This assignment aims to critically evaluate how setting a strategy impacts on the performance of an organisation. To understand the context of this assignment I must explain the organisation and give a brief description of my role within it. The name of the company I will discuss is Asset Manager Solutions Limited (AMS), they provide management services to the brewing and leisure industry. They mainly provide these services to non-performing pubs, hotels and any other leisure units, such as golf clubs etc, which are going through a management change. AMS work solely with large banks, breweries, accountants and insolvency practitioners to make these non-performing units more profitable. Specialist area managers undertake financial and operational reviews of the units and produce a report within one week, giving recommendations to the client as how they think they should proceed with each individual unit. Depending on the recommendations given, the client then decides if they would like to use AMS to proceed on their behalf to manage the units.
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I have not currently started working for AMS but I will be the Marketing Manager as of next month. This assignment therefore aims to also allow me to investigate the strategy of AMS and get a better understanding of the company I am about to work for. There are two joint owners of AMS, Guy Lissimore (50%) and my father Kamran Aziz (50%), it is from discussions with the owners that will provide me with the necessary information for this assignment.
I am going to split the assignment into three parts to correctly answer the entire set question. The first part of the assignment will concentrate on a more in-depth introduction to AMS and its strategy. I will look at different definitions of strategy and apply those to AMS, I will then discuss what performance it is that they are aiming to change by looking at this strategy. I will look at some of the strategy models and tools used to evaluate their strategy which will allow me to come to conclusions and recommendations on how best to proceed. The second section of the assignment will aim to discuss how the setting of this strategy will affect the organisation in terms of their costs, price or volume. This will use some financial modelling to come up with predictions of the changes that will happen with the changes of in the strategy. I will then move on to discuss how these changes will be managed and discuss the overall impact. The final section will be a summary of the previous two sections giving conclusions and recommendations as to how the organisation should proceed.
Section One- Strategy and its application to AMS
As Minzberg 1987 states 'The field of strategic management cannot afford to rely on a single definition of strategy, indeed the word has long been used implicitly in different ways even if it has traditionally been defined formally in only one. Explicit recognition of multiple definitions can help practitioners and researchers alike to manoeuvre through this difficult field.' Minzberg then goes on to give his definition of strategy in terms of the '5 P's' which will be discussed in relation to AMS later. The definition of strategy which I believe is most fitting to what I am trying to achieve in this assignment is Foss' 2003 definition. He believes that 'Corporate strategy is the pattern of decisions in a company that determines and reveals its objectives, purpose, or goals, produces the principal policies and plans for achieving those goals, and defines the range of business the company is to pursue, the kind of economic and human organisation it is or intends to be, and the nature of the economic and noneconomic contribution it intends to make to its shareholders, employees, customers and communities.' This is because AMS are trying to establish their strategy at present.
AMS currently has no written strategy document but has two owners with the strategy very well understood. For both of the owners this company is not their only interest, they both also work as directors for Oxford hotels and inns which is a chain of hotels and pubs. The company started by dealing with individual landlords of sites that were non-performing, they then grew to dealing with banks, accountants, insolvency practitioners and breweries. They have recently decided to focus on dealing solely with larger firms and more specifically only with banks, accountants, insolvency practitioners and breweries, Santander and KPMG are examples of some of the companies they have more recently started to work with. The assignment will focus on how setting the strategy to change from dealing with small firms to only large firms using strategic models and tools to do so will critically impact upon the performance of the organisation.
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There are many tools and models that can be used when setting a strategy. A brief list of these can be seen below (Figure1) which was identified during a recent survey by Jarzabkowski et al 2009 with the most popular tools at the bottom. I will discuss a few of the models in detail in relation to how they impact on AMS, choosing what I believe to be the most useful for helping to set the strategy for the organisation.
Figure 1: Strategy Tools Levels of Use
Porters five forces
The first tool I will use to look at the strategy will be Porter's (2008) five forces that shape industry competition. Porter originally published his work on the five forces that shape strategy in 1979 but reaffirmed, updated and extended his classic work that started a revolution in the strategy field in 2008, it will be this which I will discuss in its application to AMS' strategy. Porter believes that there are four other competitive forces beyond established industry rivals (see Figure 2) which contribute to the competition for profits, these are: customers, suppliers, potential entrants, and substitute products. It is these five forces combined which help shape the nature of competitive interaction within an industry and define its structure. Porter (2008) states that 'The strongest competitive force or forces determine the profitability of an industry and become the most important to strategy formulation. The most salient force, however is not always obvious.' It is important for AMS to use Porters Five Forces model as they have not previously looked in depth at the industry rivalry and its effect on their organisation, a very important part of creating a strategy. I will now review the five forces in relation to AMS which will help to determine the strongest of the forces to help with strategy formulation.
Figure 2: Porters 5 Forces Diagram
Threat of Entry:
Porter states that 'Entry barriers are advantages that incumbents have relative to new entrants. There are seven major sources:' the first of these seven is 'supply-side economies of scale', these economies come when organisations that produce at larger volumes gain lower costs per unit as they can spread the fixed costs over more units, command better terms from suppliers or employ more efficient technology. In the case of AMS, they enjoy economies of scale from the breweries they use to supply the liquor to the pubs and hotels. They have deals which secure them much cheaper costs per unit as they order on such a large scale to supply the large amount of clients. This will deter potential entrants to the market as it forces them to either come into the industry on a large scale which would require dislodging AMS or to accept a cost disadvantage. Due to the idea of AMS being money saving, it is very unlikely that a potential entrant would want to operate at a cost disadvantage as it would defy the objective of the business. The second source is 'demand-side benefits of scale'; these are when a customer's willingness to pay for an organisation's services increases with the number of other buyers who also support the company. For AMS this would be said to be true as they have gained the trust and confidence of large firms such as KMPG and Santander, others have been sure to follow. It would be very hard for a new entrant into the market to gain the same kind of trust and following as AMS have with these organisations, this would reduce the price the new entrant could command from the customer, again defying the objective of the company. The third source is 'customer switching costs' these are fixed costs which are faced by buyers when they change suppliers. Again AMS have the advantage here as they have secured very good low cost prices for alcohol from the breweries; it is extremely hard for entrants to even get credit with the breweries let alone getting good deals. The deals AMS have, come from longstanding relationships with the breweries, a large scale customer database and contacts that the new entrants could not compete with. This means that for the customers to change to another management services provider they would have to expect to pay much higher premiums for their alcohol. The fourth source is 'capital requirements' this is the need to invest large sums of money in order to compete. Porter claims that 'The barrier is particularly great if the capital is required for unrecoverable and therefore harder to finance expenditures,' Again in the case of AMS, the capital requirements for initial entry to market are fairly large, to even get a gas and electricity bond to service the units there would be a minimum cost of £250,000, this would be a unrecoverable bond and therefore deter new entrants. The fifth source is 'incumbency advantages independent of size' this means that no matter what their size, the organisation may have cost or quality advantages not available to potential rivals. AMS has a joint venture partnership with Oxford hotels and inns with some of its units, this means they benefit from an even wider circle of expertise area-managers, a huge network of contacts and it allows them to keep costs to a minimum as they can take advantage of the administrative and accounting staff from Oxford hotels and inns. They also benefit from combined expertise in the leisure industry as both owners have worked in the market for over 15 years each. The sixth source is 'unequal access to distribution channels', AMS use their contacts within the industry as their distribution channels, without a wide range of contacts it becomes very hard for a new entrant to hear of groups of non-performing units. Often clients try very hard to keep it private knowledge that they are bringing in AMS as they do not want the rest of the industry to know that they are having help with management issues in these units. The seventh and final source is 'restrictive government policy' this can aid or hinder new entry directly as well as amplify, or nullify, other barriers to entry. The government currently do not run any schemes that would aid new entrants wishing to penetrate the market through subsidies etc but do limit entry into the market with licensing requirements on the liquor retailing industry. These seven sources must be reviewed frequently as the market is ever changing, many of these restrictions were not in place when AMS started up and with the market being so uncertain during this current economic climate precautions must be taken to be mindful of the creative ways newcomers might find to evade apparent barriers. As well as these seven sources, AMS must also consider how potential entrants believe AMS would retaliate to their entry. If the reaction is vigorous enough and protracted then the profit potential of penetrating the industry could fall below the capital. This is not a problem AMS have had to face yet but should be something they consider when creating their strategy.
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Power of suppliers:
The next of the five forces is the power of suppliers, powerful suppliers capture more of the value for themselves by charging higher prices, shifting costs to industry participants or limiting quality or services. The suppliers used by AMS for beer and cider are Heiniken and for wine, spirits, minerals and water are Matthew Clarke, both of these suppliers are highly competitive with price as there are so many substitute organisations vying for the business. They are so competitive because AMS also secure the deals for Oxford hotels and inns, the companies combined are very important to the suppliers therefore they do not have a huge amount of bargaining power. The suppliers also know that their deals are reviewed annually using a company called 'White Box' who help AMS find the most competitive deals in the industry.
Power of buyers:
The power of buyers is the third force Porter discuss', powerful customers can force down prices by demanding better quality or more service (which increases costs) and playing off industry participants against one another. Porter states that 'Buyers are powerful if they have negotiating leverage relative to industry participants, especially if they are price sensitive, using their clout primarily to pressure price reductions.' The only buyers of the AMS services are banks, insolvency practitioners, breweries and accountants. Due to there not being any other major competitors, the buyers do not have much power in terms of control on the costs of services or the terms and conditions. The buyers pay per contract, they pay an initial fee to have the report written and then a price for management is negotiated if this is the route they choose, AMS have almost a monopoly over the market and therefore charge what they feel is acceptable to the clients without too much bargaining power from them.
Threat of substitutes:
The fourth force according to Porter is the threat of substitutes; a substitute achieves the same or similar service as an industry's product by a different means. One substitute solution to AMS is for the customers to complete the report and management services themselves. This is not only costly in terms of money savings they would make from cheaper beer prices etc but also costly in terms of time as they do not have the skilled experts as employed by AMS to undertake the report efficiently. Another substitute for the customers is for them to sell the non-performing units without investigation, this however means they would loose on potential profits as the units could be made more efficient using the services provided by AMS.
Rivalry among existing competitors:
The fifth and final force is the rivalry among existing competitors, this may take on many different forms such as price discounting, new product information advertising campaigns etc. the profitability of an industry can be limited by high rivalry. The degree to which it is driven down depends on both the intensity with which companies compete and the basis on which they compete. As previously discussed AMS do not have any direct competitors and therefore there is no rivalry between them. However it must be taken into account when forming the strategy that there is a chance of possible entrants and so it should be discussed what would be done to combat rivalry.
The strongest force is************
Boston Consulting Group Matrix
The BCG Matrix is a tool used to determine what priorities should be given in the product portfolio of a business unit. To ensure long-term value creation the organisation should have a portfolio of products which contain high-growth products in need of cash inputs as well as low-growth products that generate a lot of cash. Firgure 3 below shows a picture of the matrix, according to this AMS have a 'Star' product as it they have high market share and a high business growth rate, however they do not have a portfolio of products. Setting a strategy to have just one service in their portfolio according to the BCG matrix would be detrimental to the performance of the organisation as it means they would not have any cash cows to fund the star services. However in this case they have the backing of their joint venture company Oxford Hotels and Inns and therefore have the capability to proceed with only one main service.
Figure 3: BCG Matrix
PESTLE is an acronym for Political, Economic, Social, Technological, Legal and Environmental factors, these factors are looked at in their application to an organisation to asses the external macro environment and its effect on the business. These factors are often beyond the control of the organisation and therefore play a vital part when formulating the strategy as their effects must be planned for. Understanding the environment in which AMS operates will allow them to take advantage of the opportunities and also minimise the threats.
Changes and reforms of Licensing Laws in line with Government policy
Relaxation of opening hours and late night opening
National minimum wage increase affecting salaries and wages
EU influence and legislation regarding measures of drinks
EU and National Government guidelines regarding health
Local and National Government concerns regarding negative aspects of 'binge drinking'
Budget increases in duty on alcohol
National and international economic downturn means people generally have less disposable income for socialising
Rise in staff wages due to National Insurance and Minimum Wage increases
Cut price offers for alcohol in supermarket promotions
Increases in transport costs in line with Fuel pricing
Culturally pub centre of social life, place to meet friends and for locals to socialise
Increasing student population often associated with pubs and bars
Media concern with negative aspects of 'binge drinking'
Increased awareness of health concerns
Increased advertising on mainstream media of consuming alcohol responsibly
Wider choice and taste of alcoholic drinks in supermarkets for consumers
Developments in delivery of cold beers and chilled ale
Development of wide range of flavoured alcoholic drinks
Interest in nightlife can now be promoted via multi media, websites, blogs and social networking
Advertisements for alcohol awareness and responsible drinking on mainstream media
Increased advertisement for alcohol brands via multi media
Stronger enforcement of underage drinking regulations on local and national level
Changes in Drink Driving Laws
EU legislation on measures of drinks served
Waste, litter, refuse produced in local area
Transportation and delivery costs of goods