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 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

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 & Ends 10 Behavioural vs. Economic & Financial Objectives 11 Economic Objectives 12 Financial Objectives 13 Social Objectives 14 Stakeholders 15 Ethical Considerations 16 Are Objectives SMART?

8 Accounting Ratios 9 Benchmarking 10 R&D 11 Human Resource Management 12 The Scope of the Company
Economies of Scale, Economies of Scope, Diversification Synergy, Vertical Integration

13 The Value Chain 14 Competence 15 Strategic Architecture: Competitive Advantage 16 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 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 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

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 Prices 10 Market Structures: Perfect Competition, Monopoly,
Barriers, Contestable Mkts, Oligopoly

11 The Role of Government 12 The Structural Analysis of Industries: Profiling the Five Forces 13 Strategic Groups 14 First mover advantage 15 An Overview of Macro and Micro Models 16 Is Competition Changing? 17 Environmental Threat and Opportunity Profile: Part 2

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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 advantage FIN: Quantitative evaluation of alternative options ACC: Efficient resource allocation, isolating relevant costs PM: 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 formal Strategic planning takes place in complex and dynamic environment Attempt 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. Planning 2. Course of action emerging over time 3. 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

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 Rittells Tame & Wicked Problems
Property 1. Ability to formulate the problem 2. Relationship between problem & solution 3. Testability 4. Finality 5. Tractability 6. Level of analysis 7. Reproducibility 8. Replicability Tame Can be written down Can be formulated independently of solution Either true or false Clear solution Identifiable list of operations can be used Can identify root cause Can be tested over again as in a laboratory May occur often Wicked No definitive formulation Understanding problem is same as solving it Solutions good or bad relative to each other No clear end and no obvious test No exhaustive identifiable list of operations Never sure whether a problem or a symptom Only one try: no room for trial and error Unique

The Origins of Strategy and Tactics Greek Strategio = general; stratus = army, agein = lead Taktos = ordered (manoeuvre) tactics Military: Business analogy not complete

Strategy and the Scientific Approach No agreement on what scientific method is Karl Popper: Theories can only be falsified (problem: not possible to prove the reverse either) Kalakos: Testing not important but the overall research programme Feyerabend: Scientific method unduly constrictive, lateral thinking necessary Kuhn: 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

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 functions language CEO 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

Elements of Strategic Planning Elements 1. Managers use structure to tackle problems in their areas 2. Manager applies structure to data analysis 3. CEO integrates analyses to arrive at a decision 4. Evaluation system monitors resource allocation 5. 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 - Dont 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

Development of Corporate Strategies Corporate structure:

Decade 1950s 1960s

value creation cost < benefits (else break-up)

Strategic Concepts Devolve responsibility = decentralise General Mgt skills + Synergy Corporate Strategies Divisionalisation Diversification elusive synergy, risk spreading (management rather than shareholder)

Strategic issues Centralised control Maintain growth

1970s

Manage diversity

Portfolio planning

Balance portfolio slow economy, high inflation, Asian competition

1980s

Poor perf. of diversification Value destruction Hostile takeovers

Shareholder Value Stick to the knitting

Restructuring delayering, divestment 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 Downsizing - 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 Mega mergers - No guarantee of economy of scale - No guarantee size will produce competitive advantage Knowledge Management

Dominant logic Parenting Advantage

Late 1990s

Globalisation

Economy of scale Global Reach

2000s

Knowledge

Identify & maintain tacit knowledge

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 Understanding Strategic Planning: Who Should Pay? Value to both

Locus of control OB p1/13 i.e. comfort zone

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. 2. 3. 4. 5. 6. 7. 8. Setting goals Forecasting payoffs Forecasting shortfalls Identifying potential strategies Selecting the best strategy mix Organisation and implementation Control and reappraisal Feedback to previous activities

Weaknesses: goals may be invalid Strength: 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 approach Unstructured: 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

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

Module 3 - Company Objectives

3.1 Setting Objectives Managers tend to react to circumstances and seize opportunities Strategic plan is based on achievement of specified objectives
Explicit objectives: balance between informing managers and ensuring that competitors cannot pre-empt strategic moves

Mission statement: - They are often devoid of operational implications - General framework within which strategies are worked out 3.2 From Vision to Mission to Objectives

(elaborated)

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 statement 2. Disaggregate the mission 3. 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 business Target markets Deriving the Mission Statement (from the business definition) Mission statement can relate to e.g.: - Product quality - Degree of differentiation - Geographical area - Target segments
how the cny intends to operate within that business area

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 managements wish for the future - Must be attainable - Employees must relate to Disaggregating the Mission Mission statement applies to whole company Should 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

3.3 The Gap Concept

Gap: difference between desired & expected future states New products, market share, profitability, etc Projections complicated solution: What if scenarios After identifying gap: External or internal factors? Sufficient potential resources to close gap? Strategy possible to close gap?
future states

Specific time

future states

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 Factors Outside 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 circumstances Dynamic process constantly under review Relevant to managers and achievable 3.5 Quantifiable and Non-Quantifiable Objectives Cost benefit analysis can help assign relative importance of intangibles Translate 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

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3.8 The Principal/Agent Problem

Problem Generate a series of incentives which ensure that corporate & SBU objectives are achieved Contract between manager (principal) & subordinate (agent) ensuring that agent attempts to achieve the objectives Root 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 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 Value Net Present Value Capitalised Value
Capitalised value of income streams: Income/ cost stream Capital sum = ----------------------------Interest rate Div Share price E0 = ------re
(which are susceptible to measurement & evaluation)

Choice of Interest Rate: The Cost of Capital Two financing methods: debt, equity Equity 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 Stage 2 Stage 3 Stage 4 Stage 5 Stage 6 Stage 7
Expected income stream Shareholder wealth / value = ---------------------------------Interest rate

Decide on the Planning Period typically around five years Determine the Cost of Capital Decide on the Residual Cash Flow constant net cash flow predicted after the end of the planning period Determine the Cash Flows during the Planning Period Calculate Net Present Value of Cash Flows during the Planning Period Calculate the Present Capitalised Value of the Residual Cash Flow Add the Net Present Value, Capitalised Residual Value, Marketable Securities minus Debt
focus on the relevance of alternative courses of action

In what sense is this activity adding value to the cny?

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3.13 Social Objectives Corporate Social Responsibility (CSR)

Friedman: Smith: Hayek:
Minimisation of pollution Creating employment for disadvantaged

Any goal other than profit maximisation leads to misallocation of resources Society interests served by self-seeking individuals; tackle undesirable side-effects with collective action 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 Managers Employees Suppliers Customers Creditors Local community Government ROI, risk Highest priority stakeholder (control the supply of capital) but often short-term view Salary, advancement High impact decisions, but there is a market for managers Salary, advancement, security, fair treatment Can be replaced on labour market Prompt payment, repeat orders Depends on bargaining power of supplier (number, substitutes... ) Relative value for money, Quality, Availability Low priority stakeholder Cash flow, financial stability Only need assurance that debts will be serviced, no other interest Lack of negative externalities, Employment prospects Mutual dependency, valid stakeholder interest 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 Managers Employees

Little day-to-day influence, represented by executives Principal-agent problems Institutional shareholders may wield some power Family owned, dual role (manager, shareholder) Influence of manager increases (& shareholder diminishes) with size of company

Incentive structure must be aligned with shareholder interest

Influence of trade unions is diminishing (legislation, number of members)

Experience curve: not feasible to replace entire workforce at once Direct influence less important than extent of collaboration Related to culture, organisational structure, incentives Suppliers Customers Creditors
Depends on number of suppliers, substitutes Depends on number of customers, substitutes 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
Regulation

Role 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 Shareholders (family) Managers Employees Existing customers Suppliers

Influence High Low High Low Low

Priority High High Low High High

Precise location of stakeholders is subjective

3.15 Ethical Considerations Dickensian (amoral) capitalist is rare Geographical variation in ethics (bribes) Moral values as means towards the ends of promoting positive image - Honesty, integrity, dependability Employee 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 organisations 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, Technological ETOP 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 Total market Market share Price Workforce Wage rate Capital Capital price Materials Materials price Determining factors National income, Foreign national income, Population, Preferences, Competing products, Product life cycle Price, Marketing expenditure, Marketing strategies, Competitor marketing expenditure, Competitor strategies Demand conditions, Competitive reaction, Competitive advantage, Market segmentation Labour market conditions, Regional supply variations, Wage rate offered, Working conditions Labour market conditions, Unemployment rate Capacity of the capital goods sector Capital market conditions Capacity of suppliers 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

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Philips curve (1950s): inverse relation between inflation and unemployment 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 periods wage inflation (cost-push: production costs) Last periods 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 transferred Trade-off between perceived competitive advantage and exchange rate 4.4 Forecasting: What Will Happen Next? Accurate predictions difficult Even vague predictions can be valuable Direction of change is important All 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

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- General trend - Underlying smooth cycle - Random fluctuations (economic policy, exchange rates,...) 4.5 PEST Analysis

Facto r P E

Issue

Threat High Mediu m Low High

Identification of relevant factors and interrelationships S Political monopoly behaviour, labour laws T Economic Social 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 PEST Predict beyond extrapolations Highly subjective Early warning system 4.7 Scenarios Implications of possible futures, not forecast e.g. price reduction of competitor market share, cash flow e.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. 2. 3. 4. 5. 6.

Use the PEST approach as a checklist Apply macroeconomic ideas to economy wide influences Consider international factors both in terms of exchange rates and international competitive influences Use the environmental scanning approach to think beyond the immediate situation Put together some scenarios to help put factors into context Build a profile of opportunities and threats
Environmental threat () and opportunity (+) profile Sector Threat or opportunity International Expected appreciation of exchange rate + Growth in Eastern Bloc economies Macroeconomic Tax rate increase to fight inflation + Prospect of reduced interest rates Microeconomic 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

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Case: Revisit Porsche: Glamour at a Price

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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 demand Ceteris 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 Price Total market: price of substitute/complementary goods can shift demand curve 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 prisoners 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

(affect total market)

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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)

Highly elastic

Highly inelastic

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 characteristics Market 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 exploitation 1. Identifiable 2. Demand-related (willingness to pay more for a high quality product) 3. Adequate size 4. 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)

Type Chinese Japanes e Indian Mexican Italian

High 3 1 2 6

Quality Medium 7 1 10 5 4

Low 5

15 10 9

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

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 Customer characteristics? Customer willingness to pay? Enough customers? Can they be reached? Pricing in Segments 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 characteristics Step 2: Derive price income elasticity (also called responsiveness) Marketing Identify viable product segmentation Economics Measure demand, calculate marginal costs, revenue Accounting 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 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
(environmental scanning PEST, ETOP)

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 Marginal & total utility Question: Production process merely adds to costs rather than to market appeal? Dimensions of Quality Garvins 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 = 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 (Hagen-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-outIntroducti Decision
on Price Marketin g Capacity Investme Low High High High Growt h Low High High High Transiti on Increase Reduce Reduce Reduce Maturity Market Low JIT Replaceme Declin e Market Low Reduc e Zero
Transition or Shakeout

21

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 statics Portfolio 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

BCG Market Growth / Relative Share Matrix

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

22

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 unmanageable Need to be linked to benefit from corporate competencies Analysis of competitor portfolio relevant Defend Star by attacking Competitor Cash Cow rather than Competitor Star Provide 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.

23

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 left Factor 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

P = AR = MC = MR

24

Would also affect cost side (competition for input)

25

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 costless Where no structural barriers: entry deterring ineffective Never offers more than normal rate of profit Oligopoly Competition among the Few Game theory Kinked demand curve 5.11 The Role of Government Less efficient at resource allocation than market but legitimate role due to market failures Input 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 Defence
it is a market failure ( cost > benefit )

26

Lighthouse Demand is dictated by government-perceived right quantity

27

5.12 The Structural Analysis of Industries Porters five forces Industry competitors rivalry

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

Number of firms Many Few One

Type of market Perfect Oligopoly Monopoly

Basis for competition Price Differentiation Price (to deter

Threat of new entrants - Economies of scale Focus on the conditions that make entry attractive instead of - Regulation what competitors are actually doing - 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) - Perceived differentiation - Information

= responsiveness of a good demanded to changes in income

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 threats Common failure is lack of recognition of changes in balance and realignment of strategy
Competitive force Threat of new entrants Threat of substitutes Bargaining power of suppliers Bargaining power of buyers Industry rivalry Before supermarkets / High / High / Low / / Low Low After supermarkets / / / / / Low Low High High High

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
Relative price Computing speed

Perceived quality Capacity

28

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
Macroeconomics Competitive advantage of nations Forecasting PEST Environmental scanning Scenarios

Focus
Determination of GNP and business cycles, GNP elasticity, interest rates, inflation, unemployment and their relationship to company costs, revenues and profits National market factors which relate to the source of competitive advantage Predicting changes in key factors in the economy and the market place Checklist of factors which may affect the company in the future Identifying and tracking potentially important changes Speculating about the future and assessing the companys ability to respond

Micro models
Demand and supply Market structures Game theory Segmentation Differentiation Quality Life cycle Portfolio models Strategic groups Five forces analysis First mover advantage

Focus
Interpreting the impact of changes in market conditions Types of competition and intensity of rivalry Deriving competitive response with limited information Identifying unexploited opportunities in existing markets Product positioning Determinant of demand and differentiation Dynamic product management Strategic management Company positioning Identifying competitive forces 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)

29

Case 6: An International Romance that Failed: British Telecom and MCI (1998)

30

Module 6 - Internal Analysis of the Company

6.1 Opportunity Cost Best option foregone Identify 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 making Marginal cost excludes fixed cost Guide for minimum acceptable price Constant or increasing in the short run Marginal costs difficult to quantify Marginal 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 fixed Resource 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 effectively ABC 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 + FC TR = Sales x Price FC FC BE = ----------------------------------- = -----------------------

31

Price Variable unit cost

Net Contribution*

Competition price Production cost

32

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

ROI Return on Investment RONA Return on Net Assets Replacement value not obvious (especially if inflation is high) ROCE Return on Capital Employed ROTA Return on Total Assets ROE Return on owners equity EPS Earnings per Share Gearing ratio
Good track record should be able to raise debt High gearing ration reliant on steady profits

Net profit = --------------Net assets

Total Debt Total Debt = -------------------------- = ----------------Shareholder Equity Total assets Current assets Current ratio = -----------------------------* Current liabilities (= debt)

Quick ratio (the acid test)

Current assets Inventories = ------------------------------------------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 - Dont 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
(i.e. rate of return approach) based on unpredictable returns in the future

Opportunity cost approach or research expenditure

Simple, avoids conflict Arbitrary misallocation of resources

Keep research expenditure at constant percentage of Total costs or Total sales

Complication: Not always possible to segregate research from development

Product research vs. pure research

33

34

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 1.
2. The stage-gate process

Invention: incentives for disclosure, IP rights

Invention to prototype: screening mechanism

3.
4.

Prototype: criteria to determine potential

Prototype to patent: is delay justified or bypass this step?

5.
6.

Patent: definition of invention, imitability

Patent to development: prioritisation in development programme

7.
8.

Development: How much to spend

Development to launch: conflict between engineers and marketing

9.
10.

Launch: Differentiation and price

Launch to market exploitation: abandon or add resources

11.

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
Revolves around one individual (or small group) - New, small companies (also newspaper industry) - Strategy based on dominant leader - Lacks analysis, unpredictable Committees, structures, analysis, application of logic - Bureaucratic (civil service, old style retail banks) - Suitable for stable environment - Often does not recognise external changes - Slow, resistant Flexible teams - Multidisciplinary - Advertising agencies, consultancies - Flexible, change is norm - Individual doesnt pay attention to organisation, self-gratification - Lacks focus, unpredictable - Rare Unpredictable

1. Power culture

2. Role culture

Resistant

3. Task culture

Change is Norm

4. Personal culture Voluntary workers, individual professionals (lone architects/ consultants)

Unpredictable

WARNING:

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

35

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 Bronsons business empire, Shared reputation, brand stretching Synergy Whole is greater than the sum of the parts The 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 Economy of scale Vertical integration Capacity utilisation Joint production Innovative stimulus May be identifiable after the event but difficult to predict (e.g. for acquisition) Scope, experience Economies capacity utilisation, transport costs Spare capacity can be reallocated to other SBU Merged operations facilitates the sum of the specialisations Certainly possible, difficult to predict

Conclusion: challenge synergy claims by questioning source

36

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 Costs
-

Market firms with economies of scale Market firms subject to discipline of market competition

Rigorous internal controls unnecessary

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

Make

Benefits

Costs

More powerful governance structures Disputes settled internally Incentives to get things right Divisions cooperation more likely due to common purpose - 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 partys vulnerability once contract signed Ps 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 - Technology development - Human resource management - Management systems
Process of acquiring resources Technology for each value activity (learning by doing, product design, development...) Managing the workforce 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 doesnt 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.

37

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

Acquired Resourc es Current

Routine based Replication based Current

Unrelated Resource based

Diversification trajectory: Dynamic element; may signal a move away from core 6.15 Strategic Architecture

developed Routines

Strategic Architecture = The way in which the companys collection of unique attributes is combined together Derived from value chain and core competencies Strategic Architecture: Network of relational contracts Internal Architecture External architecture Networks Relations with Employees Relations with Suppliers & Customers Relations with Groups of Firms in related activities

Competitive Advantage

38

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.

39

Source of competitive advantage: Question is whether it is sustainable

1. Pure chance

2. Innovation

3. First mover

4. Differentiation

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
Short run Long run

Economics
Vary one factor of production Vary all factors of production

Strategy
Deal with cash flow problems, react to competitors, seize new opportunities 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 companys strategic capability
Dimension Primary activities In-bound logistics Operations Issues Bargaining power of suppliers Benchmarking Experience Synergy Economies of scale Distribution channels Market share Bargaining power of buyers Pricing Quality Repeat orders Vertical integration Economies of scope Innovation process Culture Leadership Dominant logic Competence Architecture Definition of profit Accounting ratios Financial structure Shareholder value

Out-bound logistics Marketing and sales

Service Support activities Procurement Technological development Human resource management Management systems Linkages Profitability

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

40

6.16 Strategic Advantage Profile Similar to ETOP but for internal strengths and weaknesses Strategic advantage profile SAP Internal area Research Development Production Marketing Finance Competitive strength (+) or weakness () + Recent invention Vision (wide, narrow) + Lead time Cost overruns + Full capacity Turnover rate + Customer databank Qualified salespeople + Share price Liquidity

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

41

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
Strengths Strengths Opportunities Opportunities

Type B

Weaknesses Weaknesses

Threats Threats

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 together 2. Understand competition, its strengths and weaknesses 3. Decide strategic moves & allocate resources Ambiguity Dynamics Requires imagination 7.3 Generic Strategies Represented differently at corporate and BU level Corporate level Scope of company, direction it will pursue Business level Competing in area currently occupied

Product portfolio, M&A

42

Corporate Level Generic Options Scale and scope* of company operations *Mkg course: Scope = mission statement; what customers 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 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 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 ) 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

Expansion

Retrenchment

Combination

Assessing Generic Strategies Which generic strategy will add most value to the company? Shareholder Wealth Business Level Generic Options Porters 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 Charge premium Strategy - Add characteristic Real or perceived Product positioning - Quantify price premium consumers are willing to pay Identify niches where confrontation can be avoided Then focus on cost or differentiation within the niche Continually adjusting its competitive focus in response to change in the market Typically poor performance

Differentiation

Focus

Stuck in the Middle

No distinctive strategy

43

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 Cost leadership Concerns and characteristics Optimum plant size Process engineering skills Simple product design Statistical quality control Quantitative incentives Tight resource controls Tight financial reporting system Achieving economies of scale Branding Design Marketing Advertising Service Quality Creativity in R&D

Lower Cost Broad Target Cost Leadership

Competitive Advantage Differentiati on Differentiation

Differentiation

Competitive Scope Narrow Target

Cost Focus

Differentiation Focus

Generic Strategies

Focus

Matching products with customers After sales service Dedicated work force

Decision Maker Generic Strategies Miles & Snow

Prospector Analyser Defender Reactor Identify new market opportunities sophisticated information systems, detailed investigations maintain market position without new development Deals with situation as they arise Pursue growth with differentiated or low-cost products Start from core and expand into related areas Operate in mature markets, cultivate cash cows 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 context 1. Strategy is a means, Performance is the end 2. Profitability reflects added value, not short-term cash flows; there may be other considerations 3. Hypothesis testing not feasible, conditioned by experience of the strategist. 7.4 Identifying Strategic Variations Identify courses of action available to achieve the objectives SWOT analysis help to identify the appropriate strategic variation Example Variations: Internal vs. external market development Horizontal vs. vertical integration Innovation vs. imitation 1. 2. 3. 4. 5. 6. Related and Unrelated Options (Diversification) Vertical Integration Acquisitions Alliances and Joint Ventures International Expansion From Generics to Options

(family

control)

44

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. 2. 3. 4. 5. 6. Unrealised value potential Buying market share Reducing competitive pressures Synergy Balancing portfolio 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

45

Alliances and Joint Ventures No significant long-term effects on joint venture activity on profitability Prisoners 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
International Factor Exchange rates Factor costs Productivity Government Culture Economic perf. Countr yA Countr yB

From Generics to Variations Strategic variations must satisfy a number of criteria

Generic strategy Corporate Expansion Stability Retrenchment Business Cost leadership Differentiation Focus Scale economies Segmentation Niche Investment Cost control Downsize

Variations

Consistency with objectives Suitability in terms of resources SWOT Feasibility

Acquisition Defend Divest

International Restructure Rationalise

First mover Branding Service

Experience Research Reliability

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. 2. 3. 4. 5. 6. 7.

Shareholder Wealth Performance Gaps Corporate Management SBU Management Risk and Uncertainty Analysis Managerial Perceptions From SWOT to Generics

Shareholder Wealth Theres no automatic connection between shareholder wealth and any corporate generic strategy Identify CF for generic strategies (stability, expansion, retrenchment) and compare PV Break 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, retrenchment Extent of the gap whether to reallocate resources to close the gap Ways of closing gap e.g. internal (cost control) versus external (marketing effort)

46

Corporate Management Corporate management objective SBU Management Decide components of portfolio 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 - Impact of market share on ROI - Target markets - Reducing unit cost

Issues

Project appraisal:
Year Development Total market Market share Price Unit cost Contribution Cumulative cash flow Net present value ($m) (000) (%) ($) ($) ($m) ($m) ($m) 1 8 100 2 8 120 3 150 13 1,395 692 14 2 4 200 15 1,200 630 17 15 5 250 15 1,200 610 22 37 15% 6 250 15 1,395 600 30 67 7 100 15 1,395 600 12 79

8 34

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Cost of capital

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 values Subjective 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 action 2. Strategic response to major unpredictable events (difficult)

Managerial Perceptions Information gathering & Analytical techniques do not generate strategic choice Difficult 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 SAP Align strengths with opportunities and weaknesses with threats May 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 Farming Case 2: Revisit Lymeswold Case 3: Revisit a Prestigious Price War Case 4: Revisit General Motors Case 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 structure A change in organisational structure can lead to changes in performance 1. 2. 3. 4. 5. Functional Functional Divisional Holding company Matrix Networks Advantages Disadvantages U-Form M-Form H-Form = Unitary form = Multi-divisional form

- Specialisation, Division of Labour, Simplified training, Strategic control preserved - Cross-functional coordination, functional focus, interdepartmental coordination, lack of broadly trained managers, functional profitability difficult to measure - Based on product, geography, customer - Divisional performance expressed in profit, Interfunctional coordination, broadly trained managers - Resolves principal agent problem: divisional profitability is measurable - Coordination among specialised areas, communication between functions, duplication of functions, loss of strategic control to divisional manager

Divisional

Advantages

Disadvantages

Holding

No particular logic to the incorporation of individual businesses Financial 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 When economies of scope lead to more than one dimension of organisation Many 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 Groups organised by function, geography or customer base Governed by changing implicit / explicit requirements of common tasks (no formal reporting lines) - Problems of direction and control

Matrix

Network

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 do Develop a corporate culture which rewards adaptability, innovation and flexibility Consider the dominant company culture Power, Role, Task, Personal Reallocation of resources is more than investing, retooling and hiring Techniques Survey feedbacks, Team building, Confrontation, Transactional analysis Resolve 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 SBU or Functional level Overall budget rationed among competing alternatives 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 division 2. Allocate capital directly to SBUs using the value of value added (NPV) Theres 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. 2. 3. 4.

Decide what to measure Decide how to measure Interpret outcomes Convert to policies

Categorisation of companies according to: Degree of planning Approach to evaluation and control Balanced weighting best Recommendations 1. Select few objectives 2. Derive suitable targets 3. Develop milestones, benchmarks 4. Subjective evaluation will be necessary

Control step Few objectives

Strategic Achieve competitive advantage Relative market share Performance relative to competitors Does it look like competitive advantage has been achieved?

Loose Vague: high quality high tech profile Imprecise notions None No understanding of what has been achieved so likely to be irrelevant

Planning Achieve 15% market share within 3 years 8% market share Year 1 12% Year 2 Actual vs. desired market share None

Financial Generate 15% ROI within 3 years 5% ROI Year 1 10% ROI Year 2 Allow 1% variation each year None

Derive targets Milestones Subjective evaluation

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 companys COMPETITIVE POSITION

Who Decides To Do What Objectives Business definition Mission Shareholder wealth Gap analysis Means and ends Ethics Profit maximisation Growth vector Stakeholder map Credible Quantifiable Disaggregated Economic Financial Strategists Principal agent Prospector, analyser, defender, reactor Risk aversion Team composition Group dynamics

Analysis And Diagnoses The general environment Macroeconomic analysis: unemployment, inflation, interest rate, exchange rate Forecasting Competitive advantage of nations Environmental scanning PEST Scenarios The industry & intal environment Demand and supply, price determination, elasticity Barriers to entry Forms of competition: perfect, imperfect, oligopoly, monopoly Segmentation Differentiation Quality Strategic groups

Analysis & Diagnoses (contd) Internal factors Value chain Shareholder value analysis Competence Architecture Experience curve Economies of scale Innovation Economies of scope Synergy Joint production Opportunity cost Marginal analysis Ratios Gearing Cash flow Benchmarking Human resource management Culture: power, role, task, personal Competitive position Product life cycle Market share Portfolio analysis Perceived differentiation Strategic groups Competitive reaction First mover Five forces Elements of CA ETOPS SAP Strategic advantage profile

Choice Generic strategy alternatives Corporate & business strategy Stability, expansion, retrencht Combination Cost leadership Differentiation Focus Segmentation Strategy variations
Diversification: related & unrelated

Implementation Resources & structure Divisional, functional, matrix Managerial style Critical success factors Incentives Resource allocation Opportunity cost Marginal analysis Optimisation Budgets Critical success factors Contingencies Evaluation and control Performance measures Ratios Degree of Planning & type of Control Monitoring systems

Vertical integration Mergers & acquisitions Joint ventures and alliances International Expansion
Pricing: leadership, limit, predatory

Strategy choice Risk analysis Managerial perceptions Net present value Familiarity Scenarios Break even Payback Sensitivity SWOT Game theory

Feedback Communication Management style Adaptability Learning 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 8.1 Case 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 Scorecard Case 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 SMART, Gaps, Markets, Financial

Objectives

Analysis & Diagnosis Macro PEST Industry Internal factors PLC, BCG, 5 Forces Value chain: Primary Logistics, Operations, Marketing Secondary: HR, Development, Procurement Core competencies, Cost structure??? GM, Gearing, Cash flow... Differentiation, Segmentation, Strategic Groups Pricing: Elasticity (Demand, GNP)

Competitive Position

Choice Generic Business level Strategic Variations Retrenchment, Stability, Expansion, Combination Cost, differentiation, focus, stuck-in-the-middle Related/Unrelated, Vertical/Horizontal, Acquisitions, JV & Alliances, International

Implementation Resource allocation Evaluation & Control Feedback Governance? Planning & Control matrix: Loose, Planning, Financial, Strategic

Feedback

Prospects / Future:

SWOT Break-even point, payback, sensitivity Sunk costs? ETOP/SAP Short/long term Vertical integration Procurement Labour HR

Value Chain impact:

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