The Strategy Design ProcessThe Strategy Design Process

Strategic Analysis Strategic Choice Strategy Implementationand Evaluation

Evaluate The Current

Situation

Evaluate theStrategies

Results

Implement theStrategy

Craft Changes in Structure

and Processes

Develop Action Plans, Programs,

and Processes

Analyze Resources and Internal Capabilities

IdentifySustainableCompetitiveAdvantage

Craft and Communicate

Vision and Mission

Evaluate andSelect Strategy

Establish the Basis for Sustainable

Competitive Advantage

Generate FeasibleAlternativeStrategies

CreateSustainableCompetitiveAdvantage

Feedback and Rethinking

SelectSustainableCompetitiveAdvantage

Develop a Strategic Control System

Understand and Critique Current Strategy

Analyze Industry and External Environment

Understand Industry Context and Competition

Develop Strategic Goals and Specific Long Term Objectives

Situation AnalysisSituation Analysis

IdentifyStrategic Optionsfor the

Company

Select the Best Strategyfor the

Company

A strategic group is a group of firms in an industry following the same or similar strategy.

Identifying strategic groups:• Identify principal strategic variables that distinguish firms.• Position each firm in relation to these variables.• Identify clusters.

Question 4: Which Companies are in Strongest / Weakest Positions?

Strategic Groups Within the World Strategic Groups Within the World Petroleum IndustryPetroleum Industry

Geographical Scope

0 10 20 30 40 50 60 70 80

Vert

ical

Bal

ance

00.

51.

01.

52.

0

INTERNATIONALDOWNSTREAM OIL COMPANIES

PRODUCTION COMPANIES

INTEGRATED INTERNATIONAL MAJORS

NATIONALLY-FOCUSEDDOWNSTREAM COMPANIES

INTEGRATED DOMESTICOIL COMPANIES

Neste Petrofina

ChevronShell

TotalMobil

Exxon

Statoil

PDVSA Kuwait

Unocal Arco

Petrobras ENI

Repsol

NipponSun

BP

Texaco

Elf

Phillips

Amoco

Indian Oil

ElfENI

DIVERSIFIED MAJORS

How to Start a How to Start a RevolutionRevolution

Re-conceive your product or service◦ Radically improve the value equation◦ Separate form and function◦ Achieve joy of use

Re-define the market space◦ Push the bounds of universality◦ Strive for individuality◦ Increase accessibility to your products

Re-draw industry boundaries◦ Rescale the industry◦ Compress the supply chain◦ Drive convergence between industries

What is a competitive advantage?How do you know if you have one (or not)?

How can you create one?

Sources of Competitive Sources of Competitive AdvantageAdvantage

COST ADVANTAGE

DIFFERENTIATIONADVANTAGE

COMPETITIVEADVANTAGE

Similar product

at lower cost

Price premium

from unique product

The Porter Value The Porter Value ChainChain

FIRM INFRASTRUCTURE

HUMAN RESOURCE MANAGEMENT

TECHNOLOGY DEVELOPMENT

PROCUREMENT

INBOUND OPERATIONS OUTBOUND MARKETING SERVICE

LOGISTICS LOGISTICS & SALES

PRIMARY ACTIVITIES

SUPPORTACTIVITIES

Using the Value Chain to Identify Using the Value Chain to Identify Differentiation Potential on the Differentiation Potential on the Supply SideSupply Side

FIRM INFRASTRUCTURE

HUMAN RESOURCE MANAGEMENT

TECHNOLOGY DEVELOPMENT

INBOUND OPERATIONS OUTBOUND MARKETING SERVICE

LOGISTICS LOGISTICS & SALES

IS that supports fast response

capabilities

Training to support customer service

excellence

Unique product features. Fast new product

development

Quality of components &

materials

Defect free products.

Wide variety

Fast delivery. Efficient order

processing

Building brand reputation

Customer technical support. Consumer credit. Availability of

spares

Creating Competitive AdvantageCreating Competitive Advantage

Industry structure matters, but success does not come just from industry attractiveness

Value = difference between buyer’s willingness to pay and seller’s opportunity cost

Added value = marginal value created by the firm

(value that would be lost by its absence)The larger the added value, the larger the

potential profit for the sellerCA is achieved by driving a wedge between buyer

willingness to pay and value added by the firm (scarcity)

Ghemawat & Rivkin, 2006

Activity Analysis of Value CreationActivity Analysis of Value Creation

1. Catalog activities (along the value chain)2. Use activities to analyze relative costs and cost

drivers3. Use activities to analyze relative willingness of

customers to pay• Who is the real buyer?• What do buyers want and what are they willing to pay

for?• What is the relative success of our firm and competitors

in fulfilling customer needs• Relate success back to activities – are the activities

customers need the ones we are good at?4. Explore options and make choices

• Understand competitors, their likely reactions, the bundle of benefits to customers, and the role of scope and scale

Ghemawat & Rivkin, 2006

Value NetworksValue NetworksA non-linear model of value creationA non-linear model of value creation

Porter’s Generic Porter’s Generic StrategiesStrategies

SOURCE OF COMPETITIVE ADVANTAGE

Low cost Differentiation

Industry-wide COST DIFFERENTIATIONCOMPETITIVE LEADERSHIP SCOPE

Single Segment

FOCUS

The Evolution of Competitive The Evolution of Competitive AdvantageAdvantage

How does competitive

advantage evolve?

External sources ofchange e.g.:•Changing customer demand•Changing prices•Technological change

Internal sources

of change

Resource heterogeneity

among firms means differential impact

Some firms faster and more effective in exploiting change

Some firmshave greater creative

and innovativecapability

Drivers of Cost AdvantageDrivers of Cost Advantage

PRODUCTION TECHNIQUES

PRODUCT DESIGN

INPUT COSTS

CAPACITY UTILIZATION

MANAGERIAL/ ORGANIZATIONALEFFICIENCY

ECONOMIES OF LEARNING

ECONOMIES OF SCALE

• Organizational slack

• Ratio of fixed to variable costs• Costs of installing and closing capacity

• Location advantages• Ownership of low-cost inputs • Bargaining power• Supplier cooperation

• Design for automation• Designs to economize on materials

• Mechanization and automation• Efficient utilization of materials• Increased precision

• Increased dexterity• Improved coordination/ organization

• Indivisibilities• Specialization and division of labor

Identifying Differentiation Potential: The Identifying Differentiation Potential: The Demand SideDemand Side

THE PRODUCT

THE CUSTOMER

What needs does it satisfy?

By what criteria do

they choose?

What motivat

es them?

What are key attributes?

Relate patterns of customer

preferences to product

attributesWhat price premiums do

product attributes command?What are

demographic, sociological, psychological correlates of

customer behavior?

FORMULATE DIFFERENTIATION STRATEGY• Select product positioning in relation to product attributes• Select target customer group• Ensure customer / product compatibility• Evaluate costs and benefits of differentiation

The Evolution of Honda: The Evolution of Honda: A Strategy Based on Resources and A Strategy Based on Resources and CapabilitiesCapabilities

1948 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2005

Founding ofHonda motor

company

50cc 2-cycle engine

4 cycle engines

405ccmotorcycle

Related products:ground tillers, marineengines, generators,pumps, chainsaws

First product: clip-on engine

for bicycles

The 50ccsuper-cub

N360 minicar

1000ccGoldwing

touringmotor cycle

Acura Cardivision

InsightHybrid

““Core” Competence – Three TestsCore” Competence – Three Tests

Provides potential access to a wide variety of markets and products

Makes a significant contribution to perceived customer benefits of the end product

Is difficult for competitors to imitate

Strategic IntentStrategic IntentGlobal leadership over a long time horizonAn obsession with winning at all levels of the firmA sustained, challenging, focused BHAG

◦ Stable over time◦ Attracts personal effort and commitment◦ Guide for resource development and allocation

Avoiding “recipes” for imitationCreating competitive advantages faster than

competitors can imitate them, creating “new space”

Layers of competitive advantageChanging the terms of engagement

The Relationships Between Resources, The Relationships Between Resources, Capabilities and Competitive AdvantageCapabilities and Competitive Advantage

STRATEGYINDUSTRY KEY

SUCCESS FACTORSCOMPETITIVEADVANTAGE

ORGANIZATIONALCAPABILITIES

RESOURCESTANGIBLE INTANGIBLE HUMAN

•Financial•Physical

•Technology•Reputation•Culture

•Specialized skillsand knowledge•Communication & interactive abilities•Motivation

The Profit Potential of Resources and The Profit Potential of Resources and CapabilitiesCapabilities

Scarcity

Relevance

Durability

Transferability

Replicability

Property rights

Relative bargaining power

Embeddedness of resources

THE EXTENT OF THE COMPETITIVE ADVANTAGE

ESTABLISHED

SUSTAINABILITY OF THE

COMPETITIVE ADVANTAGE

APPROPRIABILITY OF RETURNS

THE PROFITEARNING POTENTIALOF A RESOURCE OR

CAPABILITY

Preparing forPreparing for the Future: The Role of Scenario the Future: The Role of Scenario AnalysisAnalysis

Stages in undertaking multiple Scenario Analyses: Identify major forces driving industry change Predict possible impacts of each force on the industry

environment Identify interactions between different external forces Among range of outcomes, identify 2-4 most likely/

most interesting scenarios: configurations of change forces and outcomes

Consider implications of each scenario for the company Identify key signposts pointing toward the emergence

of each scenario Prepare contingency plan

Perspectives on Strategic PlanningPerspectives on Strategic Planning “The essence of strategic planning is the systematic

identification of opportunities and threats that like in the future [to] provide a basis for making better current decisions” (George Steiner)

“There are significant benefits to gain through an explicit process of formulating strategy to insure that at least the policies (if not the actions of functional departments) are coordinated and directed at some common set of goals” (Michael Porter)

“Planning is the substitution of error for chaos” (Anonymous)

“Most corporate planning is like a ritual rain dance: It has no effect on the weather that follows, but it makes those who engage in it feel they are in control” (Russell Ackoff)