The Strategy Design Process

1. The Strategy Design Process Strategic Analysis Strategic Choice Strategy Implementation and Evaluation Identify Sustainable Competitive Advantage Select Sustainable Competitive Advantage Create Sustainable Competitive Advantage Understand Industry Context and Competition Craft and Communicate Vision and Mission Develop Action Plans, Programs, and Processes Analyze Industry and External Environment Develop Strategic Goals and Specific Long Term Objectives Craft Changes in Structure and Processes Implement the Strategy Evaluate The Current Situation Evaluate and Select Strategy Analyze Resources and Internal Capabilities Establish the Basis for Sustainable Competitive Advantage Develop a Strategic Control System Understand and Critique Current Strategy Generate Feasible Alternative Strategies Evaluate the Strategies Results Feedback and Rethinking

2. 1. Industry’s dominant economic traits 2. Nature of competition & strength of competitive forces 3. Drivers of industry change 4. Competitive position of rivals 5. Strategic moves of rivals 6. Key success factors 7. Conclusions about industry attractiveness Assess Industry & Competitive Conditions 1. Assessment of company’s present strategy 2. Resource strengths and weaknesses, market opportunities, and external threats 3. Company’s costs compared to rivals 4. Strength of company’s competitive position 5. Strategic issues that need to be addressed Assess Company Situation Situation Analysis Identify Strategic Options for the Company Select the Best Strategy for the Company

3. Question 4: Which Companies are in Strongest / Weakest Positions? A strategic group is a group of firms in an industry following the same or similar strategy. • Identifying strategic groups: • Identify principal strategic variables that distinguish firms. • Position each firm in relation to these variables. • Identify clusters.

4. Strategic Groups Within the World Petroleum Industry Statoil INTEGRATED DOMESTIC OIL COMPANIES • PRODUCTION • COMPANIES INTEGRATED INTERNATIONAL MAJORS DIVERSIFIED MAJORS PDVSA Kuwait 0 0.5 1.0 1.5 2.0 Exxon Vertical Balance Amoco Shell BP Unocal Arco Chevron Total Indian Oil Phillips Texaco Mobil Petrobras ENI ENI Elf Elf INTERNATIONAL DOWNSTREAM OIL COMPANIES Repsol Neste Petrofina Nippon Sun 0 10 20 30 40 50 60 70 80 NATIONALLY-FOCUSED DOWNSTREAM COMPANIES Geographical Scope

5. How to Start a Revolution • Re-conceive your product or service • Radically improve the value equation • Separate form and function • Achieve joy of use • Re-define the market space • Push the bounds of universality • Strive for individuality • Increase accessibility to your products • Re-draw industry boundaries • Rescale the industry • Compress the supply chain • Drive convergence between industries

6. What is a competitive advantage? How do you know if you have one (or not)? How can you create one?

7. Sources of Competitive Advantage COST ADVANTAGE Similar product at lower cost COMPETITIVE ADVANTAGE Price premium from unique product DIFFERENTIATION ADVANTAGE

8. The Porter Value Chain SUPPORT ACTIVITIES FIRM INFRASTRUCTURE HUMAN RESOURCE MANAGEMENT TECHNOLOGY DEVELOPMENT PROCUREMENT INBOUND OPERATIONS OUTBOUND MARKETING SERVICE LOGISTICS LOGISTICS & SALES PRIMARY ACTIVITIES

9. Using the Value Chain to Identify Differentiation Potential on the Supply Side IS that supports fast response capabilities Training to support customer service excellence FIRM INFRASTRUCTURE HUMAN RESOURCE MANAGEMENT TECHNOLOGY DEVELOPMENT INBOUND OPERATIONS OUTBOUND MARKETING SERVICE LOGISTICS LOGISTICS & SALES Unique product features. Fast new product development Customer technical support. Consumer credit. Availability of spares Quality of components & materials Defect free products. Wide variety Fast delivery. Efficient order processing Building brand reputation

10. Creating Competitive Advantage • Industry structure matters, but success does not come just from industry attractiveness • Value = difference between buyer’s willingness to pay and seller’s opportunity cost • Added value = marginal value created by the firm (value that would be lost by its absence) • The larger the added value, the larger the potential profit for the seller • CA is achieved by driving a wedge between buyer willingness to pay and value added by the firm (scarcity) Ghemawat & Rivkin, 2006

11. Activity Analysis of Value Creation • Catalog activities (along the value chain) • Use activities to analyze relative costs and cost drivers • Use activities to analyze relative willingness of customers to pay • Who is the real buyer? • What do buyers want and what are they willing to pay for? • What is the relative success of our firm and competitors in fulfilling customer needs • Relate success back to activities – are the activities customers need the ones we are good at? • Explore options and make choices • Understand competitors, their likely reactions, the bundle of benefits to customers, and the role of scope and scale Ghemawat & Rivkin, 2006

12. Value NetworksA non-linear model of value creation

13. Porter’s Generic Strategies SOURCE OF COMPETITIVE ADVANTAGE Low cost Differentiation Industry-wideCOST DIFFERENTIATION COMPETITIVE LEADERSHIP SCOPE Single Segment FOCUS

14. The Evolution of Competitive Advantage How does competitive advantage evolve? • External sources of • change e.g.: • Changing customer demand • Changing prices • Technological change Internal sources of change Some firms have greater creative and innovative capability Resource heterogeneity among firms means differential impact Some firms faster and more effective in exploiting change

15. Drivers of Cost Advantage • Indivisibilities • Specialization and division of labor ECONOMIES OF SCALE • Increased dexterity • Improved coordination/ organization ECONOMIES OF LEARNING • Mechanization and automation • Efficient utilization of materials • Increased precision PRODUCTION TECHNIQUES • Design for automation • Designs to economize on materials PRODUCT DESIGN • Location advantages • Ownership of low-cost inputs • Bargaining power • Supplier cooperation INPUT COSTS CAPACITY UTILIZATION • Ratio of fixed to variable costs • Costs of installing and closing capacity MANAGERIAL/ ORGANIZATIONAL EFFICIENCY • Organizational slack

16. Identifying Differentiation Potential: The Demand Side What needs does it satisfy? THE PRODUCT What are key attributes? • FORMULATE DIFFERENTIATION STRATEGY • Select product positioning in relation to product attributes • Select target customer group • Ensure customer / product compatibility • Evaluate costs and benefits of differentiation Relate patterns of customer preferences to product attributes By what criteria do they choose? THE CUSTOMER What price premiums do product attributes command? What motivates them? What are demographic, sociological, psychological correlates of customer behavior?

17. The Evolution of Honda: A Strategy Based on Resources and Capabilities 50cc 2-cycle engine Related products: ground tillers, marine engines, generators, pumps, chainsaws Founding of Honda motor company 405cc motor cycle Insight Hybrid 4 cycle engines 1948 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2005 First product: clip-on engine for bicycles The 50cc super -cub N360 mini car 1000cc Goldwing touring motor cycle Acura Car division

18. “Core” Competence – Three Tests • Provides potential access to a wide variety of markets and products • Makes a significant contribution to perceived customer benefits of the end product • Is difficult for competitors to imitate

19. Strategic Intent • Global leadership over a long time horizon • An obsession with winning at all levels of the firm • A sustained, challenging, focused BHAG • Stable over time • Attracts personal effort and commitment • Guide for resource development and allocation • Avoiding “recipes” for imitation • Creating competitive advantages faster than competitors can imitate them, creating “new space” • Layers of competitive advantage • Changing the terms of engagement

20. The Relationships Between Resources, Capabilities and Competitive Advantage INDUSTRY KEY SUCCESS FACTORS COMPETITIVE ADVANTAGE STRATEGY ORGANIZATIONAL CAPABILITIES • RESOURCES • TANGIBLE INTANGIBLE HUMAN • Financial • Physical • Specialized skills • and knowledge • Communication & • interactive abilities • Motivation • Technology • Reputation • Culture

21. The Profit Potential of Resources and Capabilities Scarcity THE EXTENT OF THE COMPETITIVE ADVANTAGE ESTABLISHED Relevance Durability THE PROFIT EARNING POTENTIAL OF A RESOURCE OR CAPABILITY SUSTAINABILITY OF THE COMPETITIVE ADVANTAGE Transferability Replicability Property rights Relative bargaining power APPROPRIABILITY OF RETURNS Embeddedness of resources

22. Preparing for the Future: The Role of Scenario Analysis Stages in undertaking multiple Scenario Analyses: • Identify major forces driving industry change • Predict possible impacts of each force on the industry environment • Identify interactions between different external forces • Among range of outcomes, identify 2-4 most likely/ most interesting scenarios: configurations of change forces and outcomes • Consider implications of each scenario for the company • Identify key signposts pointing toward the emergence of each scenario • Prepare contingency plan

23. Perspectives on Strategic Planning • “The essence of strategic planning is the systematic identification of opportunities and threats that like in the future [to] provide a basis for making better current decisions” (George Steiner) • “There are significant benefits to gain through an explicit process of formulating strategy to insure that at least the policies (if not the actions of functional departments) are coordinated and directed at some common set of goals” (Michael Porter) • “Planning is the substitution of error for chaos” (Anonymous) • “Most corporate planning is like a ritual rain dance: It has no effect on the weather that follows, but it makes those who engage in it feel they are in control” (Russell Ackoff)