1 MANAGEMENT POLICY AND STRATEGY SESSION - XI Strategic Control, Continuous Improvement and E-business Prof. Sushil Department of Management Studies Indian Institute of Technology, Delhi INDIA Email: sushil@dms.iitd.ernet.in Irwin/McGraw-Hill © 2000 The McGraw-Hill Companies, Inc. 2 What is Strategic Control? Tracks a strategy as it is implemented, detects problems or changes in its underlying premises, and makes necessary adjustments. Irwin/McGraw-Hill © 2000 The McGraw-Hill Companies, Inc. Questions Involved in Assessing a Strategy’s Success 3 1. Are we moving in the proper direction? Are our assumptions about major trends and changes correct? Should we adjust or abort the strategy? 2. How are we performing? Are objectives and schedules being met? Are costs, revenues, and cash flows matching projections? Do we need to make operational changes? Irwin/McGraw-Hill © 2000 The McGraw-Hill Companies, Inc. 4 Four Types of Strategic Control 1. Strategic surveillance 2. Premise control 3. Special alert control 4. Implementation control Strategy formation Strategy implementation Time 1 Time 2 Time 3 Irwin/McGraw-Hill © 2000 The McGraw-Hill Companies, Inc. 5 Definitions of Strategic Controls Premise Control - Designed to check systematically and continuously whether premises on which the strategy is based are still valid Implementation Control - Designed to assess whether the overall strategy should be changed in light of the results associated with the incremental actions that implement the overall strategy Strategic Surveillance - Designed to monitor a broad range of events inside and outside the firm that are likely to affect the course its strategy Special Alert Control - Thorough, and often rapid, reconsideration of the firm’s strategy because of a sudden, unexpected event Irwin/McGraw-Hill © 2000 The McGraw-Hill Companies, Inc. 6 Characteristics of Strategic Controls Types of Strategic Control Basic Characteristics Implementatio n Control Key strategic thrusts and milestones Strategic Surveillance Potential threats and opportunities Degree of focusing High High Low Special Alert Control Occurrence of recognizable but unlikely events High Data acquisition: Formalization Medium High Low High Centralization Low Medium Low High Use with: Environmental factors Yes Seldom Yes Yes Yes Seldom Yes Yes Strategy-specific No factors Yes Seldom Yes Companyspecific factors Yes Seldom Seldom Objects of control Industry factors Irwin/McGraw-Hill Premise Control Planning premises and projections No © 2000 The McGraw-Hill Companies, Inc. 7 What are Operational Controls? Systems that guide, monitor, & evaluate progress in meeting short-term objectives, providing post-action evaluation and control over short periods. Irwin/McGraw-Hill © 2000 The McGraw-Hill Companies, Inc. Establishing Effective Operational Control Systems 8 1. Set standards of performance Steps involved in post action control systems 2. Measure actual performance 3. Identify deviations from standards set 4. Initiate corrective action Irwin/McGraw-Hill © 2000 The McGraw-Hill Companies, Inc. 9 Types of Operational Control Systems Budgets Schedules Irwin/McGraw-Hill Key success factors © 2000 The McGraw-Hill Companies, Inc. 10 Types of Budgets 1. Profit and loss budgets: Monitor sales and expense categories on a monthly or more frequent basis 2. Capital budgets: Show timing of specific expenditures for plant, equipment, machinery, inventories, and other capital items 3. Cash flow budgets: Forecast receipt and disbursement of cash during the budget period Irwin/McGraw-Hill © 2000 The McGraw-Hill Companies, Inc. Key Success Factors at IBM’s Lotus Notes Division Key Success Factor 1. Product quality 2. Customer service Irwin/McGraw-Hill 11 Measurable Performance Indicator a. Performance data versus specification b. Percentage of product returns c. Number of customer complaints a. Delivery cycle in days b. Percentage of orders shipped complete c. Field service delays © 2000 The McGraw-Hill Companies, Inc. Key Success Factors at IBM’s Lotus Notes Division Contd…. Key Success Factor 3. Employee morale 12 Measurable Performance Indicator a. Trends in employee attitude survey b. Absenteeism versus plan c. Employee turnover trends 4. Competition a. Number of firms competing directly b. Number of new products introduced c. Percentage of bids awarded versus standard Irwin/McGraw-Hill © 2000 The McGraw-Hill Companies, Inc. 13 EXAMPLES OF STRATEGIC CONTROL IMPLEMENTATION CONTROL AT DAYS INN When Days Inn pioneered the budget segment of the lodging industry, its strategy placed primary emphasis on company-owned facilities and it insisted on maintaining a roughly 3-to-1 company owned/franchise ratio. This ratio ensured the parent company’s total control over standards, rates, and so forth. As other firms moved into the budget segment. Days Inn saw the need to expand rapidly throughout the United States and, therefore, reversed its conservative franchise posture. This reversal would rapidly accelerate its ability to open new locations. Longtime executive, concerned about potential loss of control over local standards, instituted implementation controls requiring both franchise evaluation and annual milestone reviews. Two years into the program. Days Inn executives were convinced that a high franchise-to-company ratio was manageable, and so they accelerated the growth of franchising by doubling the franchise sales department. Irwin/McGraw-Hill © 2000 The McGraw-Hill Companies, Inc. 14 EXAMPLES OF STRATEGIC CONTROL Contd... STRATEGIC SURVELLIANCE AT CITICORP Citicorp has been pursuing an aggressive product development strategy intended to achieve an annual earnings growth 15 per cent while it becomes an institution capable of supplying clients with any kind of financial service anywhere in the world. A major obstacle to the achievement of this earnings growth is Citicorp’s exposure to default because of its extensive earlier loans to troubled Third World countries. Citicorp is sensitive to the wide variety of predictions about impending Third World defaults. Irwin/McGraw-Hill © 2000 The McGraw-Hill Companies, Inc. 15 EXAMPLES OF STRATEGIC CONTROL Contd... Citicorp’s long-range plan assumes an annual 10 per cent default on its Third World loans over any five-year period. Yet it maintains active strategic surveillance control by having each of its international branches monitor daily announcements from key governments and from inside contacts for signs of changes in a host country’s financial environment. When that surveillance detects a potential problem, management attempts to adjust Citicorp’s posture. For example, when Peru’s former president, Alan Garcia, stated that his country would not pay interest on its debt as scheduled. Citicorp raised its annual default charge to 20 per cent of its $ 100 million Peruvian exposure. Irwin/McGraw-Hill © 2000 The McGraw-Hill Companies, Inc. 16 EXAMPLES OF STRATEGIC CONTROL Contd... SPECIAL ALTERT CONTROL AT UNITED AIRLINES The sudden impact of an airline crash can be devastating to a major airline. United Airlines has made elaborate preparations to deal with this contingency. Its executive vice president, James M. Guyette, heads a crisis team that is permanently prepared do respond. Members of the team carry beepers and are always on call. If United’s Chicago headquarters receives word that a plane has crashed, for example, they can be in a “war room” within an hour to direct the response. Beds are set up nearby so team members can catch a few winks; while they sleep, alternates take their places. Members of the team have been carefully screened through simulated crisis drills. “The point is to weed out those who don’t hold up well under stress,” says Guyette. Although the team was established to handle flight disasters, it has since assumed an expanded role. The crisis team was activated when American Airlines launched a fare war. And according to Guyette, “We’re brainstorming about how we would be affected by everything from a competitor who had a serious problem to a crisis involving a hijacking or taking a United employee hostage.” Irwin/McGraw-Hill © 2000 The McGraw-Hill Companies, Inc. KMART GETS SOME BAD NEWS BY BENCHMARKING INDUSTY SUCCESS FACTOS AGAINST A KEY RIVAL - 1995 17 Key Success Factor to Benchmark Core customer Sales/square foot Shopper visits/year Loyal to the chain Location Irwin/McGraw-Hill Kmart Over 55; more than $20 k income and no kids at home $ 185 15 times per year 19 per cent of Kmart customers 36 per cent of Americans find their newest Kmart inconvenient compared to other stores Wal-Mart Under 44K, $ 40 income and kids at home $ 379 32 times per year 46 per cent of WalMart customers 49 per cent of Wal Mart customers drive past a Kmart to go to Wal-Mart © 2000 The McGraw-Hill Companies, Inc. Monitoring and Evaluating Performance Deviations Objective Forecast Key Success Factors Cost control: Ratio of indirect overhead cost to direct field and labor costs Gross profit Customer service: Installation cycle in days Ratio of service to sales personnel Product quality: Percentage of products returned Irwin/McGraw-Hill , Assumpti on, or Budget Performa nce at This Time Current Performa nce Current Deviation 10% 15% 12% +3 (ahead) 39% 40% 40% 0% 2.5 days 3.2 days 2.7 days +0.5 (ahead) Can this progress be maintained? 2.1 -0.6 (behind) Why are we behind here? How can we maintain the installation-cycle progress? 2.1% -0.1% (behind) Why are we behind here? What are the ramifications for other operations? 3.2 1.0% 2.7 2.0% 18 Analysis Are we moving too fast, or is there more unnecessary overhead than was originally thought? © 2000 The McGraw-Hill Companies, Inc. Monitoring and Evaluating Performance Deviations (concluded) Key Success Factors Product performance versus specification Marketing: Monthly sales per employee Expansion of product line Employee morale: Absenteeism rate Turnover rate Competition: New product introductions (average number) Irwin/McGraw-Hill 19 Objective, Assumption, or Budget Forecast Performance at This Time Current Performance 100% 92% 80% $12,50 0 $11,50 0 $12,10 0 +$600 (ahead) Good progress. Is it creating any problems to support? 5 +2 product s (ahead) Are the products ready? Are the perfect standards met? 3.0% 15% (on target) -8% (behind) 6 2.5% 5% 6 3 3.0% 10% 3 6 Current Deviation Analysis -12% Why are we behind here? (behind) Looks like a problem! Why are we so far behind? Did we underestimate timing? -3 What are the implications for (behind) our basic assumptions? © 2000 The McGraw-Hill Companies, Inc. The Quality Imperative: Concepts Related to TQM 20 Viewed as a new organizational culture and way of thinking Foundations of TQM Intense focus on customer satisfaction Accurate measurement of every critical variable in a business’s operation Continuous improvement of products, services, and processes Work relationships based on trust and teamwork Irwin/McGraw-Hill © 2000 The McGraw-Hill Companies, Inc. 21 Key Elements of Implementing TQM 1. Define quality and customer value 6. Adopt an error-free attitude 2. Develop a customer orientation 7. Get the facts first 3. Focus on company’s business processes 8. Encourage all levels of employees to participate 4. Develop customer and supplier partnerships 9. Create an atmosphere of total involvement 5. Take a preventive approach 10. Strive for continuous improvement Irwin/McGraw-Hill © 2000 The McGraw-Hill Companies, Inc. The Value Chain Approach to Developing a Customer Orientation External suppliers Function (like production) Seeking: Quality Efficiency Responsiveness Internal suppliers (functions) Irwin/McGraw-Hill Outputs 22 External (ultimate) customer Other internal Outputs customer s (activities) © 2000 The McGraw-Hill Companies, Inc. 23 Examples: Ways to Enhance Customer Value Quality Efficiency Marketing Provides accurate assessment of customer’s product preferences to R&D Operations Consistently produces goods matching engineering design Targets advertising campaign at customers, using cost-effective medium Minimizes scrap and R&D Designs products that combine customer demand and production capabilities Irwin/McGraw-Hill Responsiveness Quickly uncovers and reacts to changing market trends Quickly adapts to rework through high- latest demands with production yield production flexibility Uses computers to test feasibility of idea before going to more expensive fullscale prototype Carries out parallel product/process designs to speed up overall innovation © 2000 The McGraw-Hill Companies, Inc. Examples: Ways to Enhance Customer Value 24 Contd... Quality Accounti ng Provides information that managers in other functions need to make decisions Selects vendors Efficiency Simplifies and computerizes to decrease cost of gathering information Given required for their ability to vendor quality, Purchasin join in an negotiates prices g effective to provide good “partnership” value Trains work force Minimizes employee turnover to perform reducing hiring and Personnel required tasks training expenses Irwin/McGraw-Hill Responsiveness Provides information in “real time” (as events described are still happening) Schedules inbound deliveries efficiently, avoiding both extensive inventories and stock-outs In response to strong growth in sales, finds large numbers of employees and quickly teaches needed skills © 2000 The McGraw-Hill Companies, Inc. 25 QUALITY IMPROVEMENT PROCESS Phase PLAN Step 1. Select Improvement Opportunity 2. Analyze current situation 3. Identify root causes 4. Select and plan solution DO 5. Implement pilot solution Check 6. Monitor results and evaluate solution ACT 7. Standardize 8. Recycle Irwin/McGraw-Hill © 2000 The McGraw-Hill Companies, Inc. 26 SELECT IMPROVEMENT OPPORTUNITY Generate list of opportunities/problems Select important opportunity based on criteria Redefine team Write problem/opportunity statement Summarize project/define road map Management review Irwin/McGraw-Hill © 2000 The McGraw-Hill Companies, Inc. 27 ANALYZE CURRENT SITUATION Define process to be improved Identify process output Identify customer/supplier relationships Identify customer needs and expectations Define performance indicators Define supplier specifications Flow chart the process Collect baseline data Identify performance gaps Validate problem/opportunity statement Management Review Irwin/McGraw-Hill © 2000 The McGraw-Hill Companies, Inc. 28 IDENTIFY ROOT CAUSES Analyze cause and effect relationships Identify potential root causes Collect data Verify cause and effect and root causes Validate/problem/opportunity statement Management Review Irwin/McGraw-Hill © 2000 The McGraw-Hill Companies, Inc. 29 SELECT AND PLAN SOLUTION Generate list of potential solution Select best one based on criteria Define revised process Develop implementation plan Revise process output Identify expected outcomes Revise supplier specifications Modify flow charts Identify sequence/timing Define resources/controls Define responsibility Identify pilot activities Identify contigency actions Management Review Irwin/McGraw-Hill © 2000 The McGraw-Hill Companies, Inc. 30 IMPLEMENT PILOT SOLUTION Monitor Results and Evaluate Solution Monitor results relative to Targets and goals Process changes Controls Evaluation solution Management review Irwin/McGraw-Hill © 2000 The McGraw-Hill Companies, Inc. 31 STANDARDIZE Cascade beyond pilot activity Develop appropriate training materials Monitor results and evaluate solution Document entire quality improvement journey Management Review Recycle Identify new improvement opportunity Irwin/McGraw-Hill © 2000 The McGraw-Hill Companies, Inc. 32 QUALITY IMPROVEMENT TOOLS Idea Generation Consensus Process Definition Collecting Data Analyzing Cause and Effect Analyzing and Displaying Data Planning Tools Meeting Management Tools Benchmarking Questionnaires Irwin/McGraw-Hill © 2000 The McGraw-Hill Companies, Inc. 33 E-BUSINESS TRANSFORMATION E-vision: Broadening the view E-Volution: Climbing the Ladder E-Strategy: Playing with LEGOs E-Synchronization: Breaking the Boundaries E-Infrastructure: Opening the Hood E-Capitalization: Placing Winning Bets E-Organization: Rallying the People Irwin/McGraw-Hill © 2000 The McGraw-Hill Companies, Inc. 34 THE E-BUSINESS SCOPE COMPASS Who Where Irwin/McGraw-Hill © 2000 The McGraw-Hill Companies, Inc. 35 WHAT E-BUSINESS IS NOT e-Business is Not a Bolt-On to Your Business e-Business is Not About Technology e-Business is Not the CIO’s Responsibility e-Business is Not Tied to a Particular Department or Functional Area e-Business is Not a Middle-Management Initiative e-Business is Not a Fixed Target Irwin/McGraw-Hill © 2000 The McGraw-Hill Companies, Inc. 36 THE LADDER: THE EVOLUTIONARY STAGES OF E-BUSINESS Who’ in Charge? Who Pays? Who’s Affected What’s the Integration Level? Irwin/McGraw-Hill © 2000 The McGraw-Hill Companies, Inc. THE LADDER: THE EVOLUTIONARY STAGES OF E-BUSINESS Who’ in Charge? Who Pays? Who’s Affected What’s the Integration Level? Irwin/McGraw-Hill 37 © 2000 The McGraw-Hill Companies, Inc. 38 FINDING YOUR PLACE ON THE LADDER Do you Use a Lot of Raw Materials and Components? What fraction of Your Customers is Online, and How Intense are the Interactions? Do you have Multiple Layers of Resellers and Many Different Types of Channels? Do you Spend a Lot of Money on New Product Development? Are you a “Knowledge Factory”? Irwin/McGraw-Hill © 2000 The McGraw-Hill Companies, Inc. 39 THE LADDER OF E-BUSINESS INITIATIVES Reinvent Revolutionary Initiatives •Long-term •External focus •Top-line Evolutionary Initiatives •Short-term •Internal focus •Bottom-line Integrate Automate Inform •Value network level •Real-time end-to-end integration •CEO or startup team leads •Transformation outcomes •Enterprise level •Tight integration •Line of business leads •Revenue outcomes •Process level •Some integration •E-business team leads •Effective outcomes •Activity level •No integration •Grassroots efforts •Efficiency outcomes Irwin/McGraw-Hill © 2000 The McGraw-Hill Companies, Inc. 40 THE DUALITY OF E-BUSINESS INITIATIVES Characteristic Evolutionary Initiatives Revolutionary Initiatives Objective Risk-return profile Major risk factors Outcome metrices Financial impact Impact on core business Capabilities needed Business processes impacted End-state Stay in business Low -risk, low -return, short time horizon for payback Execution risk, adoption risk Reinvent your business High-risk, high return, long time horizon for payback Market risk, technology risk ROI, net present value Option value, capital appreciation, learning payoffs Grow th impact, top-line oriented Irwin/McGraw-Hill Cost impact, bottom-line oriented Enhance and improve the core Mostly, available internally Impacts focussed processes, can be isolated to a business unit or process level Integrate into the core business Often threaten the core Ned to be imported Systemic impact, typically cuts across business units and functional boundaries Spin-off from the core business © 2000 The McGraw-Hill Companies, Inc. 41 DIMENSIONS OF THE BUSINESS ARCHITECTURE Customers (value proposition) Who we serve •Customer segments •Customer needs What we make • Products • Services What we know and own • Information • Human capital • Structural capital Offerings • Relationship capital Resources Growth engine How we make revenues •Customer leverage •Offering leverage Profit •Market leverage engine •Top-line potential How we make money •Sources of profits •Quality of profits •Defensibility of profits •Bottom-line potential Irwin/McGraw-Hill Processes What we do • Realization process • Sourcing process • Operating processes • Go-to-market process Who we work with •Suppliers •Resellers • Complementors Partners (value network) © 2000 The McGraw-Hill Companies, Inc. 42 CORE PROCESSES New offering realization process-how it defines, designs, and brings new offerings to market Customer relationships management process-how it creates and builds relationships with its customers, and how it interacts with its customers Fulfillment management process-how it sources its inputs and goes to market with its products and services Human relations management process-how it attracts, grooms, and retains talent in the organization Irwin/McGraw-Hill © 2000 The McGraw-Hill Companies, Inc. 43 CORE PROCESSES Contd…. Market sensing process-hot it gathers intelligence from the market, disseminates this intelligence within the organization, and acts upon this information. Operations management process-how it transforms its inputs into outputs Business development process-how it renews its business and finds opportunities for growth. Strategy development process-how it defines its end-goals, and the means for achieving the goals. Partner management process-how it identifies, selects, coordinates with, and manages relationships with key partners and complementors Financial management process-how it deploys its financial resources and allocates capital within the business. Irwin/McGraw-Hill © 2000 The McGraw-Hill Companies, Inc. 44 THE SEAMLESS COMPANY Integrated MarComm • Television • Print • Outdoor • Personal selling • Telemarketing • Internet Irwin/McGraw-Hill Integrated channels • Retail stores • Catalog sales • Sales force • Internet Customer Relationship Repository (CRR) Unified contact management • E-mail • In-person • Live chat • Telephone • Voice over IP © 2000 The McGraw-Hill Companies, Inc. • Fax 45 Richness of physical interactions in the buying process THE NET EFFECT ON CHANNELS Irwin/McGraw-Hill High Low Brand Augmentation •Most CPG categories •Fast food •Convenience products Channel Augmentation •Most B2B products •Real estate •Computer systems •Industrial chemicals Channel Proliferation •Most shopping goods •Books •Music •Office supplies Channel Deconstruction •Most low-end services •Domestic travel •Personal investing •Prescription drugs Low High Intensity of information in the buying process © 2000 The McGraw-Hill Companies, Inc. 46 TOWARDS THE SEAMLESS COMPANY Mail Fax E-mail Web Phone Person • Establish need • Find sources • Establish trust • Determine value • Select product • Negotiate terms • Transact • Get service • Upgrade/repeat Irwin/McGraw-Hill © 2000 The McGraw-Hill Companies, Inc. TOWARDS AN ENTITY-CENTRIC INFRASTRUCTURE 47 Suppliers (direct and indirect materials) Supplier-facing Applications (“Buy-side”-SCM and ORM) ERP (Transactions Backbone) Customer-facing Applications (“Sell-side”-CRM and SFA) Customers and Salesforce Irwin/McGraw-Hill © 2000 The McGraw-Hill Companies, Inc. 48 COMPONENT-BASED ARCHITECTURE Supplier Management Customer Management Cross Application Components Partner Management Applications Specific Components Enterprise Portal Industry Specific Components Common Business Objects Distributed Object Infrastructure Legacy Application Objects Irwin/McGraw-Hill © 2000 The McGraw-Hill Companies, Inc. A VISUAL TOOL FOR EVALUATING EBUSINESS INITIATIVES 49 Anticipated payoff Scope of impact Competitive differentiation Time to payoff Trainability Adoption risk Capability risk Irwin/McGraw-Hill Integrated risk © 2000 The McGraw-Hill Companies, Inc. SEVEN ORGANIZATIONAL PROCESSES IN EBUSINESS TRANSFORMATION • Culture • Shared vision Staffing • Traits • Skills Motivating Vision and Strategy Structuring • Organization • Integration Irwin/McGraw-Hill • Incentives • Rewards Diffusing Catalyzing 50 Training • Education • Mentoring Externalizing • Partners • Suppliers © 2000 The McGraw-Hill Companies, Inc. 51 THE ROLES OF A MATURE E-BUSINESS ORGANIZATION Scope of initiative Enterprise level CIO leads Matchmaking role CEO, lead Venturing role E-business organization SBU level Department of IT leads Coordinating role Productivity-oriented internally focused SBU head leads Escalating role Growth-oriented externally focused Outcome of initiative Irwin/McGraw-Hill © 2000 The McGraw-Hill Companies, Inc.