Pindelski_Competitive_Strategies

patents and new products company's image among stockholders factor, price, profit rate of return on assets staff stability brand recognition

rate of return on investments net operating margin market shares investments in technologies net profit margin customer satisfaction revenue growth

Source: author’s own elaboration on the basis of the research carried out in the Department of Management Theory, May-July 2011. Research under the direction of M. Pindelski. Unpublished materials.

In contrast to the results of the American researchers, Polish managers predict that the future of success will be primarily determined by company's revenue growth. Interestingly enough, both, the staff stability and the image among stockholders in the companies undergoing the study, are not important aspects in this regard. In Poland, the most traditional measures of success are the market share and the rate of return on investment. Although, due to the scale, it is difficult to compare these studies, and the preliminary data suggests a slightly different perspective of the Polish employees. By the end of 2001, Cap Gemini Ernst&Young published the results of "Measures that Matter" (measures of high importance). The primary objective of the study was to identify non-financial measures of business entities that affect their market value. Based on the results, a thesis was formed stating that financial measures have a progressively smaller share in creating value. It increases in the case of difficult to measure aspects and currently affects the value by 35%.

A confirmation of this phenomenon is the fact that more and more investors during decision-making times, use recommendations based on non-financial factors. It can be assumed, that in short-term expectations, the primary value-creative factor are the finances, but certainly in the long run, more important are the non-financial measures24. Strategy and the process of its implementation become of greater importance. Both, historical data and perspectives based on different scenarios, are included in the strategy's

24 Barcz M., Błędy w budowaniu strategii firmy, Manager No. 1 (64), January 2003

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creation. It is not without significance, that there are IT support systems for the planning, knowledge management or decision-making.

Tab.18 Non-financial measures of having an impact on a company's value

Source: CapGemini Ernst & Young report, 2010

To summarize the table above, strategy implementation and quality are of great importance together with the directors and management's credibility. The credibility of people in executive positions is certainly, in some way, determined by the stability of the Supervisory Board and the Management Board, as these study results show. Given the long-term customer relationships or the development of an employees skills, we see a new dimension in both, the appraisal and the value creation aspects. The change of perception of the intellectual capital and sometimes its enormous costs are also taken into account by the intuitive market.

The lack of its appraisal or methods giving quantifiable results, prevent proper management and increase the investment risk. In conjunction with turbulent surroundings, unstable economy, and changing reality, managers are forced to navigate using tools measuring inadequate parameters. Resources are therefore allocated in different projects, not necessarily those, which could have the greatest rate of return. Moreover, without knowing certain measures, we are unable to determine trends, predictions, or the direction in which the organization follows.

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8.2 Value Chain

Reaching the competitive advantage is the most important functioning element of each business. The competitive advantage allows for the increase in profitability, quality and efficiency of activities. During the search for methods to achieve and maintain competitive advantage, the researchers’ attention was focused on two areas:

•Cost advantage - production and services at lower costs than the competitors.

•Product advantage - achieving such a level of a product's development, making it impossible for the competitors to reach.

Achieving the lowest costs in the sector becomes possible through the development of economies of scale, experience curve, vertical integration and investments in highperformance technologies. According to Porter, the market differentiation is possible by providing as much relative value added to customers, as possible. Relative, as relating to similar measures used by the competition25.

The value added for the buyer quickly transforms into an added value for the manufacturer and as a result, allows it to achieve above-average profitability. In this regard recommended is the building the of a brand, keeping up with the high quality standards related to modern technology and a sound knowledge of the customers market. This advantage can be maintained through the construction of entry and mobility barriers resulting from investments in information, skills and resources. This is a typical example of position strategy, which, however, has quickly eroded.

Changes, blurring borders, technology transfer, etc., all happening in the '90s, resulted in the fact that the market position in a sector became less important. It is not the market share or position but rather unique resources, that began to determine the success. The Resource Based View, gives particular importance to resources based on knowledge and its practical use. The end result, which is the customer's satisfaction, is based on maximizing the efficiency of all stages of the value chain. An elaboration of this concept is a strategic asset theory, and just like having an ace up one’s sleeve, it should always be available to a company during a critical time, however, until then, it should remain in hiding.

The Value Chain proposed by M.E. Porter, includes a set of activities creating value for customers. However, these measures appear to be related not only to the value for

25Porter M.E., Competitive Advantage. Creating and Sustaining Superior Performance, The Free Press, New York, 1998

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customers, but also to the value of an entire organization. Ensuring the achievement of goals and objectives within this model indirectly affects the increase in wealth of stockholders and shareholders of a company. It may not be a condition sufficient enough to ensure an increase in the market value, but without a doubt, it is a necessary one.

Fig.14 M.E.Porter‘s Value Chain

Source: own elaboration based on Porter M.E., Competitive Advantage. Creating and Sustaining Superior Performance, The Free Press, New York 1985.

According to this model, the operations of an organization used in creating value, can be

divided into the following activities:

•Primary - including the inward flows (supplies of raw materials), basic operations (processing raw materials), outward flows (product localization on the market), marketing, sales, and additional services (sales service, delivery, etc.).

•Supportingthese activities include the supply system (purchase of necessary elements to each of the processes), technology development (improvements at each stage), human resources management (planning and personnel management), infrastructure (management, finance, accounting, administration,

etc. ).

Porter draws special attention to the need of focusing on improvements in each of these spheres, as well as mutual interactions between all departments, simultaneously giving it a new, much broader context. Even the finest and most effective operations within one process, do not guarantee success. It is closely related to the fact that interests of individual cells may vary considerably. Clearly this model corresponds to the rules of creating business value, which is a much broader concept than the customer value one.

Besides ensuring smooth operations of a company's value chain, a similar analysis for suppliers and distributors appears to be of a similar importance. Only such a

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comprehensive approach may determine the competitive advantage. Building an effective system for creating value is the key element in strategy building. This concept can be represented as a variable function.

•Wc - company - basic and supporting operations of a company

•Wssupplier - basic and supporting operations of suppliers

•Wd - distributor - basic and supporting operations of distributors

The relationship between the different components can be expressed in the following way: W (Wc, Ws, Wd) = Total value offered by a company is read as a concentration of contracts.

The increase in system value is possible by increasing the W function value. The weakening of each variable, causes a decrease in function values. It is not without significance that modern technologies prevail for the quality of created systems. Using the data transfer or commonly known computerization, does not only make it easier to build appropriate structures, but also ensures their smooth operation. The focus on values supplied to individual stakeholders of an organization, should be based on the value analysis and the costs necessary for its achievement.

8.3 Balanced Scorecard (BSC)

The Balanced Scorecard consists of performance indicators, which influence a participant’s motivation and monitor the achievement of a chosen strategy. It is a tool that helps to measure business effectiveness through four perspectives:

•The Customer Perspective;

•The Financial Perspective;

•The Business Process Perspective;

•The Learning and Growth Perspective.

Within each of these perspectives, an organization sets goals to achieve, and then measures them by using individually chosen indicators.

The Customer Perspective

A balanced scorecard allows the identification of potential customers and segments in which the company has a chance to surpass competitors.

This identification serves two purposes - the first one is to draw up a value definition, which the company intends to offer to a limited number of clients. The second purpose is

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to establish the way in which a company intends to examine the validity of its decisions and if such, produce expected outcomes.

After the identification, a company has to work on objectives and measures, thanks to which it will be able to offer its customers higher added value. This condition will be met, if during the process of goal setting and formulating its indicators, the company will consider the following:

•Features of the offered product (with services assigned to it), including the product's functionality, quality and price.

•Relationships with customers, that allow keeping the customers and maintain their further interest in a company's offer.

•Company image, i.e forming a company's reputation on the market, which affects

choices made by the customers.

Among the indicators that embrace attributes associated with product characteristics, customer relationship or image, also included are, inter alia, market shares, customer maintenance, customer acquisition, customer satisfaction and customer profitability.

One of the key values of the company is to maintain their customer satisfaction, and thus keeping them to themselves. A company, which has updated information on their customer groups and treats them as key customers, is able to keep the collaboration at a satisfactory level for both sides. This can be done, provided that the preferences of selected customers, considered them being essential, actually coincide with their expectations.

Therefore the company, should examine their needs, use information collected during product development, and monitor the value of purchases made by existing customers by using, for example, a sales growth factor. Such activities help to better adapt to the emerging customer needs and their higher satisfaction.

The Financial Perspective

The Balanced Scorecard retains the financial perspective, because the financial measures summarize the calculable economic effects of past activities, extremely well. The financial measures show that implementation and execution of the strategy, contribute to improving a company's economic performance. Financial goals are usually formulated in

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relation to; for example, operating profit, rate of return on capital employed and, in the final period, economic added value. On the other hand, a fast growth of sales or positive cash flow can be some of the alternative financial objectives.

A look at a business from a financial point of view, allows, in its life cycle, the generation of three phases:

•Growth Phase (increase in sales).

•Maintenance Phase (increase in profitability).

•Maturity Phase (increase in flow of funds).

Growth phase is the period in which the company needs financial resources for product development, distribution network growth or investments related to creating customer relationships. It is possible that in this phase of life, a company shows negative cash flow, and its rate of return on the capital invested is low. This does not mean, however, that the company is doomed to failsuch data shows that future investments made by the company, absorb more financial resources than achieved revenues. The objective of this stage of development should be the company's financial revenue growth or the sales growth – where both of these objectives should relate to the segments identified by the company as key segments.

A company's maintenance phase is the time in which investors perceive it as an attractive one, but with expectations for high return on equity. This means that the company should increase its market share and focus its investments on bottlenecks removal and increase in production capacity. Therefore, a company's financial goals should apply to profitability, and in order to measure their achievement, an accounting category like - profit, can be used.

The measurement includes, for example, operating profit, gross margin, return on investment, return on equity and economic added value. The Maturity phase for companies is the focus on collecting profits generated in the previous two phases of investments. A company seeks to maintain, and not to increase its capital. Potential investment projects are subjected to increasing cash flows and choosing those that will bring the fastest return on earlier invested capital. In this phase of the development, the financial goal of a company is to maximize the cash flow, measured by using the rate of return from previously generated funds. A key to effectively applying a selected set of measures, is to link them with long-term business objectives. Measures chosen by a company should include such factors as a competitors nature or the company‘s strategy.

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In turn, the measurement of a process duration time, assumes certain cut-off points (the start of a process can be the point of placing an order, and the end - when shipping it to a client). Selection of the cut-off points depends on the preferences of each business.

The sales service processes are repairs under warranty, return service and receiving payments. During their execution, the company increases effectiveness measures by offering its customers a competent support in order to eliminate the potential product, reduce the repair time or offers conditions under which it may replace a defective product, which are very attractive to a client. A company may improve its after-sale processes quality by using a speed of service measuring tool (from the time reporting the defect - to its elimination) or a cost measuring tool (cost of resources involved in repair). Similar measures can be applied during payment collections - the company then measures quality and time of the invoicing process.

The Learning and Growth Perspective

The fourth perspective of the balanced scorecard - learning and growthidentifies resources that an organization must develop, in order to build a long-term growth and improvement. Customer perspective and internal processes are determined by factors of the highest importance for the current and future success. Companies, however, are unable to meet future objectives through those perspectives, even when using today's technologies and skills, and therefore their operations must focus also on searching for learning and growth perspectives (chances).

This perspective includes three elements, through which a company is able to increase efficiency:

•People, who by performing work contribute to the growth of a business;

•Systems, which are the tool for work and support people in the performance of their work;

•Procedures, which allow employees to move with greater confidence in areas of business.

Objectives based on the financial perspective, customer perspective and internal processes perspective usually reveal a gap between people’s capabilities, systems, procedures, and what will be needed to achieve future success. In order to fill the gap, a company is required to invest in altering staff qualifications, improve technology and information systems and to adapt to organizational procedures.

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The card allows the measurement of the stakeholder satisfaction and simplifies the decision making on planned improvements, which will influence the adaptation of the business with the expectations of its members.

Balanced Scorecard – short overview

A Balanced Scorecard helps to determine business goals, which go beyond the financial targets. With it, the company can assess how the value is created for the current and future customers, as well as how to increase the potential of your business and to invest in people, systems, and procedures necessary to improve future results. The scorecard indicates actions, which are critical from the value creation point of view. It clearly emphasizes short-term effectiveness (from a financial perspective) and the essential factors of value creation influencing a company's long-term market and financial success.

Fig.15 Balanced Scorecard philosophy and areas of interest

FINANCIAL PLAN

How should we approach the shareholders (the owners), in order159to achieve financial success?