Strategic Management PDF

Strategic Management Strategic Management: Overview Defining strategy Benefits of a strategic management process Key stages in a strategic management process – Strategic planning Stakeholders Vision and...

Strategic Management Strategic Management: Overview Defining strategy Benefits of a strategic management process Key stages in a strategic management process – Strategic planning Stakeholders Vision and objectives SWOT analysis – Internal analysis – External analysis Crafting strategy – Strategy implementation – Strategic control  References Olson, K. (2011). Economics of Farm Management in as Global Setting [James Joyce Library: SLC 630.68 OLS] – Chapters 7, 8, 9, 10 – Earlier draft of this material: Olson, K. (2001). A Strategic Management Primer for Farmers. Staff Paper P01-15. Dept. of Applied Economics, University of Minnesota See PDF on Blackboard (Supplementary Materials Folder) An alternative for Equine students Eastwood,, S. et al. (2006). Business Management for the Equine Industry [Vet Library 636.1083 EAS] – Chapters 4, 5, 6, 8  Strategy Strategy is the pattern of actions used by a farmer/business manager to accomplish goals and objectives. – Moves and approaches to: Strengthen the farm’s position Satisfy customers Achieve performance targets Accomplish long-term vision Having a strategy helps the farmer make reasoned, cohesive and consistent choices among alternative courses of action in an uncertain world  Strategy: Four Questions What do we want to achieve? Where should we put our efforts, and why? What resources do we have available? What do we need to do to compete, survive and meet our goals? Answering these questions is not a one time event In reality, a farmer’s actual strategy is partly planned and partly reactive to changing circumstances Strategic Management Involves: – Planning/developing a strategy – Implementing the chosen strategy – Controlling the outcomes of the strategy implementation – Adjusting the chosen strategy over time as time and conditions change  Strategic Management Strategic Planning – Identification of stakeholders – Development of vision and objectives – SWOT analysis Internal analysis External analysis – Crafting strategy Strategy Implementation – Obtain and organise farm resources – Direct the resources Strategic Control – Measure and evaluate farm performance – Monitor external events – Take corrective actions as needed  Strategic Management “Positioning” the business to achieve objectives “A farmer develops a strategy by understanding the business environment, seeing where and what is happening, looking for strengths and weaknesses in both his/her own farm and in the competition, and then the farmer takes steps to position the business to take advantage of opportunities, to protect it from threats, and to help accomplish goals and objectives.” Olson (2001)  Helps keep the farmer/manager focused on what is important to the success (or failure) of the business Filter out distractions (e.g. short- term opportunities) that do not fit with the longer term objectives Advantages Can evaluate potential opportunities and threats for their ability to contribute to the strategic goals of of Strategic the manager The strategy can guide day-to-day Planning decision-making Without strategy the farmer/manager may drift along without any clear idea of where the business is heading in the longer-term  A good strategy development and management process will:  Provide better guidance on the crucial point of what the farmer/manager is trying to achieve  Make the farmer more alert to the winds of change, new opportunities, and threatening developments  Provide criteria to evaluate alternative investment options: resources should be steered into strategy-supportive, results-producing areas (not the first apparent ‘good deal’ that comes along)  Unify decisions across the different management areas of the business towards a common set of long-term objectives  Create more proactive management style and counteract the tendency for decisions to be reactive or defensive  Allow flexibility for adjustment to produce sustained success in a changing environment  Help farmers become better decision makers  A systematic approach for: – Setting objectives – Evaluating the business and its environment – Determining a route map for longer-term development of the business to achieve its objectives. Strategic – Strategic Planning process: Planning – 1) Identification of stakeholders – 2) Development of vision and objectives – 3) SWOT analysis 3a) Internal analysis 3b) External analysis – 4) Crafting strategy  (1) Identification of Stakeholders More than just the farmer Internal and external stakeholders Internal: farmer, farm family, business partner(s), employees External: bank manager/lender, customers, suppliers, government, wider community/public If certain stakeholders ignored: conflict will occur – Do members of the management team (the family) share the same values, business philosophy and business ethics?  (2) Vision and Objectives Crucial in defining the strategic direction of the business Businesses that are able to clearly communicate who they are and what they stand for are often more successful than those that don’t have a true understanding of their focus. Reflection of the values and purposes of the management Can be a challenging and time-consuming process but very rewarding if done properly – Provides strong foundation on which to make business decisions  Vision Statement A strategic vision is what the stakeholders want the farm to look like 10 years or more into the future – Example questions in developing a vision: What products and activities? How big? Who will be involved and where? How will it be organised Who will be the customers? What will the farm be good at? Examples: – “We will be low-cost leaders in milk production through our choice of technology, production practices and science-based decisions.” – “We will be a profitable, sustainable, and expanding producer of cereal crops demanded by the Irish feed industry” – “We will be the premier supplier of organic beef and lamb to Good Herdsmen Ltd.”  Mission Statement A mission statement defines a farm’s current business direction(s) – Deals more with the present and very near future (vision deals with the long term) – It should use a customer orientation (not a production orientation) – Developing a customer orientation, think: Which consumer/customer groups are being satisfied? What and how are customer needs are being satisfied? Customers: final consumers and processors of farm products Complete the mission statement … – “We, [the farm, farmer, and others involved] – will [plans and objectives] – By [the process] – So that [customer’s needs being met].”  Example Mission Statements “Rosy-Lane Holsteins mission is to care for our animals by balancing production and profitability, while protecting natural resources (air, land and water) and providing a comfortable living for our family and employees. Specifically, we provide superior Holstein genetics to worldwide markets; utilize and experiment with profitable and environmentally sound technologies for plants and animals; maintain an economically viable business unit with future potential; and produce high-quality milk and receive maximum returns with minimal inputs.” “Morningside Stud's mission is to breed and compete international Grand Prix / 4* competition horses for the Olympic disciplines of showjumping and eventing by crossing world-class warmblood sires with mares that possess outstanding performance bloodlines and athleticism; to compete our stallions in international showjumping and eventing; and to sell outstanding horses to international riders, sponsors, competition stables, and excellent breeders throughout the world."  Objectives Specific, measurable performance targets based on the mission statement Track performance and progress toward the vision – Financial targets (e.g. profitability, cash flow, borrowing, net worth) – Technical targets (e.g. efficiency, quality improvement, changes to farming system, growth of the business) – Both long-term and short-term objectives (steps towards the longer-term goals) Objectives should: – Focus on important issues SMART – Specific, Measurable, – Be specific, precise, measurable Achievable, Relevant, Time-scaled – Have clear time scales – Reflect potential capability (realistic) – Require “stretch” i.e. “challenging but achievable” Multiple goals – Balanced Scorecard approach  (3) Strengths, Weaknesses, Opportunities, Threats (SWOT Analysis) Two elements: a) Internal analysis: strengths and weaknesses within the farm b) External analysis: opportunities and threats in the farm’s external business environment  (3a) Internal Analysis of the Farm Three key questions for internal analysis: i. How well is the present strategy working? on par, better, worse???? ii. What are the farm’s strengths and weaknesses? iii. How strong is the farm’s competitive position? Are the farm’s costs competitive with rivals?  i. How well is the current strategy working? What is the farm’s current financial condition and performance? Examine results of past strategic and operational decisions Performance indicators: profitability, solvency, liquidity, repayment capacity, efficiency al terms used in ratios, where they come into play Competitive advantage?: having a profit rate higher than the industry average – Profit rate: Rate of return on assets (ROA) Four building blocks to competitive advantage: – Superior efficiency – Superior quality – Superior innovation – Superior customer responsiveness  ii. Strengths and Weaknesses Identify and list strengths and weaknesses: – Strengths = core competencies, e.g. what do we perform well relative to our competitors?; what characteristics of the business gives us a competitive edge? – Weaknesses = a condition or characteristic that puts us at a disadvantage Many strengths and weaknesses follow from a systematic financial analysis Others may be identified by reviewing the functional areas farm in terms of: – Tangible resources – Intangible resources Do these give us any advantages? – Capabilities  iii. Strength of the Competitive Position The ability of the farm to improve or maintain competitiveness Based on the internal and external analyses the farm can be evaluated for the signs of competitive strengths and weaknesses: Signs of competitive strengths: – Important core competencies – Distinctive strategies could get a list like this in a an MCQ example: which ones of these aren't a strength – Cost advantages – Good match between farm’s strategic product groups with the industry’s growth areas – Above average profit margins – Taking advantages of cost economies – Above average technological and innovation capability – Creative and entrepreneurial management – Capable of capitalising on opportunities – Possessing skills in key areas  Strength of the Competitive Position (cont’d) Signs of competitive weaknesses: – Lack of clear direction – Losing ground compared to other farms – Below average growth – Short on financial resources – Poor strategic product groups compared to industry growth – Weak where best growth potential is – High cost producer costing a lot more then other farms to produce the same – Not able to take advantage of cost economies – Poor quality of skills in key areas  Are Costs Competitive? Cost Analysis… lower cost might mean lower quality, lower sot but Major source of competitive advantage: lower unit costs try maintain quality... cheap meal mightn't be worth it etc Comparative analysis with other farms (and countries perhaps) – Costs per tonne of crop, per kg of beef, per litre of milk, etc Horizontal analysis: how costs have changed over time – Sustained competitive advantage? Vertical analysis: evaluation of costs by category to identify areas with largest potential for savings/improvement (e.g. fertiliser, sprays, contractor) anywhere we could so thigs cheaper etc Value chain analysis: breaks down the whole process by activity to analyse outputs and costs and to identify where efficiencies can be improved (use of enterprise gross margin accounts) Benchmarking involves comparing costs and physical efficiencies of activities with recognised standards (e.g. Teagasc farm management standards) eg, other farms – Farmer discussion groups  3b) External Analysis of Farm Business When formulating strategy for farm it is important to evaluate external conditions that impact on the business – Opportunities and threats – Important not to be too blinkered – Factoring in an understanding the business environment makes for better strategies But potentially lots of things that need to be considered in a sound analysis of the external business environment …  (3b) External Analysis of the Farm i. What are the conditions and trends in the macro environment? – Macroeconomic environment PESTEL: Political, Economic, Social, looks at – Technological environment these Technological, Environmental, Legal aspects – Social/demographic environment LoNGPESTEL: consider Local, National and – Policy/legal environment Global aspects ii. What are the industry’s dominant economic traits? – Market size – Market growth rate and where the industry is in the growth cycle – Ease of entry to the sector – Number of ‘players’ and their relative sizes – Pace of technological change – Presence of economies of scale – Industry profitability iii. What is competition like and how strong are each of the competitive forces? – Porter’s model (next slide)  External Analysis of the Farm (cont’d) Porter’s “Five Forces Model” plus 2 4. how easy or difficult is id for people to enter into the market you are doing. eg swapping form sheep to beef. if its more diff. then its an advantage to you. 4. 1. competition or completive rivalry - the number of competitors we have# 2. the supplier you have 2. 3. 3.who is buying your products. for your farm business. how 1. how much power does customer many supplier are there, are you have on price they are paying, limited? how much power do do they have a lot of options? they have on how much this can push down price of you will pay product 5. 5. selling crops, or services (contacting) - how easy it is for your customer to change to a competitor.. eg changing contactors, if they in a contract, harder to switch and makes a competitive adv for you  External Analysis of the Farm (cont’d) iv. What is causing the industry’s structure to change? – Changes in the long-term industry growth rate – Changing buyer preferences/profiles – Technological change – Marketing innovation – Entry or exit of major players – Increasing globalisation of the industry – Changes in cost and efficiency – Regulatory influences and government policy changes NB – Changing societal concerns, attitudes and lifestyles NB – Changes in the level of uncertainty and business risk  External Analysis of the Farm (cont’d) v. What key factors will determine competitive success in the industry environment? Key Success Factors (KSF) – Technology-related – Production-related – Distribution/Marketing-related – Skills-related (e.g. organisational capability) – Others, e.g. reputation, location, access to capital and/or other resources  External Analysis of the Farm (cont’d) vi. Which farms are in the strongest/weakest competitive positions? – What are the characteristics of the strongest? And the weakest? – Characteristics: size, location, production methods, equipment, labour/skills, specialisation, diversification, vertical integration, etc – Who is likely to make what strategic moves next? vii.Is this an attractive industry and what are the prospects? – Putting all the above together: Overall assessment of the industry’s attractiveness/unattractiveness Profit outlook Special issues and problems  SWOT: Strategic Issues to be Addressed “Putting it all together” – Synthesis of internal and external analyses – What strategic issues need be improved, changed, etc. – This identification of issues is the beginning of crafting strategy The SWOT should consider: – How should the strengths be used? – Which weaknesses are critical to success? i.e. which need to be improved – Which opportunities can be taken advantage of? – Which threats are potentially destructive? – Will our combined response to these generate particular synergies, efficiencies or other benefits?  (4) Crafting Strategy Managerial process of deciding how to achieve the targeted results within the farm’s physical and economic environment and its prospects for the future – Recognises organisational resources and capabilities and the competitive environment – Good strategies are based on the competitive advantages of a business Strategy may involve: – Actions to respond to changing industry conditions (e.g. new regulations, changing demand patterns, etc) – Fresh offensive moves to strengthen long-term competitive position – Efforts to broaden/narrow product mix or alter product quality – Efforts to integrate backward or forward – Actions to capitalise on new opportunities (e.g. new technology, product innovation, purchase extra land, etc) – Defensive moves to counter against external threats – Redefining how key functions and activities are managed – Actions to improve short-term profitability – Moves to diversify the revenue base of the business and enter a new sector  Crafting Strategy (cont’d) Actual strategy that is chosen may follow a combination of generic strategies: – Low cost leadership Aim to develop a low-cost production position (efficiency) – Growth Increase scale of the farm (usually acreage) – Focus or niche Emphasis on market development: targeting a niche e.g. interest in alternative farm enterprises – Reactor Not choosing a strategy because the manager is unable to develop a competitive advantage In the long term this approach is unlikely to lead to success – Differentiation Trying to differentiate your product from that of your competitors (e.g. better quality, organic, welfare-friendly) – Best-cost provider Aim for reasonable cost but also aim for other characteristics such as quality – Retrenchment If current strategy not working Involves revising objectives and timetables toward more realistic levels  Choosing a Strategy: Scoring Proposed Strategies Vision Consistency Test – How well does the proposed strategy fit with the vision of the farmer and other stakeholders? Goodness of Fit Test – How well does the proposed strategy fit with: the external analysis of the industry and the internal analysis of the farm? Building for the Future Test – How does the proposed strategy help build competitive advantage (efficiency, quality, innovation and customer responsiveness) – Does it contribute to building resources and capabilities for the future? The Performance Test – How well does the proposed strategy contribute to achieving the objectives of the farm? Importance Test – Are important issues identified in the external and internal analyses addressed by the strategy Feasibility Test – Can it be implemented/accomplished? Resource Test – Are resources available to implement the strategy? (e.g. finance, expertise) Confidence Test – How confident that anticipated outcomes of the strategy will occur?  Scoring Proposed Strategies: Example Score each proposed strategy on a scale of 1 to 5 for each of the tests 5 indicates the best a strategy can achieve for a given test Example of scoring proposed stategies Strategy Tests (high = 5, low = 1) Building for the Future Vision consistency Goodness of Fit Performance Importance Confidence Resources Feasibility Proposed TOTAL strategy SCORE Low cost 2 3 2 3 4 4 3 3 24 New enterprise 4 4 3 4 2 4 3 4 28 Buy land 3 2 4 3 3 2 2 2 21 Organic 4 3 2 2 2 4 2 1 20  Strategy Implementation The most difficult part of strategic management – Need to keep overall vision in mind without getting overwhelmed by the details of day-to-day operations Involves: – designing the structure of the farm and aligning functional areas of management (production, marketing, finance) with the chosen strategy – Setting target dates for implementation of key stages of the plan – Assigning tasks to specific personnel – Motivating staff to accept and implement the plan – Facilitating specific training/up-skilling if required – Obtaining and directing the needed resources – Comparing actual performance with budgets – Adapting the plan and implementation to changing circumstances  Example Layout of a Strategic Project Plan Simple Example of a Strategic Project Plan for Building a Slatted Beef Shed Title of program or project: Building 5 bay slatted beef shed Reason/motivation: Achieve better operating efficiency, reduce work load and increase finishing capacity Persons responsible: Self and Jim Measurable objectives: Planning permission obtained, grant approval, loan arranged builder’s contract/ quotation finalised, Site work commenced, tanks poured, roof and walls, building finished Target dates: Planning permission by 1 March, grant approval by 15 March, builder’s contract by 30 March, bank loan approval by 1 June, Site work commenced by 15 June, tanks poured by 15 July, roof and walls by 1 September, final completion by 1 October Budget and resources €100,000, Farm labourer’s time to assist with site clearance: 5 days  Strategic Control Strategic planning and implementation are not one-time exercises – Strategic control involves evaluating farm performance during and after implementation of chosen strategy – New development/circumstances may call for corrective action performance – Reviewing changes in the surrounding environment, and making adjustments are normal, constant, and necessary parts of the strategic management process A strategic control system involves: – Choosing the key indicators that measure progress towards objectives (financial, productivity, etc) – Establishing standards against which performance is to be evaluated – Creating recording systems for the key indicators – Comparing actual performance to the established standards /targets – Evaluating the results – Taking corrective actions as necessary  Common Problems in Strategic Planning Planning under uncertainty – Difficult to prepare forecasts – Some people feel uncertainty is a reason for not planning (FALSE) – Need to examine proposed strategies under a range of scenarios (re external environment) Ivory tower planning – Out of touch/unrealistic? – Resource capabilities? – Advantage of seeking evaluation of plan by another person(s) (e.g. Advisor) Planning for present – Strategy does not include adaptations needed for future – Need to continually monitor both internal and external environment and factor that into planning – Focus more attention on vision for the future (Strategic intent) Errors caused by cognitive biases – Prior hypotheses/assumptions/bias – Escalating commitment – Illusion of control  Additional Reading See Teagasc strategic planning workbook –“My Farm, My Plan – Planning for My Future” Copy on Brightspace – Supplementary Materials Folder  Concluding Comments Strategy should change and evolve as the business environment changes and evolves – Proactive and reactive actions – Need to be entrepreneurial Other factors influencing strategy – First mover advantage – Risk – Initial competitive position – Costs or resources required – Competitors’ expected choices  Some concluding comments on FBM Farm Business Management is a challenging subject – Evidence of that in observed variation in financial performance – Requires multi-dimensional skill set Economics, production, marketing/selling/purchasing, accounting/finance, human resources Analytical and problem solving skills Ability to stand back and see the bigger picture – Business success or failure hinges on ability to manage change – Successful farm managers of the future will be those who… Understand the economics of production Maintain records and critically analyse performance Plan strategically based on defined objectives Systematically appraise business plans (viability, feasibility, worthwhileness) Carry through with focused implementation and control