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How to Do a Strategic Analysis

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Title: How to Do a Strategic Analysis


1
How to Do a Strategic Analysis
Dr. Stan Abraham 2009-10
2
What Is Strategic Analysis?
  • One persons or one groups attempt at arriving
    at a strategy and key strategic decisions for a
    company
  • For example, vision statement, objectives, and
    key programs
  • An essential precursor to strategic planning

3
Why Do It?
  • To gain strategic-planning skills
  • To integrate functional business courses you have
    taken to-date
  • To be able to help companies or organizations
    decide their future
  • To do a better job of running your own business
    one day

4
The Essential Questions
  1. Whats the current situation?
  2. Where do we want to go?
  3. How can we get there?

5
1. Whats the Current Situation?
  • Whats changing in our industry, markets,
    competitors, the economy, and other areas that
    may affect us?
  • Where are the opportunities?
  • How have we been performing and what financial
    condition are we in?
  • What strengths, resources, weaknesses, and
    competitive advantages do we have, or lack?

6
2. Where Do We Want to Go? This involves
strategic thinking
  • What are all the possible and feasible directions
    we could take?
  • Which opportunities could we pursue?
  • What alternative business models make sense?
  • Which is the best alternative?
  • Why is it the best one?

7
3. How can we get there? And how fast should we
get there?
  • What vision and strategy should we pursue?
  • What objectives should we set?
  • For the next year and three years hence?
  • What programs should we implement?
  • What contingencies can we devise in case things
    go wrong?

8
What Is Strategy?
  • Strategy is how a company actually competes
  • The best strategy is embedded in a business model
    that both provides customer value and gives the
    organization a sustainable competitive advantage
  • Know what these terms mean?

9
Strategic Planning vs. Strategic Management
Book Figure 1.1
10
A Strategic Analysis Model that works! (SAMtw)
Recommendations
Situation Analysis
Alternatives Analysis
External Review Industry Analysis Competitive
Analysis Market Analysis Environmental Analysis
Short-Term Plans Goals Objectives Strategic
Intent Programs Contingencies
Strategic Issues
Identifying Strategic Alternatives
Internal Review Financial Analysis Strengths
Weaknesses Opportunities Threats
Long-Term Plans Goals Objectives Strategic
Intent Programs Contingencies
Arguing For and Choosing a Preferred Strategy
1. What is the current situation?
2. Where do we want to go?
3. How can we get there?
11
Industry and Competitive Analysis
  • Dominant economic
    characteristics
  • Industry driving forces
  • Sources of competitive threat
  • Porters 5-forces model
  • Competitive positioning of major rivals
  • Critical success factors
  • Competitive strength analysis
  • Industry attractiveness

Situation Analysis
External
12
Dominant Economic Characteristics Example
Industry for a chemical commodity
  • Industry Size
  • 500 million sales 4 million tons total volume
  • Scope of Competitive Rivalry
  • Primarily regional producers rarely sell outside
    a 250-mile radius of plant due to high cost of
    shipping long distances
  • Industry Growth Rate
  • 2-3 percent annually
  • Stage in Lifecycle
  • Mature
  • Number of Competitors
  • About 30 companies with 110 plant locations and
    capacity of 4.5 million tons. Market shares range
    from 3-21 percent
  • Customers
  • About 2,000 buyers most are industrial chemical
    firms

External
Situation Analysis
13
Dominant Economic Characteristics (2)
  • Degree of Vertical Integration
  • Mixed. Five of the ten largest firms are
    integrated backward into mining operations and
    also forward in that sister industrial chemical
    divisions buy over 50 of their plant output all
    other firms are engaged solely in manufacturing
  • Ease of Entry/Exit
  • Moderate entry barriers exist it costs 10
    million to construct a new plant of minimum
    efficient size and a new entrant must build a
    customer base within 250 miles from the plant
  • Technology/Innovation
  • Production technology is standard and slow to
    change. Biggest changes are occurring in
    products--about 1-2 newly formulated specialty
    chemical products introduced annually, accounting
    for nearly all the industry growth

External
Situation Analysis
14
Dominant Economic Characteristics (3)
  • Product Characteristics
  • Highly standardized and commodity-like
  • Scale Economies
  • Moderate. All firms have virtually equal
    manufacturing costs, but scale economies exist in
    shipping in multiple carloads to the same
    customer and in purchasing large quantities of
    raw materials
  • Capacity Utilization
  • Efficiency is highest when producing between
    90-100 of rated plant capacity. Unit costs rise
    appreciably when utilization drops below 90
  • Industry Profitability
  • Subpar to average. The commodity nature of the
    product results in intense price-cutting when
    demand slackens, but prices firm up during
    periods of strong demand. Profits thus track the
    strength of demand for the industrys products

Situation Analysis
External
15
Industry Driving Forces
  • Changes in the industry growth rate
  • Changes in who buys the product and how they use
    it
  • Product or marketing innovation
  • Technological change
  • Entry or exit of major firms
  • Diffusion of technical know-how
  • Increasing globalization of the industry
  • Changes in cost and efficiency
  • Emerging buyer preferences for differentiation
  • Regulatory influences and government policy
    changes
  • Changing societal concerns, attitudes, lifestyles

External
Situation Analysis
16
Industry Lifecycle Curve
  • Total Industry Sales
  • Shake-out
  • Emerging Growth Maturity
    Decline

Time
Situation Analysis
External
17
Industry Lifecycle Curve (2)

  • Shake-out Stage
  • Supply Demand Competitors leave the (max.
    slope) arena or are acquired (Supply gt
    Demand)
  • Competitors enter the arena (Supply lt
    Demand)

Situation Analysis
External
18
Concentrated vs. Fragmented Industries
  • Concentrated when most of the industrys sales
    are accounted for by only a few firms
  • The Big Four accounting firms audit 96 of
    public companies in the U.S.
  • Only three firms make jet engines for the worlds
    commercial aircraft only two make the aircraft
  • Fragmented when no company has more than a
    one-percent share of the market
  • Beauty salons Bookkeepers
  • Plumbers Cement-mixing companies

Situation Analysis
External
19
The Value Chain Example Wool Suits
  • Breeding Raw
    Cloth Cloth Sheep on
    Wool Mill Wholesaler
    Tailor Retailer Farm
    Wholesaler Dyer
    Final Customer

Vertical Integration
Backwards Forwards
Situation Analysis
External
20
Sources of Competition Porters 5-Forces Model of
Competitive Threats
  • Potential New Entrants
  • Barriers to Entry
  • Suppliers Rivals
    Buyers Substitutes

Intensity of Rivalry ?
Barriers to Entry ?
Bargaining Power (a) of buyers? (b) of suppliers?
Threat of Substitutes ?
External
Situation Analysis
21
Strategic Group Map
  • A two-dimensional diagram with axes that separate
    out rivals in an industry
  • Plot competitors on the diagram
  • Group ones that are close to each other on the
    map they are said to belong to
    similar strategic groups
  • Often, circles around the groups represent
    combined sales of companies in them

Very broad
Breadth of product line
narrow
domestic
international
Geographic scope
External
Situation Analysis
22
Critical-Success-Factor Analysis
  • A critical success factor (CSF) is something a
    company must do well in order to succeed in the
    industry.
  • Example XYZ Industry
  • Competitors
  • Critical Success Factor Co. A
    B C D E
  • Engine technology 8 9
    9 7 6 10
  • Styling and features 9 8
    9 8 7 9
  • Brand reputation 10 8
    9 7 6 9
  • Strong distribution/dealer network 7
    8 9 6 7 10
  • Efficient manufacturing
    6 8 8 7 8
    9
  • Effective marketing
    9 8 9 8 7
    9

External
Situation Analysis
23
Assessing Industry Attractiveness
  • Example XYZ industry
  • Industry Factor Weight
    Rating Product
  • Sales growth rate 25 0.3 7.5
  • Market size 20 0.6 12.0
  • Industry profitability 18 0.8 14.4
  • Intensity of competition 15 0.7 10.5
  • Barriers to entry 12 0.9 10.8
  • Degree regulated 10 1.0 10.0
    ----- ---- ------ TOTALS
    100 65.2

External
Situation Analysis
24
Assessing Competitive Strength
  • Example Your Company Under Analysis
  • Competitive Factor Weight
    Rating Product
  • Technological innovativeness 22 0.6 13.2
  • Marketing/distribution 20 0.9 18.0
  • Caliber of management 18 0.9 16.2
  • Relative cost position 17 0.6 10.2
  • Brand reputation 12 1.0 12.0
  • Financial strength 11 0.7 7.7
    ----- ------ TOTALS
    100 77.3

Situation Analysis
External
25
G. E. Matrix
High
Industry Attractiveness
Invest
Your Company
Medium
Divest
Low
Weak
Avg.
Strong
Competitive Strength
Situation Analysis
External
26
Market and Customer Analysis Covered
in your Marketing course . . .
  • Identify the target market/segment
  • Identify customer needs (present and future)
  • Identify principal market segments
  • How does the customer buy (channels)?
  • What are the channel markups?
  • Extent to which customer responds to advertising
    and promotion, and which media
  • How price-sensitive is the customer?

External
Situation Analysis
27
Environmental Analysis Categories to Scan
Continually
  • Demographic changes -- regional population
    shifts, birth rates, age cohorts, etc.
  • Impending regulatory/legislative changes --
    healthcare reform, tax bills, etc.
  • Political changes (esp. at election time) -- tax
    changes, party platforms, etc.
  • Lifestyle/attitude trends -- fitness, disease
    prevention, seeking adventure, etc.
  • Sociocultural trends -- consumer activism,
    greater tolerance of diversity, etc.
  • Economic climate and trends -- extended
    recession, devaluation, etc.
  • Technological advances -- industry federal
    spending on RD, new patents, etc.
  • All the above, for each foreign country in which
    the company does business.
  • Ask, What changes/trends affect my company
    either negatively or positively? The larger the
    potential impact, the more specific data are
    needed about the trend/change.

Situation Analysis
External
28
Phase Coverage in Class
Recommendations
Situation Analysis
Alternatives Analysis
I
External Review Industry Analysis Competitive
Analysis Market Analysis Environmental Analysis
Short-Term Plans Goals Objectives Strategic
Intent Programs Contingencies
Strategic Issues
III
Identifying Strategic Alternatives
Internal Review Financial Analysis Strengths
Weaknesses Opportunities Threats
II
Long-Term Plans Goals Objectives Strategic
Intent Programs Contingencies
Arguing For and Choosing a Preferred Strategy
1. What is the current situation?
2. Where do we want to go?
3. How can we get there?
29
Scope of Phase 1
  • The group that does Phase 1 on a particular case
    goes only as far as this point
  • Phase 1 involves an external analysis of the
    industry, competition, market, and environment
  • Includes four tools
  • Porters Five-Forces Model
  • G.E. Matrix (including Industry Attractiveness
    vs. Competitive Strength)
  • CSF Analysis
  • Strategic Group Map (if applicable)

External
Situation Analysis
30
Financial Analysis
  • SAM does all the work for you after you have
    inputted income-statement and balance-sheet data
    for the given years
  • You have to select which kinds of financial data
    to present in order to give a reasonable and
    complete picture of the companys recent
    performance and current financial condition
  • You end the presentation with a financial
    conclusion slide
  • Use data from the previous charts shown to
    support your conclusion

Internal
Situation Analysis
31
Financial Charts
  • Begin with revenues and NIAT
  • Show breakdowns of revenues or profits (by
    product line or geographical region), if
    available
  • Should include current or quick ratio (not both),
    D/E or D/A ratio (not both), and Z- or Z2-Score
    (not both)
  • In addition, especially for a smaller company
  • Does it have enough cash?
  • Are its receivables climbing?
  • Does it have too much invested in inventory?
  • Where D/A ratio gt 100, show that equity is
    negative
  • Any other aspect that is worth pointing out

Situation Analysis
Internal
32
Altmans Z- and Z2-Scores
Z-score 1.2X1 1.4X2 3.3X3 0.6X4 1.0X5
Z2-score 6.5X1 3.26X2 6.72X3 1.05X4a
X1 WC/Total assets X2 RE/Total assets X3
EBIT/Total assets X4 Equity/Total debt X5
Sales/Total assets
Safe Zone
2.99
2.59
Gray Area
1.81
1.11
Bankrupt Zone
Manufacturing Companies
Non-Manufacturing Companies
Z-Score
Z2-Score
Internal
Situation Analysis
33
Financial Conclusion
  • The last sheet of the financial analysis part in
    SAMtw asks you to draw one of the following five
    conclusions about the company
  • Has been well managed and performing well, and is
    in good financial condition
  • Same as above except for one major bad thing . .
    .
  • Has had mixed results, indeterminate
  • Same as below except for one major good thing . .
    .
  • Has been poorly managed, is performing poorly,
    may be in serious trouble, should be bankrupt,
    etc.
  • And support your conclusions with numbers!

Internal
Situation Analysis
34
Financial Conclusion Example
Harley-Davidson (1988)
  • H-D has been performing very well and is
    financially in good condition
  • Motorcycle revenues grew an average 23.5/yr from
    1986-88 in a declining industry
  • NIAT grew 12.7 in 1988
  • NPM almost doubled from 1.7 in 1986 to 3.2 in
    1988
  • D/E ratio declined 54.5 from 5.5 in 1987 to 2.3
    in 1988
  • It has 52.3M in cash in 1988
  • Z-Score improved to 3.07 (safe zone) in 1988

Set off the conclusion in a different font and
color to stand out. Summarize the supporting data
in the order you showed the charts. Cite
statistics.
Internal
Situation Analysis
35
Company Strengths
  • Core competencies Cost advantages
  • financial strengths Better advertising campaigns
  • Reputation with buyers Product innovation skills
  • Well-conceived programs Proven management
  • Access to economies of scale Ahead on the
    experience curve
  • Protected from competition Efficient
    manufacturing
  • Proprietary technology Superior technology skills
  • Financial analysis of recent company performance
    and condition is also a key component of Internal
    Company Analysis, and may reveal some strengths
    and weaknesses.
  • Dont use generic strengths (as above), but be
    specific. Market leadership or increasing market
    share are never strengths.

Internal
Situation Analysis
36
Company Weaknesses
  • No clear strategic direction Falling behind in
    RD
  • Obsolete facilities Product line too narrow
  • Sub-par profitability because . . . Weak market
    image
  • Little or no managerial depth/talent Weak
    distribution network
  • Missing key skills/competencies Weak marketing
    skills
  • Poor implementation record Unable to finance
    strategies
  • Internal operating problems High relative costs
  • Poor product quality Worsening customer service
  • Deteriorating union relations Slow development of
    new products

Same notes as for Strengths slide
Internal
Situation Analysis
37
Core Competence and Competitive Advantage
Remember to add a column for capabilities at
left-hand side.
  • Criteria for Core Competence
  • Is the Is the Is the Is the capability capabili
    ty capability capability valuable? Rare? costly
    to nonsubsti- Competitive Performance imitate?
    tutable? Consequences Implications
  • No No No No Competitive Below-average disad
    vantage returns
  • Yes No No Yes/No Competitive Average parity
    returns
  • Yes Yes No Yes/No Temporary Average
    advantage returns
  • Yes Yes Yes Yes Sustainable Above-average a
    dvantage returns

Internal
Situation Analysis
38
Opportunities (Concentration strategies)
Existing
Product Development
Markets
Only Product/Market Issues are Opportunities
Expanded
Market Development
New
Existing
Improved
New
Products
Internal
Situation Analysis
39
Threats
  • Entry of low-cost foreign competitors
  • Adverse shifts in foreign exchange rates and
    trade policies
  • Slower market growth
  • Adverse demographic changes
  • Costly regulatory requirements
  • Impending economic downturn
  • Growing bargaining power of buyers and suppliers
  • Changing buyer needs and tastes
  • Rising sales of substitute products
  • Legislation with adverse impact

Situation Analysis
Internal
40
TOWS Matrix
Strengths Weaknesses
Opportunities Use strengths to exploit opportunities Seek opportunities that overcome/mitigate weaknesses
Threats Use strengths to avoid/mitigate threats Minimize weaknesses or avoid/mitigate threats (hard)
Situation Analysis
Internal
41
Scope of Phase 2
  • The group that does Phase 2 on a particular case
    goes only as far as this point
  • Phase 2 involves an internal analysis of the
    company, including financial-analysis charts, a
    financial conclusion, and a SWOT analysis
  • Includes four tools
  • Core-Competence Analysis
  • The TOWS Matrix
  • Value Analysis (not shown here) (if applicable)
  • SPACE Analysis (not shown here) (if applicable)

Internal
Situation Analysis
42
Key Strategic Issues
  • A key strategic issue is a
  • Future event or trend that may have a significant
    impact on the firm (e.g., deregulation of an
    industry, fate of the NAFTA trade agreement) and
    that should be closely monitored
  • Decision the firm is considering making that will
    have a strategic and dramatic impact on it (e.g.,
    merging with another company, changing its
    strategy, focusing on international operations)
  • Any strategic plan must address these strategic
    issues for the simple reason that they constitute
    the most important problems and issues the
    company faces

Alternatives Analysis
43
Sources of Strategic Issues
  • Most critical external issues
  • Competition
  • Industry trends
  • Market trends
  • Other trends and threats
  • Most salient internal issues Strategic
  • Financial problems Issues
  • Weaknesses
  • Opportunities worth considering

Alternatives Analysis
44
Menu of Possible Strategies
  • Staying in the same business
  • Concentration Product or market development
  • Vertical Integration Forward or backward
  • Acquisition of or merger with a competitor
  • Harvest or be acquired
  • Retrenchment and Turnaround (including Bankruptcy
    Chapters 11, 13)
  • Low-cost leadership, differentiation, or focus
  • Strategic alliances, including joint ventures
  • Exiting the business
  • Liquidation (including Bankruptcy Chapter 7)
  • Entering another business
  • Diversification through acquisition related or
    unrelated business
  • Internal diversification

Alternatives Analysis
45
Porters Generic Competitive Strategies
Competitive Advantage
Lower Cost Differentiation
Cost Leadership
Differen-tiation
Broad Target
Competitive Scope
Focused Differen-tiation
Cost Focus
Narrow Target
Source Michael E. Porter, Competitive
Advantage, Free Press, 1985
Alternatives Analysis
46
Low-Cost Leadership and Differentiation How
They Work
  • Low-Cost Leadership Differentiation

  • P
  • P P
  • C C
  • C
  • Internal emphasis External emphasis
  • Focus on cost drivers Focus on customer
    needs
  • Dont lower prices Dont let
    costs rise

Alternatives Analysis
47
Coming up with Strategic Alternatives
  • The most difficult part of strategic planning
  • Requires a lot of thought and creativity
  • The challenge is to devise 2-4 alternatives
    (bundles)
  • The minimum is two
  • More than four is practically impossible
  • Must meet four criteria
  • Mutually exclusive (i.e., doing one means not
    being able to do the others)
  • Feasible (i.e., doable and internally consistent)
  • Lead to success (as defined by the company)
  • Address all strategic issues (or delete the ones
    not addressed)

Alternatives Analysis
48
Strategic Alternative Bundles Example
Harley-Davidson (1988)
  • 1Expand 2Broaden 3Expand
    the Market the Product Line into Europe
  • Focus on older males Introduce three new Expand
    into Europe women models
  • Design models to Acquire Buell and Trade shows
    and appeal to this market offer sport bike 100
    roving bikers
  • Train dealers to Develop technolog. Create
    dealer network sell to this market advanced
    engine from scratch
  • Invest in and grow Maintain HR but Maintain HR
    but HR sales improve its sales improve its sales
  • Heavy advertising Heavy advertising Heavy
    advertising promo campaign promo campaign
    promo campaign
  • Incr. prod. capacity Incr. prod. capacity
    Incr. prod. capacity maintain high
    quality maintain high quality maintain high
    quality
  • Increase market share Increase market
    share Maintain U.S. share
  • Finance thru debt cash Finance thru
    debt cash Finance thru debt cash

Alternatives Analysis
49
Choose the Best Alternative
  • Argue for which one is better or best
  • hard to do when all are equally good
  • The choice depends on how each alternative stacks
    up against selected criteria
  • Managers that will implement the strategy must be
    involved in deciding which alternative to pursue

Alternatives Analysis
50
Criteria for Choosing a Successful Strategy
  • Shareholder ValueOften used as the measure of
    the effectiveness of strategic planning
  • RevenuesParticularly appropriate when the firm
    wants to increase market share
  • ProfitabilityImportant when earnings or cash
    flow have been flat or negative, or when the firm
    is highly leveraged
  • Investment RequiredDoes the firm have, or can it
    acquire, the resources it needs? Does it make
    sense to be acquired?
  • Degree of RiskHow certain is the firm to succeed
    if it undertakes this alternative? Is it
    risk-averse?

Alternatives Analysis
51
Criteria for Choosing a Successful Strategy
(cont.)
  • Return on investmentROI is another profitability
    measure
  • Breakeven pointThe sooner the investment is
    recouped the better
  • Match with existing company cultureWhile it may
    be better to choose an alternative that does not
    require changing the culture, the culture may
    have to change to take advantage of a better
    alternative
  • Attainment of a core competence or competitive
    advantage This is the secret of being
    competitive and attaining above-industry-average
    profits

Alternatives Analysis
52
Criteria for Choosing a Successful Strategy
(cont.)
  • TimingIs the timing right to implement a
    particular alternative? Is it better to implement
    now or later?
  • Strengthening its value propositionthe key to
    developing a revenue stream and loyal customers
  • Strengthening bargaining powerincreasing
    bargaining power with either buyers or suppliers
    will likely increase profits

Alternatives Analysis
53
Two Types of Criterion
(Rate from 0 to 10)
(Rate from 0 to 10)
  • Positively Correlated
  • Revenues
  • Profits
  • Return on investment
  • Shareholder value
  • Gaining or extending a competitive advantage
  • Strengthening its value proposition
  • Strengthening bargaining power
  • Negatively Correlated
  • Investment required
  • Time to breakeven
  • Competitive retaliation
  • Culture change required
  • Riskiness

Alternatives Analysis
54
Criteria Matrix Example for Harley-Davidson (1988)
Alternatives Analysis
55
Recommendations Format for Short- and
Long-Term Plans
  • Should include
  • Specific measurable objectives to be achieved
    next year and in three years time
  • At least Revenues and NIAT
  • Perhaps one other that is important (optional)
  • Strategic Intent
  • Major programs to implement that will achieve the
    set objectives and implement the strategy
  • Trigger and contingency pairs -- what could go
    wrong (trigger) and what would the firm do
    differently if that happened (contingency)?

56
Triggers and Contingencies Criteria to meet
  • Triggers
  • Must be quantitatively expressed
  • The cause should be external
  • Contingencies
  • Must address (alleviate) the trigger
  • Cannot renege on the chosen strategy
  • Must be something different from what the company
    is currently doing
  • Must be operational and implementable quickly
    (perhaps within 1-3 months)

57
Scope of Phase 3
  • Phase 3 ends at this point
  • The group will continually work at improving its
    list of strategic issues and bundles in class as
    Phases 1 and 2 are unfolding
  • It will then present its strategic issues and
    bundles for class discussion
  • We all understand its a work in process
  • Strive for understanding, not perfection
  • Include a criteria matrix showing your choice of
    a preferred bundle (the class may disagree)
  • Include short- and long-term recommendations

Alternatives Analysis
58
The Vision Statement What Do We Aspire to Be?
  • Typically created for five or ten years out
  • Can include numbers (objectives) or not
  • Typically created by the organizations leader
    (sometimes by the top team)
  • Must be sold to the rest of the organization
  • Must be realistic (possible to attain) and hence
    worth striving for
  • Must know when it has been achieved

59
The Mission Statement How Should We Do
Business? Our Raison D'être
  • Should encompass the companys current business
    and future strategy
  • Should include its value proposition (products or
    services offered to which target market)
  • Should include what makes the company special
  • How it creates value in order to win and keep its
    customers business

60
Creating Vision/Mission Statements
  • One of the most challenging tasks
    leaders/managers undertake
  • Most dont do it wellthey consider it time
    wasted
  • Many are unable to think clearly enough and get
    too frustrated
  • If you cannot do it, you dont know your business
    well enough
  • Leaders must get the commitment of the whole
    organization to the vision/mission statements
  • Key people should participate in its preparation
  • Should not be revised for several years, or until
    it no longer fits what the company is doing

61
When to Create Them?
  • After doing a strategic analysis
  • Because the strategy and direction of the company
    may change
  • Because you have been able to check whether the
    existing vision and mission statements need
    changing
  • Otherwise, the vision and mission statements
    essentially govern what the company does (or
    doesnt do) next

62
Thats it, folks!
  • The whole process will come to life as you start
    to do the strategic analyses yourselves
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