Strategy Translation & Value Innovation Seminar

1. ICPAKEnterprise Performance: Striking a Balance25th July, 2013 Facilitator: K.M. Murimi CEO & Team Leader JMG STRATEGY INNOVATIONS LTD engage@jmgstrategyinnovations.com

2. 9:00 – 10:30 Budgeting: Aligning to the Current Dynamics

3. ALIGNING TO THE CURRENT DYNAMICS

4. ALIGNING TO THE CURRENT DYNAMICS..cont

5. 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.

6. 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.

7. THE MISSING DIMENSION..cont

8. DEVELOP THE STRATEGY • Define mission, vision and values • Conduct strategic analysis • Formulate strategy . Stage 1 • TRANSLATE THE STRATEGY • Define strategic objectives and themes • Select measures and targets • Select strategic initiatives • Test and Adapt the Strategy • Conduct profitability analysis • Conduct strategy correlation analysis • Examine emerging strategies Stage 5 Stage 2 • Strategic plan • Strategy map • Balanced scorecard • StratEx • PLAN OPERATIVES • Improve key processes • Develop sales plan • Plan resource capacity • Prepare budgets • Monitor and Learn • Hold Strategy Reviews • Hold operational reviews Stage 3 • Operating Plan • Dashboards • Budgets • Pro forma P&Ls Stage 4 Execute processes and initiatives

9. The Five Forces That Shape Industry Competition Threat of new Entrants . Rivalry Among Existing Competitors Bargaining Power of Buyers Bargaining Power of Suppliers Threat of Substitute Products or Services

10. 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…..

11. 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.

12. 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.

13. 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.

14. VALUE INNOVATION: THE CORNERSTONE OF BLUE OCEAN STRATEGY…Cont Costs . Buyer Value Value Innovation The Simultaneous Pursuit of Differentiation and Low Cost

15. 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.

16. 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.

17. Red Ocean Versus Blue Ocean Strategy

18. Formulating and Executing Blue Ocean Strategy The Six Principles of Blue Ocean Strategy

19. STRATEGY-CULTURE MATCHING GRID StrategyCulture Commitment Competence Consistency Customers Competitors Company

20. 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.

21. 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.

22. 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.

23. 14:00 – 15:30 Forecasting and Performance Management: Tying the Duo

24. VISION: By 2013, become the leading company in our industry Increase return on capital Financial Perspective Customer Perspective Process Perspective Learning and Growth Perspective Improve Productivity Increase revenues in existing segments and markets Grow revenues in new products and services Improve operating & efficiency Grow high-value customer r/ships Accelerate product 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 Creating a High Performance culture Expand and build strategic skills, capabilities, and expertise Enable and require continuous learning and sharing of knowledge Develop leadership and an execution – driven culture

25. 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.

26. 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.

27. 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.

28. Cont… Some typical examples of strategic risks are listed below; • 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.

29. 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.

30. 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.

31. 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. B A

32. 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.

33. 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.

34. 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.

35. 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.

36. 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.

37. 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.

38. 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.

39. 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.

40. 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.

41. 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.

42. 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:

43. 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).

44. 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.

45. 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.

46. 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 Making Strategies Work Strategic Risk Management Project Management of Change

47. Case Study • Lessons on competing in an Unpredictable World China’s entrepreneurs provide valuable lessons on managing effectively in an unpredictable context. • Acknowledge the fog of the future Managers 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.

48. Out cycle the competition Simply 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.

49. 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.

50. The Business Balanced Scorecard FINANCIAL PERSPECTIVE ‘ How do you look to your stakeholders?’ . VISION ORGANISATION LEARNING ‘Are you able to sustain innovation, change and improvement?’ CUSTOMER PERSPECTIVE ‘How do you look to your customers?’ BUSINESS PROCESS ‘How effective are key business processes?’