Berdnikov V.V., Ph.D. Associate Professor

Financial University Under the Russian Government

STRATEGIC CONTROLLING IN DESIGNING AND IMPLEMENTATION OF COMPETITIVE BUSINESS MODELS

In conditions of increasing uncertainty of the external economic environment commercial organizations must pay more attention to development, monitoring and optimization of business models. It has to do with the fact that management by object (MBO) based on business administration principles does not recognize employees’ participation in decision-making thereby creating the conflict which puts obstacles in the way of creating and accumulating knowledge inside a commercial organization.

It reduces company’s strategic flexibility which is embedded in its ability of adapting to constantly changing conditions of economic environment, prevents from timely initiating of changes in forms and methods of business target achievement.

Targets developed in the framework of traditional MBO have appeared to be irrelevant in the early stage of their implementation. As a result, the current operational efficiency becomes the end in itself, strategic development priorities erode and business value is diminishing.

In the modern economic environment the principle “think globally, act locally” becomes a key condition for achieving the long-term business success. In other words, it means acting on the basis of current conditions and future predictions of economic environment.

Development problems, “bottlenecks” in the chains of the value formation, risks associated with these problems are better revealed at the level of business processes and operations in so called “flat” and client-oriented business structures.

The transfer of responsibilities and powers from the level of a corporate center to the lower level of a business organization, non-budget client’s loyalty oriented approach allow to accelerate significantly reactions to ongoing changes and form clients’ preferences by creating modern process and product innovations instead of following them. The main task of corporate center in that case is to navigate business development overcoming internal frictions and acting in the interest of stakeholders.

By referring to a business model we mean the logic of forming and distribution of added value among business segments’ stakeholders with the aim of achieving their satisfaction. A current unique technological identity gives way to flexibility and adaptability which provide with sustainable marginal income. Organizations implementing a flexible business model refuse from hierarchical structures based on a strict control and unitary actions. They build their business on knowledge management which includes activities aimed at knowledge fund creation (research and development) as well as activities with the aim of rational usage of this knowledge fund (knowledge commercialization in the form of innovation). Thereby, the aims of flexible management are to ensure current activity efficiency and the ability of a business to adapt to future challenges.

Every business model goes through stages of value creation, value retention and value loss (“migration”) [1]. External disturbances of the economic environment are able to infringe upon the dialectical development of a process. This fact complicates decision-making on a necessity to adopt a new business model or make radical changes in already existing one. The problem of irrationality phenomenon (e.g. ability to predict) emerges alongside with rational activity motivators and obstructions [2].

Adaptability and flexibility of a company’s business model, individualization along with forming key processes of business core set, copy right protection of intellectual property become the most important factors of success in the competitive environment. By referring to the business core set we understand a set of operational units at different stages of maturity which ensure positive free cash flow (FCF). It is at the level of operational units where added value is created today. Subsidiaries and associates oriented at the added value creation for a parent company, different projects logically linked with company’s development prospects carried out by the company itself as a whole as well as by its shareholders may be regarded as a periphery. As a rule, it is the source of added value for stakeholders in future.

The speed of a reaction to ongoing changes, simplicity of organizational structure and the sense of confidence in actions are the most important factors of competitive success.

Three basic principles underpin business model competitiveness:

· an identity based on a consensus of problem understanding and coordinated activities flexibility;

· a modularity assuming activities autonomy as a response to environment changes;

· networks assuming the destruction of company’s administrative barriers, business going out of organizational structure limits, company’s participation in several chains of value creation, a liquidation of differences in in-house and intercompany relationships with the use of models of action coordination and in-house commercial estimate (Business Unit Management, BUM).

At the present time, a significant share of Russian business structures working in a real sector of economy combines a strategic business unit management with a project model. Such approach ensures a compromise between control in the framework of ongoing types of activities and relative freedom of management actions in relation to promising initiatives in conditions of highly turbulent economic environment and periodic stakeholders’ conflicts. Due to the fact that the majority of commercial entities tend to ensure a rational diversification of strategy business units (SBU) that allows them to decrease the consequences of local market slumps, the company’s controller has a task to substantiate a correlation and proportions between operational and project units at different stages of maturity. As an operational SBU becomes older it ensures a possibility of their timely replacement by projects which are at operational level. As a result, an organization implements the principal of a “catamaran” in which a damaged float is replaced by a new one thereby ensuring the long-term continuity of its functionality. The achievement of action consistency of different SBUs which can enter into a conflict arising from resources distribution is not less important issue. Moreover, it requires a development priorities identification taking into account business prospects.

SBUs which have demonstrated high marginal income in the current period may fail to retain this level of income in future due to changes in clients’ preferences. Therefore while deciding on distribution issues it is necessary to take into account not only the results of current efficiency and productivity but also a prospective performance assessment. It requires the formation of principally new information by a controller. Its activities should not be focused on the assessment and analysis of current budget deviations but on the prospects of development taking into account possible changes of economic environment and competitors’ actions. Positive deviations must be encouraged and negative ones must be cut off. However, their assessment must only be conducted on the basis of company’s development prospects. New technology may create and retain value only till it is not wide spread.

The globalization of business and significantly increased capital flows do not allow any technological breakthrough to remain a unique feature of its creators for a long time. While competitors copy and disseminate new product of technology, sales revenue and marginal income are declining [1, p.38].

Therefore the effective business model cannot be sustainable for a long period of time. The changes in composition and quality of business process should be constant and the aim of these changes is to increase adaptability of business to an external economic environment and its alterations.

The business model can be presented as:

· clients bases and marginal income loyalty;

· a set of industry and organization structures;

· a system of guidelines implemented in strategic and current horizons;

· a methodology of key success factors identification (KFS);

· methods and ways of key performance indicators formalization;

· a strategy map and dashboard for different levels of business organization (company as a whole, segment, business process, working place);

· subsystems of employees’ motivation for achieving set targets and forming ideas with their implementation in ideas data bases;

· effective systems of ideas’ commercialization into innovations.

Being sufficiently sustainable and coordinated system elements must ensure preventive adaptation of a business model to the changing business environment.

Otherwise, a decrease in market value of the business which has nothing to do with key economic indicators (market share, sales volume, profit) will take place.

Many commercially successful food producing companies of the beginning XXI century (“Parnas”, “Nutriteck”, “Kampamos”) which had not implemented the modern preventive adjustment to their business model, became uncompetitive due to the value migration that was expressed in changing conditions of raw materials supply caused by protectionist measures aimed at raw materials import limitations. A realization of delayed measures with the aim of the elongation of value forming chain by integrating into it additional divisions (agricultural sales or wholesale) was conducted in conditions of the crisis 2008 – 2009 and the declining business market capitalization. All these facts have led to the critical proportion between debt value and business market value (TD/MV), the impossibility of paying interest on borrowed funds. On the contrary, actions of market leaders (“Cherkizovo Group”, “Miratorg”, “Vim-Bill-Dann”) have been always directed at creating competitive advantage factors which will ensure high capitalization in future. For example, despite the current excess of domestic poultry supply over solvent demand and decreasing return on sales at the beginning of 2011 «Cherkizovo Group» announced on the realization of “mega-project” of producing 400 000 tons of poultry meat. This “mega-project” will allow «Cherkizovo Group» not only to become a leader on the Russian market, but also start an international expansion.

Possessing a highly productive agricultural complex, crops and mixed fodder producing facilities the group, in fact, controls costs starting from crops production and ending by retail trade of poultry and meat food through a network of stores under the name of “Myasnoff”.

Price volatility for the mixed fodder which is the main cost for poultry and pork meat products is estimated to be at 10-15% for the Group companies. At the same time, the market price for crops and mixed fodder doubled in 2009-2010 due to unfavorable climate conditions of the summer 2010. However, a conversion coefficient of crops and mixed fodder usage is comparable with leading countries in the livestock sector.

Most small and middle sized poultry meat producers which do not have vertical integrated agricultural structures are in the stage of bankruptcy. Therefore at the moment of “mega-project” launching declared by «Cherkizovo Group» the poultry meat market may experience a deficit of eggs and poultry meat. In its turn, these tendencies may increase a marginal income on sales and favor an accelerated recoupment of investments in new production facilities.

The optimization of investment and operational activities financing structure is also essential for the creation of a competitive business model in Russia. The use of preferential lending regime with an effective rate ranging from 0 to 4% per annum for a period from 5 to 11 years provides large integrated business structures with an additional factor of a competitive advantage by making small producers less competitive in highly industrialized segments of business.

The main criterion of business model efficiency for a large company is its value retention and accumulation from the point of view of different stakeholders. It decreases the risk of property and other conflicts emergence in future. Moreover, the value added dynamics must be assessed on the basis of its compliance with changes in the traditional performance indicators such as sales volume, assets, profit etc.

Thereby, it can be concluded that:

a) taking into account state and employees’ interests business model is efficient if it ensures the excess of gross revenue growth rates - Т(CM) (gross output minus material costs and outsourcing costs) over the gross sales growth rates– T(GS), in other words, Т(CM) : T(GS) ≥1;

b) from the management point of view, managerial effectiveness will be achieved only in case that the added value growth rates T(EVA) are higher than the assets growth rates – T(TA), i.е. T(EVA) : T(TA);

c) from company owners’ view business model can be assessed as efficient as it leads to the excess of shareholders’ added value growth rates – T(SVA) over net profit growth rates– T(NP), i.е. T(SVA) : T(NP);

d) from creditors’ stance the excess of free cash flow growth rates T(FCF) over net debt value changes rates – T(TD), i.е. T(FCF) : T(TD).

The development of a prospective business model in the turbulent business environment is, in fact, a constant process exercised by a company’s controller (in Russia, these functions are exercised by a strategic development director).

This process can be based on the PDSA methodology which implies the continuity of the following actions: plan, do, research (observe), impact i.e. transform in other state and correct development priorities. Such approach corresponds with the aims of an adaptive management, initiates courageous innovations, destroy habitual administrative model based on budget systems.

Observation (monitoring) and impact are the main productive actions in the “PDSA” model. Undoubtfully, the former needs tools (indicators), the later requires management decision making algorithm. The developed algorithm may be inefficient in some cases though.

In our opinion, Performance Management Model (PMM) [3] which consists of a set of processes aimed at the vision formation, elaborating and monitoring action plan and system of awards, resource distribution, activities coordination may be regarded as a possible variant of creation and realization of a company’s business model (illustration #1).

PMM model is oriented at preventive actions at different levels of business management on the basis of economic environment monitoring and an elaboration of critical success factors, a correction of composition and target variables of key performance indicators.

It assumes an accelerated adaptation of the company, its SBUs and business processes to changing rules of business and its priorities in the turbulent environment. It corresponds with flexible management aims.

Practical experience of commercially successful business structures in the agricultural sector demonstrates the advantages of diversified organizations which implement related vertical integration.

By uniting several SBUs with business models which are at the different stages of “value migration” cycle the company achieves the effect of stable synergy. Such integration has technological, economic, financial, social and strategic motivations that allow to smooth over development unevenness of different national industries and compensate a decrease of rate of return in operational units at the stage of a value outflow and form sufficient social and economic potential for the realization of improving and pioneer innovations.

Illustration # 1. Controlling tools of a business model development and implementation.

Efficiency controlling allows to determine “narrow places” in business, ensure the consensus of interests among different groups of stakeholders, including employees and increase social responsibility towards society.

Periodic monitoring of value added factors and its changes in future conducted with the use controlling tools allows to make timely amendments to existing business models and prevent from “value migration” possibility.

Thereby, efficiency controlling of business models exerts influence on financial, investment and operational spheres of business and is oriented at the perspective results and ensures strategic competitiveness of companies that implement it.

List of sources used:

1. Adrian J. Slywotzky // Value Migration How To Think Several Moves Ahead Of The Competition Boston, Massachusetts, HARVARD BUSINESS SCHOOL PRESS, 1996.

2. Vivek Ranadivé // The Power to Predict How Real-Time Businesses Anticipate Customer Needs, Create Opportunities, end Beat the Competition // McGraw-Hill, 2006.

3. Nils-Göran Olve, Carl-Johan Petri, Jan Roy, Sofie Roy // Marking Scorecards Actionable (balancing strategy and control) WILEY, 2003

Abstract : the problems of designing competitive business models with the use of strategic controlling tools are examined. Their performance evaluation indicators are formulated. The phenomenon of value migration is explored.

Key words: business models, adaptive management, controlling, strategy analysis, the system of indicators for a model performance evaluation.

e-mail: berdnikovvv59@mail.ru