Chapter 11 Santiago Ibarreche Santiago Ibarreche ©

2 Sub-processElementsToolsOutcome Strategic Planning Revision of Vision, Mission and Purpose Basic Questions for Elements of a Mission Statement Reaffirmation or Change of Mission Statement Environmental Scanning Questionnaires for External and Internal Factor Evaluation IFE and EFE matrices Determination of External Threats and Opportunities and Internal Strengths and Weaknesses Summary SWOT Matrix Environmental Summary Summary of Strategic Options and Possible Strategies Strategy Formation Idea GenerationCreativity Tools Alternatives for Strategies Nurturing of StrategiesIdea Harvesting Definition of Options Models for Strategic Options BCG, IE, etc. Strategy Implementation Analysis of Options and Selection of Strategies Scenario Analysis Financial Analysis Market Analysis Main Strategies Competitive Strategies Functional Strategies Changes to the Organization Organization Theory Business Process Re-engineering Plans of Action Policies and Procedures Training and Resource Development Development of Aptitudes and Attitudes Capacity for action Organization Chart and Responsibilities Instrumentation, Implantation and Leadership Plans of action Measuring Systems and Processes Teamwork and Empowerment Quality Actions and Results Outcome Measures Strategy Evaluation Organization for learning Measuring Systems and Information Technology Feedback Information and Control Systems Continuous Improvement Flexibility by Design

 Purpose  Process  Resources  People  Support Systems Santiago Ibarreche ©

 Unclear  Generic  Impossible  Too Easy  Not shared with others  Incongruent 4

Santiago Ibarreche © 2015  Not clearly defined  Too detailed  Information not available  Responsibilities not clearly define  People not capable 5

Santiago Ibarreche © 2015  Unavailable  Unattainable  Time as a resource  Accountability  Not delivered on time  Lack of control 6

Santiago Ibarreche © 2015  Not involved in planning  Not trained  Lack of authority  Not clear accountability  “You get what you pay for”  Motivation 7

Santiago Ibarreche © 2015  Accessible  Versatility  Up to date  Coordinated  Understandable 8

Santiago Ibarreche © 2015  We need to follow up strategies otherwise:  “Norma Implantada no supervisada, vale para ….”  Paralysis by analysis  Plan is fun, action is not  “All I do is spinning, spinning, and spinning again”  “I have the sensation that I am wasting my time in controlling things instead of looking for more business”  “I got into this business to work less … not more” 9

Santiago Ibarreche © 2015  Do not Micro Manage  Set Key Indicators  Set parameters  Establish a routine  Set time for reflection  Be flexible  Stay current 10

 Internal Financial Statements  Best source of information when correctly made  Clarify assumptions  Consistency  Comparability  Other Sources  Market analysis  Intelligence information  Audits  External sources  Analysis Santiago Ibarreche ©

Santiago Ibarreche © 2015 General Financial Analysis Scheme Contribution Margin for the Industry Market Efficiency Multiplied By Co. Contribution Margin Operational Efficiency Multiplied By Operational Margin Financial Efficiency Multiplied By Margin before taxes Tax Efficiency Multiplied By Net Profit on Sales Permanent Investment Turnover Multiplied By Return on Permanent Investment Financial Leverage Multiplied By Return on Equity Reinvestment Index Multiplied By Internal Growth Index 12

Santiago Ibarreche © 2015 Market Gross Margin Marketing Efficiency x Co. Gross Profit Margin Market Sales / Market Gross Profit Margin Co. Market Share in Sales/ Co. Market Share in Margin x Co. Gross Profit / Co. Sales Formulas: 13

Santiago Ibarreche © 2015  Market Gross Margin Indicates:  How competitive is the Industry  How has it mature (historically)  Marketing Efficiency indicates:  How well are we doing against the industry  Co. Gross Margin Indicates:  How much of each dollar we sell is left after deducting those costs directly associated with the goods or services sold  Key Questions:  Are we High Volume or High Margin Business?  Is the market place changing? How so?  Is our marketing Efficient? 14

Santiago Ibarreche © 2015  Product  Variety  Satisfaction of needs and wants  Price  Competitiveness  Place  Scope  Promotion  Direct and indirect  PEOPLE  Compensation  Motivation  Capacity  Training 15

Santiago Ibarreche © 2015  Other Indicators:  General: Number of customers and sale per customer Margin analysis per customer or type of customer Geographic analysis  Services (including construction): Margin by type of service Mix of services in terms of contributions to the mix  Wholesale or Retail: Sales generated by space (sales per sq. foot)  Manufacturing: Margin by product and/or Model Mix of products 16

Santiago Ibarreche © 2015 Financial Analysis Scheme for Following Strategy implementation (Operations) Operational Profit/ Co. Gross Profit x Formulas: Co. Contribution Margin Operational Efficiency Multiplied By Operational Margin Co. Gross Profit / Co. Sales Operational Profit / Co. Sales 17

Santiago Ibarreche © 2015  Co. Gross Margin Indicates:  How much of each dollar we sell is left after deducting those costs directly associated with the goods or services sold  Operational Efficiency Indicates:  How much of each dollar of gross margin is left after paying operational costs  Operational Margin Indicates:  How much of each dollar we sell is left after deducting cost of goods and operational expenses  Key Questions:  Are we using our capacity wisely?  What are the fixed and variable elements of operations?  How is our operational efficiency if compared with the rest of the industry? 18

Santiago Ibarreche ©

Santiago Ibarreche © 2015  Other Indicators:  General: Percentage of Types of Costs Costs per Customer or Location Geographic analysis  Services (including construction): Activity Costs by type of service Mix of services in terms of contributions to the total costs  Wholesale or Retail: Costs per square foot  Manufacturing: Cost by process Mix of products Efficiency and Productivity Indexes 20

Santiago Ibarreche © 2015 Profit before taxes/ Operational profit x Formulas: Operational Margin Financial Efficiency Multiplied By Margin before taxes Operational Profit / Co. Sales Profit before taxes / Co. Sales 21

Santiago Ibarreche © 2015  Operational Margin Indicates:  How much of each dollar we sell is left after deducting cost of goods and operational expenses  Financial Efficiency Indicates:  How much of each dollar of operational margin is left after paying financial costs  Margin before taxes Indicates:  How much of each dollar we sell is left after all expenses are deducted  Key Questions:  Are we using the right mix of resources?  Is the cost of money congruent with its risk?  How well do we invest the resources borrowed? 22

Santiago Ibarreche © 2015  Other Indicators:  Weighted cost of capital  Cost of operations for obtaining capital  Cost of resources as compared with industry  Strategic Elements:  Borrowing or issuing capital  Buying or making  Buying or leasing 23

Santiago Ibarreche © 2015 Net Profit/ Profit before taxes x Formulas: Margin before taxes Tax Efficiency Multiplied By Net Profit on Sales Profit before taxes / Co. Sales Net Profit/ Co. Sales 24

Santiago Ibarreche © 2015  Margin before taxes indicates:  How much of each dollar we sell is left after all expenses are deducted  Tax efficiency indicates:  How much of each dollar of profit before taxes is left after paying taxes  Net profit on sales indicates:  How much of each dollar we sell is left after all costs including taxes  Key Questions:  Are we using the right tax strategy?  Are there some risks implicit in the tax strategies followed?  How can we minimize the payment of taxes without incurring in excessive risks? 25

Santiago Ibarreche © 2015 Co. Sales / Permanent Investment x Formulas: Net Profit on Sales Permanent Investment turnover Multiplied By Return on Permanent Investment Net Profit/ Co. Sales Net Profit/ Permanent Investment 26

Santiago Ibarreche © 2015  Net profit on sales indicates:  How much of each dollar we sell is left after all costs including taxes  Permanent investment turnover indicates:  How many times did we “sell” our permanent investment (Working Capital + Fixed Assets)  Return on permanent investment:  How much of each dollar of permanent investment has yielded during the period under analysis 27

Santiago Ibarreche © 2015  Is our level of investment adequate?  Do we have too much or too little investment?  What are the components of investment?  How is the investment in current assets financed by short term debt?  How is the working capital financed?  Do we have enough or too much investment in inventories?  How do we compare with the industry in days for collections and inventories? 28

Santiago Ibarreche © 2015  For working capital:  Current ratio  Inventories turnover  Days for collection  Aging of accounts  For fixed assets:  Fixed assets turnover  Productivity index 29

Santiago Ibarreche © 2015 Permanent Investment/ Stockholders Equity x Formulas: Return on Permanent Investment Financial Leverage Multiplied By Return on Equity Net Profit/ Permanent Investment Net Profit/ Stockholders Equity 30

Santiago Ibarreche © 2015  Return on permanent investment indicates:  How much of each dollar of permanent investment has yielded during the period under analysis  Financial leverage indicates:  How much of each dollar of equity “leverages” permanent investment  Return on equity indicates:  How much each dollar of equity yielded during the period under analysis 31

Santiago Ibarreche © 2015  Is our level of financing adequate?  Do we have too much or too little debt?  What are the sources of financing?  What alternative sources of funds are there?  How could we finance new projects or natural growth?  Is the mix of capital adequate for our industry?  Is the risk level something we can bear? 32

Santiago Ibarreche © 2015 Reinvestment/ Net Profit x Formulas: Return on Equity Reinvestment Index Multiplied By Internal Growth Index Net Profit/ Stockholders Equity Reinvestment/ Stockholders Equity 33

Santiago Ibarreche © 2015  Return on equity indicates:  How much each dollar of equity yielded during the period under analysis  Reinvestment index indicates::  How much of each dollar of net profit is reinvested in the business  Internal growth index indicates:  How much are we growing in relation to the initial equity 34

Going back to basics, the strategic management process implies:  Identifying what is important for the organization:  Defining parameters and conditions of the environment;  Examining expectations and facts; analyzing trends;  Synthesizing the ideas in potential strengths, weaknesses, opportunities, and threats;  Ideas for strategies;  Nurturing those ideas to make them vigorous and innovative;  Analyzing scenarios and selecting strategic options;  Changing structures;  Training and developing resources;  Organizing for learning, feedback, and growth; and not forgetting that  Nothing is as permanent as change Santiago Ibarreche ©

In Summary; using Santiago Ibarreche ©