Strategic Cost Management

UIAMS
Panjab University, Chandigarh
Session 3
rd
dated 24
th
July, 2013

Strategic Positioning Analysis
Organizations are not isolated entities but
operate in the context of an external
environment. It is therefore imperative to not only
evaluate oneself on an absolute scale but more so
in relation with what is happening on the exterior.
One of the foremost prerequisites in defining an
organization's strategic orientation is the
knowledge of the organization's current
positioning.

Need for understanding
An organization operates within certain bounds
that are created by its direct competitors and
industry of operations (the immediate
neighborhood) as well as the macro-
environment.
To estimate the current positioning, these
elements have to be analyzed separately and in
unison to understand the possible effects and
develop a clearer image of strategic positioning.

Understanding Strategic Positioning
Begin stepwise by first understanding the
macro environment and then the industry and
competitors.
Political Environment: A country's economic
health is inseparably conjoined with its polity.
Political environment should be necessarily
studied to assess the strategic position of the
organization.
In what ways it has a bearing is manifold and specific to
the industry; for the polity being both the legislative
and executive body for the entire nation.
Understanding Strategic Positioning
Continued
Economic Environment:
Economic health of the country of establishment and the world
market. For this, regular scrutinizing has to be done to decipher
the influence of economic decisions made by the government on
the industry and possible turbulences in the external world
Social Environment
Social fabric of the society is of tremendous significance in
shaping up an organization. Extensive research goes into figuring
out the needs and demands of the people and their expectations,
which by itself is quite a task for market research companies.
Culture of the place, the traditions, the history everything
contributes to the making of the social fabric.
It is within the dynamics of this fabric that an organization directly
interacts with making it one of the key macro environmental factors for
assessment


Understanding Strategic Positioning
Continued
Technological Factors
It emphasizes current technology and its relevant
future advancements. Over the years, world has
changed due to the development in science and
technology. Many companies that failed to adapt to the
changing environments either perished through major
defaulting or were hostilely acquired by black nights.
As Darwin's theory suggests, the world is all about
survival of the fittest. To remain strong in today's
competitive world, technological update is of prime
relevance and organizations need to be aware of it

Strategic Positions
Some of the strategic positions that one might consider are:
The low-cost firm that churns out good enough services or products at
the lowest possible cost.
The highly differentiated firm that creates the highest quality, best
designed, best supported, most attractive products or services in their
area.
The narrowly focused firm that ties itself to a very specific market and
serves its needs assiduously, typically with segmented products and
services or niche, often customized, products or services.
The broadly focused firm that serves a wider market, either with a
standardized product or through mass customization.
The firm that elaborates a previously chosen position, by penetrating
deeper, developing new markets or niches, developing new products,
carving out space at the edge of a niche, or raising barriers to
competitors wanting to do what ones firm does at present.

SWOT Analysis
Strengths (S) Weaknesses (W)
--------------------------- ------------------------
Internal
Factors
External
Factors
Opportunities (O)
-------------------------
SO Strategies
-------------------------
WO Strategies
------------------------
Threats (T)
------------------------
ST Strategies
--------------------------
WT Strategies
-------------------------
List 5-10 external
opportunities here
List 5-10 external
threats here
Use strengths to
avoid threats
Min. weaknesses
to avoid threats
Use strengths to
take advantage of
opportunities
Offset weaknesses
to take advantage
of opportunities
List 5-10 internal
strengths here
List 5-10 internal
weaknesses here
Critical Success Factors
Critical Success Factor (CSF) is the term for an
element that is necessary for an organization
or project to achieve its mission. It is a critical
factor or activity required for ensuring the
success of your business. The term was
initially used in the world of data analysis, and
business analysis.
For example, a CSF for a successful Information
Technology (IT) project is user involvement.
CSF contd
The concept of "success factors" was
developed by D. Ronald Daniel of McKinsey &
Company in 1961.
The process was refined by Jack F. Rockart in
1986.
In 1995, James A. Johnson and Michael
Friesen applied it to many sector settings,
including health care.
Some CSFs
A Business Plan should be implemented that considers a platform
for growth and profits as well as takes into consideration the
following critical success factors:
Money: positive cash flow, revenue growth, and profit margins.
Your future: Acquiring new customers and/or distributors.
Customer satisfaction: How happy they are?
Quality: How good is your product and service?
Product or service development: What's new that will increase
business with existing customers and attract new ones?
Intellectual capital: Increasing what you know is profitable.
Strategic relationships: New sources of business, products and outside
revenue.
Employee attraction and retention: Your ability to extend your reach.
Sustainability: Your personal ability to keep it all going.

Performance Evaluation
Traditional
Example: Annual Performance Appraisal
In the traditional performance appraisal process, a manager annually
writes his opinions of the performance of a reporting staff member on
a document supplied by the HR department. In some organizations,
the staff member is asked to fill out a self-review to share with the
supervisor.
Shortcoming:
Most of the time, the appraisal reflects what the manager can remember; this
is usually the most recent events.
Almost always, the appraisal is based on opinions as real performance
measurement takes time and follow-up to do well.
In many organizations, the supervisor is also asked to make judgments based
on concepts and words such as excellent performance (?), exhibits enthusiasm
(?) and achievement oriented (?).
Many managers are uncomfortable in the role of judge, so uncomfortable, in
fact, that performance appraisals are often months overdue

Balanced Scorecard
The balanced scorecard (BSC) is a strategic
performance management tool for measuring
whether the smaller-scale operational activities
of a company are aligned with its larger-scale
objectives in terms of vision and strategy.
Advantage: By focusing not only on financial
outcomes but also on the operational, marketing and
developmental inputs to these, the Balanced
Scorecard helps provide a more comprehensive view
of a business, which in turn helps organizations act in
their best long-term interests

Balanced Scorecard-continued
Balanced scorecard is a strategic planning and management
system that is used extensively in business and industry,
government, and nonprofit organizations worldwide to
align business activities to the vision and strategy of the
organization,
improve internal and external communications, and monitor
organization performance against strategic goals.
Balanced Scorecard was originated by Dr. Robert Kaplan
(Harvard Business School) and David Norton as a
performance measurement framework that added strategic
non-financial performance measures to traditional financial
metrics to give managers and executives a more 'balanced'
view of organizational performance.
Balanced scorecard was coined in the early 1990s


Adapted from The Balanced Scorecard by Kaplan & Norton
Four perspectives

The balanced scorecard suggests that we view the organization
from four perspectives, and to develop metrics, collect data and
analyze it relative to each of these perspectives:
The Learning & Growth Perspective
This perspective includes employee training and corporate cultural
attitudes related to both individual and corporate self-
improvement. In a knowledge-worker organization, people -- the
only repository of knowledge -- are the main resource. In the
current climate of rapid technological change, it is becoming
necessary for knowledge workers to be in a continuous learning
mode. Metrics can be put into place to guide managers in focusing
training funds where they can help the most. In any case, learning
and growth constitute the essential foundation for success of any
knowledge-worker organization.

Continue..
Learning and growth constitute the essential
foundation for success of any knowledge-worker
organization.
Kaplan and Norton emphasize that 'learning' is
more than 'training'; it also includes things like
mentors and tutors within the organization, as
well as that ease of communication among
workers that allows them to readily get help on a
problem when it is needed. It also includes
technological tools; and "high performance work
systems."

Business Process Perspective
The Business Process Perspective refers to
internal business processes.
Metrics based on this perspective allow the
managers to know how well their business is
running, and whether its products and services
conform to customer requirements (the mission).
Such metrics have to be carefully designed by
those who know these processes most intimately.

The internal business process
perspective contains three stages:

In the innovation cycle, customer
preferences are determined and the
products are designed.

In the operations cycle, goods and
services are produced and delivered to
the customer.

The post-sales service cycle supports
the customer after the sale.

The Internal Business Process
Perspective
Examples of possible performance measures
for the:
Innovation cycle include the number of new
technologies developed and new product
development time.

Operations cycle include defect rates and the
percent of on-time deliveries.

Post-sales service cycle include the accounts
receivable turnover ratio and warranty repair
times.
Customer Perspective
The Customer Perspective emphasizes customer focus and
customer satisfaction.
Recent management philosophy has shown an increasing
realization of the importance of customer focus and customer
satisfaction in any business.
These are leading indicators: if customers are not satisfied, they will
eventually find other suppliers that will meet their needs.
Poor performance from this perspective is a leading indicator of
future decline, even though the current financial picture may look
good.
Customers are analyzed in terms of kinds of customers and the
kinds of processes for which we are providing a product or service
to those customer groups.

The BSC Translates Strategy to a Series of Cause
and Effect Relationships
Long-Term
Strategy
Internal
Perspective
Customer
Perspective
Learning &
Growth
Financial
Perspective
How do shareholders
view organization?
How do customers
view organization?
How do employees
view organization?
How can organization grow and improve?
Performance measurements for
each perspective can be used to
determine appropriate
operational and strategic
changes.
Financial Perspective
The Financial Perspective is equally important
Kaplan and Norton do not disregard the traditional
need for financial data.
Timely and accurate funding data will always be a
priority, and managers will do whatever necessary to
provide it.
However, the current emphasis on financials leads to
the "unbalanced" situation with regard to other
perspectives.
There is also perhaps a need to include additional
financial-related data, such as risk assessment and
cost-benefit data, in this category.

Balanced Scorecard Implementation
A BSC implementation includes the
following stages:
Clarify vision, competencies, and strategies.
Analyze the four BSC perspectives to develop
objectives and measures.
Communicate the components of the BSC
throughout the organization.
Establish performance targets and action plans.
Collect and analyze scorecard data.
Investigate variances and reward employees.
Provide feedback and refine the scorecard.
Balanced Scorecard Strengths
The greatest strength of the BSC is the
communication of strategies throughout the
organization.
The BSC forces top management to clarify
the vision and strategies of the organization.
The BSC links employee rewards to
performance objectives that are linked to
the organizations vision and strategies, so
short-term and long-term strategies are
more likely to be in alignment.
Balanced Scorecard Potential Weaknesses
If based on inappropriately defined visions
and strategies, the BSC provides the wrong
incentives for managers.
Sometimes performance measures are
chosen because the data is easy to obtain,
rather than because they are linked to the
vision and strategies.
If performance measure targets are
unattainable, employees may not be
interested in BSC initiative.
Strategy Mapping
Strategy maps are communication tools used to
tell a story of how value is created for the
organization.
They show a logical, step-by-step connection between
strategic objectives (shown as ovals on the map) in
the form of a cause-and-effect chain.
Improving performance in the objectives found in
the Learning & Growth perspective enables the
organization to improve its Internal Process
perspective Objectives, which in turn enables the
organization to create desirable results in the
Customer and Financial perspectives.


Kaizen
Literally means tightening- for making continuous,
incremental improvements to the production process
The focus is on the production process, seeking
efficiencies in production, purchasing and distribution
and in turn helps in reducing costs
Incremental improvements can be in the form of
developed improved setups process, improving
machine performance to reduce waste, and increasing
employee training and motivation to encourage
employee to identify and implement the incremental
daily changes that can improve the cost and quality
performance.
Continue..

Kaizen ( "improvement") is a Japanese word adopted into English
referring to a philosophy or practices focusing on continuous
improvement in manufacturing activities, business activities in
general, and even life in general;
When used in the business sense and applied to the workplace,
kaizen typically refers to activities that continually improve all
functions of a business, from manufacturing to management and
from the CEO to the assembly line workers.
By improving standardized activities and processes, kaizen aims to
eliminate waste.
Kaizen was first implemented in several Japanese businesses during
the Japans recovery after World War II and has since been used by
corporate world. Its usage has spread to businesses throughout the
world
Continue..


The focus area of the Kaizen is not only
production and marketing.
It is based on making changes anywhere that
improvements can be made.

Benefits of Kaizen
Helps in reducing waste n areas such as
inventory, waiting times, transportation,
worker motion, employees skills, over
production and in process
Helps in improving space utilization, product
quality, use of capital, communication,
production capacity and employee retention
It provides immediate results

Six Sigma
Six Sigma is a business management strategy tool originally
developed by Motorola.
As of 2009, it enjoys widespread application in many sectors of
industry
Six Sigma seeks to improve the quality of process outputs by
identifying and removing the causes of defects (errors) and
minimizing variability in manufacturing and business processes.
Six Sigma uses a set of quality management methods, including
statistical methods, and creates a special infrastructure of people
within the organization ("Black Belts", "Green Belts", etc.) who are
experts in these methods.
Each Six Sigma project carried out within an organization follows a
defined sequence of steps and has quantified targets. These targets
can be financial (cost reduction or profit increase) or whatever is
critical to the customer of that process (cycle time, safety, delivery,
etc.).

Continue..
Is a rigorous and disciplined methodology that
uses data and statistical analysis to measure
and improve a companys operational
performance by identifying and eliminating
defects in manufacturing and service related
processes.
Commonly defines as 3.4 defects per million
opportunities
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