Strategic Analysis Fall 2009

Martin Calnan [email protected]

Introducing Strategy

What is Strategy? Strategy is the direction and scope of an organisation over the long term, which achieves advantage in a changing environment through its configuration of resources and competences with the aim of fulfilling stakeholder expectations.

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What is Strategy? “Top management’s plans to achieve results based on the mission and objectives of the firm.” (Wright) Where and how to compete. “Design a mission and define overall objectives for the firm, translate these objectives into operational action plans, implement them, measure the actual results, compare them with the expected results take corrective action.” (Truche) Exploring Corporate Strategy 8e, © Pearson Education 2008 and Marcel Truche, ESC Dijon

Characteristics of Strategic Decisions  Long-term direction  Complex and uncertain  Process and content  Competitive advantage  Strategic fit with business environment  Organisation resources and competences  Values and expectations of power players  All levels of the organization

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Implications of Strategic Decisions  Complexity

 Integration

 Uncertainty

 Relationships and networks

 Operational decisions

 Change

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Levels of Strategy Corporatelevel strategy Business-level strategy Operational strategy

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What is a Strategic Business Unit? A strategic business unit (SBU) is a part of an organisation for which there is a distinct external market for goods or services that is different from another SBU.

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Vocabulary of Strategy  Mission

 Strategic capability

 Vision

 Strategies

 Goal

 Business model

 Objective

 Control

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What is Strategic Management? Strategic management includes understanding the strategic position of an organisation, making strategic choices for the future, and managing strategy in action.

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Typical strategic management process Evaluate capabilities

Evaluate environment

Opportunities and threats Strengths & weaknesses Vision and mission Strategic directions and goals Select resources and fundamental competencies Formulate strategy Implement strategy Control and evaluate Exploring Corporate Strategy 8e, © Pearson Education 2008 and Marcel Truche, ESC Dijon

Strategic Analysis

The Organisation

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Evaluating the environment PESTEL analysis Analysis of the competitive environment Rules of the game and margin of maneuver Opportunities and threats

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Evaluating the Company’s Strategic Capabilities Evaluating internal competencies Situation Value Chain, Business Model and KSFs Competitive Advantage

Analysis of internal consistency Portfolio of products Strengths and weaknesses Exploring Corporate Strategy 8e, © Pearson Education 2008 and Marcel Truche, ESC Dijon

Formulating Strategy Mission The purpose of the firm, its very reason to exist

Vision The envisioned future, the end point, the ultimate goal

Stakeholders Who influences the firm, who depends on the firm What is their power

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Defining Strategic objectives  Determine measurable goals and objectives  Identify appropriate type of objectives  Profit, growth, innovation, size, market share, etc.

 Verify consistency with stakeholders’ objectives  Shareholders  Employees  Third parties (suppliers, clients, NGOs, …)

 Translate goals and objectives into actionable items  Processes  All levels

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Translating Strategy into Action  Strategic goals translated into operational goals  Create action plans consistent with strategy  Define measurement system

If you can’t measure it, you can’t manage it. Exploring Corporate Strategy 8e, © Pearson Education 2008 and Marcel Truche, ESC Dijon

Control and evaluation  Define indicators  Quantitative  Qualitative

 Stage operations (steps)  Corrective actions / real time follow up  Use scoreboards  Identify gaps  Analyze causes  Define action points  Plan & implement follow-up Exploring Corporate Strategy 8e, © Pearson Education 2008 and Marcel Truche, ESC Dijon

The Environment

Exhibit 2.1 Layers of the business environment

The Organisation

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PESTEL Framework Political

Economic

Social

Technological

Environmental

Legal

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What Are Key Drivers for Change? Key drivers of change are environmental factors that are likely to have a high impact on the success or failure of strategy.

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Key Aspects of PESTEL Analysis  Not just a list of influences  Need to understand key drivers of change  Drivers of change have differential impact on industries, markets, and organisations  Focus is on future impact of environmental factors  Combined effect of some of the factors likely to be most important Exploring Corporate Strategy 8e, © Pearson Education 2008 and Marcel Truche, ESC Dijon

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Exhibit 2.2 The Five Forces Framework Potential entrants

Suppliers

Competitive rivalry

Buyers

Substitutes

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The Threat of Entry: Barriers to Entry Scale and experience Access to supply and distribution channels Expected retaliation Legislation or government action Differentiation or branding Patents Exploring Corporate Strategy 8e, © Pearson Education 2008 and Marcel Truche, ESC Dijon

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Why Are Substitutes a Threat? Substitutes can reduce demand for a particular class of products as customers switch to alternatives. • Price/performance ratio • Extra-industry effects

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Bargaining power of suppliers  Degree of concentration and volume  Differentiation  Impact on firm’s costs  Switching costs  Existence of alternatives  Threat of forward integration from supplier of backward integration from focal firm Exploring Corporate Strategy 8e, © Pearson Education 2008 and Marcel Truche, ESC Dijon

Bargaining power of buyers  Concentration and volume  Differentiation  Information asymmetry  Price sensitivity  Vertical Integration  Substitutive product / distributors

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Degree of Competitive Rivalry Competitor balance Industry growth rate High fixed costs High exit barriers Low differentiation

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Key Aspects of 5-Forces Analysis  Use at level of strategic business units (SBU)  Define the industry/market/sector  Don’t just list the forces: derive implications for industry/organisation  Note connections between competitive forces and key drivers in macroenvironment  Establish interconnections between the five forces  Competition may disrupt the forces rather than accommodate them

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Managerial Implications  Which industries should we enter or leave?  What influence can we exert?  How are competitors differently affected?

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Exhibit 2.5 Comparative Industry Structure Analysis

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The Environment (Session 2)

Exhibit 2.3 The Industry Life Cycle

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Typology of competitive environments (2 BCG matrix) nd

Potential advantage in terms of cost, importance of barrier to entry, price elasticity low

Sources of differentiation, low price elastic

high

high

Fragmented system

Specialization system

Large number of companies, Several players are profitable, unit frequent entries and exit, margin is high, strong competition, multiple strategic options lower profits for followers low

Dead end system

Volume system

No dominant player, no long Few competitors, size is an term advantage, low industry advantage; leader is very profitability profitable, price is a major KSF

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What are Strategic Groups? Strategic groups are organisations within an industry with similar strategic characteristics, following similar strategies or competing on similar bases.

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Characteristics for Identifying Strategic Groups Scope of activities  Extent of product diversity  Extent of geographic coverage  Number of segments served  Distribution channels

Resource commitment  Extent of branding  Marketing effort  Extent of vertical integration  Product quality  Technological leadership  Organisational size

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Benefits of Identifying Strategic Groups Understanding competition

Analysis of strategic opportunities

Analysis of mobility barriers

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What is a Market Segment? A market segment is a group of customers who have similar needs that are different from customer needs in other parts of the market.

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Exhibit 2.7 Some Bases of Market Segmentation

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Managerial Issues in Market Segmentation How do customer needs vary by market? What is the relative market share within market segments? How can market segments be identified and ‘serviced’?

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What is a Strategic Customer? A strategic customer is the person(s) at whom the strategy is primarily addressed because they have the most influence over which goods or services are purchased.

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What are Critical Success Factors? Critical success factors (CSFs) are those product features with which a organisation must outperform the competition because they are particularly valued by a group of customers.

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The Value-Adding Process The Suppliers Raw materials + RD + Production + Distribution

Input

The Industry Raw materials + RD + Production + Distribution

Input Specific competences or KSFs

The Client Raw materials + RD + Production + Distribution

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The Company

What is Strategic Capability? Strategic capability refers to the resources and competences of an organisation needed for it to survive and prosper.

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What are Core Competences? Core competences are the skills and abilities by which resources are deployed through an organisation’s activities and processes such as to achieve competitive advantage in ways that others cannot imitate or obtain.

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Exhibit 3.1 Strategic Capabilities and Competitive Advantage

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Strategic Capability- the terminology

Exhibit 3.2 Exploring Corporate Strategy 8e, © Pearson Education 2008 and Marcel Truche, ESC Dijon

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Core Competences Lead to Competitive Advantage When…  They relate to an activity that underpins the value in the product features  They lead to levels of performance that are significantly better than competitors  They are difficult for competitors to imitate

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Exhibit 3.5 Criteria for Inimitability Culture and history

Complexity Robustness of strategic capability

Causal ambiguity

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Exhibit 3.3 Sources of Cost Efficiency Economies of scale

Experience

Cost efficiency Supply costs

Product design

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Exhibit 3.4 The Experience Curve

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The Experience Curve Competences in activities develop over time based on experience, resulting in cost efficiencies Growth may not be optional Unit costs should decline year on year First mover advantage is important

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What is Organisational Knowledge? Organisational knowledge is the collective experience accumulated through systems, routines, and activities of sharing across the organisation.

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Identifying KSF’s Client interface Value proposition  Distribution channels  Target clients



Competitive advantage 

Core competences Core Resources



Threshold competences Resources

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Identifying KSFs  Client expectations

 KSFs

 Core competencies

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Strategic Capability (Session 3)

Diagnosing Strategic Capability

Business Model/ Value chain

Activity maps

Benchmarking

SWOT analysis

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Exhibit 3.6 The Value Chain

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What is a Value Chain? A value chain describes the categories of activities within and around an organisation, which together create a product or service.

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Value Configuration (Value Chain) (Osterwalder)

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Exhibit 3.7 The Value Network

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What is a Value Network? A value network is the set of interorganisational links and relationships that are necessary to create a product or service.

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Understanding the Capabilities in Relation to the Value Network Which activities are central to an organisation’s strategic capability? Where are the profit pools? What should be outsourced? Who might be the best partners in the parts of the value network?

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SWOT Analysis

Strengths

Weaknesses

Opportunities

Threats

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SWOT: definition and examples  Strengths: resources and competencies present in the organization that can be used to build a competitive advantage  Weaknesses: what is missing to do so  A strength in a context can become a weakness when the context changes (rigidity)  Opportunities are changes in the environment that open new avenues for profit and success  Threats are events or changes in the environment that limit the organization’s ability to reach its objectives Exploring Corporate Strategy 8e, © Pearson Education 2008 and Marcel Truche, ESC Dijon

The SWOT analysis  Opposing The internal characteristics of the organization (Strengths and Weaknesses) to The environment (Opportunities and Threats)  Objective is to measure the ability of the organization to reduce threats and profitably seize opportunities

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Strategic Capability (Session 4)

Business Model Configuration

Source: A. Osterwalder, « The business model ontology ». Exploring Corporate Strategy 8e, © Pearson Education 2008 and Marcel Truche, ESC Dijon

The Business Model (Osterwalder)

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The Business Model (Osterwalder)

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The Business Model (Osterwalder)

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The Business Model (Osterwalder)

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The Business Model (Osterwalder)

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The Business Model (Osterwalder)

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Exhibit 3.8 An Activity System Map

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Lessons Learned from Activity Maps Consistency and reinforcement Difficulties of imitation Trade-offs

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Approaches to Benchmarking Historical benchmarking Industry/sector benchmarking Best-in-class benchmarking

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SWOT Matrix Analysis STRENGTH

WEAKNESSES

S

W

OPPORTUNITES

Strategy S-O

Strategy W-O

O

Target opportunities that match the firm’s strengths

Reduce weaknesses that prevent the firm from benefiting from opportunities

THREATS

Strategy S-T

Strategy W-T

T

Identify resources for the firm to reduce exposure to threats

Define defensive plan

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Competitive Advantage and Strategy (Session 5)

Which positioning? The firm’s environment is illustrated through Porter’s competitive grid

Perceived Value

High Differentiation

Niche Low cost leadership

Low Low

Price

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High

Exhibit 6.2 The Strategy Clock

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Route 1: No Frills Strategy  Low price combined with low perceived product benefits focusing on pricesensitive market segments  Commodity markets  Price-sensitive customers  High power, low switching costs among buyers  Opportunity to avoid major competitors

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Route 2: Low-Price Strategy  Lower price than competitors while offering similar product benefits  Pitfalls Margin reductions Inability to reinvest

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Route 3: Hybrid Strategy  Seeks to simultaneously achieve differentiation and low price relative to competitors  Advantageous when  Greater volumes can be achieved  Cost reductions outside differentiated activities are available  Used as an entry strategy

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Route 4: Differentiation Strategy  Seeks to provide products that offer benefits that differ from those offered by competitors  Dependent upon Identifying and understanding strategic customer needs Identifying key competitors’ strategies

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Route 5: Focused Differentiation  Seeks to provide high perceived product benefits, justifying price premiums  Key issues  Choice between focus strategy and broad differentiation  Tensions between focus strategy and other strategies  Market changes

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Routes 6-8: Failure Strategies  6 – Increase prices without increasing service/product benefits  7 – Reduction in product/service benefits with increase in relative price  8 – Reduction in benefits whilst maintaining price

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Which competitive advantage? Competitive advantage based on anticipation of demand. Ability to innovate. Quick response to market changes TIME

Competitive advantage based on costs. Concentration on volume / market share COSTS

or

Competitive advantage based on differentiation and specialization. Distinctive competencies. VALUE

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Exhibit 6.3 Sustaining Competitive Advantage Price-based strategies

Differentiation Sustainable competitive advantage

Lock-in Exploring Corporate Strategy 8e, © Pearson Education 2008 and Marcel Truche, ESC Dijon

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Achieving Low Prices Operate with lower margins

Develop a unique cost structure

Create efficiency in organisational capabilities

Focus on market segments with low expectations

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Ways of attempting to Sustain Advantage through Differentiation

Create difficulties of imitation

Create a situation of imperfect mobility

Establish a lower cost position

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Establishing Strategic Lock-In

Size or market dominance

First-mover dominance

Self-reinforcing commitment

Insistence on preservation of position

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Strategy Formulation (Session 6)

You need direction… `Would you tell me, please, which way I ought to go from here?' `That depends a good deal on where you want to get to,' said the Cat. `I don't much care where--' said Alice. `Then it doesn't matter which way you go,' said the Cat. Exploring Corporate Strategy 8e, © Pearson Education 2008 and Marcel Truche, ESC Dijon

Organisational Purposes Values Mission statement Vision statement Objectives

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What are Core Values? Core values are the underlying principles that guide an organisation’s strategy.

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Core Values  What matters is not what they are but how they are lived  Must be shared  Must translate into behaviors and actions

VALUES  “Innovation” (3M but not P&G)  “Risk taking” (Sony, but not HP)  “Customers” (Wal-Mart, but not Sony)

ACTIONS  “Employees” (HP, but not Nordstom)  “Products” (Ford, but not IBM)

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What are Mission and Vision Statements? A mission statement provides employees and stakeholders with clarity about the overall purpose of the organisation. A vision statement is concerned with what the organisation aspires to be.

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Vision and mission  A clear vision is a crucial step in formulating and implementing a strategy for a firm  The vision defines how the firm will use its resources to reach its goals  Evaluating a strategy makes no sense unless you compare achieved results and expected results

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Why vision?  Jim Collins in “Built to Last”: research on companies with decades of excellent performance, compared to laggards  Gap can be explained by existence of clearly articulated vision and values PRESERVE  Preserve the core / stimulate progress • Values • Purpose

 Vision = values, purpose/mission, long term objective STIMULATE • Operating modes • Objectives and strategies

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Core Values

Example

Passion for what we do Integrity in how we do it Pride in winning Respect for our Partners

Core Purpose / Mission A company that inspires and nurtures the human spirit, providing people an uplifting daily experience every day

25-Year BHAG (Big Hairy Audacious Goal) Turn the Starbucks brand into the most recognized and respected brand in the world

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A Few Mission Statements  “To grow more rapidly than our competitors by providing customers with the solutions they need to capture, store, process, output and communicate images—anywhere, anytime.”  To protect the lives and dignity of victims of war and internal violence and to provide them with assistance.  To improve human and animal health, directly and through its joint ventures.  To educate leaders who make a difference in the world

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Mission statement: who, what and how?  “Visible flag” for all stakeholders  Expression the long term strategic choices = coherent with strategic positioning  Reference point, particularly for employees, to base decisions upon  Ensurse consistency of decisions at all levels of the firm  Must be communicated to and shared by employees  Public commitment by the firm

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What are Objectives? Objectives are statements of specific outcomes that are to be achieved.

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AXA To be the world’s reference in financial protection

Think global, act local

Be big

Be international

Motivate and involve employees

Make profits

Listen to clients

Be professional

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Source : S. Auvé

Objectives must be measurable Strategic directions

Measurable objectives

• Be professional • Listen to clients • Make profits • Motivate and involve employees

• 0 defect

• Be international • Be big • Think globally, act locally

• Satisfaction rate = 100% • Return on investment = 20% • 10% of capital owned by employees • 60% of revenue from international • 60% of share of all active markets • 100% of local talent internationally

AXA example, source: Auvé Exploring Corporate Strategy 8e, © Pearson Education 2008 and Marcel Truche, ESC Dijon

Operational Action Plans  Each operational manager proposes action plans to reach the general objectives of the firm  Strategic objectives are translated into complementary and converging operational objectives  The strategic process must involve all levels and all functions of the firm

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Aligning operational action plans and overall strategy Level 1 Company Level 2 SBU Level 3 Functions

Level 4 Operations

Mission and strategic direction

Main objectives (measurable)

Action plans

Mission for Business Units

Operational objectives

Action plans

Mission for Functions

Operational objectives

Action plans

Mission for Factories or divisions

Operational objectives

Action plans

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Management by Fact or PBS 1. Identify what can be Demonstrate improved effectiveness

Gap must be clear and measurable 2. Identify root causes Validate

6. Measure results Roles and responsibilities 5. Implement Best options

4. Agree on action plan

one or more 3. Propose causes alternative solutions Select a solution

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Objective of MBF  Targeted use of competencies  Common tools and measurement methods  Analysis and actions based on fact  Accountability at all levels  Align individuals’ and groups’ objectives with those of the company  Ensure learning (individual and organizational)

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Strategic adjustments

MBF = Measurable implementation of strategy Mission statement General and specific objectives SB

SB

SB

SB

SB

SB

SB

SB

SB

Intra-functional Intra-functional Intra-functional meetings meetings meetings Cross-functional meetings

SB = story board

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What are Stakeholders? Stakeholders are those individuals or groups who depend on an organisation to fulfil their own goals and on whom, in turn, the organisation depends.

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Exhibit 4.7 Stakeholders of a Large Organisation

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Exhibit 4.9 The Power/Interest Matrix

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