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Strategic Management - Decisions, inertia, applications III

Updated on October 3, 2015
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Depreciation EUR and rising Exports 2014
Depreciation EUR and rising Exports 2014 | Source

3. Applied strategic concepts

3.1. Allison’s decision models applied to an actual real-world case

The European Central Bank (ECB) is lowering the central rate more and more(“Krisenbekämpfung,” 2014). And it is now buying European state bonds(“EZB-Kauf von Staatsanleihen,” 2015).

Regarding to the rational actor model, ECB is the primary actor and choses the options with the highest benefits. These benefits have to fit to its role, its mission:

“The European Central Bank and the national central banks together constitute the Eurosystem, the central banking system of the euro area. The main objective of the Eurosystem is to maintain price stability: safeguarding the value of the euro.

The European Central Bank is responsible for the prudential supervision of credit institutions located in the euro area and participating non-euro area Member States, within the Single Supervisory Mechanism, which also comprises the national competent authorities. It thereby contributes to the safety and soundness of the banking system and the stability of the financial system within the EU and each participating Member State.

We at the European Central Bank are committed to performing all our tasks effectively. In so doing, we strive for the highest level of integrity, competence, efficiency and accountability. We respect the separation between our monetary policy and supervisory tasks. In performing our tasks we are transparent while fully observing the applicable confidentiality requirements.”(“ECB,” n.d.)

So it should keep the prices and the value of the euro stable. Rational benefit of the two actions stated at the beginning would be a bigger amount of money. This should cause a mild inflation to keep economic growth stable. On the first view this could work out. But what is with the value of the euro? The euro is falling since 3 months. This policy decreases its value more and more.

If we use the organizational process model, we can see organizational boundaries. The ECB has its fixed repertoire of actions to reach its goal price stability, fulfill its mission. But also this goal could be a limit itself. Because it doesn’t include the whole economic factors in Europe and worldwide. Time and money is limited so usually it is more a satisficing strategy. Its actions might work on a short run. But what are the consequences on the long run?

It gets more interesting if we take a look at the scene through the governmental politics model. This involves several actors like the German government (the ECB is an independent by law), other European governments and Lobbies.

German companies make the most of their profits through export business (Frankfurt and Berlin, 2015). Export business runs quite well if the value of the euro is low. According to the recent exchange rate, it would now be a good deal for an American company to import goods and services from Germany.

Source

3.2. Scenario analysis - Porter's Five Forces Model

Let’s take a look at the automobile sector of the BMW group in Germany to analyze the scenario with Porter's competitive forces model.

The car market in Germany is one of the most challenging automobile markets in the world. The competitive forces are also key variables. For each force I will explain why they are important and suggest strategic options.

There are many suppliers in Germany. Each one is usually dependent to one or two customers. So the bargaining power is quite low. If there would be just a few of them, BMW would be in a bad position. They would probably have to pay higher prices for inbound material. Also BMW might face contract penalties if they can’t keep a deadline with their partners. This is why it is important to suppress the power of suppliers. BMW already uses an efficient strategy: diversification. As part of their supplier relationship management they built a database with round about 5000 suppliers. So there are substitute inputs in case one supplier doesn’t follow BMW’s orders(“BMW Group : Investor Relations : Finanzberichte im Überblick,” n.d.).

Buyers have ambitious expectations. Many of them have mechanical know how, due to the advanced education system in mechanical engineering. TV shows and magazines often explain parts and components or new technologies. The buyers are well informed. They want reliability, safety and quality. But for this they are also willing to pay a higher price. This is why BMW focuses on the premium segment. But what could be strategic options? The use of advanced technologies has several advantages. First of all, this way they create switching costs. If something is broken the buyer can’t just buy a substitute component to replace the damaged one. Second, it is harder to copy by rivals.

Porter's Five Forces
Porter's Five Forces | Source

These rivals are Daimler, Audi and Porsche. In Germany is a very high competition. This is why the returns in the German market are quite low. All these competitors focus more or less on the premium segment. Here BMW tries a differentiation strategy. BMW is advertising in a very technological approach. The concentration is on performance and a sporty design. The image sells. Because of the high competition, the car manufacturers have very high expenditures in advertisement.

Substitutes like public transportation are still no thread. Also when the oil price and so the gas price might rise. The need for private transport is still much higher. The elasticity of demand for gasoline prices is inelastic. But on the long run this will change. This is why BMW and others are pushing their electronic vehicles.

New entrants are no real thread. All car manufactures have a very long history and a unique image. No one wants to have a no name car. Of course this works for the premium sector. Also copied cars shouldn’t be dangerous as long as the image is much more important than the real performance. On the other hand it would be very capital intensive to start a new car manufacturing company. The actual situation doesn’t show much profits due to the high competition. So the costs are an important entry barrier. Another barrier is - as stated above – the technological advantage.

3.3 Risk Management failures

In a nutshell, the main purpose of risk management is to reduce risk. But proper risk management is harder as it seems. Especially identifying the risk factors and the level of their impact. A famous case when risk management failed completely was the fall of the Barings bank in 1995. The company sent Nick Leeson to run the trading office in Singapore. Nick had no prior experience or practice in trading. He had no degree. He just went into the bank directly after school, where he worked 6 years in the back office settlement before he went to Singapore.

Also if he wasn’t supposed to trade by himself1, he made some profits through arbitrage deals between Singapore and Osaka by exploiting two different trading systems. At the beginning this worked out. The headquarter in London didn’t really understand these securities Nick had to do with. But as long there was profit no one took care about it. The bad awakening came in 1995 when Barings bank found out about Nicks hidden losses about 1.3 billion USD, which led the bank into bankruptcy (“Barings Bank,” 2015, “The Baring Archive : Introduction,” n.d., “The Collapse of Barings,” n.d.) .

What was wrong?
It is irresponsible that Nick was in charge without pre-knowledge. It was also risky, especially when it is about finance, that he has to positions to cover - floor manager and head of settlement operations. The mistakes he causes in function one, he can hide with function two (account 88888). But the biggest mistake was to be uniformed. At least they could have been more skeptical. This way they would have figured out the fraud much sooner(Leeson and Whitley, 2007).

Furthermore there are many sources of risk. Banks for example differentiate between credit risk, market risk and operational risk. To manage credit risk, many banks segment their customers into several groups. Each group has different incomes and probabilities of default. The higher the probability of default, the higher the risk. These categories determine the interest rate a client has to pay for borrowing money. But as save this system might look. There are always exceptions which aren’t considered in any formula. This means risk can never be minimized completely (Hilse, 2010).

References

Barings Bank, 2015. . Wikipedia Free Encycl.

Beinhocker, E., D., Kaplan, S., 2002. Tired of strategic planning? | McKinsey & Company [WWW Document]. McKinsey Insights. URL http://www.mckinsey.com/insights/strategy/tired_of_strategic_planning (accessed 5.6.15).

Bell, C. & Cavanaugh, K., 1998. Constructive Ambiguity or Internal Self-Determination-Self-Determination, Group Accommodation, and the Belfast Agreement. Fordham Int’l LJ, 22, p.1345.

BMW Group : Investor Relations : Finanzberichte im Überblick [WWW Document], n.d. URL http://www.bmwgroup.com/d/0_0_www_bmwgroup_com/investor_relations/finanzberichte/ueberblick.shtml (accessed 4.26.15).

De Bruijn, H. & Ten Heuvelhof, E., 2010. Process management: why project management fails in complex decision making processes, Springer Science & Business Media.

ECB: The mission of the Eurosystem [WWW Document], n.d. URL https://www.ecb.europa.eu/ecb/orga/escb/html/mission_eurosys.en.html (accessed 4.26.15).

EZB-Kauf von Staatsanleihen: Das Billionenexperiment hat begonnen, 2015. . Spieg. Online.

Fischhendler, I., 2004. Legal and institutional adaptation to climate uncertainty: a study of international rivers. Water Policy, 6(4), pp.281–302.

Gan, S., 2014. How To Do Business With China, Author House.

Hilse, J. (Ed.), 2010. Praxishandbuch Firmenkundengeschäft: Geschäftsfelder, Risikomanagement, Marketing, 1. Aufl. ed. Gabler, Wiesbaden.

Kahneman, D., 2012. Thinking, fast and slow. Penguin Books, London.

Kahneman, D., Tversky, A., 1979. Prospect Theory: An Analysis of Decision under Risk, Econometrica, Vol. 47 (2) 263 – 291.

Kraus, S., 2015. OTISLINE.

Kraus, S., 2014. Behavioral Finance als Erklärungsansatz für Kapitalmarktungleichgewichte (Bachelorarbeit). Ernst-Abbe-Hochschule Jena, Jena.

Krisenbekämpfung: EZB senkt Leitzins weiter - auf 0,05 Prozent, 2014. . Spieg. Online.

Ländergrafik: Das sind die gescheiterten Banken, 2014. . Spieg. Online.

Leeson, N., Whitley, E., 2007. Rogue trader, Reprinted. ed. Sphere, London.

Moneyball (2011) - IMDb. Available at: http://www.imdb.com/title/tt1210166/ [Accessed October 1, 2015].

Pearlson, K.E., Saunders, C.S., 2012. Managing and Using Information Systems: A Strategic Approach, 5th Edition. Wiley Global Education.

Porter, M.E., 2008. Competitive advantage: Creating and sustaining superior performance. Simon and Schuster.

The Baring Archive :: Introduction [WWW Document], n.d. URL http://www.baringarchive.org.uk/ (accessed 4.25.15).

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