ElementsofSuccess

Madonna Goals Singleminded questforstardom

Giap&North Vietnam Reunificationof Vietnamunder Communistrule

AlexFerguson Successinsoccer anescaperoute frompovertyin Glasgow Clearrecognition ofimportanceof discipline, training, motivation& competitive intelligence Combinedinternal developmentof skillswith acquisitionofkey players

Understandingthe Identified Intimate environment emergingtrendsin knowledgeofthe popularculture. terrain. Recognisedpower Understandingof ofsex.Understood theUSpolitical showbiz system distribution channels Resource Appraisal Recognised limitedrawtalent. Reliedonstrength inselfpromotion, relationship management Commitmentto hardwork, disciplined, inspirational. Attentiontodetail Recognised economic& militaryweakness andpolitical strength

Implementation

Tightcontrol,long Commitment, termcommitment. dedication,control Effective ofplayers propaganda. Inspirational leadership

Whatisstrategy?

Distinguishingstrategyfromtactics: Strategyistheoverallplanfordeployingresourcestoestablishafavourableposition. Tacticisaschemeforaspecificmanoeuvre. Characteristicsofstrategicdecisions: Important Involveasignificantcommitmentofresources Noteasilyreversiblelongtermplanning,changestendtobetacticalinnature,rather thanpermanentadaptation

GiapUStriedtodumptheirsupportersinVietnaminordertoendthewar politicallytheywantedtonegotiatewiththeN.VietnameseunityofVietnam underVietnamesecontrolwithouttheirclarityofgoal,theywouldhavecreated hesitationinthemindsofthoseinthewarlongtermvision,anddeploymentof resourcesyoucannotchangeeveryyeardiversificationorcostadvantageyou cannotchangeyourstrategyorsinglemindednessofthedirection.

EvolutionofStrategicManagement EtymologyfromGreek Stratosstructureofmiltary AegisChief Strategyisbasedonwarplanning... TsunTsuTheArtofWar GlasviczPrussianwars Recentdecades... 1950sbudgetaryplanningandcontrol...Financialcontrol...Budgeting&projectmanagementand appraisal...Emphasisedfinancialmanagement 1960sCorporateplanning,planningforgrowth,forecasting&investmentplanning,riseof corporateplanningdepartments&formalplanning. EarlytoMid1970sCorporatestrategydiversificationportfoliostrategyplanningsynergy marketsharediversificationquestforglobalmarketshare Late1970stoearly1980sAnalysisofindustry&competition,positioning,analysisofindustry& competition,industry/marketselectivity.Activeassetmanagement Late1980searly1990sQuestforcompetitiveadvantage,competitiveadvantage,resource analysis,corecompetencesrestructuring,BPR,refocusingandoutsourcing. Late1990searly2000sStrategicinnovation,TheNewEconomyInnovation&knowledge dynamicsourcesofadvantageKnowledgeManagement,cooperationVirtualorganisation, alliancesquestforcriticalmass early1990sPaceofchangehasacceleratedyoucannolongerunderstandtheenvironmentand positionyourselfyoucannolongerplanforthatsincethetechnologyandmarketischangingso quicklythatcorecompetenciesiskeythrowoutanythingthatisnotacorecompetencythe

thingsthatmakeyoulesscapablethanyourcompetiors. Porter!Forcesvaluechain!CorecompetenciesProwlerhardandHarold.??? Late2000sStrategicManagementstrategyisadesigntoolyouneedtodesignastrategyto buildadesigntool.Strategybydesign. MintzbergIt'safallacytopretendthatyoucandesigninthischangingandvolatileenvironment strategyisanemergentprocesscontinuousadaptationyoucannotbesuccessfulwitharigid planyouneedtobeadaptableandchangeableorganicandchangeable... ThesamecasescanbeusedtovalidatetheirargumentsHondawasbothPorterandMintzberg's analyses. MintzberginterviewedthesamepeopleasPorterdid. ThefocusishowdidHondagrowfromsmalltolarge?Whatwastheirdrivingforces?Hondawas opportunistictoosmallinJapan. DevelopmarketshareinForeignmarketsHondastartedbyexportingsmallCCmotorbikes...It didn'tworktheUSneverboughtsmallbikesinthe70s.ButHarley'sandBMWwerepopular. Studying,buildingthebigbikesHonda'scorecompetencywasmechanicalengineeringandgood enginestheyachievedquality,reliabilityandrobustnessHarleywasnotreliable,buttheyhadthe image. Hondaextendedtheirmarketintoenginesforboats,whentheyinternationalisedandwenttotheUS. Howtheywouldtaketheopportunities,exportingthecars,andthemotorbikes... Duetochangesintheforeignexchangerate,theywereforcestomaketacticalmovestobuildthe factoriesintheUS. Anemergentstrategy!Mitzberg... AlternativelyPorteranalysisofmarket,analysisofthemarket,andbuildingtheircore competenciestoolstodeploy,andcommunicatebetter,andtoinvolveallthosearoundyouto createconsistentgoals,managementtools,performancemeasurements,anddesignstrategies. Anyfirmwouldhavedifficultywouldhaveissuesinasituationaffectingmoney. Let'sacceptthevalidityofthekeyarguments,butknowingwhereyouaregoingisalsoakeygoal. Glauswiczwhenyougotowar,unlessyouknowhowyouaregoingtowinandyou'vefiguredit outinheadquarters,howcanyouexpecttosucceedinbattle?Soyouneedsomesortofstructure, frameworkandgoal. Sobacktotheframework 1. Goalsandvision 2. Analysisoftheenvironment(whatmarketstructureisthere,whoarethecompeitors,what aretheirstrategies,strengthsandweaknesses) 3. External,internalandResourceauditwhatdowehavetocompeteinthismarket,andwhat doweneedtocompeteinthismarket 4. Implementation(Howdowedothis,etc)

SourcesofSuperiorProfitability

Corporate

Goals,ValuesandPerformance

Strategyasaquestforvalue Profitisthedriveroffirmsinamarketeconomyso.... Whatisprofit?Howmuchadditionalmoneyyoumakewhenyouincludeinyour calculationsthecostofcapitalthatyoucreatemorevaluethanwhatthecapitalcosts. Theshareholdervalueapproach Theshareholdervalueandstrategyformulation Missionandvalues

Financialobjectiveofanyfirminthelongterm Strategistshouldbeabletoproducecashflowthatmakes Vmax=Sum(C+/(1+r(ave))+=cashflowisgreaterthantheaveragecostofcapital Maximisethecashflowovertheaveragecostofcapital. Marketswecanborrowcapitalinthemarketsquotedcompanies,thetypicalwaystoraise capitalequityissueofrightsandsharesoryouraisedebtthroughbondissue. Bondseachcompany'spotentialtoraisebondsandatwhatprice. Zeroriskbondsgovernmentbonds0riskbonds,4.80%.lowestcostofcapitalistotripleA ratedcompanieshighestcostofcapitalistoothercompaniespremiumcostforaTripleArated companywhocanborrowat5.80%banksusedtobetripleA,butnowtheyarenolonger... Ifyouareconsideredahigherriskbythemarket,yourborrowingpremiumwillbehigher... IfyouareratedB(neartoB)6%premium... RatingagenciesStandard&Poors(Bisajunknoninvestmentgradecompany),Moody(Cis noninvestment), Inthesituationofaneconomicdownturn,theborrowingofcapitalpremiumincreasesconsiderably e.g.HarleyDavidsonwouldcurrentlyborrowat10%... Companiescanbuildcapitalthroughissuingsharesbutwhentheydothat,theyaregenerallyina badsituationRBSissued12billionata40%discountinordertobeabletosellthem.Even withthe40%discount,theyhadtopay1.2/3%feestotheunderwriters... Insurancetopayhighfees... Theyhadtopayahugecost,buttheyhadnochoice,becausetheirabilitytoborrowwassoreduced,

thattheywouldhavehadtopayahugecostofcapitalininterestrates... Thequestionbecomeshowmuchareyouburningcapitalbycontinuingtobeinbusiness? Areyoucoveringthelongtermcostofcapital? Itisverydifficulttochoseonemeasureofprofitabilitybecauseofallthedifferentmeasuresinthe differentaccountingstandards... FTSE100companiesthatarestillinthetop10020yearslaterwilltellyouaverydifferentstoryto theannualreports. Pensionfundsarecurrentlyfeedingtheinvestments Investmentsaresavings,andthemostcommonformofsavingisinpensions Ifyouareafundmanager,youhavetounderstandtheissueoftheshares,etc... SumofC/(1+r)worksonindividualprojects,butalsocanbeconsideredonacompanylevel. Freecashflowovertimetforecastsofhowmuchyouwillmakecomparedtohowmuchdoesit costyouovertimet.... GoalsandvisionitallcomesdowntotheC/(1+r)overtime... Isthefinancialgoaltheonlyobjectiveofafirm? Therearemanyphilosophicalissuesalongsideit,but... Profitmaximisationanambiguousgoal totalprofitvsrateofprofit Overwhattimeperiod Accountingprofitvseconomicprofit Economicvalueaddedasameasureofeconomicprofit Posttaxoperatingprofitlesscapital. Applyingshareholdervaluemaximizationtostrategychoice

Identifystrategyalternatives SelecttheonewiththehighestNPV...

Comprehensivevaluemetricsframework ValuesandMission

AnalysingtheIndustryEnvironment Objectivesofindustryanalysis Fromenvironmentalanalysistoindustryanalysis Overviewofenvironmentandindustry:SPACE Porter's5forcesFramework Applyingindustryanalysis Industry&marketboundaries ExtendingtheFiveForcesFramework: Complements,Dynamics,TheNewEconomy IdentifyingtheSuccessFactors Understandhowtheindustryanalysisdriveprofitability Thepastcannotalwayshelpusprotectthefuture.

Environmentalchanges/deregulation Supplyoffactors Changingsomeelementsoftheindustrystructure Canweactuallychangethestructures Competitorscanacttogethertochangepartiallythehigherstructuresofprofitiability

EnvironmentalAnalysistoIndustryAnalysis DeterminantsofIndustryProfitability 3KeyInfluences: Thevalueoftheproduct TheSpectrumofIndustryStructures

Perfect Competition Concentration EntryandExit barriers Product Differentiation Information Manyfirms Nobarriers Homogeneous product Perfect InformationFlow

Oligopoly Afewfirms

Duopoly Twofirms

Monopoly OneFirm Highbarriers

Significantbarriers

Potentialforproductdifferentiation Imperfectavailabilityofinformation

IndustrialAttractivenessandEnvironmentalStability:AnOverview SPACEStrategicPositionandActionEvaluation Externaldimensions IndustryAttractiveness

EnvironmentalStability Environmentalfactorssuchasfactorsofproductionland,labour,materials,inputs,energy Demandsidelevelofdemand,levelofprices,demographicstructure,thebigitemsthat canaffectthedemandtoindustry. Nottheabsolutestatusofelements Firmscanadapttoeventhetoughestofsituationsifchangecanbeanticipated. IfFactorsareunpredictablefirmswillbedifficulttoadapt

Theevenplayingfieldforallfirmscompetinginthearena Internaldimensions

Competitiveadvantage Whatisthecompetitiveadvantage?Isitdifferentiationorgoodmanufacturing? Financialstrength Whatisthefinancialsystemofthatparticularfirmtodeploythecompetitiveadvantage? Youneedthefinancialresourcestoexploit,deployandbuildtheprofitabilityofthe advantage...

AggressivePostureStrongfinancialStrength,StrongIndustryattractiveness,lowcompetitive advantage,lowEnvironmentalstability;e.g.Microsofttheyhavetheircashcow,andtheyare protectingit;theyneedtokeepaneyeonthemarketsandacquireaccesstothenewinnovations; Tryingtoensurethattheycanprotectthemselvesfromcompaniesgainingacompetitiveadvantage e.g.Steelmanufacturersbuyingupcompanieslargerthanthemtoleveragetheirfinancial muscleandreducecompetitiveadvantageinthemarket. CompetitivePostureexamplesincludethosewithfirstmoveradvantage,e.g.Google,BlueRay; Facebookthosewithlowcompetitiveadvantage,andlowfinancialstrength,buthighindustry attractivenessandhighenvironmentaluncertainty ConservativePostureOligopolies;consumergoods,volumeindustries;etcHighFinancial Strengthsandhighcompetitiveadvantage,butlowindustryattractivenessandlowenvironmental stability.Anychangesorinnovationswillbemirroredbyyourcompetitors...

Defensivethruste.g.Rovertheyhadnomoney,nocustomers,nobenefits,noprospects,sothey soldupandsoldtoChinaitwasbetternottoinvest.Optionsavailableoption1closedown, andgetoutoftheindustryoroption2makeaturnaroundandmaketheoperationsabitleanerby reducingcostsandemployees...Makeitmoreattractivetosomeoneelsetobuyitandmakethemost oftheassets...

FinancialStrength Conservativ e 6

Aggressiv e

Competitiv 6 e Advantage

1 1 6 Industry Attractivenes s

Defensiv e

Competitive Posture (oftenfirstmover EnvironmentalStability 6 advantage) e.g.Google;Blue Ray;Facebook

Measurestoscorethosekeydimensions...
CompanySpecific

FactorsthatUnderpinFinancialStrength

Returnonsales Returnoninvestmentinabsolutetermsandrelativetoindustrypeers Overallcashflow Liquidity Leverage Capitalneedsversuscapitalavailability Relativesharepriceperformance

Thesearecompanyspecificitisworthconsideringexamplecompaniesonthebasisofthis informationandlookatitontheselevels FactorswhichunderpinthejudgementonCompetitiveAdvantage MarketShare Qualityofproduct/serviceoffer CustomerLoyalty Innovationability Controlofinputsanddistributionhowmuchcontrolofyourinputsdoyouhavehow muchcontrolofyourdistributionchannelsdoyouhave?Ifyoudon'thavecontrolofit, someoneelsemighthavecontrolofit... Qualityofassetshumancapitalincludedskillsandknowledgeacquiredovertime Technology LabourProductivityhowlongdoesittakeyoutomanufacturesomethingcomparedto yourrivals? Thesearecompanyspecific

IndustrySpecific
FactorswhichunderpinthejudgementonIndustryAttractiveness PaulVernonProductLifeCycleInnovation,ExplorationandExploitation,HighGrowthas morepeoplebuy,thepricecomesdownandmorecanbesoldotherplayersjoinandcompetition reducespricesThenitreachessaturationareplacementandrenewalmarketandgrowthslows downtoabout34%Thenmovesintodecline...Theprofitabilityfollowsthatcurvetoosoifitis intheendquartile,itisinlowattractiveness.

Strongbarriersfromnewentrants Highdifferentiation Growthrateandgrowthpotential Lowpricesensitivity

Highvalueadded Highlevelofresourceutilisation Attractivelevelofprofitabilitynowandinthefuture

FactorswhichunderpinEnvironmentalStability

Instabilityinthewiderenvironmentimpacts Ontheindustrydimensions Demand Pricelevels Technologicalobsolescence Onthecompetitiveadvantagedimensions costsoflabour materials finances Generalareastoconsiderare: howtheeconomy,governmentregulations,technology,societyandecologycombine toaffectdemand,prices,costsandcompetitiveintensity

Thisisasimplemodel,butifyouhaveaccesstodata,wecanrefineitthisiswhycompaniespay wellforbusinessintelligenceandthusyoucanapplyhigherfunctionalityforthedifferentpeople. Comparehistoricinformationtocomparehowtheshapechangesovertime,andassesswhatcould potentiallybehappeninganalysisofacompany'sdynamicsandwhereitmaybenowandwhereit mightbeinthefuture... Identifyingwhatishappeningandwheretheyareheading,wecanguesswheretheyaregoing... Whatishappeningforallthesemarketsittendstobegenerallymovingtowardsconsolidation... Inthefuture,Eon,EDFandNpowerwillprobablybeallthatisleftoverafter10years... Thebigcompanieshaveanaggressivestrategytobuyupcompetitorsinordertoreducecompetitive advantageinthearea. Thegovernmentdoesn'treallycareifthecompanyismakingalotofprofittheycareabout whetheritmakesacompetitivemarketfortheconsumer... Doestheconsumergaininasituationwherethereisamonopolyorwouldbreakingupacompany improvethingsfortheconsumer? Inutilities,governmentscanregulatebyintroducingacaponreturnoncapital... WhenutilitiesandrailwayswereprivatisedintheUK,thegovernmentintroducedthepriceindex formulasothatconsumersgainfromimprovementsintheproductivityandefficiencies....Any efficiencygainswillbesharedwithconsumers...

BAAhasacappedRateofreturnat7%...

ApplySPACEmodeltotheCrownCork Industrialattractiveness&Environmentalstabilitythisisspecifictotheindustry CompetitiveadvantageandFinancialstructurethisisspecifictothecompany Drawtheinformationfromthedifferentcompanies... 1graphpositionkeycompetitors... Theorisepositioninginthefuture....

Q2applyingthefiveforces... Whatisthepositionofeachoftheforceineachoftheindustrieswhothepowerlieswith suppliers,competitors,newentrantsandsubstitutesassesseachofthefiveforcesintheindustry... Makeanassessmentofthedriversthataredepressingprofitabilityintheindustry....andwhichare thedriversofprofitabilityintotheindustry... Threatofsubstitutesbuyerspropensitytosubstitute/priceperformancecharacteristicsof substitutes. Price/performancecharacteristicsmakealuminiummoreinterestingthansteel,whilststeelismore competitivetoaluminium. Cansofcokecanbemadeusingsteeloraluminium,steelisusuallycheaperthanaluminiumwhilst aluminiumcanmakethecanbetteraluminiumcanbemouldedoneindustrialoperationcan makethetubesteelwillbreaksowithaluminium,youpaymoreinitially,butthecostof manufactureischeaper... Aluminiumyoucandobetterlithographythansteelyoucanprintthebrand/images,etc improvedperformance Substitutiontendencieswillbedrivenbythepriceperformancegraph.

Threatofentry Entrant'sthreattoindustryprofitabilitydependsupontheheightofbarrierstoentyrprincipal

sourcesofbarrierstoentryare:

Capitalrequirements Economiesofscale Absolutecostadvantage Productdifferentiation Accesstochannelsofdistribution Legalandregulatorybarriers Retaliation

BargainingPowerofBuyers Buyer'spricesensitivity Costofpurchasesas%ofbuyer'stotalcosts Howdifferentiatedisthepurchaseditem? Howintenseisthecompetitionbetweenbuyers? Howimportantistheitemtoqualityofthebuyer'sownoutput? Relativebargainingpower Sizeandconcentrationofbuyersrelativetosellers. Buyer'sinformationaffectofinternet Abilitytobackwardintegrate Analysisofsupplierpowerissymmetric CrownCorkcokecouldpotentiallybuildtheirowncanfactoryinordertoensureIamreasonable aboutthecosts... Wholesalerimposeshigherpricesontheirbuyers,whatarethechancesthattheywillchargeforit... RivalryBetweenEstablishedCompetitors Extenttowhichindustryprofitabilityisdepressedbyaggressivepricecompetitiondepnedsupon: Concentration(numberandsizedistributionoffirms) Diversityofcompetitors(differencesingoals,coststructure,etc) Productdifferentiation Excesscapacity... Costconditions Economiesofscale Applyingfiveforcesanalysis Industryboundaries:identifyingrelevantmarket...

WhatistheindustryisBMWisin? Worldautoindustry Europeanautoindustry Worldluxurycarindustry Keycriterion:substitutability Ondemandside:arebuyerswillingtosubstitutebetweentypesofcarsacrosscountries Onthesupplyside:aremanufacturersabletoswitchproductionbetweentypesofcarsand acrosscountries Mayneedtoanalyseindustryatdifferentlevelsfordifferenttypesofdecision. Activitychainreaduponit....

Cokedon'townanythingapartfromthebrandandtheformulatheydon'tmanufactureanything... Theyjustimposetheirrulesonthefillers,butthebrandiswherevaluecomes...

IdentifyKeysuccessfactors Prerequisitesforsuccessful Whatdocustomerswant? Howdoesthefirmsurvive competition Analysisofcompetition Whatdrivescompetition Whatarethemaindimensionsof competition? Howintenseiscompetition? Howcanweobtainasuperior competitiveposition Keysuccessfactors

Analysisofdemand Whatareourcustomers? Whatdotheywant?

IdentifyingKeySuccessFactorsbyAnalysingProfitDrivers:Retailing Salesmixofproducts Avoidingmarkdownsthrutightinventoryctrl Max.buyingpowertomin.costofgoodspurch. Max.sales/sq.Ftthru: location*productmix/customerservice*QC Max.inventoryturnoverthroughelectronicdata interchange,closevendorrelationships, fastdeliveries Min.capitaldeploymentthroughoutsourcing& leasing

Returnonsales ROCE Sales/CapitalEmployed

Thehigherinventoryturnover,thebetteryourcapitalisworkingforyou Outsourcethingsyouarenotefficientat Sellandleasebackfreescapitalthatcanbeusedbetteranditallowsyoutoallowother specialiststomanageyourpropertyreducecoststhroughleasing... ConsidertheEconomicfeaturesgothroughthelistingswhenanalysingtheindustries... Forecastingindustryprofitability Strategiestoimproveindustryprofitability Definingindustryboundaries Keycriterionsubstitution KeySuccessFactors IndustryAnalysis&TheNewEconomy MappingStrategicGroups IndividualfirmsandSGscanbeclassifiedaccordingtotheirscoperesourceprofilestrategy pursuedandtypeofcompetitiveadvantagesought. Scope: Geographic Customerfocus Productscope

Competitivestance Quality/serviceoffer Relativeprice Valueoffer Discretionaryexpense Relativecost/technology Thesefactorsareusuallyemployedtoconstructasimpletwoaxisstrategicgroup BCGStrategicEnvironmentMatrix GenericStrategicTypologies

Many Approaches

Fragmented Apparel, construction, engineering, jewellery, small consultancies Stalemate (regionalmarkets) Basicchemicals, volumegrade paper, wholesalebanking, etc Small Specialised Pharma,luxury cars, chocolate confectionary Volume Jetengines, Supermarkets, Motorcycles, Standard microprocessors, etc Larg e

Few Approaches

PotentialSizeofCompetitiveAdvantage

Thesearebasedonwarfare... Stalemate

VolumeDesertwar FragmentedGuerillawarfare SpecialisedHighgroundwarfare