ICPAKEnterprise Performance: Striking a

Balance25th July, 2013

Facilitator: K.M. MurimiCEO & Team Leader

JMG STRATEGY INNOVATIONS LTDengage@jmgstrategyinnovations.com

9:00 – 10:30

Budgeting: Aligning to the Current Dynamics

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ALIGNING TO THE CURRENT DYNAMICSGENERAL ATTRIBUTES LEADERSHIP COMPETENCIES

CREATING VALUE• Customer Focused •Innovation/Risk taking•Delivering Results

•Customer Insight: Outstanding leaders understand their customers•Breakthrough Thinking: Outstanding leaders challenge conventional thinking and focus on possibilities.•Drive to Achieve: Outstanding leaders look for ways to accomplish work faster, at lower costs, and with higher quality.

EXECUTING STRATEGY• Understanding Strategy•Accountability•Communications•Teamwork

• Team Leadership: Outstanding leaders link vision to the company.•Open communications: Outstanding leaders tell the truth. They openly share with peers, managers and subordinates.•Teamwork: Outstanding leaders work collaboratively with their own teams and across 0rganizational and geographic boundaries

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ALIGNING TO THE CURRENT DYNAMICS..contDEVELOPING HUMAN CAPITAL• Learning•Coaching/Developing•Personal Contribution

•Building Capabilities: Outstanding leaders act to build the organization’s long term capability to produce and sustain excellent results.•Coaching/Developing Talent: Outstanding leaders actively develop others to build a strong team•Personal dedication: Outstanding leaders act in ways that support company goals and strategies.•Decisiveness: outstanding leaders make and act on tough decisions with speed•Passion for the business: Outstanding leaders are outwardly passionate about our business, winning in the market place

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TRANSLATE THE STRATEGY

Once the strategy has been formulated, managers need to translate it into objectives and measures that can be clearly communicated to all units and employees. Our own work on developing strategy maps and balanced scorecards has contributed to this translation.

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THE MISSING DIMENSION

Over the past few decades strategy has become a plan that positions a company in its external landscape. That’s not enough. Strategy should also guide the development of the company – its identity and purpose – over time.

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THE MISSING DIMENSION..contThe Prevailing Approach: Strategy as a Set Solution

What is Missing: Strategy as a Dynamic Process

A long-term sustainable competitive advantage

Goal Creation of value

The CEO and strategy consultants Leadership CEO as chief strategist; the job cannot be outsourced

Unchanging plan that derives from an analytical, left-brain exercise

Form Organic process that is adaptive, holistic, and open-ended

Intense period of formulation followed by prolonged period of implementation

Time Frame

Everyday, continuous, unending

Defending an established strategy through time

Ongoing Activity

Fostering competitive advantages and developing the company through time

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. Stage 1

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DEVELOP THE STRATEGY•Define mission, vision and

values•Conduct strategic analysis•Formulate strategy

Test and Adapt the Strategy•Conduct profitability analysis•Conduct strategy correlation analysis•Examine emerging strategies

Monitor and Learn•Hold Strategy Reviews•Hold operational reviews

TRANSLATE THE STRATEGY

•Define strategic objectives and themes•Select measures and targets•Select strategic initiatives

PLAN OPERATIVES•Improve key processes •Develop sales plan•Plan resource capacity•Prepare budgets

Execute processes and initiatives

Strategic plan•Strategy map•Balanced scorecard•StratEx

Operating Plan•Dashboards•Budgets

•Pro forma P&Ls

Stage 5Stage 4

Stage 2Stage 3

The Five Forces That Shape Industry Competition

.

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Rivalry Among Existing

Competitors

Threat of new Entrants

Bargaining Power of BuyersBargaining Power of

Suppliers

Threat of Substitute Products or Services

NEW MARKET SPACE

• Companies must stop competing with each other. The only way to beat the competition is to stop trying to beat the competition.

• Blue Oceans denote all the industries not in existence today. This is the unknown market space.

• In the red oceans, industry boundaries are defined and accepted, and the competitive rules of the game are known. Here, companies try to outperform their rivals to grab a greater share…..

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NEW MARKET SPACE…cont• ….of existing demand. As the market space gets

crowded, prospects for profits and growth are reduced. Products become commodities, and cut-throat competition turns the red ocean bloody.

• It will always be important to swim successfully in the red ocean by outcompeting rivals. Red oceans will always matter and will always be a fact of business life. But with supply exceeding demand in more industries, competing for a share of contracting markets, while necessary, will not be sufficient to sustain high performance. To seize new profit and growth opportunities, they also need to create blue oceans.

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The rising Imperative of Creating Blue Oceans

All this suggests that the business environment in which most strategy and management approaches of the twentieth century evolved is increasingly disappearing. As red oceans become increasingly bloody, management will need to be more concerned with blue oceans than the current cohort of managers is accustomed to.

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VALUE INNOVATION: THE CORNERSTONE OF BLUE OCEAN STRATEGY

Value innovation is created in the region where a company’s actions favorably affect both its cost structure and its value proposition to buyers. Cost savings are made by eliminating and reducing the factors an industry competes on. Buyer value is lifted by raising and creating elements the industry has never offered. Over time, costs are reduced further as scale economies kick in due to the high sales volumes that superior value generates.

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VALUE INNOVATION: THE CORNERSTONE OF BLUE OCEAN STRATEGY…Cont

.

Cos

tsBuyer Value

Value Innovation

The Simultaneous Pursuit of Differentiation and Low Cost14

• Blue ocean strategy integrates the range of a firm’s functional and operational activities.

• In this sense, value innovation is more than innovation. It is about strategy that embraces the entire system of a company’s activities. Value innovation requires companies to orient the whole system toward achieving a leap in value for both buyers and themselves.

• Competition-based red ocean strategy assumes that an industry’s structural conditions are given and that firms are forced to compete within them, an assumption based on what the academics call the structuralist view, or environmental determinism.

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Cont…• In contrast, value innovation is based on the

view that market boundaries and industry structure are not given and can be reconstructed by the actions and beliefs of industry players. We call this the reconstructionist view.

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Red Ocean Versus Blue Ocean Strategy

Red Ocean Strategy Blue Ocean Strategy Compete in existing market space.

Create uncontested market space.

Beat the competition. Make the competition irrelevant.

Exploit existing demand. Create and capture new demand.

Make the value-cost trade-off. Break the value-cost trade-off.Align the whole system of a firm’s activities with its strategic choice of differentiation or low cost.

Align the whole system of a firm’s activities in pursuit of differentiation and low cost.

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Formulating and Executing Blue Ocean Strategy

The Six Principles of Blue Ocean StrategyFormulation Principles Risk Factor each principle

attenuates

Reconstruct market boundaries Search risk

Focus on the big picture, not the numbers

Planning risk

Reach beyond existing demand Scale risk

Get the strategic sequence right Business model risk

Execution Principles Risk factor each principle attenuates

Overcome key organizational hurdles Organizational risk

Build execution into strategy Management Risk

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STRATEGY-CULTURE MATCHING GRID

Strategy Culture Commitment Competence

Consistency

Customers

Competitors

Company

Match? Match? Match?

Match? Match? Match?

Match? Match? Match?

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• Customers/Commitment – An organization’s collective commitment to a common purpose must coincide with the organization’s way of satisfying customer needs.

• Competitors/Commitment – Commitment to a common purpose must augment the organization’s method for gaining a sustainable advantage over competitors.

• Company/Commitment – commitment to a common purpose must support the company’s attempt to capitalize on its strengths.

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• Customers/Competence – An organization’s competence to deliver superior performance must satisfy the customers’ needs.

• Competitors/Competence – Competence to deliver superior performance must match the organization's method of gaining a sustainable advantage over competitors.

• Company/Competence – Competence to deliver superior performance must agree with the organization’s efforts to capitalize on its strengths.

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• Customers/Consistency – An organization’s consistency in perpetuating commitment and competence by attracting and keeping the keeping the right people must parallel efforts to get and keep customers.

• Competitors/Consistency – Consistency in perpetuating the culture must agree with the organization’s methods of gaining advantage over competitors.

• Company/Consistency – Consistently perpetuating the culture must enhance the organization’s efforts to capitalize on its strengths.

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14:00 – 15:30

Forecasting and Performance Management: Tying the Duo

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VISION: By 2013, become the leading company in our industry

Financial Perspective

CustomerPerspective

Process Perspective

Learning and Growth Perspective

Increase return on capital

Improve Productivity

Increase revenues in existing segments and markets

Grow revenues in new products and services

Be a leader in quality and reliability

Provide valued service, applications expertise and support

Introduce innovative, high performance products and solutions

Improve supply chain efficiency and effectiveness

Optimize customer profitability

Excel at technology, product development and life cycle management

Expand and build strategic skills, capabilities, and expertise

Develop leadership and an execution – driven culture

Enable and require continuous learning and sharing of knowledge

Creating a High Performance culture

Improve operating & efficiency Grow high-value customer r/ships Accelerate product and services

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Identifying Potential Risks

The most obvious initial classification of risk is to differentiate it in terms of the risk level within the organisation on which it impacts. The obvious classification in this respect is as listed below;

• Strategic risk;• Change or project risk;• Operational risk;• Unforeseeable risk.

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Cont…Over and above this basic classification, risk can

also be classified in terms of the specific nature of the risk, its origin and characteristics, and the extent to which the risk is dependent upon or linked with other risks. A second possible classification is listed below;

• Financial and knowledge risk;• Internal and external risks;• Speculative and static risks;• Risk interdependency.

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Strategic Risk• Strategic risk relates to risk at the corporate

level, and it affects the development and implementation of an organization's strategy. An example is the risk resulting from an incorrect assessment of future market trends when developing the initial strategy.

• Strategic risk includes risk relating to the long-term performance of the organisation. This includes a range of variables such as the market, corporate governance and stakeholders.

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Cont…

Some typical examples of strategic risks are listed below;

1.The strategic plan might be incorrect• Incorrect assumptions may have been made.• The environment may have been incorrectly

assessed.• Sufficient resources may not be available.• The plan might not actually represent where

the organisation really wants to go.

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Cont…

2. The original strategic plan may have been correct but internal changes may compromised it.

• Internal reorganizations may have led to a loss of efficiency.

• Required changes in operational processes may not have been introduced.

• Planned changes may not have delivered what was required.

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Cont…

3. The original strategic plan may have been correct but external changes may have comprised it.

• The external environment may have changed significantly.

• New competitors may have emerged.• New competing products may have been

released.• Statutory controls may have changed.

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Risk Management Policy

• In considering strategic risk management, the organisation is looking to move from current position A to desired position B as shown below;

• Point A: Current position. This is where the company is now. The position is determined by a number of factors including market position, size, vulnerability, gearing, asset base and so on.

A B

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Cont…• Point B: Desired position. This is where the company

directors want to be in X years’ time. Again, this position can be determined and described using a wide range of variables.

• The risks that stand between position A and position B cannot be accurately determined. They may affect the achievement of the strategy more in some areas than in others. Wholly unforeseen events might affect the viability of navigating between A and B. The net result is that the company evolution suffers deflections as it attempts to implement the strategy or stay on course. Some risks have greater impact than the strategy foresaw.

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Cont…

• In order to take account of these variations, most strategies allow a variance envelope. This permits divergence up to a certain limit, after which a warning is sounded. The variance envelope typically contracts as a function of time. As the company nears desired position B, the allowable margin of error must diminish.

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Cont…• Strategic rick management is concerned with

the identification and management of these risks in order to ensure that the organisation finishes up within an acceptable distance of the original goal. If the implementation process is resulting in a transgression from the required course, the strategic risk management system should be able to detect this and (at least to some extent) predict the consequences.

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Cont…• Change risk relates to both planned and imposed

change. Planned change is necessary in order to implement strategies, whereas imposed changes arise from internal and external forces.

• Operational risk can be defined as ‘the risk of direct or indirect loss, resulting from inadequate or failed internal processes, people and systems or from external events’. Operational risk also effectively includes anything that can impact on the overall performance of the organisation and on the ability of the organisation to create value. Operational risk therefore includes events such as mistakes or missed opportunities.

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Cont…

• Financial risk includes market, credit, capital structure and reporting risks. This particular risk heading is easily the most heavily covered in the literature on risk management. Financial risk is considered in detail in the Edinburgh Business School distance learning texts Financial Risk Management 1 and 2.

• Knowledge risk can also be non-IT based. In many ways the real value of an organization lies in its people.

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Cont…• …In most successful organizations there are a relatively

small number of very important people. These people fulfill key roles and functions, and are essential for the continuing success of the enterprise. They carry a combination of natural ability and acquired specific knowledge about the organisation. In most cases, the knowledge base of these individuals is not written down or formally recorded in any way. If the person is lost the chances are that his or her knowledge goes too. This lack of knowledge transfer is often a major problem when a key person leaves the organisation for whatever reason. The effect is often encountered immediately after an acquisition.

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Strategic Risk Management

The degree of uncertainty within the environment is fuelled by numerous drivers. These include;

• Technological change;• The actions of competitors;• Changes in customer demand;• Statutory changes such as regulatory and

prescriptive controls;• Internal change such as a board reshuffle;• Required tactical responses to imposed

unforeseeable risk impacts.

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Ten questions• What is Strategic risk?In seeking to identify strategic risks, two primary

categories must be considered. The first of these is those events, changes or actions that occur in the external environment and over which the organisation has no control, but which can impact on the organization's strategic success or failure. The second area where strategic risk arises is in the implementation of strategy, where the organisation can drift away from its intended course or objectives.

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• If a risk can impact on the whole of an organization must it be a strategic risk?

A risk that can impact on the whole of an organisation may be a strategic risk, but whether it is or not depends on the circumstances. Just because a particular risk is capable of causing widespread loss, disruption or failure it does not necessarily mean it falls into the strategic risk category. An example of a very significant operational risk that could affect the entire organisation is the compromise of the organization's IT system. Such an event could have dire consequences (depending on the timescale involved and the nature of the organisation), but it is clearly an operational rather than a strategic risk.

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• Can Strategic risks be insured or transferred to other parties?

Strategic risks cannot generally be insured. They arise out of external issues that are beyond the control of the organisation, and such can be considered as speculative or market risks. An obvious example is long-term changes in interest rates resulting from changes in the overall levels of economic activity.

• Who is responsible for managing the strategic risks in an organisation?

Many strategic risks are distinguishable by the fact that they are beyond the influence and control of the organisation and are therefore beyond the control of the individual.

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Cont…

Although it is not possible to control such risks, it is important that the organisation monitors them on a regular basis and, where appropriate, develops contingency responses to potential scenarios.

• Can the primary classifications of external and internal strategic risks be further subdivided?

External strategic risks originate outside the organization and cannot be controlled. This group could be subdivided into categories such as:

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• Economic (changes in the performance of the economy);

• Government (changes in government or in government policy);

• Market (changes in market behaviour);• Social (demographic changes).Internal strategic risks originate from with the

organisation. This group could be subdivided into numerous groups including:

• Organizational (changes in long-term organizational structure);

• Strategic (changes in strategic objectives);• Governance ( changes in corporate governance);• Policy (changes in long-term priorities).

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• Which tools can be applied to identifying and managing strategic risks?

There are several well-established models (such as scenario planning) that can be used for risk identification in the external environment. After identifying the risks, a standard risk matrix or map can be used to rank the identifying risks in terms of their significance.

• Of the many risks that can affect an organisation arising from its external environment, which is the most significant?

A risk assessment matrix or map with appropriate descriptions of risk likelihood and impact should be developed and used by the company to rank those risks they have identified by importance and in relation to a set timescale.

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• As resources are limited, how does the organisation decide where to put its efforts to manage strategic risk?

The significance of the identified risk set is clear to the organisation, and resources can justifiably be allocated to reduce or manage the potential uncertainty surrounding this risk set.

• At what stage should an organisation assess its strategic risks?

The identification and management of external strategic risks is likely to be part of the organization's strategic planning function.

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• How does risk management fit into the strategic planning process?

Strategic risk management is one component of the Strategic Focus Wheel.

Strategic Planning

Strategy Focus Wheel

Project Management of

Change

Making Strategies Work

Strategic Risk Management

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Case Study• Lessons on competing in an Unpredictable WorldChina’s entrepreneurs provide valuable lessons on

managing effectively in an unpredictable context. • Acknowledge the fog of the futureManagers must rethink their view of time in order to

compete effectively in unpredictable markets like China. They must abandon the illusion that the future stretches out before them that they can peer over the horizon, predict the future, and plan with accuracy and certainty. Instead, managers should adopt an unfolding view of time in which a steady stream of unanticipated threats and opportunities emerge, termed the fog of the future view of time.

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• Out cycle the competitionSimply sensing and anticipating emerging

opportunities and threats is not enough. Executives must also translate insight into effective action.

• Develop a Flexible Hierarchy The term Flexible Hierarchy describes an

organizational form that balances top-down priority setting with decentralized execution.

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HAVE TEAM LEAD BY STRATEGIC PLAN

The strategic planning process involves the articulation of the vision of a business, the identification of the key objectives that underlie the vision, and the few things that need to be done well to achieve the key objectives. The Business Balanced Scorecard provides the measures that tell the organization whether it is successfully its performance.

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The Business Balanced Scorecard

. FINANCIAL PERSPECTIVE

‘ How do you look to your stakeholders?’

ORGANISATION LEARNING ‘Are you able to sustain innovation, change and

improvement?’

BUSINESS PROCESS ‘How effective are key business processes?’

CUSTOMER PERSPECTIVE

‘How do you look to your customers?’

VISION

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Using the Business Balanced Scorecard (example)

.Financial Perspective

•Market Share•Product, customer and channel profitability•Growth in share per country •Differential in share between each unit and next best rival•Cost-income ratio•Direct v support headcount

Organizational learning/innovation•New products representing >10% of sales•New customers representing >10% of sales•New technology introduced successfully•Contribution to market share and profits from acquisitions

Process Performance•Staff Productivity•Volume of business processed per person •Error rate•Cross-sales•Utilization of process by other products

Customer Perspective•Customer response time•Number of customer complaints•Repeat business percentage•Response rate to marketing•Retention rate

VISION To be the market

leader

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The Scorecard is a useful tool because it provides:• A framework for articulating strategy. The

scorecard requires that the vision of the organization be properly articulated and balanced. The vision has to be expressed in terms of the four dimensions of stakeholder, customer, process and organizational learning. Conflicting priorities across these dimensions need to be resolved.

• A means for measuring and reviewing performance. The scorecard at the top level allows executives to review the performance of the business along the key dimensions.

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Cont…• Structuring of information collected. It allows the

information collected by the organization to be structured in accordance with the dimension and measure it supports. This process alone highlights the inadequacy of current information collected and the gaps in the information currently provided.

• A framework for determining the role of systems in meeting the strategic objectives. It allows the organization's systems to be seen in the light of the executives’ view of what is important for the business to achieve. The overall role of the….

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Cont…• ….systems in providing value to the vision

becomes clearer by addressing which systems support the customers, which the processes, which the organization's innovation and which the stakeholder.

As a strategic tool the Scorecard can be used to:• Build up a picture of the performance

measures of rivals• Benchmark performance against peers• Explore alternative performance scenarios.

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Cont…The Scorecard is not the answer to all performance

measurement problems: it provides a means of articulating, testing and monitoring performance. However, it is not designed to measure:

• The success of tactical moves• The success of attack, defence and retaliatory

strategies• Detailed progress in the delivery of a corporate

transformation or business process re-engineering programme

• The impact of changes in the environment or structure of the industry, in the way that, say, Porter’s industry-structure analysis.

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Simplified Strategic and business planning model

. Current business direction

Baseline strengths and weaknesses

Opportunities and threats

Review and evaluate

Formulate future business direction

Decide business change programme

Business plan

Knowledge

StrategyPlan

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Knowledge is required of:• What the business is, what its strengths and

weaknesses are, what its potential is, what its capacity to change is

• What the opportunities and threats facing the business are, what the capability of its rivals are, what the changing external environment holds for it

• What the business would like to be, how this relates to the knowledge of what it is and what the external environment means for it.

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Strategy based on such knowledge is required to:

• Determine where the business should go and how to take it there

• Prepare the business for uncertainty• Prepare the business to seize opportunity • Prepare the business for changePlans are required to implement strategy and

provide a detailed point of reference for the organization to enable it to:

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• Prioritize efforts• Allocate resources to activities• Monitor progress.The importance of systematically collecting

information, formulating strategy and planning cannot be over-emphasized. Without the discipline of translating strategy into plans, your business will not effectively assimilate information, allocate resources, set targets, determine what does and does not work and have a reference point to compare its performance against and to decide whether to accept or reject opportunities.

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Corporate transformationTo achieve the vision the questions that need to be

answered are:• What processes and systems are needed?• What products and services are needed?• What people, resources and competencies are

needed?• How should these processes, people and resources be

organized?• What should the values and culture of the organization

be?• What does the organization currently look like?• How far away from the vision is the organization

(gaps)?60