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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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