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Welcome to BA495 Business Strategy and Policy

Welcome to BA495 Business Strategy and Policy. John A. Hengeveld. Agenda for Today – short day…. Chapter 4-5 of Grant Discussion of Simulation/Q&A. Analyze Strategic Framework. CRITERIA. External Analysis. KSF. Competitive Mapping Customer Value Drivers Sustaining Profitability

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Welcome to BA495 Business Strategy and Policy

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  1. Welcome to BA495Business Strategy and Policy John A. Hengeveld

  2. Agenda for Today – short day… • Chapter 4-5 of Grant • Discussion of Simulation/Q&A

  3. Analyze Strategic Framework CRITERIA ExternalAnalysis KSF Competitive Mapping Customer Value Drivers Sustaining Profitability Global Framework InternalAnalysis R/C Competency Rent Earning Potential Resource/Capability Map Strategic Process MAP Strategic Implementation Organizational Structure Process Change Management Implementation Plan Risk Mitigation Implementation Strategic Due Diligence Draft Implementation Congruence R/C Review Competitive Response RiskIdentification And Reduction Select Strategic Direction Generate Strategic Alternatives Select Short List v Criteria TOWS Classic Strategic Approaches

  4. Identifying Key Success Factors by Analyzing Profit Drivers: Retailing Sales mix of products Return on Sales Avoiding markdowns through tight inventory control Max. buying power to minimize cost of goods purchased ROCE Max. sales/sq. foot through: *location *product mix *customer service *quality control Sales/Capital Employed Max. inventory turnover through electronic data interchange, close vendor relationships, fast delivery Minimize capital deployment through outsourcing & leasing

  5. The Contribution of Game Theory to Competitive Analysis • Main value: • Framing strategic decisions as interactions between competitors • Predicting outcomes of compeittive situations involving a few • players • Some key concepts: • Competition and Cooperation—Game theory can show conditions • where cooperation more advantagfeeous than comeptition • Deterrence—changing the payoffs in the game in order to deter • a comeptitor from certain actions • Commitment—irrevokable demployments of resoruces that • give criditability to threats • Signaling—communication to influnece a comeptior’s decision Problems of game theory: Useful in explaining past competitive behavior—weak in prediucting future competive behaoir. What’s the problem? — Multitude of models, outcomes highly sensitive to small changes in assumptions

  6. A Framework for Competitor Analysis OBJECTIVES What are competitor’s current goals? Is performance meeting there goals? How are its goals likely to change? STRATEGY How is the firm competing? • PREDICTIONS • What strategy changes • will the competitor • initiate? • How will the competitor • respond to our strategic • initiatives? ASSUMPTIONS What assumptions does the competitor hold about the industry and itself? RESOURCES & CAPABILITIES What are the competitors’ key strengths and weaknesses?

  7. Segmentation Analysis: The Principal Stages • Identify key variables and categories. • Construct a segmentation matrix • Analyze segment attractiveness • Identify KSFs in each segment • Analyze benefits of broad vs. narrow scope. Identify segmentation variables Reduce to 2 or 3 variables Identify discrete categories for each variable Potential for economies of scope across segments Similarity of KSFs Product differentiation benefits of segment focus

  8. *Size *Technical sophistication *OEM/replacement The Basis for Segmentation: Customer and Product Characteristics Industrial buyers Characteristics of the Buyers *Demographics *Lifestyle *Purchase occasion Household buyers *Size *Distributor/broker *Exclusive/ nonexclusive *General/special list Distribution channel Opportunities for Differentiation Geographical location *Physical size *Price level *Product features *Technology design *Inputs used (e.g. raw materials) *Performance characteristics *Pre-sales & post-sales services Characteristics of the Product

  9. Segmenting the European Metal Can Industry

  10. Segmenting the World Automobile Market REGION US& Canada W.Europe E.Europe Asia Lat America Australia Africa Luxury Cars Full-size sedans Mid-size sedans Small sedans Station wagons Passenger minivans Sports cars Sport-utility Pick-up trucks

  11. Vertical Segmentation & Industry Profit Pools —The US Auto Industry 25% 20 Service & repair Leasing Operating margin 15 Warranty Aftermarket parts Auto manufacturing 10 Auto rental Auto insurance Auto loans New car dealers 5 Used car dealers 0 Gasoline 100% 0 Share of industry revenue

  12. SEGMENT Segmentation and Key Success Factors in the U.S. Bicycle Industry KEY SUCCESS FACTORS * Low-costs through global sourcing of components & low-wage assembly. * Supply contract with major retailer. Leading competitors: Taiwanese & Chinese assemblers, some U.S manufacturers, e.g. Murray Ohio, Huffy Low price bicycles sold primarily through department and discount stores, mainly under the retailer’s own brand (e.g. Sears’ “Free Spirit”); *Cost effieciency through large scale operation and either low wages or automated manufacturing. *Reputation for quality (durability, reliability) through effective marketing to dealers and/or consumers. * International marketing & distribution. Leading competitors: Raleigh, Giant, Peugeot, Fuji Medium-priced bicycles sold primarily under manufacturer’s brand name and distributed mainly through specialist bicycles stores; *Quality of components and assembly, Innovation in design (e.g. minimizing weight and wind resistence). *Reputation (e.g. through success in racing, through effective brand management). *Strong dealer relations. High-priced bicycles for enthusiasts. Children’s bicycles (and tricycles) sold primarily through toy retailers (discount toy stores, department stores, and specialist toy stores). Similar to low-price bicycle segment.

  13. Strategic Group Analysis A strategic group is a group of firms in an industry following the same or similar strategy. • Identifying strategic groups: • Identify principal strategic • variables which distinguish • firms. • Position each firm in relation • to these variables. • Identify clusters.

  14. Strategic Groups in the World Automobile Industry Broad GLOBAL, BROAD-LINE PRODUCERS e.g., GM, Ford, Toyota, Nissan, Honda, VW, Daimler Chrysler REGIONALLY-FOCUSED BROAD-LINE PRODUCERS e.g. Fiat, PSA, Renault, GLOBAL SUPPLIERS OF NARROW MODEL RANGE e.g., Volvo, Subaru, Isuzu, Suzuki, Saab, Hyundai NATIONALLY FOCUSED, INTERMEDIATE LINE PRODUCERS e.g. Tofas, Kia, Proton, Maruti PRODUCT RANGE LUXURY CAR MANUFACTURERS e.g., Jaguar, Rolls Royce, BMW NATIONALLY- FOCUSED, SMALL, SPECIALIST PRODUCERS e.g., Bristol (U.K.), Classic Roadsters (U.S.), Morgan (U.K.) PERFORMANCE CAR PRODUCERS e.g., Porsche, Maserati, Lotus Narrow National GEOGRAPHICAL SCOPE Global

  15. Strategic Groups Within the World Petroleum Industry INTERNATIONAL UPSTREAM COMPANIES INTEGRATED OIL MAJORS INTERNATIONAL UPSTREAM, REGIONALLY FOCUSED DOWNSTREAM Premier Oil Enterprise Kuwait Petroleum PDVSA INTEGRATED DOMESTIC OIL COMPANIES • NATIONAL • PRODUCTION • COMPANIES Iran NOC 0 0.5 1.0 1.5 2.0 Statoil BP-Amoco Exxon -Mobil Vertical Balance INTEGRATED INTERNATIONAL MAJORS Pemex Petronas Chevron Royal Dutch -Shell Gp. Phillips ENI Elf-Fina-Total Repsol YPF Indian Oil Phillips Texaco Petrobras ENI INTERNATIONAL DOWNSTREAM OIL COMPANIES Repsol Nippon E.g. Neste Tosco 0 10 20 30 40 50 60 70 80 NATIONALLY-FOCUSED DOWNSTREAM COMPANIES Geographical Scope

  16. Analyzing Resources & Capabilities • The role of resources and capabilities in strategy formulation. • The resources of the firm • Organizational capabilities • Appraising the profit potential of resources and capabilities • Creating new capabilities. OUTLINE

  17. Shifting the Focus of Strategy Analysis: From the External to the Internal Environment THE FIRM Goals and Values Resources and Capabilities Structure and Systems • THE • INDUSTRY • ENVIRONMENT • Competitors • Customers • Suppliers STRATEGY STRATEGY The Firm-Strategy Interface The Environment-Strategy Interface

  18. Rationale for the Resource-based Approach to Strategy • When the external environment is subject to rapid change, internal resources and capabilities offer a more secure basis for strategy than market focus. • Resources and capabilities are the primary sources of profitability

  19. The Evolution of Honda Motor Company 50cc 2-cycle engine Related products: ground tillers, marine engines, generators, pumps, chainsaws Founding of Honda motor company 405cc motor cycle 4 cycle engines 1948 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 First product: clip-on engine for bicycles The 50cc super -cub N360 mini car 1000cc Goldwing touring motor cycle Acura Car division

  20. Canon: Products and Core Technical Capabilities Precision Mechanics Fine Optics Plain-paper copier Color copier Color laser copier Laser copier 35mm SLR camera Compact fashion camera EOS autofocus camera Digital camera Video still camera Basic fax Laser fax Inkjet printer Laser printer Color video printer Mask aligners Excimer laser aligners Stepper aligners Calculator Notebook computer Micro- Electronics

  21. Evolution of Capabilities and Products: 3M Road signs & markings Videotape Sandpaper Carborundum mining Floppy disks & data storage products Scotchtape Audio tape Acetate film Post-it notes Housewares/kit- chen products PRODUCTS Surgical tapes & dressings Pharmaceuticals Materials sciences Flexible circuitry Health sciences CAPABILITIES Microreplication New-product development & introduction Thin-film technologies Abrasives Adhesives

  22. The Links between Resources, Capabilities and Competitive Advantage INDUSTRY KEY SUCCESS FACTORS COMPETITIVE ADVANTAGE STRATEGY ORGANIZATIONAL CAPABILITIES • RESOURCES • TANGIBLE INTANGIBLE HUMAN • Financial • Physical • Skills/know-how • Capacity for communication & collaboration • Motivation • Technology • Reputation • Culture

  23. Appraising Resources RESOURCE CHARACTERISTICS INDICATORS Financial Borrowing capacity Debt/ Equity ratio Internal funds/ generation Credit rating Tangible Net cash flow Resources Physical Plant and equipment: Market value of size, location, technology fixed assets. flexibility. Scale of plants Land and buildings. Alternatives for fixed Raw materials. assets Technology Patents, copyrights, know how No. of patents owned. R&D facilities. Royalty income Intangible Technical and scientific R&D expenditure. Resources employees R&D staff Reputation Brands. Customer loyalty. Company Brand equity. Product reputation (with suppliers, customers, price premium. government) Recognition. Human Training, experience, adaptability, Employee qualifications, Resources commitment and loyability of customers pay rates, turnover.

  24. Firms with the Highest Ratios of Market Value to Book Value Juniper Networks 58.5 Computer software and services Oracle (US) 56.2 Computer software and services TIM (Italy) 45.0 Telecommunications Broadcom 42.6 Computer software and services Nokia (Finland) 42.0 Telecom equipment Yahoo (US) 41.3 Computer software and services Cisco Systems (US) 31.9 Telecom equipment America Online (US) 34.0 Telecommunications US West (US) 28.9 Telecommunications Glaxo Wellcome (UK) 25.4 Drugs Sun Microsystems (US) 24.4 Computers Charles Schwab (US) 24.2 Financial services L.M. Ericsson (Sweden) 24.1 Telecom equipment Warner Lambert (US) 23.0 Drugs EMC (US) 21.5 Electronics Amgen (US) 21.4 Drugs Dell Computer (US) 21.0 Computers Colegate Palmolive (US) 20.8 Personal care products SmithKline Beecham (US) 20.6 Drugs SAP (Germany) 19.4 Computer software and services Pfizer (US) 19.4 Drugs Eli Lilly (US) 18.8 Drugs Sprint PCS Group 18.3 Telecommunications Softbank (Japan) 18.2 Computer software and services Source: Business Week, July 2000

  25. The World’s Most Valuable Brands, 2000 RankCompanyBrand Rank Company Brand value value ($bn.) ($bn.) 1 Coca-Cola 72.5 8 Disney 33.6 2 Microsoft 70.2 9 McDonald’s27.9 3 IBM 53.2 10 AT&T 25.5 4 Intel 39.0 11 Marlboro 22.1 5 Nokia 38.5 12 Mercedes 21.1 6 Genera Electric 38.1 13 Hewlett-Packard 20.6 7 Ford 36.4 14 Cisco Systems 20.0 Source: Interbrand

  26. Identifying Organizational Capabilities :Functional Approach FUNCTION CAPABILITY EXEMPLARS Corporate Financial management Exxon, Coca Cola Management General Electric, Strategic Control Emerson Electric, GE Coordinating decentralized ABB, Shell business units Managing Acquisitions Nationsbank, ConAgra MIS Speed and responsiveness through American Airlines rapid information transfer LL Bean R&D Research capability Mereck, AT&T Development of innovative new products Sony, 3M Manufacturing Efficient volume manufacturing Briggs & Stratton Continuous Improvement Nucor, Motorola Flexibility Benetton Design Marketing Design Capability Apple, Swatch, Brand Management Proctor & Gamble, PepsiCo Sales & Distribution Promoting reputation American Express Responsiveness to market trends The Gap Sales Responsiveness Microsoft, Glaxo Efficiency and speed of distribution Federal Express Customer Service Walt Disney

  27. The Value Chain: The McKinsey Business System TECHNOLOGY PRODUCT DESIGN MANUFACTURING MARKETING DISTRIBUTION SERVICE

  28. A Hierarchy of Capabilities: A Telecom Manufacturer CROSS FUNCTIONAL CAPABILITIES BROAD FUNCTIONAL CAPABILITIES ACTIVITY RELATED CAPABILITIES (Operations related only) SPECIALIZED CAPABILITIES (Manufacturing related only) SINGLE-TASK CAPABILITIES (Only those related to PCB assembly) INDIVIDUALS’ SPECIALIZED KNOWLEDGE

  29. Appraising VW’s Resources and Capabilities 10 Superfluous Strengths Key Strengths • Relative • Strength 5 Zone of Irrelevance Key Weaknesses 1 1 5 10 Strategic Importance

  30. 6 9 4 5 2 11 3 1 10 1 8 Amoco’s Appraisal of Organizational Capabilities (illustrative only) 1. Effective deal making 2. Rapid new product development 3. Relentless cost forms 4. Product quality 5. JV management 6. Superior EH&S management 7. Managing culturally diverse workforce 8. Fast decision making 9. Customer segmentation 10.Capture synergies across divisions 11. Effective procurement Superfluous strengths Key weaknesses Superior Performance Parity Inconsequential weaknesses Key strengths Deficient 7 Not important Needed to play Needed to win Importance

  31. Distinctive Capabilities as a Consequence of Childhood Experiences Company Capability Past History Exxon Financial Exxon’s predecessor, Standard Oil (NJ) management was the holding co. for Rockefeller’s Standard Oil Trust RD/ Coordinating Shell a j-v formed from Shell T&T founded to Shell decentralized sell Russian oil in China, and Royal Dutch global empire founded to exploit Indonesian reserves BP “Elephant Discovered huge Persian reserves, went on to hunting” find Forties Field and Prudhoe Bay ENI Deal making in The Enrico Mattei legacy; the challenge of politicized managing government relations in post-war environments Italy Mobil Lubricants Vacuum Oil Co. founded in 1866 to supply patented petroleum lubricants 2

  32. Approaches to Capability Development 1) Linking strategy to Human Resource Management--developing individual competencies 2) Greenfield development in separate organizational unit (IBM & the PC, Xerox & PARC, GM & Saturn) 3) Product sequencing (Intel , Sony, Hyundai) 4) Change management to transform values and behaviors (GE, BP)

  33. Product Sequencing to Build Capabilities: Hyundai • Hydrodynamics • Thermodynamics • Fuel engineering • Emission control • Lubrication • Kinetics& vibration • Ceramics • Electronic control • systems • Auto styling &design • Casting & forging • Chassis design • Tooling • Body production • Export mktg. Capabilities • FWD • engineering • CAD/CAM • Assembly • control • systems • Advanced • component • handling • Assembly • Production • engineering • Local • marketing • Large-scale design integration • Global logistics • Lifecycle engineering ‘Alpha’ engine SKD CKD Ford Cortina Accent Avante Sonanta Pony Excel Products 1968 1970 1985 1974 1994-95

  34. Summary: A Framework for Analyzing Resources and Capabilities 4. Develop strategy implications: (a) In relation to strengths--How canthese be exploited more effectively and fully? (b) In relation to weaknesses --Identify opportunities to outsourcing activities that can be better performed by other organizations. --How can weaknesses be corrected through acquiring and developing resources and capabilities? STRATEGY POTENTIAL FOR SUSTAINABLE COMPETITIVE ADVANTAGE 3. Appraise the firm’s resources and capabilities in terms of: (a) strategic importance (b) relative strength 2. Explore the linkages between resources and capabilities CAPABILITIES 1. Identify the firm’s resources and capabilities RESOURCES

  35. R/C Strategic Analysis

  36. 6 9 3 5 2 8 4 1 10 7 Appraising the Capabilities of a Business School (illustrative only) C1 Alumni relations C2 Student placement C3 Teaching C4.Administration C5 Course devlpmnt C6 Student recruitment C7 Research C8 Corporate relations C9 Marketing C10 IT C11 PR C12 HRM Superfluous strengths Key strengths Superior Relative Strength Parity Inconsequential weaknesses 12 11 Key weaknesses Deficient Not important Critically important Importance

  37. 10 Superfluous Strengths Key Strengths Relative Strength Zone of Irrelevance Key Weaknesses 1 1 Strategic Importance 10 Essential Step: Get to Action Plan Leverage Divestiture?? Most CRITICAL ZONE OF ACTION

  38. 10 Superfluous Strengths Key Strengths Relative Strength Zone of Irrelevance Key Weaknesses 1 1 Strategic Importance 10 Essential Step: Get to Action Move UP MOVE LEFT

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