Strategic Management 313 - Assignment 2 News Critique - Topic 1 - The Challenges of Strategic Management This example is prepared by Brad Turner 1. News item sources Anonymous, (2009), 'Business: Undermined; Rio Tinto and Chinalco,' The Economist. London: Feb 14, Vol. 390, Iss. 8618; pg. 73. Bream, R, Burgess, K, Smith, P. (2009), 'Rio investors wary of Chinalco tie-up,' Financial Times. London: Feb 12, 2009. pg. 17 Scott, M, (2009), 'Rio Tinto in record Chinese deal,' Business Week (Online). New York: Feb 13, 2009. Accessed 14.02.09. http://www.businessweek.com.dbgw.lis.curtin.edu.au/globalbiz/content/feb2009/gb20090212_820262. htm Dyer, G, Tucker, S, Waldmeir, P, (2009), 'Business as much as politics is pulling the Chinese strings.' Financial Times. London (UK): Feb 13, 2009. pg. 21 2. Summary Mining giant Rio Tinto (Rio) has fallen victim to the ailing commodity prices left in the wake of the global economic crisis. The firm invested too heavily during the short lived mining sector boom (i.e. the purchase of Canadian aluminium producer Alcan for $38.1 billion) and now finds itself in huge debt, suffering diminishing returns and in need of a buyout (Anonymous 2009). A year after BHP Billiton's A$150 billion dollar takeover offer (which was rejected by Rio), Chinalco is offering China's largest-ever foreign investment, some A$30 billion cash (Scott 2009). The offer has left industry analysts, the Australian government and Rio's shareholders with mixed feelings. On the one hand A$30 billion is regarded to be a fair current-day price and many of jobs might be saved. But but on the other hand, China's rising influence within the company may create conflicts of interest and constrain future strategic management options. 3. Linkages to topic Strategic Management 313 - Assignment 2 Topic 1 (chapter 1 of text) highlights at least four theory based challenges of strategic management pertinent to Chinalco's takeover bid. (1) The strategic management process aims to simultaneously satisfy all stakeholders and minimise support lost. This is proving very difficult for Rio. Many stakeholders (particularly investors) have expressed gross disappointment in Rio's board for not choosing to make available new shares to local investors as an alternative to the Chinalco deal (Bream et al 2009). (2) The Industrial Organisation (I/O) model holds that the firm's external environment has the greatest influence on strategic decision making. This appears to the case for Rio right now. Whether the deal will go ahead hinges on political considerations. For example, the Australian Foreign Investment Review Board wants to amend its takeover laws to go beyond straightforward acquisitions and encompass 'complex investments' (Anonymous 2009). There is also mounting speculation that BHP Billiton is preparing to make a counter offer (Dyer et al 2009). (3) Strategic decision making helps a firm attain its vision/mission. In this case, Rio is in crisis control with a murky vision while the State owned Chinalco hopes to gain more commodity pricing power over Western mining companies (Anonymous 2009; Bream et al 2009). (4) Ethical business behaviour requires consistent honesty. Rio is 'pitching' the Chinalco deal to the Australian government as a way of boosting the economy and saving two thousand Australian jobs. Is this an honest appraisal of the situation? Or is Rio playing to the governments fears putting them in a catch-22 situation? What can be learnt? Failing multi-nationals are at the mercy of their industry's globalised environment and are unable to satisfy the interests of all stakeholders. Predicted outcome Rio needs a buyer. BHP Billiton will probably remain silent and the deal with Chinalco is likely to go ahead. The Australian government will lend support fearing more mining sector job losses and the public's disapproval. Any takeover law amendments will be conveniently delayed. China's strategic agenda is to become a price maker in the global commodity market and drive prices down. Further linkages with other topic of the unit Strategic Management 313 - Assignment 2 This event also illustrates the further topics of the unit such as Mergers and Acquisitions, Corporate Governance, International Strategy, Organising for Success and Managing Organisational Performance 1. The sources or sources which published the news item. Nahan, Mike. Drought of people is our big challenge. The West Australian, Saturday, February 23, 2008, p. 67-68.. O'Donovan, Jennifer. Working across the generations. Engineers Australia, February, 2008, p. 60. Cairnes, Margo. Growing in wisdom, not just age. Engineers Australia, February, 2008, p. 57. 2. A brief summary of the event (e.g. an attempt of BHP Billiton to take over Rio Tinto; market reaction on the event). Shortage of people, including shortage of skills in Australia and around the world. This is a particularly sharp issue for Western Australia with its boom in the mining and construction sector: \"teachers, hairdressers, taxi drivers, brickies and farmers have downed their instruments and headed to the mines\" (Nahan, 2008). Further more, Australia is becoming an ageing work force: \"the pressure to find capable skilled workers, combined with the drop in young people entering the labour market\" (Cairnes, 2008). 3. How does a news item illustrate the topic assigned for your presentation. The topic is \"The Strategic Management process\". The selected media reports illustrate the external environment in Australia. This environment creates certain opportunities as well as pose certain threats for businesses and non-for profit organisations (e.g. government).This environmental characteristic - shortage of people and skills and aging working forces - demand response of businesses to neutralise these environmental threats. These environmental threats also affect the ability of businesses to implement their strategies. Indeed, if the company does not have appropriate HR policies which are seeking to attract and retain mature age workers, the company may be placed at a greater risk of lack of skilled people. According to Cairnes (2008), \"mature age people require work flexibility, training in information management and career change (...) In return, they can bring experience, wisdom and leadership...\" As we can see from selected media reports, shortage of people and skills will alter strategic choice which businesses make in many areas In addition, shortage of people and skills demand an effective communication of various generations (baby boomers, X and Y). It is very encouraging to find out that, according to O'Donovan and also (independently) The Centre for Creative Leadership (2008), \"these three generations have more commonalities than the sceptics would have us believe\". These findings have implications for HR policies. Indeed, \"different generations have similar values, they just express them differently\" and \"loyalty depends on the context, not on the generation\" (O'Donovan, 2008). Value-based HR policies would be able to unite human resources of firms and make them strongly to implement strategies. 4. What can be learnt from the event? How does this event (a news item) contribute to a better understanding of the topic assigned for your presentation. Analysts (Nahan, 2008) suggest three strategy of dealing with people and skills shortage: increase the birth rate in Australia, \"push and pull\" more Australians from the unemployment into forking forces, and attract people from overseas (or from interstate into Western Australia). In addition, increase working age of people (Cairnes, 2008). These strategies should be common for all businesses in Australia, this shows how the external environment influences strategic choice of businesses. What can be learned? A strategy of a single firm and its implementation is influenced by the environmental forces which dictate choice of certain internal mechanisms (e.g. choice of HR policies to promote an effective communication of different generations and retain aging work forces). 5. Can you predict the further development of the situation? What might happen next? Migration policies in Australia are likely to be reconsidered. Businesses have to create conditions for better learning, the use of every experience. Cairnes shares an interesting story of the manager who had two employees working for him for 20 years. \"One he saw as someone with 20 years' experince. The other he saw as someone with one year's experience 20 times\". Lecture 11 Strategy Evaluation Learning objectives Describe strategy evaluation Identify the key results areas that can be used to improve business performance Explain how scenario planning can be used for strategy evaluation Comprehend how a company's value can be created and analysed Learning objectives Recognise how the McKinsey 7-S model can be used for strategy evaluation and execution Discuss the balanced scorecard model as an approach to strategy evaluation Describe a framework to identify key success factors Appreciate the need for ongoing strategy evaluation in uncertain times SCENE SETTER AIR AUSTRALIA - FAILURE IN THE GROWING BUDGET AIRLINES MARKET The low-cost airline strategy was introduced in 2000 by Virgin Growth of the "no frills" airlines in Australasia -budgets airlines count 25 per cent of the Asian aviation market Air Australia - halted all flights and was placed into liquidation 4000 passengers were left in Bangkok, Honolulu and Phuket to search for alternative flights home in February 2012 Previously known as Air Charter Logistics and later Strategic Airlines Pty Ltd The company was founded in 1991 as a cargo air freight broker and focused on the airline transportation of oversize or unique cargo The airline owed creditors up to $90 million but had only $1 million in assets because most of its equipment was leased. not operational but also "not saleable" Introduction Why, in the same market environment, do some companies prosper while others struggle to survive? How does a company's internal characteristics such as resources, capabilities and core competencies, enable it to create a competitive advantage? Many factors contribute to the success or failure of companies. One of these factors is the company's strategies. Evaluation of a company's performance involves evaluating its strategies. What is strategy evaluation? Strategy evaluation refer to the appraisal of plans and results of plans that centrally concern or affect the basic mission of the enterprise Rumelt stated that the evaluation of strategy should provide answers to the following questions: - Are the objectives of the business appropriate? - Are the major policies and plan appropriate? - Do the results obtained to date confirm or refute critical assumptions on which the strategy rests? What is strategy evaluation? It is argued that strategy evaluation should take three forms at different stages of the strategic management process - Performance evaluation and strategic appraisal - the first step in developing a new strategy or in the fundamental reappraisal of existing strategy - Strategy evaluation and selection - the prospective appraisal of strategy options and the selection of a preferred strategy - Evaluation and control of strategy outcomes - this follows strategy implementation to ensure strategic goals are met What is strategy evaluation? Evaluation also involves the determination of the value of the company's strategy Managers can compare the value of a strategy before it was chosen with the value of the strategy after it has been implemented By doing so, managers identify whether the strategy has achieved what it was expected to achieve Monitoring is an ongoing activity performed within the company to check if a strategy which is being implemented is on the right track Evaluative tools Strategic 'SWOT analysis', 'achievement of objectives', and 'closing the planning gap' Financial returns on investments, level of risk, based on standard measures of organisational performance Organisational acceptability, involvement, internal fit and consistency, motivational Key result areas (KRAs) Set of objectives that the organisation focuses on to ensure that it is improving its operations in a way that will increase business performance in the desired areas KRAs can be used to prioritise objectives and the actions necessary to achieve them Rouse's 'four goal structure is a useful framework 1. The product or service itself (i.e. the concept, its development, production, delivery and marketing) 2. Methods and tools required to support the product or service (e.g. design or manufacturing) 3.Establishing the strategic capacity that can help to facilitate the sale of the product or service, e.g. gaining experience and building relationships within the industry, with suppliers and with customers 4. The knowledge and technology areas required to support the development and delivery of the product or service the competency gaps that must be overcome. Scenario planning in strategy evaluation Scenario planning involves the structural use of management judgement to construct multiple 'script-like characterisations of possible futures' These characteristics focus on the dynamics of how a particular future might unfold by studying causal relationships, dominating trends, the behaviour of key players and internal consistency The US Army developed scenario planning and war gaming in the 1950s. Scenario planning in strategy evaluation The evaluation of strategy within scenario planning process has to meet the following criteria: Transparency the presentation of results that can be understood and trusted. Ease of judgement less chance of errors in the process of questioning and reasoning. Versatility the evaluation should be able to incorporate both financial and non-financial objectives. Flexibility changes in perspective can be accommodated as insights and understanding increase, and alternative perspectives of different participants in the decision-making process can be modelled and compared. Evaluating value Business is about creating value Value, in its broadest sense, refers to the amount of money customers are willing to pay for a good or service The challenge for business strategy is, first, to create value for customers and, second, to extract some of that value in the form of profit for the company Value can be created in two ways: by production - by physically transforming products that are less valued by customers into products that are more valued by customers; by commerce - by repositioning products in space and time. Linkages between companies' profit and value Profit maximisation means maximising the net present value of profits over the life time of a company Profit maximisation leads to maximising the value of the company The value of the company is calculated in the same way as for any other asset the net present value (NPV) of the returns to that asset The McKinsey 7-S model To achieve the desired performance targets, organisational strategy should be supported with appropriate mechanisms of implementation Strategy implementation incorporates a broad range of interrelated changes 7-S Model was introduced by McKinsey and Company partners The model describes the seven factors for effective strategy execution. The McKinsey 7-S model The 7-S model describes the seven factors critical for effective strategy execution - strategy - structure - systems - staff - skills - style/culture - shared values The balanced scorecard The balanced scorecard methodology provides an integrated framework for balancing financial and strategic goals, and extending these balanced performance measures down the organisation to individual business units and departments Developed by Kaplan and Norton, it considers the long term performance of the organisation rather than predominantly financial criteria of short term nature The balanced scorecard The performance measures combine the answers to four questions: - how do we look to shareholders? - how do customers see us? - what must we excel at? - can we continue to improve and create value? The balanced scorecard strategy map Fig. 12.2 Linkages between the 7-S model and the balanced scorecard Table 12.1 Assessment of the balanced scorecard as an evaluation technique The balanced score card is an effective tool to assess strategy success by using financial and non-financial measures It examines strategy from four different perspectives This technique forces organisations to pool information that is normally dispersed among various documents of the organisation Key success factors The factors that consistently lead to the success of a strategy are referred to as the key success factors There is an extensive body of a literature on identification of these factors These factors have also been called critical success factors or just success factors Ford Australia - Is there future in Australian Car Manufacturing? Ford is ranked fifth globally behind Toyota, General Motors, Volkswagen and Hyundai In 2012 the company has cut more than 1000 jobs around the world Ford was unable to maintain sales at a reasonable level the company shutdown three assembly lines in the UK and Europe and the future of its manufacturing facilities in Australia is to be reviewed after 2016 Sales of Falcon, large Australian sedan, are declining every year and only in 2012 were down 30% In general, the company's sales are down 5% in a market which is up 10% manufacturing is no longer a source of competitive advantage of the company's Australian operations Strategy evaluation in uncertain times Companies require flexibility in decision-making in uncertain times This is also relevant to strategy evaluation In a time of a rapid, fundamental, and universally perceptible change, expanding roles of governments, re-evaluation of imbalances in global trade and capital markets, and pervasive uncertainty, companies have to continuously reassess their business models to unlock unexpected opportunities Summary This session has covered many issues of strategy formulation and evaluation including: - Techniques of strategy evaluation - Key success factors - Scenario planning - Value creation - Frameworks of implementation Strategic Management 313 Semester 1, 2013 An example of assignment \"News Critique\" The sources which published the news item 1. 2. 3. 4. Chambers, M. BHP taps new boss for new era. The Australian, February 21, 2013, p. 1 and p. 4. Chambers, M. Kloppers' last act is on costs. The Australian, February 21, 2013, p. 17. Fitzgerald, B. Shale push may refefine BHP. The Australian, February 21, 2013, p. 17. Batholomeusz, S. Kloppers shows rest how it should be done. The Australian, February 21, 2013, p. 20. 5. Smith, S. Linguist's call-up to BHP helm. The West Australian, February 21, 2013, p. 18. 6. White, A. Marius's legacy may be picking successor. The Australian, February 21, 2013, p. 20. A brief summary of the event The biggest Australian company BHP Billiton appointed new ECO Mr Andrew Mackenzie. The announcement about BHP leadership change was perceived by the market analysts as \"a sharper focus on the cost-cutting phase that already seen coalminers closed, projects abandoned and job losses\" (Chambers, 2013: 1). The BHP leadership change was announced only four weeks after BHP's major competitor Rio Tinto also replaced its CEO with the newly appointed CEO Sam Walsh as well as recent appointment of new chief executives at big rival miners Vale of Brazil. \"BHP Billiton's announcement coincided with news of a 58 per cent fall in its first-half profit in the wake of last year's sharp fall in commodity prices. The $US4.2 billion profit is nonetheless the biggest so far of the largest corporate reporting season\" (Smith, 2013: 18). How does a news item illustrate the topic assigned for your presentation? The assigned topic for this assignment is \"Corporate Governance\". This news event focuses on leadership change at the nation's biggest company. This leadership change also reflects on sharper focus on cost-cutting measures which will allow a company to deal with lower iron ore and coal prices and decreasing demand on resources from China. Although, the succession planning is one of the top responsibilities of a board, in the case of BHP the outgoing CEO Marius Kloppers gave the company's chair Jac Nasser and the board a number of strong internal candidates for the job. Marius Kloppers pursued Andrew Mackenzie, senior BP and Rio Tinto executive, relentlessly until he convinced him to join BHP. Marius Kloppers, the outgoing BHP's CEO, followed the advice which he received nearly 6 years ago from former BHP CEO Paul Anderson \"that he should immediately start thinking about his successor\" (Batholomeusz, 2013: 20). Corporate governance is the process of how important strategic decisions are made and controlled in organisations. The leadership change at BHP demonstrates that the decision to appoint a new CEO was \"mutually\" made by the outgoing CEO Marius Kloppers and the company's board. Corporate governance is closely related to the sustainability of an organisation. New CEO of BHP Andrew Mackenzie will, as he explained, \"pick up where Mr Kloppers left off, working within BHP's long-term strategy of concentrating on low-cost, long-life, expandable assets and sharpening its cost-cutting focus\" (Fitzgerald, 2013:17). Strong succession plan of the outgoing CEO and his collaboration with the board regarding timing of his departure create positive conditions for sustainable development of the company and continuity of the implementation of its long- term strategy in the best interests of shareholders and the society. The Kloppers' tenure is viewed as extremely successful for BHP and its shareholders even despite the extraordinary volatility of the market created by the global financial crisis (Batholomeusz, 2013). BHP has produced total shareholder returns of nearly 50 per cent since 2007-08 as opposite to its major rivals who destroyed shareholder value during the same period. Strong succession plan and the new CEO recommended by the outgoing CEO are also important conditions of the implementation of the legacy of the outgoing CEO. Mr Kloppers is leaving the company in very strong shape and with considerable Bella Butler, School of Management, Curtin University March, 2013 Strategic Management 313 Semester 1, 2013 An example of assignment \"News Critique\" options, for example, such as expansion of the US shale gas presence and building the potash business in Canada ((Batholomeusz, 2013). Mr Kloppers had also started to implement costs-cutting initiatives in response to the changing industry and market conditions. Can you predict the further development of the situation? What might happen next? According to the mining industry analysts, an important element of Mr Kloppers' legacy \"may be[came] picking [his] successor\" (White, 2013: 20). Indeed, leadership change could become a very bitter experience for those who are involved if this is not conducted in the right way. Leadership change potentially could create some uncertainty both within the company and among its shareholders and within a more distant network of business associates. It could also result in managerial opportunism - the use of corporate resources, whether they are tangible or intangible, for a manager's benefit at the expense of the company's investors. Marius Kloppers has been in the position of BHP's CEO for 5.5 years when the announcement about his stepping down was made. He held his position longer than the 4.4-year average for an Australian chief executive (White, 2013). Mr Klopper will be recognised for leading the company to $24 billion in dividends, $10 billion in buybacks, facilitating the development of the onshore US shale oil and gas business, conducting high-profile acquisitions, but \"his biggest contribution may yet prove to be bringing [his successor] Mackenzie into the company for the difficult years ahead\" (White, 2013:20). Linkages to other topics of the course Strategic Management This news can be used to illustrate the following topics* of the course: Evaluating External and Industry Environment (the external changes in the industry call for new ways to implement a company's strategy and this includes cost-cutting measures and focus on growing markets); Analysing Resources and Capabilities (new leadership skills will be required in different market and industry conditions); Corporate Strategy (restructuring of the corporate portfolio in response to market and industry changes); International Strategy (focus on growing regional markets, e.g. the USA and Canadian markets as opposite to other regional markets). *These topics are listed as examples; the news can be used to illustrate any topic of this course. Bella Butler, School of Management, Curtin University March, 2013