Business management systems modelling

Plekhanov Russian University of Economics Department of Management Theory and Business Technologies Yana Butenko, Yury Lyandau, Valery Maslennikov, Elena Sulimova BUSINESS MANAGEMENT SYSTEMS MODELLING LECTURER’S WORKBOOK Moscow – 2014 UDC 65.0(075.8) LBC 65.290-2я73 Authors: Yana Butenko Ph.D. in Economics, Associate Professor Department of Management Theory and Business Technologies Plekhanov Russian University of Economics Yury Lyandau Ph.D. in Economics, Associate Professor Department of Management Theory and Business Technologies Plekhanov Russian University of Economics Valery Maslennikov Doctor of Economics, Professor, Head of Department Department of Management Theory and Business Technologies Plekhanov Russian University of Economics Elena Sulimova Ph.D. in Economics, Associate Professor Department of Management Theory and Business Technologies Plekhanov Russian University of Economics Business Management Systems Modelling: Lecturer’s Workbook / Yana Butenko, Yury Lyandau, Valery Maslennikov, Elena Sulimova. – Moscow: Publishing House “Paleotype”, 2014. – 108 pp. ISBN 978-5-94727-883-5 This workbook is intended to provide students with business management skills as a manager or entrepreneur. The study guide helps the instructor to teach students the algorithm for proceeding along the path from the formation of an entrepreneurial idea to the organization and optimization of a functioning business. The workbook allows students to learn how to plan a business management system by building business models. UDC 65.0(075.8) LBC 65.290-2я73 ISBN 978-5-94727-883-5 © Yana Butenko, Yury Lyandau, Valery Maslennikov, Elena Sulimova, 2014 © Publishing House “Paleotype”, 2014 CONTENTS CONTENTS PURPOSE OF WORKBOOK ........................................................................................................................... 6 WORKBOOK METHODOLOGY.................................................................................................................... 6 Situation (morphological description of business) ........................................................................................ 6 Core components of business models ............................................................................................................ 6 Workbook study algorithm ............................................................................................................................ 7 SECTION 1. CONCEPTS OF BUSINESS MANAGEMENT SYSTEM MODELLING ................................ 8 1.2. LYANDAU’S BUSINESS MODEL ...................................................................................................... 8 1.2. THE BUSINESS MANAGEMENT SYSTEM MODEL ..................................................................... 10 PART 1. OBJECT OF MANAGEMENT ....................................................................................................... 12 SECTION 2. DESCRIPTION OF THE OBJECT OF MANAGEMENT ....................................................... 13 2.1. SELECTION OF THE PRODUCT (SERVICE) .................................................................................. 13 2.2. Selection of business location............................................................................................................... 17 SECTION 3. RATIONALE FOR TARGET CLIENTS AND POTENTIAL REVENUE ............................. 21 PART 2. SUBJECT OF MANAGEMENT ..................................................................................................... 24 SECTION 4. DEVELOPMENT OF CORPORATE STRATEGY ................................................................. 25 4.1. Vision and mission ............................................................................................................................... 25 4.2. Goals and objectives ............................................................................................................................. 27 4.3. Strategy instruments ............................................................................................................................. 29 4.3.1. PEST analysis .................................................................................................................................... 29 4.3.2. Porter’s model................................................................................................................................ 34 4.3.3. SWOT analysis .............................................................................................................................. 42 4.3.4. BCG matrix ................................................................................................................................... 46 4.3.5. Balanced scorecard (strategy maps) .............................................................................................. 54 SECTION 5. ARCHITECTURE OF MANAGEMENT PROCESSES .......................................................... 57 5.1. Modelling of business processes .......................................................................................................... 57 5.2. Core and auxiliary business processes.................................................................................................. 59 5.3. Justification of personnel needs ............................................................................................................ 64 5.4. Organizational structure ....................................................................................................................... 66 5.4.1. Linear-functional organizational structure .................................................................................... 66 5.4.2. Project management organizational structure ................................................................................ 67 5.5. Employee regulation documentation .................................................................................................... 69 5.6. Responsibility matrix as a management tool ........................................................................................ 76 SECTION 6. RATIONALE FOR FINANCIAL RESULTS ........................................................................... 78 SECTION 7. INFORMATIONAL SUPPORT FOR MANAGEMENT ......................................................... 80 SECTION 8. LEGAL FRAMEWORK FOR MANAGEMENT ..................................................................... 82 8.1. Selection of the legal and organizational format of the business ......................................................... 82 4 CONTENTS 8.2. Registration........................................................................................................................................... 84 8.3. Licensing .............................................................................................................................................. 88 SECTION 9. RISK MANAGEMENT ............................................................................................................ 90 SECTION 10. BUSINESS IDEA DEVELOPMENT ..................................................................................... 94 SECTION 11. IMPROVEMENT OF BUSINESS PROCESSES ................................................................... 99 11.1. Improvement of the management process .......................................................................................... 99 11.2. Improvement of the value creation process ...................................................................................... 105 5 PURPOSE OF WORKBOOK PURPOSE OF WORKBOOK This workbook has been developed for the purpose of teaching business management skills. The use of this workbook implies the selection and study of a specific market of goods and services as well as the study of the features of functioning companies. The business chosen for study purposes should correspond to certain business operating conditions in such a way that the development of the business management system takes into account all key parameters of business modelling. Through the completion of the workbook exercises the student formulates a clear understanding of how a business operates and, in particular, is able to do the following: 1. To understand the object of management in terms of understanding the technological process of creating value for the consumer 2. To identify an appropriate business organization concept based on information about consumer preferences 3. To determine the most significant parameters which influence revenues for a business 4. To understand the subject of management 5. To identify the most suitable market segment based on information about supply and demand 6. To develop initiatives aimed at improving corporate management 7. To take into consideration all key expense items for a business 8. To understand the most significant business risks All calculations are made by the student independently based on relevant information gathered and aggregate market indicators. WORKBOOK METHODOLOGY Situation (morphological description of business) A proprietor decides to invest in a given business. To this end, he hires a manager and asks him to develop a business model as well as to organize the operational aspects of the business. The primary objective of this endeavor is to attract clients by offering high-quality products and/or services. Core components of business models Business – an economic enterprise intended to systematically generate profits or other benefits through the investment of one’s own or borrowed funds, the use of material and nonmaterial assets and aimed at the performance of work, provision of services and/or sale of goods. Investor – a legal entity or individual who invests their own, borrowed or other attracted funds (resources) in investment projects with the aim of generating an income. Manager – a hired employee with management skills in the area of operations assigned in the organization who is granted some degree of executive authority. Businessman – a person who uses resources in a certain business aimed at generating profits or other benefits through the creation and sale of certain products or services. Entrepreneur – a person who is engaged in his own business based on an innovative business idea at one’s own risk and material liability with the aim of generating profits or other benefits. Proprietor – the subject of property, a legal entity or individual holding property rights and acting in the role of the proprietor, allocator and user of property. Business owner – a person or company who regularly and actively participates in property management: bestowing, bequeathing, exchanging, selling, leasing or other actions corresponding to their authority. 6 WORKBOOK METHODOLOGY Client – a legal entity or individual with whom an enterprise is engaged in commodity-trade relations to sell products, perform work or provide services with the aim of satisfying the client’s needs. Product – the result of material or non-material production with an intended purpose and qualitative attributes which make it fit for use/consumption Service – an action or set of actions performed by one person/entity for or on behalf of another with the aim of achieving a desired result in return for an agreed payment. Good – the product of labor created for the purpose of sale and capable of meeting demand. Producer – a legal entity or person who prepares goods, products and/or provides services. Supplier (contractor) – a legal entity or person which provides goods and services or performs work for buyers (clients) in accordance with the conditions of a signed supply agreement which represents a sort of buy-sell agreement. Workbook study algorithm 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 7 To become acquainted with the concepts of a business model and management system model To formulate a business idea To substantiate anticipated sales volumes To describe revenue structure To justify business strategy To build a process model for business activities To develop a corporate organizational structure To justify expenses and substantiate financial results To ensure sufficient informational support for management To ensure sufficient legal support for management To analyze risks To identify development opportunities for business idea SECTION 1. CONCEPTS OF BUSINESS MANAGEMENT SYSTEM MODELLING SECTION 1. CONCEPTS OF BUSINESS MANAGEMENT SYSTEM MODELLING 1.2. LYANDAU’S BUSINESS MODEL It is important for a manager to understand the simple steps of business modeling. In this workbook we will consider Lyandau’s business model. Relations with Partners Relations with Owners Partners Owners (Proprietors, Investors, Shareholders) Relations with Competitors Competitors Relations with Suppliers Suppliers Relations with Clients Manager Clients Intellectual Technology Resources Subprocess 1 Subprocess 2 Subprocess N Value creation process Product / Service Let’s consider each of the components of this business model in detail. 1. Proprietors The first step is the determination of the relationship with the proprietors. The proprietor determines the conditions of the relationship with the manager. The proprietors can act in the role of a business owner and take active part in the management or play the role of an investor financing a specific business idea. What role does the proprietor choose? What are the terms of the proprietor’s relationship with the manager? 2. Clients Here we identify the main types of consumers of the company’s products or services. Who are the clients? What products/services do the clients want? What are their preferences? What do they need? How can the client be influenced? How should relationships with clients be established? 8 INTRODUCTION 3. Products/services Clarification of the main advantages of the organization’s products/services. Identification of their unique attributes and features. What guarantees and aftersale services are offered? 4. Resources Allocation of resources for the production of products or provision of services as well as support of the organization’s operational activities. Resources can be categorized into the following groups: financial, informational, human, material and time. 5. Suppliers Identification of the main suppliers of resources for the production of products or provision of services. How many suppliers does the organization need? How should suppliers be selected? How should work with suppliers be organized? What kind of requirements should be established for the quality of resources provided and delivery conditions? 6. Operations Establishment of effective business operations, identification of the core principles of the organization’s functioning and approach to doing business. Assessment of revenue streams and cost structure. 7. Technologies The use of innovative (intellectual) technologies in an organization’s operations with the aim of improving efficiency, reducing expenses, improving quality of work. What technologies are used in this sector? To what extent is the assimilation of new technologies justified? What effect should be achieved through the assimilation of the proposed new technologies? 8. Business partners Here the organization’s business partners are determined, such as financial institutions, government bodies, etc. How does the organization cooperate with financial institutions? Which bank will be used for opening accounts and making transactions? How will the organization interact with state agencies? What other structures will be relevant to the organization’s business? 9. Competitors Existing and potential competitors of the organization are identified. Who are the organization’s main competitors? What are their advantages and disadvantages? How should relations with competitors be correctly established? What organizations could potentially become competitors? 9 SECTION 1. CONCEPTS OF BUSINESS MANAGEMENT SYSTEM MODELLING 1.2. THE BUSINESS MANAGEMENT SYSTEM MODEL GLOSSARY Organization – an open system of interconnected and managed parts (subdivisions, people, etc.) with a specific goal, purpose, mission and the corresponding resources for this: (1) financial, (2) material (equipment, etc.), (3) human, (4) information and (5) time resources. Any organization regardless of its purpose can be described by a number of specific parameters, the most important of which include: the organization’s aims and objectives, its organizational structure, external and internal environment, cumulative resources, regulatory and legal framework, operational processes, system of social and economic relations, and corporate culture. Organization management – the process of the assignment and movement of resources in an organization with an established aim according to a strategic plan developed in advance and with continual control of work results. Management system – the aggregate of actions which determine the focus of management. COMMENTARY Below is a graphical representation of a business management system model. MANAGEMENT SYSTEM (organizational structure, decision making) RESOURCES      intellectual material finance information time BUSINESS PROCESSES (creating value for the consumers) PRODUCT SERVICE TECHNOLOGY (execution of business processes) 10 INTRODUCTION The management process entails actions which are intended to achieve the common objective or set of objectives identified for the organization. A special management body charged with carrying out management functions is created to coordinate these actions. Thus, every organization has two components: the subject of management (managers) and object of management (business). A depiction of these relationships can be found below. ORGANIZATION Informational input Managing body A Material input Financial input Managed structure B Material output Financial output А – management instructions, B – reporting on execution The part of a commercial organization which fulfills the management functions is comprised of many interconnected links and represents a management system which provides for the execution of a number of specific functions. One of the core principles of a management system is a hierarchal structure. The concept of a hierarchy is reflected in the vertical subordination between various levels of an organization’s management: the hierarchy of authority, hierarchy of functions – subordination according to position (rank), functional subordination. In the process of organizational systems planning it is necessary to take into consideration how they can be used to help achieve strategic, tactical and operational objectives.  Strategic objectives correspond to an organization’s mission and characterize the business focus of the organization and prospects for its development. The strategic reference points are reflected in advertising and publications and are used to create the organization’s image.  Tactical objectives correspond with an organization’s daily operations, provide mobilization of the necessary resources and are reflected in the work plans of business divisions.  Operational objectives provide specificity and detail for tactical objectives, correspond to the functional delegation of responsibilities and are used to control performance and compliance. After developing the strategic objectives, it is necessary to determine the strategic vision of the organization. The selection of the right strategy opens the door for the next phase in organization planning – the creation of a management system using mechanistic and organic organizational structure types. The execution of all phases of organizational planning is based on analysis of resources available and needs of the external environment. All phases of business management system planning in this workbook involve model simulations using parameters provided by the student as well as from open sources of information. 11 SECTION 1. CONCEPTS OF BUSINESS MANAGEMENT SYSTEM MODELLING PART 1. OBJECT OF MANAGEMENT PART 1. OBJECT OF MANAGEMENT 12 PART 1. OBJECT OF MANAGEMENT SECTION 2. DESCRIPTION OF THE OBJECT OF MANAGEMENT 2.1. SELECTION OF THE PRODUCT (SERVICE) GLOSSARY Business idea – the idea which underpins the work of the new company or is used for the expansion of the scope of an existing business. Business model – the description of the business format which helps the company to generate income in order to achieve functional sustainability. Object of management – a separate structure or the organization as a whole which falls under the control of the management. Subject of management – the corporate body or person which exercises managerial control. Management focus – the realm of the company’s activities on which the subject of management primarily focuses its attention. COMMENTARY In order to build a business model it is necessary to organize the model into a chain of logic:  determine the who the consumers (clients) are;  determine what of value they acquire, through which channels of delivery they receive this value and how to build relationships with them;  calculate income streams and the resources needed to generate for this;  describe the key actions necessary to perform the work;  determine partners and suppliers;  study the structure of expenses. In order to build the management system it is necessary to map out the following:  Management processes;  Organizational structure (creation of value and management)  Strategic concept of the organization;  Core functions of management (core activities, personnel, finances, purchases, sales, etc.). MANAGER’S TASKS Formulate the manager’s tasks at this stage of planning the business. 1. Determine the main content of the 9 positions of the business model. 2. Design a model of interaction for the participants of the business in accordance with their roles. 3. Determine the list of products / services which will be provided to the clients. 13 SECTION 2. DESCRIPTION OF THE OBJECT OF MANAGEMENT EXERCISE 1 Formulate responses to the template questions of the business model for all 9 positions (one to two sentences). 1. Proprietors The owner partially finances the project and tasks the manager with implementing the business idea of creating an automotive service center. 2. Clients Clients not served by official dealerships, transiting automobiles, official dealers outsourcing automotive repair work. 3. Products/services We offer high-quality automotive repair backed up by guarantees at prices lower than those offered by official dealerships. A cumulative discount program is offered. The quality of the work performed is guaranteed. 4. Resources Recruitment of qualified personnel, acquisition of automotive parts from reliable suppliers, discounted credit conditions. 5. Suppliers The purchase of parts from official and unofficial distributors depending on client needs. Identification of deferred payment options. 6. Operations The ongoing improvement of the provision of services and quality of work performed. Revenue from automotive repair services (body work, electrical system installation, tire replacement, car wash). Lease, labor costs, equipment costs, utilities, insurance, taxes. 7. Technologies The use of specialized computer programs to identify problems in the systems of the main automotive manufacturers. 8. Business partners Obtaining permits from state agencies. The selection of a reliable bank with the best online banking system as well low commissions. 9. Competitors Selection of business location with the lowest saturation of competitors. Formation of a pricing policy which is lower than at official dealerships. Offer of guarantee for work performed. 14 PART 1. OBJECT OF MANAGEMENT EXERCISE 2 Make a graphical representation of the interaction of the various participants of a business as defined by their roles. Dividends Proprietor (owner, investor, shareholder) Investments COMPANY (legal entity) Sales channel Business management system Parts and operating materials SUPPLIERS Payment 15 Value creation process Tangible services CLIENTS Payment SECTION 2. DESCRIPTION OF THE OBJECT OF MANAGEMENT EXERCISE 3 Characterize the business management system model. The business management system model is reflected in the interaction between participants of the business in accordance with their roles. As the graphical representation in Exercise 2 shows, in order to organize the business of a company, it is necessary to identify the source of investment, target consumer segments and supplier base, to develop the process of value chain creation and management system of the company, as well as to map out how the various elements of the model interact. The positive result of the interaction of all the elements of the business management system should be the achievement of the goal or goals established for the organizations. EXERCISE 4 Now it is necessary to determine the list of products/services to be offered to clients. Tire replacement and balancing Check-up and diagnostics services Electronic systems maintenance Oil change services Sale of automotive parts (as part of automotive service business) Painting Body work Mechanical work Car wash 16 PART 1. OBJECT OF MANAGEMENT 2.2. Selection of business location GLOSSARY Bedroom district – a residential district (usually in a large city or suburb) whose residents each day commute to work in the city’s business district or industrial district and return home to sleep at night. Industrial zone – a rather generalized concept defining the territory of a city which is mainly occupied by industrial enterprises as well as other businesses of an industrial nature. Construction process – all organizational, exploratory, construction, installation and launch work related to the creation, adaptation or demolition of a property as well as engagement with the relevant agencies which oversee such work. Building code and regulations (SNiP) – the totality of government regulatory acts of a technical, economic and legal nature covering development activities as well as engineering exploration work, architecture and building design, and construction. COMMENTARY In most cases the successful organization of a business in the real sector of the economy depends on its location. When choosing a business location it is also possible to take into account certain specific opportunities, such as inexpensive premises available for lease in a particular district, the opportunity to lease premises from the city (a 49-year lease with buyout option), the availability of land for sale, etc. However, it is critically important to recognize the fact that a business must be oriented toward the client, so it is necessary at the start to correctly determine the needs of potential clients and build the business based on these needs. The undeliberate use of opportunities to economize during the initial stages of organizing a business can lead to serious financial losses or even bankruptcy in the long run. So the manager needs to clearly analyze the potential client base and determine the development trends for client needs, the development trends for the particular business segment and conducting marketing research as well as research on the competitive environment. In the future this will make it possible to establish processes for managing the marketing and competitiveness of the business. MANAGER’S TASKS Formulate the manager’s tasks at this stage in the planning of a business. 1. To determine the business’s real estate needs. 2. To identify the options for selecting real estate. 3. To select the most viable location for the business. 17 SECTION 2. DESCRIPTION OF THE OBJECT OF MANAGEMENT EXERCISE 1 Describe the requirements for real estate: Entry and exit driveways Reception area Workplaces (painting booth, stations for work on undercarriages, motors, installation of electronic components, etc.) Area for repair, diagnostics and servicing equipment Parking area Car wash area Noise barriers (if located in bedroom district) EXERCISE 2 Select an option for choosing real estate for setting up business: Lease/purchase of premises with subsequent renovation Lease/purchase of premises already suited for this business Lease/purchase of a piece of land for construction of suitable premises Other: 18 PART 1. OBJECT OF MANAGEMENT EXERCISE 3 Select a location for the business: А EXERCISE 4 Provide the rationale for your choice of location: An automotive service center can be located in a bedroom district, in an industrial zone or along a major road. Each of these options has drawbacks. In the first instance, there are a large number of potential clients who reside in the bedroom district, but as a rule their work schedule limits their ability to visit an automotive services center to the weekends, evenings or early in the morning. A location along a major road implies a large number of potential clients passing by the center. However, this situation could also create difficulties in the establishment of a loyal clientele. A location in an industrial zone would require substantial investment in advertising, as potential clients may simply be unaware that a new automotive service has appeared, or the signing of an agreement with dealerships which need to have the cars of their clients serviced. In this case we consider the option of a location in an industrial zone along a major road. The chosen district has premises available in which it is possible to set up an automotive service in compliance with all the requirements of government agencies and to develop a good client base. 19 SECTION 2. DESCRIPTION OF THE OBJECT OF MANAGEMENT EXERCISE 5 Draw the layout of the premises: Tire service station Body work station Washing station Painting booth Employee Area (parts storage, staff room, shower) Toilet Офис Leisure area 14,2 мм x 6,3 мм 20 PART 1. OBJECT OF MANAGEMENT SECTION 3. RATIONALE FOR TARGET CLIENTS AND POTENTIAL REVENUE GLOSSARY Revenues – money or other forms of material value received from individuals or legal entities as a result of some kind of activity during a given period. Expenses – costs incurred in the process of doing business leading to a reduction in the organization’s funds or an increase in its debt. Gross revenues (sales volume) – revenues received by a company from its core business, usually from the sale of goods or provision of services. In many countries the term turnover is used as a synonym for gross revenues. Pricing – the process of establishing prices for goods or services. Sales volume (amount of work performed, services provided) – one of the key indicators characterizing the financial performance of a business for a given period, the fulfillment of obligations to clients. Average cost of service – the average cost of a business’s services is determined bases on the weighted average of service prices according to the price list (arithmetic average). The planned volume of each service is considered in the calculation of the average cost of service. COMMENTARY A business’s revenues are needed for the financing of expansion and achieving the economic and social development objectives of the business. Revenues are the main source of financing of a business’s operations. The volume of revenues generated by business operations is a critically important factor impacting net operating income. Revenue from sale of goods, work or services means money received on the business’s account or through the cash register as a result of economic gains from business operations. In order to calculate annual revenues from the sale of products and services, it is necessary to first determine the list and relative proportion of services (work) provided (performed) by the business. In order to calculate operating costs, it is advisable to use the prices, rates and wages (hourly and piecework) typical for the given segment and region. Operating costs can be grouped into the following line-item categories: − worker salaries and bonuses; − payroll taxes and social contributions (pension fund, workplace accident and illness insurance, etc.); − cost of spare parts and materials; lubricants; water for technical use; transport and procurement costs; supplier markups on spare parts, materials, etc., necessary for repair and maintenance work; − depreciation allowances for basic production assets; − lease payments for equipment, premises, etc.; depreciation of non-material assets; − overhead costs, including such general expenses as: − training and business trips; − entertainment; − services of third-party organizations; − transport; 21 SECTION 3. RATIONALE FOR TARGET CLIENTS AND POTENTIAL REVENUE − − − utilities; administrative expenses; advertising and other. Gross profit is calculated as the difference between revenues (sales volume) and operating expenses. Net profit is derived by subtracting taxes and other obligatory payments from the gross profit. The investment payback period at the moment of the creation and implementation of a project is calculated as the ratio of total investment to net profit of the business. This ratio indicates how many years it will take for all capital expenses to be recovered at the forecasted level of profit. If the payback period is acceptable to the entrepreneur and investors, then the project can be implemented in practice. All commercial and some noncommercial organizations face the issue of determining the prices for their goods and services. In market conditions pricing is a very complicated process which takes into consideration a multitude of factors. The selection of a general pricing strategy and the basic approaches to determining prices for new and existing products (services offered) with the aim of increasing sales volumes (turnover), boosting production and strengthening a business’s market positions is supported by marketing research. Prices and pricing policy are an important component of a company’s marketing policy. Prices are highly dependent on other aspects of a company’s operations, and commercial results are very much dependent on price levels. A correct or incorrect pricing policy can have a multidimensional impact on the entire functioning of a company. Each company develops its own approach to pricing. In small firms the prices are usually set by the general director. In large companies the issue of pricing as a rule is handled at the middle management level. Pricing policy is usually most influenced by managers of the distribution (sales) department, production managers, financial directors and accountants. Prior to establishing the final price, a firm must take into consideration the state regulatory burden, the level and dynamics of demand as well as the needs of wholesale and retail dealers which sell the product to the final users. Pricing methods Cost-plus method. It is necessary to ensure that there is a market demand at the proposed price (that the product/service will be purchased at this price). CP/S + M = PP/S CP/S – cost of production/provision of product or service; M – markup; PP/S – price of the product or service. Market-oriented method. It is necessary to organize the business in such a way as to ensure that costs do not exceed the calculated cost of production/provision of product/service. PC – P = CP/S PC – competitors’ price; P – profit. MANAGER’S TASKS Formulate the manager’s tasks at this stage in the planning of a business. 1. Identify the main sources of revenue for the planned business 2. Determine the average number of services to be provided to each client 3. Calculate the price of one visit 22 PART 1. OBJECT OF MANAGEMENT EXERCISE 1 Identify the company’s main sources of revenue: Item No. 1 2 3 4 5 6 7 8 9 Price Price Price Number Price per Unit of Number per Number per unit, per day, per year, measure per day month, per year rubles rubles month rubles rubles Type of work1 Tire replacement and pieces balancing Check-up and diagnostics standard services hours Electronic systems standard maintenance hours standard Oil change services hours Sale of automotive parts (as part of automotive pieces service business) standard Painting hours standard Body work hours standard Mechanical work hours Car wash pieces 350 3 1 167 100 35 000 1 200 420 000 500 4 2 083 125 62 500 1 500 750 000 700 2 1 556 67 46 667 800 560 000 500 2 972 58 29 167 700 350 000 2 000 3 5 556 83 16 667 1 000 2 000 000 400 3 1 111 83 33 333 1 000 400 000 600 2 1 167 58 35 000 700 420 000 500 2 972 58 29 167 700 350 000 100 21 2 083 625 62 500 7 500 750 000 Total 42 16 667 1 258 500 000 15 100 6 000 000 EXERCISE 2 Calculate the number of clients served and weighted average price of services provided to each client: Per year Per month Per day 3 3 3 Number of clients serviced3 5 033 419 14 Weighted average price per visit, rubles4 1 192 1 192 1 192 Complexity coefficient (number of services provided to each client per visit)2 1 2 As listed in Exercise 4 of Section 2.1 The complexity coefficient remains the same for the year, month and day 3 Number of clients served 4 = ∑services complexity coefficient The weighted average price is the same for all periods Weighted average price of one visit = 23 ∑price number of clients served PART 2. SUBJECT OF MANAGEMENT PART 2. SUBJECT OF MANAGEMENT PART 2. SUBJECT OF MANAGEMENT 24 PART 2. SUBJECT OF MANAGEMENT SECTION 4. DEVELOPMENT OF CORPORATE STRATEGY 4.1. Vision and mission GLOSSARY Mission – a sort of starting point which indicates the purpose of a company’s existence or the place of a business division in the general corporate architecture of an organization. It is a concise, internally focused statement of the reason for the organization’s existence, the basic purpose toward which its activities are directed, and the values that guide employees’ activities. (Robert Kaplan, David Norton) Vision – a picture of the future which serves as a guideline for the business’s core areas of operations as well as the role of employees participating in the realization of these corporate aims and objectives. Strategy – a roadmap of interconnected actions aimed at the ongoing fulfillment of the corporate mission and achieving the aims and objectives taking into account the organization’s interaction with external factors. COMMENTARY The mission can include a declaration of values and convictions, the products which the organization will produce or the client (market) needs which it aims to satisfy, key technologies to be used, strategic development principles as well as the organization’s internal and external policies. Detailed description of corporate mission Products or services What products or services does your organization provide? Target client categories Who are your target clients? Technology Does your business focus on the use of new or traditional technologies? Competitive advantages What unique features and strategic advantages set you organization apart from competitors? Philosophy What are the core values, aims and ethical principles of your organization? MANAGER’S TASKS Formulate the manager’s tasks at this stage in the planning of a business. 1. Determine the corporate mission. 2. Formulate a comprehensive mission statement. 3. Formulate a corporate vision. 25 SECTION 4. DEVELOPMENT OF CORPORATE STRATEGY EXERCISE 1 Describe your corporate mission: Our mission is to provide clients with high-quality technical services to ensure that they experience only positive emotions from the process of owning an automobile. EXERCISE 2 Fill out the table below for the purpose of formulating a comprehensive mission statement: Detailed description of corporate mission Products or services Our organization offers a wide range of automotive services: comprehensive diagnostics and repair of all major automotive units – motors, electrical systems, running gear, suspension systems, transmissions, diesel engines, body work, painting and much more. Target clients The owners of passenger vehicles made by Russian, Korean, Japanese, American, German, Italian and British manufacturers seeking qualified repair and maintenance services at a cost less than that offered by official dealers. Technology The use of the latest technologies ensuring the high-quality work of mechanics as well as computerize diagnostics systems providing very accurate identification of causes of malfunctioning. Competitive advantages A convenient location allowing clients to visit the automotive service at any time suitable for the client. Philosophy When using the services of this automotive service center the client receives high-quality service, qualified technical support and a guarantee on work performed. Moreover, the wait time will pass unnoticed in the comfortable waiting area which offers snacks, drinks, WiFi, television and more. We strive to ensure that a visit to the automotive service is a process which generates positive emotions for the client!!! EXERCISE 3 Formulate your corporate vision: The creation of a high-tech automotive service business which stands out for its affordable prices and excellent quality of service provided by highly qualified specialists. 26 PART 2. SUBJECT OF MANAGEMENT 4.2. Goals and objectives GLOSSARY Goals and objectives – the desired result which the organization aims to achieve through the execution of certain set of processes and using the resources necessary. Goals and objectives can be evaluated according to the SMART criteria: Specific – the goal should be clearly specified. Measurable – the goal should in some way be quantifiable. Achievable – the goal should be achievable for the specific person assigned to achieve it. Result-oriented – the goal should be focused on a result and not on a process. Time-bound – the goal should have a specific timeframe. COMMENTARY Here is a depiction of corporate goals in a hierarchical diagram: Attain a leading position on the market Finances Clients Increase the number of new clients (20 new clients each month) Increase profit by 15% over the course of the year Reduce expenses by 5% over 6 months Increase revenues by 5% per month Business processes Launch a system of online sales within 3 months Provide Implement a Introduce a Launch an quality new payment system of internet store aftersales system discounts within 3 servicing for within 3 a period of 2 with 1 month months months years Learning and growth Increase the level of automation within 6 months Organize new technology training for employees within 3 months Implement an employee motivation system within 2 months MANAGER’S TASKS Formulate the manager’s tasks at this stage in the planning of a business. 1. Formulate a corporate strategy. 2. Identify the strategic goal of the organization. 3. Build a hierarchical scheme of corporate goals based on four perspectives: finances, clients, business processes, and training & development. 27 SECTION 4. DEVELOPMENT OF CORPORATE STRATEGY EXERCISE 1 Formulate your corporate strategy: To continually attract new clientele, while transforming new clients into returning ones by providing special offers to this category of clients, as well as to sell automotive parts at prices 20% less than offered by official dealers. To expand the list of services offered through the use of the latest technologies operated by highly qualified specialists. EXERCISE 2 Build a hierarchical scheme of goals for your organization: Ensure the stable functioning of the business Finances Increase profit to 500 000 within 12 months Decrease expenses by 5% within a year Increase revenues to 2 500 000 per month within 8 months Clients Increase the number of returning clients Reduce the number of return visits due to the fault of the automotive service Business processes Raise the volume of services provided to 2000 man-hours per month Learning and growth Improve employee qualifications Develop a Acquire an system of equipment for Implement timely employee discounts and Ensure serving delivery of British-made motivation introduce within parts service automobiles system 2 months agreements within a year Ensure workplaces are properly equipped 28 PART 2. SUBJECT OF MANAGEMENT 4.3. Strategy instruments 4.3.1. PEST analysis GLOSSARY PEST analysis is an instrument for strategic analysis involving the identification and assessment of factors in the external environment which could potentially influence a company’s business in the future. The results of PEST analysis are used as a basis for strategic planning. COMMENTARY PEST analysis covers Political, Economic, Social and Technological as well as environmental factors: 1. Political factors: 4. Technological factors: 1.1. Legislation impacting the sector 4.1. R&D expenditures 1.2. State regulation of competition 4.2. State policy on scientific and technological 1.3. Employment regulations progress 1.4. Labor law 4.3. IP (intellectual property) protection 1.5. Tax policy 4.4. Emergence of new technologies 1.6. Trade policy 4.5. Speed of assimilation of new technologies 1.7. Government relations on the national level 4.6. Emergence of new materials 1.8. Government relations on the regional level 4.7. Technological developments 1.9. Government relations on the municipal level 4.8. Impact of IT (including the internet) 1.10. Political stability 4.9. Access to technologies and licenses 4.10. Lack of necessary equipment in the country 2. Economic factors: 2.1. Economic situation and trends 5. Environmental factors: 2.2. Investment climate in the sector 5.1. International and national environmental 2.3. Consumer paying capacity laws, standards and requirements 2.4. Unemployment 5.2. Environmental situation in the country 2.5. Customs duties 5.3. Environmental situation in the region 2.6. Threat of economic instability 5.4. Environmental safety 2.7. Price controls 5.5. Level of awareness of health problems 2.8. Inflation 5.6. Natural disasters typical for a certain area 2.9. GDP dynamics 5.7. Climatic conditions of a certain area 2.10. Exchange rate dynamics 5.8. Emergence of new technologies taking into account environmental factors 3. Social factors: 5.9. Expenditures on cleaning of air, water, etc. 3.1. Lifestyle changes 5.10. Healthy lifestyle movements, environmental 3.2. Values changes activism 3.3. Changes in client tastes and preferences 3.4. Company reputation and brand 3.5. Lack of qualified personnel 3.6. Demography 3.7. Changes in personal income structure 3.8. Media influence 3.9. Religious factors 3.10. Ethnic factors 29 SECTION 4. DEVELOPMENT OF CORPORATE STRATEGY MANAGER’S TASKS Formulate the manager’s tasks at this stage in the planning of a business. 1. Identify factors which have the most influence on the business of your organization. 2. Conduct a quantitative PEST analysis. 3. Compile an External Factor Analysis Summary (EFAS) based on the results of the PEST analysis. EXERCISE 1 Perform a qualitative PEST analysis, which should be done according to the following algorithm: 1. From the theoretical factors, select the factors which are the most influential for the organization of your business (no more than 5 for each group of factors). 2. Independently conduct an expert assessment of the degree of influence of each of the selected factors on the business and on the industry as a whole and record the results in columns 3 and 4 in the table below. The preferred scoring scale is from 0 to 3. 3. Determine the nature of the influence of the selected factors: a positive influence is indicated by a +1 and a negative influence indicated by a -1. 4. Calculate the significance and nature of the influence by multiplying the values from columns 3, 4 and 5 and record the product in column 6. 5. Through independent expert analysis determine the relative weight of each factor such that sum of the relative weights is equal to 1 for each group. 6. Calculate the weighted score for each of the factors – the product of the values in columns 6 and 7 in the table below. Level of Level of Positive Level of Weight of Weighted influence influence or influence factor in on on negative score score group business industry nature Factor Political factors 1 2 3 4 5 6 7 8 Legislation impacting the sector 3 3 -1 -9 0.25 -2.25 State regulation of competition 1 2 1 2 0.2 0.4 Employment regulations 2 1 1 2 0.15 0.3 Labor law 3 3 -1 -9 0.15 -1.35 Tax policy 3 2 -1 -6 0.25 -1.5 1 – Total for political factors group 30 PART 2. SUBJECT OF MANAGEMENT Continuation of table from Exercise 1 Economic factors 1 2 3 4 5 6 7 8 Economic situation and trends 3 3 1 9 0.35 3.15 Investment climate in sector 2 3 1 6 0.35 2.1 Consumer paying capacity 3 2 1 6 0.2 1.2 Unemployment 2 3 1 6 0.05 0.3 Customs duties 2 1 -1 -2 0.05 -0.1 1 – Social factors Total for economic factors group Changes in client tastes and preferences 2 3 1 6 0.25 1.5 Lack of qualified specialists 3 3 -1 -9 0.4 -3.6 Demographics 2 3 -1 -6 0.05 -0.3 Changes in personal income structure 2 2 1 4 0.2 0.8 Media influence 2 1 1 2 0.1 0.2 1 – Technological factors Total for social factors group R&D expenses 1 3 1 3 0.2 0.6 State policy on scientific and technological progress 1 2 1 2 0.2 0.4 IP (intellectual property) protection 1 2 1 2 0.1 0.2 Emergence of new technologies 3 3 1 9 0.3 2.7 Speed of assimilation of new technologies 2 3 -1 -6 0.2 -1.2 1 – Environmental factors Total for technological factors group International and national environmental laws, standards and requirements 1 3 1 3 0.15 0.45 Environmental safety 1 3 -1 -3 0.15 -0.45 Level of awareness of health problems 2 2 -1 -4 0.2 -0.8 Emergence of new technologies taking into account environmental factors 2 2 1 4 0.25 1 Healthy lifestyle movements, environmental activism 2 2 -1 -4 0.25 -1 1 – Total for environmental factors group 31 SECTION 4. DEVELOPMENT OF CORPORATE STRATEGY EXERCISE 2 Using the results of Exercise 1, write an External Factor Analysis Summary (EFAS) based on the factors influencing the business’s operations. This exercise should be carried out as follows: 1. Select the factors from column 8 in the table from Exercise 1 with the highest weighted scores and place them in the table for this exercise under Opportunities (no more than five factors). 2. Select the factors from column 8 in the table from Exercise 1 with the lowest weighted scores and place them in the table for this exercise under Threats (no more than five factors). 3. Independently determine the weight of the each of the factors so that the sum of all factors identified as Opportunities and Threats is equal to 1. 4. Independently score each of the factors on a scale from 1 to 5 and record the result in column 3 of the table below. 5. Calculate the weighted score of the factors – the product of the values in columns 2 and 3. Notes: 1. This EFAS form is used as a means for summarizing the analysis of strategic external factors. It can serve as a method for analyzing the preparedness of an organization to react to strategic external factors in the context of the expected significance of these factors for the organization’s future. 2. Both the summary score and the weighted score indicate the degree to which the organization should react to external factors. Weight Score Weighted score Economic situation and trends 0.05 3 0.15 Investment climate in the sector 0.05 2 0.10 Consumer paying capacity 0.10 4 0.40 Changes in client tastes and preferences 0.15 5 0.75 Emergence of new technologies 0.10 3 0.30 – 1.7 Factor Opportunities Summary score of opportunities Threats Legislation impacting the sector 0.15 3 0.45 Labor law 0.05 3 0.15 Tax policy 0.10 5 0.50 Lack of qualified specialists 0.15 5 0.60 Speed of assimilation of new technologies 0.10 4 0.40 – Summary score of threats Summary score 1 – – 32 PART 2. SUBJECT OF MANAGEMENT EXERCISE 3 Formulate a conclusion from the EFAS based on the factors influencing the business’s operations: As a result of the analysis performed, it is possible to identify the external factors to which the organization should be prepared to respond. Considering the expected significance of the selected factors, we can conclude that the overall level of threats (2.1) is higher than the level of opportunities (1.7). The most significant external threat is the “lack of qualified specialists” (0.60). The highest weighted score among external factors which represent opportunities was for “changes in client tastes and preferences” (0.75). 33 SECTION 4. DEVELOPMENT OF CORPORATE STRATEGY 4.3.2. Porter’s model GLOSSARY Porter’s model – a method for analyzing economic sectors and developing business strategies. COMMENTARY Analysis of the level of competition using Michael Porter’s “Five Forces of Competitive Position Analysis” takes into consideration the following external forces: 1) the bargaining power of suppliers; 2) the bargaining power of buyers (end-users); 3) the intensity of competitive rivalry; 4) the threat of new entrants; 5) the threat of substitute products or services; 6) the influence of interested groups. Barriers to entry:  Economics of Scale  Proprietary product differences  Brand identity  Switching costs  Capital requirements  Access to distribution  Absolute cost advantages: - Proprietary learning curve - Access to necessary inputs - Proprietary low-cost product design  Government policy Bargaining  Expected relation power of suppliers SUPPLIERS Determinants of supplier power:  Differentiation of inputs  Switching costs of suppliers and firms in the industry  Presence of substitute inputs  Supplier concentration  Importance of volume to supplier  Cost relative to total purchases in the industry  Impact of inputs on cost or differentiation  Threat of forward integration relative to threat of backward integration by firms in the industry NEW ENTRANTS Threat of new entrants INDUSTRY COMPETITORS INTENSITY OF RIVALRY Rivalry determinants:  Industry growth  Fixed (or storage) costs/value added  Intermittent overcapacity  Product differences  Brand identity  Switching costs  Concentration and balance  Informational complexity  Diversity of competitors  Corporate stakes  Exit barriers Bargaining power of buyers BUYERS Determinants of buyer power: Bargaining leverage: Price sensitivity:  Buyer  Price/total concentration purchases Threat of versus firm  Product substitutes concentration differences  Buyer volume  Brand  Buyer switching identity costs relative to impact on firm switching quality/ costs performance  Buyer  Buyer information profits SUBSTITUTES  Ability to  Decision backward makers’ integrate incentives Determinants of substitution  Substitute threat: products  Relative price  Pull-through performance of substitutes  Switching costs  Buyer propensity to substitute 34 PART 2. SUBJECT OF MANAGEMENT Five Forces Table Score Weighted score (1 to 3) [2 х 3] 2 3 4 1 – ∑ Force Weight 1 Force factor 1 2 3 Total The relevant factors are written out for each of the five forces and given a weight and score. The total weight of all the factors of one force is equal to 1. The factors are scored on a scale from 1 to 3 depending on the influence of the given factor on the company. The weighted score is the product of the weight and score. The weighted scores are then summed up to arrive at the weighted score for each force, which is then recorded in a separate table to provide a clear picture of the level of influence of each of the five forces. MANAGER’S TASKS Formulate the manager’s tasks at this stage in the planning of a business. 1. Determine the factors for each of the five forces which influence the company. 2. Determine the weight of the factors and score them. 3. Determine the level of influence of each of the five forces. 35 SECTION 4. DEVELOPMENT OF CORPORATE STRATEGY EXERCISE 1 Use Porter’s Five Forces of Competitive Position Analysis to assess the position of your business. Template for analysis of competitive forces using Porter’s model5 This template is comprised of 5 tables, each of which is used to assess the level of threat posed by one of Porter’s five forces of competitive position. In each of the tables the parameters are provided for assessment of the competition along with a short description of them. The assessment of the parameters is scored on a scale from 1 to 3. In order to assign a score for a parameter, simply select one of the three statements which best matches the situation and record the corresponding score (from 1 to 3). The total number of points for each table is then used to determine the level of competitive threat presented by each of the five forces. Step one: assess the competitiveness of the company’s product and the level of competition on the market 1.1 Substitutes Parameter Substitutes (price/quality) Commentary A substitute is capable of achieving the same quality at lower prices Parameter score 3 points 2 points 1 point Substitutes exist and account for large share on the market Substitutes exist but have only recently entered the market and account for small share No known substitutes 1 Total score 1 1 point Low level of threats from substitutes 2 points Medium level threats from substitutes 3 points High level of threats from substitutes 1.2 Industry competition Parameter Commentary Number of players Market growth rate 5 Parameter score 3 points 2 points 1 point The higher the number of players, the higher the level of competition and risk of losing market share High level of market saturation Medium level of market saturation (310) Small number of players (1-3) The lower the market growth rate, the higher the risk of restructuring of market share Stagnation or decline Slowing growth Rapid growth 3 1 http://powerbranding.ru/metodiki-v-marketinge/pyat-sil-konkurencii-portera/ 36 PART 2. SUBJECT OF MANAGEMENT Level of product differentiation The lower the level of differentiation, the higher the level of standardization and the higher the risk of consumers shifting between various companies on the market Companies sell a standardized product The product is standardized according to core parameters but also possess key differing features which provide additional advantages The products of different companies substantially differ from one another 1 Limitations on raising prices The lower the level of opportunity for raising prices, the higher the risk of profit loss due to growth in expenses Tough price competition, lack of opportunity to raise prices There is opportunity to raise prices but only at the same rate as growth in expenses There is always an opportunity to raise prices to cover growing expenses as well as increase profits 2 Total score 7 4 points Low level of industry competition 5-8 points Medium level of industry competition 9-12 points High level of industry competition 1.3 New entrants Parameter Commentary Economy of scale opportunities The larger the production volume, the lower the cost of materials and the lower overhead costs per item created Strong brands with a high level of consumer awareness and loyalty The stronger the existing brands on the market, the more difficult it is for new players to gain a foothold on the market Product differentiation The higher the level of differentiation, the more difficult it is for new players to enter the market and claim an unoccupied market niche 37 Parameter score 3 points 2 points 1 point Nonexistent Only certain market players have such opportunities Significant 2 No major players 2-3 major players account for 50% of the market 2-3 major players account for 80% of the market Micro-niches exist All possible market niches are occupied 3 Low level of product diversity 2 SECTION 4. DEVELOPMENT OF CORPORATE STRATEGY Market entry costs Access to distribution channels The higher the level of investment required to get started in the industry, the more difficult it is for new players to enter the market The more difficult it is to reach the target audience, the less appealing the industry is for new players Low (payback within 1-3 months of start of operations) Medium (payback within 6-12 months of start of operations) High (payback period longer than one year from start of operations) Access to distribution channels requires a moderate level of investment Access to distribution channels is limited 3 Access to distribution channels are full open 3 Government policy Readiness of existing players to lower prices Industry growth rate The government can limit or close market entry through licensing requirements, limitations on access to important raw materials, and price regulations No limitations imposed by the state The state has a The state completely limited regulates the involvement in the industry and industry’s establishes functioning limitations 3 If players are prepared to lower prices to maintain market share, then this presents a significant barrier for new entrants Existing players will not lower prices The higher the growth rate, the more eager new players will be to enter the market High and increasing Major players will not lower prices Any attempt to offer lower prices will be met by lower prices by existing players 2 Slowing Stagnation or decline 3 Total 21 8 points Low level of threats from new entrants 9-16 points Medium level of threats from new entrants 17-24 points High level of threats from new entrants Step two: Assess the threats coming from consumers 2.1 Bargaining power of buyers Parameter Commentary Share of buyers accounting for large portion of sales If a few buyers are making large-scale purchases, the company may be forced to make concessions to them Parameter score 3 points 2 points 1 point Several clients account for more than 80% of sales A small portion of clients account for approximately 50% of sales The sales volume is evenly distributed among all clients 2 38 PART 2. SUBJECT OF MANAGEMENT The less unique the company’s product, the higher the likelihood that the buyer can find a substitutes with additional risk for the buyer Aptitude to switch to substitutes The company’s product is not unique and there are fully analogous products available on the market The company’s product is partially unique, with distinctive features which are important for clients The company’s product is entirely unique and there is nothing analogous on the market 2 Price sensitivity Consumers are not satisfied with the level of quality available on the market The higher the price sensitivity the greater the likelihood that the buyer will seek a lower price with a competitor The buyer will always switch to the product with the lowest price A lack of satisfaction in quality creates latent demand which can be satisfied by new entrants or existing competitors Lack of satisfaction with the key features of the product The buyer will switch producers only if there is a significant price difference The buyer has no price sensitivity Lack of satisfaction with the secondary features of the product Full satisfaction with the product 3 2 Total 9 4 points Low level of threats of client loss 5-8 points Medium level of threats of client loss 9-12 points High level of threats of client loss Step three: Assess the threats to your business coming from suppliers 3.1. Bargaining power of suppliers Parameter Commentary Parameter score 2 points 1 point Number of suppliers The smaller the number of suppliers, the greater the likelihood of unwarranted increases in prices Small number of suppliers or monopoly Large selection of suppliers Limitations in the resources of suppliers The greater the level of limitation of supplier resources, the greater the likelihood of price growth Limitations in the volume of resources Costs incurred from changing suppliers The higher the costs of switching suppliers, the greater the threat of price growth High costs of switching suppliers 39 1 No limitations 1 Low cost of switching suppliers 1 SECTION 4. DEVELOPMENT OF CORPORATE STRATEGY Supplier priorities The lower the level of priority given to the industry by the supplier, the less attention/effort the supplier will make, which implies a higher risk of poorquality work Low priority of the industry for the supplier High priority of the industry for the supplier 1 Total 4 4 points Low level of supplier bargaining power 5-6 points Medium level of supplier bargaining power 7-8 points High level of supplier bargaining power EXERCISE 2 Using Porter’s model, identify the weighted score of each of the selected factors and then draw conclusions based on the weighted score for each of the five forces. This exercise should be completed as followed: 1. Find three factors from each of the five forces which most influence the business’s operations 2. Determine the weight for each of the selected factors 3. Score the factors 4. Find the weighted score for each of the factors 5. Determine the weighted score for each of the forces 6. Draw the appropriate conclusions Weight Score (1-3) Weighted score Existence of several suppliers 0.3 3 0.9 Quality of parts provided by suppliers 0.45 3 1.35 Cost of switching suppliers 0.25 1 0.25 1 – 2.5 Number of clients 0.4 3 1.2 Price sensitivity 0.4 3 1.2 Concentration of clients compared to concentration of services 0.2 1 0.2 1 – 2.6 Number of competitors 0.4 3 1.2 Differentiation among competitors 0.3 2 0.6 Spending on advertising by competitors 0.3 2 0.6 1 – 2.4 Force Bargaining power of suppliers Total Bargaining power of buyers Total Level of competition Total 40 PART 2. SUBJECT OF MANAGEMENT Threat of substitutes Emergence of dealers’ automotive centers working with parts supplied by clients 0.7 1 0.7 Price comparison for the new services offered by dealers’ automotive centers 0.15 2 0.3 The cost of switching to dealers’ automotive centers 0.15 2 0.3 1 – 1.3 Market entry barriers 0.5 3 1.5 Start-up costs 0.2 1 0.2 Access to suppliers 0.3 1 0.3 1 – 2 Total Threat of new entrants Total Conclusions: The most influential force is the consumers’ bargaining power, which means that particular attention should be paid to their needs. Suppliers play an important role, as without automotive parts the center will not be able to perform the services which it advertises. The activities of competitors should be monitored, including their pricing policy, in order to preserve and increase the client base. New entrants present a certain threat. In this industry there is practically no threat from substitute services. 41 SECTION 4. DEVELOPMENT OF CORPORATE STRATEGY 4.3.3. SWOT analysis GLOSSARY SWOT analysis – a strategic instrument which allows for analysis of an organization’s Strengths and Weaknesses arising from within the organization as well as the Opportunities and Threats originating outside the organization. COMMENTARY In practice several different formats can be used for performing SWOT analysis: 1. Express SWOT analysis – this is the most commonly used format and it allows for the identification of an organization’s strengths which can help to confront external threats as well as its weaknesses which may undermine its ability to deal with such threats. The express SWOT analysis format is very succinct and simple. However, this format only allows for a qualitative analysis, which in practice is not always sufficient. The express SWOT analysis matrix is as follows: Internal S – Strengths W – Weaknesses S1 Qualified personnel W1 Weak advertising policy S2 Good management W2 Poor management S3 Employee motivation W3 Lack of strategy S4 Well-developed IT and document processing W4 system Lack of supplemental services S5 Low turnover W5 Small market share S6 High quality products and services W6 High prices on products and services S7 Individual approach to clients W7 Poor internal logistics S8 Discount system W8 Lengthy process of assimilating new IT S9 Quality customer service W9 High overhead S10 Low overhead W10 Poor quality customer service External O – Opportunities T – Threats O1 Establishment of partnerships T1 Competitors acquiring advantages O2 Emergence of new technologies T2 Emergence of new competitors O3 Attraction of new clients T3 Accelerated inflation O4 Introduction of new services T4 Higher taxes O5 Departure of competitors from market T5 Worsening of the demographic situation O6 Lower inflation T6 Decline in personal income O7 Lower taxes T7 Suppliers leaving the market O8 Rise in personal income T8 Disadvantageous state policy O9 Improvement of the demographic situation T9 Economic crisis O10 State regulation of competition in the industry T10 Changes in consumer preferences 42 PART 2. SUBJECT OF MANAGEMENT 2. Composite SWOT analysis – this is a strategic instrument which encompasses indicators characterizing the organization’s operations at present and outlining prospects for the future. This format allows for quantitative assessment of factors and the development of a set of measures necessary for achieving strategic goals. A clear drawback of this approach is the difficult procedure for performing the analysis. The сomposite SWOT analysis matrix is as follows: MANAGER’S TASKS Formulate the manager’s tasks at this stage in the planning of a business. 1. Determine the strengths and weaknesses, threats and opportunities which are most relevant for your business. 2. Perform a correlational SWOT analysis for the organization. 3. Draw conclusions based on the results of the correlational SWOT analysis. EXERCISE 1 Fill out the SWOT analysis matrix according to the following algorithm: 1. Select from the theoretical materials the factors which have the most influence on the operations of your organization (no more than five for each group of factors). 2. Independently assess the degree of influence of the selected factors and record the result in the designated column in the table below. A scale from 0 to 3 is recommended for the score. Strengths (S) External Internal S1 43 S2 Qualified personnel Individual approach to each client Score Weaknesses (W) Score 3 W1 Weak advertising policy 2 2 W2 Poor management 3 S3 Discount system 2 W3 Lack of supplemental services 1 S4 High quality of service 3 W4 Small market share 3 S5 Good customer service 3 W5 High price of services 2 Opportunities (O) Score Threats (T) Score O1 O2 Establishment of partnerships Emergence of new technologies 3 T1 Competitors acquiring advantages 3 3 T2 Appearance of new competitors 2 O3 Attraction of new clients 3 T3 Higher taxes 2 O4 Introduction of new services 1 T4 Suppliers leaving the market 2 O5 Rise in personal income 3 T5 Change in consumer preferences 3 SECTION 4. DEVELOPMENT OF CORPORATE STRATEGY EXERCISE 2 Based on the results above, perform a correlational SWOT analysis of the organization. This exercise should be performed as follows: each cell of the matrix should be filled with the sum of the score of the corresponding factors from Exercise 1. For example, if in Exercise 1 the factor S 1 = 2 and the factor O1 = 1, then the cell S1 O1 in this matrix should be the sum of these two factors, i.e. 3. All of the remaining cells of the correlational SWOT analysis matrix should be filled out in the same manner. Threats (T) Opportunities (O) Strengths (S) Weaknesses (W) S1 S2 S3 S4 S5 W1 W2 W3 W4 W5 O1 6 5 5 6 6 5 6 4 6 5 O2 6 5 5 6 6 5 6 4 6 5 O3 6 5 5 6 6 5 6 4 6 5 O4 4 3 3 4 4 3 4 2 4 3 O5 6 5 5 6 6 5 6 4 6 5 T1 6 5 5 6 6 5 6 4 6 5 T2 5 4 4 5 5 4 5 3 5 4 T3 5 4 4 5 5 4 5 3 5 4 T4 5 4 4 5 5 4 5 3 5 4 T5 6 5 5 6 6 5 6 4 6 5 EXERCISE 3 Based on the results obtained in Exercise 2, analyze the most important factors influencing your organization and draw the corresponding conclusions. To complete this exercise, it is necessary to understand the following: S-O actions, which represent a growth strategy, are measures or programs which leverage the Strengths to take advantage of each Opportunity. Thus, the conclusions for the S+O group can be drawn in the following manner: Thanks to [Factor S], the business is able or has the possibility to [Factor О] W-O actions, which represent a defensive strategy, are measures or programs aimed at improving, changing or overcoming Weaknesses in order to take advantage of the Opportunities identified. Thus, the conclusions for the W+O group can be drawn in the following manner: [Factor W] hinders or is a reason preventing the realization of [Factor O] S-T actions, which represent a defensive strategy, are steps taking to appropriately use Strengths in order to prevent the realization of possible Threats. Thus, the conclusions for the S+T group can be drawn in the following manner: [Factor T] could undermine [Factor S] 44 PART 2. SUBJECT OF MANAGEMENT W-T actions, which represent a defensive strategy, are measures or programs aimed at overcoming or improving on Weaknesses in order to prevent or minimize the risk of Threats. Thus, the conclusions for the W+T group can be drawn in the following manner: [Factor W] could further worsen the situation with regard to risk of [Factor T] No. Factor S1 Qualified personnel O2 Use of new technologies W2 Poor management O2 Use of new technologies S1 Qualified personnel T1 Competitors acquiring advantages W2 Poor management T1 Competitors acquiring advantages S+O W+O S+T W+T 45 Conclusion Thanks to the existence of qualified personnel, it seems possible to take advantage of new technologies Poor management hinders the use of new technologies The acquisition of competitive advantages by competitors could lead to a decrease in number of qualified personnel Poor management could further worsen the situation if competitors acquire advantages SECTION 4. DEVELOPMENT OF CORPORATE STRATEGY 4.3.4. BCG matrix GLOSSARY BCG matrix – an instrument for strategic analysis and planning of marketing. It was created by Bruce D. Henderson, founder of the Boston Consulting Group, for analysis of the relevance of a company’s products based on their position on the market with regard to product growth and market share. Market volume – the possible volume of sales of a product or service at a given price. Relative Market Growth Rate (Cash usage) COMMENTARY Question Marks Stars Dogs Cash Cows This instrument is grounded in theory, and two concepts in particular: a product’s lifecycle and economies of scale or the learning curve. The vertical axis of the matrix represents market growth while the horizontal axis represents relative market share. The combination of these two indicators allows for the classification of products according to the four possible roles which these products can play for the company producing or selling them. Stars – high growth in sales volume and a large market share. Market share needs to be maintained or increased. The Stars produce a large amount of Relative Market Share revenue. However, despite the appeal of such products, (Cash generation) their net cash flow is rather small, as substantial investments are required to maintain the high growth rates. Cash Cows (Money Bags) – high market share but low sales growth. Cash Cows need to be carefully maintained and controled. Their appeal lies in the fact that they do not require additional investment and are capable of generating a good cash flow. The money earned here can be directed toward the development of Question Marks or the maintenance of Stars. Dogs (Lame Ducks, Dead Weight) – low growth and low market share. Such products generally are not very profitable and require a lot of attention for management. The Dogs should be disposed of. Question Marks (Wild Cats, Dark Horses, Problem Children) – low market share but high growth rates. Problem Children need to be studied. They have the prospect to become either Stars or Dogs. If there is a real opportunity that the product will move into the Stars category, then it should be kept. Otherwise, it should be disposed of. MANAGER’S TASKS Formulate the manager’s tasks at this stage in the planning of a business. 1. Develop recommendations for the organization of a company’s management using a BCG matrix based on sales volume. 2. Develop recommendations for the organization of a company’s management using a BCG matrix based on profit. 46 PART 2. SUBJECT OF MANAGEMENT EXERCISE 1 Calculate the market growth rate, relative market share and share of total revenues for each type of service (with the given organization having operated on the market for the past 4 years6). The sales volume over the past 4 years and market share of the company and of the main competitor for each type of product/service is presented in the table: Sales volume, 1000 rub. No. Type of service Market share in 2013, % 2010 2011 2012 2013 Company Top competitor 1 Tire replacement and balancing 250 300 400 420 8 50 2 Check-up and diagnostics services 420 550 630 750 2 15 3 Electronic systems maintenance 285 340 480 560 11 21 4 Oil change services 280 310 330 350 16 12 5 Sale of automotive parts (as part of automotive service business) 51 31 6 Painting 320 350 370 400 6 10 7 Body work 330 360 400 420 35 15 8 Mechanical work 270 290 320 350 14 16 9 Car wash 650 690 730 750 6 13 – – 1 200 1 650 1 860 2 000 Total 4 005 4 840 5 520 6 000 Create a BCG matrix based on the results generated in Exercise 1 by entering the relevant data into the corresponding cells of the matrix. No. Type of service Market growth rate, %7 Relative market share8 Share in company’s total revenues, %9 1 Tire replacement and balancing 105.0 0.2 7.0 2 Check-up and diagnostics services 119.0 0.1 12.5 3 Electronic systems maintenance 116.7 0.5 9.3 4 Oil change services 106.1 1.3 5.8 6 If a company has been operating on the market for more than a year, then it is possible to calculate the market growth rate and relative market share growth – the indicators used in the BCG matrix. 7 8 9 Market growth rate = 𝑅elative market share = Sales volume𝑖 Market share of 𝐭𝐨𝐩 𝐜𝐨𝐦𝐩𝐞𝐭𝐢𝐭𝐨𝐫 Sales volume𝑗 Share of service in total revenues = 47 × 100% Sales volume 𝑖−1 Market share of the 𝐜𝐨𝐦𝐩𝐚𝐧𝐲 ∑ Sales volume × 100% SECTION 4. DEVELOPMENT OF CORPORATE STRATEGY 5 Sale of automotive parts (as part of automotive service business) 107.5 1.6 33.3 6 Painting 108.1 0.6 6.7 7 Body work 105.0 2.3 7.0 8 Mechanical work 109.4 0.9 5.8 9 Car wash 102.7 0.5 12.5 Annual sales volume11, rubles. Annual profit12, rubles 2 3 EXERCISE 2 1. Calculate the input data for the BCG matrix Table 1 Input data No. Type of service10 1 1 Tire replacement and balancing 420 000 100 000 2 Check-up and diagnostics services 750 000 300 000 3 Electronic systems maintenance 560 000 200 000 4 Oil change services 350 000 105 000 5 Sale of automotive parts (as part of automotive service business) 2 000 000 900 000 6 Painting 400 000 95 000 7 Body work 420 000 110 000 8 Mechanical work 350 000 80 000 9 Car wash 750 000 450 000 6 000 000 2 340 000 Total 10 Taken from Exercise 4 of Subsection 2.1 Taken from Exercise 1 of Section 3 12 Information must be provided 11 48 PART 2. SUBJECT OF MANAGEMENT Table 2 Calculation of weighted average market growth for matrix13 Market growth rates are indicative of the maturity, level of saturation and appeal of the market on which the company is selling its goods and services. No. Market growth rate, % Type of service 1 Weighted Qualitative description of average market growth rate Market market growth (𝑐𝑜𝑙. 𝟒 > 10% = 𝐻𝑖𝑔ℎ; volume14, rate rubles 𝑐𝑜𝑙. 𝟒 < 10% = 𝐿𝑜𝑤) 𝑐𝑜𝑙.𝟐 ×𝑐𝑜𝑙.𝟑 ( ∑ 𝑐𝑜𝑙.𝟑 ) 2 3 4 5 1 Tire replacement and balancing 105.0 420 000 7.4 Low 2 Check-up and diagnostics services 119.0 750 000 14.9 High 3 Electronic systems maintenance 116.7 560 000 10.9 High 4 Oil change services 106.1 350 000 6.2 Low 5 Sale of automotive parts (as part of automotive service business) 107.5 2 000 000 35.8 High 6 Painting 108.1 400 000 7.2 Low 7 Body work 105.0 420 000 7.4 Low 8 Mechanical work 109.4 350 000 6.4 Low 9 Car wash 102.7 750 000 12.8 High – 6 000 000 – – Total 13 The example provides the weighted average market growth rate (weighted by the total volume of the market on which the company operates). The simple market growth rate can also be used in this model. 14 Market volume = Number of products × Price of products; i. e. , the market volume is the total sales volume. 49 SECTION 4. DEVELOPMENT OF CORPORATE STRATEGY Table 3 Calculation of relative market share15 Relative market share is an indicator of the competitiveness of a company’s products relative to industry peers. No. Type of service Market Market Qualitative description of Relative share of share of relative market share market share company’s top (col. 𝟒 > 1 = 𝐻𝑖𝑔ℎ; col.𝟐 services, competito ( col.𝟑 ) col. 𝟒 < 1 = 𝐿𝑜𝑤) % r, % 1 2 3 4 5 1 Tire replacement and balancing 8 50 0.2 Low 2 Check-up and diagnostics services 2 15 0.1 Low 3 Electronic systems maintenance 11 21 0.5 Low 4 Oil change services 16 12 1.3 High 5 Sale of automotive parts (as part of automotive service business) 51 31 1.6 High 6 Painting 6 10 0.6 Low 7 Body work 35 15 2.3 High 8 Mechanical work 14 16 0.9 Low 9 Car wash 6 13 0.5 Low 2. Generate a BCG matrix based on sales volume Enter the information from Table 2 and Table 3 into the appropriate cells of the BCG matrix. Sort the products/services into groups in the corresponding cells. Analysis according to sales volume allows of conclusions to be made regarding prospects for business development. If no exact data is available on market share, a simpler approach may be taken: enter 1 if the company’s share is larger than that of the top competitor; enter 0 if the company’s share is smaller than that of the top competitor. 15 50 PART 2. SUBJECT OF MANAGEMENT Table 4 BCG matrix based on sales volume (more than 10%) High Services Growth rate Sales volume Services Question Marks Stars Service 2 Service 9 Service 3 750 000 750 000 560 000 Service 5 2 000 000 Total 2 060 000 Total 2 000 000 (less than 10%) Dogs Low Sales volume Cash Cows Service 1 420 000 Service 7 420 000 Service 6 400 000 Service 4 350 000 Service 8 350 000 Total 1 170 000 Total 770 000 Low (less than 1) High (more than 1) Relative market share Table 5 Conclusions drawn from the BCG matrix based on sales volume Question Marks Stars The company does not have a sufficient number of Stars. Firstly, the existing stars need to be converted into Cash Cows. Secondly, opportunities should be The existing Services 2, 3 and 9 should be sought to convert Services 2, 3 and 9 into Stars developed as follows: create competitive (strengthen competitive advantages, develop advantages – strengthen promotion – provide knowledge about these services). If it does not seem additional support possible to develop the existing Question Marks into Stars, then new services capable of taking their place should be considered. Dogs Cash Cows The company’s first step is to decide the fate of Services 1, 6 and 8. There are two options available. Firstly, these services can be Since both of these services account for practically the eliminated. Secondly, if the market volume is same volume of sales, they should be supported large, an attempt can be made to turn them into equally. The aim is to maintain their current position. Cash Cows, in which case programs are needed to reposition or improve the services. Portfolio balance: satisfactory (3 230 000 and 2 770 000 rubles). Promising new services should be explored along with the strengthening of the position of recently launched services (Question Marks) on the market. 51 SECTION 4. DEVELOPMENT OF CORPORATE STRATEGY 3. Generate a BCG matrix based on profit Enter the information from Table 2 and Table 3 into the appropriate cells of the BCG matrix. Sort the products/services into groups in the corresponding cells. Analysis according to profit allows of conclusions to be made regarding investment opportunities. Table 6 BCG matrix based on profit High (more than 10%) Services Low (less than 10%) Growth rate Profit Services Question Marks Service 9 Service 2 Service 3 450 000 300 000 200 000 Service 5 Total 950 000 Total Profit Stars 900 000 900 000 Dogs Cash Cows Service 1 Service 6 Service 8 100 000 95 000 80 000 Service 7 Service 4 110 000 105 000 Total 275 000 Total 215 000 Low (less than 1) High (more than 1) Relative market share Table 7 Conclusions drawn from the BCG matrix based on profit Question Marks Stars In light of the fact that the services in the Question Marks group produce the same amount of profit, they can be developed equally, gradually converting them into Stars through addition investment in development. Service 5 generates the largest amount of profit for the company. Thus investment should be made in the development of this service with the aim of converting it into a cash cow. Dogs Cash Cows Services 1, 6 and 8 produce a small portion of the profit, which means that they should receive only minimal support. However, in the case that a decision is made to reposition the services, more substantial investments will be required. Since both services in the Cash Cows group produce practically the same amount of profit, but also at a level which is relatively low compared to other services only moderate support should be allocated for their support. The portfolio’s balance from the perspective of investment is good (1 225 000 and 1 115 000 rubles): profit from the cash cows can be used to support the Question Marks. At the same time the share of the illiquid services of the Dogs group is not very large. 52 PART 2. SUBJECT OF MANAGEMENT EXERCISE 3 Formulate a product strategy for each of the types of services based on the BCG matrix analysis. In the formation of the product strategy, the following solutions and principles can be used: Stars should be protected and reinforced; As the opportunity arises the Dogs should be disposed of if there are no compelling reasons to preserve them; Cash Cows should be placed under strict control in terms of capital expenditures and their excess cash flow should be transferred under the control of a top-level manager; Dogs should be closely studied to determine if a reasonable amount of investment could convert them into Stars; A combination of the Dogs, Stars and Cash Cows generates the best sales and profit performance by ensuring moderate profitability, good liquidity and long-term growth; A combination of Dogs and Stars leads to unstainable returns and poor liquidity; A combination of Cash Cows and Dogs leads to declining sales and profitability. 53 SECTION 4. DEVELOPMENT OF CORPORATE STRATEGY 4.3.5. Balanced scorecard (strategy maps) GLOSSARY Balanced scorecard – an instrument for turning a company’s mission, vision and strategy into a specific set of objectives and benchmarks allowing for measurement of progress toward the achievement of these objectives as well as the measures necessary for achieving them. In order to visually demonstrate the objectives, benchmarks and measures a tool called a strategy map is used. Strategy maps illustrate the logic of a strategy, identifying the processes, nonmaterial assets, objectives and initiatives necessary to implement a strategy or part of a strategy. COMMENTARY Robert Kaplan and David Norton, the developers of the balanced scorecard, began their collaboration in 1990 with a multi-company research project that explored new ways to measure organizational performance. The underlying presupposition of their work was that executives and employees paid attention to what they could measure and that people could not manage well what they were not measuring. Consequently, executives’ attention and efforts were overly focused on influencing short-term financial measures and insufficiently on investing in and managing intangible assets that provided the foundation for future financial success. Kaplan and Norton believed without an improved performance measurement system it is impossible to development mobilize such intangible assets, which inevitably leads to forfeiture of major opportunities for value creation. Their project resulted in an article published in the Harvard Business Review in 1992 titled “The Balanced Scorecard – Measures that Drive Performance”. This concept generated great resonance in the business world and the Balanced Scorecard (BSC) continued to be developed not only by the authors but also by practicing managers of all level as well as in academic studies around the world. According to the BSC concept, financial metrics remain the ultimate outcome measures for company success but they are supplemented with metrics from three additional perspectives – customer, internal business processes, and learning and growth – which are key success factors and drivers of future financial results. A key element of the BSC is strategic initiatives which represent real actions and/or action plans to implement a strategy and achieve strategic goals. In essence, strategic initiatives are a list of measures to be taken in order to achieve a strategic result, i.e., the tactical steps for executing a strategy. In order to provide visual and informative depiction of the Balanced Scorecard, in the 1990s Kaplan and Norton introduced the concept of a strategy map for the BSC. This map illustrates the business’s activities not only in terms of financial results but also across all four perspectives included in the BSC: finance, customer, internal business processes, and learning and growth. These four perspectives encompass the core business architecture of an organization. 54 PART 2. SUBJECT OF MANAGEMENT Example of corporate strategy map Learning and growth Business processes Clients Finance Corporate strategy map Reduce expenses by 5% over 6 months Increase profits by 15% within 1 year Increase revenues by 5% each month Percent decrease in expenses Profit Revenues Provide quality aftersale servicing Increase number of customers Implement discount system within 1 month Percent of regular customers Percent increase in client base Percent decrease in expenses Launch payment system within 3 months Launch online sales system within 3 months Launch internet store within 2 months Launch expenses Total costs of ownership Launch expenses Organize new technology training for employees within 3 months Increase the level of automation within 6 months Improve the system of motivation within 5 months Expenses on employee training Percent of automated processes Percent of satisfied employees MANAGER’S TASKS Formulate the manager’s tasks at this stage in the planning of a business. 1. Determine the corporate strategy. 2. Determine the organization’s objectives according to the four perspectives: financial, customer, business process, and learning and growth. 3. 55 Determine the benchmarks for measuring the degree of achievement of the objectives. SECTION 4. DEVELOPMENT OF CORPORATE STRATEGY EXERCISE 1 Create a strategy map for the selected strategy: Learning and growth Business processes Clients Finance Corporate strategy map of the automotive service center Reduce expenses by 5% within 1 year Increase profit to 500 000 per month within 12 months Increase revenues to 500 000 within 8 months Percent decrease in expenses Profit Revenues Decrease the number of return visits due to the center’s fault Increase number of customers Increase number of regular customers Develop a system of discounts and introduce service agreements Number of return visits due to the center’s fault Percent increase in client base Percent of return customers Number of customers signing service agreements Raise the volume of services provided to 2000 man-hours per month Acquire equipment for serving Britishmade automobiles within a year Ensure timely delivery of parts Number of manhours per month Expenses on equipment Percent of parts ordered on time Ensure workplaces are properly equipped Improve employee qualifications Implement an employee motivation system within 2 months Cost of a workplace Expenses on employee training Percent of satisfied employees 56 PART 2. SUBJECT OF MANAGEMENT SECTION 5. ARCHITECTURE OF MANAGEMENT PROCESSES 5.1. Modelling of business processes GLOSSARY Business process – the logical sequence of actions which use a specified set of resources with the aim of achieving a measureable result. COMMENTARY The process of value creation is described as a sequence of actions beginning with the receipt of an order from the client to the delivery of requested product/service to the client. The diagram below presents certain sub-processes which can be part of the larger chain of the customer service process. Accept order Deliver product or service Write up order Client Receive advanced payment Accept payment Monitor quality Begin producti on or work process MANAGER’S TASKS Formulate the manager’s tasks at this stage in the planning of a business. 1. Identify the main subprocesses of the customer service business process. 2. Determine the sequence of execution of these subprocesses. 57 SECTION 5. ARCHITECTURE OF MANAGEMENT PROCESSES EXERCISE 1 Create a model of the value creation process: Acceptance of order Diagnostics Report to client on problems and time of repair work Determination of parts costs Client approval of price of work Order write-up Receipt of partial payment from client Transfer of automobile to repair station Completion of repair work Quality control review Signing of act of completion and issue of invoice Receipt of payment from client Turnover of automobile 58 PART 2. SUBJECT OF MANAGEMENT 5.2. Core and auxiliary business processes GLOSSARY Core processes – processes which reflect the fundamental business of the company, i.e., those which create products or provide services for the consumer, external or internal. Management processes are aimed at the management and development of the core processes. When modelling business management systems it is usually assumed that that there should be no more than 7±2 core processes and no more than 4±2 auxiliary and management processes, respectively, as it is difficult for an executive to effectively comprehend and, consequently manage more than 7-9 objects of management simultaneously. Thus the total number of business processes should be no more than 15-20, with 25 being the absolute maximum. Management support processes provide support to management processes. Auxiliary processes (service processes) ensure the functioning of core processes and most of them are typical for businesses of various industries (equipment maintenance, administrative functions, etc.). COMMENTARY Chief accountant Shop supervisor Business process: accounting and bookkeeping Business process: equipment maintenance A decision-maker is assigned responsibility for each of the processes. The diagram to the left provides an example of specific business processes and the designated decision-maker responsible for the processes’ execution. Connectivity of business processes Management processes (marketing, sales, logistics, finance, etc.) Subject of management Corporate management system Object of management Value creation process Management support processes (HR, informational support, legal support, security, etc.) Core business processes (production management, procurement, delivery, etc.) Auxiliary processes (equipment maintenance and repair, heating, electrical supply, water supply, etc.) MANAGER’S TASKS Formulate the manager’s tasks at this stage in the planning of a business. 1. Identify the senior-level business processes from the four groups. 2. Identify the organization’s production and management personnel. 3. Determine which decision-makers are responsible for which business processes. 59 SECTION 5. ARCHITECTURE OF MANAGEMENT PROCESSES EXERCISE 1 Determine the executive-level business processes. Management processes Management of sales Management of production processes Provision of production personnel Management support processes Documentation management Legal support Risk management Financial management Provision of management personnel Core processes Procurement of materials and parts Performance of repair work Auxiliary processes Accounting Equipment maintenance Security Administrative issues 60 PART 2. SUBJECT OF MANAGEMENT EXERCISE 2 Identify the workplaces of the production personnel on the map: Tire service station Body work station Painting booth Worker Worker Worker Employee Area (parts storage, staff room, shower) Worker Worker Worker Washing station Worker Worker Janitor Toilet Leisure area Офис 14,2 мм x 6,3 мм EXERCISE 3 Identify the workplaces of the office workers on the map: Tire service station Body work station Painting booth Worker Worker Worker Employee Area (parts storage, staff room, shower) Worker Worker Worker Washing station Worker Worker Janitor Toilet Офис General director 61 Chief accountant Customer relations manager Master Accountantcashier Leisure area 14,2 мм x 6,3 мм SECTION 5. ARCHITECTURE OF MANAGEMENT PROCESSES EXERCISE 4 Identify the persons responsible for subprocesses: Acceptance of order Diagnostics Report to client on problems and time of repair work Determination of parts costs Client approval of price of work Order write-up Receipt of partial payment from client Transfer of automobile to repair station Completion of repair work Quality control review Signing of act of completion and issue of invoice Receipt of payment from client Turnover of automobile Manager Master Master Manager Manager Manager Accountant Manager Worker Master Manager Accountant Manager 62 PART 2. SUBJECT OF MANAGEMENT EXERCISE 5 Outline the management processes and management support processes and indicate the employees responsible for the execution of these processes: Management processes Customer relations manager Customer relations manager General director Management of sales Management of production processes Provision of production personnel Management support processes General director Documentation management General director General director Legal support Provision of management personnel General director Risk management General director Financial management EXERCISE 6 Outline the core processes and auxiliary processes and indicate the employees responsible for the execution of these processes: Core processes Master Procurement of materials and parts Master Performance of repair work Auxiliary processes Chief accountant Accounting 63 Master Equipment maintenance Security Security General director Administrative issues SECTION 5. ARCHITECTURE OF MANAGEMENT PROCESSES 5.3. Justification of personnel needs GLOSSARY Personnel management — the targeted efforts of management, as well as directors and specialists of the personnel management department, to develop a personnel policy concept and strategy as well as methods for managing personnel. COMMENTARY The effective functioning of a business is highly dependent on the organization of work with personnel. This includes training, selected and placement of personnel, improvement of their qualifications, organization and equipping of workplaces, selection of the most rational methods and approaches for performing work, provision of conditions which correspond to the requirements of business ethics, sanitary norms, labor health and safety at every workplace. Multiple sources can be used to find personnel: job centers, internal resources, commercial recruiting agencies, job announcements, announcements by job seekers in the internet and press, specialized websites, educational institutions, etc. Office personnel generally includes such positions as: general director (director), deputy general director (director), chief engineer, chief mechanic, chief economist, secretary, chief accountant, deputy chief accountant, senior accountant, bookkeeper, lawyer, etc. Positions in production departments include: customer service head, service manager, workshop supervisor, senior master, master, section foreman, head of computing center, diagnostics engineer, etc. When assessing the number of personnel needed, one approach is to focus on employee workload, while keeping in mind employment conditions. For example, employees should be actively engaged in work no less than 80% of the time. If the amount of useful engagement time is less, then the number of employees can be decreased; if it is more, then the number can be increased. Planning for personnel needs is based on information about existing and planned workplaces, plans for administrative and technical measures, the staffing schedule and plans for filling vacancies. MANAGER’S TASKS Formulate the manager’s tasks at this stage in the planning of a business. 1. Determine the organization’s personnel needs and select qualified personnel. 2. Establish the salary levels for employees. 3. Develop a system of material and immaterial motivation for personnel. 64 PART 2. SUBJECT OF MANAGEMENT EXERCISE 1 Identify the personnel needs of the organization: Number of people Recruitment source Monthly salary, rubles Annual expense, rubles Director, university degree 1 own resources 60 000 720 000 Chief accountant, university degree 1 job center 40 000 480 000 Bookkeeper, university degree 1 job center 30 000 360 000 Sales manager, specialized secondary education 1 job center 30 000 360 000 Guard, secondary education 2 job center 20 000 480 000 Master mechanic, university degree 1 advertisement 30 000 360 000 Worker, specialized secondary education 8 advertisement 25 000 2 400 000 Janitor, specialized secondary education 1 advertisement 15 000 180 000 Total 14 395 000 5 340 000 Position, qualification 65 SECTION 5. ARCHITECTURE OF MANAGEMENT PROCESSES 5.4. Organizational structure GLOSSARY Business organizational structure – the organizational structure entails the composition, subordination, coordination and delegation of work among business divisions and levels of management between which relationships are established with regard to power of authority, lines of command and information flow. Span of control – the optimal number of workers subordinate to one supervisor. Based on various sources the optimal number is 7 to 12 subordinates. COMMENTARY 5.4.1. Linear-functional organizational structure The linear structure is such that each business division is supervised by a director who is personally responsible for all management functions of the subordinate unit and employees. Line manager Line manager Line manager The director’s decisions are passed down along the line of command and must be followed by Worker Worker Worker subordinates. The director, in turn, reports to the next director up. The linear structure is as a rule used by small and mid-sized enterprises engaged in simply businesses without much cooperation and coordination between business divisions. Senior-level director The functional structure General director implies specialization in the execution of specific management functions, which are Production Financial Marketing Sales director carried out by specially director director director designated functional business divisions (or functional executives). The functional organizational structure is based on the horizontal separation of management tasks. The instructions by functional business divisions (within their competencies) must be followed by the production business divisions. The functional structure is commonly found in large companies. General director Production director Sales director Financial director Marketing director Line manager Line manager Line manager Line manager Worker Worker Worker Worker The linear-functional structure allows a business’s functional services to prepare the necessary information for the linear directors to make informed decisions about production and management issues which arise. The linear-functional structure is used in the majority of companies. 66 PART 2. SUBJECT OF MANAGEMENT 5.4.2. Project management organizational structure The project management structure is a temporal management structure established for the purpose of achieving a specific objective. The core idea is to gather into one team the company’s most qualified employees in order to carry out a complex project. Once the project is complete, the team is disbanded. One form of project management is the creation of a special business division (project team) working on a temporary basis, i.e. for as long as necessary to complete the given project. The group usually includes various specialists, including management specialists. The project manager is given authority to oversee all aspects of the project, from the project planning and work schedule to the spending of the allocated funds and material compensation and rewards for employees. Management Production Procurement Sales Project management Mechanical work Inventory planning Advertising Assembly Purchases Delivery Such structures can be created in centralized and decentralized formats. In the decentralized format the functional and auxiliary business divisions are assigned specific roles within the projects and report to the project manager, whereas in the centralized format they play general support roles for all projects and report to the general director. Project managers establish the substance and sequence of the work performed while the heads of function business divisions are responsible for the proper and timely execution of the work. Such an organizational structure can be used in separate organizations as well as within the management systems of organizations. MANAGER’S TASKS Formulate the manager’s tasks at this stage in the planning of a business. 1. Determine the span of control in the organization. 2. Draw up the organizational structure of the business. 3. Develop a project management structure for executing a specific project. 67 SECTION 5. ARCHITECTURE OF MANAGEMENT PROCESSES EXERCISE 1 Formulate the linear-functional organizational structure. General director Customer relations manager Chief accountant Master Worker Security Accountant Janitor Linear relationship Functional relationship EXERCISE 2 Formulate the project management structure for developing new products/services General director Customer relations manager Master Accountant Worker 1 Project director Project manager External participant of project team Functional relationship Linear relationship 68 PART 2. SUBJECT OF MANAGEMENT 5.5. Employee regulation documentation GLOSSARY Business unit – a dedicated structure which performs a specific role (production, service provision, etc.) in the business with its own objectives, functions and responsibilities. A business unit can function independently (such as a branch or rep office) or lack the features of a stand-alone organization (internal business division). Business unit regulations – the corporate document stipulating the how the business unit is created, its legal and administrative position within the structure of the organization, its objectives and functions, its rights and relationships with respect to other business units of the organization, the responsibilities of the business unit on the whole and its director in particular. COMMENTARY Since there are no laws regulating what business unit regulations should include or how they should be developed, each business decides for itself which organizational issues should be regulated in these corporate documents for each specific business unit. According to the Job Qualification Reference Guide for Managers, Specialists and Other Workforce Positions of the Russian Ministry of Labor, the task of developing business unit regulations should be undertaken by the labor organization and compensation department. Seeing that far from every company has such a department, this task is usually assigned to the personnel service, which often is the initiator of the introduction of such regulations. The legal department can also be engaged in the process of developing such documents. If the company has developed a standard policy for internal corporate documents, then the business unit regulations can be developed directly by the business unit itself, in which case the head of the business unit would be responsible for the development of the regulations. The regulations are endorsed by the respective business unit head and approved by the general director of the organization. Organizations which consist of several business units are obliged to develop business unit regulations which identify the objectives, functions, rights and responsibilities of each business unit. Business unit regulations are not mandatory from the point of view of labor law; however, these regulations are necessary for assigning roles to business units and employees within an organization. The requirements with regard to the content of the business unit regulations can be stipulated in an internal corporate document (for example, as a corporate standard policy). If a business does not have such a document, then a template for such regulations can be used. In order to avoid disagreements over areas of authority and responsibility for one function or another, it is important to carefully consider the content of the business unit regulations and include as much detail as possible. MANAGER’S TASKS Formulate the manager’s tasks at this stage in the planning of a business. 1. Identify the place of a business unit in the organizational structure. 2. Consider the functions of the business unit. 3. Determine the nature of the business unit’s relationships with other business units in the organization. 69 SECTION 5. ARCHITECTURE OF MANAGEMENT PROCESSES EXERCISE 1 Develop the general provisions of the business unit regulations (for example, for the accounting department). The general provisions identify the legal status of the business unit and establish the reporting relationship of the unit to a specific position. The Accounting Department (“Unit”) is a business unit of the company. The Accounting Department is part of the company. The Accounting Department is created and eliminated by a decision of the General Director. The structure and staff of the Unit is approved by the General Director in accordance with the objectives and volume of work corresponding to the company’s strategic objectives and plans. The employees of the Unit are appointed to and removed from their positions in accordance to the procedure stipulated in the official job descriptions. Director of business unit: The Unit is the headed by the Chief Accountant, who reports to the General Director. Documentation: In its work the Accounting Department is guided by the following routine regulatory-procedural documentation: Agreements Expense budget Development strategy As well as: Administrative documents These Regulations Other procedural, instructional and normative documents regulating the work carried out by the Unit Rights: The rights of employees of the Unit are established in their official job descriptions and legislation of the Russian Federation. Responsibilities: The Chief Accountant is fully responsible for the quality and timeliness of the aim and objectives outlined in these Regulations. The degree of responsibility of other employees of the Accounting Department is stipulated in their official job descriptions. 70 PART 2. SUBJECT OF MANAGEMENT EXERCISE 2 Develop the organizational structure section of the business unit regulation (for example, for the Accounting Department). This section includes the staffing chart and organizational diagram of the business unit. 1. Staffing chart No. 1 Business unit Accounting Department Total number of employees, including: Position Number of staff Accountant 3 Chief Accountant 1 4 Directors 1 Specialists 3 2. Organizational diagram Accounting department Chief accountant Accountant EXERCISE 3 Develop the business unit objectives for the business unit regulations (for example, for the Accounting Department). The main business functions of the Accounting Department are described in this section. 1. Business processes of the unit. In accordance with the established objectives, the business unit fulfills the following business processes:  A7 Financing of operations and settlement of accounts  A7.1 Formation of the income and expense budget  A7.2 Control over revenues 71 SECTION 5. ARCHITECTURE OF MANAGEMENT PROCESSES     A7.3 Calculation of payments due A7.4 Formation of a budget for payments A7.5 Settlement of payments A7.6 Compilation of financial reporting 2. Business processes executed by employees of the business unit. Employees of the Accounting Department execute the following business processes: No. Process Employee 1. A1 Strategy and business development Chief Accountant 2. A1.4 Development of normative and procedural documentation Chief Accountant 3. A4.2.1 Project feasibility studies Accountant 4. A4.2.2 Technical working design and project analysis Accountant 5. A4.2.3.3 Construction and installation work Accountant 6. A4.2.4 Formation of administrative documentation Accountant 7. A4.2.5 Start-up and set-up work Accountant 8. A4.3.1 Project inauguration Accountant 9. A4.3.3 Project close-out Accountant 10. A6.4.5 Payment of invoices Accountant 3. Other tasks and functions.  The business unit keeps account of primary documentation for business processes and procedures in accordance with corporate norms and procedures regulating internal audit.  Organizes accounting for the economic and financial activities of the business.  Compiles full and accurate information on the company’s operations and its financial situation.  Provides the necessary financial information to internal and external stakeholders in compliance with Russian law.  Exercises control over the economic use of material, labor and financial resources for the sake of protecting corporate property.  Establishes an accounting policy in accordance with legislation on corporate accounting and with due regard for the structure and unique features of the company’s operations and the need to ensure its financial sustainability.  Ensures proper inventory of corporate property.  Monitors the execution of economic transactions. 72 PART 2. SUBJECT OF MANAGEMENT EXERCISE 4 Develop the section on interaction with other business units and external parties of the business unit regulations (for example, for the Accounting Department). The section defines working relationships with other services and departments on organizational and business issues. 1. Incoming documents, information and material assets. The Accounting Department receives documents, information and material assets from the following business units: Sales Department: Agreements Development strategy Procurement Department: Agreements Instrument certificates Receipt vouchers Quality certificates for material assets Commercial invoices Consignment notes from suppliers Shipping documents The Accounting Department receives documents, information and material assets from the following employees and external parties: Senior Engineer: Acceptance acts and commercial invoices Reports of project feasibility studies Technical working designs Specialists in responsible for commissioning work: Commissioning documentation Project managers: Commissioning acts Acceptance acts and commercial invoices Acceptance acts for start-up and set-up work Project acceptance acts Project completion acts Agreements 73 SECTION 5. ARCHITECTURE OF MANAGEMENT PROCESSES Administrative documentation Reports on construction and installation operations Reports on start-up and set-up work Project plans Turn-over documentation Technical working designs 2. Outgoing documents, information and material assets. The Accounting Department delivers documents, information and material assets to the following business units: Engineering Department: Budget for payments Personnel Department: Budget for payments Sales Department: Budget for payments Procurement Department: Budget for payments The Accounting Department provides documents, information and material assets to the following employees and external parties: Project teams: Budget for payments Partners: Money 3. Composition of sets of objects. No. 1. Set of objects Acceptance acts and commercial invoices Objects in the set Acceptance acts Commercial invoices 74 PART 2. SUBJECT OF MANAGEMENT 4. Composition of roles of employee participating in the interaction. No. 1. 2. 75 Role People performing acceptancedelivery work Project team Subject Senior engineer Business unit Company Work Delivery work Client Acceptance work Government oversight bodies Acceptance work Master Company Delivery work Installer Installation department Delivery work Head of installation department Installation department Delivery work Project manager Company Delivery work Senior engineer Company Project documentation Master Company Installation work Installer Installation department Installation work Head of installation department Installation department Installation work Project manager Company Project management SECTION 5. ARCHITECTURE OF MANAGEMENT PROCESSES 5.6. Responsibility matrix as a management tool GLOSSARY Responsibility matrix – a matrix determining which employees are responsible for the execution of which business processes as well as which other employees are engaged as participants in the given business processes. COMMENTARY The responsibility matrix is constructed such that the rows indicate the business processes while the columns indicate the positions. The employee responsible for the process is indicated by an R while an employee participating in the process is indicated by a P. Processes Positions Manager Acceptance of order Master R Diagnostics R Positions Sales management Accountant Processes Manager When creating a responsibility matrix for top-level management and auxiliary processes, as a rule, only the employees responsible for the given process are indicated. R Accounting R MANAGER’S TASKS Formulate the manager’s tasks at this stage in the planning of a business. 1. Formulate the responsibility matrix for top-level processes. 2. Identify the employees responsible for and the employees participating in the execution of business processes. 3. Formulate the responsibility matrix for the customer service business process. 4. Identify the employees responsible for and the employees participating in the execution of business processes. 76 PART 2. SUBJECT OF MANAGEMENT EXERCISE 1 Create a responsibility matrix for the customer service process: Processes Positions Acceptance of order Manager Master Accountant Worker R Diagnostics R Report to client on problems and time of repair work R P Determination of parts costs R P Client approval of price of work R Order write-up R Receipt of partial payment from client P Transfer of automobile to repair station R P P R P P Completion of repair work P R Quality control review R P Signing of act of completion and issue of invoice R Receipt of payment from client P Turnover of automobile R P R P EXERCISE 2 Management of finances Management of production processes Management of sales Management of personnel Management of document flow Management of risks Legal support Procurements of materials and parts Repair work Accounting Equipment maintenance Security Administrative issues 77 P R Janitor Security P R P P P P P P P P P R P R R P P P Accountant P Worker P P Master R R P R R R R P Client Service Manager Positions Chief Accountant Processes General Director Create a responsibility matrix for the top-level business processes: P P R P P P P P P P P P P P R P P P SECTION 6. RATIONALE FOR FINANCIAL RESULTS SECTION 6. RATIONALE FOR FINANCIAL RESULTS GLOSSARY Financial plan – a document which outlines the company’s pathway to achieving its financial aims with consideration of projected revenues and expenses. Present value (PV) – the estimated current value of future income received over a span of time discounted with regard to change in the value of money over the given period. Net present value (NPV) – the discounted value of a project calculated as the sum of discounted net cash flows received in each period throughout the lifecycle of a project. Discount rate – the rate used to discount future revenue flows to arrive at the present value. COMMENTARY In order to calculate the PV for a specific period, the revenue for the period should be divided by (1 + discount rate). For example: Annual income totals 1 000 000 rubles. The discount rate is 10%. Thus the Present Value is calculated as follows: PV = 1 000 000 / (1+0.1) ≈ 909 091 The NPV is calculated as follows: 𝑁 𝑁𝑃𝑉 = ∑ 𝑡 𝐶𝐹𝑡 − 𝐼𝐶 (1 + 𝑖)𝑡 where, CF – cash flow (net income per year); IC – invested capital; i – discount rate; t – time in years. Thus having calculated the PV for each period, it is possible to calculate the NPV as follows: NPV = (PV1 + PV2 + … + PVn) - IC MANAGER’S TASKS Formulate the manager’s tasks at this stage in the planning of a business. 1. Determine the projected income for a specific period of time. 2. Calculate the Net Present Value of the project. 3. Analyze the parameters of the project in the case that certain input parameters are changed. 78 PART 2. SUBJECT OF MANAGEMENT EXERCISE 1 Calculate the Present Value for 4 years. Projected annual income in the first year = 6 000 000 rubles Projected annual income in the first year = 7 000 000 rubles Projected annual income in the first year = 8 000 000 rubles Projected annual income in the first year = 8 000 000 rubles Discount rate = 12% PV1= 6000000 / (1 + 0,12) = 5357143 PV2= 7000000 / (1 + 0,12)2 = 5580357 PV3= 7000000 / (1 + 0,12)3 = 4982206 PV4= 8000000 / (1 + 0,12)4 = 5085823 EXERCISE 2 Calculate the Net Present Value of the project based on this 4-year period. Expenses on planning, construction and repairs = 6 000 000 rubles Expenses on production equipment = 3 000 000 rubles Expenses on office equipment = 2 000 000 rubles Marketing expenses = 500 000 rubles Expenses on materials = 1 000 000 rubles Other expenses = 1 500 000 rubles Total: total capital expenses on the project 14 000 000 rubles NPV = (5357143 + 5580357 + 4982206 + 5085823) – 14000000 = 7005529 EXERCISE 3 Calculate the impact on the NPV of a 15% decline in projected cash flow. PV1= (1-0,15) * 6000000 / (1 + 0,12) = 0,85 * 6000000 / 1,12 = 4553571 PV2= (1-0,15) * 7000000 / (1 + 0,12)2 = 0,85 * 7000000 / 1,25 = 4760000 PV3= (1-0,15) * 7000000 / (1 + 0,12)3 = 0,85 * 7000000 / 1,41 = 4219858 PV4= (1-0,15) * 8000000 / (1 + 0,12)4 = 0,85 * 8000000 / 1,57 = 4331210 NPV = (4553571 + 4760000 + 4219858 + 4331210) – 14000000 = 3864639 Change in NPV: |NPVnew – NPVinitial|/NPVinitial*100% = |3864639 – 7005529|/7005529*100% = 45% Thus NPV declined by 45% as a result of the 15% decline in net cash flow. 79 SECTION 7. INFORMATIONAL SUPPORT FOR MANAGEMENT SECTION 7. INFORMATIONAL SUPPORT FOR MANAGEMENT GLOSSARY The information system (IS) collects, processes, stores, analyzes and distributes information for specific purposes. The IS consists of both the incoming information (data, instructions) and outgoing information (reports, calculations). The purpose of a corporate information system is to produce information needed by the company and create an informational and technological environment for managing such information. The information systems of modern companies are complex systems which include a wide variety of computer platforms, operating systems and network architecture as well as various software suites capable of performing various tasks. COMMENTARY It is practically impossible to imagine the execution of business process without the use of various information systems which help automate business processes. Major companies use certain systems which cost tens and even hundreds of millions of rubles to purchase and operate. The implementation timeframe for such projects can reach several years. Small business as a rule uses ready-made solutions which provide automation for 1 to 50 workplaces and cover all of the basic and auxiliary processes as well as certain management processes. The cost of such solutions starts from 10 000 rubles. Modern business is continually coming up with new demands for their information systems. Initially many companies employed chaotic approaches to automation – the automation of certain parts of business processes. As a result of such automation, problems emerge one after the other, with each problem requiring resources for solutions. Meanwhile the company accumulates a collection of unconnected and unintegrated computer programs lacking a common information base, among other things. Partial automation of a business process entails the separation of specific part of the process and providing it with the information systems it requires. This approach is not a very expensive and allows for the automation of isolated functional subdivisions. At the same time problems arise in the integration of the solutions of different offices and departments within the company. Most companies do not have the resources from the start to implement an information system which would encompass all business processes, which means that only key business processes are usually selected for automation. Another approach which is becoming increasingly prevalent is the comprehensive automation of business processes base on specially developed IT strategy. This approach entails the development of a strategy for assimilating information technologies which are aligned with the organization’s objectives. Information systems are a critical component for modern enterprises. They should provide for the effective functioning of business models developed in correspondence to the market’s needs and the business environment in which the organization functions. MANAGER’S TASKS Formulate the manager’s tasks at this stage in the planning of a business. 1. Identify the business processes which should be automated. 2. Consider the possible solutions for automating these business processes. 3. Compare the total costs of owning and operating an IT system with the organization’s available resources. 4. Select the most appropriate solution available. 80 PART 2. SUBJECT OF MANAGEMENT EXERCISE 1 Select an information system for automation of the organization’s management processes. The table below lists three types of IT solutions for automation of business processes, as well as their costs, number of functional modules, number of automated workplaces and the cost of technical support. Rank the solutions according to their suitability for business needs (on a scale of 1 to 3) and add up the ranks for each attribute. The solution with the lowest total score is the optimal choice. Cost of No. Information system Functional modules Automated Cost of technical workplaces maintenance Score acquisition sum Quantit Rubles Rank Quantity Rank Rank Rubles Rank y 1 Solution by freelance IT developers 10 000 1 1 3 1 3 none 3 10 2 1C: Enterprise 30 000 2 12 1 6 2 6 000 1 6 3 Specialized information system 120 000 3 6 2 12 1 15 000 2 8 EXERCISE 2 Provide the rationale for your decision. For the automation of the business processes of the automotive service, the most appropriate solution is the 1C: Enterprise system, as the total cost of ownership is less than a specialized solution while the functionality and number of workplaces are sufficient for automation of the business processes. The solution provided by freelance programmers is not suitable due to its limited functionality and the lack of technical support. 81 SECTION 8. LEGAL FRAMEWORK FOR MANAGEMENT SECTION 8. LEGAL FRAMEWORK FOR MANAGEMENT 8.1. Selection of the legal and organizational format of the business GLOSSARY Sole proprietor (individual entrepreneur) – a person registered as an entrepreneur and doing business without forming a legal entity, the head of the family farms [Russian Tax Code] Limited liability company – a company created by one or several people and whose charter capital is divided in parts; the owners are not liable for the company’s obligations and their risk from losses incurred by the LLC is limited to their share in the charter capital of the company [Federal Law on Limited Liability Companies]. Joint-stock company – a commercial entity whose charter capital is divided among a specified number of shares, which certify the rights of the shareholder with regard to the company. Shareholders are not liable for the company’s obligations and their risk from losses incurred by the company is limited to the face value of their shares [Federal Law on Joint Stock Company]. Open joint-stock company – a joint-stock company whose shareholders can sell shares without obtaining approval from other shareholders [Russian Civil Code]. Closed joint-stock company – a joint-stock company whose shares are distributed among its founders or a specified group of shareholders. Shareholders of a closed joint-stock company have the preemptive right to acquire shares put up for sale by other shareholders of the company [Russian Civil Code]. Noncommercial organization – an organization which does not aim to make a profit from its operations and does not distribute income among its participants [Federal Law on Noncommercial Organizations]. COMMENTARY The main regulatory and legislative acts governing the operations of organizations are: − Russian Civil Code (Part 1) − Russian Tax Code (Part 1) − Russian Federal Law on Limited Liability Companies − Russian Federal Law on Joint-Stock Companies − Russian Federal Law on Noncommercial Organizations MANAGER’S TASKS Formulate the manager’s tasks at this stage in the planning of a business. 1. Analyze the existing legal formats for organizing a business. 2. Determine the advantages and disadvantages of each format with regard to the business in questions. 3. Select the most appropriate legal format. 82 PART 2. SUBJECT OF MANAGEMENT EXERCISE 1 Select the most suitable legal format: Sole proprietor Limited liability company Open joint-stock company Closed joint-stock company Noncommercial organization Other: EXERCISE 2 Provide the rationale for your selection of this legal format: Due to the fact that the organization is just being created, during the first stage the choice of the sole proprietor format is also possible. 83 SECTION 8. LEGAL FRAMEWORK FOR MANAGEMENT 8.2. Registration GLOSSARY The charter capital of limited liability company consists of the nominal value of the participants’ shares (interest). The charter capital should be no less than 10 000 rubles [Federal Law on Limited Liability Companies]. The minimal size of the charter capital of an open joint-stock company should also be no less than one thousand times the minimal legal wage on the date of the registration of the company [Federal Law on Joint-Stock Companies]. The charter capital of a joint stock company consists of the nominal value of the company’s shares acquired by the shareholders. This value represents the minimum amount of funds guaranteeing the interest of the company’s creditors. It cannot be less than the amount stipulated in the Law on Joint-Stock Companies [Russian Civil Code (part 1)]. The corporate charter is a registered and officially approved document which represents a set of provisions and rules governing the operations of the legal entity, determining its structure, constitution, types of business operations, relationships with other parties and government bodies, rights and obligations [B. A. Raizberg, L. Sh. Lozovsky, E. B. Starodubtseva. Modern Dictionary of Economics. – Moscow: INFRA-M, 2006]. The Simplified Taxation System provides exemption from corporate profit tax and property tax. Organizations operating under the Simplified Taxation System are not subject to the Value-Added Tax (VAT) with the exception of VAT on imported products [Russian Tax Code (part2)]. COMMENTARY The key legislative acts governing the operations of most legal entities which detail the list of documents necessary for registration, interaction with the tax inspectorate and the procedure to registering an organization are: − The Federal Law on State Registration of Legal Entities and Sole Proprietors; − The Federal Law on Limited Liability Companies; − The Federal Law on Joint-Stock Companies. MANAGER’S TASKS Formulate the manager’s tasks at this stage in the planning of a business. 1. Compile the list of documents necessary for the registration of a legal entity of the selected legal format. 2. Determine your approach to interaction with the tax inspectorate when submitting documents for registration. 3. Organize the registration procedure depending on the selected legal format. 84 PART 2. SUBJECT OF MANAGEMENT EXERCISE 1 Create a list of documents necessary for registration (corresponding to the selected legal format): Signed application for state registration of a new commercial entity (Form R1101) Decision to create a legal entity in the form of a meeting protocol, agreement or other document as stipulated in Russian legislation The founding documents of the legal entity (charter) Proof of registration of foreign legal entity in country of origin or other document of equal legal standing establishing the legal status of a foreign legal entity participating as a founder in the new company (if necessary) Proof of payment of government registration fees EXERCISE 2 Map out the procedure for filing an application to register at new company at the tax inspectorate: Documents received for registration of LLC Inter-District Inspectorate No.46 of the Federal Tax Service of Russia XOR Review of documents Tax service inspector Documents meet requirements Documents do not meet requirements Issue state registration number... Issue letter of refusal to register File No.1 Registration application (form r11001) Decision to create legal entity XOR Registration application (form r11001) Passport of Russian citizen General director of company to be created 85 Number in electronic queuing system R005 Receipt indicating payment of state registration fee Documents deliver to document discharge department Passport of Document Russian citizen acknowledging receipt of documents R005 Tax service specialist (document acceptance) Set of documents Tax service specialist (document discharge) 7 working days Transfer to the document acceptance hall Charter XOR Rejection letter Passport of Registration application Russian citizen (form r11001) Decision to create legal entity Receipt indicating payment of state Charter registration fee General director of company to be created No. in e-queuing system V025 General director of company to be created Registered charter Primary Tax State registration Registration number Number SECTION 8. LEGAL FRAMEWORK FOR MANAGEMENT EXERCISE 3 Outline the process for registration of a legal entity according to the legal format selected: Determination of core business activity of LLC Selection of legal address Name or brand name of LLC Formation of charter capital Drafting of decision or protocol on founding of LLC Compilation of charter of LLC Signing of agreement on establishment of LLC Completion of application for registration of LLC Payment of state fees for registration of LLC Submission of documents to tax inspectorate to register LLC Receipt of documents from tax inspectorate Filing of notification on transition to simplified tax regime (if necessary) Production of corporate seal and opening of bank account 86 PART 2. SUBJECT OF MANAGEMENT EXERCISE 4 List the documents received from the tax inspectorate following completion of registration Certificate of state registration of LLC Charter of LLC with stamp indicating registration Tax registration certificate Certificate of registration in Unified State Register of Legal Entities Confirmation of assignment of statistical codes from Rosstat EXERCISE 5 List the documents necessary for a commercial organization to open a bank account: Certificate of state registration of LLC Tax registration certificate Charter of LLC Decision or Agreement to establish LLC Notification of registration with Rosstat Certificate of registration in Unified State Register of Legal Entities Note from Protocol of Founding Meeting on the Appointment of General Director General Director Appointment Order with term of appointment indicated 87 SECTION 8. LEGAL FRAMEWORK FOR MANAGEMENT 8.3. Licensing GLOSSARY License – permission to exercise a right or the right to undertake set of actions certified (confirmed) by an eponymous document. In practice, license agreements (contracts) which entail the transfer of private licensing rights are also called licenses. Licensing – the process of issuing special permission (a license). Licensor – one of the parties of a licensing agreement which grants the other party – the licensee – the right to use the object of the license (an invention, technology or other form of industrial property). Licensee – the legal entity or sole proprietor which acquires the license to perform a specific type of operation. License conditions – the conditions governing the lawful use of the license. State Standards (GOST) – the main type of state standards in Russia. Certification – a document confirming compliance with GOST standards. Declaration of conformity – a document confirming the conformity of the object with technical regulations, standard provisions, codes or agreement conditions. Technical regulations – regulations which establish the characteristics of a product or service or processes and production methods related to it. Sanitary-Epidemiological Conclusion – a document confirming compliance or lack of compliance with rules governing environmental conditions, economic and other operations, products, works or services; buildings, structures, premises, equipment and other property which the applicant seeks to use in the course of business operations. Since July 1, 2010, the sanitary-epidemiological conclusion was abolished and replaced with the State Product Registration Certificate. State Product Registration Certificate – a document confirming the safety of the production process that is used by all participants of the Customs Union: Russia, Belarus and Kazakhstan. In Russia the state product registration is carried out by the Federal Service for Supervision of Consumer Rights Protection and Human Well-Being (Rospotrebnadzor), which issues a uniform document confirming the product’s safety. GOST ISO 9001 Certificate of Quality Management – a document confirming compliance with the requirements and standards of ISO 9000 standards for quality management. COMMENTARY The main legislative act regulating the licensing process is the Federal Law on Licensing of Certain Types of Activities, which lists the types of activities requiring a license, the licensing requirements, procedure for acquiring a license and other aspects related to licensing. Fire safety requirements are stipulated in the Federal Law on Technical Regulations on Fire Safety Requirements. At present the State Fire Safety Service does not issue conclusions as Article 144 of the abovementioned law transfers this function to independent expert organizations. 88 PART 2. SUBJECT OF MANAGEMENT MANAGER’S TASKS Formulate the manager’s tasks at this stage in the planning of a business. 1. Identify which types of activities of the organization require licensing. 2. Compile the list of documents necessary for receiving a license. 3. Determine the list of documents necessary for receiving a conclusion / approval from the State Fire Safety Service. EXERCISE 1 Compile the list of documents necessary for receiving a license: Application List of work posts with visual scheme State Registration Certificate (with bank account information on the reverse side) Charter of the LLC Land lease agreement Sanitary-Epidemiological Conclusion Permit from the State Fire Safety Service or independent expert organization (for welding and painting work) Order appointing person responsible for occupational safety and safety stations Order appointing person responsible for technical maintenance and repair work Proof or professional competency of responsible persons (employment history book, diploma) Certificate of compliance with standards EXERCISE 2 List the items necessary to receive a conclusion of conformity with the requirements of the State Fire Safety Service: State Registration Certificate (copy). Certificate of Tax Registration (copy). Charter (copy). Letter from Rosstat (copy) Certificate of registration in Unified State Register of Legal Entities (copy) Lease agreement (sublease agreement) Property ownership certificate for premises (copy). Bureau of Technical Inventory documents (floor plan with legend) Agreement on servicing of fire alarm system (copy) 89 SECTION 9. RISK MANAGEMENT SECTION 9. RISK MANAGEMENT GLOSSARY Risk – the likelihood of the occurrence of an event with negative consequences. In management and economics a risk is understood as the possibility of an event which would result in losses arising from incorrect business planning decisions. There are various categories of risk, and in this section we examine the main risk categories which businesses face. Risk management – measures taking by managers when facing uncertainties to reduce the likelihood of the occurrence of an event with negative impacts. Administrative risks – the likelihood of losses as the result of management decisions either occurring during the implementation of the decisions or in the future as a consequence of their implementation. Example: incorrect choice of business development strategy Marketing risks – risks related to the incorrect choice of marketing concept, incorrect target group, etc. Example: incorrect marketing concept Financial risks – risks of financial losses resulting from the company’s operations. Example: currency risks Operational (technical and technological) risks – risks of problems occurring in the process of the production of products or provision of services. Example: incorrect execution of technological processes Political risks – risks stemming from the actions of government bodies which affect the company’s operations. Example: changes in tax policy Legal risks – risks of losses arising from violations of the law by the company or its partners. Example: mistakes in the preparation of documentation for acquiring a license COMMENTARY A risk is an economic category. As an economic category, it represents the possibility of the occurrence of an event which could produce one of three economic results: negative (failure, damages, losses), neutral; positive (gain, advantage, profit). A risk is an action taken in the hope of a fortunate outcome based on the principle of “let’s roll the dice.” Of course, risks can be avoided, as it is possible to steer away from any events involving risk. However, for an entrepreneur, avoiding risks often entails missing out on possible profits. A risk is also a financial category, which means that risks can be mitigated using financial mechanisms. Risk mitigation is achieved through financial management practices and strategy. Together these practices and strategy are called risk management, which represents an important part of financial management. Risk management entails a system for managing risks and the economic, or more precisely financial, relations which arise in the management of this process. Management strategy entails both the channeling resources and the method of their application for the sake of achieving the established objectives. This is facilitated by a certain set of rules and guidelines for decision making. The strategy allows for efforts to be focused on solutions available which do not contradict the strategy while setting aside all other options. After achievement of the established objectives the strategy becomes obsolete. The emergence of new objectives gives rise to the need to develop a new strategy. 90 PART 2. SUBJECT OF MANAGEMENT Tactics are the specific measures and methods used for the achievement of the established objectives in specific conditions. Tactical efforts are aimed at selecting the optimal solution and most appropriate methods and measures for the given situation. Risk management, as a management system, consists of two subsystems: the managed subsystem (object of management) and the managing subsystem (subject of management). The object of management in risk management is the risk, the capital investments which involve risk and economic relationships between entities in the process of the manifestation of the risk. These economic relationships include relations between the insurer and the insured, the borrower and the lender, between entrepreneurs. The subject of management in risk management is a special group of people (financial manager, acquirer, actuary and others), which through various management practices and methods guides the functioning of the object of management. The administration of the object of management, i.e. the management process itself, can only function properly if certain information is circulated between the managing and managed subsystems. The process of management regardless of its substance implies the receipt, transfer, processing and use of information. In risk management, the receipt of reliable and complete information plays a critical role, as the receipt of information allows for specific and appropriate decisions to be made in response to the risks faced. Informational support for risk management includes information of various types and nature: statistical, economic, commercial, financial and so on. This information includes knowledge about the likelihood an insurance event, about the existence and size of demand for products and capital, about the financial sustainability and solubility of clients, partners and competitors, about prices, exchange rates and tariffs, including insurance rates and insurance conditions, about dividends and interest rates, etc. A manager with sufficiently high qualifications always strives to receive any information, even if it is bad information, or to grasp the key takeaways of such information, or to glean valuable information even from a refusal of another party to discuss a certain topic. Information is accumulated piece by little piece, and these pieces together can be arranged to create a very valuable informational picture. If a financial manager has access to reliable business information, it allows him to make expedient financial and commercial decisions and ensure the correctness of these decisions, which naturally leads to lower losses and more profit. The proper use of information when executing transactions leads a minimal likelihood of financial losses. Every decision is based on information. The quality of this information is of great significance. The more ambiguous the information, the less precise the decision. Moreover, information ages quickly and should be used expediently. Risk management encompasses a range of problems related to practically all areas and aspects of management. The manager’s main tasks in this area are:  to determine high risk areas,  to appraise the level of risk,  to develop measures to reduce the likelihood of the realization of risk,  to have responses available to compensate for losses in the case of the realization of risk. Risk management includes the following strategies:  avoidance of activities which entail a certain degree of risk;  acceptance of responsibility for risks with the guarantee of full compensation for risk-related losses through the company’s own funds (the creation of an insurance fund);  distribution of risk among the direct participants of the business;  the sale or transfer of responsibility for risk to a third party;  mitigation of the possible negative consequences of risks with the help of preventative measures. 91 SECTION 9. RISK MANAGEMENT There are various methods for assessing risk:  Qualitative risk assessment  Risk modelling  Sensitivity analysis  Break-even analysis  Analog method  Discount rate analysis  Others In order to assess the level of risk of an investment and the sustainability of a project, as a rule, qualitative risk assessment and sensitivity analysis are used. Qualitative risk assessment allow for the identification of all possible types of risks associated with a project as well as to propose measures to minimize consequences and deploy compensation mechanisms. Sensitivity analysis is the calculation of how different values of independent variables will impact one or more dependent variables in a given situation. Examples an independent variable: sales volume, overhead costs. Example of a dependent variable: Net Present Value Information on threats and weaknesses components of SWOT analysis, covered in Section 5 of this workbook, are also included in sections of risk classification. MANAGER’S TASKS Formulate the manager’s tasks at this stage in the planning of a business. 1. Identify potential risks arising from the organization’s operations, in the process of doing business and in the management decision-making process. 2. Determine the level of these risks. 3. Development measures to minimize risks. 92 PART 2. SUBJECT OF MANAGEMENT EXERCISE 1 Perform a qualitative risk assessment: Risk Inappropriate development strategy Problems related to employee management Assessment of probability Risk mitigation measures (low, medium, high) Administrative risks medium medium Inappropriate concept medium Emergence of new competitors medium Competitors acquiring advantages high Decline in demand minimal Higher prices on automotive parts minimal Incorrect layout of work area minimal Devaluation of national currency minimal Changes in legislation medium Mistakes in fundamental corporate documents Failure to secure necessary permits 93 Perform analysis of marketing and strategy Develop a personnel management system, including material and psychological motivation, social support, etc. Marketing risks Adopt a professional approach to the selection of the concept based on knowledge and experience from the implementation of similar projects Monitor competitors and their approaches to doing business and implement the appropriate measures to remain competitive Monitor competitors and their approaches to doing business and implement the appropriate measures to remain competitive Adopt measures to increase the number of clients (advertising, special initiatives, etc.); improve quality of service Operational risks Correctly calculate costs. Carefully analyze and choose reliable suppliers Commission a layout plan from an organization which is licensed and specializes in the development of such projects Financial risks Settlements on the development of the project are in rubles. Expenses on parts from foreign manufacturers are individually agreed upon with the client. Political risks There is a likelihood of changes in the system of taxations, tax rates as well as documents regulating the automotive service business; but these changes will similarly affect all participants of the market. At the same time, correct tax planning and optimization are important. Legal risks minimal Seek legal assistance from a qualified law firm minimal Analysis of the legal requirements and consultations and support from the appropriate specialists. SECTION 10. BUSINESS IDEA DEVELOPMENT SECTION 10. BUSINESS IDEA DEVELOPMENT GLOSSARY Business – an enterprising economic venture which has two aims: the generation of profit, and the further growth and development of the business itself. Business plan – the technical and economic rationale for the enterprise’s operations; a program for business operations which describes the model for the future development of the company. Investment – long-term placement of capital with the intention of making a profit. Investment differs from credit in the degree to which the investor (creditor) is shielded from risks: credit and interest accrued is returned according to an agreed timeframe which is not dependent on the profitability of the project, while investment is returned and produces a profit only for profitable projects. If a project is unprofitable, the investment can be lost in part or in full. Gross revenues (sales volume) – revenues received by a company from its core business, usually from the sale of goods or provision of services. In many countries the term turnover is used as a synonym for gross revenues. Return on investment (ROI) – an indicator of the effectiveness of capital investments; it is calculated as the economic effect (return) of the investment divided by the cost of the investment. Capital investment – investment in fixed assets (core assets), including expenses on new construction, reconstruction and facility upgrades, acquisition of automobiles, equipment, instruments and inventory, R&D work and other such expenses. Franchise – the object of a franchising agreement, the set of benefits received from the use of the brand and business model of the franchiser, as well as other benefits associated with establishing and running a business. A franchise can entail a method of doing business, a trademark or a technology with mutual commitments and concessions between the franchiser and the franchisee on a commercial basis and in compliance with laws on the protection of intellectual property rights. Franchising (originating from the old French word franc, which meant freedom, exemption; right, privilege), commercial concession – a relationship between two entities in which one party (the franchiser) transfers to the other party (the franchisee) for money (royalties) the rights to a certain type of business based on a proprietary business model. This is a well-developed form of licensing whereby one party (the franchiser) provides the other party (the franchisee) the right on a paid basis to act on its behalf, using the trademarks and/or brand of the franchiser. Consulting – the provision of consultations to companies and individuals on management, economic, legal, financial, production and other issues to help them achieve their established objectives and execute their business strategy. Consulting company – an organization which provides consulting services to organizations and private individuals. 94 PART 2. SUBJECT OF MANAGEMENT COMMENTARY At the initial stage of the development of an organization’s business, the manager must determine the parameters of the object of management and reach agreement on them with the investor. There are several options for organizing a business:  Creation of a business from scratch  Purchase of functioning business  Purchase of a franchise business  Association or affiliation with an existing network of businesses Each of these options has its own advantages and drawbacks. For example, the creation of a business from scratch will cost less than the purchase of a functioning business, but there are also more risks associated with this approach, such as the lack of a client base, incorrect planning calculations, etc. The purchase of a functioning and well-developed business at first seems like a very appealing idea, but unfortunately it is not possible to fully insure oneself against the possibility of the emergence of hidden debts, problems with personnel, etc. The third and fourth options are the safest in terms of the organization of the business, but there are some nuances here as well. When purchasing a franchise business, the investor acts in the role of the franchisee and acquires from the franchiser a set of business rules as well as marketing privileges – an existing brand, advertising and so on. At the same time, the investor must pay a certain amount of money to the franchiser for the franchise. Moreover, a certain percentage of monthly revenues are also paid to the franchiser. Joining an existing business network is one of the safest options for organizing a business, as in this case there is a ready-made business model, clientele, etc. At the same time, certain business rules have already been established and the investor may not have the opportunity to influence the development concept, and for the investor this would require some financial commitments and associated risks. There are also various options for developing a business. Depending on the opportunities available, a company’s management can independently implement business development projects or turn to consulting companies which specialize in such projects and can provide assistance in developing certain business ideas. A business idea is an idea which links someone’s needs for a certain product or service with the opportunities for an entrepreneur to provide this product or service. A business idea is a concept which can be used either to build a new company or to establish a new business focus for an already functioning company. The emergence of a business idea is a result of the combination of the entrepreneur’s knowledge and life experience and the factor of chance: some circumstances, random observations or even some phrase dropped in conversation – something which jolts the entrepreneurs thinking from its ordinary track off into a new and unconventional direction. As a rule, business ideas are aimed at the creation of new goods and services which the market needs. Additionally, it is very important to know how to position oneself, how to advertise and sell oneself and one’s product. The success and quality of execution of a business idea is highly dependent on the preparatory work – the collection and analysis of information vital to the project. The development of the idea begins with analysis of the market. Conscientious execution of the analysis and meticulous development of the business plan are critical to avoiding serious missteps in the execution of an entrepreneurial project. Missteps at this stage can lead to a need to spend additional resources and time, and sometimes in substantial amounts. When beginning to study the market, the primary aim at this stage should be to formulate a clear and objective picture of the potential client – the person or business which could (and hopefully already wants) to receive benefit from you product or service. The analysis should identify specific criteria by which you can recognize your client. These criteria categories could be age, gender, income level, profession, etc. 95 SECTION 10. BUSINESS IDEA DEVELOPMENT The compilation of the picture of your client should begin the collection of information from internet sources, specialized journals and newspapers, statistical and analytical publications. Additionally, sometimes useful information can be acquired from state agencies and commercial organizations and associations. The analysis will help determine the degree to which the business idea is feasible for implementation or whether it should go back to the drawing board for further development. The information gathered should correspond to the criteria as defined by the type of product or service as well as the specific aims of the analysis. It is also necessary to gather information for the analysis of other characteristics of the market and the planning of your actions on this market. This information should assist in addressing such issues as: determining the market volume (how much of the product can be sold), what perception of the product should be formed in among the target audience, how they appreciate the benefits of your product, etc. Particular attention should be paid to information about the existence and level of competition in your area of the market. Information about competitors’ merchandise is also important in terms of developing the features of your own products or services. The best way to collect information is to assume the role of the client, i.e. to go and purchase the product or service from a competitor. Preliminarily determine what you should pay attention to in this process. In order to perform the analysis of the business idea, the following method can be used: consider how the business idea is perceived by the following market groups: the author of the business idea, the consumer, competitors, third-party people or organizations interested in the success of the business idea (stakeholders). The author of the business idea (the company proposing the idea or the potential entrepreneur who intends to build a business based on this idea) should determine the attributes of his product or service as well as highlight which attributes set the product apart from what is already available on the market. The next step is to determine the format (text, website, presentation, etc.) for engaging potential clients, explaining what benefits they will receive from the use of the product or service. The consumer. Here it is important to taken into consideration that there are three points of view of consumers:  the point of view of the buyer who makes the decision to purchase the product or service (it is quite possible that buyer is not the same person who uses the product);  the point of view of those who have influence on the decision of the buyer;  the point of view of the person who uses your product or service. It follows that all of these points of view should be considered when engaging potential consumers. The competitor. In the analysis, competitors can be divided into primary and secondary competitors, depending on the features of their products and services. If the features do not substantially differ from the features of your merchandise, then these are your primary competitors. If the competing merchandise can only under specific circumstances serve as a replacement for your products, then these are your secondary competitors. Other stakeholders – third-party people and organizations interested in the success of the business idea. This category includes more than just those who are interested in financial participation and profit sharing but also various business organizations and producers of other products and services not competing with yours but sharing the same general sphere of business. For example, the media. Determine who can be of use and what kind of use in the implementation of your business idea. In analyzing a business idea, it is also necessary to use such methods as SWOT analysis, which entails the careful consideration of the following internal and external factors impacting the business idea: Strengths, Weaknesses, Opportunities, Threats. More detailed information on SWOT analysis is provided in Section 4 of this workbook. 96 PART 2. SUBJECT OF MANAGEMENT MANAGER’S TASKS Formulate the manager’s tasks at this stage in the planning of a business. 1. Determine the options available for business development. 2. Analyze the options and present an analytical report to investors. 3. Reach an agreement on the conditions for the development of the selected option. EXERCISE 1 Select your choice for the organization of the business: Creation of a new business Purchase of a functioning business Purchase of a franchise business Association or affiliation with an existing network/chain of businesses Other: EXERCISE 2 Provide rationale for the chosen approach to organizing the business: The creation of a new automotive service will require more time but also less cost than the purchase of a functioning business. This approach also minimizes the risks related to the lack of complete information about the seller’s business. There are no available offers to purchase a franchise. Chain projects require large investments. 97 SECTION 10. BUSINESS IDEA DEVELOPMENT EXERCISE 3 Select your approach to the implementation of business development proposals: Develop project independently Become participant of business network/chain Hire consulting company to come up with options for business development Other: EXERCISE 4 Provide rationale for your choice this approach to implementing business development proposals: At this stage it is only possible to develop such a project independently due to the lack of funds available for hiring a consulting company. It is impossible to join a business network or chain due to the fact that there are no such organizations which have a similar concept. 98 PART 2. SUBJECT OF MANAGEMENT SECTION 11. IMPROVEMENT OF BUSINESS PROCESSES 11.1. Improvement of the management process GLOSSARY Improvement of a business process entails a change in the process’s nature, making it faster, less expensive, more flexible or otherwise acquiring better qualities. There is a wide range of possibilities for improving business processes, for example, the reduction of the time of a work cycle and/or optimization of expenses, but as a rule they are all based on changes to the sequence of events, the level of activity or the resources engaged in the process. It follows that a business process can only be changed by implementing changes in the process’s components. COMMENTARY Improvement of the management process is achieved via the following algorithm: 1. First, select one of the processes of the management of an organization described in Section 5 of this workbook. For example, Procurement Management. 2. Next, describe the main stages of the selected process. The stages of the Procurement Management are as follows: Identification of material needs Market analysis Selection of suppliers Placement of orders Delivery agreement preparation and management Monitoring of delivery Budgeting for procurements 99 SECTION 11. IMPROVEMENT OF BUSINESS PROCESSES 3. Next, the parameters of the management process should be determined. For the given process the following parameters can be identified:  time of execution  the direct cost of the labor of the manager (salary), which can be calculated with this formula: Direct labor cost =   Monthly salary × Time of execution of given process Number of hours worked per month material and technical expenses supporting the management process – for the purpose of simplification this is estimated as 20% of the direct labor cost of the manager labor cost of administrative personnel (security, cleaning, etc.) – for the purpose of simplification this is estimated as 20% of the direct labor cost of the manager Example: The monthly salary of a procurement manager = 120 000 rubles. Number of hours worked per month = 160 hours. Cost of 1 hour of the manager’s work = 120 000/160 = 750 rubles. Example of the calculation of the numerical components of the Procurement Management process No. Steps of the process Execution time, hours Direct labor costs, rubles Material and technical costs, rubles Expenses on administrati ve personnel, rubles Total expenses, rubles 1 Identification of material needs 1 750 150 75 975 2 Market analysis 5 3750 750 375 4875 3 Selection of suppliers 3 2250 450 225 2925 4 Placement of orders 2 1500 300 150 1950 5 Delivery agreement preparation and management 10 7500 1500 750 9750 6 Monitoring of delivery 3 2250 450 225 2925 7 Budgeting for procurements 2 1500 300 150 1950 26 19500 3900 1950 25350 Total 4. Next, calculate the cost of the process. Cost of the process = Direct labor costs for manager’s salary + Material and technical cost + Expenses on administrative personnel 100 PART 2. SUBJECT OF MANAGEMENT Example: The cost of the Procurement Management process = 25 350 rubles. Time spent by manager on one contract = 26 hours. The KPI for the Procurement Management process = Number of hours worked by the manager per month Time required to execute one agreement Thus, the KPI for the Procurement Management process is ≈6 (160/26) per procurement manager. 5. The next step is to recalculate the numerical components of the management process following the introduction of measures aimed at improving the process. For management processes, improvement can be achieved through the shortening of the time of execution of a process. Thus it is necessary to analyze each of the steps of the process and determine where the execution time can be reduced. Here is an example of the improvement of Procurement Management process:  the use of a special online portal for suppliers could reduce the amount of time to select an supplier by 1 hour (investment required – 200 000 rubles);  use of a logistics management application for tablet computers could reduce by 1 hour the delivery monitoring time (cost – 12 000 rubles). Example of the recalculation of the numerical components of the Procurement Management process No. Steps of the process Execution time, hours Direct labor costs, rubles Material and technical costs, rubles Expenses on administrati ve personnel, rubles Total expenses, rubles 1 Identification of material needs 1 750 150 75 975 2 Market analysis 5 3750 750 375 4875 3 Selection of suppliers 2 1500 300 150 1950 4 Placement of orders 2 1500 300 150 1950 5 Delivery agreement preparation and management 10 7500 1500 750 9750 6 Monitoring of delivery 2 1500 300 150 1950 7 Budgeting for procurements 2 1500 300 150 1950 24 18000 3600 1800 23400 Total The cost of the Procurement Management process = 23 400 rubles 101 SECTION 11. IMPROVEMENT OF BUSINESS PROCESSES 6. The final step involves a comparison of these results with the results prior to the implementation of the improvement measures and drawing the corresponding conclusions. Example: The time savings amounted to 2 hours per agreement per manager. Thus the savings per procurement manager per year amounts to 144 hours (12 * 2 * 6). The economic effect in rubles saved per year is 108 000 rubles (144*750). The payback period for such an investment is ≈ 2 years (200 000 + 12 000)/108 000. The number of additional agreements which one manager can execute per year (according to the KPI) = 6 (144/24) Conclusions: as a result of the improvement measures to the Procurement Management process, the time spent on one procurement agreement has been reduced by 2 hours for each manager, thus reducing the cost of the process by 108 000 rubles per year, which implies an investment payback period of 2 years. MANAGER’S TASKS Formulate the manager’s tasks at this stage in the planning of a business. 1. Identify which management process can be improved. 2. Select options for improving the management process. 3. Evaluate the effectiveness of the proposed management measures to improve the management process. EXERCISE 1 Select a management process and identify its main stages. Sales Management process: Market analysis Research on products/services Pricing Distribution of products/services Promotion of products/services 102 PART 2. SUBJECT OF MANAGEMENT EXERCISE 2 Identify the numerical components of the process. Information about the salary of a sales manager can be taken from Section 5 of this workbook. Direct labor costs for manager’s salary 30 000 rubles Number of hours per month 160 hours Cost of one hour of manager’s work 187.5 rubles Calculation of the numerical components of the Sales Management process No. Steps of the process Execution time, hours Direct labor costs, rubles Material and technical costs, rubles Expenses on administrative personnel, rubles Total expenses, rubles 3 750*0.2=750 3 750*0.1=375 4 875 1 Market analysis 20 3 750 2 Research on products/services 25 4 687.5 3 Pricing 10 1 875 1 875*0.2=375 1 875*0.1=187.5 2 437.5 4 Distribution of products/services 80 15 000 15 000*0.2=3000 15 000*0.1=1 500 19 500 5 Promotion of products/services 25 4 687.5 4 687.5*0.2=937.5 4 687.5*0.1=468.8 6 093.6 160 30 000 Total 4 687.5*0.2=937.5 4 687.5*0.1=468.7 6 000 Cost of process Process KPI 3 000 6 093.5 39 000 39 000 rubles Time spent serving one client = 0.6 (160/267) EXERCISE 3 Propose measures to improve the management process, then recalculate the numerical components of the process and draw the corresponding conclusions. Measures to improve the management process: Introduction of a client relationship management system at a cost of 25 000 rubles with the aim of reducing time spent on the “promotion of products/services” by 2 hours and the “distribution of products/services” by 4 hours. 103 SECTION 11. IMPROVEMENT OF BUSINESS PROCESSES Recalculation of the numerical components of the Sales Management process No. Steps of the process Execution time, hours Direct labor costs, rubles Material and technical costs, rubles Expenses on administrative personnel, rubles Total expenses, rubles 1 Market analysis 20 3 750 3 750*0.2=750 3 750*0.1=375 4 875 2 Research on products/services 25 4 687.5 3 Pricing 10 1 875 1 875*0.2=375 1 875*0.1=187.5 2 437.5 4 Distribution of products/services 76 14 250 14 250*0.2=2 850 14 250*0.1=1 425 18 525 5 Promotion of products/services 23 4 312.5 4 312.5*0.2=862.5 4 312.5*0.1=431.2 5 606.3 Total 154 28 875 Cost of process 4 687.5*0.2=937.5 4 687.5*0.1=468.7 5 775 2 888 160 – 154 = 6 hours Cost saved 39 000 – 37 538 = 1 462 rubles Payback period for measures to improve management process 37 538 37 538 rubles Time saved Change in process KPI 6 093.8 Time spent serving one client 154/267 = 0.57 25 000/(1 462*12) = 1.42 years Conclusion: The introduction of the client relationship management system reduces the time and cost of serving each client. The payback period for the investment is approximately one and a half years. 104 PART 2. SUBJECT OF MANAGEMENT 11.2. Improvement of the value creation process COMMENTARY Improvement of the value-creation process can be accomplished in the following manner: 1. It is necessary to identify the numerical components of the value creation process described in Section 5 of this workbook as well as the quantity of products/services, their price and cost. Example of the calculation of the numerical components of the value creation process Direct labor costs, rubles Overhead expenses (500% of direct labor costs), rubles. Total expenses, rubles. No. Steps of the process Execution time, hours. 1 Analysis of client needs 1.5 1 500 7 500 9 000 2 Procurement of resources 2 2 000 10 000 12 000 3 Production 20 20 000 100 000 120 000 4 Sale 1 1 000 5 000 6 000 5 Aftersale servicing 0.5 500 2 500 3 000 25 25 000 125 000 150 000 Total Number of products created/services provided per month – 50 units Price of 1 unit = 3 500 rubles Cost of 1 unit = 3 000 rubles (150 000 rubles / 50 units) Measures should be identified to improve the value creation process. For example, the assimilation of new production equipment with the aim of reducing the production time by 6 hours. The acquisition of the equipment would cost 1 500 000 rubles. 3. Now the numerical components of the value creation process should be recalculated. 2. Example of the recalculation of the numerical components of the value creation process No. Steps of the process Execution time, hours. Direct labor costs, rubles Overhead expenses (500% of direct labor costs), rubles. Total expenses, rubles. 1 Analysis of client needs 1.5 1 500 7 500 9 000 2 Procurement of resources 2 2 000 10 000 12 000 3 Production 14 14 000 70 000 84000 4 Sale 1 1 000 5 000 6 000 5 Aftersale servicing 0.5 500 2 500 3 000 19 19 000 95 000 114 000 Total 105 SECTION 11. IMPROVEMENT OF BUSINESS PROCESSES The sales price of one unit of product/service = 3 500 rubles. The new production volume is ≈ 66 units (50 units * 25 hours / 19 hours) Cost of one unit = 2280 rubles (114000 rubles / 50 units) 4. The factors influence the profit margin should be identified and the corresponding conclusions drawn. Example: factors influencing the profit margin:  Coefficient for change in sales volume at same price = 1.32 (66 units * 3 500 rubles) / (50 units * 3 500 rubles)  Profit from higher sales volume = 33 000 rubles (50 units * (3 500 rubles – 3 000 rubles) * 1.32)  Savings generated by lower cost per unit = 47 520 rubles (66 units * 2 280 rubles – 66 units * 3 000 rubles).  Income from price change = 0 rubles (66 units * 3 500 rubles) - (66 units * 3 500 rubles). As a result of this measure to improve the value creation process, the company receives 55 520 rubles in additional profit each month (66*(3 500 – 2 280) – 50*(3 500 – 3 000)). Payback period is estimated at ≈ 2.25 years (1 500 000/(55 520*12)). MANAGER’S TASKS Formulate the manager’s tasks at this stage in the planning of a business. 1. Identify the parameters of the value creation process. 2. Select measures for improving the value creation process. 3. Assess the effectiveness of the proposed measures for improving the value creation process. EXERCISE 1 Determine the numerical components of the value creation process as well as the number of units of products/services, their price and cost. No. Steps of the process Execution time, hours. Direct labor costs, rubles Overhead expenses (500% of direct labor costs), rubles. Total expenses, rubles. 1 2 3 4 5 6 0.3 0.3*30 000/160=56.25 281.25 337.5 1 1*30 000/160=187.5 937.5 1125 1 Acceptance of order 2 Diagnostics 3 Report to client on problems and time of repair work 0.3 0.3*30 000/160=56.25 281.25 337.5 4 Determination of parts costs 0.2 0.2*30 000/160=37.5 187.5 225 106 PART 2. SUBJECT OF MANAGEMENT 1 2 3 4 5 6 5 Client approval of price of work 0.3 0.3*30 000/160=56.25 281.25 337.5 6 Order write-up 0.2 0.2*30 000/160=37.5 187.5 225 7 Receipt of partial payment from client 0.1 0.1*30 000/160=18.75 93.75 112.5 8 Transfer of automobile to repair station 0.2 0.2*30 000/160=37.5 187.5 225 9 Completion of repair work 24 24*25 000/160=3750 18750 22 500 10 Quality control review 0.3 0.3*30 000/160=56.25 281.25 337.5 11 Signing of act of completion and issue of invoice 0.2 0.2*30 000/160=37.5 187.5 225 12 Receipt of payment from client 0.1 0.1*30 000/160=18.75 93.75 112.5 13 Turnover of automobile 0.2 0.2*30 000/160=37.5 187.5 225 Total 27,4 4 387.5 21 937.5 26 325 Number of units of product/service 20 Price per unit (rubles) 35 000 Cost per unit 26 325 EXERCISE 2 Identify measures for improving the value creation process and recalculate the numerical components. Measures to improve the value creation process: 1. Acquisition of new computer for diagnostics, allowing for reduction of diagnostics time by 40%. Cost of computer – 150 000 rubles. 2. Assimilation of new equipment costing 800 000 rubles as well as the hiring of a new employee with a salary of 25 000 rubles per month. This employee will be engaged for four hours in this process. This measure will reduce the total repair work time by 8 hours. 107 SECTION 11. IMPROVEMENT OF BUSINESS PROCESSES Recalculation of the numerical components of the value creation process No. Steps of the process Execution time, hours. Direct labor costs, rubles Overhead expenses (500% of direct labor costs), rubles. Total expenses, rubles. 1 Acceptance of order 0.3 0.3*30 000/160=56.25 281.25 337.5 2 Diagnostics 0.6 0.6*30 000/160=112.5 562.5 675 3 Report to client on problems and time of repair work 0.3 0.3*30 000/160=56.25 281.25 337.5 4 Determination of parts costs 0.2 0.2*30 000/160=37.5 187.5 225 5 Client approval of price of work 0.3 0.3*30 000/160=56.25 281.25 337.5 6 Order write-up 0.2 0.2*30 000/160=37.5 187.5 225 7 Receipt of partial payment from client 0.1 0.1*30 000/160=18.75 93.75 112.5 8 Transfer of automobile to repair station 0.2 0.2*30 000/160=37.5 187.5 225 9 Completion of repair work 16 16*25 000/160 + 4*25 000/160 = 3125 15 625 18 750 10 Quality control review 0.3 0.3*30 000/160=56.25 281.25 337.5 11 Signing of act of completion and issue of invoice 0.2 0.2*30 000/160=37.5 187.5 225 12 Receipt of payment from client 0.1 0.1*30 000/160=18.75 93.75 112.5 13 Turnover of automobile 0.2 0.2*30 000/160=37.5 187.5 225 Total 19 3 687.5 18 437.5 22 125 108 PART 2. SUBJECT OF MANAGEMENT EXERCISE 3 Identify the factors influencing the volume of profit and make the appropriate conclusions. Factors influencing profit New volume of products/services Coefficient for change in sales volume at same price Sales proceeds Money saved from change in cost Profit from change in price Change in monthly profit Payback period 20 * 27.4 / 19 ≈ 29 29/20 ≈ 1.45 20*(35 000 – 26 325)*1.45 = 251 575 29*22 125 – 29*26 325 = -121 800 (29*35 000) – (29*35 000) = 0 29*(35 000 – 22 125) – 20*(35 000 – 26 325) = 199 875 (150 000 + 800 000 + 25 000*12)/(199 875*12) = 0.52 (without consideration of labor taxes) Conclusions: As a result of the implementation of the outlined measures to improve the value creation process, the increase in monthly profit totals 199 875 rubles. The investment payback period is approximately half a year. 109