strategy chapter 7 ppat

Slide 7.*Exploring Corporate Strategy, Seventh Edition, © Pearson Education Ltd 2005

Exploring Corporate Strategy7th Edition

Part III

Strategic

Choices


Exploring Corporate Strategy7th Edition

Chapter 7

Directions and Methods

Of Development


Directions and Methods of DevelopmentOutline

•Directions for strategy development•Methods of strategy development

• Internal, acquisition, alliance

•Forms of strategic alliance•Success criteria for strategic choices

• Suitability, acceptability, feasibility

•Techniques to evaluate strategic options


Motives for Strategies

•Environment-based• Fit strategies to changing business environment

•Capability-based• Stretch and exploit organisational resources and

competences

•Expectations-based• Meet expectations deriving from cultural and

political context


Development Directions

Development directions are the strategic options available to an organisation, in terms of products and market coverage, taking into account the strategic capability of the organisation and the expectations of stakeholders


Strategy Development Directions

Exhibit 7.1

Source: Adapted from H. Ansoff, Corporate Strategy, Penguin, 1988, Chapter 6.


Protect and Build

•Downsizing or withdrawal from activities•Maintenance of market share

Consolidation - Protect and strengthen position in current markets with current products

•Leverage competences•Desirability of dominant market share

Market penetration - Organisation gains market share


Product Development (1)

•With existing capabilities• Follow changing customer needs• Short product life cycles• Exploitation of core competence in market

analysis

• With new capabilities• Change of emphasis in customer needs• Change in Critical Success Factors (CSFs)

Deliver modified or new products to existing markets


Product Development (2)

•Associated dilemmas• Expense, risk and potential unprofitability• Unacceptable consequences of not developing

new products


Market Development

•New market segments with similar CSFs•New uses for existing products•New geographic markets•Issues

• Normally requires some product development and capability development

• Credibility and expectations

Offer existing products in new markets


Diversification

•Related diversification•Unrelated diversification

A strategy that takes the organisation away from both its current markets and products


The TOWS Matrix

Exhibit 7.2


Methods of Strategy Development

•Internal Development• Build on and develop an organisation’s own

capabilities• Organic development

•Mergers and Acquisitions• Take over ownership of another organisation

•Strategic Alliances• Two or more organisations share resources and

activities


Motives for Internal Development

Spread cost over time – easier for companies with limited resources

Avoid potential incompatibility

Develop new markets – direct involvement to increase understanding& create core competence

Inability to find suitable acquisition target

Avoid culture clashDevelop highly technical products in-house to create core competence

Lack of choice – breaking new ground/only one in field

ExpectationsCapabilitiesEnvironment


Motives for Mergers and Acquisitions

LearningFinancial – opportunistic acquisition of firm with low share value

Speculative to boost short-term share value

Cost efficiencyDeregulation – created suboptimal units ripe for acquisition

Ambitions of senior managers

Address lack of resources or competences

Competitive situation – static market, avoid competitor reaction

Institutional shareholders want continuing growth

Exploit core competences in new arena

Speed in fast-moving product/market

ExpectationsCapabilitiesEnvironment


Issues in Making Acquisitions Work

•Difficult to add any value•Inability to integrate the new company•Difficult to identify which knowledge to transfer for organisational learning•Problems of cultural fit, especially for cross country acquisitions

In many cases acquisitions fail to improve financial performance. Companies commonly overpay.


Motives for Strategic Alliances

•Need for critical mass• Cost reduction• Improved customer offering

•Co-specialisation• Each partner concentrates on using own

capabilities, e.g. geographical market entry, value chain activities, Public Finance Initiative

•Learning• Helps to develop future competences


Types of Strategic Alliance

Exhibit 7.3


Ingredients of Successful Alliances (1)

•Clear strategic purpose with senior management support•Compatibility at operational level

• Strong interpersonal relationships• Transcend national cultural differences

•Defining and meeting performance expectations

• Clear goals, governance and organisation• Simple, flexible, allowed to evolve and change


Ingredients of Successful Alliances (2)

•Trust• Most important for success• Competence based• Character based


Success Criteria for Strategic Options (1)

•Suitability• Whether strategy addresses circumstances in

which organisation is operating• Linked to strategic position• Rationale of strategy

•Acceptability• The expected performance outcomes (e.g.

risk/return)• Meeting expectations of stakeholders


Success Criteria for Strategic Options (2)

•Feasibility• Whether strategy can be made to work in

practice• Linked to strategic capability


Understanding the suitability of strategic options by using concepts about the strategic postion

Exhibit 7.4


Suitability – Strategic Position

Manage culture clash in merger/alliance

“Real” acceptability, impact on feasibility

Cultural web

Effect on stakeholdersManage power/interest

Acceptability to stakeholdersPower and interest

Stakeholders

How to integrate (e.g. merger/alliance)

Opportunities for vertical integration/outsourcing

Value chain

Eliminate weaknessesExploit strengths

Industry threshold standardsBasis of competitive advantage

Core Competence

RepositioningAttractiveness of groups, Mobility barriers, strategic spaces

Strategic Groups

Barriers to new entrantsCompetitive forces5-forces

Contingency plansUncertainty/riskScenarios

Industry convergenceGrowth/declineChanges in industry structure

PESTEL

Strategy must addressTo understandConcept

Amended Exh 7.4


Some examples of suitability

Exhibit 7.5


Examples of Suitability - Directions for Growth

ExpectationsCapabilityEnvironment

Suitability in terms ofStrategicOption

Better returns at higher risk by seeking new business

Exploit core competences in new areas

Current markets saturated/declining

Diversifi-cation

Exploit current products

Opportunities for new geographical market, new segments/uses

Market developm’t

Better returns at medium risk by exploiting current strengths or market knowledge

Exploit R&DExploit knowledge of customer needs

Product developm’t

Exploit superior resources & competences

Gain market share for advantage

Market penetration

Better returns at low risk by exploiting current strategies

Build on strengths – invest and innovate

Withdraw from declining marketsSell valuable assetsMaintain market share

Consolid-ation

Adapted from Exh. 7.5/ split into two


Examples of Suitability - Methods of Growth

Returns: growth or share valueProblems of culture clash

ExpectationsCapabilityEnvironment

Suitability in terms ofStrategicOption

Required for entryDilutes riskFashionable

Complementary competencesLearning from partners

SpeedIndustry norm

Strategic alliance

Acquire competencesScale economies

SpeedSupply/demandP/E ratios

M&A

Cultural/political easeLearning and competence development Spread of cost

First in fieldPartners/acquisitions not available

Internal developm’t



Understanding the relative suitability ofStrategic options

Exhibit 7.6


Why Strategies may be Unsuitable

•Biased • Not addressing all three factors of environment,

capability and expectations

•Relative suitability• Other options may be more suitable

•Elements of strategy not internally consistent• Competitive strategy, development direction and

development method


Some criteria for understanding the acceptability of strategic options

Exhibit 7.7


Criteria for Acceptability

Technical detail often difficult

Mergers and acquisitions

Impact on shareholder value

Shareholder value analysis

QuantificationReal options analysis

Sequence of decisionsReal options

Difficulties of quantification

Major infrastructure projects

Wider costs/benefits (incl. intangibles)

Cost-benefit

Apply to discrete projectsOnly tangible costs/benefits

ROCEPayback periodDCF

Financial return on investments

Profitability

Return

LimitationsExamplesTo UnderstandCriteria



Criteria for Acceptability

Largely qualitativeStakeholder mappingGame theory

Political dimension

Stakeholder reactions

Tests factors separately

What if? analysisTest assumptions/robustness

Sensitivity analysis

Break-even analysisImpact on gearing/liquidity

Robustness of strategy

Financial ratio projections

Risk

LimitationsExamplesTo UnderstandCriteria



Assessing profitability

Exhibit 7.8a


Assessing profitability

Exhibit 7.8b


Real options framework

Exhibit 7.9

Source: Reprinted with permission of Harvard Business Review. Adapted from T.A. Luehrman, “Strategy as a portfolio of real options”, September-October, 1998, p. 3. Copyright © 1989 by the Harvard Business School Publishing Corporation; all rights reserved.


Feasibility

•Financial• Funds flow forecasting – timing of new funding• Break-even analysis

•Resource deployment• Resources and competences needed

• Threshold• Unique resources/core competences

• Scale, quality of resource, timetable for change


Resource Deployment

Exhibit 7.10


Key Points (1)

•Three elements of strategic choice• Competitive strategy• Direction of development• Method of development

•Four categories of development directions• Protect and build• Product development• Market development• Diversification


Key Points (2)

•Three methods of strategy development• Internal development• Mergers and acquisitions• Strategic alliances

•Three success criteria for strategic options• Suitability• Acceptability• Feasibility

•Range of analytical techniques for evaluation of strategic options

Documents

strategy chapter 7 ppat