Strategic Analysis Fall 2009

Martin [email protected]

Introducing Strategy

Exploring Corporate Strategy 8e, © Pearson Education 2008 and Marcel Truche, ESC Dijon 1-3

What is Strategy?

Strategy is the direction and scope of an organisation over the long term, which

achieves advantage in a changing environment through its configuration of

resources and competences with the aim of fulfilling stakeholder expectations.

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

What is Strategy?

“Top management’s plans to achieve results based on the mission and objectives of

the firm.” (Wright)

Where and how to compete.

“Design a mission and define overall objectives for the firm, translate these

objectives into operational action plans, implement them, measure the actual

results, compare them with the expected results take corrective action.” (Truche)


Characteristics of Strategic Decisions

Long-term direction

Complex and uncertain

Process and content

Competitive advantage

Strategic fit with business environment

Organisation resources and competences

Values and expectations of power players

All levels of the organization


Implications of Strategic Decisions

Complexity

Uncertainty

Operational decisions

Integration

Relationships and networks

Change


Levels of Strategy

Operational strategy

Business-level strategy

Corporate-level

strategy


What is a Strategic Business Unit?

A strategic business unit (SBU) is a part of an organisation for which

there is a distinct external market for goods or services that is different

from another SBU.


Vocabulary of Strategy

Mission

Vision

Goal

Objective

Strategic capability

Strategies

Business model

Control


What is Strategic Management?

Strategic management includes understanding the strategic position of an organisation, making strategic choices for the future, and managing

strategy in action.


Typical strategic management process

Evaluate capabilities

Strengths & weaknesses

Evaluate environment

Opportunities and threats

Vision and mission

Strategic directions and goals

Select resources and fundamental competencies

Formulate strategy

Implement strategy

Control and evaluate


Strategic Analysis

The Organisation


Evaluating the environment

PESTEL analysis

Analysis of the competitive environment

Rules of the game and margin of maneuver

Opportunities and threats


Evaluating the Company’s Strategic Capabilities

Evaluating internal competencies

Situation

Value Chain, Business Model and KSFs

Competitive Advantage

Analysis of internal consistency

Portfolio of products

Strengths and weaknesses


Formulating Strategy

MissionThe purpose of the firm, its very reason to

existVision

The envisioned future, the end point, the ultimate goal

StakeholdersWho influences the firm, who depends on

the firmWhat is their power


Defining Strategic objectives

Determine measurable goals and objectives

Identify appropriate type of objectives Profit, growth, innovation, size, market share, etc.

Verify consistency with stakeholders’ objectives Shareholders

Employees

Third parties (suppliers, clients, NGOs, …)

Translate goals and objectives into actionable items Processes

All levels


Translating Strategy into Action

Strategic goals translated into operational goals

Create action plans consistent with strategy

Define measurement system

If you can’t measure it, you can’t manage it.


Control and evaluation Define indicators

Quantitative

Qualitative

Stage operations (steps)

Corrective actions / real time follow up

Use scoreboards

Identify gaps

Analyze causes

Define action points

Plan & implement follow-up

The Environment


Exhibit 2.1 Layers of the business environment

The Organisation


PESTEL Framework

Political Economic

Technological

Environmental Legal

Social


What Are Key Drivers for Change?

Key drivers of change are environmental factors that are likely

to have a high impact on the success or failure of strategy.


Key Aspects of PESTEL Analysis

Not just a list of influences

Need to understand key drivers of change

Drivers of change have differential impact on industries, markets, and organisations

Focus is on future impact of environmental factors

Combined effect of some of the factors likely to be most important


Exhibit 2.2 The Five Forces Framework

Competitive rivalry

Potential entrants

Buyers

Substitutes

Suppliers


The Threat of Entry: Barriers to Entry

Scale and experience

Access to supply and distribution channels

Expected retaliation

Legislation or government action

Differentiation or branding

Patents


Why Are Substitutes a Threat?

Substitutes can reduce demand for a particular class of products as customers switch to alternatives.

• Price/performance ratio

• Extra-industry effects


Bargaining power of suppliers

Degree of concentration and volume

Differentiation

Impact on firm’s costs

Switching costs

Existence of alternatives

Threat of forward integration from supplier of backward integration from focal firm


Bargaining power of buyers

Concentration and volume

Differentiation

Information asymmetry

Price sensitivity

Vertical Integration

Substitutive product / distributors


Degree of Competitive Rivalry

Competitor balance

Industry growth rate

High fixed costs

High exit barriers

Low differentiation


Key Aspects of 5-Forces Analysis

Use at level of strategic business units (SBU)

Define the industry/market/sector

Don’t just list the forces: derive implications for industry/organisation

Note connections between competitive forces and key drivers in macroenvironment

Establish interconnections between the five forces

Competition may disrupt the forces rather than accommodate them


Managerial Implications

Which industries should we enter or leave?

What influence can we exert?

How are competitors differently affected?


Exhibit 2.5 Comparative Industry Structure Analysis

The Environment (Session 2)


Exhibit 2.3 The Industry Life Cycle


Typology of competitive environments (2nd BCG matrix)

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

low high

Sources of differentiation, low

price elasticity

high Fragmented systemLarge number of companies, frequent entries and exit, multiple strategic options

Specialization systemSeveral players are profitable, unit margin is high, strong competition, lower profits for followers

low

Dead end systemNo dominant player, no long term advantage, low industry profitability

Volume systemFew competitors, size is an advantage; leader is very profitable, price is a major KSF


What are Strategic Groups?

Strategic groups are organisations within an industry

with similar strategic characteristics, following similar

strategies or competing on similar bases.


Characteristics for Identifying Strategic Groups

Scope of activities

Extent of product diversity

Extent of geographic coverage

Number of segments served

Distribution channels

Resource commitment

Extent of branding

Marketing effort

Extent of vertical integration

Product quality

Technological leadership

Organisational size


Benefits of Identifying Strategic Groups

Understanding competition

Analysis of strategic opportunities

Analysis of mobility barriers


What is a Market Segment?

A market segment is a group of customers who have similar needs

that are different from customer needs in other parts of the market.


Exhibit 2.7 Some Bases of Market Segmentation


Managerial Issues in Market Segmentation

How do customer needs vary by market?

What is the relative market share within market segments?

How can market segments be identified and ‘serviced’?


What is a Strategic Customer?

A strategic customer is the person(s) at whom the strategy is primarily addressed because they

have the most influence over which goods or services are purchased.


What are Critical Success Factors?

Critical success factors (CSFs) are those product features with which a organisation must outperform the

competition because they are particularly valued by a group of

customers.


The Value-Adding Process

1-44

The Industry

Raw materials + RD + Production + Distribution

The Suppliers


The Client


Input

Input

Specific competences

or KSFs

Specific competences

or KSFs

The Company


What is Strategic Capability?

Strategic capability refers to the resources and competences

of an organisation needed for it to survive and prosper.


What are Core Competences?

Core competences are the skills and abilities by which resources are deployed through an organisation’s activities and

processes such as to achieve competitive advantage in ways that others cannot

imitate or obtain.


Exhibit 3.1 Strategic Capabilities and Competitive Advantage


Strategic Capability- the terminology

Exhibit 3.2


Core Competences Lead to Competitive Advantage When…

They relate to an activity that underpins the value in the product features

They lead to levels of performance that are significantly better than competitors

They are difficult for competitors to imitate


Exhibit 3.5 Criteria for Inimitability

Robustness of strategic capability

Complexity Culture andhistory

Causal ambiguity


Exhibit 3.3 Sources of Cost Efficiency

Costefficiency

Economiesof scale

Experience

Productdesign

Supply costs


Exhibit 3.4 The Experience Curve


The Experience Curve

Competences in activities develop over time based on experience, resulting in cost efficiencies

Growth may not be optional

Unit costs should decline year on year

First mover advantage is important


What is Organisational Knowledge?

Organisational knowledge is the collective experience accumulated

through systems, routines, and activities of sharing across the

organisation.


Identifying KSF’s

Resources

Threshold competences

Core Resources

Core competences

Competitive advantage

Client interfaceValue proposition Distribution channels Target clients


Identifying KSFs

Client expectations

KSFs

Core competencies

1-57

Strategic Capability(Session 3)


Diagnosing Strategic Capability

Activity maps

Benchmarking SWOT analysis

Business Model/Value chain


Exhibit 3.6 The Value Chain


What is a Value Chain?

A value chain describes the categories of activities within and

around an organisation, which together create a product or

service.


Value Configuration (Value Chain)(Osterwalder)


Exhibit 3.7 The Value Network


What is a Value Network?

A value network is the set of interorganisational links and

relationships that are necessary to create a product or service.


Understanding the Capabilities in Relation to the Value Network

Which activities are central to an organisation’s strategic capability?

Where are the profit pools?

What should be outsourced?

Who might be the best partners in the parts of the value network?


SWOT Analysis

Strengths Weaknesses

Opportunities Threats


SWOT: definition and examples

Strengths: resources and competencies present in the organization that can be used to build a competitive advantage

Weaknesses: what is missing to do so

A strength in a context can become a weakness when the context changes (rigidity)

Opportunities are changes in the environment that open new avenues for profit and success

Threats are events or changes in the environment that limit the organization’s ability to reach its objectives


The SWOT analysisOpposing

The internal characteristics of the organization (Strengths and Weaknesses) to

The environment (Opportunities and Threats)

Objective is to measure the ability of the organization to reduce threats and profitably seize opportunities

Strategic Capability (Session 4)


Business Model Configuration

Source: A. Osterwalder, « The business model ontology ».


The Business Model (Osterwalder)












Exhibit 3.8 An Activity System Map


Lessons Learned from Activity Maps

Consistency and reinforcement

Difficulties of imitation

Trade-offs


Approaches to Benchmarking

Historical benchmarking

Industry/sector benchmarking

Best-in-class benchmarking


SWOT Matrix Analysis

STRENGTH

SWEAKNESSES

W

OPPORTUNITES

OStrategy S-O

Target opportunities that match the firm’s strengths

Strategy W-OReduce weaknesses that

prevent the firm from benefiting from opportunities

THREATS

T

Strategy S-TIdentify resources for the

firm to reduce exposure to threats

Strategy W-TDefine defensive plan

Competitive Advantage and Strategy (Session 5)


Which positioning?P

erce

ived

Val

ue

Price

High

LowLow High

Low cost leadership

Differentiation

Niche

The firm’s environment is illustrated through Porter’s competitive grid


Exhibit 6.2 The Strategy Clock


Route 1: No Frills Strategy

Low price combined with low perceived product benefits focusing on price-sensitive market segments

Commodity markets

Price-sensitive customers

High power, low switching costs among buyers

Opportunity to avoid major competitors


Route 2: Low-Price Strategy

Lower price than competitors while offering similar product benefits

Pitfalls

Margin reductions

Inability to reinvest


Route 3: Hybrid Strategy

Seeks to simultaneously achieve differentiation and low price relative to competitors

Advantageous when

Greater volumes can be achieved

Cost reductions outside differentiated activities are available

Used as an entry strategy


Route 4: Differentiation Strategy

Seeks to provide products that offer benefits that differ from those offered by competitors

Dependent upon

Identifying and understanding strategic customer needs

Identifying key competitors’ strategies


Route 5: Focused Differentiation

Seeks to provide high perceived product benefits, justifying price premiums

Key issues

Choice between focus strategy and broad differentiation

Tensions between focus strategy and other strategies

Market changes


Routes 6-8: Failure Strategies

6 – Increase prices without increasing service/product benefits

7 – Reduction in product/service benefits with increase in relative price

8 – Reduction in benefits whilst maintaining price


Which competitive advantage?

Competitive advantage based on costs. Concentration on

volume / market share

Competitive advantage based on differentiation and

specialization. Distinctive competencies.

Competitive advantage based on anticipation of demand. Ability to innovate.

Quick response to market changes

COSTS VALUE

TIME

or


Exhibit 6.3 Sustaining Competitive Advantage

Sustainablecompetitiveadvantage

Price-based strategies

Lock-in

Differentiation


Achieving Low Prices

Operate with lowermargins

Develop a unique cost structure

Create efficiency inorganisational

capabilities

Focus on market segments with

low expectations


Ways of attempting to Sustain Advantage through Differentiation

Create difficultiesof imitation

Create a situation of imperfect mobility

Establish a lowercost position


Establishing Strategic Lock-In

Size or marketdominance

First-moverdominance

Self-reinforcingcommitment

Insistence on preservation

of position

Strategy Formulation(Session 6)


You need direction…

`Would you tell me, please, which way I ought to go from here?'

`That depends a good deal on where you want to get to,' said the Cat.

`I don't much care where--' said Alice.

`Then it doesn't matter which way you go,' said the Cat.


Organisational Purposes

Values

Mission statement

Vision statement

Objectives


What are Core Values?

Core values are the underlying principles that guide

an organisation’s strategy.


Core ValuesWhat matters is not what they are but how

they are lived

Must be shared

Must translate into behaviors and actions

VALUES ACTIONS

“Innovation” (3M but not P&G)

“Risk taking” (Sony, but not HP)

“Customers” (Wal-Mart, but not Sony)

“Employees” (HP, but not Nordstom)

“Products” (Ford, but not IBM)


What are Mission and Vision Statements?

A mission statement provides employees and stakeholders with clarity

about the overall purpose of the organisation.

A vision statement is concerned with what the organisation

aspires to be.


Vision and mission

A clear vision is a crucial step in formulating and implementing a strategy for a firm

The vision defines how the firm will use its resources to reach its goals

Evaluating a strategy makes no sense unless you compare achieved results and expected results


102

PRESERVE

STIMULATE

• Values• Purpose

• Operating modes• Objectives and strategies

Why vision?Jim Collins in “Built to Last”: research

on companies with decades of excellent performance, compared to laggards

Gap can be explained by existence of clearly articulated vision and values

Preserve the core / stimulate progress

Vision = values, purpose/mission, long term objective


ExampleCore Values

Passion for what we do

Integrity in how we do it

Pride in winning

Respect for our Partners

Core Purpose / Mission

A company that inspires and nurtures the human spirit, providing people an uplifting daily experience every day

25-Year BHAG (Big Hairy Audacious Goal)

Turn the Starbucks brand into the most recognized and respected brand in the world


A Few Mission Statements “To grow more rapidly than our competitors by

providing customers with the solutions they need to capture, store, process, output and communicate images—anywhere, anytime.”

To protect the lives and dignity of victims of war and internal violence and to provide them with assistance.

To improve human and animal health, directly and through its joint ventures.

To educate leaders who make a difference in the world


Mission statement: who, what and how?

“Visible flag” for all stakeholders

Expression the long term strategic choices = coherent with strategic positioning

Reference point, particularly for employees, to base decisions upon

Ensurse consistency of decisions at all levels of the firm

Must be communicated to and shared by employees

Public commitment by the firm


What are Objectives?

Objectives are statements of specific outcomes

that are to be achieved.

The goal is to translate a mission into performance and to define tools to

measure it.

Exploring Corporate Strategy 8e, © Pearson Education 2008 and Marcel Truche, ESC DijonB

e professional

Listen to clients

Make profits

Motivate and involve em

ployees

Be international

Be big

Think global, act local

AXA To be the world’s

reference in financial protection

Source : S. Auvé


Objectives must be measurable

Strategic directions Measurable objectives

• Be professional

• Listen to clients

• Make profits

• Motivate and involve employees

• Be international

• Be big

• Think globally, act locally

• 0 defect

• Satisfaction rate = 100%

• Return on investment = 20%

• 10% of capital owned by employees

• 60% of revenue from international

• 60% of share of all active markets

• 100% of local talent internationally

AXA example, source: Auvé


Operational Action Plans

Each operational manager proposes action plans to reach the general objectives of the firm

Strategic objectives are translated into complementary and converging operational objectives

The strategic process must involve all levels and all functions of the firm


Aligning operational action plans and overall strategy

Level 1

Company

Mission and strategic direction

Main objectives (measurable)

Action plans

Level 2

SBUMission for

Business UnitsOperational objectives

Level 3 Functions Mission for

Functions Operational objectives

Level 4 Operations

Mission for Factories or divisions

Operational objectives

Action plans

Action plans

Action plans


1. Identify what can be improved

2. Identify root causes

3. Propose alternative solutions

4. Agree on action plan

5. Implement

6. Measure results

Gap must be clear and measurable

Validate one or more causes

Select a solutionBest options

Roles and responsibilities

Demonstrate effectiveness

Management by Fact or PBS


Objective of MBF

Targeted use of competencies

Common tools and measurement methods

Analysis and actions based on fact

Accountability at all levels

Align individuals’ and groups’ objectives with those of the company

Ensure learning (individual and organizational)


Mission statement

General and specific objectives

SB

SB = story board

SB SB

SB SB SBSB SB SB

Intra-functionalmeetings



Cross-functional meetings

Stra

tegi

c ad

just

men

tsMBF = Measurable

implementation of strategy


What are Stakeholders?

Stakeholders are those individuals or groups who depend on an

organisation to fulfil their own goals and on whom, in turn, the

organisation depends.


Exhibit 4.7 Stakeholders of a Large Organisation


Exhibit 4.9 The Power/Interest Matrix

Strategic Analysis Fall 2009

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