strategic planning not to generate strategic plans but as a learning tool to create “prepared minds” within their management teams.

A former senior executive at GE Capital explained the logic of such thinking. Business is often unpredictable. Two competitors merge, another develops a new technology, the government issues new regulations and market demand swings in a different direction. It is often during these real time developments that a company’s most important strategic decisions are made. Too often however, companies react poorly under the pressure because they are not well prepared for these unpredictable events. Discussions among top managers are often based more on opinion than fact, and the subsequent decisions end up being based on gut instinct rather than thoughtful analysis. GE Capital however, believes it gains a competitive advantage by following a disciplined strategy process that focuses on preparing it for the uncertainties ahead.

As our analysis makes clear, real strategy is made in real time. It follows then the goal of a formal strategic planning process is to make sure that key decision makers have a solid understanding of the business, share a common fact base and agree on important assumptions. These elements of the prepared mind serve as a foundation upon which good strategic decisions can be made throughout the year. One of the most important ways of building that foundation is by getting the central elements of the process right.

How to create prepared minds?

Most strategic planning processes are built around a set of annual or other time period meetings in which the chief executive officer and senior corporate team review the strategies of the company’s business units or divisions. The chief executive and top team typically meet separately to discuss corporate strategy as well.

We found the key to transforming these review meetings from “dog and pony” shows into effective vehicles for learning was to view them not as reviews by the chief executive but as conversations. The difference is that a conversation is a two way street in which participants learn from and challenge on another. The goal is for everyone to leave the room much better informed than when they went in. Achieving that outcome requires a lot of preparation by all the participants.

Who should attend reviews?

At the E.D. Smith Company in Canada, they believe real conversations take place in groups of three to ten people, no more. E.D. Smith simply do not believe that effective results will be achieved in large groups for both logistical and political reasons. Llewellyn Smith, the former President and Chairman of the E.D. Smith board believes that once the group grows, it is difficult to ensure that everyone can participate meaningfully so hierarchical forces are more likely to come into play. Rather than frank discussion, in larger groups one is more likely to see posturing and politicking. Some companies in our study tempted by the values of inclusion, brought in groups of thirty or more to their strategy reviews. These discussions were inhibited and people came away feeling the exercise had been more of a show than a real dialogue about critical business issues.

In reality, there are only two essential participants in a business unit strategy review; the chief executive officer and the business unit leader. Everyone else is discretionary and should be included only if he or she is truly a decision maker. The number of decision makers varies from company to company but typically includes the corporate chief financial officer, the group executive that the business unit reports to, the head of human resources, one or two senior corporate executives and two to three senior members of the business unit team. The corporate head of strategy also usually attends as the person responsible for making sure the conversation is effective. Thus, the total number of participants can be kept to between five and ten, with twelve as the maximum. People will fight to be included in these meetings but, other forums can be set up to keep them informed and get their buy in.

How long should reviews be?

It’s not possible to have an in depth strategy discussion about a significant business in less than a day. There are simply too many topics to cover such as customers, competitors, technology, regulation, risks, investments, market segmentation, resources and more. Spending less time in these areas prevents the careful poking and prodding of issues required to get the full benefit from the effort. It may sound like a lot to commit a full day to each major business unit, but most chief executives we interviewed said they wanted to spend about a third of their time on strategy.

Given two hundred and forty working days in a year, that leaves eighty days to devote to strategy. In that context, it seems reasonable to expect the chief executive to spend ten to thirty days in intensive, well – prepared strategy discussions. As one Emerson Electric executive told us, “At first I resented the Emerson process because it was such a large commitment of time, but then after a few cycles I realized it was making me and my team better managers. The process of preparing for it and the meetings themselves made us realize things about our business we wouldn’t have found out in any other way.” Former chief executive Charles F. Knight said that “more than half my time each year is blocked out strictly for planning,” a commitment to strategy that has been carried on by his successor, David Farr.

Where should planning meetings be held?

It is best to hold planning meetings off site. Holding the meetings off site will minimise the distractions of day – to – day business at corporate headquarters, allow participants to focus on the task at hand and allow for free time for participants to caucus in an environment free of the daily challenges.

What should be discussed?

Many companies combine their strategy reviews with a discussion of budgets and financial targets. That is a big mistake. When the two are combined, the discussion is dominated by a focus on the numbers and short-term issues; long term strategy questions receive only cursory attention. Likewise, if there is no other forum in which to discuss the financials, they will inevitably come up in the strategy meetings. Ideally, companies should have two clearly demarcated meetings: one full day on business – unit strategy and another meeting at a different time of the year to set financial targets. The two should then be linked with a common, rolling three to five year financial plan that ties together strategic initiatives with budgets and financial targets. Such strategic linking is crucial.

Focus on long term trends, opportunities, challenges and decisions are crucial. In businesses where decisions have a long lifetime and are difficult to reverse, such as aerospace or telecommunications, long term might mean five to ten years. In those where commitments have a shorter life, such as software or consumer goods, it might mean two to four years.

The discussion should focus on questions over the appropriate time horizon such as: What are our aspirations? What are the critical trends regarding customers, competitors, technology and regulation? How is our business model performing and how will it likely evolve? What are the key challenges and opportunities we face? What capabilities do we need to build for the future? What are the key risks and uncertainties we face? What can we do to ensure our adaptability, flexibility and profitability?

How should the conversation be conducted?

The main purpose of the discussions is to challenge the strategy by testing assumptions about the market, checking that a full range of strategic choices is considered, exploring potential opportunities and risks, and forcing an honest assessment of the business’s strengths and weaknesses.

An organizations culture will dictate the tone of the discussions, and there is no one right culture for planning. Good strategic planning can emerge from the in – your – face culture of Emerson Electric or the more genteel culture of Hewlett – Packard. There are however, certainly some wrong ways to conduct strategic planning conversations. Sometimes business – unit heads, resentful of what they see as “interference from corporate,” try to reveal as little information as possible; on the other side, senior corporate leaders at times turn the meetings into a game of “gotcha,” seeking all the skeletons in the business unit’s closets.

Exploring the strategy’s boundaries and pushing the business team to explore worst case scenarios.

The conversations can be hardnosed, but it is important to create an environment that does not become an “us verses them.” In a firm such as Emerson, where staff are able to challenge one another, it is done by exploring the boundaries of the strategy – pushing the business team to explore worst – case scenarios and understand what might make them come true. Testing to see if aspirations could be ratcheted upward; or investigating the competitive implications of a radical cost reduction or product performance improvement are a given.

It is also fine to create an collegial atmosphere, as long as it does not devolve to the point where uncomfortable issues are glossed over or buried. One company we studied never made an effective strategic plan because it was so consensus oriented. Tough issues simply were postponed until another meeting because the members of the management team were not able to confront one another and an empathetic management relationship evolved.

How much preparation is necessary for these meetings?

Preparation by the principals is the key to making a full day strategy discussion pay off. The tasks should not be outsourced to staff people. A document detailing the strategy should be sent out at least a week before the meeting, allowing participants the time they will need to study it. That will prevent people from having to take the time to read and understand the slides for the first time. Instead, participants will come ready to ask questions and debate the issues.

The corporation should provide the business units with a template that serves as a guideline for analysis. Templates should define the company’s current position in terms of customers, products or services and market segments; assess the future direction of industry, including customer trends, competitor actions, technology changes and globalization; and determine major opportunities and threats facing the business. It is also helpful to share with units the best plan of the previous year to create a gold standard of what is expected.

Each unit should be given a lot of latitude. Every business unit is different, and one size does not fit all because, in some cases templates can obscure more than they reveal. Also, strategy reviews are a great way for a chief executive to check out the quality of the company’s managers. If there is too much corporate guidance, it becomes harder to tell the real strategists from those who are merely good at filling out templates.

What follow – up is needed?

Disciplined follow up is essential. Long term strategic goals should be tied to shorter-term budgets, financial targets, operating plans and human resource strategies. In companies that had a good process, the chief executive personally took detailed notes; wrote a three to four page memo to the business unit of division management summarizing the main themes, implications and commitments; and used the notes as a starting point for the next review. The goals should also be incorporated into the compensation plans of the unit management team. Follow – up assures the strategic plans do not lie ignored on the executive bookshelf. Rather, they are living documents that drive actions and performance.

Prepared minds in action.

How does one judge the success or failure of the strategic planning process? Not by whether the written plans are good, or whether everyone felt good afterward, or even whether any big decisions were made during the meetings. The ultimate criterion is whether all the participants came out of the process better prepared for the real job of strategic decision making. In our research, we saw many examples in which the right process led to that result.

Consider how rigorous planning helped a multi – business industrial goods firms expand internationally. Unexpectedly, its automotive parts division faced the opportunity to acquire two large businesses in Germany, where it had not been a significant player. Because the company was new to the market and would need to commit significant resources in order to succeed in it, the decision was risky.

Fortunately, the chief executive, the corporate team and business unit team members had engaged in extensive strategy discussions and therefore already had a point of view on the German market and the strategic fit presented by the opportunity. As well, a thorough understanding of the economics of the product area in question was solidified. The company was able to make a decision quite quickly and out negotiate a slower rival that was not as well prepared. The acquisitions were critical to the success of the company’s growth strategy.

Similarly, Stryker Canada a medical device company used its strategic planning efforts to focus on a new growth area. The strategy review revealed the divisions core business, while enjoying a large market share and excellent profitability, was slowly becoming commoditized. Looking at demographic factors, company executives realized orthopaedics applications would be increasingly important. More weekend athlete Baby Boomers were blowing out their knees and hips. Over the course of a few years, the company engaged in various activities as a result of that insight. It generated material breakthroughs in the lab that suggested innovative ways of creating orthopaedics devices, acquired a business that could be a home for further sports -medicine activities, and pursued licensing opportunities to extend the product offering. The management team was bale to put the pieces of the puzzle together because it was clear on the scope of the growth opportunity and the need to act in the face of potential declines in its existing business.

Diligence is key to prepared minds in action.

The reverse of the two above scenarios are clearly illustrated in the E.D. Smith, Canada acquisition of GEM, Mississippi. Senior management officials at E.D. Smith were told by reliable food industry sources that they had to expand to the United States in order to stay abreast with customers as they expanded their market and became more global in their strategic challenges. Llewellyn Smith, then President and Chairman of the Board for E.D. Smith left the task to one man to make all decisions as it related to expansion. Not well prepared for the task (through no fault of his own), the person committed E. D. Smith to purchase GEM Industries in Byhalia, Mississippi from a Toronto business man.

Few, if any business unit team members were engaged in strategy discussions. Strategic acquisition analysis was none existent and a thorough understanding of the economics of products, technology, market for labour resources and geographic cultural was not evaluated. As a result, after spending approximately ten million dollars and various corporate resources in a two year period, E.D. Smith sold all of its interest in the company and went back to Canada.

Although E. D. Smith did solidify the WalMart, Sams Choice and HEB. jam business for the Southern United States, Llewellyn Smith later stated that this could have been accomplished by using the Canadian resources at the existing plant in Winona. The company eventually recovered and managed to return to profitability but, at a significant cost.

Prepared minds can also help companies reject moves that do not make sense. A company with a large aerospace and defence division invested a lot of time in its strategy reviews to ensure top managers understood the economic implications of consolidation in its industry. Instead of accepting the standard line from the industry press and pundits, the participants looked in detail at what it meant for their specific subsectors of the industry and their own future economics.

They were not gullible when their investment bankers came to town arguing that the company needed greater economies of scale to survive and proposing a specific acquisition target that would soon be for sale. Armed with an appreciation of the business and aware of the strengths and weaknesses of competitors, top management chose not to do the deal – which in hindsight proved to be the right decision. Their preparation enabled them to sort out sensible deals from foolish ones and avoid a potentially costly and distracting mistake.

Contrast that outcome with events at an agrochemical firm where poorly prepared leaders were required to respond to market challenges. Growth in the company’s industry had come primarily from the development and sale of genetically modified seeds (GMS).

At one point, the company’s seed division held a brainstorming session to talk about new growth opportunities. European colleagues raised the possibility of a backlash in their home countries against food grown from GMS but, a corporate senior executive who had joined the discussion was unhappy with this negative view of the business and took the topic off the table.

Later, European consumers did indeed object to GMS foods and the company was blindsided by the rapid decline of its European seed business. That outcome might have been avoided if the company had a formal process for fact based, open minded discussions of business unit risks among senior corporate and business unit leaders. In the absence of such a process, the whim of one senior executive overrode the concerns of the business unit.

Summary.

As these examples suggest, there is no reason strategic planning should be the butt of cynical jokes. It is one of the most important tasks for corporate and business unit executives.

Companies whose processes look more like tribal rituals waste valuable executive time at a minimum and more seriously, they may leave corporate leaders unprepared to respond properly when the inevitable moments of truth arise. When repositioned as a learning process, formal strategic planning can help managers make solidly grounded strategic decisions in a world of turbulence and uncertainty.

Strategic Planning Using Strategic Filters and Wildly Important Goals

Abstract

The strategic planning process can take many paths. It can require months of preparatory analysis or simply use the collective knowledge of the management team. Either method requires that the company make decisions on its future course. In this paper we will show how to use Strategic Filters as a way to sift through the data and make the best decisions. Then, we will focus these decisions into a few Wildly Important Goals (WIGs) that will be resourced and completed.

Strategic Planning: Strategic Filters & Wildly Important Goals

  • Driving Force Filter – The Competitive Advantage you can Prove
  • Emerging Trend Filter
  • Customer Filter
  • Wildly Important Goals
  • Strategy Map

Driving Force Filter

The driving force is the key differentiator or competitive advantage of the company. The most important element of the driving force is the proof. If you want your employees and your customers to believe it, then you must find the data that backs up your claim.

Here is a list of things that are NOT acceptable examples of driving force:

  • Knowledgeable employees
  • Customer Service
  • Quality
  • Trust
  • Responsiveness
  • Reputation
  • Innovation
  • Etc.

The reason these are not good examples is that any company can claim these and everyone is saying it. If everyone is saying it, then no one will believe it.

Here are some driving force examples that the marketplace can believe are real differentiators:

  • Innovation / Experience – We invented surgical-adhesive to replace sutures. The use of surgical-adhesive reduces surgical time by 20 – 90% with lower risk of infection.
  • Speed – We will produce any custom product in 2 weeks or less versus our competitors who are at 6 weeks or more.
  • Rugged – We produce the most rugged portable power generation equipment for military use. Our mean-time-between-failure is 10,000 + hours.
  • Customer Service / Training – We trained 1580 customer-mechanics in service/repair techniques last year and have two mechanics dedicated to assisting customer-mechanics over the phone.
  • Product Leadership – We are the only Consulting Firm in the Midwest with experience applying quantitative process improvement tools to streamline sales and marketing; reducing costs and growing sales.

Once you know and agree on the Driving Force for your company, you can use this to understand:

  • What you did to be the best
  • The core competencies that support your Driving Force
  • How you stay the best

Emerging Trend Filter

Emerging trends are outside forces that you cannot control and may impact your business. These may include:

  • Economic/monetary trends
  • Political/regulatory trends
  • Social/demographic trends
  • Market conditions
  • Customer attributes/habits
  • Competitor profiles/mix
  • Technology evolution
  • Manufacturing capabilities
  • Product design/content
  • Sales & marketing methods
  • Distribution methods/systems
  • Resources – natural/human/financial

We want these to be a strategic filter because they may require you to change your business model beyond internal competencies and customer requirements. They will impact how you:

  • Sell
  • Distribute
  • Purchase
  • Plan acquisitions
  • Develop new products and services

We have lived during a time of great external disruption. Books and newspapers are a great example. Amazon changed book buying by making almost every book ever published available, either new through its warehouses or used via used-book partners. Instead of buying just what is in the bookstore you can buy whatever you want, get recommendations for new books based on what you previously bought and read comments from other consumers before you buy.

Then Amazon changed again by offering the Kindle E-reader linked to its online bookstore. Now you can have thousands of books 1 minute after you, buy delivered wirelessly over cell networks. Newspapers and magazines are delivered to your Kindle every night at 3 AM. No ink, no printing, no late or missing delivery service, no problem when you travel. Instead, you get perfect service.

Now we now have the iPad from Apple, which promises to embed graphics and videos within books, magazines and newspapers. This will incorporate the e-delivery features of the Kindle and make the reading experience completely different.

Printers and Publishers needed to see these trends coming, to survive and thrive. These developments can shut down huge companies and make others clear winners.

Other trends of note are environmental/clean-tech, monetary/interest rates and global markets/supply chains.

Customer Filter

Understanding your customers completes the filter-puzzle and will allow you to make the best decisions on your strategic plan. A significant time is spent understanding who are your best customers. We recommend a quantitative approach of choosing the key measureable characteristics that are important to your organization and then using Pareto Analysis to sort your customers from best to worst based on these measures.

Once you know who your best customers are you can determine the characteristics that they share. Communicating through the sales force or directly with these customers you need to ask two critical questions:

  • Why do they buy from you?
  • What pain do they have?

At the end of the Customer-Filter session you will know:

  • Who your best customer are
  • The characteristics of the best (what differentiates them from everyone else)
  • Why customers buy from you
  • What pain customers have that you may be able to solve (with special emphasis put on the best customers

Wildly Important Goals (WIGs)

With all the preparatory work complete you can now create your strategic plan. The best companies always focus on achieving a few wildly important goals. Everyone in your organization is working on the important things every day. Serving customers, delivering product, coaching employees, buying, etc. are all important and need to happen every day, week and month. Strategic Planning looks out on a longer time horizon. Therefore we need to go above the important and focus on a few (3 or less) Wildly Important Goals that will take longer but will create breakthrough results for your organization.

This focus gives the plan a sense of reality. Lots of organizations try to do too many things and end up either not getting most done or doing an average job. You want to be great!

These WIGs can include:

  • Acquisitions or divestitures
  • Major capital expenditures
  • Product development
  • Geographic expansions
  • Entire new businesses or brands
  • Marketing campaigns
  • Globalize the supply chain
  • Internal process improvement efforts (Lean Six Sigma)
  • Implementing new information technology systems
  • And endless other ideas

Strategy Map

The last step is too align the organization with the Wildly Important Goals. A Strategy Map is a simple tool to visually show how each department is going to support each WIG.

To view an example of a Strategy Map go to http://supplyvelocity.com/whitepapers.asp.

The example you will see is of a medical technology company whose Wildly Important Goals was to dramatically ramp-up new product development. The map shows how Marketing, Research, Development/Engineering and Manufacturing all support this strategy.

Creative Use of KPI-SWOT Strategic Planning

A key performance indicator SWOT is an assessment tool of crucial outcomes of the performance of a particular company or an essential indicator of exact health status of an institution. Key performance indicators are procedures that stakeholders and managers use to determine their firm’s achievements. SWOT analysis an approach to planning which involves the checking and measuring of performance against expectations. This type of strategic planning is known as performance-driven planning. Strategic planning key objective is to instigate and agree on effective strategic planning processes.

This article focuses on how the SWOT analysis creates, classifies and prioritizes key performance indicators and identifies internal potential and weaknesses and external opportunities by conducting an environmental assessment. The swot analysis strategy is a tool used to conducts brainstorming to come up with ways to improve the performance of an institution and minimize the weaknesses and threats and augmenting strengths. There are several procedure involved in strategic planning engine: the performance of kip SWOT-idea cross impact analysis, formulating of plans, objectives, missions and goals.

After selecting the proposed plan, strategic planning engine performs a cross-impact analysis to establish the impact of the proposed plan on the firm’s ability to accomplish its kip-SWOT. It is also the role of strategic planning to finalize and implement, monitor and evaluate plans and their influence on strategies and goals of the institutional kip-SWOT. For an institution to come up with an effective working set of kip’s SWOT, the organizing committee must create a scheme of prioritizing the company’s activities and events. The main aim is to develop a feasible plan that represents the long-term survival and development plan of the organization.

It is advisable for the company to formulate a number of prospective plans so as to be in a position of trying out some of them to come up with the best and most effective plan that is compatible with the company’s objectives and goals. For a performance driven plan to be effective, valuable measures must be implemented and its value ascertained. Identification of SWOTs is crucial because successive steps in the course of planning for accomplishments of the chosen objective may result from the SWOTs. First, the committee members must make certain whether the objective is achievable, given the SWOTs. If it is not attainable, the organization must come up with different objectives and the process should be repeated again.

Once an appropriate SWOT has been established, the strategies should be sufficiently defined and correctly categorized. As they plan this data, organizers should also create a kpi update calendar that shows each data cycle and knows when new numbers will be there, who will gather the data, who will be in charge of the reports, calculations and giving out the outcome. All members of the company should agree upon a certain plan and should work together to ensure that their business achieves its long-term objectives and becomes successful. SWOT analysis is an effectual development tool that companies should use to assess their performance and identify various situations that will assist them to attain their objective goals.

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