MANAGEMENT POLICY AND STRATEGY SESSION - XI

1. MANAGEMENT POLICY AND STRATEGYSESSION - 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

2. What is Strategic Control? Tracks a strategy as it is implemented, detects problems or changes in its underlying premises, and makes necessary adjustments.

3. Questions Involved in Assessing a Strategy’s Success 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?

4. 1. Strategic surveillance 2. Premise control 3. Special alert control 4. Implementation control Strategy formation Strategy implementation Time 1 Time 2 Time 3 Four Types of Strategic Control

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

6. Characteristics of Strategic Controls Types of Strategic Control Basic Characteristics Premise Control Implementation Control Strategic Surveillance Special Alert Control Occurrence of recognizable but unlikely events Objects of control Planning premises and projections Key strategic thrusts and milestones Potential threats and opportunities Degree of focusing High High Low High Data acquisition: Formalization Medium High Low High Centralization Low Medium Low High Use with: Environmental factors Yes Seldom Yes Yes Industry factors Yes Seldom Yes Yes Strategy-specific factors No Yes Seldom Yes Company-specific factors No Yes Seldom Seldom

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.

8. Steps involved in post action control systems Establishing Effective Operational Control Systems 1. Set standards of performance 2. Measure actual performance 3. Identify deviations from standards set 4. Initiate corrective action

9. Budgets Schedules Key success factors Types of Operational Control Systems

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

11. Key Success Factors at IBM’s Lotus Notes Division Key Success Factor Measurable Performance Indicator 1. Product quality a. Performance data versus specification b. Percentage of product returns c. Number of customer complaints 2. Customer service a. Delivery cycle in days b. Percentage of orders shipped complete c. Field service delays

12. Key Success Factors at IBM’s Lotus Notes Division Contd…. Key Success Factor Measurable Performance Indicator 3. Employee morale 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

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.

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.

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.

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.”

17. KMART GETS SOME BAD NEWS BY BENCHMARKING INDUSTY SUCCESS FACTOS AGAINST A KEY RIVAL - 1995 Key Success Factor Kmart Wal-Mart to Benchmark Core customer Over 55; more than Under 44K, $ 40 income $20 k income and no and kids at home kids at home Sales/square foot $ 185 $ 379 Shopper visits/year 15 times per year 32 times per year Loyal to the chain 19 per cent of Kmart 46 per cent of Wal- customers Mart customers Location 36 per cent of 49 per cent of Wal Americans find their Mart customers drive newest Kmart past a Kmart to go to inconvenient compared Wal-Mart to other stores

18. Key Success Factors Objective, Assumption, or Budget Forecast Performance at This Time Current Performance Current Deviation Analysis Cost control: Ratio of indirect overhead cost to direct field and labor costs 10% 15% 12% +3 (ahead) Are we moving too fast, or is there more unnecessary overhead than was originally thought? Gross profit 39% 40% 40% 0% Customer service: Installation cycle in days 2.5 days 3.2 days 2.7 days +0.5 (ahead) Can this progress be maintained? Ratio of service to sales personnel 3.2 2.7 2.1 -0.6 (behind) Why are we behind here? How can we maintain the installation-cycle progress? Product quality: Percentage of products returned 1.0% 2.0% 2.1% -0.1% (behind) Why are we behind here? What are the ramifications for other operations? Monitoring and Evaluating Performance Deviations

19. Key Success Factors Objective, Assumption, or Budget Forecast Performance at This Time Current Performance Current Deviation Analysis Product performance versus specification 100% 92% 80% -12% (behind) Why are we behind here? Marketing: Monthly sales per employee $12,500 $11,500 $12,100 +$600 (ahead) Good progress. Is it creating any problems to support? Expansion of product line 6 3 5 +2 products (ahead) Are the products ready? Are the perfect standards met? Employee morale: Absenteeism rate Turnover rate 2.5% 5% 3.0% 10% 3.0% 15% (on target) -8% (behind) Looks like a problem! Why are we so far behind? Competition: New product introductions (average number) 6 3 6 -3 (behind) Did we underestimate timing? What are the implications for our basic assumptions? Monitoring and Evaluating Performance Deviations (concluded)

20. The Quality Imperative: Concepts Related to TQM • 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

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

22. The Value Chain Approach to Developinga Customer Orientation External suppliers Input Seeking: Quality Efficiency Responsiveness External (ultimate) customer Function (like production) Outputs Other internal customers (activities) Outputs Internal suppliers (functions) Input

23. Examples: Ways to Enhance Customer Value Quality Efficiency Responsiveness Marketing Provides accurate assessment of customer’s product preferences to R&D Targets advertising campaign at customers, using cost-effective medium Quickly uncovers and reacts to changing market trends Operations Consistently produces goods matching engineering design Minimizes scrap and rework through high-production yield Quickly adapts to latest demands with production flexibility Carries out parallel product/process designs to speed up overall innovation Designs products that combine customer demand and production capabilities Uses computers to test feasibility of idea before going to more expensive full-scale prototype R&D

24. Examples: Ways to Enhance Customer Value Contd... Quality Efficiency Responsiveness Accounting Provides information that managers in other functions need to make decisions Simplifies and computerizes to decrease cost of gathering information Provides information in “real time” (as events described are still happening) Purchasing Selects vendors for their ability to join in an effective “partnership” Given required vendor quality, negotiates prices to provide good value Schedules inbound deliveries efficiently, avoiding both extensive inventories and stock-outs Personnel Trains work force to perform required tasks Minimizes employee turnover reducing hiring and training expenses In response to strong growth in sales, finds large numbers of employees and quickly teaches needed skills

25. QUALITY IMPROVEMENT PROCESS Step 1. Select Improvement Opportunity 2. Analyze current situation 3. Identify root causes 4. Select and plan solution Phase PLAN DO 5. Implement pilot solution Check 6. Monitor results and evaluate solution ACT 7. Standardize 8. Recycle

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

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

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

29. SELECT AND PLAN SOLUTION • Generate list of potential solution • Select best one based on criteria • Define revised process • Revise process output • Identify expected outcomes • Revise supplier specifications • Modify flow charts • Develop implementation plan • Identify sequence/timing • Define resources/controls • Define responsibility • Identify pilot activities • Identify contigency actions • Management Review

30. IMPLEMENT PILOT SOLUTION Monitor Results and Evaluate Solution • Monitor results relative to - • Targets and goals • Process changes • Controls • Evaluation solution • Management review

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

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

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

34. THE E-BUSINESS SCOPE COMPASS Who Value Network Customers Firm Outcomes Outcomes Outcomes Infor Why What Collaboration Transactions mation Cost Relationship Transformation In-house Hosted Hosted Remotely Anywhere Hosted Where

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

36. THE LADDER: THE EVOLUTIONARY STAGES OF E-BUSINESS • Who’ in Charge? • Who Pays? • Who’s Affected • What’s the Integration Level?

37. THE LADDER: THE EVOLUTIONARY STAGES OF E-BUSINESS • Who’ in Charge? • Who Pays? • Who’s Affected • What’s the Integration Level?

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”?

39. THE LADDER OF E-BUSINESS INITIATIVES Revolutionary Initiatives Reinvent Integrate • Long-term • External focus • Top-line • Value network level • Real-time end-to-end • integration • CEO or startup • team leads • Transformation • outcomes Automate Evolutionary Initiatives Inform • Enterprise level • Tight integration • Line of business leads • Revenue outcomes • Short-term • Internal focus • Bottom-line • Process level • Some integration • E-business team leads • Effective outcomes • Activity level • No integration • Grassroots efforts • Efficiency outcomes

40. THE DUALITY OF E-BUSINESS INITIATIVES

41. DIMENSIONS OF THE BUSINESS ARCHITECTURE • What we make • Products • Services • Information Customers (value proposition) • What we know and own • Human capital • Structural capital • Relationship capital • Who we serve • Customer segments • Customer needs Offerings Resources • What we do • Realization process • Sourcing process • Operating processes • Go-to-market process Growth engine Processes • How we make revenues • Customer leverage • Offering leverage • Market leverage • Top-line potential Partners (value network) Profit engine • Who we work with • Suppliers • Resellers • Complementors • How we make money • Sources of profits • Quality of profits • Defensibility of profits • Bottom-line potential

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

43. CORE PROCESSESContd…. • 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.

44. THE SEAMLESS COMPANY • Integrated MarComm • Television • Print • Outdoor • Personal selling • Telemarketing • Internet • Integrated channels • Retail stores • Catalog sales • Sales force • Internet Seamless marketing Seamless sales Customer Relationship Repository (CRR) Seamless service • Unified contact management • In-person • Telephone • Fax • E-mail • Live chat • Voice over IP

45. THE NET EFFECT ON CHANNELS • Channel Augmentation • Most B2B products • Real estate • Computer systems • Industrial chemicals • Brand Augmentation • Most CPG categories • Fast food • Convenience products High • Channel Proliferation • Most shopping goods • Books • Music • Office supplies • Channel Deconstruction • Most low-end services • Domestic travel • Personal investing • Prescription drugs Richness of physical interactions in the buying process Low High Low Intensity of information in the buying process

46. TOWARDS THE SEAMLESS COMPANY Fax Web Phone Mail E-mail Person • Establish need • Find sources • Establish trust • Determine value • Select product • Negotiate terms • Transact • Get service • Upgrade/repeat

47. TOWARDS AN ENTITY-CENTRIC INFRASTRUCTURE Suppliers (direct and indirect materials) Supplier-facing Applications (“Buy-side”-SCM and ORM) Employee-facing Applications (Intranet and KM) ERP (Transactions Backbone) Partner-facing Applications (PRM) Resellers and Affiliates Employees Customer-facing Applications (“Sell-side”-CRM and SFA) Customers and Salesforce

48. COMPONENT-BASED ARCHITECTURE Supplier Management Customer Management Partner Management Enterprise Portal Applications Specific Components Industry Specific Components Cross Application Components Common Business Objects Distributed Object Infrastructure Legacy Application Objects

49. A VISUAL TOOL FOR EVALUATING E-BUSINESS INITIATIVES Anticipated payoff Scope of impact Competitive differentiation Time to payoff Trainability Adoption risk Capability risk Integrated risk

50. SEVEN ORGANIZATIONAL PROCESSES IN E-BUSINESS TRANSFORMATION Diffusing • Incentives • Rewards Catalyzing • Culture • Shared vision Motivating Vision and Strategy Staffing Training • Education • Mentoring Structuring External- izing • Traits • Skills • Partners • Suppliers • Organization • Integration