The article of Vadim Zolotarevsky, Consultant of EBS Company, "A long way to an effective strategic choice" was publishen in "General Director" magazine (January 2005)
At the beginning and in the middle of the 90’s the main business-strategy of Ukrainian entrepreneurs could be described in the following way: buy everything that is cheap. But starting with the end of the last century the problem of ownership of non-profile assets appeared before businessmen. Owners understood that an excessive diversification of business fields had became a burden for a further development of some companies.Conditions for a strategic choice
In contrast to international corporations, successful examples of Ukrainian business have similar history of their organization and development. As a rule, an entrepreneur flair and skill to implement business ideas in different spheres led to success.
Inability to concentrate and lack of knowledge of foreign successful experience naturally led to forming of assets of different ideology and profits, and also to inexpedient conducting different kinds of business (different demand for investments, approaches to personnel qualification etc.). In such a situation it is necessary for owners to make a strategic choice which can be risky in some way (loss of assets making profit). But it also gives an opportunity to cut the knot and use one’s brains for prospective ideas, and time and strength for development in those spheres where entrepreneur’s skills are the most effective and market potential is huge. Such concentration makes it possible to build effective business and count on long-term potency. So, we’ll speak about such a fundamental choice when risk is justified and results suit expectations of successful entrepreneurs, born in the “era of forming of national capitalism”.
Field markets satiation and hard but qualitative competition make it necessary to find one’s own effective and comfortable place at national market which influences long-term business stability. Companies work on this problem which is closely connected with a strategic choice to reach quick development due to opening up “new horizons” or mastering their work at already opened markets. “New horizons” mean moving to another field dimension of the market or offering new approaches to work (strategies) and tools of future development (including financial).
World business practice which is copied by national market shows that possessing information about the mechanism of implementing strategies in practice is not the key aspect of company’s strategic effectiveness. The logic of work organization of any company can explain this – aims of higher level (strategies) determine goals of lower levels and set the way of organization work. That means that mistakes on higher level and errors in strategic choice are much worse than failures that occur in the process of strategy implementation. A strategic choice defines objects of large investments, main points in positioning and can influence company’s development and its business reputation.
Hence, success of the whole strategic management much depends on an effective strategic choice. It is expedient to define strategic management with the help of its main stages: analysis, prediction, planning and control.
Strategic choice is implemented on first two stages – analysis and prediction where the basis of future competitiveness is laid. Here key aspects of market presence, positioning and tools of providing competitiveness and possible business scale are defined. Moreover, strategic choice means not to take part in profitable assets (for example, not to sell oil) that fall short of this strategic choice and consequently they fall of the relevant role in the fundamental model of business functioning.
When company A made a decision to restructure its business (2003), it was a multidirectional corporation with non-structured portfolio of assets (enterprises under control) of different liquidity, with havoc in juridical and organizational structure of management based on the authority of key people in the company.
This company was known due to its successful work on the financial market, though the spheres of its work included:
• Trade activity on a market of raw materials (high profits, weak position and competence);
• Financial activity : factoring and providing financial services (high profits and competence);
• One-time investments in prospective enterprises (for a private satisfaction and for future);
• Recurrent trade deals – equipment for various fields (high profits, non-prospective);
• Sport marketing (some undertaking on something like potential market);
• Trading company in Lithuania (good positions, profits an competences).
Problems and new goals
The company received normal business profit (30%) due to key managers’ search of a client on the national market to make a good deal with. Main source of prosperity was a financial company. Its director’s business feeling made it possible for a corporation to have corporative rights to some interesting assets. While other spheres either gave minimum profit or gained the status of main expenses, but they were useful for advancing one’s own interests in profitable work schemes.
Key group managers controlled the work of companies under control, wasting much time and strength that can be used for developing prospective projects. The owners realized the necessity of business formalization, namely alienation of non-profile assets, regulation of sphere of responsibility. Absence of an elementary order in system of inner discounting didn’t allow to structure system of business management and fix its real market worth. This means that it was difficult for the company to define key competences on the market, work in one sphere and make purposeful investments. All these factors are necessary for long-term business competitiveness.
It was necessary to make decisions which could lead to restructure of assets portfolio and raise its effectiveness due to redistribution of business activity – reduction of the assets with a great number of resources (money, people, and work technologies). Moreover, such changes had to be made according to deliberate and adopted priorities of strategic development. Tools of solving these problems should consider the possibility of strengthening of current competences and creation of effective system of strategic business management (including regulation) which is the key condition for qualitative changes.
One should admit that due to analysis of successful western experience in market development and owners’ preferences considering business spheres companies intended to work in investment business. That meant the necessity of working out the form and select effective working tools on a purposeful market to provide favourable positions that will raise profits and status.
Hence, company A had reached some definite stage of its development - it had entered basic markets and normalized business profits. Now it was time to start working on a higher level to do a long-term planning of strategic goals and operate with greater money flows. To realize these intentions it was necessary to improve the model of business management. This could make it possible to control assets on a strategic level and to make investments in new projects. This meant that company had to make a strategic choice that could define the way of business development.
Working out a strategic behavior model
On first stage it is important to structure the company’s owners and management’s ideas and put right questions about possibilities and ways of business development. This can be done after several meetings with key business managers and invited consultants. Main principles of a strategic behavior should be worked out during these meetings.
Before the first strategic meeting key aspects of current business were discussed in company A: its structure, assets condition and potential (those of companies under control), investment potential and requirements, qualitative level of management and system of corporation control. As a result of such a corporative diagnosis conditions for further business development (financial potential, assets structure) were defined. It was also named what markets are favourable for company to have resources and work effectively on.
As a rule, working on a strategic choice on the first stage means to analyze market and forecast its future condition in details: spheres’ structure, demand potential. To do this it is necessary to answer the following questions:
• Where can one realize strategic claims: on a current market, adjoining segment, in a new sphere? Or, is it necessary to enlarge the potential of a definite market segment?
• How? With the help of what tools, approaches and competences?
An active search of possibilities and approaches to work on a purposeful market was done together with company A considering current profitable business spheres. The emphasis was placed on successful western working models to raise the quality of business functioning. Other conditions of a long-term competitiveness are selection of professional personnel, creation of an independent management structure and delegation of responsibility for effective operational work.
Hence, the main criteria of strategic tools choice were:
• The owners’ possibility to influence the development of business spheres;
• Saving high-profitable centers (companies) in a market portfolio;
• Possibility to keep away from control of operation process;
• Participation in prospective segments of investment market.
The main goal of the meeting was to define what sphere was the best for usage of current business and market potential and what spheres were not worth working in it. After choosing main spheres of work, the company had to set goals it wanted to achieve and development priority for it is the basis of future company strategy and its financial model.
After defining key corporation competences, possible models of business functioning were analyzed.
Multidirectional corporation
This variant was a logical step and continued the process of business development of the previous years. After current assets had been structured, it would take great pains to control the whole structure and direct investments, the possibility of quick development of the main company would be very small.
Industrial corporation (vertically integrated holding)
Possible business scale and future working spheres were not promising. Resource potential and management competences didn’t meet the requirements necessary for the development of the business of this kind. This model of business management seemed risky due to high market concentration, middling financial potential and lack of skillful managers which could lead an effective business.
Diversificated horizontal holding
This model didn’t meet the owners’ requirements for keeping away from the operational activity. Moreover large expenses had to be made for structure stabilization.
Investment company
This working model let to concentrate on key competences, work hard on a strategic level of control of business investments and choose different approaches to work on a purposeful market.
The analysis of all the models of future corporation development created the image of a wishful business condition and it helped to choose the right form of its development with the consideration of regional presence.
A strategic choice is done
As a result some alteration appeared in business process. The owners and some managers focused on trade business development in Lithuania; trade and sport business in Ukraine was closed. Company B was opened for the development of investment business. An experienced manager from Great Britain held the post of its director.
The development of investment business in Ukraine needed additional work on defining its form and guiding lines. The owners’ desire to open a classical investment bank became such a guiding line. This decision was influenced by effective world practice, access to foreign money markets, possibility to increase assets and diversification of working tools on a financial-investment market.
For creating an effective investment bank, definite competences had to be stabilized (amalgamationabsorption, control of corporative conflicts etc.), also time was needed for preparation, especially for assets structuring to create a liquid and balanced investment portfolio.
It was decided to expand already existed competences and develop a newly opened investment company with another brand, assets portfolio and brand new management level.
Defining the basic principals of business development let to formulate the company’s mission and see clearly the condition of business by the end of prediction period (2008).
Moreover, key aspects of corporative strategy of investment business in Ukraine were worked out.
• Creation of an effective corporative strategy of investment business in Ukraine means:
Thorough selection of investment objects using the criterion of presence of technical, technological and other resources necessary for development (access to raw materials, personnel etc.), forecast of market development;
Forming of an effective assets structure with the help of horizontal integration in industrial assets management. This gives an opportunity to raise prices, include liquid assets in the portfolio (realty, property in land) with the purpose of risk diversification and increase of portfolio stability, to analyze the necessity of any status acquire, rise the appeal of an investment object;
Forming of a liquid structure of portfolio investments;
Control of company synergy on investment and financial markets;
Entering controllable financial markets for increasing possible working tools (factoring, assets control);
Selection of the form of assets and capital structure which will influence the development of investment business;
Creation of an effective organizational model of investment business management with the help of dividing companies on the principal of their centers functioning;
• A good business reputation on an investment market was decided to be achieved with the help of:
Entering the history with the help of large/prominent deals on an investment market;
Following the strategy of purchase of rights to prospective assets;
Participation in projects of a high risk;
Purposeful creation of an image of a successful company on a market.
The goals of a future investment bank (IB), projects of development of each company on a financial-investment market, the possibility of their amalgamation were discussed during further meetings. It should be also cleared out what has to be paid much attention for the development of corporative brand and business strategies, what functional priorities are for the companies-representatives of corporation A in Ukraine.
Main requirements for business strategy and key strategy aspects of financial and investment companies were worked out on the basis of those priorities. This allowed to form a list of inner projects necessary for achieving strategic goals and build a financial model and a business management model which defined functions and goals of a corporative center.
A successful choice is a condition for strategic effectiveness
After a strategic choice had been done corporation’s owners moved the corporative center to Lithuania and concentrated on strategic management, redistribution of investment flows and development of trade business in this region. Business capitalization led to growth of trade business profits in Lithuania and scale of investment business in Ukraine. It became possible due to gaining necessary competences (including invitation of experienced highly qualified managers), effective interaction between financial and investment companies (spheres of responsibility in large projects were clearly divided between them). New very interesting assets in an investment portfolio were very important for its sale to strategic investors was highly profitable. Moreover, a mechanism of investment projects management was formed.
Strategic initiatives of the corporation were corrected with the consideration of the changes that occurred on a market. The system of a strategic planning was worked out on a final strategic meeting. It needed essential changes in management structure and invitation of experienced managers. Now they continue to work on business strategies for companies with the purpose to create a mechanism which can put the structure on a brand new level of investment business management not depending on the corporation personnel.
Hence, strengthening of the competences of company A on a purposeful market and synergy of portfolio companies became possible due to a well thought-out strategic choice considering business development and the owners’ ability to concentrate on key goals and choose priorities.
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