Dissertation word rimskacisla - jirikoukal.com also want to thank to Doc. Ing. Miloslav Keřkovský,...

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Acknowledgements

I would like to thank to the DPC SYSTEMS company, which supported me in

my study of Master of Business and Administration. I thank it mainly for the fact that

it enabled to me to realize the obtained theoretical knowledge in practice. I am very

grateful for this opportunity.

Another person, whom I value very much and thanks to whom I was able to

complete this dissertation, is my tutor, Ing. Miloš Drdla, Dr., MBA. Special thanks to

him for having been my adviser and it was thanks to him that I gained a necessary di-

stance and a detached view.

I also want to thank to Doc. Ing. Miloslav Keřkovský, MBA, CSc. and to the

whole team of lecturers for the attention they devoted to me during all the study. The

knowledge and experience that I obtained thanks to them, are a good basis for my

further education and development of my potential.

Jiří Koukal

ii

Abstract

Not only in the Czech Republic, but also in all the European Union, play small

and medium-size firms an important role. Although their share in the total number of

all the business entities is more than 99%, we often hear about success or fusions of

big corporations and the work of their management. Exactly this news influence, to a

large degree, the public opinion and distort the view of entrepreneurial world. Exactly

on these big companies the eyes of a great part of MBA students are fixed. And that is

why a great part of the tuition, however generalized it is, is concentrated in this direc-

tion.

Primarily these reasons forced me to try to show the small and medium-size

companies with trade orientation their way. The way, at the end of which there is the

understanding of importance of strategic management for business and also the fact

that it is not only the privilege of supranational companies or perhaps a theoretical

babble of academics.

So that all the sphere of strategic management could be understood correctly

and in depth in all the context, the segmentation of this dissertation is a little upside

down. It proceeds from the practice to theory. It generalizes.

After the necessary theoretical introduction it tries to show concrete

procedures and results on a concrete company. The subsequent methodological

procedure then indicates possibilities, how to develop one’s business by means of

theoretical instruments.

The depth of individual procedures can sure always be more extensive, but it

is the same as in life. Everyone certainly knows, what instruments we need for

making a table or a chair. But if I give them to you and describe the technological

procedure as well as I can, will it be easy for all of you to make them?

That is why the final chapter - methodological procedure – indicates the way,

which everyone, who want to build a successful company, can take. It is not as impor-

tant, whether it is only a small company with ten employees, it is the way of thinking

what matters. If this procedure helps to only a single company to better results, it will

be the evidence that my work made sense.

iii

Table of Content

Acknowledgements ...................................................................................i

Abstract ....................................................................................................ii

Table of Content ......................................................................................iii

List of Figures ..........................................................................................v

List of Tables...........................................................................................vi

1. Introduction ..........................................................................................1

1.1. Brief introduction into the issue........................................................................3

1.2. Aims and Objectives of the Dissertation .........................................................12

1.4. Research Methods Used .................................................................................26

2. Strategic management of small and medium-size firms ...................... 28

2.1. Definition of small and medium-size firms .....................................................28

2.2. Strategic management in SMEs ......................................................................28

2.3. Importance of SMEs in EU and in CR ............................................................31

2.4. Alternative for SMEs......................................................................................33

3. Analysis and subsequent formulation of Business Strategy................. 40

3.1. Formulation of Business Strategy ...................................................................40

3.1.1. Revision of basic criteria of strategic management ..................................40

3.1.2. Strategic Business Unit (SBU) .................................................................41

3.1.3. Objectives of SBU following from strategic objectives .............................42

3.1.4. Generic character of SBUs ......................................................................43

3.1.5. Attitudes of „Stakeholders“ .....................................................................44

3.1.6. Conclusions of the analysis – basis for a subsequent formulation of BS ...46

3.2. Business Strategy (BS) ...................................................................................46

3.2.1. Objectives of the dissertation ...................................................................48

3.2.2. Data sources............................................................................................49

3.2.3. Theoretical concept used .........................................................................50

iv

3.3. Analytical part................................................................................................51

3.3.1. External environment...............................................................................51

3.3.2. Internal environment ...............................................................................70

3.4. SWOT............................................................................................................83

3.5. Proposal part ..................................................................................................84

3.5.1. Product portfolio .....................................................................................85

3.5.2. Price Policy.............................................................................................87

3.5.3. Promotion................................................................................................90

3.5.4. Distribution Channels..............................................................................94

3.5.5. Human Resources ....................................................................................96

3.5.6. Process....................................................................................................99

3.5.6. Strategic Planning ................................................................................. 103

3.5.7. Recommendations for implementation ................................................... 106

3.5.8. Justification of BS implementation proposals......................................... 108

4. Methodological procedure for SM of SMEs in the sphere of trade and services................................................................................................. 109

4.1. Purpose and aims of methodology ................................................................ 109

4.2. Definition of terms ....................................................................................... 110

4.3. Structure of methodological procedure ......................................................... 113

4.3.1. Objectives.............................................................................................. 113

4.3.2. Strategic analysis................................................................................... 115

4.3.3. Formulation of BS ................................................................................. 123

5. Conclusion........................................................................................ 126

6. Apendices ......................................................................................... 128

7. Bibliography ..................................................................................... 129

v

List of Figures

Figure 1-1: Usual elements of a successful strategy...................................................11

Figure 1-2: Process of strategic planning...................................................................14

Figure 1-3: Hierarchy of company strategies .............................................................17

Figure 1-4: Porter’s competition strategy...................................................................19

Figure 1-5: Porter’s five-factor model .......................................................................20

Figure 1-6: Corporate strategy according to Solution Portals.....................................22

Figure 1-7: Four-level hierarchy of strategies ............................................................23

Figure 2-1: Strategic thinking....................................................................................34

Figure 2-2: Kotler’s marketing approach ...................................................................35

Figure 2-3: 4“C“s for a customer...............................................................................35

Figure 2-4: Proces benchmarkingu ............................................................................39

Figure 3-1: Basic content delimitation of BS.............................................................47

Figure 3-2: Strategic Gap ..........................................................................................48

Figure 3-3: Scenario of future Europe .......................................................................54

Figure 3-4: Graph of productivity of DPC SYSTEMS (in CZK)................................65

Figure 3-5: Benchmarking of competitors .................................................................66

Figure 3-6: Methodology of McKinsey Company .....................................................71

Figure 3-7: Internal Benchmarking - sales.................................................................77

Figure 3-8: Internal Benchmarking - financial obligations.........................................77

Figure 3-9: Internal Benchmarking - ROA ................................................................78

Figure 3-10: “A-D” Analysis (2003/2004).................................................................81

Figure 3-11: Widened marketing mix........................................................................85

Figure 3-12: Quarterly sales .................................................................................... 104

Figure 4-1: SWOT scheme...................................................................................... 111

Figure 4-2: “4P” scheme ........................................................................................ 112

Figure 4-3: More detailed information = clearer objective ....................................... 117

Figure 7-1 Organization structure............................................................................ 128

Figure 7-2 Conservation internal margin ................................................................. 128

vi

List of Tables

Table 2-1: Selected characteristics of SMEs in Czech Republic.................................32

Table 3-1: Generic character of SBUs .......................................................................43

Table 3-2: Expectations of stakeholders ....................................................................44

Table 3-3: Structure of analytical part .......................................................................47

Table 3-4: Benchmarking - Exterier Products............................................................67

Table 3-5: Benchmarking - Interier products .............................................................68

Table 3-6: Shrnutí formou ETOP ..............................................................................69

Table 3-7: Vybrané kritéria hodnocení pracovníků ....................................................74

Table 3-8: “A-D” Analysis - terminology..................................................................80

Table 3-9: Summarization in the form of SAP...........................................................82

Table 3-10: SWOT....................................................................................................83

Table 3-11: Time line.............................................................................................. 106

Table 4-1: Scenario matrix ...................................................................................... 113

Table 4-2: Specific Aims......................................................................................... 114

Table 4-3: Steps and tools ....................................................................................... 117

Table 4-4: Gantt Chart ............................................................................................ 125

1

1. Introduction

The reason for the choice of this theme is mainly the fact that the company, in

which I am employed in the position of executive director, belongs to the category of

small and medium-size firms. A great part of the available information and methodo-

logical procedures is concentrated on large firms and that is why I feel the need to see

the strategic management in companies from the viewpoint of a small firm.

Because I perceive this situation in everyday managerial life quite strongly, I

have decided to formulate business strategy for our company and on the basis of it to

create a generally accepted methodological procedure for the strategic management in

SME with trade orientation.

Company characteristic

The DPC SYSTEMS company entered the Czech market in 1992. From the

beginning of its business activity it specialized in the sale of TOLLENS coating

compositions, for the distribution of which it obtained the exclusive commerce

representation in the Czech Republic already in 1992.

TOLLENS coating compositions are used for interior and exterior coatings,

the coating of sheetmetal elements, wooden products, floors etc. The important group

of products are acrylate, acrylate-silicone, silicate, lime or pliolite (with the possibility

of laying on at low temperatures) facade paints with antimildew and antifungi

admixtures.

Also accessory products (craftsmen tools, spraying devices, etc.) are a part of

the offer. The line of products offered has also expanded by a gradual development of

commercial activities and business relations with LAFARGE PEINTURES.

TOLLENS – paint making – was set up already in 1748 in the Netherlands.

Since 1990, TOLLENS has been a 100% ownership of the LAFARGE supranational

concern and the head office of its subsidiary company LAFARGE PEINTURES,

which we do trade with, is in Paris. It owns 3 production plants – two in France, one

in the Netherlands. It is a dominant supplier of building coating compositions on the

French, Spanish and Italian markets. TOLLENS colors can be found with 230 distri-

2

butors in many European countries. The company has its representation also in the

other parts of the world, e.g. in the South America or China.

TOLLENS is the ISO 9002 certificate holder and in the development and

production of new products it always lays emphasis on quality, product capabilities

for the customer and ecology.

DPC SYSTEMS prefers the offer of quality services for the customer,

covering, apart from the products themselves, also the project preparation, advisory

service, possibly also a complete realization, during which the newest technologies

are applied. The company based its business policy on an individual approach to the

customer, on meeting his requirements, and it aims to continue with it also in future.

The unique mixing system enables the pigmentation of a chosen type of

coating compositions in the almost unlimited color range. It is also possible to fulfill

the individual wish of a customer for a shade of color by means of the

spectrophotometrical analyzer. This system enables to mix almost any shade of color

according to the color card of another producer or according to a color model

(photograph, logo, etc.)

In 1999 the company started the sale of the certified external insulation system

of TOLTHERM as a reaction to the growing demand in this market segment. The

outstanding feature of this system is the variability in insulants used and especially in

the possibilities of surfacing – textures of plasters and their colourity.

Since the same year, a subsidiary company DPC SLOVAKIA has secured the

sale of TOLLENS trademark throughout the Slovak Republic.

In 2002, DPC SYSTEMS company s.r.o. obtained the certificate of ISO 9001

for paints and building material wholesale and retail. The quality of products and

customer service were tested sufficiently during the twelve years of experience on a

number of reference constructions all over the area of this republic.

The fixed assets of the DPC SYSTEMS company is CZK 2 000 000. Partners

are 2 natural persons and 2 legal entities. The number of employees is 13.

3

1.1. Brief introduction into the issue

In this chapter I will try to explain the basic concepts of strategic management

primarily in view of the historical development of strategic management, which

proceeded in a different way in different parts of the world.

The terms “strategic planning” and “strategic management” themselves are

among fundamental contradictions. Sometimes the change of a name is

acknowledged, but only as a historical development of terminology for the same acti-

vities (Glueck, Jauch, 1988). Some authors then draw a distinction between individual

terms and their various meanings (Ansoff, 1990). Others avoid these terms and speak

about the analysis, creation, selection and implementation of strategy and its control

(Porter, 1994).

If we consider the three development focuses, i.e. the USA, Europe and Japan,

we can observe that, while the main difference between the USA and Europe is in the

heterochronism, Japan created its own management style. In spite of that, also this

Japanese style was created on the basis of an intensive analysis of American and

European management after World War II. It follows from this that the driving force

of management development in the world was above all the American management

and its development was reflected more or less also in different geographical areas.

Of course, at present the individual approaches converge more and more and in fact,

we can already speak about only the transatlantic and the Japanese ones, if we do not

take into account certain specialities (e.g. China). This is also true in the area of

strategic management.

If we want to trace the roots of strategy in management, logically, we have to

start in the USA. The chronological development of strategic management from

American sources:

• 340 before Christ - Sun Tzu issued the book of Art of War

• the 1960s – the American Department of Defense published „System of

planning and budgeting“

4

• the 1970s – a Boston consulting firm published the growth-share matrix

and subsequently another consulting firm McKinsey published the

branch attractiveness matrix and company position matrix.

• the 1980s – the Porter’s model of competitive environment was used for

the first time

• the 1990s – books that are considered crucial were published1

The concept of “strategy” can generally be traced even several centuries

before Christ. In the area of management however, strategy started to be taken into

account from approximately the 1950s. This late beginning was probably caused by

the fact that the management methods created in the 19th century were often regarded

as personal matters of businessmen and at the same time, microeconomic theories of

those times did not include ideas of strategy.

The concept of “strategy” can generally be traced even several centuries

before Christ. In the area of management however, strategy started to be taken into

account from approximately the 1950s. This late beginning was probably caused by

the fact that the management methods created in the 19th century were often regarded

as personal matters of businessmen and at the same time, microeconomic theories of

those times did not include ideas of strategy.

At the beginning of the 20th century, a successful company could be

characterized as production-oriented, concentrated on low costs and mass production.

At the end of the 1930s companies started to concentrate on meeting the customer’s

requirements and a new type of companies appeared, i.e. market-oriented companies.

This orientation stimulated indirectly new and more sophisticated methods of

company management and other directions of development. Exactly at this time we

can also find the foundation stones laid by a range of economists, management

theorists, mathematicians and others. These contributions sure influenced

management, but they cannot be regarded as real concepts of strategic management.

In spite of this, at the end of this period, in the 1940s, new companies oriented to the

1 Robert S. Kaplan: The Balanced Scorecard

5

product development appeared, which founded their success on the continuous

improvement of the products properties, and companies oriented to research and

development, which then became leaders in the field of technical properties of

products.

Since the 1950s companies have gradually shifted from the individual partial

orientations to the environment-orientation. This shift lasts till now. Companies

started to realize that success cannot be guaranteed safely on the basis of orientation

to a certain field (production, marketing, product development, research) in the

constantly more complicated and demanding environment), but that it is necessary to

combine and use all the approaches depending on the demands of the outer

environment. We can suppose that with the transition of companies to this approach,

new strategic activities started to develop, which had a character of long-term

planning.

Strategic activities can be devided, since their appearance in the 1950s, into

three stages of development, which can be called long-term planning, strategic

planning and strategic management. This terminology is generally accepted, but in

concepts and their understanding it comes to a mutual penetration, sometimes even to

a contradiction.

Long-term planning

The long-term planning was a reaction of companies to the fast change of

market development and to its new complexities. This new situation enforced faster

and more radical changes inside companies than in the previous period. This trend,

which came up in the USA in the 1950s, brought something more than the existing

not sufficient system of budgeting. It was necessary to find an instrument capable of

preparing the company for the future with the previously unknown stress on

competitiveness and the need of expansion. The solution was long-term planning,

which proved useful very quickly and was almost immediately accepted by all the big

firms and a number of medium-size ones. The essential element of long-term planning

was the prognosis of a future development. It was supposed that the future can be

prognosed on the basis of extrapolation of the previous development – growth (in this

period development was equal to growth).

6

The company management supposes automatically that the future must be

better than the previous development and tries to set higher, optimistic targets. In the

well managed companies the results are above extrapolation with a typical saw effect.

In the worse managed companies it comes to the same effect, but under the

development line.

Strategic planning

The strategic planning, arisen in the 1960s, almost ten years after the first at-

tempts at long-term planning, already has characteristics of the today used methods of

creation and implementation of company strategy. The most important cause of the

emergence of strategic planning was the saturation and decrease in growth of many

markets. Hardly anybody was able to explain these changes at that time, but it was

apparent that the approach of long-term planning, the base of which is the prerequisite

for growth on the basis of extrapolation and setting positive targets, is of no benefit to

the company and is the source of risk and danger. Strategic planning is a complex and

demanding method requiring much more time for processing the goals than the long-

term planning. Scientific basis was given to these new conceptions first of all by

Alfred Chandler, a group of four professors of the Harvard University and Igor

Ansoff.

In his book Strategy and Structure (1962), dealing with the analysis of the

greatest American companies, Alfred Chandler in fact raised issues concerning

strategic management. He was the first to state that strategy is the first concern and

only according to it the company must make up the most suitable organization, which

will enable it to realize the strategy.

Four Harvard professors, Learned, Christensen, Andrews and Guth, published

their book Business Policy – Text and Cases in 1965. Here they described the creation

of a methodological frame, based on strengths and weaknesses of a company,

opportunities and threats of the environment, values system of the company and

company objectives. This work (methodology) containing also case studies became

known later under the name of LCAG.

7

The synthesis of strategy theories into a highly analytical and complex work

was done by Igor Ansoff also in 1965, when he published his Corporate strategy. In

this publication, where strategy shifted into new dimensions, he defined strategy

clearly as a rule for decision-making in this area: sphere of activities, product and

market. In management he also established the concepts of synergy, growth vectors,

partly also the competitive advantage.

The basic idea of strategic planning supposes that it is possible to prognostica-

te the future on the basis of extrapolation of the past. For this reason the first step is

the so called prospective analysis identifying trends, threats, opportunities and indivi-

dual influencing events in the company environment, which can change the existing

development of the company performance. The difference between a prognosis based

on this analysis, i.e. results, which the company will most probably reach, and a

prognosis of results based on the extrapolation of the existing development (long-term

planning) is called the control gap, i.e. the difference arising from the fact that the

results and influences of environment analysis were included in the prognosis.

The second step of strategic planning is the competitive analysis. The result of

this analysis is the identification of a certain potential of improving the company

performance on the basis of the company’s success in the individual fields of

company activities. This analysis shows which fields are going to develop

promisingly and which, on the contrary, have their future uncertain. The competitive

analysis is followed up by the third one, the so-called portfolio analysis. This compa-

res the company’s prospects in individual fields, determines priorities and allocates

resources for the implementation of strategies in individual fields. In case the

company uses the results and recommendations of the competitive and portfolio

analyses, it is able to reach a higher performance. This performance is higher by the

so-called competitive gap than the performance determined only on the basis of

environment analysis. At this moment the total analysis of the strategic gap is finished

and budgets and programs for realizing the objectives can be determined.

In many cases companies are not satisfied with the prognosticated trend and

make another step, which is the diversification analysis. This identifies drawbacks in

the existing portfolio of fields and determines new fields, which should be

contributive to the company. The increase of the company performance on the basis

of doing business in new fields determines final objectives and intentions of the whole

8

company. Instruments and methods for making this analysis are various and their use

depends on companies themselves.

It is necessary to stress that the results of the first processes of strategic

planning were very discouraging. The results did not appear in short time and it also

turned out that strategic planning is not a cure-all of growing problems, as many ma-

nagers had expected. Mostly it turns out that the planned objectives are not fulfilled

and that is why they are shifted to the next period and real sources are higher than the

anticipated ones.

The basis of failure of strategic planning in the 1960s and 1970s in the USA

consisted in the fact that American companies expected that strategic planning would

replace the long-term planning with the same simplicity and success. They took over

the strategic planning and more or less expected that they would manage to achieve

the objectives determined, as well as in the past. But strategic plans together with

many analyses literally paralyzed the company development now and then, under the

best conditions they only killed intuition and creativity of managers. Plans became

omnipotent and the fact that strategic planning is one of the tools for managing the

company, contributing to gaining a long-term successfulness, was forgotten. The

results will turn up only in case that the top management is convinced of practicability

and benefit of the objectives and if it passes this conviction on the subordinates.

The routine activities of the strategy creation and implementation based on

various analyses had to be supplemented later by the identification of ambitions and

interests of the managers responsible for the implementation of adequate strategies.

This development indicates the transition to another, distinct stage of the set of

strategic activities, to the stage of strategic management.

Strategic management

In the period of introducing the strategic planning it was apparent that the

possible strategies based on the strategic gap analysis must be confronted with

weaknesses and strengths of the company. Problems appeared by a concrete

confrontation of the company’s possibilities with the outer opportunities and limits,

when it turned out that the present strengths can become drawbacks in future. Under

9

the best conditions we cannot use the existing strengths within the frame of a possible

set of alternative strategies. The solution to this problem is handled by the strategic

management. Its origination is connected with the mid-80s. At this time the attention

started to aim, as a reaction to an excessively mechanistic character of the existing

understanding the strategy, to the so far ignored issues concerning human resources,

organization and technology.

Success of the newly selected strategy depended not only on the changes of

outer environment, but also on the abilities of the company, which changes with the

changes of this environment. Prognosticating and planning is not only related to the

outer environment, but newly also to the matters inside the company. These two

activities must complement and support one another. Thus, the sphere of interests is

extended by company skills, culture, management style and carrying out changes

inside the company.

Representatives of this new interpretation of strategy are above all M. Porter,

H. Mintzberg, K. Ohmae (earlier works of these authors are on the boundary between

strategic planning and strategic management).

In conclusion it is possible to say that from a very general point of view we

can agree that a successful process of strategic management consists of creating the

mission and vision, analysis of environment and of threats and opportunities

evaluation, company analysis and evaluation of strengths and weaknesses, mission re-

evaluation, creation of strategic objectives, creation of strategic alternatives, selection

of a suitable strategy, implementation of this strategy, continuous control of achieving

the strategic objectives and of common modification of operational goals and plans.

As stated already, some name this process as strategic management, others as

strategic planning. It is possible to say however, that most authors agree on the fact

that since the middle of 1980s the term of strategic planning has been replaced by the

term of strategic management.

Strategic management and planning is a general process, which describes how

to do business and how to achieve the set objectives in the best way. This process re-

quires full utilization of business potential and of resources necessary for reaching the

concerete objectives. The theoretical concepts of strategic management described

below offer a system of requirements and answers to critical questions asked of the

10

management. These are especially the questions concerning the size and availability

of resources and securing obligations.

A successful strategic system should2 :

• describe vision of the organization, its mission and basic shared values

• define clear and measurable strategic objectives

• concentrate on the potential spheres of business and look for possible

opportunities and threats for each market

• understand the contemporary and future needs of the aimed customer

segment

• analyze strengths and weaknesses of the company by comparison with

the competitors, which influence each part of the values-creating chain

• identify and evaluate alternative strategies

• develop such a concept that will provide a specific competitive

advantage and will differ, as far as the profit is concerned, from the

competitor companies

• define interests of all the interest groups of „stakeholders“

• prepare the program of policy and plans for implementation of the

strategy accepted

• determine supportive organizational structures, information and control

systems and the system of continuous training

• allocate resources for securing the decisive business activities

• monitor performance and plan a response to the possibility of the change

of environment

2 Business Consulting (2005)

11

The system of strategic planning is often implemented under the following

conditions:

• change of business direction and of conducting business (the so-called

strategic gap)

• support of negotiations based on the facts concerning politically delicate

issues

• creating a common framework of the decision-making process in the

organization

• setting up a due environment for decision-making about budget and

carrying out evaluations

• training of managers from the point of view of securing information for

better decision-making.

• necessity to increase confidence in the business management

Figure 1-1: Usual elements of a successful strategy

12

1.2. Aims and Objectives of the Dissertation

The aim of this dissertation is above all to determine procedures and principles

for securing the basic activities of strategic management in SMEs.

The purpose is to view the complete issue as a system. At first I will try to

explain basic concepts and to elaborate the issue of strategic management in

companies (primarily small and medium-size) in general. On the basis of this I will

try to work out a certain directive, or as the case may be, to select the most suitable

combination of the existing concepts with the other suggestions. According to this

proposal I will further elaborate the Business strategy for my company. It means

therefore that not only theoretical perspectives with a view to the needs of DPC

SYSTEMS will be fulfilled, but also the dissertation will primarily have a practical

impact in the form of the Business strategy. On the whole this dissertation can then be

used as a methodological manual for other companies belonging to the category of

SME.

The objective of this assignment is to create a methodological procedure by

establishing the strategic management in small and medium-size companies. As I

have already stated above, I am highlighting small and medium-size companies,

primarily because a vast majority of them do not proceed according to the elementary

principles of strategic management, but also because the standard, generally available

models of strategic management do not satisfy the needs of SMEs from the point of

view of applicability of certain aspects.

Primary objectives of the dissertation are followling:

• Theoretical view of the strategic management of SME

• Formulating the Business Strategy of a selected SBU

• Creating a methodological procedure for the strategic management of

SME in the sphere of trade and services

13

Secondary objectives of this dissertation are:

• To explain basic concepts and principles of strategic management (SM)

• To offer an alternative to standard models of SM

• To acquaint the reader broadly with the issue of SM

To persuade the reader about the necessity of establishing any form of SM in

the company and of obtaining competitiveness also within the European market.

It is apparent that the same concept of strategic management is not suitable for

every company. It can be caused by the field of activity of the parent company, point

of business and the culture of the nation and its inhabitants, position on the market,

size of the company and the last but not least, by the view of shareholders and top

management.

Introductory view

For the unification of concepts it is not off the point to explain, what the

strategy and strategic management are. It is apparent that there is no exclusive,

generally accepted definition of the strategic management theory. Because various

authors and managers differ on the issue, we will use one of the definitions presented

by Johnson and Scholes (1993).

„Strategy determines the direction and scope of the organization’s activities in

the long term. Ideally it adjusts resources of the organization to the changing

environment, in which the organization operates, markets, customers and

expectations of the interersted parties (stakeholders).“

The different concepts of strategy present also in the fact, how some authors

interpret strategic objectives. Some understand objectives as a part of strategy; others

regard strategy as a means of reaching the objectives set in advance. Perhaps that is

why H. Mintzberg insists that an effective strategist is the man, who can live with

14

contradictions3. His interpretation of strategy (1991) is that strategy is a model

(pattern, template) or plan, which integrates the main organizational objectives and

succession of activities into a compact whole.

Whatever variant of the theoretical definition we decide for, the fact is that the

strategic management (formerly planning) should be understood as a never ending

process, which includes logical and successive steps, as it is shown in the following

figures.

Figure 1-2: Process of strategic planning

As I have already mentioned above, there is a whole range of theoretical

concepts of strategic management. A certain part of strategic management models

bears signs of modification or replication of the best-known ones, that is why I will

further pay attention only to those, which I regard as fundamental or different. These

are:

3 Henry Mintzberg belongs to the most respected specialists in the field of strategy. He is known as a lecturer from the Canadian McGill University and an author of a lot of thought-provoking publications.

15

• Concept according to Keřkovský – Vykypěl (so-called BIBS concept)

• Porter’s concept of competition strategy

• Model of the strategy concept according to Solution Portals

• Four-level hierarchy of strategies

Selected theoretical concepts of strategic management

The integrated complex of opinions/ideas of strategic management applicable

in concrete conditions. It is an expression of basic opinions/ideas of the philosophy,

model, functioning and organization of strategic management. It should also concern

methodological aspects of strategy creation.

The concept of strategic management should fulfill the following conditions:

1. To define the model of strategic management (elements and their

relations, e.g. the hierarchy of strategies).

2. To define basic concepts.

3. To create optimum conditions for structuring the question of strategies

formulation and for the division of labour/cooperation of teams.

4. To provide instructions/methodology for processing sectional

tasks/documents (e.g. to define the content of formulated strategies).

BIBS concept

One comprehensive approach to the strategic management is called „BIBS

concept of strategic management“. It was proposed by M. Keřkovský and O.

Vykypěl, on the basis of their study of the key work of strategic management in the

Western Europe and USA and on the comparison of this knowledge with the usual

method of strategic management in Czech companies. The unified concept was tested

by both, by practical research and by a study of The Master of Business

Administration program organized in Brno in cooperation with The Nottingham Trent

University, Great Britain.

16

Strategic management is a process, by which the vision and mission of

organizations are determined and from these strategic objectives are derived on the

basis of strategic analysis and of trends of future development. It seeks and selects an

optimum strategy of the development of a company or of its organizational

components so that the company resources could be used effectively in cooperation

with opportunities on the market.

This process starts by defining the function (mission) of the organization. This

function corresponds with basic ideas (vision) of the company founders about what is

going to be the business objective, what the company’s customers will be like, what

requirements they will have and by what products and services the company will meet

the requirements of its customers. The mission and vision are followed by the strate-

gic analysis, identification of the existing strategic position, determining strategic

objectives and selection of strategy. A part of the strategic management is at the same

time the implementation of the selected strategic plans, their monitoring and evaluati-

on. The following figure documents clearly the hierarchy of company strategies.

17

Figure 1-3: Hierarchy of company strategies

Corporate strategy expresses basic business decisions, e.g. in what country

and in which field the company (or a concrete businessman) is going to do business,

how he is going to allocate available capital funds, in what basic way the business is

going to be managed, which of the existing business plans is going to be further

preferred and which suppressed, etc. Primarily the fact is expressed that the corporate

strategy defines a strategic frame for the following business strategies of the

individual strategic commercial units of the company. It is possible to view the

corporate strategy on the one hand as the elaboration of the mission of the company,

on the other hand it can be regarded as a sort of assignment/basis for formulating the

corresponding business strategies. Usually only a limited circle of crucial owners and

top managers of the company take part in the formulation of corporate strategy.

18

Business strategy expresses basic strategic objectives and ways leading to

their reaching for a certain strategic business unit. Among the strategic business units

there are typically companies making various products for various markets. As far as

the content is concerned, the business strategy should specify basic factors of the

widened marketing mix as it is shown in the following scheme.

Horizontal strategy defines strategic objectives common for more strategic

business units. The sense of its definition is the solution of mutual strategic relations

of business units, which, if not solved, could lead to the weakening of strategic efforts

of the company as a whole. For example price policy, personnel policy, wage policy,

etc.

Functional strategy secures the strategic development of important specific

areas in accordance with a total strategic development of the company. Each business

strategy should be, in this sense, further elaborated into the form of several functional

strategies, e.g. into the form of strategy of marketing development, strategy of human

resources management, IT/IS strategy, financial strategy etc.

Porter’s approach to formulating the strategy

The classic interpretation of competition strategy according to a professor of

the Harvard University Michael E. Porter is based on the scheme shown in Figure 1-4.

According to him, to elaborate a competition strategy basically means to work

out general principles, which determine, how the company will compete on the rele-

vant market, what objectives there will be and what measures will be necessary for

reaching these objectives. The scheme given shows, that the competition strategy is a

combination of objectives, which the company tries to achieve, and of means, which

lead to their fulfilling. Although various companies can interpret and call some of the

concepts in various ways, the basic meaning of the strategy consists in the difference

between objectives and means.

The scheme given below – we can call it Wheel of competition strategy – is a

certain tool for expressing the key aspects in one figure. This construction is based on

the fact that in the centre of the wheel there are objectives as a general determination,

19

how we want to compete and their specific aims. Spokes of the wheel are than made

by operative measures, by means of which the company tries to reach its objectives.

Like with a normal wheel, it holds true that the spokes have to lean against the hub

and moreover to be mutually connected.

Figure 1-4: Porter’s competition strategy

The second idea presented, related to the previous scheme, is the general

context, in which this strategy is defined.

It includes four key factors:

• Strengths and weaknesses (abilities and skills, technology, trademark

etc.)

• Personal values represent primarily the motivation of senior executives

• Outer limits are set predominantly by the field, in which the company is

active

• Social expectations reflect influence, which e.g. government politics,

social interests and many others have on the company

20

Figure 1-5 given below is rather a classic, nevertheless I regard it important

for the illustration of another factor I want to mention.

Although the environment, where the company conducts business, is very

extensive, the key aspect of this environment is the field (branch), in which competi-

tion is met. The departmental structure then has a great influence both on setting the

rules, and on determining the strategies. Outer influences are relative primarily in the

sense that they influence basically all the competitors in the field. A key role is also

played by different abilities of companies to manage them.

Figure 1-5: Porter’s five-factor model

I am not going to deal with this part in detail, because we will discuss it closer

in the following chapters by formulating the business strategy of DPC SYSTEMS.

The competition strategy must also include assuming such an attitude, which

will maximize own abilities. It follows from this that it is necessary to analyse

competitors. Although the opinion of the fact, whether to have this information of not,

is quite apparent, it is striking, how many companies underestimate this process.

From the point of view of senior executives there can exist two aspects. We

either know everything about our competitors, or the competition cannot be analysed

systematically. I think that none of these suppositions is right. This is supported by

21

another of the complex views of the Porter’s competition strategy. There are four

components of such an analysis of the competition.

1. Future objectives – knowledge of aims helps to estimate, how he will react

to strategic changes, it is suitable to know the objectives at all levels

2. Existing strategy – how he is doing in the existing competition, what he

does and what he can do, it can be explicit or implicit

3. Prerequisites – what he knows (prerequisites) about himself and about the

field, possibly about other competitor companies acting in it

4. Abilities – strengths and weaknesses

The understanding of these components enables companies to predict

competently the profile of the competitor’s possible reaction. However, the basic

prerequisite is periodic obtaining and updating all the important and relevant

information.

Conception of strategy according to Solution Portals

The view of strategic management by means of Solution

Portals web portal is based on the fact that correct questions are raised

about key elements of the company management in logical sequence.

It appears to me that a good marketing maneuver is the addressing of

potential clients. It introduces a product as the first complete

management solution for small business. Another important message

is that Nobody knows Your business better than You do, then why

should you have external consultants?

As shown in Figure 1-6, in the logic similar to the other

concepts of strategic management, individual spheres, which are

necessary to be answered, are suggested.

22

Spheres suggested by means of this concept:

• Company Strategy - Management Information

• Relationship Management - Value Chain

• Marketing Plans - Strategy management

• Business Opportunities and other

Figure 1-6: Corporate strategy according to Solution Portals

This conception is based on the fact that the Corporate strategy of your

company has a unique composition and it is therefore the basis of success.

23

The advantage of this conception is:

• It enables to formulate and implement the selected strategy easily and

logically

• Effort of all employees aims to the common vision and mission

Four-level hierarchy of strategies

A model similar to the three-level BIBS. The following picture is informative

enough.

Figure 1-7: Four-level hierarchy of strategies

24

The other concepts

Aim of this chapter is to describe, in a simplified way, basic principles of the

other, often-mentioned concepts.

Johnson and Scholes

Their conception of strategy is based on the prerequisite that the strategy is

oriented to the future and it should secure a specific competitive advantage for the

company. Therefore, not a higher operational effectiveness, but a completely new

conception and approach to the issue are in question.

Other points, on which their concept is based, are:

• strategy determines basic parameters of enterprise

• strategy should reach harmony between the environment and own

abilities, on which the company has to build, if it is to be successful

• strategy should determine elementary ways of resource allocation

• strategy sets tasks for the tactical and operative levels

• strategy also has to take into account opinions of „stakeholders“,

company culture and values

Bob De Wit and Ron Meyer

The conception of strategy according to these authors is also based on the

book Strategy: Process, Content, Context published in New York in 1995. Several

points are dealt with here showing that the strategy is:

• integrative model for decision-making

• directive delimiting basic forms of competitive fight

• means for reaching a competitive advantage by using strengths and op-

portunities and suppressing weaknesses and threats

25

• logical system of co-ordination of managerial tasks at all levels

• in compliance with economic interests of “stakeholders”

Strategy: process, content, context ‒ while the authors themselves created the

structure of the book, most of the content is created by an article written by prominent

experts (by Hammel, Mintzberg, Porter, Prahalad, Rumelt, Senge and many others).

This book is not meant to be read from the beginning to the end, it is not even suitable

for beginners. On the other hand it can be a perfect supplement of a systematic pre-

sentation like that by Keřkovský or Grant and it provides a deep insight into

management from another point of view.

Robert M. Grant

If we take a cursory look at the Grant’s book of Contemporary Strategic

Analysis, from which these concepts are taken, the approach to strategy and

management can seem similar to the one in BIBS concept. There is more in it than

only a revision of the existing.

Instead of mutual comparison of academic constructions, Grant always prefers

concentration on the practical values of a concrete concept to commercial

applications. But if we still want to compare the Keřkovský’s concept with the outline

presented by Grant, we will notice a big difference. While the author of the BIBS

concept supposes that strategic thinking is always a conscious process, preceded by

certain decisions, R.M. Grant is aware of the fact that many decisions in trade are

often made unintentionally (it is similarly viewed also by H. Mintzberg).

Another difference between these two approaches is the attitude to

implementation strategy. In BIBS the process of strategic thinking is divided into

three different phases: analysis, proposal and implementation. Although Keřkovský

and Vykypěl admit that many strategies crash in the implementation phase,

unfortunately, only a little space is given to the theme of implementation in their

book. On the other hand Grant (2002) shows that a strategic formulation cannot be

separated from its implementation. But neither here can we find a separate chapter

about implementation.

26

Glueck and Jauch

The mentioned authors describe the process of strategy formulation in a

slightly different way. Nevertheless, one important difference is shown here and that

is the so-called “strategic scenarios”. As Keřkovský rightly states, the formulation

proposal of the company strategy must be based on previous analyses and found out

facts. However it is necessary to create more scenarios of the possible development,

because not always it is possible to propose a concrete direction and concrete

objective after the carried out analyses. For example by creating optimistic and pes-

simistic scenarios of the company strategy.

Evaluation and selection of a suitable concept

Selection of the right concept is to a large extent an individual business. Most

of the above mentioned approaches have their strict basis in contemporary

professional literature. The BIBS concept however, is from my point of view probab-

ly closest to the „how-to-do“. The authors provide many details and directive

proposals for various management levels. Some of the concepts contain a greater

amount of illustration and examples; they are also more straightforward and simple

than the BIBS concept.

In spite of that the BIBS concept is for me the clearest from the logical point

of view, although the consequences in practice are not always understandable at first

sight.

1.4. Research Methods Used

So that we could carry out relevant analyses, on which the proposal part is

going to be based, it is necessary to describe the individual methods of data and

information collection for one thing, and the sources, from which it was continuously

drawn on, for another.

The basis for data and information collection for writing this dissertation was

predominantly literature, the list of which can be found in chapter 6. The study of li-

27

terature was necessary first of all for writing the theoretical part of this dissertation.

Without this step it would be hardly possible to form an objective opinion about

strategic management and moreover, the conception of dissertation could lack funda-

mental necessities. As the greatest contribution I regard the fact that the comparison

of various aspects and attitudes to the same issue has a consequence of deeper under-

standing and a detached point of view.

An important source of inspiration and theoretical preparation is of course the

study of MBA Senior Executive itself. Although this study is primarily centred on the

development of BIBS conception, it suggests the possibilities of application of

strategic management in a more general way. The individual modules from both years

were always successfully concluded by a paper. In these I tried to apply the obtained

knowledge with a maximum use in the practice. That is why I include also my own

assignments in the sources in literature.

Another substantial and important source was the Internet. This permanently

developing phenomenon is a profound repository of knowledge and inspiration. Ironi-

cally, it is also a great problem to find the right information in the mass of more or

less high-quality and up-to-date information. That is why I relatively often refer to

sources found on the Internet. The most often visited Internet presentations:

• www.valuebasedmanagement.net

• www.czso.cz, http://portal.gov.cz

• www.wikipedia.org

• www.mpo.cz, www.businessinfo.cz

The basic methods used, which appear through all the assignment, comple-

ment one another and combine mutually. Deliberately I have used especially:

• Deductive reasoning – which moves from the more general aspects to

the more specific ones. It begins with the consideration of the problem

and then it limits itself to the hypothesis, which is then tested in practice

• Inductive reasoning – is the opposite of deduction, it starts from specific

observations and aims to broad, generally accepted theories

• Abstraction – I see it as a process, by which the reality is reduced to-

wards a given model, from which another idea or concept arises

28

2. Strategic management of small and medium-size firms

2.1. Definition of small and medium-size firms

For the use of the concept and definition of SMEs in the Czech economic

sphere the EU directive from 6th May 2003 is crucial4. By this we understand an orga-

nizational unit, which carries out economic activity. But its legal norm does not

matter here.

For classification into individual categories, criteria of the number of workers

and financial results are determined.

The category of medium-size firms is created by companies, the number of

workers of which ranges from 50 to 250 employed people, and at the same time

whose annual turnover does not exceed 50m EUR and/or the asset value does not

exceed 43m EUR.

Small firms are such companies, which have their annual turnover not higher

than 10m EUR and /or whose asset value does not exceed 10m EUR. As far as the

number of employees is concerned, the limit is 50 people.

Within the frame of small firms there exists a subcategory of the so-called

microfirms having less than 10 employees and at the same time their turnover or asset

value not exceeding 2m EUR.

2.2. Strategic management in SMEs

Problems that I can see within the frame of strategic management in SMEs can

in fact be divided into three groups. First of all there are problems following from the

very nature of SME companies, the second group of problems concern the lack of

knowledge of strategic management or bad management of this knowledge in

practice, and the third is insufficient internal communication. The second two groups

of problems are common to an extent for both small and medium-size and big

companies.

4 Commission Recommendation of 06/05/2003 concerning the definition of micro, small and medium-sized enterprises, Brussels, 06/05/2003, C (2003), 1422 final

29

1. Separateness of small and medium-size firms

The main problem of small and medium-size firms is not their size, but their

isolation5. This motto is comparatively apposite, especially if we put it into context

with everyday functioning of SMEs. Whether the separateness is caused by a lack of

interest of the companies themselves or whether it is the consequence of the influence

of environment, the fact is that the differences from big corporations are constantly

relevant.

Among the weaknesses of most companies belonging due to their parameters

to the group of SMEs there are:

• Strategic management and commercial processes

• Marketing and commercial activities

• Financial background

• Motivation and human resources

• Knowledge of languages

The above mentioned points can be supplemented with other problems, which

have no simple solutions. Among these there are for example the sentiment of top

management, lack of feedback or the problem of the change of management style and

organizational structure during the company growth.

Strategic management and planning is certainly no cure-all, but if SMEs are

equipped with sufficient theoretical knowledge and if they are interested to change

things, it is a substantial stimulus for the future.

2. Bad or no strategic management

Because we will get to the partial processes of strategic management later in

subsequent chapters, I will limit myself only to the last step – the strategy implemen-

5 According to OECD (Local Systems of Small Firms and Job Creation)

30

tation itself. Within the frame of strategy “implementation” we can talk about three

steps of the strategic management process:

1st step – carrying out of strategic analyses (entries for the process of strategic

management)

2nd step – selection and formulation of strategy

3rd step – actual implementation of strategy, i.e. its realization

The strategy implementation is in itself a great phenomenon. According to the

renowned Business Week magazine, strategy has never before been more important

than today. Another influential magazine, Fortune Magazine, carried out a research,

according to which less than 10% formulated strategies are implemented effectively.

The cause is not the fact that the strategies are bad, but in 70% of cases their

implementation is not effective. The fact is that the absence of strategic management

or bad implementation is not foreign even to big corporations. On the other hand, if a

small company makes such a fatal mistake, it can have even existential consequences

for it. But an economically strong corporation would get over such a mistake much

easier.

3. Internal communication

Internal communication, a seemingly invisible and unmeasurable element of

the company, the task of which is to connect all the employees of the company, so

that they get the right information for their work in the right time, is put at present

more and more into connection with the company performance and successful

company management. These situations are clear examples that, if communication

functions insufficiently, an appreciable source of problems arises. And from these

problems there is only a step to a negative influence on the result.

And what about the situation on the Czech market? As resulted from the

market research by preparing the conference of Internal communication organized by

the top vision company, a lot of important companies operating on the Czech and

Slovak markets begin to work hard on internal communication. In some companies

they base on the knowledge of their supranational parent companies and try to apply

global know-how with modifications to the local conditions of the Czech Republic.

Somewhere else they prepare and realize their own strategy with the emphasis on

31

their own company culture. And just the project of setting the system of internal

communication and its smooth start is the most demanding task.

2.3. Importance of SMEs in EU and in CR

The importance of Small and Medium Enterprises (SME) from the point of

view of the number of people employed, gross turnover level and of their number

makes of these companies an important factor for social and economic conditions of

European countries. A vast majority of EU members for example faces threatening or

real unemployment and that is why it is necessary to create new job vacancies flexibly

and find opportunities of lowering the unemployment.

The so-called European chart for small firms, which was accepted by the EU

members in June 2000, has the key importance for SMEs. It declares, apart from other

things, that SMEs form the backbone of European economy and the main background

of its competitive ability especially towards the USA. The EU further regards it as a

key to the solution of the painful issue of social problems of employment, the

development of enterprise and the creation of European economy based on

knowledge.

Before extending the EU, more than 74m people were employed in almost

90m economic units in this economic grouping, which are about 99,8 % of all the

companies in EU. The total number of employed people is almost 113m of workers,

i.e. SMEs participated in the total employment by about two thirds. It is moreover

estimated that SMEs secure about 55 % of the increase of new job vacancies, which is

evaluated as important for the innovative development of lower orders not demanding

strong financial and personal background.

Similarly to the EU, SMEs are a wide basis for enterprise also in the CR. We

can therefore suppose that the proactive policy of the EU, which has already proved

useful in the existing EU members and which will be developed also in CR, will bring

positive results. A considerable share of foreign capital in a great part of Czech

trading and manufacturing companies is substantial for the procedure of integrating

Czech SMEs in the EU economy.

32

Table 2-1: Selected characteristics of SMEs in Czech Republic

YEAR 2004

Legal entities (0-249)

Physical persons (0-249)

Total number of SMEs

Total employees in SMEs (in thousands)

Share of SMEs employees in the total in CR

Share of number of SMEs in total number of companies

Industry 25 687 133 263 158 950 655 49,85 99,42

Trade 53 699 204 372 258 071 387 78,18 99,95

Services 43 793 260 894 304 687 338 78,60 99,94

Building Industry

6 457 92 818 99 275 176 80,00 99,93

Other 15 093 156 061 171 149 343 - -

Total 144 729 847 408 992 132 1 899 61,50 99,85

For example in 2003 this influence presented itself in almost 95 thousands of

trading units. Participation in companies – including a lot of SMEs – has a substantial

influence on their management and development. Not only thanks to various forms of

cooperation (from strategic to informal partnership) participated these companies in

the export of the Czech Republic in the last couple of years by about 65-70 %. Thus

they have a significant participation in the future and deeper integration of Czech

SMEs into EU6.

From the above mentioned, not only a dominant position of SMEs on the

Czech market is apparent, but also the fact that by that our economic subjects are not

too different from other EU states.

One of fundamental questions we can ask is “To what extent can SMEs

maintain their position and successfulness in comparison with big, primarily

European companies?” History shows however – and the prediction of future as well

– that the key sign of prosperity of an organization is especially the art of managing it.

6 Vodáček,Vodáčková, 2004, p. 15-22

33

In spite of their advantages over big enterprises (innovative behaviour, less

demanding management or organizational flexibility), SMEs have the following disa-

dvantages:

• Capital strength and availability of resources

• Position on the market and resources for changes

• Professionalism and resultativity of negotiations with „stakeholders“

• Effectiveness of economic processes

2.4. Alternative for SMEs

„If we do not change the direction, we will most likely end up where we are

heading for”– Old Chinese proverb

If we wanted to find an alternative for the existing concepts of strategic

thinking and at the same time we cannot (or do not want to) use the complexity of the

solutions offered, I will try to suggest one of the possibilities.

Although the term of strategic management is for a great number of managers

only another one of theoretical and fashionable excesses of academics, practice and

statistics prove the contrary. From the global point of view, only just those companies

are successful in the long term, in which the system of strategic thinking has become

rooted at all levels. That is why I concentrated my consideration on the most impor-

tant aspects, which accompany successful companies and which can be used also in

SMEs. I have identified the following factors:

1. Strategic thinking as a necessary prerequisite of executives

2. Marketing approach as a backbone of the whole system

3. Benchmarking as a process instrument

First of the key criteria is definitely the necessary extent of strategic thinking.

This is very aptly outlined by the following Figure describing the difference between

routine, strategic and intuitive thinking.

34

Figure 2-1: Strategic thinking

This scheme is based on the ideas of Kenichi Ohmaeho (1982), a Japanese

guru of (modern) management. It is apparent that strategic thinking is concentrated

on looking for the invisible. At first sight the problems solved and surrounding

mechanisms are outlined logically. But if we want to move towards success markedly,

we have to go deeper and view things from a different angle. Only then are we able to

find the coveted key factors of success and to adapt the vision, objectives and

company structure to new conditions.

Routine thinking is rather close to operating management. On the other hand

intuitive acting is often connected with company founders or leaders. History shows

us however that a mere intuition – if not supported by strategic analyses – is not able

to secure the company’s prosperity in the long term.

35

Another important factor is the marketing approach. The truth is that this

conception suits rather to trading companies than to manufacturing ones, nevertheless

it is only a direction and consideration of possibilities. On the other hand, also in ma-

nufacturing companies we can talk about “a seller and a buyer”, if we have in mind

the behaviour between individual departments, managing units or even colleagues

(Kotler, 2002).

Figure 2-2: Kotler’s marketing approach

The research will show us the individual segments, which consist of buyers

having various needs. Pragmatic approach then means that we have to concentrate

purposefully on those segments only, which we are able to satisfy in the highest

quality. It is also important, how we are going to present (position) our offer for each

target segment. It should be drafted so that the target customers could acknowledge,

how it differs from the competition, and so that they could see in it perfect fulfillment

of their own needs.

The following Figure demonstrates spheres, which the customer prefers by his

decision-making. For example: if we offer a higher utility value of the product to the

customer than he is able to appreciate (or willing to pay), we will have too high

inputs/costs and price. It is therefore reasonable not to underestimate these factors.

Figure 2-3: 4“C“s for a customer

36

Segmentation, targeting and positioning (STP) therefore represent strategic

thinking of the company. In the following phase, an adequate marketing mix (MM) is

worked out already, which reflects wishes and requirements of customers in the best

way. After the consequent implementation it is necessary to choose effective control

measures, which will monitor and evaluate the results. And also such mechanisms

must be secured, which will enable to improve STP strategies and MM tactic

operatively.

The third and last point of this operative approach is benchmarking. Because

it is a strategic process instrument, which is very often applied in the concepts

described below, I will pay more attention to it. At first, a little theory …

Benchmarking is a process of constant comparing and measuring the

company with the leading companies and the aim is to obtain information, which will

help the company to accept and realize activities leading to the improvement of its

own performance7. In other words: “We have to look for the best procedures in

business, which lead to outstanding results”, says Robert C. Camp – one of the

leading personalities in the sphere of benchmarking.

.

It is also convenient to differ between the benchmark (comparative criterion)

as a standard and benchmarking as a process of measuring. It is necessary to note that

benchmarking can contribute markedly to reaching a competitive advantage. A neces-

sary condition is, however, the consequent implementation of the best procedures and

practices.

7 Definition according to International Benchmarking Clearinghouse by APQC (American productivity and Quality Center)

37

Approaches to benchmarking

We can find in fact two different approaches in practice.

1. Output benchmarking

This procedure compares relative performance to the given criteria, very often

between competitor companies. Comparison and measurement is done by more

companies, mostly in attendance of a third party (e.g. Benchmarking centre - ČSJ8),

and these in fact resolve questions like WHAT the company reaches.

The advantage is the identification of the difference in performance and it can

show, where the company must improve. But the disadvantage is that it does not give

instructions, HOW to improve. Very difficult is moreover the interpretation of results,

if we are comparing small and big companies in some criteria.

2. Process benchmarking

Measures the individual performance of a process and its functionality. The

comparison is carried out to the companies, which are the best in executing concrete

compared processes. Process benchmarking tries to seek the practices and answers to

the questions of HOW? It follows therefore that process benchmarking requires

usually much more information, preparations, local visits etc.

The advantage is that it is possible to find out how to improve oneself and to

what extent. Another positive is a better interpretation between the compared

organizations. A disadvantage or danger can appear, if the company does not know

what and why to compare.

The above described can be summed up to the conclusion that the output

benchmarking measures and compares consequences, the process benchmarking seeks

the causes.

8 www.benchmarking.cz

38

Types of benchmarking

Because benchmarking can also be segmented (and it is definitely purposeful),

according to separate processes we can do the following:

- internal benchmarking – compares activities, procedures or outputs of

organizational units within one company

- competition benchmarking – is concentrated on specific products,

processes and methods used by the best direct competitors in the branch

- branch/functional benchmarking – compares similar functions within

the same branch to the performance of the leader in the branch

- generic benchmarking – compares working practices independent of a

branch, this method contributes most to innovations

Benchmarking should be connected with strategic management. Strategically

oriented companies with their mission and strategic objectives defined need an

instrument, which will secure them the possibility of permanent improving. The most

effective from this point of view seems to be the concentration to the key processes

and their improving.

Because there are various approaches to benchmarking, I am offering only one

of them. This template determines general connections for creating a process model9.

9 The four-quadrant model was developed by companies intensively dealing with benchmarking (Boenig Corporation, Digital Equipment Corporation, Motorola Inc, Xerox Corporation)

39

Figure 2-4: Proces benchmarkingu

Benchmarking then should:

• provide criteria comparing the performance of the given process

• describe the gap in performance so that it is secured by comparison with

the identified levels of performance

• find the best practices for achieving such results that can be

continuously monitored

• determine performance objectives for the process and identify areas, in

which it is necessary to take correction measures. The person, who

initiates benchmarking, is then responsible for the implementation of

action plan (who, how, by when etc.)

Thanks to the comparison of the state of things with first-rate companies,

benchmarking offers an opportunity for improving. It is therefore an instrument of

competitive ability. Methodology of benchmarking helps to create action plans for

implementation. It can be used, in its strategic orientation, for a better understanding

the market, for development of new services or products, for setting targets in the

sphere of performance, at the level of customer assistance, in financial proportion

indicators and for developing key practices and procedures, which will enable to

reach the set strategic objectives.

40

3. Analysis and subsequent formulation of Business Strategy

3.1. Formulation of Business Strategy

„It is a great mistake to develop theories before we have information“ – Sir

Arthur Conan Doyle

3.1.1. Revision of basic criteria of strategic management

After having defined basic parameters of strategic management in previous

chapters, it is necessary to analyse, in accordance with the same logic, the contempo-

rary state of strategic management in the DPC SYSTEMS company (see figure 7-1).

The main and most important factor is the decision of owners about primary

business activities and objectives.

The fulfilling of this point is declared by a formally described vision and

mission of the company, which form the foundation stone of the company culture.

They are also thoroughly communicated both inside and outside the company, as the

evidence of a self-confident company, which knows, where it aims, and which can

formulate its ideas clearly. They are expressed in the following way:

Vision

• we will provide products and services for the sphere of building industry

• in accordance with the business policy of Lafarge Peintures we want to

be successful in the long term in winning prestigious orders

• our priority is the Czech and Slovak market, in future we are going to

extend our activities also into the surrounding states

• we will introduce and apply the system of strategic management

• the high prestige of TOLLENS trademark will always be a synonym for

comfort, independence and individuality

41

Mission

• we try hard to have the value of our products, perceived by the

customer, higher than the competition

• we build up the trust of our customers and employees by keeping

agreements, we grow and want them to grow with us

• we respect laws and good manners

• we contribute to improving the environment by supplying exclusively

ecological products

• we work together on reaching strategic objectives of the company and

respect team consensus

3.1.2. Strategic Business Unit (SBU)

No less important is the decision, what the division of the company into

individual SBUs will be and what generic character will they have. The owners of

DPC SYSTEMS have defined, in cooperation with the management, the following

division:

In spite of the fact that DPC is a small company, we can trace down two SBUs

here. It is therefore necessary to formulate a separate business strategy for each of

them. We can use the same construction, but the individual analyses would have to be

adjusted to some particularities and differences, which each of the SBUs has. This

division is defined in the corporate strategy, which reflects elementary interests of the

owners and their business decisions.

The first SBU (let us call it KZS) has the task to define, find and constantly

enlarge the target group of customers and to offer it products and services connected

with contact insulation systems for buildings.

The second SBU, which we are interested in in this case and for which the fol-

lowing business strategy will be proposed, can be called PAINT.

42

If we want to characterize PAINT from the point of view of classification, we

can choose among the following possibilities:

• organizational (its determination copies in fact the organizational

structure of the company, the adequate business strategy is then the

strategy of the given organizational unit)

• strategic-marketing

• project (covers activities connected with a certain project, when at the

strategic level these activities are managed by the BS worked out into

individual functional strategies)

Although each SBU can have a different structure, the PAINT SBU can be

classified to the so-called strategic-marketing classification. In practice it means that

its delimitation goes across organizational units (EO,TO,OO) with the aim to reach

the set targets. The products themselves have not basically a different character than

products, offered by the KZS SBU (they moreover complement one another), but

some elements of marketing mix are different.

It is predominantly the Price, Promotion and Product. In other cases the

activities overlap to a degree, nevertheless the 3 „P“ are key aspects to that extent that

the division into two separate units is desirable.

3.1.3. Objectives of SBU following from strategic objectives

As mentioned above, the business plan should be insofar logical, elaborate and

detailed to be able to persuade the reader of a practicability of the project. At the same

time it must support superior strategies, or aim to meeting strategic objectives of the

company. These objectives are based on the business strategy, which is formally

defined.

• To increase the turnover in comparison with 2004 by 15%

• To increase the sale of Tollens paints by 30% in comparison with 2004

• To keep up total costs

43

• To increase the margin by min. 2%

• To lower total costs of transport by 10%

Apart from the above mentioned objectives, which meet SMART criteria,

there are other, no less important ones. They are not strictly SMART, nevertheless

they belong to the key preconditions for fulfilling the measurable parameters.

• To create an effective marketing strategy

• To manage receivables effectively

• To increase the effectiveness of businessmen

The unambiguous objective for SBU PAINT is the growth and development of

its activities. Because of future aiming of the society and future intentions it is

absolutely necessary to fulfill the set objectives. As follows from marketing studies,

state economy and growth in the branch, these objectives are practicable.

3.1.4. Generic character of SBUs Table 3-1: Generic character of SBUs

Advantage Target Scope

Low Cost Product Uniqueness

Broad (Industry Wide)

Cost Leadership Strategy Differentiation Strategy

Narrow (Market Segment)

Focus Strategy (low cost)

Focus Strategy (differentiation)

From the point of view of generic character our company prefers

differentiation strategies with a maximum accent on the use of new technologies like

especially ICT and e-commerce. It is given by the profiling on the market, by a

44

segment selected, by services offered and last but not least, by the objectives of

management and owners. A distinct characteristic of this strategy should be the

individual approach and quick adaptation of services to customer wishes. For the KZS

SBU, the cost leadership strategy is intended.

3.1.5. Attitudes of „Stakeholders“

This analysis is necessary not only by formulating strategies, but also by

creating business plans. The reason of this statement is the fact that, to a great extent,

it is the attitudes of stakeholders, which predestines successfulness by

implementation. That is why a business plan should be formulated also with a view to

expectations and objectives of the decisive stakeholders.

At first it is convenient to define characteristic features of individual groups of

stakeholders from the point of view of their expectations, objectives and negotiating

power. Another criterion should be a maximum objective (more sources) value of the

estimate of their importance (strength). Because this analysis can show that individual

stakeholders can have different (or contrary) objectives, that is why it is necessary to

have a possibility to objectify priorities and minimalize negative impacts of

stakeholders with a lower coefficient.

Table 3-2: Expectations of stakeholders

Stakeholders Objectives Expectations Value

Shareholders

annual profit

market development and

sales increase

strong company image

fulfillment of business

strategy

activities primarily in

Prague and Central

Bohemia

formulation of new

vision

5

45

Management

controlling

CRM systems

strategic management

extending of trade

network

priority is the Czech

market

information from the

market

consistency, unified

communication

strategy

keeping of agreements

4

Employees

prospering company

maintaining job

company culture

increasing wages

self-realization 3

Customers

service and sales

promotion in the region

lower price

competitive advantage

advertisement

higher margin 3

Competition

to gain a greater share in

the total sale of our

distributors

increasing influence

on our customers 2

Value „5“ = highest interest, „1“ = lower interest

Because we are a small company, the list of decisive stakeholders is limited. I

even dare say that the opinion of owners is crucial and it could be markedly put above

the interests of all the other stakeholders. But as a member of management I am aware

that if the reactions of the other stakeholders are too negative, it would be very

difficult to enforce the individual projects.

46

3.1.6. Conclusions of the analysis – basis for a subsequent formulation of business strategy

From the above given analyses it is apparent that our company disposes of the

basic elements of strategic management, which is a good basis for its further

development. It is therefore necessary to develop and strengthen this trend in order to

become a successful company. There is a saying that you reap what you sow.

For the following formulation of business strategy (and possible other functio-

nal strategies) we can trace down the basic criteria:

• Vision and values of the company

• Objectives of owners and management

• Orientation of business and its aiming

The following points define in fact the corporate strategy and are therefore the

starting assignment for the elaboration of business strategy.

1. Singling out of SBU

2. Generic character of individual SBUs, which, to a large extent,

predestines their orientation

3. Strategic SMART objectives for a selected SBU

4. Attitudes of “stakeholders”, which are, to a degree, the description of the

company culture and are the expression of their interests

3.2. Business Strategy (BS)

In this chapter I will try to analyze and suggest relative factors serving to the

formulation of business strategy of the DPC SYSTEMS company. The previous

chapter serves in fact as a definition of corporate strategy and is therefore the initial

superordinate strategy.

47

I have created the structure in accordance with standard procedures taking into

account the needs and possibilities of small companies. The steps mentioned below

define the basic outline for its creation and delimitation of the content.

Figure 3-1: Basic content delimitation of BS

If we want to formulate a BS for a concrete SBU, we always have to have

relevant strategic information at our disposal, which we will (according to a relevant

theoretical formula or instrument) recast into the proposals of solving the situation.

Table 3-3: Structure of analytical part

steps detail steps tool used

PEST analysis

Porters model

Stakeholders

External Factors

Benchmarking

7S

Customer Analysis

Strategic Analysis

Internal Factors

Products Analysis

48

It is important to realize that a change – in this case the change of business

strategy - must be initiated on the basis of major decisions. Any unfounded change is

demanding of resources and is a test of company culture. The strategic decision about

a new formulation of business strategy in case of SBU PAINT is the fact that a

strategic gap occurred.

Figure 3-2: Strategic Gap

This term describes the state, when it comes to a contradiction between

intentions and reality by fulfilling the previous strategy. If the intention with basic

company objectives (Fig. 3-2) was formulated and has not been fulfilled in the long

term, it is a serious reason for a change. These indicators or objectives were determi-

ned by the management on the basis of the previous analysis of the investment needs

of the company, internal situation of the company and other relevant factors. In spite

of the fact that they were practicable, the existing strategy leads unfortunately to

unacceptable results.

3.2.1. Objectives of the dissertation

The primary objective of this chapter is to formulate business strategy accor-

ding to the described theoretical concept. On the basis of the analyses of external and

internal environment of our company (or one SBU), I will try to suggest a business

strategy according to a standard model and structure of the widened marketing mix.

49

The sense of this part of the dissertation is a practical use of the described the-

oretical methods in a concrete company with practical consequences applicable in

practice.

3.2.2. Data sources

To be able to carry out relevant analyses, which will subsequently be the basis

for a proposal part, we have to describe the individual methods of data and

information collection on the one hand as well as sources, on which it was drawn, on

the other.

As I have already described in the introduction to this dissertation, I have

drawn the most important information and knowledge on the following basic sources:

• study of professional and managerial literature

• study of MBA SE at B.I.B.S. Brno

• internet and web presentations of companies

No less important were also the data from the MIS company, departmental

knowledge of the employees, annual reports of the companies of the same branch,

presentation data of the coating compositions producers in this country and abroad

and published information and professional articles of a marketing character. The pro-

jection of an expected development in future years was elaborated on the basis of

statistic relations, knowledge of the development in the branch and processing sectors

and my own estimate of changes in connection with programs and projects, prepared

at various levels.

Other information sources used for the needs of this dissertation were:

• interviews with BIBS lectors, colleague managers/students, managers of

departmental companies and the other stakeholders

• the research itself in the form of questions and answers among our

business partners, which I have purposefully asked and evaluated with a

50

view to mapping primarily the environment of small and medium-size

companies in the segment of building industry

• marketing researches carried out by external companies in the periods of

October-December 2003 and October-November 2004

• comparison of financial statements of the greatest competitors in and

outside the branch with the statements from the same period in our

company (Source: collection of documents, relevant OR– income

statements, balance sheets, cash-flow, annexes, annual reports)

• annual departmental reports APPM10 (2002, 2003, 2004)

• CRM of our company, where the substantial information from the

market, from our suppliers and buyers, departmental movements, trends

etc. are integrated

3.2.3. Theoretical concept used

In considerations of which of the offered concepts of strategic management

described in chapters 1-3 to use, I had in mind predominantly the fact that a strategy

proposal for a small company with limited resources is in question. I am also aware of

the fact that no matter how good proposal of any strategy will not be successful, if it

is not understandable above all to the bearers of strategic management in the

company.

In our case the bearers of strategic management are primarily the members of

management and owners of the company. Their common interest is of course to

present the new business strategy successfully and implement in the company.

Nevertheless, unless also the other employees concerned as secondary bearers of

strategic management cooperate by the implementation, its realization can be

seriously endangered.

That is why I have chosen, for the subsequent elaboration, the concept of

strategic management, let us call it BIBS concept, as the pillar of the whole

10 Academy of Producer Painting Material

51

dissertation and this concept is described closer in chapter 1–3. To this concept I will

add procedures called “Alternative for SMEs” in chapter 2-4.

Although this procedure can look like a superfluous mix of two different

views of strategic management, I am convinced that it has its reason for the

formulation in conditions of a small company.

3.3. Analytical part

The analytical part of every paper has primarily to secure sufficient material

for the subsequent proposal part on the basis of relevant theoretical instruments. Of

great consequence is also the subjective view of the evaluator also in spite of the fact

that the results elaborated according to the relevant methodology are instructive.

3.3.1. External environment

“ There are companies of three types: those contributing to the fact that

something is happening, those following what is happening and those wondering what

happened “ - Anonym

The analysis of the external environment has predominantly the task to

identify and then define possible threats or opportunities, which the given SBU can

expect by its business activity. It is absolutely necessary for the creation of a quality

strategy and consequent planning.

It is convenient to divide the analysis into the general environment (PEST),

where we are interested in all the important factors influencing economy as a whole,

and a departmental environment (Porter), in which we are trying to look for relevant

threats and opportunities primarily for the given branch of business.

The importance of these activities is given by the fact that the main causes of

the increase, decrease or other changes are given mostly by the influence of environ-

mental factors and only then by its internal state. Researches also confirm that the

52

companies carefully monitoring and systematically analyzing the company’s

environment are more successful.

PEST Analysis11

This analysis is concentrated first of all on monitoring and evaluation of

trends, which can influence the company significantly in future. As a company

importing and exporting products, we have to concentrate, by the analysis of the

external environment, also on the influences within the European Union.

Because it is meaningful to deal with only those factors, which are relevant for

the given issue, I will purposefully not mention all the factors. Another important fact

is that by the analysis it is necessary to consider primarily the trends, which can

influence the company in the given period, in our case it is the period of two years

(2005-2006).

It is convenient to realize that the quality of information obtained has a

decisive influence mainly for the person, who will make the strategic decision on the

basis of it. The truth is that the better the information obtained, the more effective the

consequent solution proposal and the probability of success.

Political factors

If the PEST analysis is not to be only a formality, it should, primarily in

companies trading with foreign countries, concentrate also on the all-European

context.

Because nothing is predestined in the European development in the next

decade and the development can make for various directions.

Although many of the great decisions about extending the EU have already

been made, its impact depends decisively on the selection of strategies, which are still

lying in front of us. There are many possible results. This range is illustrated by four

possible scenarios12. The most probable of them is Scenario No. 4 (probability 40%).

11 most information drawn on www.businessinfo.cz 12 Economist Intelligence Unit, 2003, p. 52-54

53

National support of integration is weak and economic liberalization

stagnates.

• single market strengthens, political integration slows down

• governments prefer status-quo for EU

• further extending is possible, but expectations on both sides are smaller

• economic competition among member states will intensify, it will

enforce certain reforms at the supranational level

• countries, which undergo reforms, are “rewarded” with a greater

dynamics – lower unemployment, faster growth

• a considerably uneven performance among EU countries

• most of the member countries will accept Euro, but some of them will

stay outside

• EU is not the most important player in the foreign policy, but the

“coalition of the willing” gathers to debate specific questions

• Big member states ignore foreign policy at the expense of bilateral

relations, especially with the USA and perhaps Russia

54

Figure 3-3: Scenario of future Europe

This scenario forecasts that Europe will become more or less a mosaic, but

relatively successful. Little will be expected from the progress at the EU level and

thus the burden passes straight to the governments of states. Their performance will

be different and in connection with that also the growth schemes across the EU. A

more intensive economic competition on the enlarged single market, however, will

stimulate such policies, which make the markets more open and flexible. Political

integration, suspended at the level of European twenty-five, will move forward

mainly with small groups of specific issues. Although the other member countries will

view these groups with caution, they will be perceived as useful experiments, which

represent only a little threat for the EU as a whole.

From the point of view of the Czech Republic the political factors are

following:

The Czech Republic has been heading towards liberal democracy already

since its foundation. At this moment, apart from other things, the constitution had

55

already been prepared including the voting system. It determines that the

parliamentary election takes place according to the principle of proportional

representation.

This system in fact enforces coalition governments. The government made of

one party is usually possible only as a minority government – proportion of the

greatest parties approaches 30%. This system can be perceived as the source of

political instability. The tension by constituting the minority government coalition

after the election in 1996 or difficulties by constituting the coalition government after

the election in 1998 are evidence of that and show possible risks.

Most parties form their political programs according to a simple scheme:

market and free economy + legal state. To this some parties – especially the left-wing

ones – add social, potentially ecological orientation. With a view to the fact that

parties do not make their programs concrete in the form of proposals of factual

measures, it is difficult for voters to orientate themselves rationally.

- relative political stability (probable change in the following election,

when the governing ČSSD will be replaced by the right-wing ODS)

- protection of intellectual property has considerable reserves as regards

enforceability

- European standards are established in many fields thanks to the

conditions incorporated in the access agreement and continuous control

- stimuli to foreign investors are markedly motivational

- total tax burden is high

- working hours/week is longer than the European average

- average nominal wages (+ approx. 5%) as well as its real value (+3,7%)

has been permanently growing for several years in a row already, now

its value is 18 220 CZK in the business sphere

- minimum wages is set to 7 280 CZK (January 2005) and since 1991,

when it was statistically recorded, it has been continuously growing

- little directness of social benefits, high tax burden and non-existence of a

global system of lifelong learning

56

- toughening the conditions of paying unemployment benefits as well as

conditions of premature retirement

Economic factors

The trend of a comparatively strong crown against European currency is

convenient for importers. Stable business environment in the conditions of developing

democracy. Since 2000 light growth of GDP (3,1% in 2003 and 2004) and more or

less expected development of basic macroeconomic indicators (specifically with GDP

we suppose growth in the range from 3 to 3,5%). It is possible to observe a

considerable reduction of money price to the lowest value in history, increase of

unemployment rate above the limit of 10% and a historically advantageous rate of

CZK towards EUR – for importers. Household consumption will be increasing in

approximately the same values like in 2004 also in this year (approx. 3.3% to 3,7%).

These are factors influencing companies positively. Problems can be caused in future

by deficient economy with the state budget and deepening the national debt.

Economy is in good condition and for the first time in the last 9 years the

growth of GDP exceeded the limit of 5%. The growth is drawn by export, not by

home demand, and thus there is no risk of increasing the inflation or worsening of

trade balance, as was the case in 1996 to 1997. On the contrary, the excellent trade

balance strengthens the crown and therefore lowers inflation. The Czech economy

thus has its best future prospects in its history. Moreover, the GDP is growing

considerably thanks to the support of foreign investments and a successful drawing on

the EU funds, especially in support of business.

The ability of companies to export is the consequence of investments and of

extending production capacities in previous years.

At the moment the Czech Republic is at the head in the EU as regards the

growth of GDP with almost a quadruple of the EU average (1,3%)13. By way of

contrast, Germany 0,6%, France 1,3%, Great Britain 1,8%.

Economic situation in the last year and economic development followed up

with the growth tendencies from 2001, but not all the conditions were so favourable.

For example the growth of the European GDP has slowed down by more than two 13 Information from 2nd quarter of 2005

57

percentage points, in the so-called technological sector it has come to a crisis and the

fluctuation in oil prices has been still fading. The growth at last broke free from the

stagnation, but the growth was very little. The bearer of this trend was Germany,

which is the general trading partner of the Czech Republic.

Thanks to low labour costs and competitive prices the CR was able to

eliminate to a degree the low growth of European countries, but even so it came to a

considerable decrease in foreign trade dynamics.

The departmental structure of economy did not markedly change, slight

tendencies to strengthen the participation of services in the creation of GDP to the

exclusion of both primary (agriculture, raw material extraction) and secondary

(industry, building industry) sectors were going on. In 2000 – 2002 the inflow of

foreign investments was apparent in certain branches (trade) and spheres of

manufacturing industry with mass production, which led to a more vigorous increase

in labour productivity. In spite of sufficient production capacity, outdated technical

level in a range of fields and a great labour supply, there is still only a little pressure

on the growth of labour productivity and changes in the structure of production.

- economic system is stable, we are beginning to be a standard economy

of European type

- state interventions into free trade are minimal

- performance of financial market has an increasing tendency

- infrastructure is developing successfully predominantly thanks to

foreign investments (which have a slight decrease compared to the

previous period)14

- abilities of employees are within the frame of European average, from

the point of view of productivity we are still behind the EU, although the

total productivity is growing (4,6%)

- at the moment the economic growth in the CR and SR is fastest in

Central Europe (even from the absolute point of view)

14 Yearbook of HN (Economic newspaper) 2004

58

- the value of inflation is continuously approx. 2,1% this year, which is

the same as the average in the Euro zone

- unemployment has been slowly decreasing since January of this year,

when it was 9,8% and at the same time highest in the last year, in

August 2005 its value is 8,6%, which is still more than the EU average

Social and demographic factors

The living standard of the population in CR is growing and this phenomenon

is apparent also in building industry. State housing assistance (of mortgage or saving

for building purposes, etc.) as well as higher incomes result in higher consumption of

coating compositions. The building production is growing and if this trend is going to

continue, interannual growth is estimated at min. 5-8%. As regards the individual

market segments, exterior paints have had a descending tendency since 2000, in 2003

the slump stopped and a slight grow is supposed in the following two years. In

decorative inside paints the supply markedly outstrips demand, we are expecting a

stationary state, higher competitive tension and a great price pressure.

Market demand is of a variable growth character supported by the demand of

professional segment and a gradual demand of hobby segment. This aspect presents

itself by the growth in companies oriented to craftsmen, the interest is directed at

specialized dealers. Retail networks (OBI, Baumax etc.) represent today approx. 11-

15% of all purchases of decorative coating compositions, their position strengthens

with the number of shops. Dealers prefer professional prospective buyers, but the

measure of communication is superficial. Sales promotion runs by means of sales

offers or loyalty discounts.

There are quite a lot of negatives in this sphere, especially the ageing of

inhabitants and unsolved pension reform, weak mobility of work force and lack of

supply of labour in closely profiled positions. Problems are also caused by the

concentration of specialists and professionals towards Prague. People start to perceive

environmental issues and begin to be more active in enforcing their ideas – especially

rejecting ones (dumps, problematic plants and productions). During the 1990s it came

to striking changes in the lifestyle and exploitation of free time. Consumers become,

thanks to a greater supply, more demanding and sophisticated.

59

Important element is the education of population. During the last nine years

there is a positive development tendency here, which shows a higher number of

academically qualified people (+ 20,3 %) and secondary school students (+ 19,1 %).

Number of people with elementary education and without education is lower (- 19,4

%). This trend brings pressure on higher wages, creates new attitudes to the length of

working hours, self-improvement and last but not least to the mobility of work forces.

High unemployment together with the stagnation of wages result in

households in postponing some less important purchases for more suitable time.

Thanks to the inclination to the habits of people from highly developed countries and

to a total change of household expenditures, the trend of increasing purchases by

means of instalment sales of certain kind of goods is apparent.

Similarly to the previous period, not only statewide, but also regional point of

view is further necessary of:

- living standard of population is growing and life style resembles more

West European economies (leisure time activities, education, etc.)

- average age (39,5) as well as old age index have been continuously

growing since 1991

- little mobility and flexibility of labour force (similarly to EU)

- in the last couple of years the decrease in population with elementary

education is apparent, slightly increasing is professional and complete

secondary education, as to the percentage, the greatest growth has the

interest in university studies (absolutely)

- number of divorces has been growing since 1999 (32 000 in 2005),

number of marriages at the age of 25-29 decreases in favour of the age

range of 30-34 years

- attitude to health and environment has been substantially changing in the

last 10 years, the evidence is apart from other things prolonging life

expectancy

- number of issued trade certificates also confirms the spirit of enterprise

60

- the Czechs are still conservative as to moving even within regions,

numbers are the same in the last years

- investments in environment have been gradually decreasing since 1995

(32 milliards, or 14 milliards CZK), on the other hand the fact is that for

example areas of nature reserves are increasing, air and water quality

improves

- Living standard increased, but at the same time deepened the limits to-

wards socially weak groups of population (families with children,

pensioners, unemployed)

- A decisive growth factor became labour productivity, but the relation

between the growth of labour productivity and the growth of real wages

is below the level of balance

Technological factors

Concentration on the technological development in the sphere of products is

important primarily with companies following the differentiation strategy, unlike

companies concentrating mainly on the technologies increasing productivity. These

companies then prefer the cost leadership strategy. From the point of view of the

market share, contemporary trade policy and mission of DPC company, a tendency to

the differentiation strategy is apparent and that is why it is necessary to concentrate on

technological conditions on the market.

The market with special building materials, coating systems and paints offers

goods and products of various qualities. This depends firstly on the possibility to react

flexibly to the demand (laboratories, logistics system) and secondly on technologies

used by final treatment (pigmentation and stirring apparatus). In case of possibility to

use own laboratories it is an advantage involving the possibility to offer new products

and innovate older ones. As regards final treatment of products by pigmentation of

shades according to the customer’s wish, very important are technological

apparatuses, their qualified operation and last but not least also software with

formulas and variant offers.

61

Because the technologies used are capital-intensive, the long-term strategic

planning is emphasized. On the basis of these technological analyses, such a

technology is selected, which meets the necessary criteria. They are for example

advantage over the competition and adequate time sustainability or quick return of

investments thanks to relatively high margins.

Production by means of such technology is then flexible, effective and faster.

But it can also be a good marketing instrument, because a customer prefers to use the

possibility of buying a product made by the most modern technology than that

processed by outdated manufacturing processes. The indisputable advantage of the

use of modern technologies is the possibility to organize the production better, faster

and with less human factor, which is from the point of view of increasing labour

productivity and decreasing costs appreciable.

- The contemporary technological development in some segments

corresponds to the development rate in EU (mobile phones), in other

segments we are still below the European average (internet)

- The technological impact on the productivity is recognizable especially

in factories with foreign property participation and in services (mainly in

IS/IT)

- The speed of technological spread is given by primarily a marked

influence of foreign investors (although in the last two years the speed

has been decreasing)

- There is an exponential growth not only in the number of PCs in

households, but also of high-speed Internet connections, of mobile

phones and of own web sites.

- As well as the number of human resources in science and technology has

been growing since 2000, the number of economical subjects dealing

with science and technology is growing, internal science and research

expenses are growing as well (32,3 milliards in 2004)

62

Porter’s model of competitive environment

Considering the above given we can suppose further economic growth, which

cannot miss the sphere of building industry. Because DPC concentrates on the

production and sale of the so-called special building materials and is to a decisive

degree dependent economically on these activities, the development on the building

market will have a substantial influence on further development and functioning of

the company. Building industry was in a slight slump to 2003, although for example

housing development (starting, construction and completion) of flats has a clearly

growing tendency, apart from the year 2001. The main reason of decline in building

production was restrictions in 1997 - 1999. These savings affected the sphere of

investments, construction in general and slowed down markedly repairs and

rehabilitation of buildings. In 2001 – 2002, apart from public contracts, also

construction within the frame of inflow of foreign investments contributed markedly

to a repeated growth. After the entry of CR to EU in 2004 we are expecting further

inflow of investments into this segment of the market. This will also bring an

increased number of orders and subsequently an increased demand for materials that

we trade in.

Bargaining power of buyers

Bargaining power of the greatest buyers is relatively great. If we have in mind

the first group of customers described below, large building companies are strong in

their position. They ask for extended maturity, the so-called retained money, when a

part of means invoiced is released after the expiry of guarantee, further the fulfillment

without the deposit on material, supplier credits, etc. Distributors and realization

companies: with these the bargaining position is the strongest at the beginning of the

relation, when they are trying to find a suitable supplier. As soon as this partnership is

established, their position in this sense is limited and after signing long-term contracts

they are trying to achieve correct relations with their suppliers.

It does not mean however, that they could not go over to a competitor, because

his switching costs are relatively small. Because there are available substitutes and if

this customer has market information and is a strong distributor in the given sphere,

the threat can be real. If he, moreover, does not perceive differences between the

63

products of individual suppliers, it is expensive to retain such a customer, but it is far

more expensive to win a new one.

Bargaining power of suppliers

Bargaining power of our suppliers is markedly weakened for several reasons.

An important element is our stable position on the market. There are quite a lot of

producers, both domestic and foreign. We have exact and up-to-date information from

the branch by means of marketing activities and other activities. Thanks to long-term

relations there is a certain form of partnership between us and large purchases with

the greatest suppliers are the result of accumulating purchases of products of the same

quality from each of them. But the substitutability of the mentioned products is

considerable, because the products and their qualities are similar. It is caused, among

other things, by standardization, and that is why we can put also the products of

another producer into the certified system without changing quality of the end

product. Switching costs on our side would then be minimal.

On the other hand there are also reasons, which increase the strength of some

suppliers. In case of the change of strategy these suppliers can carry out the forward

integration, which is not possible in the opposite case. The strength of our SBU is

further lowered by the fact that it has only a limited influence on other distributors.

Threat of entry

A beginning company with a small volume of production or sale will not be

financially attractive for potential customers compared to the already existing

competitors. Because they have important cost advantages following from the

experience on the given market and by the access to know-how and existing sources.

In the sphere of economies of scale there is not too large space for new

players, because the barriers mentioned below are important by considering the entry

to this segment of the market. The reason is high input investments and fixed cost,

low profit rate and lately fluctuations in growth and fluctuality. Having these

obstacles in mind, a relatively difficult connection to distribution channels seems to

be less important.

64

While competitor companies especially from Germany and Italy stagnate in

their further development or are only slightly increasing their influence on the market,

import and sale of the products of Slovenian companies shows a considerable growth.

Although these companies have at present a relatively small share in the total import

(9 %), their potential can be a complication in future.

Threat of substitutes

The threat of substitute is relatively high. Although the companies offering

substitutes have not often a sufficiently wide assortment of goods, services and

quality, the idea of substituting a part of product portfolio by substitutes thanks to the

lower price is very tempting for a customer. Switching costs are moreover also low.

Competitive rivalry within industry

The rivalry of companies on the market is high, because a great lot of compa-

nies operate on it. The profitability of the branch is not too high and the competitors

are often concentrated on the survival strategy. Thanks to the fact that this market is

not too growing at the moment, companies try to maintain their positions almost at all

costs.

Benchmarking of products and competition

One of the strategic objectives, which should be set by every Czech company,

is a considerable increase of labour productivity. It is an important element showing a

promising growth and can be a basic competitive advantage. That is why it is often

one of the comparative criteria.

65

Figure 3-4: Graph of productivity of DPC SYSTEMS (in CZK)

It is apparent from graph 3-4, that labour productivity measured by total yields

or sales and by the added value to number-of-employees ratio is growing. In spite of

this positive trend it is, compared not only to the competition on the domestic market,

low. By way of contrast, labour productivity of the EU 15 average in the sphere of

trade is by almost 70% higher. The growing productivity is to a great degree given by

the change of managerial behaviour and on the basis of strategic management.

Competition

The entry of new competitors and potential withdrawal from the branch is

comparatively easy. The withdrawal from the branch is not so often, because

companies prefer the variant of expanding the influence in the value-creating chain to

a change of influence in the given branch. There are several barriers considered by

each subject interested in the entry in this field.

If we ignore for example technological factors, to the main barriers of entrance

belong high fixed expenditures, growth fluctuations, not too high profits, empirical

effect and the necessity to cope with the winter season, when building activity is

considerably damped down. And last but not least, we can topically mention also an

66

anticipated growth of final prices thanks to the increased VAT and an important factor

is also the image and history of the company.

The position of our SBU on the market is regularly evaluated thanks to

marketing activities, information from the field, Internet, company periodicals and

also sources such as for example register of companies or court. We have at our

disposal regular evaluations of subjects in the form of official reports (annual report,

balance sheet, income statement, etc.), which helps us by determination of partial and

strategic decisions.

It follows from these sources that we cannot compete with companies taking

advantage of economies of scale as to the volume of sale, but in the sphere of product

differentiation and special materials we have relatively stable results, measured by the

profit rate. The trend of these indicators is, in comparison with the selected

competitors, increasing.

Figure 3-5: Benchmarking of competitors

I have chosen the above given competitor companies for the reason that we

encounter them most often in the fight for a customer. Within the frame of this

competition it is in my opinion provident to monitor the competition and compare it

with our company in basic factors.

67

It follows from the graph 3-5 that the companies mentioned are considerably

more productive than our company and their advantage increases each year. That is

why it is desirable to obtain enough information about their activities, method of sale

and other factors.

Products

The meaning of this comparison table is the absence of arguments both for our

traders and for our external dealers. The aim was to create material, which contains

relevant data and comparable materials and which will be possible to be updated

continuously.

Table 3-4: Benchmarking - Exterier Products

Group Company Product name Package kg/l Price / m2

Paulín Floral 418 14 l 19,40

Mineral-Finish 24 kg 16,60

Mistral Fasade 1 l 15,54

10 l 13,55

Tikkurilla Finngard Novasil 10 l 22,14

1 l 18,19

Keim Granital 5 kg 26,84

25 kg 26,83

Baumit SilicatFarbe 5 kg 46,48

25 kg 46,48

Caparol Amphisilan 10 l 32,50

Sylitol Fassaden 10 l 35,75

Tollens Tol Facade Acryl 5 l 19,00

15 l 17,60

Toll-o-tex 1 l 31,00

68

The detailed analysis is an internal material of the company and contains some

inside information. That is why a view of the products can seem superficial in this

form. Apart from other things however it contains a misleading reducing from kg to

lb, the remaining sizes of packing or discounts on products for both retail and

wholesale customers. For the purpose of this dissertation the table is sufficient. It

follows from it that, if we compare competitors aiming at the same target group and

products of the same (similar) qualities, we are more than able to compete. But we

must communicate this advantage better towards customers.

Table 3-5: Benchmarking - Interier products

Group Company Product name Package kg/l Price / m2

Mistral Dekor 1 l 10,40

10 l 9,04

Tikkurilla Pure White 10 l 4,58

Optiva 5 10 l 13,38

Optiva Supermat 10 l 12,97

Paulín Tixotropica 14 l 5,48

Tollens Crylomat 5 l 14,80

15 l 13,00

Fastomat 5 l 19,30

15 l 17,90

Defi Profi 14 l 8,40-11,10

40 l 8,00-10,70

inte

rin

ter ii

oror

Caparol CapaTrend 2,5 l 8,43

15 l 18,40

Toll Facade Silicate 15 l 22,70

69

10 l 6,88

ExpressMalerit 2,5 l 11,00

30 l 9,74

Unlike the category of products for exterior paints, we are, at first sight, not so

interesting for a potential buyer mainly from the point of view of price. However, we

can turn this handicap to our advantage by means of an appropriate marketing com-

munication, if we offer this factor with other services.

In the remaining categories of products the situation is similar to that of

interior. They are mainly the category of products for wood, ferrous and non-ferrous

metals, decorative paintings and specialties.

Summary by means of ETOP15

I want to summarize the results of external environment by means of this

technique. Although it can be considerably enlarged by other factors, such as impact

of individual factors on receipts or costs, the purpose is to identify the expected trends

and estimate their probable influence.

Table 3-6: Shrnutí formou ETOP

Sector of environment

Influence Value

political stability

growth of living standard

education of population

excessive social orientation

o

+

+

-

15 Environmental Threat and Opportunity Profile

70

economical growing and strong currency growth of GDP

productivity of labour inflation

+ + - -

social unemployment low mobility and flexibility of population

education is growing population is growing older

+ - +

o/+

technological Inflow of new technologies use of IT

+ +

suppliers bargaining power of suppliers is weakened +

customers their position is strong switching costs are relatively low

- -

competition shows growing receipts and profits number of direct competitors is lowering

productivity

- + -

products qualitatively at a lower level (technically and subjectively) prices per m2

range of assortment and services

+ - +

+ opportunity - threat o neutral

3.3.2. Internal environment

One of the standard methods serves for identification of threats and weaknes-

ses of the company and it is one of the conditions of a successful implementation of

the strategy. Individual elements must complement one another and only in their

mutual harmony key success of each company can be searched for.

71

«7S» analysis (selected factors)

Figure 3-6: Methodology of McKinsey Company

An analysis of internal environment can help us to reveal strengths and

weaknesses of a company and is an important component conditioning the subsequent

successful implementation. I will shortly mention key factors of success according to

the model of McKinsey consulting company.

Systems

Thanks to the well-established quality system of ISO 9001 also the control

systems and sharing of information are given. As regards control and distribution of

information, there is a functional and comparatively effective system here, in which

the information is at the disposal of all the employees by means of intranet.

Style

The style of managerial work has been considerably changing during the last

three years. Nowadays, an important part of this style is a quest to solve problems by

means of a subordinate. A problem appears, when there is contradiction between what

is really happening and what you wish to happen. An employee should use his time to

72

solve his problems and not the time of his superior16. Of course, this style is grounded

on basic values, principles, regulations and directives, but unlike in previous years,

these are more formal and the stress is put more on the form of mentoring and

couching.

Basic difference is probably in the fact that earlier all decisions were

submitted to minimizing the costs and now the decision is effective. In the past the

company was regarded as a “machine”, everyone had his place in the hierarchy given

exactly, so that all activities mesh together like wheels in the clockwork. Due to a

shift in managerial thinking boundaries between individual activities mingle, overlap

and complement one another. A common objective are the same values … .

Staff

The executives (management of the company) are at minimum three years in

the company and they were appointed to their posts always after their previous expe-

rience at the lower posts. We cannot say unambiguously that this is an ideal model,

nevertheless it fits in the contemporary company culture. After the preceding failures

it was necessary to change (within the frame of the new business strategy) the

positions of key workers and that is why the most perspective department was chosen.

Although (or just because) the new management style, change of strategy and position

are for these workers a relatively important motivation, it seems that changes are

realized slower that necessary.

The contemporary management is trying to change the state, which, also

thanks to the above mentioned changes, came about after the change of the

executives. Thanks to the intergrowth of the proprietary and executive structure the

possibilities of further development are limited to a degree.

Relatively positive is the fact that the fluctuation is minimal. It is relative, be-

cause if the company management cannot motivate its subordinates and colleagues in

the long term, there is always a threat of “burn-out”. However, now this fact has a

positive influence on the increasing of experience effect and is also a good signal for

key customers. It is a comparatively young and perspective team of people longing

for success and it is one of the common aims. At the same time a certain caution in

decision-making can be seen after the changes made – perhaps under the unfounded

16 Johnson, Blanchard (1993) p. 30-33

73

threat of the loss of a job or a worry brought about by the feeling that they have not,

in the new business strategy, exactly defined limits, which can lead to their non-active

approach.

Relations are informal, friendly, both between the management and

subordinates, and between colleagues, but with a sufficient amount of

professionalism. Attitudes and loyalty to the company, which is comparatively known

it its branch, are at a relatively high level. The reason a stable team can also be the

system of evaluation, remuneration and wide employee’s amenities, which are above

the average in the branch.

However, there is one element, which is necessary to changed by trainings,

seminars or by means of other methods. It is the time management. Although this

term is used very often lately, not nearly all people perceive it as a weakness or

problem. That can be the reason – together with inappropriate management – of a

frequent not meeting deadlines of individual projects and therefore of a slow shift

from an idea to the goal.

Skills

These are, from the professional point of view, of a very good standard. There

are people in each department, who are at a sufficient level from the product or

professional point of view and who, by following new trends and self-improvement,

are convenient for the demands of the company. We are trying to improve these skills

also for example by the fact that minimum two employees (also from various depart-

ments) of our company always take part in trainings for our business partners or

potential customers, so that both the feedback, and extending the knowledge of all the

employees could be secured. We are not yet completely satisfied with the fact that the

absolute orientation to the customer is so far more a proclamation than a fact. This

new view of (not only) business relations with our partners is too fresh to be able to

function without problems. If however time tells that we are not able to fulfill new

tasks with the existing employees, the structure will have to change in favour of the

system, because this system is accepted and supported by most „stakeholders“.

Thanks to a sharper competitive fight we came to the conclusion that selling

skills of tradesmen must be markedly supported by trainings, because to deal with the

objections of new customers is a great problem for us.

74

The above mentioned allegations are based on quarterly evaluations of wor-

kers of individual departments, which give us (apart from setting the standard for a

given position) answers to questions, about which topic it is necessary to secure a

training or seminar.

Table 3-7: Vybrané kritéria hodnocení pracovníků

(selected) Criteria Aim Contemporary state (1-5)

proficiency knowledge of products

language skills

computer literacy

1

2

2

2

3

4

others skills efficiency

consistency

drive

Shared value

Due to the natural development of the company, change of strategy and

influence of the external conditions, also the informally delimited mission of the

company is changing. If we understand mission as a way to the future desirable state

– vision - and concentrated more or less on the present, it is clear that it must be

revised from time to time and adjust to external or internal conditions. One of the

basic foundation stones of this company’s mission is „to constantly maintain and

strengthen confidence and satisfaction of our customers“. All the employees should

try to orientate oneself to the customer, although we can see that this is only a formal

declaration for some of the employees. The reason is probably the appreciable change

in the organization and the effort to change thinking in the approach to customers. Es-

pecially those, who are in the company for a long time, are not able to adapt

themselves. Because in the contemporary turbulent environment slow changes and

inadaptability are inadmissible, this can be one of real threats of the company. One of

benefits, which the change in approach to customers should be, is the fact that any

decision of any employee – if it corresponds to our mission – gives the possibility of

75

one’s own initiative. Thus, a passive employee can become a creative and active

individual.

Factors of company and working resources

DPC puts emphasis on the prestige and image of the company, experience and

motivation of executives and quality of employees. Neither underestimates it the ef-

fectiveness of the organizational structure and the importance of information system.

Especially after the commitment in the form of the obtained ISO 9001

certificate the organizational structure is constantly subjected to revisions and in spite

of the effort of all the employees it still has reserves. The aim of top management is

for the organization in the company to function in accordance with objectives and

visions of the company.

In the budgets of the beginning of the given period, regular education of em-

ployees, partly according to financial possibilities of SBU, partly also with a view to

the needs of the company, is always taken into account. And last but not least, also the

interest of employees in further professional growth plays an important role in the

education plan. This plan is made on the basis of interviews of employees with the

immediate superiors.

Unlike personnel policy, social policy has a clear direction in the future. The

support of employees for example within the frame of additional pension insurance or

longer holidays are probably other reasons, why the fluctuation of employees is

almost zero.

The number of employees of the company, after the consolidation of forces,

reached 13, from which 6 are women and 9 men. 5 employees are directly involved in

trade, 4 are a part of logistics department, one works in marketing and the company

management has 3 members.

One of the greatest problems of SBU is little successfulness in winning orders

and the system of management of business team. But if the work effectiveness

increases properly with commercial representatives, the way of their management

changes and possibly the team supplements with one commercial representative, the

76

structure, size and proficiency of the company as a whole should meet the

requirements necessary for achieving the company objectives.

The information system has also gone through an important change in the last

two years. The basis of this change was unification of programs and modules from

various companies (store, accountancy, property wages) and replacing by one system,

which includes all in one whole. HMD company was chosen on the basis of selection

procedure with a view to contemporary and future supposed needs of SBU. It was

appropriate also from the point of view of the possibility of flexible expanding and

from the point of view of readiness for new information technologies, technological

trends and development.

From the point of view of stability also the background, in which the company

functions, is important. DPC has not its own real estate and its functioning depends to

a large degree on the lease. But we have enough evidence from the history to decide

for a change of attitude to this issue. One of the priorities in the nearest future will

then be the effort to buy or build a head office.

Financial and budget factors

Since the beginning of its existence, DPC has realized lucrative and interesting

businesses, which enabled it a comparatively fast development. The boom of business

activities was especially apparent after the entry of the foreign partner in the property

structures.

The year of a turning point, when the company experienced hard competitive

fight and when management of that time contributed to the unsatisfactory results, was

the year 1999. In the following two years the company oscillated in the zone of red

numbers and the only possibility was to establish the “survival strategy”. Only in

2002 it came to a mild recovery and the continuous cumulative results from the 3rd

quarter of 2003 indicate that the growth has a rising tendency again.

DPC has not been forced to ask for a financial credit until the last year. But

nowadays, when the provision of resources would help the company to bridge over

short-term difficulties, banks judge subjects primarily according to the financial

statements, and their obtaining is therefore not quite real.

77

Figure 3-7: Internal Benchmarking - sales

Figure 3-8: Internal Benchmarking - financial obligations

78

Figure 3-9: Internal Benchmarking – ROA

It is apparent from the graphs shown that receipts and margins have falling

tendencies17. The departmental environment is growing and that is why the result is

even more dissatisfying. The reason why margin is not decreasing adequately to the

turnover is the fact that there are higher savings on the costs side, even if it, in the

long run, damages the company, a positive is the growing productivity.

Receivables are falling faster than obligations, which means a negative

development, assets are being consumed and unless the trend of growth in turnover

reverses, existential problems can occur.

Primarily in the last period under consideration we can see, how quickly the

other financial indicators are falling, which consists mainly in low receipts, which

often do not cover monthly fixed costs.

17 Sedláček (2001) p. 35-48, 62-77

79

Analysis of buyers

Paret’s rule

As I have mentioned previously, if we want to be successful, we must be,

apart from other thing, effective. That is why it is not off the point to carry out the

analysis of customers in regular intervals. The same is of course true of suppliers,

which is in our case, thanks to the exclusive representation of Tollens trademark in

CR, not topical.

One of the possibilities is to use the Paret’s rule. If we compare the periods of

2003 – 2004, we find out the following:

• the trend is that we sell smaller volume of goods and less items to more

customers (303, 304)

• 20% of the most important customers generate us 87% of the turnover,

which is the same in each year

• in case of profit there is a tendency that the same group of customers

generates us less gross margin (86, 85)

It follows from this that it is necessary:

• either to strengthen the positions (by the offer of services, actions,

benefits, marketing etc.) of customers <20%

• or to weaken the positions of „TOP 10“, or possibly of the least

profitable customers from the point of view of LifeTime Value

Management.

• or to combine both with the aim to approach the Paret’s rule 80/20

“A-D” analysis

As it was mentioned in the previous chapters, according to the generic

character SBU PAINT applies differentiation strategy. It follows from this that, apart

80

from other things, it is absolutely necessary to divide the existing customers into

categories, on the basis of which we can offer better services corresponding to their

requirements.

On the basis of the existing experience and needs we divide our customers in

the following way:

Table 3-8: “A-D” Analysis – terminology

Marking Description Note

A building company Companies realizing both painting work and insulating systems

B painting companies and tradesmen

Specialists in paints - painters, decorators

C mix distributors Trading companies with their own realization activity

D pure distributors Trading companies without their own realization

E others Other undefined companies with turnover lower than 50 000 CZK/year

Important, but so far comparatively badly measurable distribution channel are

architects and designing offices. In spite of the fact that they participate indirectly in

our turnover considerably, they are not taken into account in the following graph.

81

Figure 3-10: “A-D” Analysis (2003/2004)

We can approach a detailed analysis of customers from various points of view,

e.g. from the point of view of profitability, market share in the given region or

perspective and potential growth. Decisive for further analyses is the assignment (e.g.

within marketing strategy).

Analysis of products

If we apply the Paret’s rule also to our line of products, we come to the

following finding:

• we are selling less items than in the previous period (340, 307)

• 20% of the best-selling items bring 83% (2003), or 84% (2004) of the

turnover

• according to profit, first 20% of items generate 85% (2003), or 86%

(2004)

The importance of the most sold items is therefore relatively high and has a

slightly growing tendency. It follows from this that it is necessary to optimize the

portfolio of products. It is therefore necessary to change, supplement or support less

sold items, or to narrow the lime of products. The solution could be a compromise

variant, i.e. to have a part of it to order only.

82

As well as in the case of customers we can (according to the character of a

concrete project) use the analysis according to turnover ratio, margins, product lines,

etc. But it is always necessary to have mainly trends in mind, that is why it is

necessary to carry out these analyses regularly.

For the sake of this paper we will not need other product analyses now. It is

mainly the matter of method and they would not have a great influence on the end

result.

Summarization in the form of SAP18

This technique enables to summarize key factors of internal environment. It

can also be extended by the weight of individual factors and their influence therefore

quantified. But for the sake of this paper it is not necessary.

Table 3-9: Summarization in the form of SAP

Internal factors Competitive strength or weakness

management style, management, ISO 9001 +

low fluctuation – stable team o/+

expert knowledge +

work effectiveness - time management -

Selling skills – orientation to customer -

social policy - benefits +

system of motivation -

IS/IT +

background – lease relationship o

finance (cash flow, turnover - profit, ROA, indebtedness, liquidity, obligations - receivables)

-

distribution channel - architects -

18 Strategic Advantage Profile

83

portfolio of products and services -

distribution of customers -

owners in commercial structure -

+ strength - weakness o neutral

3.4. SWOT

From a purely technical point of view we cannot, in fact, speak about analysis,

because it is “only” a sum of the most important conclusions and knowledge from

previous analyses. In spite of that it is a key element, which defines and names

strengths and opportunities on the one hand, threats and weaknesses on the other.

Table 3-10: SWOT

Strenghts Weaknesses

Strategic management

Company culture

Trademark image

Portfolio of products and services

Support of owners

Professional qualities of employees

Planning

Proactive management

System of company education

Using the market information

(inter-organizational learning)

Controlling and effectiveness

Financial management

Finding key customers

Management of receivables

Time management (consistency)

Selling skills

Productivity of labour

System of motivation

Owners in commercial structure

Opportunities Threats

84

Use of IS/IT

Finding an objective

Competitive advantage (technically)

Extending the trade network

New marketing activities and

distribution channels (architects and

design offices)

Extending services – maximum

orientation to customer

Internal and external communication

Selling manual

Strategic alliances

Growth of existing competition

Non-adaptation to surrounding

(branch) conditions

Bargaining power of key customers

Support of general contractor

Payment morale of customers

3.5. Proposal part

„The best way to retain customers is to think permanently, how to give them

more for less money“ – Jack Welch, former chairman of the board of General

Electric

The proposal of business strategy on the basis of relevant analyses must, after

being approved by the company management, have the following parameters:

- link-up to company strategy, SMART criteria

- to respect wishes and attitudes of stakeholders

- to determine concrete responsibilities (implementation, controlling,

communication)

- maximum use of company strengths and opportunities offered

According to the following figure I will gradually formulate key activities,

objectives and proposals for each of the spheres of this enlarged marketing mix as a

starting point for defining business strategy.

85

Figure 3-11: Widened marketing mix

3.5.1. Product portfolio

From the point of view of products we have a relatively wide line of products.

This opinion is based on periodic questionnaire surveys among our distributors, their

customers, retail selling and other sources. Apart from the cheapest products, which

could compete with domestic producers (Balakom, HET, Primalex) and some special

products (Keim), the product portfolio is sufficient to cover the requirements of most

customers in the segment, on which we concentrate.

To the main strengths belong, apart from other things, a wide range of shades

of colour, which able of pigmentation into various materials and several qualitative

and price levels of products. If we compare the quality of products, amount of

packing offered, margins offered or service related to technological issues, we are

totally competitive in the segment, where our activities aim.

Although the scale of products is relatively wide, I must define several

shortages, which are necessary to be removed:

• portfolio opotimization, maintaining internal margin

• low possibility of influencing production

• slow innovation and reactions to customer’s needs

86

Even if we have three categories of products at our disposal (qualitative,

price), in each category (interior, exterior, wood, metal, other) we use these

possibilities very little. It is predominantly the question of selling skills, relevant

know-how and good knowledge of strategic objectives of the company.

We must further better communicate advantages resulting from technical

advantages of products (substantiality, advantage of small packings, various

possibilities of pigmentation, properties such as abrasion resistance, etc.) On the basis

of our experience, know-how of the French supplier and modification for the Czech

environment it is necessary to create a selling manual, the content of which will be

the main selling argument. The commercial director will be responsible for this step

and the time horizon for elaboration must take the following commercial season into

account.

Other two defined shortages are a consequence of the fact that Tollens is only

one of the trademarks, which they have in their product portfolio and the other

trademarks represented (Agora, Settef, Viero etc.) have already been offered by

competitor companies in the long term (e.g. Montako - Viero). It is given by the

gradual globalization, by merger of supranational companies. If we want to remove

this problem, there are in fact two possibilities.

• to persuade the existing supplier of the necessity of the intended changes

with a view to the future holding and development of both our company

and the Tollens trademark.

• within the frame of one of the forms of strategic alliances19 to enter the

cooperation with the competing subjects, possibly to buy the required

products from them

In the last couple of years domestic producers have got to the technological

level of foreign producers of coating compositions, thanks to the investments in the

production, and the same is true in the technical support.

That is why I see one of the opportunities in the use of a strong image of the

trademark and in the offer of new services, which will reflect the needs of customers. 19 Vodáček, Vodáčková (2004) p.76-82

87

The offer must be grounded on our contemporary possibilities, be addressed at the

maximum and primarily respect wishes of the target group of customers. As services

using new technologies20 and fulfill the above mentioned parameters I regard:

• quality and up-to-date web presentation connected to CRM and MIS

• on-line technical support, Q and A, fast response to answers

• web calculator for a quick calculation of the volume of colours

necessary for a concrete building

• possibility of visualization of objects (exterior, interior) supplied by the

customer with the offer of colour solution

• spectrophotometer including software for the modification of formulas

• to solve potential claims mainly with a view to customer

• offer of “package” of services with various values to various customers

• internet shop in a modified form, which stresses 4C for a customer

The above mentioned new services must be coordinated by a member of

management, who will be able to define both the marketing strategy, and IS/IT

strategy. It is necessary to secure the basic proposals with the possibilities of

realization by the end of 2005, so that the services are communicated and ready for

use before the spring season.

3.5.2. Price Policy

Price is the only one component of marketing mix, which does not create

costs, but incomes. That is why it is very important to select it properly also with a

view to the realized volume of sale.

The list price and the accompanying pricing system for the individual levels of

sales are given by the fact that the same model is used by the general contractor. This

system is one of the two systems used (the other model is used mainly by Austrian or

20 Drucker (2001) p. 95-124

88

German companies) and it is appropriate to preserve it in future firstly because for a

customer it is more transparent.

Because products in base prices are almost not sold, there is a question,

whether to change the system or not to the intent that recommended retail prices will

be broadly reduced and the business conditions will be adjusted to distributors. The

aim would be, by an appropriate presentation, the change in thinking of end customers

about a too expensive trademark, increasing volumes with lower margin and a

suitable motivation for distributors in the form of bonuses or backward discounts. The

total reduction should not be too striking, because it could have the following

consequences:

• the expectation of higher volumes of sale would not be realized and the

consequence of this irreversible step would be lower profits of

distributors

• lower list price could evoke negative feelings with some new customers

(previous high margin of a supplier, lower quality and prestige of the

trademark)

To answer these questions I would use a marketing research elaborated by an

external company without announcing the beneficiary. The period between this and

next season seems to be the most suitable for this research with a view to a possible

incorporation of results into the business condition for the year 2006.

Another variant is to keep the existing state with more advantageous

conditions for the existing customers by means of backward discounts and a higher

marketing support. Because it is absolutely necessary to balance the state of obligati-

ons and receivables from the point of view of cash flow, this fact has to play an

important role supported by system changes.

If we decide (and my considerations will go on in this direction) for new

business partners, which will be regional dealers with the orientation to petty

tradesmen and retail outlets, it must have adequate conditions.

89

In the existing situation (mainly in Prague), when margins of retailers range

from 15 - 20% (with domestic products to 10%), the discount from the basic retail

price list must be more distinct, than we were willing to have it up to now. That is

why I propose to increase this discount by 6% and another 4% the customer could get

another 4% in the form of credit note, if he fulfill some other conditions (keeping due

dates, cash payment, keeping the minimum turnovers per period etc.)

The price will be set in the region similarly to the other parts of the republic a

bit higher than that of competition or domestic producers, but with a comparatively

high added value. The height of margin should be one of decisive motivators for the

customers addressed.

Financial plan

The financial plan must be based on pricing indicated in the previous text and

will be a part of the business plan.

Expected yields and costs

As it has been mentioned above, the receipts for the next 2 years are planned

always by15 % higher than in the previous period. This supposition is real and is

based on both analyses carried out by our company and conclusions of the departmen-

tal study of APPM. This estimate is supported by the contemporary and expected

strength of our economy as a whole.

A more detailed structure of costs and yields is a part of an internal material

of the company and basic parameters of both factors are monitored in it in the long

term. This information does not include movements of accounting operations, but

they are primarily a managerial view of the relevant fact. Mainly in small and

medium-size companies it is important to perceive real movements without the

influence of accountancy, such as real payments of leasing, supposed debt collections

etc.

It is apparent form the material given that by the required growth of yields va-

riable costs will grow relatively little (+5%). The obtained means will be used to

90

cover the loss in cash flow, early settlement to suppliers as a competitive advantage

and mainly the development of the company in the form of massive marketing

actions.

Price policy

One of the objectives of our company is the increase of margin. That is why it

is necessary to concentrate on some specific issues in the sale of our products. The

scheme of the train of thought of a dealer in everyday operation is shown in picture 7-

2 in appendix.

Because the Tollens product portfolio is one of competitive advantages, which

our company has at its disposal, it is necessary to be able to manipulate it.

There are three categories of products divided according to the quality,

product capabilities, price, and margin level. Primarily it is necessary to concentrate

on a customer, who is willing to buy and sell materials of the highest quality, where it

is also the highest margin. But if the wish of the customer is different, it is necessary

to react according to where there is a chance to satisfy his demands. For this

alternative there are another two categories, we should attempt to be able to justify the

higher price, so that the satisfied customer returned for repeated purchases.

Concrete requirements on minimum price must be set by the commercial

director, who has to reflect this fact into the business strategy. Within the frame of

controlling and reporting these factors must be apparent and possible undesirable

phenomena must be recognized in time.

In total the recommended retail price will fluctuate slightly above the average

in the branch. The effort of clients to increase discounts will be compensated by

pointed actions, presents with concrete products (which is not standard in our branch)

and by other supportive media.

3.5.3. Promotion

As a company concentrated on the target group of customers, whose

requirement is mainly the maximal service and a certain personality, it is necessary to

support the mark by a unified company identity. It means therefore to offer new poten-

91

tial dealers the equipment of shops in a uniform style and a logo manual has to be at

the disposal. This would contain not only the permitted sizes and types of typefaces,

but also their color, all the mercantile prints or printmaking of cars.

The unified company identity21 is one of the basic prerequisites for

strengthening the prestige of trademark. It is also important to use the web

presentation for the support of new customers. It should consist not only in references

to their websites, but mainly in propagation as perspective professional partners with

the offer of a closer connection and with the use of modern technologies. I have in

mind for example to obtain approach to our knowledge database and eSupport or the

connection of MIS or CRM systems in future.

Not only basic selling instruments such as price lists and product catalogues,

but mainly sample books of individual products, color samples from the point of view

of covering power or color range also in comparison with competitor products will

serve for the support of sale.

Seminars and trainings are important (on which the trainees will get a

certificate), because one of the key and effective weapons is the «catalogue of

objections and selling skills». This material is based on the French know-how and our

own experience in the Czech environment.

Within the frame of support of sale and of a good start of a partnership we will

promote new companies via media and thus declare the creation of a strategic alliance

of a quality regional partner and the traditional European trademark.

Another important part of marketing activities is the support of both future

distributors and of their (end) customers. Because it is often the case that materials are

not bought by the owner himself, but by a responsible worker, an important part of

motivation by decision-making about the choice of supplier is some form of presents.

That is why it can be contributive to create a catalogue of practical presents (French

wine or cheeses, brand clothing or electronics) mainly because it is not common in the

branch of building materials and coating compositions.

For the culmination and motivation at the end of the year I propose, according

to the increase beyond the planned sales, a trendy foreign trip to France or

Netherlands, where the company was founded quarter of a century ago.

21 Foret (2003) p. 179-192

92

Within the frame of continuous updating it is necessary to examine

competitors periodically. Especially before the entry into the target market it is

necessary to know especially the main competitors, their intentions for future,

business policy, offered margins and services etc. Correct timing, knowledge of the

target segment and a suitable partnership is necessary for the success. This factor is

very time-consuming and that is why I propose to outsource it partly. At first we

determine the main competitors and then, by means of an appropriate combination of

external and internal information, we find out the necessary data. By the use of

benchmarking as a process instrument we should be interested in the following infor-

mation:

• competitor’s position on the market (which segments it contains,

reputation among stakeholders, successes or failures)

• products and services (technical parameters, assortment structure, crea-

tivity, innovation)

• price policy (margin for distributors, retail prices and discounts, impacts

of marketing activities on the customer, payment terms and due dates)

• advertising and promotion (which media they use, what budget they

have, kinds of communication)

• distribution and logistics (distribution channels, regions, system of

transport, where and under what conditions he buys, how warehousing

functions)

• sale (how many dealers it has and in what structure they work,

fluctuation, system of motivation)

• finance (what payment terms it has/gets, how financing is secured)

Marketing plan - Target market and customers

At present it is almost impracticable to build one’s own branch offices with

quality personnel (also due to the lack of time and finance). It seems to me that the

best solution in the situation given is to address the following potential customers:

93

• medium-size and large building companies

• contacts with companies, which cooperated with us successfully in the

past

• important specialized coating compositions shops

• minor paint-varnish chains

• addressing dealers (distributors) of rival brands

The condition of the searched subject must be:

• good name and image in the region

• background and professionalism of employees

• own trade network and contacts

• ability to sell expensive products

• effort and interest in development

It is pragmatic to build such a demand in each perspective region to strengthen

the familiarity of the brand in such a way that after the unsatisfactory results the

region will be secured by another dealer without a marked impact on the continuous

trading. That is why I recommend to communicate parallely with more potential

partners in the given region.

Big building companies can be interesting partners, but they should not be the

priority, because by buying and consuming material they in fact compete with

tradesmen, on which the sale should mainly concentrate. They can be an interesting

alternative for larger projects, which will be connected to our contacts in the sphere of

architects and preservationists.

Individual shops (although with a big turnover) are one of the solutions, but

they should rather complete the selling possibilities in the region. Chains can function

primarily as «advertising channel», because they cannot secure the necessary care and

service thanks to the wide range22.

22 Havlíček, Kašík (2005) p.49-51

94

The person responsible for preparation, progress and evaluation is business

manager, who has to be sufficiently equipped as to motivation and professionally with

sufficient instruments for this task. Because this task will be partly delegated to the

other workers and partly solved by external sources, it is at the most necessary to be

consistent and to have sufficient organizational skills.

3.5.4. Distribution Channels

At the beginning it is necessary to say that there are in fact two ways: direct

sale and sale via intermediaries. Since the origination of our company we have

preferred the second way and this is also true for the following period.

As I have indicated in chapter 3.3.2 there are certain problems in our distribu-

tion network and the greatest shortages in my view are following:

• great number of distributors with own realizations

• factual non-existence of distribution channel - architects

• sale - offer via internet

• completing the regions and possibility to substitute dealers

If the distributors continue to realize orders by means of their own companies,

they will soon get into the position, when the number of their customers starts to de-

crease. As companies with commercial orientation they “take over” the work of the

same clients, on which they are primarily concentrated. They are not able to compete

with them, sellers of material, and that is why they will turn their attention to other

dealers. Our distributors of course cannot manage to secure most orders in the region

and together with the outflow of customers they will start to have a decreasing trend

of volume of sale.

The only possibility to avoid this (already apparent) trend is to offer better

conditions to the existing dealers, so that they are not forced to realize orders, to help

them with communication with these customers, to train them regularly in the form of

seminars according to the selling manual and company know-how. At the same time

95

we must persuade them about the necessity of this step and, thanks to marketing

research of the given region, about the necessity of changes.

Although we see architects and designing offices as the most important distri-

bution channel, we considerably underestimate this segment. Effective measures

leading to rectification have not been introduced yet.

That is why it is necessary at first to address this category of customers in an

appropriate manner and to concentrate on their real needs. On the basis of evaluation

of their demands we must quickly carry out the necessary changes and communicate

them in the right way. We have se far approached this target group as to a common

dealer. But it is evident that their requirements are very different from purchasing

behaviour of the other groups. The greatest mistake would be, if we supposed their

needs. If we want to succeed or to address this segment more markedly, we must

change our behaviour and offer totally different services (they are what matters most).

The support by means of Internet can be one of them. Typical electronic trade

is not too suitable medium also for the reason that its distribution is subsequently

comparatively expensive. But what this way of promotion is able to fulfill, is the

elaboration into a form of interactive catalogue. This, apart form containing basic

parameters of coating compositions technical and safety notes, certificates etc.), can

be connected to other existing databases. I have in mind mainly warehousing,

knowledge base, photos of references, modification of services. They would probably

welcome the transfer of our sample books into the electronic version, because the

standard is CAD applications and its extensions.

The last of shortages, which it is necessary to solve primarily is completing

the dealers in the region, where we have no representation yet and which will be

perspective from the point of view of investments return. It is apparent that it is very

difficult at present to get a new distributor. Here I can see two possibilities: either to

find a beginner dealer and give him a chance on the given market or to address

dealers of competitive products and offer them cooperation. In both cases however,

the information is necessary and in this case it is appropriate to use the services of

external companies again and supplement them with own information.

96

In the regions with the existing representation and non-perspective results I

suggest to start intensive communication with the other dealers in the region, to

prevent a possible collapse of trade in the given locality and to create competitive

environment, which, as a final consequence, can bring better services to the customer.

The region, where this model should start at firs, is Prague. One of important

factor that we must bear in mind is the contemporary position of the existing dealer.

Although he has not the warranted franchise in the region, after several years it can

nevertheless be a tender issue, which must not be underestimated. Primarily

communication and declaration of common interests can prevent possible problems

and misunderstandings. That is why it seems to me as appropriate to start looking for

such a partner, who would operate outside the sphere of influence of the existing

distributor. In future we will probably not avoid this, but I am convinced that by pre-

senting suitable arguments this situation is solvable.

The area of Prague and its neighborhood is large enough for 4 distributors to

complement one another and to create a balanced competition.

3.5.5. Human Resources

Although I have mentioned, in the analytical part by the analysis of

employee’s skills, the fact that most dealers (they are what matters most) are at an

excellent level form the technical point of view, but it cannot be a satisfactory state. It

should be a necessary precondition. I can see reserves mainly in the following

spheres23:

• time management

• selling skills

• motivation, consistency

It is appropriate to outsource the first two spheres. It seems to me that a

combination of seminars of general selling skills with a maximum aiming at the

segments that we are trying to operate. I am convinced that time management in a

23 Covey (1997) p.140-176

97

small company has a far greater consequences than in a big corporation. The reason is

a certain universality and substitutionality of employees. Sources are mostly limited

and not always it is possible to use the services of external partners.

Another problem, the solution of which must be very quick, is the

demotivation and inconsistency of dealers by trade negotiations. Partly it is given by

their human qualities, but I can see the main cause in the lack of conceptual steps

within the frame of business team. Clearly defined and followed rules can basically

change this trend. It is said that 80% of success of a company depends on the

correctly set processes.

Reflection

The fact that the Czech Republic has been opening up for western economy in

the last couple of years more than any time before brings – apart from indisputable

positives – also some negative phenomena. Big firms and supranational global

companies bring with themselves a demand for quality and primarily qualified mana-

gerial working power. This trend creates, apart from other things, demand for

qualification standards of the MBA type determined mainly for higher and middle

management. This demand is at present higher than the offer, which is also shown by

a fast growth of certain companies offering this postgraduate education. Also media

and professional magazines are adapting themselves to this trend, they support

awareness of strategy by the content of their commentaries predominantly for big

companies.

There are two problems that I see in this fast growth. The first is the

adaptation of teaching of most of these institutions to the requirements of big

companies, which have in many aspects other needs than SME in spite of the fact that

SME are a backbone of both Czech and European economy. The second problem is a

comparatively great probability that it will come to disillusion of a certain part of

students/managers mainly for the following reasons:

98

- big companies do not appreciate duly their theoretical knowledge

obtained, because they come to the Czech market with a comparatively clear

ideas and strategic objectives, which means, as a final consequence, limiting the

manager’s creativity and illusion that he can change things

- small companies are on the contrary not ready to accept strategic

thinking in a short time and therefore they do not fully appreciate this

experience either, moreover they are often not able to react to financial

requirements of these qualified professionals

- the last reason can be a disillusion from the fact, how big differences

there are in the functioning of corporations and small firms (it is by far not only

the matter of extent of bureaucracy)

Apart form other things, one important thing follows from the above mentio-

ned: demands and requirements on the employee – manager are from the point of

view of the size of the company various. While a manager in a big corporation must,

apart form professional knowledge and formal education, fulfill especially the

prerequisites of 100% fulfilling of criteria set in advance, an employee of a small

company is not too loaded by formal duties, must be more universal, creative and

maximum effective. Only that will enable him to survive and any hesitation can be

immediately seen, unlike big firms, where these consequences are not visible at first

sight.

One of the ways, how to solve this seeming contradiction is to adjust the form

of strategic management to the companies of SME type. Another necessary condition

is of course the „properly tuned market“, from which different requirements and

comments than up to now can result. I dare say that specific competitive advantage of

the company, strategic thinking and management together with information and

knowledge obtained during MBA studies are a far greater contribution (and much

more important) for managers of SMEs. BY adjustment I mean the fact that in points,

99

where the approach or possibilities of solution differ between big companies and

SMEs, it is necessary to offer alternatives.

A suitable combination of managerial qualities of a small and big company

therefore can be the basic requirement by recruitment of new employees.

3.5.6. Process

Basic processes are defined by the quality system of ISO 9001. The system of

quality management is compiled to enable operative management and securing of all

the operational processes influencing the quality of activity.

This system enables to react flexibly to possible shortages, if they should

appear, including the correction measures and preventive measures.

The identification of processes necessary for the system of quality

management and criteria necessary for functioning and management of these

processes are given in appendix 1 of the quality manual.

The quality is improved by feedbacks from own evaluation of quality policy

and quality objectives, internal inspections and data analyses and from the evaluation

of activity by the customer. The quality system includes mainly:

• identification of individual activities,

• determining responsibility for the performance of these activities,

• securing coordination of activities,

• criteria and methods necessary for functioning of processes,

• determining resources and their availability,

• monitoring, measuring and analyses of processes,

• management of processes in accordance with the requirements of ČSN

EN ISO 9001,

• application of measures necessary for planning the results and constant

improving these processes.

100

Logistics

Logistics plays an important role in the effectiveness of activities and last but

not least in the satisfaction of distributors. The importance of this department is

stressed by the fact that one of the company's objectives is lowering the transport

costs, which in its consequence lowers the profit from a customer and this fact is very

often forgotten. The transport costs from suppliers and to customers belong to the

greatest cost burdens and they can be, by means of using suitable mechanisms,

lowered to a reasonable height.

That is why the cost reduction should be one of the motivation and evaluation

criteria, or, a special bonus should be created from the saving. One of the possibilities

is to operate a consignment stock with the selected customers. It will increase the total

costs on obtaining the goods, but the transport costs can be reduced significantly and

greater operativeness will be secured. So far we have tried to react to the demands of

customers and of the Prague distributor operatively, which led to the increased costs

on logistics. More effective work with orders from suppliers, better communication

between the shop and logistics and last but not least minimizing of problem supplies

from France should, as a final consequence, reduce transport costs and also the time

of stock turnover.

Another objective should be the store balance and more effective work with

stock. Concrete measures should contain for example:

• transport at our expense should be realized twice a week by volumes

above X paints or the value of goods minimum CZK X

• structure of consignment store will be corrected operatively in the first

months on the basis of items selected by us

• after X months the distributor will proceed to the standard system of

invoice purchase with due date of 30 days, in exceptional cases with ne-

gotiable due dates

• value of the first consignment (which will be covered by the draft per

aval) will be maximum CZK X

101

These and other measures should be proposed by the head of logistics in his

proposal of situation solution, which will, together with the business manager, create

such directives, on the basis of which new business conditions will be allowed to

come into force. These are a part of the Distribution contract.

Reporting and Controlling

Reporting activity is not very favoured work and makes sense only if:

• SMART parameters and ways of evaluation are defined

• The results are regularly communicated including proposals arising from

them

The objective of reports should be a regular supply of strategic information

from the most important customers and their logical structure enabling regular

updating.

Because the independent legal entities are in question, we must try to create a

strategic alliance on the basis of partnership. The basis must be, apart from other

things, openness, communicativeness and effort to solve the problems emerged

operatively. That is why it should not be a problem to create such a form of report,

which will provide enough information not only as a feedback to the distributor

himself, but also to us, so that we could, within the frame of support, adjust the

necessary instruments adequately and make them more effective. This information

will be a significant contribution from a concrete market and at the same time will

serve as a marketing research.

Controlling activity24 is not our strength and is therefore desirable to get the

words “responsibility” and “consistency” into the vocabulary of mainly the business

team. That is why such rules have to be created, which will be motivating enough on

one side, but there must be a negative motivation on the other. It means that it will be

clear in advance, what consequences the non-performance of the given task will have.

24 Kopčaj (2004) p. 231-238

102

Responsible for this control should be primarily the business manager, who

should authorize the KA manager to elaborate the proposal of reported information

and of the way of solution in case of deviation from the expected facts.

Outsourcing

One of the elements accompanying the trading of our company is outsourcing.

We will continue this singling out of activities, which are not crucial for the company

and have not a confidential character, also in the forthcoming period. They are

mainly:

• trainings and seminars

• promotion and advertising

• research

• transport

In the long term we cooperate with companies, which secure these activities

for us and understand our needs and the needs of our customers. We have got neither

sufficient capacity, nor use for the given affairs, that is why we decided that we must

concentrate on the basis of our business.

These activities are considered and proposed, from the point of view of costs,

in a material, which is a part of the proposal of business conditions for a potential

distributor and stresses mainly the motivation and participation of a partner in these

needs. The reason is, apart from other things, the fact that he does not get this support

automatically free of charge, he can take an active part in it (although symbolically)

and realizes the value he gets from us.

As well as the general contractor of Tollens materials from France, also we

took to trainings and seminars, which are secured by external companies in our name

and at our costs. These companies hand over our partners not only general selling

skills, but mainly know-how according to manuals elaborated on the basis of Tollens

materials adapted to the Czech conditions. It is one of the values and merits of the

brand, which thus deepens the interest in its products and strengthens its position on

the market.

103

Due to unsatisfactory results with some PR agencies it is necessary to select a

perspective and professional partner. So that this cooperation could be a contribution

for us, the services offer of such a partner should include also the ability to secure

promotion materials including advertisement in media and sales support. If the partner

really were strong and willing to build our business in the long term, it would be

appropriate for him to take part in the research and marketing activities of our compa-

ny.

This assignment is suitable for the company representative, because it directly

influences marketing and indirectly human resources in the company.

The last important item, which is to a degree dependent on the external

subjects, is transport. It has already been mentioned, but a topic for the head of

logistics to think about is, if it is not possible to limit this activity by such a volume

and to try to solve the situation by oneself on the basis of data evaluation. If he has a

support in the process economy, the operativeness of our services increases and it will

be another of the company’s activities, where effectiveness and productivity will not

be only a wish.

3.5.6. Strategic Planning

“Plans are nothing, planning is all” - D. Eisenhower

Budgeting

The necessary condition of a good start is control and continuous monitoring

of the state of business. The following average quarterly coefficients result from

statistic observation of our business activities in the last years:

104

Figure 3-12: Quarterly sales

These coefficients include all the fluctuations in sales (also the disastrous dro-

pouts after the floods in 2002) and thanks to the chronological order they are getting

more and more exact. This information offers us therefore distinct guidelines for

planning sales in individual periods of the year.

As mentioned in the previous chapters, the aim is to increase the turnover of

the company. This plan supposes that also due to the late start of preparatory works

the required sale will be realized as late as in 2006. If the increase of sale is planned

by 15% (which represents approx. CZK 5m), actual sum falls on new distributors for

this year. In Prague itself the volumes of sale before floods in 2002 were by 6m

higher than at present. This supposition is realistic also thanks to the tendencies in the

general environment (see PEST analysis) and the revival of interest of new partners

(designers, professional painting companies etc.) in the Tollens brand.

It is apparent from the above given, what the preconditions for the creation of

monthly, possibly quarterly sales are. There is, therefore, a sufficient etalon of

anticipated turnover for the control of turnover development.

Management plan

As mentioned above, our company belongs to SMEs. Since the beginning we

have concentrated on building a trade network from external partners with franchise

for our products. It follows from that that the business team is drawn up as the service

for these partners in such a way that each sphere of business is allocated to a different

105

worker. In other words, a businessman is based on a specialization and not on

universality in the right sense of the word.

That is why the support of dealers in the given region will proceed in the same

way. The business manager will be a coordinator of the whole project and partial

responsibilities will be divided between KA dealers according to the products (contact

insulating system or coating compositions) and the head of logistics in case of things

connected with it.

In the preparatory period, which must not be too long25, it is necessary for us

to obtain too much information to be able to secure it well ourselves. That is why I

propose to select a suitable external company, which will secure the necessary

information for us and help us specify our view of the marketing strategy.

As it is the case of each project, it is necessary to propose, apart form dividing

tasks and responsibilities, also the motivation of team members. In our case the grea-

test part of responsibility is held by the business manager, who is already motivated

by an individual bonus and supplement to his payment assessment. An important role

in the operativeness itself will therefore be played by the already mentioned workers.

The experience of these employees is sufficient for them to be able to fulfill the tasks

set and so is the authority to the necessary performance. This step of increasing the

sale is crucial for all the company that is why the reward for completing this task

should be above standard, or it should stress the importance of the task. The height of

financial reward will be mainly dependent on the profit. Therefore, the turnover

height is not primarily as important as the margin, or profit. This pressure on the

effectiveness of work will be rewarded by a substantial percentage of the profit above

the frame of objectives considered.

Time Line

One of the basic components of each strategy and elaboration into a

subsequent plan is the time line. A project with an aspiration to be successful must

count not only with costs, yields or risks, but these must be related to time – really

and with a certain degree of reserves.

25 Pivoda (1997) p. 22

106

In our case it is clear that from the point of view of sales the period for

evaluation is clear, but partial objectives are not so obvious. To keep certain logic, it

is appropriate to use the Kotler’s model26 and to summarize it into the Gantt’s

diagram. That is why the whole project of implementation of a new business strategy

(or its basic components) should be drafted in the following time frame:

Table 3-11: Time line

Task Duration X/05 XI/05 XII/05 I/06 II/06 III/06

portfolio optimization 2M

creation of a sale manual 2M

new services (selection-setting up)

1+1M

budget 2006 1M

HRM - seminars 2M

benchmarking of competi-tors

permanently

market research 2M

reporting a controlling perma-nently

new segmentation 2M

3.5.7. Recommendations for implementation

A vast majority of concepts about strategic management does unfortunately

not pay the necessary attention just to the implementation of the formulated strategy.

It is probably caused also by the fact that this final step is a totally individual act of

every company and the ways of fulfilling can be based on the tacit knowledge and

charisma of the management. According to my experience in the sphere of SME it is

26 Kotler (2002) p. 45

107

mainly the following points, which to a large extent cause a great percentage of

unsuccessful implementations.

Critical factors of success

I each project it is necessary to count with the fact that not all the planned

procedures, terms and objectives will be always fulfilled. That is why I enumerate

here the list of factors, the elimination of which I regard as crucial, if we want to

succeed in the implementation of business plan.

• Inconsistency and insufficient orientation to customer

• Unclear and uncertain partial objectives (they are not SMART)

• Wrong implementation and plan of procedure

• Wrong selection of partner and underestimating data and information

from the initial survey

• Little attention by training, or underestimating communication of key

factors

• Resistance of human factors

• Slow reactions to changes of market and feedback

• Incorrectly managed change

• Securing of available resources

Before the implementation of any change the aim should be to define critical

points, which could cause failure or partial setback. At the same time the management

must do everything that is necessary to eliminate these negative factors.

In case of implementation of a new business strategy in our company I see as

the most probable the human hostility to changes in spite of the fact that it is the only

possible way27. I am convinced however that by means of consistent communication,

motivation and participation of the other employees in partial tasks it is possible to

reach a successful change. This must then be communicated with the same

consistency to our business partners and supported by suitable marketing activities.

27 Keřkovský, Drdla (2003) p.140-148

108

Action plan

Although the so-called action plan is more or less an instrument for managing

changes at the operative level, I regard it necessary to mention its important role. If

certain measures are proposed within the frame of business strategy, it is evident that

it is necessary to divide the organization, tasks, competences and responsibilities.

Similarly to table 3-11 where the time schedule of actions is proposed, the

above mentioned in the action plan should be supplemented with concrete names (or

positions) with possible motivation consequences.

3.5.8. Justification of BS implementation proposals

Proposals of changes in the business strategy of the DPC SYSTEMS company

are the result of detailed analysis of the external and internal environment of the

company and of a subsequent logical deduction of the facts discovered. The proposals

are not, in my view, in contradiction with the allegation “what is to be proposed, it

must be analyses at first”. Rightfulness and relevantness of concrete measures is

based mainly on the idea that they are trying to use strengths of the company and

offered opportunities and at the same time to eliminate weaknesses.

I am convinced of the correctness of the procedure proposed and of key topics,

which will lead to fulfilling the assignment set by the company management and they

are in accordance with the interests of the stakeholders concerned.

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4. Methodological procedure for SM of SMEs in the sphere of trade and services

4.1. Purpose and aims of methodology

„If the pace of changes inside the company is overtaken by the pace of

changes outside the company, its end is at hand“ – Jack Welch, former chairman of

the board of General Electric

The purpose of the following methodological procedure is primarily to offer

an alternative to the existing complex solutions, which are, with their range and

structure, not quite suitable for the conditions of SMEs.

The aim of this methodology is to describe in a more detail the procedure and

its logical sequences for the possibility of business strategy formulation, which will

fulfill the parameters of strategic management. I am convinced that if the reader

proceeds according to individual steps, this procedure is quite sufficient. A I have

notified already, it is primarily a direction for the management of small and medium-

size companies, where I can see certain particularities compared to the generally used

methods.

It is mainly the lack of time and finance, which limits the use of the method

available to the full. Further a far smaller extent of formalization is necessary, from

which it follows that the demands made on the system management must be different.

And last but not least it must contain such methods that are available also to the so-

called micro-companies. Most of small companies have not introduced quality

management and other process instruments, and therefore too sophisticated

instruments would be for them inapplicable in practice.

However, if the proposed analytical instruments will be continuously worked

with, trends following from them evaluated professionally and on the basis of them

the individual strategic procedures adjusted, it is no doubt a pragmatic way to the

reaching of strategic objectives.

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4.2. Definition of terms

This material is primarily concentrated on the top management of the

company. In spite of that it will be appropriate to explain some basic terms. The

reason is mainly the fact that the management without theoretical knowledge of

Master of Business Administration can understand some terms used superficially or at

all.

Relevant definitions and terms will be described so that the reader can

conceive of what each term means, or how the author understands it.

• PEST ANALYSIS

is the analysis of external macro-environment. P.E.S.T. is the acronym for

political, economic, social a technological factors. Its task is to identify and define

basic trends that could in future influence the given SBU.

• PORTER’S MODEL (see Figure 1-6)

this analysis of departmental environment of the company, similarly to the

previous analysis, is a standard technique defining basic behaviour of competitors on

the given market. The result of the analysis will be a description of the contemporary

position and other perspectives.

• BENCHMARKING

is the process of continuous comparison and measurement of the company

with the companies and its aim is to get information that will help the company to

accept and realize activities leading to the improvement of its own performance. In

other words, it is a search for the best procedures in business leading to outstanding

results. The necessary condition is however, a subsequent implementation of the best

procedures and practices. This strategic process instrument can be used both internal-

ly and externally.

• INTERNAL FACTORS

the model of “7S” is widely used. One of the objectives of this analysis is the

revealing of the so-called key factors of success conditioning a successful strategy

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implementation. This methodology has the following factors: structure, systems, style,

staff, skills, strategy and shared value. A suitable supplement of the analysis of

internal environment is the revision of financial factors.

• SWOT

is the summary of key opportunities and threats following from the analysis of

external and departmental environment. On the basis of internal audit, strengths are

identified, on which the company has to build its strategy, and weaknesses define the

negatives, which have to be eliminated.

Figure 4-1: SWOT scheme

• SMART

Another one of acronyms representing a basic view of how to set targets

unambiguously. Each of them must be specific, measurable, acceptable, realistic and

timed. This all the basic criteria necessary for both the beneficiary and the executor to

have an unequivocal assignment are given.

• MARKETING MIX

Its basic components (product, price, place, promotion) define key activities,

the mutual interconnection of which can effectively maximize profits of companies.

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At present also other components are used (people, process), but they are basically

only modifications of the basic 4P.

Figure 4-2: “4P” scheme

• 4C FOR CUSTOMER (see Fig. 2-3)

Is a suitable supplement of MM mainly because it stresses the look at product

from the point of view of a customer, unlike MM. Customer Value, Cost to the

Customer, Convenience and Communication express the value preferred by the cu-

stomer.

• PARETO RULE

Because most of our activities are ineffective, V. Paret and his followers

revealed the seeming injustice of the world almost 200 years ago. Most of wealth

belongs to a minority of people, 80% of profit is created by 20% of products. They

found out that 80% of inputs bring only 20% of outputs. Thinking 80/20 is non-linear!

It is difficult to delimit exactly causes and interdependences. Great changes in the

system can result from seemingly insignificant causes. It is apparent from these facts

that the disproportions should bring up a question, whether the processes are set

correctly and why.

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• MAP / SCENARIO28

The MAP method and scenarios method have a common denominator. In fact

they enable us, on the basis of history and present, to predict the future development

of the external environment. If the company works systematically with these

instruments, it can examine possible impacts on the choice of a certain strategy.

Table 4-1: Scenario matrix

Variable 1

Outcome 1.1 Outcome 1.2

Outcome 2.1 Scenario I Scenario II Variable 2

Outcome 2.2 Scenario III Scenario IV

4.3. Structure of methodological procedure

The aim of the following chapter is to offer one of the views of a conceptual

solution by proposing a business strategy. I will try to sum up, in logical sequence, the

previous theories and practical use by formulating the business strategy for the DPC

SYSTEMS company, generalize them and offer them as methodological instructions

for the solution of similar situations.

4.3.1. Objectives

Whether we are creating a corporate, business or functional strategy, we must

first define the basic objectives. The key process in this phase is to set up these

objectives according to SMART criteria, which is the basic prerequisite of the correct

evaluation of the subsequent connected activities. Another reason of setting objectives

is the fact that exactly on the basis of them some specific analytical or process instru-

ments can be used and as a final consequence, also the strategy proposed.

28 Sculley,Byrne (1994) p. 274-279

114

If we propose objectives for the highest (corporate) level, they are often identi-

fied with the ideas of owners. If we define objectives for a lower level, we must

realize the super-ordinate strategy and its assignment, only then it has sense to

elaborate partial objectives and tasks.

Examples of objectives and specific objectives according to SMART are

shown in table 4-2.

Table 4-2: Specific Aims

Objectives Specific objectives

higher sales and profit within 2 years to increase sale by 15% (not counting inflation) and margin by 2%

increase productivity

to increase labour productivity with a view to added value from 302 to 560 000

optimize product and services portfolio

to lower total number of items offered by 15% and to extend number of services by X,Y in the following season

address new segments

by end of year to secure research in 3 D-I-Y markets and to propose a relevant MS

improve selling skills of dealers

within 2 months to propose methodology and system of in-house education

Methods, procedures, data collection (information sources)

As soon as we have selected basic strategic objectives, we must consider what

information sources to choose for the subsequent analysis. At present one of the basic

information sources is Internet. At the same time it is clear that in almost 10 milliards

of web sites29 and a huge number of articles it can be a problem to find relevant

information. That is why it is appropriate to create such an information system and

structure, which will react to the requirements of strategic needs.

29 www.google.com

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Nowadays there is a large selection of products on the market offering

complex solutions, where apart from the connection to the existing accounting eco-

nomy and warehousing there are possibilities of setting key information about the

competition, its products and services, results of individual analyses, predictions of

development trends and many other. Unlike in previous years the offer became

available also for SMEs both financially, and from the point of view of real needs.

Also in this case however it can be a problem to make a right choice. If one of

the objectives is (and it is often forgotten) the formulation of IS/IT strategy, this

requirement can be elaborated in more detail.

Other information sources can be mainly:

• web presentations of suppliers, buyers and competitors

• annual reports, accounting statements and other legal information30

• researches and marketing studies

• collection of information and data from the market (primarily the

question of businessmen)

4.3.2. Strategic analysis

We need high-quality information primarily for strategic analysis to be able to

come, on the basis of them, to correct conclusions. Only then are we able to propose

such solutions that will lead to a real solving the given problem. But we must realise

that these researches are demanding of sources (finance, time, people) and just these

are limited in SMEs. It is therefore absolutely necessary to do one’s own research

continuously, both data collection, and evaluation.

30 http://www.justice.cz/xqw/xervlet/insl/index?sysinf.@typ=sbirka&sysinf.@strana=documentList&vypisListin.@cEkSub=323317

116

A frequent problem that we encounter is the state, when it is necessary to

make a decision quickly. But if the information is not collected in time, thare are

basically two possibilities.

1. Research and study secured by an external company

2. Own extimate and internal brainstorming on a given topic

But in my view neither of these variants is from the point of view of long term

correct. In the first case it is a comparatively expensive solution and moreover

companies are very cautious about this possibility lately. The main reason can be the

nonportability of tacit knowledge and therefore the research conclusions need not be

quite relevant. The second reason can be the financial point of view and carefulness in

transferring information ot the third parties, especially if they can also work for the

competition.

The detailedness of research should then be determined according to what the

results will serve for. Figure 4-3 shows that the more detailed and deeper information

we will have, the sharper we will se the potential solution of the problem. If we there-

fore want it at once and in rhe range corresponding to strategic decisions, for a big

part of SMEs this variant is financially impracticable.

As regards the second case, this model can function in the short run. Problems

that I can see are following:

I. Does not work with development trends (primarily from the poin of view of

external environment)

II. It is apparent from the statistics that companies using continuously obtained

information are more successful and effective

In the following table there are steps and instruments used that I regard appro-

priate for small and medium-size companies in the context of previous chapters. If

therefore a company, mainly of a trade orientation, decides to elaborate the strategic

analysis for the purpose of formulation of business strategy, the following steps

should be sufficient for the identification of all substantial factors.

I know from my own experience that not all the information can be secured at

once in the required quality. It is also apparent that the use of all the suggested

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methods can be too wide-ranging mainly for small companies. However, it is

necessary to realize two basic rules.

Firstly: to analyze somehow the external and internal environment of the

company is absolutely necessary for the reason of identification of SWOT factors. If

they are elaborated well on the basis of the relevant information, it is a basic prerequi-

site for approaching the system rectification.

Secondly: if basic parameters of continuous information (which can be

continuously monitored) collection are set, we can expect low future costs by later

analyses, the possibility of continuous monitoring of various trends and influencing

factors and it is therefore valuable material and basis for strategic decisions.

Non-use of all the offered methods can result in the lack of suitable sources

for the subsequent solution proposals and therefore coming to wrong conclusions!

Figure 4-3: More detailed information = clearer objective

Table 4-3: Steps and tools

steps detail steps tool used detail tool used

PEST analysis all factors

Porter's model all factors

shareholders

management

(top) customers

employees

Strategic Analysis

External Factors

Stakeholders

cluster partners

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steps detail steps tool used detail tool used

profit

productivity

External

benchmarking

marketing

7S all factors

sales/margin trends

LTV Customer Analysis

their customers

price policy

service Supplier Analysis

partnership

pareto rule Products Analysis

sales/margin trends

Internal Fac-tors

Finance Analysis budgeting

External environment

PEST

By a PEST or SLEPT analysis (according to whether we add legislation as

another analyzed factor) we lay the foundations for the analysis of external

environment. I recommend, for future transparence and elaboration, to round off each

partial analysis by a brief summary and conclusion. The conclusion will be possible to

be used in the final SWOT.

For completeness it is reasonable to mention a logical, but often ignored

remark. Let us evaluate and analyze only relevant factors. The work will then be not a

large project, which will be a problem for an experienced analyst. If also a total extent

of the analysis is given in advance, this fact will force the researcher to separate the

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essenctial from the non-essential. Otherwise the work would only be a formal act with

minimum benefit to the company.

One of suitable servers that I can recommend is the businessinfo.cz. The other

information is currently available at http://portal.gov.cz, which is a portal to the other

ministries and relevant state administration organs. Here you can find all the necessa-

ry data from the general environment including information related to the EU.

For the sake of clearness it is possible to look at the following two references,

which give us sufficient space for understanding individual factors:

• http://www.valuebasedmanagement.net/

• http://www.netmba.com/strategy/pest/

PORTER

The conclusion of Porter’s analysis of departmental environment should be

predominantly suggestions “What to do?“, what measures of strategic importance are

applicable by formulating the business strategy. If a company’s influence exceeds the

frame of trade in CR (or it will do in the nearest future), it is appropriate to include

also the foreign environment in the analyses. It is of course true also for the general

environment. However we must have in mind quality information sources and the fact

that foreign environment of the company is far more competitive and complex than

within the frame of CR.

The output of this analysis whould be a complex of suggestions and ideas of

strategic decisions mainly in business processes, which will contribute to fulfilling the

defined objectives and strengthen the position of the given company in its branch.

STAKEHOLDERS

This analysis should bring answers to questions, who are the most important

stakeholders, what wishes and objectives they have, what values they acknowledge

and possibly the value of their expectations with a view to wishes of the other groups.

From the point of view of transparency, the best thing is to elaborate this

analysis into a table and as the starting information platform I recommend the

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research in the form of interview. If we succeed in getting open opinions about the

suitably formulated questions, this analysis can help us markedly by formulating the

strategy. It is better to ask the participants about their opinions than to suppose what

they think! Due to this imprudence and bad communication it often comes to wrong

conclusions, which complicate in the end the adopting of the strategy proposed.

BENCHMARKING

A suitable instrument for the analysis within the frame of external

environment is benchmarking. It is suitable mainly for the companies that are not

leaders on the market. If they are leaders, there are enough examples within the frame

of global economy, to which they can relate certain activities and find out, how

THEY do it. Then they should choose the best possible variant of reaching it or over-

take the benchmarking subject.

In the first phase it is appropriate to select the performance benchmarking.

Although this method gives no answers how to achieve a change, the relative

comparison of performance is important. Here we can see in which spheres we must

improve. It is not suitable to use it for a mutual comparison of small and big

companies due to the differences arising from the substance. The interpretation can

then be misleading. The turnover, profit, number of employees can be a typical

example.

Process benchmarking needs much more information, but because it measures

the individual performance, it can answer a question how to improve, if the

comparison is made with companies, which are the best in the processes compared.

The productivity counted on added value can be an example of how the processes in

the company with the productivity e.g. above the EU average proceed. In a small

company the internal benchmarking in fact loses sense, but the competitive, branch

and generic ones have their reason. The latter compares practices independent of

business field and is therefore very innovative.

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Internal environment

„7S“

Method, which I recommend as a comparatively complex view of internal

structure of a company and source, is the method of key factors according to the Mc-

Kinsey consulting company31. Even if it is not necessary to analyze each of the seven

factors, it is apparent that their mutual interconnection influences the total result. It is

impossible to lift one of the factors out of context without looking for causalitites with

the other "S"s. It would be a non-system solution that does not lead to the objective

and it will probably have a negative influence on the conclusions of the elaborated

analysis.

ANALYSIS OF CUSTOMERS

According to the Paret's rule it is suitable to analyze customers according to

the turnover, profit or the so-called LTV32. If we get this basic overview, we can

further divide the customers into group with the same or similar shopping habits,

possibly other common criteria. Thus we get the possibility to prepare and use

specific marketing products for a given group of customers and thus to increase own

effectiveness. Another advantage is the possibility to follow in time the behaviour of

these groups according to various criteria and on the basis of changes in their

behaviour to adjust the offer operatively.

With TOP customers I recommend to obtain regularly the following

information bout their enterprise:

- What is the share of our deliveries in their total purchases?

- Who are their key customers?

- From which competitor they buy - what and why?

31 http://www.mckinsey.com/aboutus/locations/prague/

32 LTV - Life Time Value Management

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Of course it is valid in case of wholesalers and distributors. The requirements

of customers from the distributor are often different from what he offers them. In case

of orientation to the end customer we can obtain this information easier.

ANALYSIS OF SUPPLIERS

Like in the previous case, it is suitable to monitor basic behavior of suppliers

in time, also including the continuous offer of competitive suppliers. It is short-

sighted to concentrate only on the price of delivered products or services. Competitive

price is of course the basis, but in the context of other factors such as long-range

cooperation and partnership or the so-called "packages". If this selected approach is

mutually advantageous, the long-range successful cooperation is realistic. Both

partners must percieve the relation as winnings - winnings.

However from the point of view of the customer it is provident to create a

reasonable dependence of the supplier on our withdrawals and to build gradually a

strong position.

ANALYSIS OF PRODUCTS

We can analyze products from several points of view. I again regard it

meaningful to divide products into related groups and to use the Paret's rule. Thus we

can suitably optimize our portfolio of products or services. If we work continuously

with margins and turnovers in individual categories, we can use this experience firstly

in supportive marketing activities and secondly by financial planning at the highest

level within the frame of company budget.

FINANCIAL FACTORS

These key parameters should of course be an item of interest primarily for

management and partners, but they are also a suitable control instrument. If we

establish certain fincial criteria in the budget, it is necessary to work out the financial

analysis, which will be the etalon of continuous management. Big companies have

these instruments mostly integrated in the extensive information systems. But this

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solution is not suitable for SMEs due to its robusness, complexity and primarily the

need of managerial view of finance. Simple instruments in the form of spreadsheet

(e.g. http://www.mujweb.cz/www/mbocanek/) can be very helpful here.

SWOT

The final summary of the most important knowledge and conclusions into

SWOT is a logical result of individual analyses. The key aspects should appear here,

which will be used in the proposal part as spheres of intervention. That is why they

must have a strategic character. The quality of analyses and subsequent summary is

very important for further development, because to make a right decision on the basis

of wrong interpretations or incomplete information can have unforseeable

consequences for a company. It is therefore appropriate to subject the concluslions in

SWOT to internal inquiry mainly in cases of strategic character.

4.3.3. Formulation of BS

“Marketing is not the art of finding clever ways to dispose of what you make.

It is the art of creating genuine customer value." - Philip Kotler

The formulation of business strategy on the basis of strategic analysis should

proceed in the following two stages:

1. Formulation of BS

2. Implementation of BS

Ad 1)

The structure of marketing mix in general requires that relevant managers

should decide for a product or service, set the price, decide how they will distribute

their product and select the way of its promotion.

Like economists viewing supply and demand, management often views the

marketing mix (MM) in its basic form (4P) as a “locker with instruments”, which they

124

can use by marketing planning. At present the widened MM (7P) is often used, but the

question is not how many “P”s we should have, but what frame is the most useful for

the creation of business strategy.

Problem is that management looks at the market by means of 4P optics from

the point of view of the seller, but not of the buyer. Customers, unlike sellers, buy a

value or a solution of a problem. The seller is interested in the total costs, which he

must expend on the acquisition as comfortably as possible, more than the price itself.

Moreover, customers do not want only promotion, but they prefer mutual

communication. That is why the customer’s point of view (4C) should be taken into

account befor formulating the BS and only then his 4P should be put.

Ad 2)

The implementation itself is as important a step as the previous BS formulati-

on. If we do not succeed in motivating the employees interested, organizing well and

managing the change or eliminating critical factors of success, we can rank among

companies, which in spite of a well elaborated MM did not implement the proposed

strategies.

One of the possibilities of bringing a system and transparency into the

implementation process is to use the Gantt chart (Table 4-4). If we approach this

process as a project, we are able to divide it into individual parts upto the level of

action plan. To each task we can assign a concrete name or working position, further

power and responsibility and in the end motivation for completeing the task (it can

also have a negative character under certain circumstances). If these SMART criteria

are given, we are able to evaluate continuously and correct possible deviatioans

during all the implementation process.

The last step is the determination of possible risks and their elimination. It is

important to name real risks with the proposal of concrete measures, which minimize

or eliminate their influence. Only thus all the prerequisits of successful

implementation of business strategy are secured (although theoretically)

125

Table 4-4: Gantt Chart

Task Duration 1. 2. 3. 4. 5. 6.

T1 2D

T2 3D

T3 3D

T4 5D

126

5. Conclusion

One of the main aims of this dissertation was the formulation of business

strategy of the DPC SYSTEMS company, or its SBU PAINTS. The greatest practical

contribution is in my opinion the fact that it is for the first time in its history that it

came formally to the creation of business strategy with all the consequences. So far

we have solved only partial problems without apparent link-up to the functioning of

the whole. I am convinced that this work lays new foundations of strategic

management in our company and it will always be up to the management, how it will

approach this issue and how it will develop it further. It provides directions, by means

of standard and attested mechanisms in logical sequence, how to reach and fulfill the

wishes of owners. At the same time, the complex/analysis of ideas for subsequent

revisions of business strategy is in my opinion sufficient.

This paper should have also instructed the reader, in the wide context, in

problems and history of strategic management. I hope it persuaded him of the

necessity to introduce basic processes into each company with ambitions to be

successful.

Another of the aims that I have determined at the beginning of the dissertation

was to crate a methodological procedure for small and medium-size companies by

formulating the business strategy. I have purposefully selected the orientation on trade

and services, because for example production companies could apply other methods

by formulating their strategies. I wanted to offer and alternative to the existing models

of strategic management, although this work draws on and primarily is based on them.

I hope I succeeded in it and if the work brought an explanatory example to only a

single small company, on which it would be based by its strategic intentions, I could

not have wished more.

What the concrete influence of the proposal of business strategy on

functioning and results of our company will be, time alone will tell, nevertheless one

quite concrete contribution it has already. I have in mind my own enrichment with

theoretical knowledge with the formulation of BS, which I have, apart from other

things, obtained during the MBA study by B.I.B.S. Brno.

127

In the end I want to express my conviction that I succeeded to fulfill all the

objectives that I set at the beginning and I hope the evaluators of this dissertation will

come to the same conclusion.

128

6. Apendices

Figure 6-1 Organization structure

Figure 6-2 Conservation internal margin

129

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