PBL Trigger 4 - How to predict and implement large scale change in time of crisis?

Learning Objective 1 - What are the causes & indicators of crisis and how it can be analyzed?

Some of the early warning signs of a brewing financial crisis can be viewed as:

• ·        Poor trade balance, depicted in the form of “current account”
• ·        Accelerated inflation, leading to the possibility of hyperinflation
• ·        Overvaluation of currency
• ·        Excessive available credit leading to widespread defaults
• ·        Consistently low interest rates leading to the formation of bubbles from lack of risk
• ·        Large fiscal deficits
• ·        Public recognition leading to lower consumer spending and falling stock prices

The list can go on and on. There is no perfect indicator of large scale financial crisis but many microcosms that orbit and influence one another.

The causes of crisis are very specific to each country. They can be caused by poor regulation and greed in the financial sector, political parties or regimes making drastic changes to legislation, spikes in commodities from climate change or many other causes. The one uniting factor seems to be inflation.

Morah, C. (2016). What causes a recession? [online] Investopedia. Available at: http://www.investopedia.com/ask/answers/08/cause-of-recession.asp [Accessed 26 Sep. 2016].

Economics of Crisis. (2016). *Indications of a Financial Crisis. [online] Available at: http://www.economicsofcrisis.com/indications.html [Accessed 26 Sep. 2016].

Nowandfutures.com. (2016). Financial Crisis - indicators and estimates. [online] Available at: http://www.nowandfutures.com/financial_crisis.html [Accessed 26 Sep. 2016].

Learning Objective 2 - How does crisis affect an economy?

A financial crisis can have many far reaching and cascading effects on larger economy. Some of these effects manifest as:

• ·        Food shortages
• ·        An increased dependence on imports
• ·        High unemployment
• ·        Plummeting stock prices
• ·        Increased interest rates
• ·        Narrowing of market offerings
• ·        Rising national deficits
• ·        Lowering of tax revenue; Leading to austerity measures
• ·        Slowdown of Gov’t dependent industry
• ·        Consumer uncertainty and spending drop offs

Of course the impact of crisis on an economy is larger than we can fathom, one of the largest impact is on the consumer. The confidence of the consumer can be shaken to the core and can prolong the crisis. If the public at large decides that the recession is still on, the recession will still be on.

 

Ioan Grillo (2016). How Venezuela, Once Latin America's Richest Nation, Collapsed. Time. [online] Available at: http://time.com/venezuela-brink/ [Accessed 26 Sep. 2016].

Nber.org. (2016). The Effect of the Economic Crisis on American Households. [online] Available at: http://www.nber.org/bah/2010no3/w16407.html [Accessed 26 Sep. 2016].

 

Toro, M. (2016). Venezuela Is Falling Apart. [online] The Atlantic. Available at: http://www.theatlantic.com/international/archive/2016/05/venezuela-is-falling-apart/481755/ [Accessed 26 Sep. 2016].

 

Learning Objective 3 - What actions can be taken to respond to crisis?

After creating a PESTEL analysis and examining contributing factors the government should form their reaction. This reaction to crisis will either come from the government as stimulus, austerity or reform; or to it in the form of a drastic political response. A government may try to mitigate to a slowdown with stimulus programs targeting a plethora of markets and industries (George Bush sent me $200 in 2008, it didn’t work). Austerity, I’m sure we are all familiar with, spending cuts and/or tax increases aimed at cutting the bottom line. Reform can take the shape of banking and reporting regulations or new legislation. Voter reaction is usually swift and harsh, switching to the opposition of whatever party is in power, often swinging in a more conservative direction.

Davies, H. (2015). The political effects of financial crises. [online] the Guardian. Available at: https://www.theguardian.com/business/2015/dec/24/the-political-effects-of-financial-crises [Accessed 26 Sep. 2016].

Nber.org. (2016). [online] Available at: http://www.nber.org/digest/mar09/w14753.html [Accessed 26 Sep. 2016].

Example of a PESTEL analysis

What is a value chain?

A value chain is a method developed by Michael Porter of taking in materials and step-by-step adding value to them through various methods, backed by support structures, in turn delivering a more profitable, more valued product to the customer (Investopedia 2016). Unlike a supply chain which looks up toward suppliers to gain value, a value chain seeks to create value for the customer (Weiner T. 2014).

What are the key functions and core structures in business?

Key Functions include:

Inbound logistics

• Coordination suppliers; receiving & warehousing raw materials; managing inventory

Operations

• Refining raw materials into customer ready market offerings (i.e. manufacturing); assembling
• Packaging

Outbound logistics

• Delivering finished products to distributors, resellers, franchises, branches or the like

Marketing & Sales

• Marketing
• Advertising
• Pricing, the 4 P’s

Service

• Maintenance or service programs
• Customer service or customer retention programs
• Repair or warranty service

Alongside theses five key points of Porter’s value chain are activities designed to support and maintain the organization. These can be categorized as:

Firm infrastructure or organization

• Management
• Accounting
• Operations

Human resources

• Recruitment and termination
• Training and employee retention
• Benefits management

Technology

• Research and development

• Automation

• ICT  

Procurement

• Purchasing of raw materials

What strategic analysis is needed for creating value?

There appear to be two general types of analysis for gaining value from a company’s value chain model. This first thing an organization would do to create and capture value is to determine what kind of competitive advantage they are seeking. These two competitive advantages can be described as “cost advantage” or “differentiation advantage”. If a company seeks to gain market share through cost management it will need to go through a five step process.

1. Finding the organization's core and supporting functions and how they form a hierarchy in relation to the value chain, not necessarily to how the company itself is structured.
2. Determine the cost and value of each function in direct relation to the cost of the product.
3. Identify the cost drivers for each of these necessary functions (i.e. the parts of each function that are cash intensive.)
4. Examine the relationship between each of these functions to determine if change in one function may lead to positive or negative changes in another.
5. Find opportunities for for cost savings with the information gathered

On the other hand, analyzing with differentiation in mind is a different beast entirely. This process entails the following steps:

1. Understand the point in the value chain that bring forth the most value for the customer
2. Weigh different approaches to provide more value for the customer
3. Seek out the viable differentiation

  

(Jurevicius 2013)

What are the methods to improve the efficiency of an organization?

After thoughtful analysis of the organization’s value chain and determining whether to seek a cost competitive strategy or a competitive strategy based on differentiation, an organization must seek out methods of improving efficiency. One method may be vertical integration at either ends of the value chain to mitigate costs in production or distribution and sales (Quickmba.com 2016).  Organizations should adopt a long term, company wide efficiency mindset, rather than treating it as a temporary initiative (Weiner T. (2014). Other methods could include standardization of processes, cutting down on labor intensive activities. There is no one size fits all method, but an individual balance of deliberate, well informed strategy and a congruent culture will improve any organization.  

Sources:

Investopedia. (2016). Value Chain. [online] Available at: http://www.investopedia.com/terms/v/valuechain.asp [Accessed 19 Sep. 2016].

Jurevicius, O. (2013). Looking at your Value Chain will make you Smarter. [online] Strategic Management Insight. Available at: https://www.strategicmanagementinsight.com/tools/value-chain-analysis.html [Accessed 19 Sep. 2016].

Morrissey R.  (2016) Building Efficient Organizations. [online] Available at: http://www.bain.com/publications/articles/ryan-morrissey-building-efficient-organizations-video.aspx  [Accessed 19 Sep. 2016].

Quickmba.com. (2016). Vertical Integration. [online] Available at: http://www.quickmba.com/strategy/vertical-integration/ [Accessed 19 Sep. 2016].

Weiner T. (2014). How to Develop an Efficient Value Chain. [online] Available at: http://www.mepsupplychain.org/develop-efficient-value-chain/ [Accessed 19 Sep. 2016].

What is the difference between Mission And Vision?

Mission helps convey a sense of purpose for a company’s management, employees, and customers. A guiding light for for all to follow. A vision is the set of goals for the future of the enterprise. To define the difference simply: “What are we here to do?” and “Where do we want to go?”. (Fernandes 2016). In recent news, Apple’s mission is to enrich people’s lives with well made, easy to use devices; Apple’s vision is to replace all of their user base’s headphones with Apple products. Mission is something you act on, vision is aspirational. Both statements are also directed to different audiences. Mission statements should be designed for everyone, from employees to shareholders to customers. Vision statements on the other hand are internally focused, a view into a future where the mission is properly fulfilled (Wichtner-Zoia 2012).

What role does Mission play in a company’s identity?

Mission statements are the bedrock of company identity. Mission is the foundation of how a company is viewed both internally and externally. It can inspire loyalty and motivation in a company’s employees, differentiate itself from its competition to its customers and give a sense of comfort and security to its shareholders. Mission statements are company identity, made tangible. As part of an annual report, mission statements may be the widest read corporate messaging available, giving companies a means of building their images to all of their constituents (Leuthesser & Kohli 1997).

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How does a company adapt its mission and strategy to reflect its new vision?

When adapting to a changing world, businesses must have fixed values and core ideologies. Analysing these along with where a company would like be in the future should help define new strategies. The mission should remain unchanged in all but the most extreme cases while guiding and focusing vision and strategy. By identifying lofty goals and a clear meaning of their impact once achieved, a company can begin to form its vision (Collins 1996). Once the mission has been fully assessed and the vision is formed, strategy must be implemented. By evaluating the business’s strength, weaknesses, opportunities and threats (SWOT) it can begin to carve out its changing strategy.

4. How can a company’s strategy help in adapting to change?

An organization’s strategy is how it actually plans to adapt to change. Once mission is examined and a bold vision is in place, the strategy is the follow through. Adaptation should be the name of the game. Strategic planning gurus Onstrategy recommend quarterly strategy assessment and adaptation reviews to go alongside annual strategic reports and implementation (2016). Through thoughtful and decisive implementation of a business’s strategy the organization can help to ensure its mission is met, even in a changing world.

References

Collins, J. Harvard Business Review. (1996).Building Your Company’s Vision. [online] Available at: https://hbr.org/1996/09/building-your-companys-vision [Accessed 10 Sep. 2016].

Fernandes, P. Business News Daily. (2016). What Is a Vision Statement?. [online] Available at: http://www.businessnewsdaily.com/3882-vision-statement.html [Accessed 5 Sep. 2016].

Leuthesser, L. & Kohli, C. Business Horizons Kelley School of Business, Indiana University (May-June 1997) Corporate Identity: The Role Of Mission Statements

Onstrategyhq.com. (2016). [online] Available at: http://onstrategyhq.com/resources/strategic-planning-process-basics/ [Accessed 10 Sep. 2016].

Wichtner-Zoia, Y. MSU Extension. (2012). “Mission” and “vision:” explore the difference. [online] Available at: http://msue.anr.msu.edu/news/mission_and_vision_explore_the_difference [Accessed 5 Sep. 2016].