LEARNING OBJECTIVES

1.      Understand the basic concept of strategy.
2.      understand the process in strategic management, including environmental scanning and SWOT analysis, strategy formulation and strategy implementation.
3.      Identify and explain corporate, business and functional strategies.
4.      Understand the nature of value chain.
5.      Understand the strategic cost management techniques, including JIT, TQM and quality costing.

1.1.1

Definitions

(a)       Strategy is the direction and scope of an organization over the long term, which achieves competitive advantage in a changing environment through its configuration of resources and competencies with the aim of fulfilling stakeholder expectations.
(b)       Strategic management is a process that management use strategies to achieve objective, goal and performance of a company.

2.2

Example 1 – Levels of strategy

ABC Ltd is a company selling widgets. The finance director says: 'We plan to issue more shares to raise money for new plant capacity – we don't want loan finance – which will enable us to compete better in the vital and growing widget markets of Latin America. After we've promised the shareholders 5 per cent profit growth this year, and trading is tough.

What are the corporate, business and functional strategies in the above statement?

• The corporate objective is minimum 5% profit growth.
• The corporate strategy is the decision that entering new markets, rather than producing new products will achieve this.
• The business strategy suggests that those markets include Latin America.
• The operational or functional strategy involves the decision to invest in new plant (the production function), which is to be financed by shares rather than loans (the finance function).

3.1

Definitions

(a)       Mission – broad, general statements that tell why your organization exists. These do not usually change from year to year.
For example:
3M – “To solve unsolved problems innovatively”
Walt Disney – “To make people happy”
(b)       Goals – statements describing what your organization wishes to accomplish, stemming from your mission. Goals are the ends toward which your efforts will be directed and often change from semester to semester and year to year, depending on the organization.
(c)       Objectives – Descriptions of exactly what is to be done, derived from the goals; clear specific statements of measurable tasks that will be accomplished as steps toward reaching your goals. Objectives are short-term and have deadlines.

3.2

Example 2 – Mission, Goals and Objectives: Restaurant Example

1.        Mission: Provide to our valued customers prompt and high quality food and service in a friendly and courteous manner.
2.        Goals:

• Reduce the average customer waiting time
• Reduce cholesterol in food
• Improve customer perception of courtesy

3.        Objectives:

• Reduce the average customer waiting time by 10 minutes
• Reduce cholesterol in food by 10% within a year
• Improve customer perception of courtesy within a year

4.        Specific actions:
To reduce customer waiting time…
"Add five more tables to the dining room by (date)"
"Add one cook to the staff during peak periods by (date)"

To reduce cholesterol…
"Begin using unsaturated fats by (date)"
"Begin using lowfat salad dressing by (date)"

To improve customer perception of courtesy…
"Provide eight hours of customer service training to all team members by (date)"
"Establish awards for courteous service and begin by (date)"

Factors

Potential impacts

Overall growth or fall in GDP

Increased/decreased demand for goods (for example, dishwashers) and services (for example, holidays)

Local economic trends

Type of industry in the area, office/factory rents, labour rates, property prices

Inflation

How much it costs to borrow money affects cash flow, some companies carry a high level of debt, consumer spending is affected by rises in interest rates

Interest rates

Corporate tax affects how much firms can invest or return to shareholders, income tax affects how much consumers have to spend therefore demand

Tax levels

Corporate tax affects how much firms can invest or return to shareholders, income tax affects how much consumers have to spend therefore demand

Government spending

Suppliers to the government (for example, construction firms) are affected by spending

Business cycle

Economic activity is always punctuated by periods of growth followed by decline, simply because of the nature of trade. Government policy can cause, exacerbate or mitigate such trends, but cannot abolish the business cycle. (Industries that prosper when others are declining are called counter-cyclical industries.)

Factors

Potential impacts

Exchange rates

Cost of imports, selling prices and value of exports; cost of hedging against fluctuations

Characteristics of overseas markets

Desirable overseas markets (demand) or sources of supply (cheap imports?)

International capital market

Generally, advanced economies accept that supply and demand set the value of their currencies, using interest rates only to control inflation

Large multinational companies (MNCs)

MNCs have huge turnovers and significant political influence because of governments' desire to attract capital investment

Government policy on trade/protection

Cost of barriers to trade, effect on supplier interests of free trade, erection of reciprocal barriers, possibility of dumping

Factors

Comment

Growth

The rate of growth or decline in a national population and in regional populations

Age

Changes in the age distribution of the population. In some countries, there will be an increasing proportion of the national population over retirement age. In developing countries there are very large numbers of young people

Geography

The concentration of population into certain geographical areas

Ethnicity (種族特點)

A population might contain groups with different ethnic origins from the majority

Household and family structure

A household is the basic social unit and the number of children might determine its size, whether elderly parents live at home and so on

Social structure

The population of a society can be broken down into a number of subgroups, with different attitudes and access to economic resources. Social class, however, is hard to measure (as people's subjective perceptions vary)

Employment

In part, this is related to changes in the workplace. Many people believe that there is a move to a casual flexible workforce; factories will have a group of core employees, supplemented by a group of insecure peripheral employees, on part-time or temporary contracts, working as and when required.

Wealth

Rising standards of living lead to increased demand for certain types of consumer goods. This is why developing countries are attractive as markets

Factors

Example

General legal framework: contract, tort, agency

Basic ways of doing business, negligence proceedings, ownership, rights and responsibilities, property

Criminal law

Theft, insider dealing; bribery, deception, industrial espionage

Company law

Directors and their duties, reporting requirements, takeover proceedings, shareholders' rights, insolvency

Employment law

Trade Union recognition, minimum wage, unfair dismissal, redundancy, maternity

Health and safety

Fire precautions, safety procedures

Data protection

Use of information about employees and customers

Marketing and sales

Laws to protect consumers (for example, refunds and replacement, 'cooling off' period after credit agreements), what is or isn't allowed in advertising

Environment

Pollution control, waste disposal

Tax law

Corporate tax payment, collection of income tax

Competition law

General illegality of cartels

5.1.1

SWOT analysis

SWOT analysis is a systematic method for detailing the strengths, weaknesses, opportunities and threats to an organisation. It attempts to provide a picture of the organisation's position relative to the impact of important internal and external factors and is therefore a useful part of the first step in formulating strategies.

5.1.6

Example 3 – SWOT

The Hong Kong Jockey Club is one of the largest racing organisations in the world. Horse racing is the most popular spectator sport in Hong Kong and through its subsidiaries, the Club is the only authorised operator of horse racing. It also operates the Mark Six lottery and under Government authority offers betting on football matches held outside Hong Kong.

The Club is the largest single taxpayer in Hong Kong – HK$12,976 million in 2008/09, or about 6.8 per cent of all taxes collected by the Government's Inland Revenue Department. A unique feature of the Club, much admired worldwide, is its not-for-profit business model whereby its surplus goes to charity. Over the past decade, the Club has donated an average of one billion Hong Kong dollars every year to hundreds of charities and community projects. Today, the Club ranks alongside organisations such as the Rockefeller Foundation as one of the biggest charity donors in the world.

The Club is also one of the largest employers in Hong Kong, with some 5,300 full-time and 21,000 part-time staff.

The racing arm of the Hong Kong Jockey Club operates two thoroughbred race tracks in Hong Kong – at Happy Valley and Sha Tin. Racing is held at Happy Valley on Wednesdays mostly in the evenings, and at Sha Tin on Sundays mostly in the daytime.

Racing facilities in Hong Kong are among the finest in the world. Happy Valley's historic race track at Happy Valley, with its spectacular cityscape setting, offers racegoers a truly electric atmosphere, especially during night meetings.

Sha Tin Racecourse, opened in 1978, boasts some of the world's most sophisticated racing facilities and plays host to Hong Kong's major international events. Its high-resolution diamond vision screen is the longest TV display in the world, while the recently-opened covered Parade Ring sets new standards of comfort and access for racing fans with its unique, retractable paddock roof.

Required:

Access the website of the Hong Kong Jockey Club (www.hkjc.com/english/) and address the following issues:
1.        Outline the Vision and Mission of the Hong Kong Jockey Club.
2         Carry out a brief SWOT analysis of the Hong Kong Jockey Club. In this identify at least four items under each category. (Note: It is recognised that there may be more than four possible items under each category, and that acceptable answers may vary in content).

Solution:

1.        Vision and Mission
Vision – To be a world leader in the provision of horse racing, sporting and betting entertainment, and Hong Kong's premier charity and community benefactor.

Mission – To provide total customer satisfaction through meeting the expectations of all Club customers and stakeholders – the racing and betting public; lottery players; Club Members; charities and community organisations; Government; and ultimately, the people of Hong Kong and thereby be one of Hong Kong's most respected organisations.

2.        SWOT analysis
Strengths (internal)

• Very strong brand recognition as one of the premier thoroughbred racing organisations in the world.
• Strong financial position, although the 2008-2009 season experienced a 2 per cent fall in the dollar gross margin.
• Excellent race track, especially at Sha Tin.
• Attracts high quality horses, trainers, jockeys and administrators from overseas.
• Strong government support, enhanced by high tax revenues for government.
• Recognised as largest charity donor in Hong Kong.

Weaknesses (internal)

• Reliance on overseas horse stocks – that is, there is no local breeding operation, due to environmental and climatic conditions.
• Heavy reliance on overseas trainers and jockeys.
• Limited land for expansion – none at Happy Valley.
• As a corollary of limited land, there is pressure on training facilities.
• Possible perception that racing is not for young people.

Opportunities (external)

• Expansion of racing product into Mainland China.
• Expansion of wagering to casino operations in Hong Kong, as a challenge to Macau.
• Strategic alliances with other racing organisations in the Pacific Rim, including Japan, Australia, New Zealand and California.
• Establish own breeding operations in Pacific Rim countries.
• Increase usage of racecourse facilities for functions, catering and conferences on non-race days.

Threats (external)

• Alternative forms of wagering (eg Macau casinos).
• Political interference, either overtly or in the form of increased taxation of wagering.
• Equine disease – this happened in Australia in 2008-2009 and curtailed racing in a major market for six months.
• Erosion of wagering income due to rise in popularity of other forms of gambling,
• Lack of clarity about who are the primary stakeholders of the Club.

Value chain analysis

The value chain describes those activities of the organisation that add value to purchased inputs. Primary activities are involved in the production of goods and services. Support activities provide necessary assistance. Linkages are the relationships between activities.

Comment

Inbound logistics

Receiving, handling and storing inputs to the production system: warehousing, transport, stock control and so on

Operations

Converting resource inputs into a final product: resource inputs are not only materials. People are a resource, especially in service industries

Outbound logistics

Storing the product and its distribution to customers: packaging, testing, delivery and so on; for service industries, this activity may be more concerned with bringing customers to the place where the service is available; an example would be front of house management in a theatre

Marketing and sales

Informing customers about the product, persuading them to buy it, and enabling them to do so: advertising, promotion and so on

After-sales service

Installing products, repairing them, upgrading them, providing spare parts and so forth

Comment

Procurement

All of the processes involved in acquiring the resource inputs to the primary activities (for example, purchase of materials, subcomponents equipment)

Technology development

Product design, improving processes and resource utilization

Human resource management

Recruiting, training, managing, developing and rewarding people; this activity takes place in all parts of the organisation, not just in the HRM department

Firm infrastructure

Planning, finance, quality control, the structures and routines that make up the organisation's culture

5.3.1

Benchmarking

Benchmarking is a tool that helps to aid teams in problem solving. It involves studying organizations that are among the best in the business world for performing a particular task. For example, companies with similar business nature, processes, size and turnover would be selected for the benchmarking process.

The performance of different organizations, subsidiaries or investment centres can be compared (benchmarked) by calculating suitable financial or non-financial ratios for each of them to ascertain which are better or worse than the average.

5.3.2

Example 4 – Benchmarking

A typical example of benchmarking can be done by:
(a)       Comparison with previous years (i.e. inter-year fluctuation)
(b)       Comparison between industry sectors
(c)       Comparison with international competitors

(a)       Inter-year comparison

(b)       Industry comparison

(c)       International comparison

JIT

JIT system is a system in inventory management by which materials ordered are received just as they are needed and so avoiding the need to carry any materials or components inventory. It is generally known as demand driven as production and delivery are done immediately after the order is made.

6.1.5

Benefits of JIT

(a)       Reduction in inventory holding costs
(b)       Reduced manufacturing lead times
(c)       Improved labour productivity
(d)       Reduced scrap/rework/warranty cost
(e)       Reduced price on purchased materials
(f)        Need for less accounting records
(g)       Lower level of investment in working capital

TQM

TQM is an organization-wide effort to seek continuous improvement in all aspects of operations. It suggests that products should be of zero defects and do right in the first time.

The characteristics of TQM are:
(a)       TQM necessitates an internal managerial system of planning, controlling and decision-making.
(b)       It requires participation by everyone in the organization.
(c)       It focuses on improving goods and services from the customers’ point of view.

TQM is an important concept for companies, particularly manufacturing ones, as the cost of poor quality products is huge as that could involve additional costs and could also damage the image of the company in the long run.

6.2.2

Cost associated with quality

(a)       Prevention costs – incurred in preventing poor quality products and services but always difficult to ensure that product or service produced are absolutely non-defective in practice.
(b)       Appraisal costs – incurred in determining or identifying poor quality and defects of products or services.
(c)       Internal failure costs – incurred due to the failed detection of acceptable quality before delivery.
(d)       External failure costs – incurred due to faulty product or services delivered to clients such as compensation costs.

Quality costing

It describes the cost that incurred for product or service failures as the company cannot deliver its normal level of service or product quality to its clients and it may include the lost of revenue and cost of bad publicity, etc.

$

Quality training

150,000

Scrap and waste

65,000

Quality inspections

180,000

Warranty handling

95,000

Waste disposal

21,000

Quality technology

500,000

Test equipment

140,000

Procedure verifications

90,000

Quality circles

320,000

Customer reimbursement/returns

76,000