We will try to analyze this fundamental point when trying to find success. There are several reasons why groups of Shareholders or Directors confuse two important approaches when they sit down to plan and develop a model for their organization.
We briefly describe the steps that must be followed before implementing a Balanced Scorecard and where we must stop until we are totally sure that we are moving in the right direction.
First we write the MISSION (which tells us why we exist) then the VALUES (what we believe in) then the VISION (which tells us what we want to be in the future), later when we analyze the current situation we develop a SWOT chart. (SWOT. Forces, opportunities, weaknesses, threats).
And then the VALUE CHAIN (which according to Porter says that activities are the basis of the strategy, that is, what we should stand out in. The differentiation comes from the activities we choose and how we carry them out)
To get to the STRATEGY (which is our game or battle plan), from here we go to the CMI (balanced scorecard) and its strategic maps, that is, we go to ACTION.
Why do we draw a bang before the strategy?
Because here we are in danger, if we don't do the right thing
Warnings:
- The strategy must specify the results it seeks and describe how to achieve them. The strategy cannot be applied if it is not understood and cannot be understood if not described. It is to move from the current situation to the future (desirable but uncertain). The relationships between inductors and results will be the hypothesis that defines the strategy. But? Strategies There is NOT a single or a model, there may be several and of different types depending on what the company pursues.
Let's start by describing a very simple example of a journey.
Let's remember this simple case for when we later apply it to a case of our company.
A group of people are doing a jungle safari on foot, walking through the jungle until they reach a fairly wide and flowing river that they must cross. Let's analyze the situation.
River Crossing Analysis
The group of people sit down to think about the strategy (game plan) to cross it and define as alternatives to build a raft or swim across it as the worst.
In the first case the short-term goal would be to get the materials and build the raft, the longer-term goal (in this case, a few hours) to drive the raft and get it to the other shore.
When we are developing the strategy to achieve the first objective, we must think about the long term, that is, how many hours must the raft withstand the force of the water so that it does not destroy itself and take the entire group to safety. We should also ask ourselves a few questions of the type
"WHAT IF" what happens if there are shallow rocks?
What happens if there are eddies?
What if there are crocodiles or piranhas?
What happens if the raft is destroyed before arriving?
CONCLUSION: When we design our strategy we consider the times and their objectives (in the short and long term) and another very important factor is the cause-effect relationships. "If we do this then this will happen another"
Let us return to the drivers of growth and profitability or productivity, which together with shareholder value are generally the base strategies in all organizations.
We do not take into account that they are juxtaposed and opposed strategies, which are one of the most frequent causes of strategic failure. When they realize the apparent contradictions they return to one-dimensional behavior and abandon the challenge to which they have committed themselves.
How then to define a joint strategy?
Defining a strategy is not a simple matter, even more so if we think that, by not finding the right one or containing errors, it will communicate and start with the same errors.
The Management team gets to work to translate their business strategy into specific strategic objectives, so the team must think about where it will put emphasis, growth. in generating cash flow.? or in the return on invested capital.?
One question we should ask ourselves to start would be;
“How to get a competitive advantage that differentiates us from the competitors and that lasts over time to produce concrete results? "
If we define a strategy aimed at safe growth, we will come up with topics such as:
- Increase our customer base. Produce new products or services. Quality to satisfy our customers. Sales grow faster than the market average. More items sold at higher prices. Sell non-traditional products. More new customers..More than current customers.
If we define the strategy oriented to profitability or productivity, cases such as:
- Lower costs. Make cuts in salaries or personnel. Be leaders in costs in the sector. Take care of assets and their turnover. Generate more benefits with what we have. Income and expenses per service unit, division or per case. Increase operating margins. Control fixed and current assets.
And, if the strategy is oriented to shareholder value, the topics will be:
- Increase the return on invested capital. Dividend profitability. Price-benefit performance. Increase the value of stocks.
What happens if we mix one or two strategic themes from each list mentioned above?
We will enter a vicious circle, in a loop that will prevent us from advancing until tired we give up to continue and abandon the task that the VISION mentioned to us.
We must seek a balance between the result drivers and their indicators, let us never forget the balance between the short and long term, the balance between profitability and growth.
Preparing for the future means investing. But how can we know today that the actions we are taking will help to set the stage for tomorrow.
How to reward a group that designed a good marketing campaign today if we do not know the results, everything went well today but tomorrow the economy with problems or competition with more advanced technology than ours can dawn and everything is punctured. How do I balance the risks I'm taking today with the results that will be seen tomorrow or the day after.
Now if we go to a practical case of a company called "WW SA"
Once the diagnosis has been made (where you can see what opportunities offered by the medium can be exploited using the company's strengths) and the long-term objectives have been defined (that is, where you want to go) the next step is to see what they are the paths (strategies) by which you can reach those goals and choose one or more of them.
It is a company that manufactures and markets agricultural implements:
WW SA
The General Manager of the company WW SA holds a meeting with his peers in finance, production, engineering, marketing, human resources and administration.
Begin the meeting by remembering the vision, reviewing the swot chart, the Porter matrix, and the value chain.
Vision:
"We want to be the national manufacturer that contributes the most to obtaining food for Argentina and the world in all sectors, especially dairy, refrigeration, and agriculture."
FOFA - SWOT frame
| F - strengths | O- opportunities |
| Good positioning in the market
Implement quality and durability Prices in the market average |
Reactivation of the sector by opening exports of primary goods.
Increase in international grain prices. Growth prospects. |
| D - weaknesses | A - Threats |
| Cash flow destroyed by last year's recession.
Lack of credits at international rates. Lack of alignment and departmental synergies Lack of an information technology system Lack of planning due to failure of previous plans. |
Still unstable economy
Government does not comply with sanitary measures with the European Union. Climatic agents nationwide. |
Porter matrix and Value chain:
PRIMARY ACTIVITIES
Primary Activities of the Company
SUPPORT ACTIVITIES
- Engineering and research Quality tests and after-sales services Database administration Marketing and image dissemination Administration and generation of financial and non-financial information.
The President, after analyzing the aforementioned documentation and listening to managers about the current situation of the company, the market and the economy in general, presents the objectives to be pursued in the near and longer term future.
So far the meeting has been conducted with attention and great interest.
The CEO says in the short term we must rebuild our working capital, normalize the flow of funds and lower our prices by 5%.
For the current year we must increase our sales by 20% and by 100% for the following four / five years.
Henceforth the meeting became hot among the participants because of:
Production mentioned that, to grow 20% this year and 100% for the remaining four, it would need to make investments in machinery and stock of some imported inputs.
An overtime plan and some additional staff.
Engineering would need a training plan to improve the productivity and efficiency of operational employees, investments in computer equipment, research and benchmarking are also essential.
Marketing informs the recruitment of vendors, their training and alignment to the organization. It is necessary to lower the sales prices to reach the desired sales percentages.
Administration: He comments that he needs to improve his information system to provide the data that the General Management requires in time and form for decision making. Make computer investments due to increased data processing volume and speed.
Finally Finance says they are all crazy; They want to lower prices to sell more and increase costs through overtime, increase amortizations for equipment investments, research and development.
They want to rebuild the flow of funds and working capital by selling more and increasing current assets for receivables. THIS IS NOT GOING TO WORK.
The General Manager proposes to reopen the dialogue and initiate the development of strategies to reach the desired future.
It coincides that everyone's exposure has its degree of certainty but if we do not look for a game plan to be able to meet the stated objectives we will lose the opportunity to grow that is presented today and if we miss the train and do not get on we will stay on the track forever.
The CEO reports that from the detailed analysis of the objectives pursued we have two types, some are oriented to productivity or profitability or others to growth, therefore we must focus on two strategies to achieve them.
When describing the two proposed strategies, he mentions the strategic themes that comprise them:
We will use a growth strategy and for this we will focus on the task of increasing our customer base of the implements we manufacture, to this we will add the efforts so that the same customers use all the original spare parts and maintenance services for them. And as general support, we will make alliances with producers and sellers of tractors or other implements that we do not manufacture to reach first place and be leaders in the field.
For the other types of objectives we need a productivity strategy in which we will emphasize the reduction of both direct and indirect costs, we will increase production efficiency by eliminating downtime in different phases of the process, reducing to the maximum the waste of inputs trying to reconvert or sell them without affecting the quality of our products in the least. And as a complement, lower current assets either in materials in stock or accounts receivable, increasing the speed of circulation of the aforementioned.
After describing the strategies, the staff members exchange opinions again, but this time more focused and concentrated to carry out the strategic plan.
Now, says the President, but what happens if a competitor makes an innovation in the operation of an implement and makes it more versatile than ours?
Answer production: Our production plan (Processes) includes flexible matrices to incorporate changes at any stage and this is because the databases of user suggestions (Learning) are constantly updated to incorporate the necessary changes that customers demand (Customer satisfaction) and if we add to this the opinions of users of other brands, we can detect the defects and strengths of the machines that compete with us. Add our bench process is very advanced!
President, what if someone reduces prices below ours?
Responds Commercial: Working hand in hand with the administration people to have the data of the cost structure updated and adding the initiative of the plan reduction and use of waste we will always have a good market price and if someone is below it is violating quality margins
At this point, those responsible for marketing will inform us of the preferences of users regarding price and quality and here the possibility of a second brand with lower prices or not according to market requirements will be evaluated.
President: What if we have a year with unusual weather conditions?
What happens if Argentina loses the permits to export to the European Union?
They report production and sales: We are always alert to situations like these, so we have the equipment export plan in place for MERCOSUR, now made possible by the devaluation that our currency suffered, making us internationally competitive.
Human Resources says that the night shift is incorporated and new operators are being trained.
Continuing with the contribution of all those present, we proceed to make the cause and effect diagram.
Causes and Effects Diagram
Causes and Effects Diagram
Construction of the Board Matrix
So far the President showed the idea of the business, the business mission, where we are now and where he would like to be in 4 years. He reviewed the factors that are for and against, developed the activities and their sources of value, set the short and medium term objectives, presented and discussed two strategies, analyzed what happened if there were major changes in the environment and the market and what was discussed was transferred to a matrix of causes and effects.
Now they build the matrix of the board, identifying in the four perspectives the critical success factors, the performance indicators and business plans.
| Outlook | Critical factors of success | Indicators | Plan to achieve goals |
| Learning | Motivated employees
IT generation Alliance with tractor producers |
% semiannual incentives
Teamwork qualification Update frequency Bases Closed agreements. |
Human Resources Plan
Benchmarking. |
| Processes | Spare parts production
Services offered Use of waste |
Sales / targets
Waste / sales or reuse |
Continuous improvement
Training |
| customers | User suggestions
Customer databases Customer satisfaction |
Suggestions / made effective
% New customers Repeat Clients Polls |
Brand and image disclosure |
| Financial | Profitability on sales
Lower costs Optimization working capital |
Sales / targets
Cost compliance Cash flow Rotating stoks Ctas. receivable / sales |
Budget monitoring
Syst. ABC costs Financing Providers Receipts on time Collections |
