The Strategy Formulation

Process
Strategic Assessment
Analysis of Resources, Capabilities and
Competence

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 Some commonly used techniques for internal
analysis

Single Businesses
Resource Audit
Analysis of cost and profit)
Benchmarking, Value Chain Analysis,
(Supply Chain Analysis)

Both Single and Multiple Businesses

Core Competencies
Shareholder Value Analysis
Distinctive Organisational Capabilities

Multiple Businesses
Assessing Parenting Advantage,
Portfolio Analysis)

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 Resource Audit
 Resources
 Physical
 Human
 Financial
 Other
 Quality and Quantity
 Unique resources
 A good initial analysis

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Analysis of Costs and Profit

 Current sources of profits and trends

 Recast standard reporting to give new
insights
 Pragmatic approach to get value from
time and effort spent
 A good initial analysis

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Benchmarking

 Objective comparison with best in class

 Benchmarking clubs common
 Simple in theory - Hard in practice
 Observed differences in performance may
be due to differences in parameters
 Qualitative observations may be more
valuable than quantitative

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Value Chain Analysis

 Basic Value chain in

 Elegant in theory
 Time-consuming in practice
 Revised value chain to reflect power of
people and knowledge

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 Value Chain Analysis
 The term value chain describes a way of looking at a
business as a chain of activities that transform
inputs into outputs that customers value.
 Customer value derives from three basic sources:
 activities that differentiate the product

 activities that lower its cost

 activities that meet the customer’s need quickly.

 Value chain analysis views the organization as a

sequential process of value-creating activities, and
attempts to understand how a business creates
customer value by examining the contributions of
different activities within the business to that value.

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The Value Chain
Secondary Activities

General administration

Human resource management M

ar
Research, technology, and systems development gi
n
Procurement

Inbound Operations Outbound Marketing Service

logistics logistics and
sales

in
g
ar
M
Primary Activities
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Conducting a Value Chain Analysis

 Step 1. Divide the firm’s operations into specific activities or

business processes, usually grouping them according to primary
and support activities. Within each category, a firm typically
performs a number of discrete activities that may represent key
strengths or weaknesses.
 Step 2. Next, attach costs to each discrete activity.
 Step 3. Recognize the difficulty in activity-based accounting.
 Step 4. Identify the activities that differentiate the firm from
their competitors.

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 Conducting a Value Chain Analysis
 Step 5. After documenting the value chain, managers
need to identify the activities that are critical to buyer
satisfaction and market success. These are the activities
that deserve major scrutiny in an internal analysis.
 The mission should influence managers’ choice of the activities
they examine in detail.
 The nature of value chains and the relative importance of the
activities within them vary by industry.
 The relative importance of value activities can vary by a
company’s position in a broader value system that includes the
value chains of its upstream suppliers and downstream
customers or partners involved in providing products or
services.
 Step 6. Compare to competitors.

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 Figure Revised Value Chain

Firm’s infrastructure
SUPPORT
ACTIVITIES Technology trapping and commercialisation
Strategic Management

INFORMATION SYSTEMS & KNOWLEDGE MANAGEMENT

basic skills, technical, price, revenue,

PRIMARY know-how, core management, place, customer
profit,
ACTIVITIES technologiescompetence marketing, promotion satisfaction, market
strategic assets sales, product loyalty
share,
production service

HUMAN RESOURCE MANAGEMENT

PROCUREMENT AND SUPPLIER MANAGEMENT

Source: adapted from Porter, M (1985), Martin (1995) to reflect recent developments
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Why talking “competencies”?

 Ten years, what a difference make!

 80s: restructure, declutter, delayer the corporation
 90s: identify, cultivate and exploit the core
competencies that make growth possible
 Rethinking the Corporation
 Why? Market boundaries changer quickly, targets are
elusive and value capture is at the best temporary
 Need: Invent new markets, enter emerging markets,
shift customer choice in established markets
 All these, require radical change in the management of
major companies: focus on a portfolio of competencies
(instead of a portfolio of business)

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 The Core Competence Perspective

Traditional Perspective Core Competence

Perspective

Market share of present markets Share of future opportunities

Strategic Business Unit Focus Corporate Competence

Stand-alone Pattern of alliances

Speed to Market Perseverance towards long-

term vision

Adapted from Hamel, G & Prahalad, C.K. (1994) Competing for the Future

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Beyond price/performance

 Japanese firms provided a good example

 they have been able to generate a blizzard of
features and functional enhancements that bring
technological sophistication to everyday products
 The return of “long run”
 In the short run, a company’s competitiveness
derives from the price/performance attributes of
current projects
 In the long run, competitiveness derives from an
ability to build, at lower cost and quickly, the core
competencies that spawn unanticipated products

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 How competencies support
products?End products
1 2 3 4 5 6 7 8 9 10

Business 1 Business 2 Business 3 Business 4

Core product 1 Core product 2

Core Competence 1 Core Competence 2 Core Competence 3

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--- is a cross-organizational boundaries
culture

 Core competencies are the collective

learning in the organization, especially how
to coordinate diverse production skills and
integrate multiple streams of technologies
 Sony capacity to…
 Philips expertise in…
 Competence is about
 Harmonizing streams of technology
 Organization of work
 Delivery of value

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How to think of competence

 Successful companies seem to preside over

portfolios of unrelated business in terms of
customers, distribution channels, and
merchandising strategy…
 … because they are able to integrate skills
 In that context, core competencies provide
strategic flexibility (possibility to enter more
markets)
 … and of course, is difficult to be imitated
 How many: not more than five, six…

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From core competences to core
products

 The tangible link between core

competencies and end products is what we
call the core products
 The physical embodiments of one or more core
competencies
 Core products are the components or
subassemblies that actually contribute that
contribute to the value of the end products
 Attention to the difference between core
competence – core product – end product

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Layers of competition

 At the level of core competence, the goal

should be to build leadership in in the design
and the development of a particular class of
product functionality
 To sustain leadership in their core
competence areas, companies seek to
maximize their share in core products
 They also need to define a strategic
architecture
 A tree of the corporation organized around core
products and core competencies

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Competition for competence

 Competition to develop and acquire

constituent skills and technologies
 Competition to synthesize core
competencies
 Competition to maximize core product
share
 Competition to maximize end product
share
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Processes, positions and paths

 Processes
 Integration
 Learning
 Reconfiguration and transformation
 Positions
 Technological assets
 Complementary assets
 Financial assets
 Paths
 Path-dependencies
 Technological opportunities

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 The Tests for Core Competence

 Essential to corporate survival in short and long term

 Invisible to competitors
 Difficult to imitate
 Unique to the enterprise
 Result from a mix of skills, resources and processes
 A capability which the organization can sustain over time
 Greater than the competence of an individual
 Essential to the development of core products
 Essential to the implementation of strategic intent
 Essential to the strategic choices of the enterprise
 Marketable and commercially viable
 Few in number

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 Figure 10.5 The roots of core competence for a
typical manufacturing business

Product or Service (as chosen by the cus

Different Rule or process based Knowledge based,

products, parts, provision, of knowledge person specific
sub-assemblies & functionality professional service

CORE COMPETENCE

Basic technologies, bodies of knowledge, corporate or individual

learning, relationship culture, strategic assets, parts, processes,
raw materials, supply chain management
(C) Mahen Tampoe February 6,
1996
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Figure 10.6 The roots of core competence for typical professional
services firms

Collective
knowledge
Personality of the
Mindset
organisation

Inter- Embodied Products

personal Staff Skills as Core &
Skills Services
Competence

Task
Professional
Skills
knowledge

(C) Mahen Tampoe February 6, 1996

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 Figure 10.7 Applying Shareholder
Value Analysis
Shareholder Return
Corporate Creating Shareholder
Dividends
Objective Value
Capital Growth

Valuation Cash from Discount

Debt
Components Operations Rate

Fixed & Working

Value Duration of Sales Growth
Capital
Cost of
Value growth Op. Profit Margin Capital
Drivers investment

Management Operating Investment Financing

Decisions
Adapted from Rappaport (1986)

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Assessing Parenting Advantage

 Stand-alone influence
 Linkage influence
 Central functions and service
 Corporate development

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Figure 10.9 Portfolio Analysis

Market Share
High Low

Market
Growth
High

?
Rate
Low

Source: Originally Boston Consulting Group. In Widespread use

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 Choosing the right tools for internal
analysis

 Start with simple techniques

 Consider all tools and identify those likely to be
useful
 Define the competitive capabilities the enterprise
needs
 Identify the subsystems which support these
capabilities
 Identify core competence relative to competitive
capabilities
 Determine changes to enhance/improve core
competence
 Take a systemic view
 Adjust the methods of analysis in the light of what is 28