Strategy analysis s PDF

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The notion of strategyWhat is strategy? In its broadest meaning, strategy can be defined as a plan of action designed to achieve a long- term overall aim. It’s a general definition. The concept of strategy implies: The capacity to take decisions —> this is the main aspect Taking very important de...

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Teach for America ! Mission statement: “To enlist, develop, and mobilize as many as possible of our nation’s most promising future leaders to grow and to strengthen the movement for educational equity and excellence”. ! Vision statement: “One day all children in this nation will have the opportunity to attain an excellent education”.! McDonald’s Corporation ! Mission statement: “Our goal is to become customer’s favorite place and way to eat and drink by serving core favorites such as our World Famous Fries, Big Mac, Quarter Pounder and Chicken McNuggets”. ! Vision statement: “To move with velocity to drive profitable growth and become an even better McDonald’s serving more customers delicious food each day around the world”. ! Twitter ! Mission statement: “To give everyone the power to create and share ideas and information instantly without barriers”. ! Vision statement: “Believing in free expression and the thought that every voice has the power to impact the world”.! These types of missions are costumer-oriented or product-oriented?! Alzheimer’s association —> costumer-oriented ! Teach for America —> costumer-oriented! McDonald’s Corporation —> product-oriented —> identifies the key products of the company! Twitter —> costumer-oriented ! Elements of a strategy statement • The objective: is the main goal that the strategy is designed to achieve within a specific time frame; —> it is the strategic goal, long-term goal formulated by the board of directors! The business scope: is the part of the business landscape in which the company will operate; • the company’s scope encompasses three main dimensions which are: ! - The target costumer offering! - The geographical location ! - The vertical integration ! Each dimension may vary according to the relevance given to it. For instance, the focus on a specific type of customer may be more important than a focus on a specific geographical location;! • The competitive advantage: what the company will do differently or better than the competition to achieve the selected objective. —> the competitive advantage expresses the company’s ability to outperform its competitors.! Analyzing Nestlé’s mission, vision and strategy statement ! Mission: “As the “Good Food, Good Life” company, we enhance quality of life and contribute to a healthier future.” And “Based on a compelling ( = efficace, interessante) Nutrition, Health and Wellness strategy, our company delivers sustainable value over the short term and the long term.” ! Vision: “We are executing on (= to perform a task or complete an activity succesfully) our Nutrition, Health and Wellness strategy and creating sustained value for shareholders and society over the short and long term”. —> “we are executing” means that the company is trying to do something, so the sentence is based on a forward-looking approach. ! The strategy statement: !

- The strategic objective: “Our long-term value creation model” is its long term goal; they create -

value by “increasing growth, improving operational efficiency, allocating our resources and capital with discipline and clear priorities”.! The business scope: “We aim to provide the tastiest and healthiest choices, for all times of the day and for all stages of life, delivered in a convenient manner.”!

- The competitive advantage: “We are a global company with deep local roots, which gives us a unique ability to understand local consumers and adapt fast to their preferences.” —> in this sentence is underlined that Nestlé has a unique ability, that permits the company to outwit its competitors; but also “We also have industry-leading R&D capabilities that support our Nutrition, Health and Wellness strategy and our innovation initiatives”.! As we have seen is not so easy to find out where the mission, vision and strategy statements are located, so we need to go deep and search on the official company’s websites.! About these three documents that we have just seen (mission, vision and strategy statements) we can say that they are mainly related to the formulation stage, because as we will see, formulation is in fact selecting the long-term goals, the strategic goals, that must be then translated into performance targets whose achievement is in charge of organization. In order to select long-term goals the board of directors needs to have a clear understanding of company’s mission and vision.!

Lesson 12.03! We can consider two other documents that are useful if we want to know what is the company’s strategy, and they are the socalled business plan, that is a really popular document, and the management report or management commentary ( = Relazione sulla Gestione). These two ones mainly relate to the implementation stage of the company strategy, so they provide information about the results achieved or the actions that a company intends to adopt in order to achieve the selected goals. ! Business plan Until the new business needs to raise finance, there is little need for any explicit statement of strategy. At the point, the entrepreneur articulates the strategy in a business plan. ! A business plan is a written document that describes in detail how a company is going to achieve its goals. It presents the resources that the company requires to implement its strategy, and the ways adopted by the company in order to achieve the selecting goals.—> we can easily notice that the business plan belongs to the implementation stage because tells us how a company “is going to achieve its goals”.! It is an important document to implement the selected strategy as it is primarily used for implementing and managing the strategic direction of a company.! The business plan is a document that could be very useful in investigating a company’s strategy. ! Think about Apple’s experience. ! When Steve Jobs and Steve Wozniak, that are the founders of Apple, founded Apple Computer at the beginning of 1977 strategy was in their acts and through their conversation. A written articulation of Apple’s strategy did not appear until they needed to write a business plan in order to attract venture capitalists funding. Apple did not adopt a systematic strategic planning process until several years later, when they needed to establish capital expenditures budgets for its differentiation in products. ! Usually companies, especially small and medium companies, formulate a business plan only when they need to raise finances.! Management commentary/report Mission, vision and strategy statements underline company’s intentions that are not necessarily realized. !

In order to verify whether the strategic statement is realized, it is necessary to check other sources such as the annual report and the management report or management commentary. This last document is not a document that is included in the annual report, it is a separated one. ! This document provides information on a firm’s business scope (products and its markets) and how it competes within these markets. ! Thus, it is important to verify whether what the company says it is doing, matches with what it is actually doing.! —> The name “management commentary” is the international name for the Italian document “management report” that is the “Relazione sulla Gestione” ! —> If you want to verify if a selected strategy has been actually implemented and if we want to know a company’s strategic goals has been achieved we have to look at the business plan and at the management commentary; it is not correct to focus the attention on the vision or mission or strategy statement. ! —> It is clear how the perspective characterizing this document is completely different with respect to the vision, the mission and the strategy statements, because here we are talking about something that has already happen. ! What is or are the differences between the business plan and the management commentary?! We can say that the business plan identifies the resources required to achieve a specific strategy and the ways the company uses to achieve this goal/s. While the management commentary provides the information useful in order to verify if the strategy has been implemented. ! The business plan only says how the company is organized in the implementation of the strategy whereas the management commentary reports the achieved results.! The definition provided by the international financial reporting standard:! “Management commentary is a narrative report that provides a context within which to interpret the financial position, financial performance and cash flows of an entity. It also provides management with an opportunity to explain its objectives and its strategies for achieving those objectives. Users routinely use the type of information provided in management commentary to help them evaluate an entity’s prospects and its general risks, as well as the success of management’s strategies for achieving its stated objectives. For many entities, management commentary is already an important element of their communication with the capital markets, supplementing (= integrando) as well as complementing the financial statements”.! The management commentary is a narrative report that provides financial and non-financial information useful to users of financial report. It could provide, together with other reports, insights into the company’s strategy for creating shareholder value over time in the long-term, its progress in implementing it, and the potential impact on future financial performance not yet captured by the financial statements.! This document provides additional information with respect to the financial statement as whole. —> Financial statements are written records that convey the business activities and the financial performance of a company.! What about the main strategic contents with reference to this document?! - The nature of the business! - Objectives (= strategic goals, long-term goals) and strategies! - Resources, risks and relationships! - Performance measures and indicators —> as we know, strategic goals are translated in performance targets; in order to verify if these targets have been achieved, we need to select specific KPIs (Key Performance Indicators).! If we read the management commentary we can find some information in order to assess (= valutare, stimare) if the company’s implemented strategy is a successful one or failing one.! The nature of the business ! “Management should provide a description of the business to help users of financial reports to gain an understanding of the entity and of the external environment in which it operates. (…)

Depending on the nature of the business, management commentary may include an integrated discussion of the following types of information: ! a) The industries in which the entity operates;! b) The entity’s main markets and competitive position within those markets; —> underling its competitive advantage.! c) Significant features of the legal, regulatory and macro-economic environments that influence the entity and the markets in which the entity operates;! d) The entity’s main products, services, business processes and distribution methods;! e) The entity’s structure and how it creates value! It is really clear how the management commentary contributes to the general understanding of a company’s strategy in terms of its implementation, and its analysis. ! In the management commentary, the company is not declaring its intentions, ambitions; but is telling us how the strategy has been implemented and which are the external and internal conditions effecting the company’s strategy. ! *Strategy analysis is based on the examination of external and internal environment* Objectives and strategies ! (As we said before, objectives are long-term goals or strategic goals. There is an important difference between goals and targets: goals are long-term whereas targets are short-term.)! “Management should disclose its objectives and strategies in a way that enables users of the financial reports to understand the priorities for action as well as to identify the resources that must be managed to deliver results”. ! For example: how management intends to address market trends and the threats and opportunities those market trends represent; ! For example: significant changes in companies’ goals and strategies from the previous period or periods; ! For example: discussion of the relationship among goals, strategy, management actions and executive remuneration.! Resources, risks and relationships ! “Management commentary should include a clear description of the most important resources, risks and relationships that management believes can affect the entity’s value and how those resources, risks and relationships are managed”. ! The document provides information not only about the external environment, but also about the internal environment. ! About resources we can say that the company has to set out (= esporre, illustrare, definire) the critical financial and non financial resources available to the company, and how those resources are used in meeting management’s stated objectives. ! About risk we can say that management should disclose the company’s principal risk exposures and change in those risks together with its plan, its strategy, for bearing or mitigating those risks; as well as the disclosure of the effectiveness of its risk management’s strategy: we know that threats could become also opportunity so the relation between risk and strategy is a very strict relation. ! About relationships, we can say that the documents should identify the significant relationships that the company has with stakeholders. How those relationships are likely to affect the performance of the company, and how those relationships are managed. ! Performance measures and indicators ! “Management should disclose performance measures and indicators (both financial and nonfinancial) that are used by management to assess progress against its stated objectives”.! Italian documentation: ! Management report (art. 2428 Italian Code) !

“The financial statements shall enclose a report of the directors providing a true, balanced and exhaustive analysis of the position of the company and of the development and the result of the business, as a whole and in the various sectors in which it operated, also through controlled undertakings (= impegno) with particular regard to costs, revenues and investments, as well as a description of the main risks and uncertainties in which the company may incur” (art. 2428, first clause, Civil Code).! —> It is less focus on strategic information than the international one (Management commentary), but also here there are many strategic information that the company should disclose in terms of company’s position, results achieved, performance, which means strategy’s impacts on the company’s result. Also here there is an examination of the external environment in terms of risks and uncertainties but also opportunities. ! Strategy formulation: it is the starting point, it implies the selection of long-term goals that are defined by all the three documents.! Implementing strategy: the business plan is characterized by a forward-looking perspective because it provides information about the resources required in order to achieve the selected goals, and also about the ways in order to achieve these goals.! Implemented strategy: the management report provides information about the implementation of the strategy. When occurs the management report, the process of strategy is already closed. ! To sum up: ! From the beginning of the course till now, we have focused on three main topics. ! - The notion of strategy and the different definitions of it and the different schools of thought about strategy; ! - The key strategic actors in terms of board of directors and stakeholders and the relation with the board of directors and the relevant stakeholders;! - The documents we need to examine in order to identify the company’s strategy.!

The strategy process What is a strategy process? ! It indicates the process through which companies create and implement strategies. The strategy’s formulation stage places an important role in the strategy analysis as a systematic analysis to make better decisions. ! Without analysis, strategic decisions are susceptible to power battles, individual whims, fads, and wishful thinking. Concepts, theories and analytical tools are complements of, and not substitute for, intuition and creativity. Their role is to provide frameworks for organizing discussion, processing information, and developing consensus. ! In the figure, we can notice how strategy process is complex and is made by different stages.! In order to make a strategy, a company should develop different steps and the most important are those identified in this figure: ! 1. Setting the strategic agenda ! 2. Analyzing the situation —> both the internal and external environment, which provide the information in order to create an effective strategy ! 3. Formulating strategy ! 4. Implementing strategy !

After implementing the company’s strategy we need to verify the related performance and results in terms of financial and non financial performances. ! As we can see, there is a line that connects the fourth stage and the first stage, because after the implementation we need to verify if the strategy implemented has produced the expected outcomes in terms of performance. If the performance is satisfactory we don’t need to take any other measure. But if the performance is not satisfactory, we need to start from the beginning carrying out some corrective actions.! 1. Setting the strategic agenda ! Any strategy-making must begin by identifying the important issues that the strategy must address. This involves assessing whether the current strategy is working by:! • Identifying the current strategy;! • Appraising performance: How well is the current strategy performing?! ! So first of all, we need to evaluate what is the current strategy and secondly we need to understand what is the related performance. The second step, usually called performance appraisal, consists in the evaluation whether the current strategy works well or we have to take any measures in order to improve it. ! The performance appraisal is strictly linked to the value creation process:! Performance is the ability to create value in the long-term and to do this the company needs to adopt a sustainable approach in the selection of its long-term goals. This means that the company should consider all the relevant dimensions and not only the economic one.! In this sense, the value creation process is based on the integration of economic, social and environmental dimensions, and requires that economic growth supports cultural and social progress and respects the environment. ! Moreover, according to the sustainability view, the company should adopt the so called “Stakeholder view”. Under this approach, the value creation process requires the company to operate in the interests of all its stakeholders (employees, shareholders, customers, suppliers, public administration, the society as a whole) not only shareholders, trying to balance the needs and requests of all of them.! Value can be created in two different ways:! - By production ! - By commerce! What is the difference between these two ways?! Production creates values by physically transforming products that are less valued by consumers into products that are more valued by consumers. For instance, by turning coffee beans and milk into cappuccino. ! Commerce creates value not by physically transforming products but by repositioning them in space and time. ! The question we need to answer is “How we can measure the value created by a company?” because we have said that the performance is the ability to create value in the long term, so the problem is how to measure this value. ! What is the relation between the selection of the strategic goals and the translation of these goals into performance targets? What is the difference? ! The strategic goals, also called objective, are long-term goals, and are selected within the formulation stage. They are translated into performance targets that are short-term goals through corporate planning. ! The first ones are selected by the corporate governance bodies whereas the second ones are achieved by the organization and the achievement of them allows the ...