Strategic Planning – BSP – Strategic Management

Module 1 Introduction to Strategy, Planning and Structure 1 Strategic Planning: The Context 2 What Is Strategic Planning? 3 The Process of Strategy and Decision Making 4 Business Unit and Corporate Strategy 5 Is Strategic Planning Only for Top Management?

Module 2 Modelling the Strategic Planning Process 1 The Modelling Approach 2 Strategy Making

Module 3 Company Objectives 1 Setting Objectives 2 From Vision to Mission to Objectives 3 The Gap Concept 4 Credible Objectives 5 Quantifiable and Non-Quantifiable Objectives 6 Aggregate Objectives 7 Disaggregated Objectives 8 The Principal-Agent Problem 9 Means & Ends10 Behavioural vs. Economic & Financial Objectives11 Economic Objectives12 Financial Objectives13 Social Objectives14 Stakeholders15 Ethical Considerations16 Are Objectives SMART?

Module 4 The Company and the Economy 1 The Company in the Economic Environment: PEST, ETOP 2 Revenue and Costs: The Basic Model 3 The Workings of the Economy 4 Forecasting: What Will Happen Next? 5 PEST Analysis 6 Environmental Scanning 7 Scenarios 8 The Economy and Profitability 9 Environmental Threat and Opportunity Profile: Part 1

Module 5 The Company and The Market 1 The Market 2 The Demand Curve 3 Competitive Reaction: Game Theory, The Kinked Demand Curve,

Competitive Pricing 4 Segmentation 5 Product Quality 6 Product Life Cycles 7 Portfolio Models 8 Supply 9 Markets and Prices10 Market Structures: Perfect Competition, Monopoly,

Barriers, Contestable Mkts, Oligopoly11 The Role of Government12 The Structural Analysis of Industries: Profiling the Five Forces13 Strategic Groups14 First mover advantage15 An Overview of Macro and Micro Models16 Is Competition Changing?17 Environmental Threat and Opportunity Profile: Part 2

Module 6 Internal Analysis of the Company 1 Opportunity Cost 2 Fixed Costs, Variable Costs and Sunk Costs 3 Marginal Analysis 4 Diminishing Marginal Product 5 Profit Maximisation 6 Production Costs 7 Accounting Techniques Break-Even Analysis, Payback Period , Sensitivity Analysis 8 Accounting Ratios 9 Benchmarking10 R&D11 Human Resource Management12 The Scope of the Company Economies of Scale, Economies of Scope, Diversification Synergy, Vertical Integration13 The Value Chain14 Competence15 Strategic Architecture: Competitive Advantage16 Strategic Advantage Profile

Module 7 Making Choices among Strategies 1 A Structure for Rational Choice 2 Strengths, Weaknesses, Opportunities and Threats 3 Generic Strategies 4 Identifying Strategic Variations 5 Strategy Choice

Module 8 Implementing & Evaluating Strategy 1 Implementing Strategy 2 Organisational Structure 3 Resource Allocation 4 Evaluation and Control 5 Feedback 6 The Augmented Process Model 7 Postscript: Strategic Planning Works

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Module 1 - Introduction to Strategy, Planning & Structure

1.1 Strategic Planning: The Context

Rationale for core courses:

OB: - Organisations are run by people. - Effectiveness relies on understanding motives & how they interact.

EC: Operates at 3 levels:- Business affected by business cycle, interest rate, exchange rate, government policy, etc.- How markets operates, how prices are determined, competitive forces, effects of market structure- Efficiency, marginal analysis

MKG: Relating product characteristics to market demand. Winning & maintaining competitive advantageFIN: Quantitative evaluation of alternative optionsACC: Efficient resource allocation, isolating relevant costsPM: Time, cost, quality trade-offs – Map, assess & monitor risk.

1.2 What Is Strategic Planning?

Comparable in complexity to economic policy making (many factors & issues)- Profitability, sales growth, market share, relative costs, competitive position, pricing, environmental

scanning, human resource management, timing new product launch, dividend policy, company culture

Approach: - Merge business concepts to understand how companies operate in competitive environment- Develop understanding of inter-relationships- Explain why companies have succeeded/failed in the past & how to operate successfully in future

Apply the integrating approach to Madonna

Managers’ Definitions of Strategy

Many different definitions: Setting objectives, long-term thinking, market alignment, selecting best options...

Academic Definitions of Strategy

Informal versus formalStrategic planning takes place in complex and dynamic environmentAttempt to identify critical success factors

Depends on correlating actions and outcomes (cause/effect): Difficult in business Depends on behaviour of competitors; about the unknowable and unpredictable

Three Approaches to Strategic Planning

1. Planning2. Course of action emerging over time3. Outcomes of the resources

1. Planning approach: prescriptive, rational objectives Determine objectives Analyse business environment Make forecasts Design plan and pass down for execution

Assumptions: Future can be predicted accurately enough to make rational choice Possible to detach strategy formulation from everyday management,

Relevant information can be extracted for strategy makers- Possible to forego short-term benefit for long-term advantage- Strategies can be managed as proposed- CEO has knowledge and power to choose from options, does not need consensus- Once defined strategy decision does not need to change- Implementation is distinct phase that only begins once strategy is agreed

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2. Emergent strategy: strategy is not planned but emerges in an unpredictable manner- No cause effect relationship- Managers only can handle limited options- Managers are biased- Managers seek satisfactory (not optimal) solution- Organisations are coalitions of interest groups, implementation requires negotiation- Managers consider culture & politics as much as resource availability & external factors- Bounded rationality – rational based on limited (incomplete, unreliable) information – satisficing

3. Resource-based strategy:- Company not passive collection of resources- Develops ability to take advantage of opportunities and create new opportunities- Core competences Distinctive capabilities Strategic capabilities

Rittell’s Tame & Wicked Problems

Property Tame Wicked

1. Ability to formulate the problem Can be written down No definitive formulation

2. Relationship between problem & solution Can be formulated independently of solution Understanding problem is same as solving it

3. Testability Either true or false Solutions good or bad relative to each other

4. Finality Clear solution No clear end and no obvious test

5. Tractability Identifiable list of operations can be used No exhaustive identifiable list of operations

6. Level of analysis Can identify root cause Never sure whether a problem or a symptom

7. Reproducibility Can be tested over again as in a laboratory Only one try: no room for trial and error

8. Replicability May occur often Unique

The Origins of Strategy and Tactics

Greek Strategio = general; stratus = army, agein = leadTaktos = ordered (manoeuvre) tacticsMilitary: Business analogy not complete

Strategy and the Scientific Approach

No agreement on what scientific method isKarl Popper: Theories can only be falsified (problem: not possible to prove the reverse either)Kalakos: Testing not important but the overall research programmeFeyerabend: Scientific method unduly constrictive, lateral thinking necessaryKuhn: Scientific paradigm changes over time

Intractable problems:- Different views of strategic planning- Range of variables (company type, environment) enormous- Significant interaction among variables- Changing variables combined with time lags between actions & outcomes difficult to disentangle

cause and effect- Wicked nature of business

Two levels of problem- Scientific method cannot provide definitive answers- Data not sufficient to test hypotheses

Two approaches: in-depth versus larges-scale educational studies- Strategy research more in-depth (anecdotal), casual empiricism- En Search of Excellence: 8 attributes of 43 “successful” companies, not equally predominant

Alternative interpretation: companies will continue- Hall & Banbury: strategic planning leads to higher performance

At least correlated, causation could be inverse

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Strategic Planning & Strategic Thinking

Challenges:- Three approaches to strategic planning- Wicked problem- Scientific method cannot be applied

Two fundamental skills for strategic planner- Synthesis (breadth) across disciplines- Evaluation (depth) by applying models

1.3 The Process of Strategy and Decision Making

Strategic decision making- Cannot be expressed in mechanistic fashion- Nonetheless susceptible to structured analysis

Strategy Dynamics

Complex interdependent non-linear dynamic system- Not random: deterministic not chaotic not predictable- Even if possible to pin-point strategic success

Must ensure not temporary and can be sustained

The Mythical Company

1. How Well Are We Performing?2. What Should We Be Doing in the Future?3. How Can We Achieve Successful Change?

Different views of strategy expressed in each function’s languageCEO must arrive at strategy supported by all

- Since all functions must implement

Strategy and Crises

Strategy challenges:- Urgent day-to-day problem. Divert attention

CEO options:- Defer strategic changes- Amend changes (moving target)- Insist on strategy

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Elements of Strategic Planning

Elements1. Managers use structure to tackle problems in their areas2. Manager applies structure to data analysis3. CEO integrates analyses to arrive at a decision4. Evaluation system monitors resource allocation5. Strategy may be modified in future

Structure- Different expertise for each functional manager- Body of theory introduces order to real-world complexity- Structure within which can establish priorities and identify objectives- Lack of structure reaction, arbitrary- Caution: structure may be inappropriate or obsolete

Analysis- Tools and techniques to make sense of relationships and data- Help to identify what is important & irrelevant- Don’t confuse rigour with numbers- Precision is not essential- Data can be: relative order of magnitude, positive / negative, qualitative / quantitative

Integration- Implications of recommendations in one area (OB, EC, MK, …) for other aspects of company operations- Challenge: reconcile implications

Evaluation- Performance, how well resources were being allocated- Variety of measurements

(Cny perf: ROI, Profit Margin – Resource allocation efficiency: Asset Turnover, Contribution on Assets, Sales per Employee)- Help identify problems or concern, early warnings- Not possible to express all targets quantitatively- Competitive benchmarks invaluable- For persons & groups: not aggregated, must relate to objectives, Or can be irrelevant, counterproductive

Feedback- Maintain alignment with actual events

1.4 Business Unit and Corporate Strategy

SBU strategy- What is the market?- Which target segments?- What is the competition?- How to sustain competitive advantage?

Corporate strategy- Determining the portfolio of SBUs- Allocating resources among SBUs- Developing new business ventures- Appointing SBU CEOs

Successful SBU strategy is necessary, no sufficient, condition for successful corporate strategy

Allocating Corporate Resources

Two approaches to corporate resource allocation (e.g. with two groups of three SBUs each)- By SBU (most efficient but not always best choice)- By group

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Development of Corporate Strategies

Corporate structure: value creation cost < benefits (else break-up)

Decade Strategic issues Strategic Concepts Corporate Strategies

1950s Centralised control Devolve responsibility = decentralise Divisionalisation

1960s Maintain growth General Mgt skills + Synergy Diversification

elusive synergy, risk spreading (management rather than shareholder)

1970s Manage diversity Portfolio planning Balance portfolio

slow economy, high inflation, Asian competition

1980s Poor perf. of diversification Shareholder Value Restructuring

Value destruction Stick to the knitting delayering, divestment

Hostile takeovers many failed strategies Opportunity

Early 1990s Core business Core Competences Linked portfolios one approach focus on related diversification (no guarantee against value destruction)- Alternate view: only justification for diversification is

sharing resources and particular competitive advantage

Dominant logic Downsizing

Parenting Advantage - Stand-alone influence : interference destroys value,‘10% versus 100%’ paradox

- Linkage influence : linkages possible anyhow, ‘enlightened self-interest’ paradox

- Functional & services influence :insulated supplier, ‘beating the specialists’ paradox

- Corporate dvpt activities :most new ventures, M&A, bus. redef. fail to create value‘beating the odds’ paradox

Late 1990s Globalisation Economy of scale

Global Reach

Mega mergers- No guarantee of economy of scale- No guarantee size will produce competitive advantage

2000s Knowledge Identify & maintain tacit knowledge Knowledge Management

1.5 Is Strategic Planning Only for Top Management?

Company Benefits of Strategic Planning

Process of defining plan potentially more valuable than plan- Better understanding of individual manager, of opportunity costs, cooperation requirements, balanced

view of other groups, elimination of unnecessary conflicts- Understanding of manager of overall plan improves ability to position/ defend requests & select which

proposals are most appropriate- Easier for manager to adapt to environmental changes and deduce impact

Individual Benefits of Understanding Strategic Planning

Better understanding of company direction- Predict changes- Align proposals / requests improved support / prestige / career prospects Locus of control OB p1/13

i.e. comfort zone

Understanding Strategic Planning: Who Should Pay?

Value to both

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Module 2 - Modelling the Strategic Planning Process

2.1 The Modelling Approach

Model provides structure within which problems can be analysed- SP model not based on cause & effect relationships- Attempt to rationalise complex processes of decision making

The Components of a Model

Planning as a flow process

1. Setting goals2. Forecasting payoffs3. Forecasting shortfalls4. Identifying potential strategies5. Selecting the best strategy mix6. Organisation and implementation7. Control and reappraisal8. Feedback to previous activities

Weaknesses: goals may be invalidStrength: no better approach, identifies main components

Feedback potentially most important element

Milton Friedman: real test of model: how well it predicts future events

Steps not necessarily consecutive

Benefits and Costs of the Modelling Approach

Structured versus unstructured approachUnstructured: difficult to identify general principles

Benefits of modelling planning (structured)- Provides structure- Simplifies complex processes- Acts as a checklist- Identifies areas of disagreement

Costs- Mechanistic impression- Introduces rigidity to a dynamic process- Gives impression that strategy can be derived from a model

The Strategic Process Model

For example, 4 areas for analysis:- General environment- Competition within the industry- Internal strength and weaknesses- Current and potential competitive position

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Questions for model:- Do strategists have appropriate characteristics?- Are objectives clear?- Was environment analysed adequately?- Was correct alternative selected?- Are resources allocated effectively?- Does the model adapt to feedback?

No single critical success factor; how many weaknesses can a strategic process bear?

2.2 Strategy Making

Peters & Waterman (In Search for Excellence): strong leader is recurring factor of successful companies

Strategy and the Evolution of the Company

Company’s “evolution”:- Small or entrepreneurial – controlled by owner- Integrated – owner controls strategy, delegates operations- Diversified – objective criteria evaluation, product/market decisions are delegated to heads of SBUs

Strategists

Research into managerial styles and approaches- Unable to identify causal relations between behaviour and outcomes

Ensuring that the right type of person is in charge

Strategic planning: multidimensional, multilevel

Management roles:- Strategist, entrepreneur, goal setter- Analyser (competition, environment)

- Strategy decision maker (advisor)

- Implementer and controller (resource allocation)

- Communicator (competitive hence strategic dynamic change)

Conflict inherent in process: efficiency, flexibility, ...

Review QuestionCase 1: Rover Accelerates into the Fast Lane (1994)Case 2: The Millennium Dome: How to Lose Money in the 21st Century (2001)

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Module 3 - Company Objectives

3.1 Setting Objectives

Managers tend to react to circumstances and seize opportunitiesStrategic plan is based on achievement of specified objectives

Explicit objectives: balance between informing managers and ensuring that competitors cannot pre-empt strategic movesMission statement:

- They are often devoid of operational implications- General framework within which strategies are worked out (elaborated)

3.2 From Vision to Mission to Objectives

Vision: long-term view of what the company is about and the markets within which it should be operating- Developed by CEO

Translate the vision into tangible set of direction steps:1. Develop the mission statement2. Disaggregate the mission3. Derive objectives

Mission statement characteristics:- Define business that organisation is in- Be clearly understood by employees- Provide focus for activities

Defining the Business of the Organisation (on a regular base)

Productive scope (e.g. make or buy) impacts skill set

Market positioning (distribution and marketing channels)

Breadth & Focus of businessTarget markets

Deriving the Mission Statement (from the business definition)

Mission statement can relate to e.g.: how the cny intends to operate within that business area

- Product quality- Degree of differentiation- Geographical area- Target segments

Each statement implies different focus, different allocation of resources and marketing approaches

Sometimes mission statement describes status quo (merely describes what the cny is)

Sometimes describes management’s “wish” for the future- Must be attainable- Employees must relate to

Disaggregating the Mission

Mission statement applies to whole companyShould be applied to individual parts of the organisation (e.g. functional departments)

Setting Objectives

Determine what has to be achieved for the mission to be successful

Stated as measurable performance targets- Introduce accountability into business

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3.3 The Gap Concept

Gap: difference between desired & expected future states- New products, market share, profitability, etc

Projections complicated solution: “What if” scenariosAfter identifying gap:

- External or internal factors?- Sufficient potential resources to close gap?- Strategy possible to close gap?

Possible that gap between expected and desired future state is larger than difference between current and desired (i.e. negative trend)

External or Internal Gap FactorsOutside gap factors

- Can be too great to close Reduction in market size, product prices

- May be possible to counteract Aggressive competitor actions, government intervention

Internal gap mobilisation of resources

- Inappropriate allocation of resources resource reallocation

- Insufficient resources (quantity or quality)

Gaps and Resources

Not only ability to acquire resources- Also timing is important- Combine gap analysis with dynamic scenario approach

Identify critical success factors- Arrange finance, personnel, productive capacity- May be possible to defer until needed

Gaps & Incentives (motivation)

Current incentive system usually aligned to expected state rather than desired state- May be necessary to change incentives to promote gap closure

3.4 Credible Objectives

Objectives must be appropriate to company circumstancesDynamic process constantly under reviewRelevant to managers and achievable

3.5 Quantifiable and Non-Quantifiable Objectives

Cost benefit analysis can help assign relative importance of intangiblesTranslate non-quantifiable objectives into quantifiables (ROI) trade-offs, opportunity cost

3.6 Aggregate Objectives

The corporate objective as derived from the mission statement is an aggregate concept in the sense that it applies to overall cny perf., size, target markets, financial structure, etc.

- Maximizing shareholder wealth / value- Quantitative aggregate objectives measure the effectiveness of corporate executives- Principal-agent problem

3.7 Disaggregated Objectives

Corporate objectives SBU objectives Sales objectives, Production objectives

May be conflicting: e.g. - Sales: increase market share- Production: decrease inventory

3.8 The Principal/Agent Problem

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Specific time

future states

future states

Problem Generate a series of incentives which ensure that corporate & SBU objectives are achievedContract between manager (principal) & subordinate (agent) ensuring that agent attempts to achieve the objectivesRoot cause: asymmetric information = agent has more information

3.9 Means and Ends

Alternative to disaggregating objectives: specify series of means for each end

3.10 Behavioural vs. Economic & Financial Objectives

Behaviourist approach Interpersonal processes impact probability of success:- Efficient communications- Good labour relations- Contented workforce

No cny can afford to ignore economic & financial objectives (which are susceptible to measurement & evaluation)

3.11 Economic Objectives

Economic objectives different than financial:- What is being maximised?

Diminishing marginal product Additional resources likely to yield diminishing returns

- Individuals maximise welfare / happiness- Companies maximise profits- Altruism not necessarily non-maximising but cny no profit max. as its goal is unlikely to succeed - Eurotunnel

Maximising problems:- Vast number of options bounded rationality satisficing criterion (eg. hurdle rate used in financial appraisal)

- Dynamic environment (insufficient time for analysis)

3.12 Financial Objectives

Enable quantification of profit maximising objective

Discounting and Present ValueNet Present ValueCapitalised Value

Income/ cost stream DivCapitalised value of income streams: Capital sum = ----------------------------- Share price E0 = -------

Interest rate re

Choice of Interest Rate: The Cost of Capital

Two financing methods: debt, equityEquity rate not known – must be estimated Capital asset pricing

Return on Investment

Misleading view of single investment but average ROI of company sufficient to monitor performance

Shareholder Wealth

Stage 1 Decide on the Planning Period – typically around five years

Stage 2 Determine the Cost of CapitalStage 3 Decide on the Residual Cash Flow – constant net cash flow predicted after the end of the planning period

Stage 4 Determine the Cash Flows during the Planning PeriodStage 5 Calculate Net Present Value of Cash Flows during the Planning PeriodStage 6 Calculate the Present Capitalised Value of the Residual Cash FlowStage 7 Add the Net Present Value, Capitalised Residual Value, Marketable Securities minus Debt

‘In what sense is this activity adding value to the cny?’ focus on the relevance of alternative courses of action

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Expected income streamShareholder wealth / value = ----------------------------------

3.13 Social Objectives

Corporate Social Responsibility (CSR) Minimisation of pollution – Creating employment for disadvantaged

Friedman: Any goal other than profit maximisation leads to misallocation of resourcesSmith: Society interests served by self-seeking individuals; tackle undesirable side-effects with collective actionHayek: Unintended consequences of human action – may harm both company and society

Lack of efficiency:- How much of resources for each objective- Reduce competitiveness- Efficiency vs. equity It may be that pursuit of equity (CSR) is consistent with profit maximisation

3.14 Stakeholders

Stakeholder Interest

- Conflict of interest: which is more important?- Influence of stakeholders on company

Stakeholder Interests – Priorities

Shareholders ROI, risk – Highest priority stakeholder (control the supply of capital) but often short-term view

Managers Salary, advancement – High impact decisions, but there is a market for managers

Employees Salary, advancement, security, fair treatment – Can be replaced on labour market

Suppliers Prompt payment, repeat orders – Depends on bargaining power of supplier (number, substitutes... )

Customers Relative value for money, Quality, Availability – Low priority stakeholder

Creditors Cash flow, financial stability – Only need assurance that debts will be serviced, no other interest

Local community Lack of negative externalities, Employment prospects – Mutual dependency, valid stakeholder interest

Government Payment of taxes, abide by law – No stakeholder interest unless in gvt run organisations

Stakeholder Influence

E.g. trade unions, interest groups influence often in conflict

Shareholders Little day-to-day influence, represented by executives Principal-agent problemsInstitutional shareholders may wield some power – Family owned, dual role (manager, shareholder)

Managers Influence of manager increases (& shareholder diminishes) with size of companyIncentive structure must be aligned with shareholder interest

Employees Influence of trade unions is diminishing (legislation, number of members)Experience curve: not feasible to replace entire workforce at onceDirect influence less important than extent of collaborationRelated to culture, organisational structure, incentives

Suppliers Depends on number of suppliers, substitutes

Customers Depends on number of customers, substitutes

Creditors May want representative on board (e.g. for a start-up with VC funding)Influence diminishes with track record

Local community Series of constraints:- Good employer reputation: easy recruitment at the going wage rate

- Pollution: difficulty obtaining permission for expansion

Government RegulationRole as purchaser (defense industry)

Policies on subsidies and trade (import / export)

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Mapping Stakeholders

Stakeholder influence & priority can have a significant impact on how an organisation operates & on its potential for change.

Stakeholder Influence Priority

Shareholders (family) High HighManagers Low HighEmployees High LowExisting customers Low HighSuppliers Low High

Precise location of stakeholders is subjective

3.15 Ethical Considerations

Dickensian (amoral) capitalist is rareGeographical variation in ethics (bribes)Moral values as means towards the ends of promoting positive image

- Honesty, integrity, dependabilityEmployee perception:

- (Survey) Company values loyalty but not whistle-blowing

3.16 Are Objectives SMART?

Specific, Measurable, Achievable, Relevant, Time-bound

Relevant objectives are linked to the organisation’s strategy & achievement of the objective is seen to move the business towards its goals.

Relevant: it is clearly important that objectives are aligned with the resource capabilities (resource based strategy)

Case: Porsche: Glamour at a Price (1993)

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Module 4 - The Company and the Economy

4.1 The Company in the Economic Environment

Environmental scanning:PEST – Political, Economic, Social, TechnologicalETOP – Environmental Threat & Opportunity Profile

4.2 Revenue and Costs: The Basic Model

Revenue = Total market x Market share x Price

Outlay = Number of workers x Wage rate

+ Units of capital x Price

+ Units of material x Price

Variable Determining factors

Total market National income, Foreign national income, Population, Preferences, Competing products,Product life cycle

Market share Price, Marketing expenditure, Marketing strategies, Competitor marketing expenditure, Competitor strategies

Price Demand conditions, Competitive reaction, Competitive advantage, Market segmentationWorkforce Labour market conditions, Regional supply variations, Wage rate offered, Working conditionsWage rate Labour market conditions, Unemployment rate Capital Capacity of the capital goods sectorCapital price Capital market conditionsMaterials Capacity of suppliers

Materials price Materials market conditions

4.3 The Workings of the Economy

Reasons for analysing economy- Distinguish between internal and external influences- Identify opportunities and threats- Economic context necessary to interpret expert predictions

Understanding and Using Economic Information

Minimum: view of current state of economy- E.g. unemployment, industrial output, consumer spending- Capacity / volume planning depends on extrapolation of trends

Supply and Demand in the Economy

Potential or Full employment GNP- If all labour force fully employed & no excess capacity- Actual output may exceed potential output shortages of labour overtime

Managers should ask: what is the difference between potential and actual output?

Three elements of unemployment- Structural: large scale disruptions when industries fold (UK 1980s: Mining)- Frictional: job search, transition (Correlation to unemployment compensation)

- Demand-related: difference between actual and potential output

Unemployment and Inflation

When market economy approaches full employment, supply bottlenecks emerge- Increased wage rates, capital costs, material prices (wage rate sticky with significant unemployment)

- Demand-pull inflation: too much money chasing too few goods

Philips curve (1950s): inverse relation between inflation and unemployment

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1970s stagflation: Philips curve shifted Expectations (extrapolation of inflation)

Elimination of expectation: Monetarist: keep money supply growth constant Alternative: increase unemployment and wait

Inflation depends on: Unemployment (demand-pull) Last period’s wage inflation (cost-push: production costs) Last period’s inflation (expectations)

The International Economy

Relative inflation rates Implications on prices and costs

Exchange rate fluctuations International capital flows are 80x real trade flows

- exchange rate independent of balance of trade Primary factors: relative interest rates and expectations Tendency to overshoot & undershoot

- Bias toward cyclical variations Companies not in foreign exchange business

- Hedge bets by buying/selling currency forward- But: impossible to predict cash flow precisely so residual risk remains

Competitive advantage of nations Porter: competitive position geographically concentrated Home nation shapes opportunity perception

- Pressure to innovate and invest Favourable domestic factor conditions (highly specialised)

Favourable demand conditions (sophisticated consumers)

Danger of protectionism (stifles innovation)

National environment Influences Domestic factor conditions (Silicon Valley, Plastic valley…)

Related and supporting industries (accessible suppliers)

Demand conditions (Japan gadget – Germany car)

Strategy, structure and rivalry (competition innovation)

Country-specific advantage – exploit market by exporting (cost advantage)Company-specific advantage – invest in country if advantage can be transferredTrade-off between perceived competitive advantage and exchange rate

4.4 Forecasting: What Will Happen Next?

Accurate predictions difficultEven vague predictions can be valuable Direction of change is importantAll forecasters share same poor track record

Tend to follow rather than predict change No connection between model complexity and accuracy

Simple approach leading indicator (statistical association)

Chosen since served as predictor in the past (but no guarantee for future) Unpredictable events (oil prices, war...)

Business cycle Clear in retrospect, difficult to predict Three components

- General trend- Underlying smooth cycle- Random fluctuations (economic policy, exchange rates,...)

4.5 PEST Analysis

Identification of relevant factors and interrelationships

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Factor Issue ThreatP … HighE … MediumS … LowT … High

Political monopoly behaviour, labour lawsEconomicSocial demographic composition, social norms (typically qualitative, not quantitative)

Technological continuous process but can be disruptive

4.6 Environmental Scanning

Monitor continuously all of the PEST type variables Predict changes Assess implications

Wider range of variables than PESTPredict beyond extrapolationsHighly subjectiveEarly warning system

4.7 Scenarios

Implications of possible futures, not forecaste.g. price reduction of competitor market share, cash flowe.g. inflation falls...

4.8 The Economy and Profitability

Implications for Company Sales and Revenues

GNP elasticity – responsiveness of product demand to changes in GNP (rough idea of magnitude)

Not whole story: not only size of GNP but distribution of national expenditure

Competitive Reaction and the Economic Environment

Anticipate competitor reaction to environmental changes (e.g. price cut)

Implications for Inputs and Company Costs

GNP growth may lead to increased costs Labour rates, input prices May exceed revenue growth

4.9 Environmental Threat and Opportunity Profile (ETOP): Part 1

Framework for identifying factors:

1. Use the PEST approach as a checklist2. Apply macroeconomic ideas to economy wide influences3. Consider international factors both in terms of exchange rates and international competitive influences4. Use the environmental scanning approach to think beyond the immediate situation5. Put together some scenarios to help put factors into context6. Build a profile of opportunities and threats

Case: Revisit Porsche: Glamour at a Price

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Environmental threat (−) and opportunity (+) profileSector Threat or opportunityInternational − Expected appreciation of exchange rate

+ Growth in Eastern Bloc economiesMacroeconomic − Tax rate increase to fight inflation

+ Prospect of reduced interest ratesMicroeconomic − Price of alcohol falling in real terms

+ Shop opening regulations repealed− Competition within the strategic group

Socioeconomic − Report on sugar: no health influence+ Increase in outdoor activities

Market − More substitutes appearing+ Growth has been steady

Supplier − Strikes in prospect+ Take-over by multinational

Module 5 - The Company & The Market

5.1 The Market

Market is principal mechanism for resource allocation in industrialised nations. Understanding operation is critical for insight into customer, competitor behaviour Strengths & Weaknesses are basis for legitimate government intervention

5.2 The Demand Curve

Price elasticity of demandCeteris paribus – changing one variable and holding others constant

Demand Factors

Determinants of market size (largely outside company control)

Product life cycle Business cycle Exogenous shocks GNP elasticity Exchange rates

Determinants of market share (can be influenced)

Price Marketing

Demand curve: price affects position, other factors shift curve

Demand Curve and Market Share

High inelasticity means steep price reduction is necessary to increase market share: May provoke competitor reaction shifting the D curve to left

Higher market share (determinant of competitive advantage – through price reduction)

Increases competitive advantage May lead to lower revenue (depending on elasticity)

Demand Curve and Marketing Expenditure

Marketing expenditure increases sales (& market share)

Exact shape of response curve not usually known Shifts demand curve to right

Revenue = Total market x Market share x PriceTotal market: price of substitute/complementary goods can shift demand curve (affect total market)

Market share: market expenditure can shift demand curve

Estimating the Demand Curve

Cannot extrapolate on different empirical data points (from different time periods) Demand curve may shift over time

5.3 Competitive Reaction

Predict competitive reaction Important to be aware of dilemmas – rather than prescribing complex gaming rules

Game Theory

Zero-sum game any gain made by one party is at the expense of the other – e.g. static/declining market (cigarettes)

Price setting w/o collusion prisoner’s dilemma (potential costs & benefits, high degree of uncertainty, competitor unpredictability)

Unless there is trust and commitment / agreement there is incentive for one party to break ranks

Introduce another variable situation repeated # of time (1 year), legal agreement

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The Kinked Demand Curve

At price P sales revenue ( P x Q ) is maximised

Market conditions may change kink

Industry consolidation increases slope below kink (decreases elasticity)

Competitive Pricing

Three main forms of competitive pricing:

Price leadership: (fragile situation)

Dominant firm initiates price changes Retaliates against defectors Difficult without sending conflicting signals

- Penalising defector penalises all the small companies

Limit pricing: Erect entry barrier by setting low price to deter entry Only worthwhile if cost advantage

Even then: questionable whether it will be sustainable/optimal in long-term it becomes a game

Predatory pricing: Drive new entrants (and weak competitors) out of business Requires strength (e.g. cash reserves)

These approaches are rarely, if ever, found in practice

5.4 Segmentation

Market segment: group of consumers with common set of characteristicsMarket demand curve: sum of market segment demand curves

Segmentation characteristics: Income, social class, geographical location, age, sex, family size, education Difficult to differentiate price except by geography

Required characteristics to enable exploitation1. Identifiable2. Demand-related (willingness to pay more for a high quality product)

3. Adequate size4. Attainable (reachable by marketing and advertising)

Identifying segmentation variables Identify key product characteristics Derive characteristics of the target segment Identify location (physical, income, class...) of the target segment

Construct segmentation matrix Identify two key variables (e.g. restaurant ethnicity x quality) Fill in with offerings Identify gaps

- Do not necessarily mean good opportunity- May have been tested and found unprofitable

Analyse segment attractiveness Complex variety of strategic models Demand and supply analyses, market structures

(Perfect competition, Monopoly, Barriers to entry, Contestable markets, Oligopoly)

Identify key success factors (necessary but not sufficient conditions for success)

Customer characteristics? Customer willingness to pay? Enough customers? Can they be reached?Pricing in Segments

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Highly elastic

Highly inelastic

Quality

Type High Medium Low

Chinese 3 7 5Japanese 1 1Indian 2 10 15Mexican 5 10Italian 6 4 9

Prices may vary across segments even when costs are equivalent

Optimum price to charge in each segment Discriminating monopoly Monopolist charges higher prices in market with low D elasticity than in market with high D elasticity

Step 1: Determine segment characteristics and matching product characteristicsStep 2: Derive price income elasticity (also called responsiveness)

Marketing Identify viable product segmentationEconomics Measure demand, calculate marginal costs, revenueAccounting Cost allocation to segments/products, maximise profits

Product Differentiation

Differences may be more apparent than real Perception of buyers

Most important determinants of product success Perceived price vs. competition Perceived differentiation vs. competition

Launch project, make time, quality and cost trade-offs Relative perceived quality

Dynamic positioning: monitor current and future product position (environmental scanning – PEST, ETOP)

5.5 Product Quality

Vague definition of quality Comparative studies: differences only marginal

- Actual differences not necessarily correlated to manufacturer claims Employee views

- Production process- Product reliability

Transcendent quality Platonic (circular) definition: can only be recognised in light of experience.

Product-based quality Bundle of characteristics which can be measured

- Associate price elasticity of with characteristic Some products include irrelevant characteristics

- Too much quality: e.g. 100m waterproof watch Service industries

- Correlation between quality and consistency- Mean-time between failure

User-based quality (perceived)

Appearance: only option where function is predefined (e.g. kettle) Functional characteristics: Durability, flexibility, strength, speed... Interaction of quality dimensions can produce more utility than sum of components

Production-based quality Conformance to specifications Statistical quality control Cost reduction

Value-based quality Combines cost with quality Marginal & total utility Question: Production process merely adds to costs rather than to market appeal?

Dimensions of Quality

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Garvin’s dimensions of quality Performance Features Reliability Conformance Durability Serviceability Aesthetics Overall perceived quality

Statistical methods can estimate weights.Cluster analysis can relate market segments and product dimensions identify exploitable niches

E.g. higher incomes may weight aesthetics higher

Hedonic price index – formula for determining price consumers are willing to pay Price = Σ weights x characteristics

Quality and Strategy

Quality implications are not straightforward Quality and Price not always positively related Higher quality does not systematically mean higher price Investment in higher perceived quality might be a substitute for advertising expenditure High perceived quality does not guarantee profitability (Häagen-Dazs)

Total Quality Management (TQM) Became more of a philosophy than business technique

- Success dependent on energy and commitment- Surveys: 80% of initiatives failed

Associated features do not produce competitive advantage- Quality training, process improvement, benchmarking- Can be imitated by competitors

Behavioural features associated with advantage- Open culture, employee empowerment, executive commitment

Some initial success in eliminating inefficiencies- Difficult to find subsequent costless improvements: cost/quality trade-off

5.6 Product Life Cycles

Introduction: Investment in production and marketing Negative cash flow High uncertainty regarding market, competition, profitability

Growth: Objective: increase market share High marketing expenses Low prices Underutilised capacity

Maturity: Gear productive capacity to demand (JIT) Competitive advantage based on market share Reduced costs (reduce mkg expenditures, selling costs) potential high positive cash flows

Decline: Decide on exit, phase-out

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Transitionor

Shakeout

Decision Introduction

Growth

Transition

Maturity Decline

Price Low Low Increase Market MarketMarketing

High High Reduce Low Low

Capacity High High Reduce JIT Reduce

Investme High High Reduce Replaceme Zero

Product Life Cycle model affected by business cycle

Basis for PLC definition Company sales, market sales, profit Market definition

- Cumulative sales, annual sales, sales value, unit numbers, ...

Prediction of shape and duration of PLC is imprecise. Impacted by: – Substitutes

– Technology (obsolescence)

– Durability and replacement (after market saturation)

Validity of product life cycle concept is controversial Different shapes, durations, sequences Still provides structure within which to interpret data

5.7 Portfolio Models

Economic models of demand analysis, differentiation, segmentation based on comparative staticsPortfolio explicitly takes dynamics into account

The BCG Relative Share Growth Matrix

Relative market share is source of competitive advantage: Economy of scale Experience effect

Higher market share lower unit cost

Growth stage: Aggressive selling strategy

- Higher marketing expenditure- Lower price

Build capacity ahead of demand

Mature stage: Market share becomes more secure

- Reduce marketing- Raise prices

Dog: Low market share, low growth rate May still be profitable: Niche (fragmented market) – Relative efficiency of the company If not profitable even though efficiently produced then little future

Question Mark: Low market share, high growth rate Future Star or Dog How much resources to allocate

Star: High market share, high growth Maintain market share until growth ceases (with competitive pricing)

High marketing costs (to fend off competition)

Cash Cow: High Market share, low growth Economies of scale, JIT, reduce marketing expenditure generate high positive cash flows

Other Portfolio Models More complex than BCG

McKinsey portfolio model Business Strength Variables: capacity utilisation, relative costs Industry attractiveness Variables: Growth rate, profitability, cost trends, industry structure

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BCG Market Growth / Relative Share Matrix

Limitations of Portfolio Models

Implications not universal Based on assumptions Not always economies of scale May be even diseconomies of scale

Portfolio Models and Corporate Strategy

Optimum portfolio: Cash cows generate cash to satisfy shareholders and finance Stars and Question Marks

Selection not mechanistic Difficult to identify which Question Marks / Stars likely to succeed

Matrix variables do not capture all relevant information

Portfolio of wholly unrelated products may be unmanageableNeed to be linked to benefit from corporate competencies

Analysis of competitor portfolio relevantDefend Star by attacking Competitor Cash Cow rather than Competitor StarProvide insights into competitor actions

Principal-Agent problem between Corporate and SBU CEOs- SBU may be unwilling to dispose of Star but it might add more value to allocate resources elsewhere

Ansoff Growth Vector Matrix: (Existing, New) x (Market, Product) – The direction in which the cny intends to develop its

(E/E) Increase penetration (market share) portfolio

(E/N) Product replacement, dvpt (N/E) Market development (new uses, segments) (N/N) Diversification

Penetration:- Mature market (growth at expense of competition): Dog Cash Cow- Growth market: Question Mark Star- Growth depends on Pricing & Marketing strategies

Product replacement:- E.g. product at end of life cycle- Fulfils existing requirements- Satisfies changing consumer preferences

Market Development- New geographical locations, segments, niches- Depends on pricing and marketing strategies

Diversification:- Unrelated diversification (new markets, new products)

Strategy and Product Information

Required information

Price elasticity Income elasticity Marketing effect on the demand curve Competitive conditions Market size & growth Relative market share Product life cycle

The objective of a market analysis is to go beyond the product and quantify the conceptual factor as far as possible.

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5.8 Supply

Upward sloping supply curve: P= f(Q)Position and shape depend on production costs

The Industry Supply Curve & Strategy

Implications of shape on company strategy: Increase in demand (right shift of demand curve) anticipated then:

- Steep (inelastic) supply curve: Large increase in price Produce same amount, charge more- Flat (elastic) supply curve: Large increase in quantity Produce more

Shifting the Industry Supply Curve

Factor cost increase: shift supply curve leftFactor cost decrease: shift supply curve right

5.9 Markets and Prices

Information on industry S & D conditions can help assess impact of: Rough magnitude of change Entry of competitors (increase of supply) Emergence of substitutes (decrease in demand)

5.10 Market Structures

Market structure is the main determinant of long-term profitability

Perfect Competition

Perfect market: Homogeneous product No entry barriers No economies of scale Universal availability of information Large number of buyers and sellers

Demand curve is horizontal (perfectly elastic)

Firm is price taker Quantity is at lowest average cost

- Intersection of marginal and average cost

Perfect competition is not realistic But: useful as benchmark Differentiation and imperfect consumer knowledge

Identify imperfections and capitalise on these factors Entry barriers – enable monopoly profits Non-homogeneity: product differentiation

- Packaged services, e.g. maintenance and support- New features (e.g. PC memory, colour, ...)

Monopoly

Demand curve slopes down: firm is not price taker.

Profit maximisation: MC = MR

Entry of competitor (monopolistic competition) Would push demand curve down Would also affect cost side (competition for input)

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P = AR = MC = MR

Barriers to Entry

Structural barriers (outside control of firm)

Size of market Capital requirements Sunk costs (exit costs) – Exit barriers just as important as entry barriers

Legislation or tacit agreement – Patent, De Beers, OPEC

Economies of scale Experience effect – Cost advantage of first movers

Strategic barriers (depend on actions of firm)

Reputation – Quality, Reliability

Pricing – Limit pricing, Predatory pricing, but both doubtful

Access to distribution channels

Usually impossible to prevent competition in the long run Deterring strategies may defer entry Sufficient time to build market share, economies of scale... Entry barriers are more imagined than real

Contestable Markets

Entry costs are not sunk, exit is costlessWhere no structural barriers: entry deterring ineffective ( cost > benefit )

Never offers more than normal rate of profit

Oligopoly Competition among the Few

Game theoryKinked demand curve

5.11 The Role of Government

Less efficient at resource allocation than market but legitimate role due to market failuresInput into PEST analysis and environmental scanning

Government and Rule Making

Employment law Statutory rights Mobility of labour

Monopoly US more opposed than Europe

Health and safety Standards add costs Attract better labour

Separation of management and ownership (Principal-Agent Problem) Extent to which manager can be made responsible to shareholders

Rules changes when governments change

Government and Regulating

Externalities: costs and benefits which do not accrue to parties in exchange Private cost (= cny cost) vs. social cost (= cny & environment cost)

Government actions: Internalise the externality (= fishing rights to a chemical cny)

Regulating output Setting emission standards Imposing taxes

Government and Allocating = provision of public goods

Public goods: not possible to exclude non-paying consumers it is a market failure

Defence Lighthouse Demand is dictated by government-perceived “right quantity”

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5.12 The Structural Analysis of Industries

Porter’s five forces

Industry competitors’ rivalry- Number of competitors- Intensity based on mkt structure, PLC & recent competitive activity

Threat of new entrants- Economies of scale- Regulation - Entry price- Technological factors (e.g. R&D costs)

- New entrant will have similar product & compete mainly on price

Threat of substitutes- Technological progress- Substitute fulfil same needs & effectively reduces market size

Suppliers’ bargaining power- Monopoly (e.g. trade unions, scarce skills such as financial specialists)

- Monopsony (1 buyers, many sellers supermarket vs. farmers)

Buyers’ bargaining power- Depends on elasticity of demand- Monopoly power- Brand identify loyalty- Switching costs- Number of buyers- Income elasticity (mainly saturated market, or luxury) = responsiveness of a good demanded to changes in income

- Perceived differentiation- Information

Collectively determine ability to earn rates of ROI above the opportunity cost of capital

Profiling the Five Forces

Focus of company efforts will be on forces with high threatsCommon failure is lack of recognition of changes in balance and realignment of strategy

Criticisms of the Five Forces Model

Gives the impression that all forces are equally important Focuses on threats rather than cooperation and alliances Does not deal with internal issues such as human resources and efficiency

5.13 Strategic Groups

Challenge: identifying direct competitors

Define key dimensions of characteristics and strategy Organisation: scale, degree of vertical integration, diversification, distribution channels Product characteristics: quality, image, level of technology Financial structure: return on assets, gearing

Mapping quality, specialisation of ethnic restaurants relative price, perceived quality computing speed vs. capacity

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Number of firms Type of market Basis for competitionMany Perfect PriceFew Oligopoly DifferentiationOne Monopoly Price (to deter

entrants)

Focus on the conditions that make entry attractive instead of what competitors are actually doing

Competitive force Before supermarkets After supermarketsThreat of new entrants …/… High …/… LowThreat of substitutes …/… High …/… LowBargaining power of suppliers

…/… Low …/… High

Bargaining power of buyers …/… Low …/… HighIndustry rivalry …/… Low …/… High

Relative priceComputing speed

Perceived qualityCapacity

5.14 First mover advantage

Economies of scale (average cost decreasing with output)

Experience curve (limited time)

Costs: Experimentation & failure Production techniques Marketing

5.15 An Overview of Macro and Micro Models

Macro models Focus

Macroeconomics Determination of GNP and business cycles, GNP elasticity, interest rates, inflation, unemployment and their relationship to company costs, revenues and profits

Competitive advantage of nations National market factors which relate to the source of competitive advantage

Forecasting Predicting changes in key factors in the economy and the market place

PEST Checklist of factors which may affect the company in the future

Environmental scanning Identifying and tracking potentially important changes

Scenarios Speculating about the future and assessing the company’s ability to respond

Micro models Focus

Demand and supply Interpreting the impact of changes in market conditions

Market structures Types of competition and intensity of rivalry

Game theory Deriving competitive response with limited information

Segmentation Identifying unexploited opportunities in existing markets

Differentiation Product positioning

Quality Determinant of demand and differentiation

Life cycle Dynamic product management

Portfolio models Strategic management

Strategic groups Company positioning

Five forces analysis Identifying competitive forces

First mover advantage Capitalise on early lead

5.16 Is Competition Changing?

Increased pace of technological change improvements in communications Internet Globalisation

New terminology: Hypercompetition – Dynamic competition

Are markets becoming more perfectly competitive? Are product life cycles becoming shorter? Are the five forces becoming more powerful?

Yes for some industries, no for others

5.17 Environmental Threat and Opportunity Profile: Part 2

See 4.9.

Case 1: Apple Computer (1991)Case 2: Salmon Farming (1992)Case 3: Lymeswold Cheese (1991)Case 4: Cigarette Price Wars (1994)Case 5: A Prestigious Price War (1996)Case 6: An International Romance that Failed: British Telecom and MCI (1998)

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Module 6 - Internal Analysis of the Company

6.1 Opportunity Cost

Best option foregoneIdentify all options and compare with each other

6.2 Fixed Costs, Variable Costs and Sunk Costs

Misconceptions: Each product should bear its share of overhead misallocation of resources Considering sunk costs in decision making

6.3 Marginal Analysis

Only relevant costs (not average costs) should be considered in decision makingMarginal cost excludes fixed cost

Guide for minimum acceptable price Constant or increasing in the short run

Marginal costs difficult to quantifyMarginal revenue difficult to estimate

Short run: productive capacity is constant. Only variable inputs can change

6.4 Diminishing Marginal Product

Adding factor input yields diminishing returns when production capacity is fixedResource allocation for SBUs Allocate until marginal products of SBUs/ Departments are equal

6.5 Profit Maximisation

Increase quantity until MC = MR

Real life What are the additional expected costs? What are the additional expected revenues?

6.6 Production Costs

Different views of Accountants and Economists: Marginal vs. average costs

- Economist: Marginal costs allows assessment of contraction/expansion options- Accountant: All costs must be allocated average costs more appropriate

Future vs. historical costs- Economist: Sunk costs are irrelevant, historical costs only useful if good predictor of future- Accountant: Ignoring any historical costs will distort picture

Joint Production Complicates cost allocation Activity-based Costing (ABC)Joint products and by-products may be required in order to compete effectivelyABC not a complete solution to the accounting problem

Factors determining unit cost are complex and interconnected Hiring policies Overtime/Undertime Attrition Learning-Experience effect Business cycle Exogenous shocks (e.g. fluctuations on commodity markets)

6.7 Accounting Techniques

Break-Even Analysis

TC = Sales x Variable unit cost + FCTR = Sales x Price

FC FCBE = ----------------------------------- = ----------------------- Price – Variable unit cost Net Contribution* * Competition price – Production cost

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Payback Period

Issues: BE qty Ignores discounting (but can be included) PB = ---------------------- Ignores post-period cash flows Yearly sales qty

May have implications for selection of product portfolio E.g. may be unacceptable to increase debt ratio

Sensitivity Analysis

Minimum: Best / Worst scenario for each important variableDifferent dimensions of performance: NPV, Payback period, cash flow, break-even...

Non-obvious outcome: identify the combination of conditions which are necessary for success

6.8 Accounting Ratios

ROI Return on Investment Net profit

RONA Return on Net Assets – Replacement value not obvious (especially if inflation is high) = --------------- Net assets

ROCE Return on Capital Employed ROTA Return on Total Assets ROE Return on owners’ equity EPS Earnings per Share Gearing ratio Total Debt Total Debt

Good track record should be able to raise debt = -------------------------- = -----------------High gearing ration reliant on steady profits Shareholder Equity Total assets

Quick ratio (the acid test) Current assets – Inventories Current assets

= ------------------------------------------- Current ratio = ------------------------------ Debt* * Current liabilities (= debt)

6.9 Benchmarking

Starting point: Annual reports of competitors in same industry

Caution- Comparison only approximate (like-with-like is difficult)

- Are portfolios similar- Are there synergies not easily identified- Same life-cycle stages, competitive conditions

- No guarantee competitors are pursuing best practices- Don’t reveal “how” competitive advantage is achieveed

6.10 R&D

Schumpeter: idea of ‘Creative destruction’ Periods of calm punctuated by shocks when old sources of CA are destroyed and replaced

Hypercompetition Technological progress / Information technology sources of CA eroded at accelerating rate

Research and Innovation

Rate of return on research expenditure 30% ROI on inventions have reached marketing stage

Two challenges: 1. How much to spend?2. Identify potentially profitable products

Opportunity cost approach or research expenditure (i.e. rate of return approach) – based on unpredictable returns in the future

Keep research expenditure at constant percentage of Total costs or Total sales Simple, avoids conflict Arbitrary – misallocation of resources

Complication: Not always possible to segregate research from development

Product research vs. pure research

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Development

Starts from the prototype (research output/outcome) stage throughout the product life

Open questions- How much to spend on development?- When to launch?- Price to charge?- Marketing effort?

Product development conflicts – time, cost, quality trade-offs Development engineer: Quality maximisation Peer reputation Financial controller: Cost within budget Marketing manager: Early launch first mover advantage

Marginal analysis: Does last dollar spent on development yield more or less than one dollar profit

Innovation as a process – The stage-gate process

1. Invention: incentives for disclosure, IP rights2. Invention to prototype: screening mechanism3. Prototype: criteria to determine potential4. Prototype to patent: is delay justified or bypass this step?5. Patent: definition of invention, imitability6. Patent to development: prioritisation in development programme7. Development: How much to spend8. Development to launch: conflict between engineers and marketing9. Launch: Differentiation and price

10. Launch to market exploitation: abandon or add resources11. Market exploitation

6.11 Human Resource Management

Important for strategy: People are resources that can be affected by strategic change Strategic changes must be implemented by people Adaptability and ability to cope with strategic change

Four types of culture Cope with strategic change

1. Power culture Revolves around one individual (or small group) Unpredictable- New, small companies (also newspaper industry)- Strategy based on dominant leader- Lacks analysis, unpredictable

2. Role culture Committees, structures, analysis, application of logic Resistant- Bureaucratic (civil service, old style retail banks)- Suitable for stable environment- Often does not recognise external changes- Slow, resistant

3. Task culture Flexible teams Change is Norm- Multidisciplinary- Advertising agencies, consultancies- Flexible, change is norm

4. Personal culture Voluntary workers, individual professionals (lone architects/ consultants) Unpredictable- Individual doesn’t pay attention to organisation, self-gratification- Lacks focus, unpredictable- Rare

WARNING: Failure often ascribed to “cultural problems”.May actually be due to general principal-agent problems (e.g. incentives not aligned with strategic objectives).

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6.12 The Scope of the Company

Economies of Scale

Relation between average cost of production and productive capacity

Emerge reasons Indivisibilities – each production addition comes in discrete amount (e.g. steel plant)

Technical relationships – declining relationship between capacity and unit cost

Specialisation – more feasible as the size of the company increases

Significant in some industries, hardly exist in others. Difficult to measure as it is more based on efficient combination of labour and capital.

Economies of Scope

Unit cost reduction as number of products (rather than number of units) increases Sharing inputs Good reputation R&D spill-over effects Competing in related industry with a coordinated strategy

Diseconomies of scope: unrelated markets, different resources, different management skills (spread thinly)

Diversification

Acquisitions: stock price outcomes Combined value of parent and target rises following announcement (temporary) Abnormal returns accrue to target firm Acquiring firms returns statistically small

Incentives for diversification Minimise risk Manager risk, not shareholder risk

Add value through parenting function unconvincing (see 1.5)

Applying the dominant management logic e.g. Richard Bronson’s business empire, Shared reputation, brand stretching

Synergy

Whole is greater than the sum of the partsThe corporation is valued at more than the sum of the value of its individual parts

Intuitive appeal but difficult to pin down in practice

Two problems Identify where the benefits of synergy are generated Little empirical evidence to guide company in actual situations

Synergy sources: Corporate management May be identifiable after the event but difficult to predict (e.g. for acquisition) Economy of scale Scope, experience Vertical integration Economies capacity utilisation, transport costs Capacity utilisation Spare capacity can be reallocated to other SBU Joint production Merged operations facilitates the sum of the specialisations Innovative stimulus Certainly possible, difficult to predict

Conclusion: challenge synergy claims by questioning source

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Vertical Integration

Forward, backward integration

Make or buy

Fallacious arguments for making Avoid paying a profit margin to other firms Avoid paying high prices during peak demand or scarce supply

Market (“buy”) Benefits - Market firms with economies of scale- Market firms subject to discipline of market competition – Rigorous internal controls unnecessary

Costs - Compromise of production flow coordination (difference of priorities)- Private information leaked to competitors- Transaction costs

Make Benefits - More powerful governance structures – Disputes settled internally

- Incentives to get things right- Divisions’ cooperation more likely due to common purpose

Costs - Unlikely scale economies- Different stages can be different presenting different strategic problems- Compounding of risk (sum of each stage risk)

Complete contract cannot be achieved in same way as internal contract Too complex to consider all eventualities – Bounded rationality

Difficulty in specifying and measuring performance with accuracy Neither party will reveal all information (places buyer at disadvantage) – Asymmetric information (a PA pb feature)

Holdup problem exploit other party’s vulnerability once contract signed – P’s D where parties have incentive to default

Vertical integration involves complex trade-offs

Balance between efficiency benefits of using the market with market risk exposure

Hybrid solution allow option of buying from outside suppliers if their price is lower

6.13 The Value Chain (Porter breaks value chain into)

Primary activities (logistics of production and sales)

- In-bound logistics Receiving, storing, handling inputs to production

- Operations Transforming inputs into outputs = making, testing, packaging

- Out-bound logistics Moving product to buyer (tangible product) or brining buyer to product (services)

- Marketing & sales Providing information to buyer, inducement and opportunities to buy

- Service Maintain the value of the product

Support activities - Procurement Process of acquiring resources

- Technology development Technology for each value activity (learning by doing, product design, development...)

- Human resource management Managing the workforce

- Management systems Quality control, finance, operational planning

Value chain benefits: Tool for analysing effectiveness and basis for competitive advantage Identifying strategic options Identifying strengths and weaknesses

Simple disaggregating doesn’t tell whole story Linkages contribute to competitive advantage Competitors can identify areas of success using benchmarking but more difficult to replicate linkages Must be visualised as a holistic system

Uniqueness and difficulty of imitating the value chain result in sustainable CA.

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6.14 Competence

Distinctive competence Often not single competence but integration of competencies that generate competitive advantage /edge

Core competencies What business the company should be in? Important for restructuring, delayering, downsizing... to rationalise activities Also important for expansion

Conventional SBU mentality leads to Underinvestment in core competencies (focus on own effectiveness without wider view of linkages)

Imprisoned resources (capital budgeting works for homogenous resources but not human skills)

Bounded innovation (no pursuit of hybrid opportunities)

Core competence is NOT Outspending on R&D Sharing resources (e.g. excess capacity) Vertical integration

Three tests to identify a core competence Gives potential access to a wide array of markets Makes a significant contribution to perceived customer benefits Difficult to imitate

Rare, typically no more than 5 or 6 per company

If unrecognized they can be unwittingly surrendered when contracting out or divesting.

Core competencies lead to core products – might be component rather than complete end product e.g. Canon printer ‘engines’

Three levels of competence (Chiesa & Manzini): Systems Goals, culture, organisational design of company

Distinctive capabilities Repeatable patterns enabling coordinated deployment of knowledge and resources

Core output Can be exploited for new products/services/markets

Source of diversification: Routines (capabilities) vs. resources (e.g. core inputs)

Routine based diversification – ScottishPower: managing water, gas, telecom

Resource based diversification – EBS MBA: New routines for distance learning

Replication based – Least risky – Based on expansion

Unrelated – Most risky – Only resource shared = financial structure & control system – e.g. Virgin

Diversification trajectory: Dynamic element; may signal a move away from core

6.15 Strategic Architecture

Strategic Architecture = The way in which the company’s collection of unique attributes is combined together

Derived from value chain and core competencies

Strategic Architecture: Network of relational contracts

Internal Architecture Relations with Employees External architecture Relations with Suppliers & Customers Networks Relations with Groups of Firms in related activities

Competitive Advantage

Under perfect competition there is no competitive advantage. When the conditions for perfect competition are not met then an opportunity arises to make monopoly profits and CA but this is always under threat.

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Routine based UnrelatedAcquired

Resources

Replication based Resource basedCurrent

Current developed

Routines

Source of competitive advantage: 1. Pure chance 2. Innovation 3. First mover 4. Differentiation

Question is whether it is sustainable

Two sources of sustainable CA:

1. Market position (Strategic assets = structural entry barriers)- Relative size of market- Sunk costs- Legislation- Economies of scale- Experience effects

2. Internal strengths (Distinctive capabilities)- Architecture- Reputation- Innovation- Core competences

Protection of CA: Causal ambiguity difficult to establish exactly what characteristics contribute to success Uncertain imitability due to causal ambiguity, imitation may not work

Sustainable = long run

Time period Economics Strategy

Short run Vary one factor of production Deal with cash flow problems, react to competitors, seize new opportunities

Long run Vary all factors of production Develop a linked portfolio, build on core competence, focus on generic strategies

There is a parallel between the economic and the strategic definitions in the sense that both are based on concepts rather than defined time periods

Assessing the company’s strategic capability

Dimension Issues

Primary activities In-bound logistics Bargaining power of suppliers

Operations BenchmarkingExperienceSynergyEconomies of scale

Out-bound logistics Distribution channels

Marketing and sales Market shareBargaining power of buyersPricingQuality

Service Repeat orders

Support activities Procurement Vertical integrationEconomies of scope

Technological development Innovation process

Human resource management CultureLeadership

Management systems Dominant logicCompetence

Linkages Architecture

Profitability Definition of profitAccounting ratiosFinancial structureShareholder value

The salient point of the value chain is the end result: profitability & shareholder value.

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6.16 Strategic Advantage Profile

Similar to ETOP but for internal strengths and weaknesses

Strategic advantage profile SAP

Internal area Competitive strength (+) or weakness (−)

Research + Recent invention− Vision (wide, narrow)

Development + Lead time− Cost overruns

Production + Full capacity− Turnover rate

Marketing + Customer databank− Qualified salespeople

Finance + Share price− Liquidity

Case 1: Analysing Company AccountsCase 2: Analysing Company InformationCase 3: Lufthansa Has a Rough Landing (1993)Case 4: General Motors: the Story of an Empire (1998)

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Module 7 - Making Choices among Strategies

7.1 A Structure for Rational Choice

Process: Objectives Economic environment The markets ETOP

Company SAP

Can never generate course of action automatically Provides basis for informed choice

7.2 Strengths, Weaknesses, Opportunities and Threats

Built on ETOP and SAP

Type A Type B

Mobilise strengths to take advantage of opportunities and Tackle weaknesses to counter threats

Convert weaknesses to strengths in order to exploit opportunities.

SWOT uses:1. Understand company, its operation and how different functions fit together2. Understand competition, its strengths and weaknesses3. Decide strategic moves & allocate resources

AmbiguityDynamics – Requires imagination

7.3 Generic Strategies

Represented differently at corporate and BU level Corporate level Scope of company, direction it will pursue – Product portfolio, M&A

Business level Competing in area currently occupied

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Strengths Opportunities

Weaknesses Threats

Strengths Opportunities

Weaknesses Threats

Corporate Level Generic Options

Scale and scope* of company operations *Mkg course: Scope = mission statement; what customer’s needs are & what firm must do to satisfy

Not directly tied to profitability (objective of all three)

Stability No change in size of markets, product lines, acquiring new businesses Not necessarily “steady state”

- Small performance gap Convergence without change to policy

- Mature markets PLC may mean no need for investment

- Internal weaknesses Increase operating efficiency, expansion not cost-effective

- Unstable financial history Danger of hostile take-over

- Poor economic prospects Downturn, declining market

- Competitive threat Requires focused defence

- Perceived costs of change Stability is wrong to pursue

- Risk-averse managers

Expansion Common if products are in growth phase- Diversifying risk controversial

- Searching for competencies- Economies of scale- Experience effects- Building advance capacity- Managerial motivation remuneration related to total revenue rather than profitability

Retrenchment Downsizing, delayering, restructuring Quest for more efficiency

Stigma from implication of past mistakes Often necessary to appoint new CEO

Not necessarily incompetence – Can be logical strategy- PLC- De-acquisition of Dogs for purposes of diversification when cash rich- Overextended markets Losing money on some customers ( MC > MR )

Combination Multiple SBUs pursuing different generic strategies Different sequential strategies Dynamic overall strategy

Opportunity cost Some resources could be put to better use & be redeployed

Product Portfolio In the long term, companies pursue a combination generic strategy

Assessing Generic Strategies Which generic strategy will add most value to the company? Shareholder Wealth

Business Level Generic Options Porter’s 4 generic strategies

Cost Leadership Unit costs are significantly lower Economies of scale/scope/experience Strategy:

- Increase market share- Efficient resource allocation- Technological development to reduce costs

Differentiation Charge premium Strategy

- Add characteristic – Real or perceived – Product positioning

- Quantify price premium consumers are willing to pay

Focus Identify niches where confrontation can be avoided Then focus on cost or differentiation within the niche

Stuck in the Middle– No distinctive strategy –

Continually adjusting its competitive focus in response to change in the market Typically poor performance

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Competitive Scope (Narrow/Niche, Broad) and Competitive Advantage (Cost, Differentiation)

Value chain & Generic strategy must be aligned, otherwise it will end up stuck in the middle.

Generic strategy Concerns and characteristics

Cost leadership Optimum plant sizeProcess engineering skillsSimple product designStatistical quality controlQuantitative incentivesTight resource controlsTight financial reporting systemAchieving economies of scale

Differentiation BrandingDesignMarketingAdvertisingServiceQualityCreativity in R&D

Focus Matching products with customersAfter sales serviceDedicated work force

Decision Maker Generic Strategies Miles & Snow

Prospector Identify new market opportunities Pursue growth with differentiated or low-cost productsAnalyser sophisticated information systems, detailed investigations Start from core and expand into related areasDefender maintain market position without new development Operate in mature markets, cultivate cash cowsReactor Deals with situation as they arise No clearly defined strategy

Many managers have no clear idea of the strategy of their own company Often Reactors pretending to be Prospectors

Generic Strategies & Company Performance

Not possible to proscribe optimal strategy based on company and context1. Strategy is a means, Performance is the end2. Profitability reflects added value, not short-term cash flows; there may be other considerations (family control)

3. Hypothesis testing not feasible, conditioned by experience of the strategist.

7.4 Identifying Strategic Variations

Identify courses of action available to achieve the objectivesSWOT analysis help to identify the appropriate strategic variation

Example Variations: Internal vs. external market development Horizontal vs. vertical integration Innovation vs. imitation

1. Related and Unrelated Options (Diversification)2. Vertical Integration3. Acquisitions4. Alliances and Joint Ventures5. International Expansion6. From Generics to Options

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Competitive AdvantageLower Cost Differentiation

Cost Leadership DifferentiationBroad Target

Competitive Scope

Cost Focus Differentiation FocusNarrow Target

Generic Strategies

Related and Unrelated Options (Diversification) – see p32

Arguments for related diversification Familiarity with business – Marketing & selling techniques – Similar production processes

Shared overheads Competition is well known

Argument against related diversification Competitive legislation Ranking of relatedness may focus on wrong variables

Factors contributing to short term returns (can be replicated)

Costs, efficiency, market knowledge

Factors contributing to long term returns (less obvious)

Economies of scale/ scope across SBUs – common distribution system

Use an existing core competence – marketing child products (baby food & toys)

Utilise core competency to create new strategic assets Expand the pool of core competencies

Vertical Integration

Some benefits but may be counteracted by costs of unrelated diversification

Critical question: would company add value by controlling other parts of the productive chain

Acquisitions

Reasons:1. Unrealised value potential2. Buying market share3. Reducing competitive pressures4. Synergy5. Balancing portfolio6. Developing core competence

1. Unrealised value potential- Inefficient development expenditure – lower mkt share, higher unit cost, opp. to shift upward the perceived price diffo matrix

- Market strategy has not pursued opportunities – product diffo, segmentation

- Poor resource management- Expected increase in demand- Weak products – divest to release resources

2. Buying market share- If currently at full capacity, growth would require investment- Take-over avoids costs of competitive thrust- Acquired labour force high on experience curve

3. Reducing competitive pressure- Anti-trust laws limit options- Monopoly power does not equate to monopoly profits (contestable markets)

4. Synergy- No guarantee, history not encouraging

5. Balancing portfolio- Does not add value without synergy or economy of scope

6. Core competencies- No obvious way to determine potential contribution to core competencies beforehand- Based on general view of strategic thrust

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Alliances and Joint Ventures

No significant long-term effects on joint venture activity on profitabilityPrisoner’s dilemma: no contract can cover all eventualities, one side always has incentive to cheat.Principal agent problems

International Expansion

CA in one location does not easily transfer abroad – Focus on the elements of CA which can be transferred

Variables which complicate operations Volatile exchange rates – Produce as close as possible to consumers ‘think glocal’

Relative factor costs vary by country – labour, capital

Productivity varies among countries Government protects home production Cultural norms vary Economies of different countries rarely move in step

From Generics to Variations

Strategic variations must satisfy a number of criteria

Consistency with objectives Suitability in terms of resources – SWOT

Feasibility

7.5 Strategy Choice

Select the strategy that maximises shareholder wealth – PV of all future cash flows

Challenges in real world

Future is too uncertain – Cannot be captured in cash-flow projection

Strategy must consider means as well as ends – Proposed courses of action

1. Shareholder Wealth2. Performance Gaps3. Corporate Management4. SBU Management5. Risk and Uncertainty Analysis6. Managerial Perceptions7. From SWOT to Generics

Shareholder Wealth

There’s no automatic connection between shareholder wealth and any corporate generic strategyIdentify CF for generic strategies (stability, expansion, retrenchment) and compare PVBreak down analysis into SBUs to identify which SBUs are contributing most value

Caution: often future events are too uncertain – estimation errors are too great to permit their use

Performance Gaps

Gap identifies most appropriate strategy stability, expansion, retrenchmentExtent of the gap whether to reallocate resources to close the gapWays of closing gap e.g. internal (cost control) versus external (marketing effort)

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International Factor

Country A

Country B

Exchange ratesFactor costsProductivityGovernmentCultureEconomic perf.

Generic strategy

Variations

Corporate

Expansion Investment Acquisition InternationalStability Cost control Defend RestructureRetrenchment Downsize Divest Rationalise

Business

Cost leadership Scale economies First mover ExperienceDifferentiation Segmentation Branding ResearchFocus Niche Service Reliability

Corporate Management

Corporate management objective Decide components of portfolioSBU Management Management of the selected products

Strategy options based on the BCG relative growth share matrix

Eliminate Dogs Identify Stars to replace Cash Cows (when they come to an end) Transform Question Marks into Stars

- Requires significant effort- May become ineffective if competitor is quicker- May need to abandon if Cash Cow is under threat

Achieve a balanced but linked portfolio: familiarity matrix – related to Ansoff growth vector

Corporate strategy concerned with intangible factors (not measurable) No “right” balance of products in portfolio matrix No hard criteria for selecting markets to enter No obvious resource allocation between SBUs Hard to translate into CF terms

SBU Management

Objective - Exploitation of products and markets- Efficient allocation of resources- Achieve competitive advantage in products selected by corporate

Issues - Impact of market share on ROI- Target markets- Reducing unit cost

Project appraisal:

Year 1 2 3 4 5 6 7

Development ($m) 8 8Total market (000) 100 120 150 200 250 250 100Market share (%) 13 15 15 15 15Price ($) 1,395 1,200 1,200 1,395 1,395Unit cost ($) 692 630 610 600 600Contribution ($m) 14 17 22 30 12

Cumulative cash flow ($m) −8 −16 −2 15 37 67 79

Net present value ($m) 34 Cost of capital 15%

Assumptions: Total market derived from PLC Market share and price closely related (price reduction increases market share) Unit cost declines with experience effect Cumulative cash flow indicates payback period

Framework permits exploration of different scenarios, sensitivity analysis

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Risk and Uncertainty Analysis

All strategy options are uncertain

Attempt to incorporate decision making into a structured framework

Assign probabilities to expected valuesSubjective estimates which depend on credibility of individual managers

Consider risk aversion: risks are not symmetrical

Unforeseen risk (uncertainty) cannot be quantified- Make allowances- Contingency planning – address wide variety of scenarios

1. Minimise probability of loss due to risk, identify alternate courses of action2. Strategic response to major unpredictable events (difficult)

Managerial Perceptions

Information gathering & Analytical techniques do not generate strategic choiceDifficult for outside observers to assess rationality of decision making process

Factors: External dependence – Customers, suppliers, shareholders

Risk attitude – Related to company culture – Risk averse/ seeking/ neutral

- Risk aversion: e.g. minimax criterion – Selecting the option with the lowest potential lost

- Risk aversion not the same as conservatism (Keeping status quo – which may be higher risk – risk ignorant)

Previous strategy – Sunk investments lead to passive stance

Managerial Power Relationships – Principal agent issues (conflict of interest with SBU manager)

Consensus decisions – Paradox of voting – Can be manipulated

Decision are rarely purely rational

From SWOT to Generics

Start with SWOT analysis using prioritisation from ETOP and SAPAlign strengths with opportunities and weaknesses with threatsMay lead to diametrically opposed strategies depending on focus on strengths or weaknesses.

Opportunity for inventive thinking. Thinking differently confers CA.

Example of a choice process

Case 1: Revisit Salmon FarmingCase 2: Revisit LymeswoldCase 3: Revisit a Prestigious Price WarCase 4: Revisit General MotorsCase 5: The Rise and Fall of Amstrad (1993)Case 6: What Is a Jaguar Worth? (1992)Case 7: Good Morning Television Has a Bad Day (1993)Case 8: The Rise and Fall of Brands (1996)

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Module 8 - Implementing & Evaluating Strategy

8.1 Implementing Strategy

Implementation visualised as starting after strategy definition Constant feedback with earlier stages

Strategy is not end in itself – process Detailed plans not necessary, may be counter-productive – Inhibit agility

8.2 Organisational Structure

Organisational structure affects power structureA change in organisational structure can lead to changes in performance

1. Functional U-Form = Unitary form2. Divisional M-Form = Multi-divisional form3. Holding company H-Form4. Matrix5. Networks

Functional Advantages - Specialisation, Division of Labour, Simplified training, Strategic control preserved

Disadvantages - Cross-functional coordination, functional focus, interdepartmental coordination, lack of broadly trained managers, functional profitability difficult to measure

Divisional Advantages - Based on product, geography, customer- Divisional performance expressed in profit, Interfunctional coordination,

broadly trained managers- Resolves principal agent problem: divisional profitability is measurable

Disadvantages - Coordination among specialised areas, communication between functions, duplication of functions, loss of strategic control to divisional manager

Holding No particular logic to the incorporation of individual businessesFinancial control allocate resources & exploit opportunities through investment, M&A, A&P- Advantage Risk spreading, Financial strength for new market entry- Drawback Lack of synergy, game theory problems

Matrix When economies of scope lead to more than one dimension of organisationMany individuals report to two hierarchies & have two bosses Principal agent problems- Advantage Flexibility & adaptability, Less bureaucratic, Close coordination- Drawback Slow decision making (general agreement required), Specific responsibility often unclear,

Highly dependent on effective teams

Network Groups organised by function, geography or customer baseGoverned by changing implicit / explicit requirements of common tasks (no formal reporting lines)- Problems of direction and control

Selection criteria: Which structure adds most value? Which is best able to adapt to change? Structure in terms of the company value chain The structure, as a method of resource allocation, should be aligned to the company objectives and the

competitive environment.

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8.3 Resource Allocation

Resource allocation to be aligned with strategic thrust – Use the value chain

Management of Change

Reallocation of resources involves changing what people doDevelop a corporate culture which rewards adaptability, innovation and flexibilityConsider the dominant company culture Power, Role, Task, PersonalReallocation of resources is more than investing, retooling and hiringTechniques Survey feedbacks, Team building, Confrontation, Transactional analysisResolve principal agent problem by re-aligning incentive system consistent with company & individual objectives

Critical Success Factors

Identify events which must occur, or things which must be done to ensure success.

Involves understanding of Available resources Required resources Sequence of events Likely individual reactions

Management Style

Management skills may not match the requirements of strategic change.Leadership style and company culture impact the ability of the organisation to change.Identify gaps in management style & inconsistencies between planned & current requirements.

Budgets

Corporate level Overall budget rationed among competing alternatives

SBU or Functional level Resources allocated to individual managers to carry out the objectives

The corporate rules ensuring efficient resource allocation:

1. Competitive bidding: allocate capital based on the ratio of the total funds requested by each division2. Allocate capital directly to SBUs using the value of value added (NPV)

There’s a long term dimension to corporate dimension which cannot be quantified.Budget allocation can be haphazard and can go wrong.

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8.4 Evaluation and Control

Steps:1. Decide what to measure2. Decide how to measure3. Interpret outcomes4. Convert to policies

Categorisation of companies according to: Degree of planning Approach to evaluation and control Balanced weighting best

Recommendations1. Select few objectives2. Derive suitable targets3. Develop milestones, benchmarks4. Subjective evaluation will be necessary

Control step Strategic Loose Planning Financial

Few objectives Achieve competitive advantage

Vague: high quality high tech profile

Achieve 15% market share within 3 years

Generate 15% ROI within 3 years

Derive targets Relative market share Imprecise notions 8% market share Year 1 12% Year 2

5% ROI Year 1 10% ROI Year 2

Milestones Performance relative to competitors

None Actual vs. desiredmarket share

Allow 1% variation each year

Subjective evaluation

Does it look like competitive advantage has been achieved?

No understanding of what has been achieved so likely to be irrelevant

None None

Lack of strategic control over internal processes can have severe repercussions.

8.5 Feedback

Companies must pay explicit attention to feedback

Communication channels: ensure that information is communicated to the right people Adaptability: part of company culture – willingness to listen, admit mistakes and be proactive Learning organisation: build on past experience.

Formalised structure does not ensure feedback integration

Ensure that the strategy process remains robust in the face of dynamic events.

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8.6 The Augmented Process Model

Be aware AT ALL TIMES of the company’s COMPETITIVE POSITION

Who Decides To Do What Analysis And Diagnoses Analysis & Diagnoses (cont’d) Choice Implementation

ObjectivesBusiness definitionMissionShareholder wealthGap analysisMeans and endsEthicsProfit maximisationGrowth vectorStakeholder mapCredibleQuantifiableDisaggregatedEconomicFinancial

StrategistsPrincipal agentProspector, analyser, defender, reactorRisk aversionTeam compositionGroup dynamics

The general environmentMacroeconomic analysis: unemployment, inflation, interest rate, exchange rateForecastingCompetitive advantage of nationsEnvironmental scanningPESTScenarios

The industry & intal environmentDemand and supply, pricedetermination, elasticityBarriers to entryForms of competition: perfect, imperfect, oligopoly, monopolySegmentationDifferentiationQualityStrategic groups

Internal factorsValue chainShareholder value analysisCompetenceArchitectureExperience curveEconomies of scaleInnovationEconomies of scopeSynergyJoint productionOpportunity costMarginal analysisRatiosGearingCash flowBenchmarkingHuman resource managementCulture: power, role, task, personal

Competitive positionProduct life cycleMarket sharePortfolio analysisPerceived differentiationStrategic groupsCompetitive reactionFirst moverFive forcesElements of CAETOPSSAP Strategic advantage profile

Generic strategy alternativesCorporate & business strategyStability, expansion, retrencht

CombinationCost leadershipDifferentiationFocusSegmentation

Strategy variationsDiversification: related & unrelatedVertical integrationMergers & acquisitionsJoint ventures and alliancesInternational ExpansionPricing: leadership, limit, predatory

Strategy choiceRisk analysisManagerial perceptionsNet present valueFamiliarityScenariosBreak evenPaybackSensitivitySWOTGame theory

Resources & structureDivisional, functional, matrixManagerial styleCritical success factorsIncentives

Resource allocationOpportunity costMarginal analysisOptimisationBudgetsCritical success factorsContingencies

Evaluation and controlPerformance measuresRatiosDegree of Planning & type of ControlMonitoring systems

Feedback

CommunicationManagement styleAdaptabilityLearning organisation

Overview of competitive position: integration of models relating to Unit cost, competitive reaction and market share

Integrated approach: Basis for evaluating overall competitive position New product development launch, investment appraisal, entering new markets Rationale for takeover, make vs. buy...

8.7 Postscript: Strategic Planning Works

Strategy: Get big picture right Direct resources accordingly

Review Question 8.1Case 1: The Body Shop (1992)Case 2: Daimler in a Spin (1996)Case 3: Eurotunnel – a Financial Hole in the Ground (1996)Case 4: The Balanced ScorecardCase 5: Revisit An International Romance that Failed: British Telecom and MCI

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Strategic Process Model

Who Decides what?

Strategy Prospector, Analyser, Defender, Reactor Governance, Stakeholders, Principal-Agent Culture: Power, Role, Personal, Task

Objectives SMART, Gaps, Markets, Financial

Analysis & Diagnosis

Macro PEST

Industry PLC, BCG, 5 Forces

Internal factors Value chain: Primary Logistics, Operations, MarketingSecondary: HR, Development, Procurement

Core competencies, Cost structure??? GM, Gearing, Cash flow...

Competitive Position Differentiation, Segmentation, Strategic Groups Pricing: Elasticity (Demand, GNP)

Choice

Generic Retrenchment, Stability, Expansion, Combination

Business level Cost, differentiation, focus, stuck-in-the-middle

Strategic Variations Related/Unrelated, Vertical/Horizontal, Acquisitions, JV & Alliances, International

Implementation

Resource allocation

Evaluation & Control Governance? Planning & Control matrix: Loose, Planning, Financial, Strategic

Feedback

Feedback

Prospects / Future: SWOT Break-even point, payback, sensitivity Sunk costs? ETOP/SAP Short/long term

Value Chain impact: Vertical integration Procurement Labour HR

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