Key Strategic Issues, Key Success FactorsSTR6008 International Business Strategy ModuleRichard Frost

Key Strategic Issues(KSIs)

Thinking Strategically About a Companys Macro-environmentA companys macro-environment includes all relevant factors and influences outside its boundariesDiagnosing a companys external situation involves assessing strategically important factors that have a bearing on the decisions a companys makes about itsDirectionObjectivesStrategyBusiness modelRequires that company managers scan the external environment toIdentify potentially important external developmentsAssess their impact and influenceAdapt a companys direction and strategy as needed

Lugus PrinciplesReferring back to this, we know that this looking outwards and looking for important changes is one of the three most important jobs that senior managers must do (or get done on their behalf)We will see just how and why this is so, with a couple of examples, later in this presentation

What we are really interested in:We want to know, as senior managers, what are the big changes arising from the external environment and internal situation of the firm.We want to know about these, because if they are big, they will very likely make problems for our organisation.

What we are really interested in:We call these:The Key Strategic Issues (KSIs).These may be defined as: Those factors or events, which may be internal or external to the organisation, and are likely to have a major impact on its ability to achieve its stated strategic aims and objectives.

What we are really interested in:

Key Strategic Issues (KSIs). Some authors call them Critical Strategic Issues (CSIs)Are usually difficult to solve and take the allocation of many valuable resources, over time, to overcome them.Failing to correctly respond to them, though, may seriously damage the business in the short to medium term.It may even kill it off

Example - KODAKKodak was a major producer of photographic equipment and equipment based on photography processes silver nitrate film, cameras, developing equipment, printers, photocopiers.It was the worlds biggest producer of traditional silver nitrate film and in the USA alone it had 89% of the business.

Example - KODAKKodak received a shock back in 1982, when Sony produced MAVICA, the worlds first digital camera.The camera was rubbish, really today we have cameras of resolution 20Gb or more, but MAVICA had a resolution of about 500K pixels

Example - KODAKNevertheless, Kodak knew that this was a strategic issue, because although Mavica was rubbish, they could see that digital technology would become very powerful some time in the future.And so they set up a technical committee to report back to the Board of Directors each year, about the progress of Digital Photography

Example - KODAKEach year the group reported back on the growth of digital, and Kodak knew that one day their silver nitrate film business would die but they assessed that it would still keep going strongly, through the 1980s and the 1990s.

Example - KODAKWe can describe this business as their Cash Cow in other words, they sold billions of pieces of film, and made significant profits from the film business, to support developments in other areas of their business.Each year, the committee reported back on the progress of digital.Each year the accountants in Kodak looked at the cash flow and profits from their film business and said It is still OK

Example - KODAKStrangely, even though they watched the growth of digital camera technology, and some of Kodaks engineers even developed and patented some of the best technology in modern digital cameras, it was 2000 before Kodak developed their own digital camera.

Example - KODAKBy then, though, it was too late - the market for digital cameras was already dominated by Japanese brands such as Nikon, Fuji, Sony, etc.To some extent this was caused by Kodaks reliance on traditional film profits and to some extent by management belief and knowledge about the old technology all directors had grown up with it, not digital, and they wanted to protect and stay with their baby

Example - KODAKThe end result of this was that they never really made any inroads into the digital film business; in 2006 they outsourced all of their digital camera manufacturing to FlextronicsMeanwhile, even though sales of digital cameras really began to take off, Kodak completely exited the digital camera business in 2010

Example - KODAKIn 2002 an unknown Chinese company offered Kodak $12 billion to buy the film stock business, the business making machines to develop the film (the sort of machines you used to see in photo shops like really big photocopiers), the factories related to this manufacture, and the right to use the Kodak brand name on film.

Example - KODAK

This is a large film developing machine by Kodak

Example - KODAKKodaks digital committee and the accountants got together. The committee guys thought that the price was a good one, but the accountants wanted to know how long it would be before film sales collapsed. The digital guys thought and said: Christmas 2011.So the accountants looked at the projected cash flows and profits, and recommended the Board reject the bid, which they did.

Example - KODAKIn 2007 the Chinese firm came back, offering this time only $5 billion for the same business assets. Again, the digital guys said that the collapse of film against digital would not happen until 2011 and the accountants computed that the cash flows and profits from the film business were worth more, so they rejected the bid again.

Example - KODAKThe sale of digital cameras overtook those of traditional cameras in 2009 and by early 2010 the sale of traditional film had collapsed.Kodak announced that they would cease manufacture of traditional film stock by the end of 2010

Example - KODAKSo, nearly 2 years before the digital guys had thought it, their traditional business had collapsedThey had no digital technology to replace itTheir business selling film developing equipment also collapsed

Example - KODAKKodak filed for Chapter 11 Bankruptcy Protection in the USA on January 19th, 2012It sold off or closed down all of its businesses except those connected with printingIt also sold off almost all of its digital patents, to firms like Apple, Samsung, etc., for over $525 million. It left bankruptcy on 3rd September, 2013, as a printer company.

Example - KODAKSo, even though they knew about, understood and had taken part in, the development of digital camera technology, this major shift in their industry effectively killed off Kodak.

Example pre-KODAKTechnology change is often a major company killer when I was a student we used ancient word processor technology known as a typewriter! Famous companies were Smith Corona, Underwood, Olivetti, Remington, Imperial Adler and Olympia

Example pre-KODAK

This is an Underwood Touchmaster 5, a machine like this I learned to type on in 1971!

Example pre-KODAKWhen word processing computers became available from the 1980s onwards, the future of typewriters was sealed they would die, because the new technology offered superior benefits to the end users.IBM sold off its typewriter business in 1990. By 1995 nearly all of those firms I listed a moment ago had either exited the business or had gone bust

Example pre-KODAKUnderwoods was bought out by Olivetti in 1988;Remingtons parent company stopped manufacturing them in 1994;Olivetti stopped making them only in 2001, went bust, was bought and sold by various companies and now exists as a shadow of its former self, specialising in computer systems and software.

KSIs - ConclusionsSo, it may be that a technology change massively changes an industry and history tells us that usually the firms who were big players with the old technology VERY rarely become big players in the new one.This seems to be due to what we might call the save my baby syndrome I mentioned earlier

KSIs - ConclusionsBut it is not only technology that causes such deaths;It may be changing consumer tastesNew legislationA massive new competitor coming into our market from overseasOr one of many other causes! Or several together!!!

Why are we interested in these? - 1First, because KSIs tell us about change coming up in the industry, and allows us to assess how big, fast and dangerous these changes are to our particular business (for they will not affect all businesses to the same extent, or in the same ways), and then think about what reaction to the change we might need to have

Why are we interested in these? - 2Second, because they relate to the questions we looked at last week:In particular, question 3

Key Questions Regarding the Industry and Competitive Environment3-*

Question 3: What KSIs Are Driving Industry Change and What Impacts Will They Have?Industries change because forces are driving industry change - so participants must alter their strategy and actions to suitKSIs are the major underlying causes of changing industry and competitive conditionsWhere do KSIs originate?Outer ring of macro-environmentInner ring of macro-environment

STEP 1: Identify forces likely to exert greatest influence over next 1 - 3 yearsUsually no more than 3 - 4 factors qualify as real drivers of changeAnalyzing Driving Forces: Three Key Steps

STEP 2: Assess impactAre KSIs acting to cause market demand for product to increase or decrease?Are KSIs acting to make competition more or less intense?Will KSIs lead to higher or lower industry profitability?How quickly are these changes likely to fall upon the industry?Analyzing Driving Forces: Three Key Steps

Analyzing Driving Forces: Three Key StepsSTEP 3: Determine what strategy changes are needed to prepare for the impacts of KSIs This shows us how the first and second part of the Lugus Principles link together, and how one is dependent on the other just doing one part in isolation will not make things better for our organisation!

Changes in long-term industry growth rateIncreasing globalization of industry bringing in new and often bigger competitorsEmerging new Internet capabilities and applicationsChanges in who buys the product and how they use itProduct innovationTechnological change/process innovationMarketing innovationCommon KSIs - 1

Entry or exit of major firmsDiffusion of technical knowledgeChanges in cost and efficiencyConsumer preferences shift from standardized to differentiated products (or vice versa)Changes in degree of uncertainty and riskRegulatory policies/government legislationChanging societal concerns, attitudes, and lifestylesCommon KSIs - 2

External Driving forces are not the only part of KSIs, though!So far, we have considered in detail the external forces acting upon a firm, but as mentioned earlier, there can also be internal pressures which the firm must take account of, if it is to survive.It is the external and internal forces that determine the extent of KSIs which any firm faces at any given time.

Internal issues may arise from a number of areas:Leadership problemsVision [or rather the lack of] and poor Strategic Thinking/Decision-making problemsResource and Capability problemsSystems and Process problemsCultural problems

Lugus Principles Check - 2These will relate very much to issues inside the organisation and decisions that senior managers have to make about changes to structure, systems, processes and culture, as a part of formulating a new or amended strategy to deal with the KSIs

Leadership issuesMay arise from:Poor/ineffective senior managementToo many staff in too many layers of managementToo much bureaucracy and red tape internallyStereotypical behaviour - Lack of fresh vision and energy all senior managers came up through the ranks, togetherA disaster most senior managers killed in an air crash, or a tsunami

Lack of Vision Issues:Pretty self-explanatory:Leaders lack the vision to manage the business and its future development will not see the need for change;Cannot produce a sensible strategic plan, or have a good plan but no idea about effective executionCannot motivate staff below them in the hierarchyKODAK?!!

Lack of decision-making/poor executionLeaders may not understand the situation they are inThey may find it difficult to make any sort of decisionPersonality/power of individuals may sway thoughts of othersMay lack skills or interest to get the job doneToo busy furthering own career/political infighting and so onGenerally incompetent in the job, but survive somehow?KODAK?

Poor CultureMaybe heavily bureaucratic and naturally resistant to changeMay be dominated by reactionary forces (unions often try to defend members rights sometimes even in the face of common sense and survival)Poor communications, distrust of senior management, passive resistance to new ideas, leading sometimes even to sabotage, are all possible issues.

KEY SUCCESS FACTORSKSFs

Key Success FactorsHaving considered the BIG factors that will bring change to our industry (or already have), we must also then think about the relationship between the second and the third elements of the Lugus Principles what is it that we must do right in order to compete successfully against our rivals, and to satisfy the needs of our customers?

What we are really interested in:What are the Critical or Key things the firm must get right the Key Success Factors (KSFs) [You sometimes will see them called Critical Success Factors {CSFs} but the term has the same meaning.]

Why are we interested in these? - 2Second, because if we understand KSFs, then we know the areas of the business and the processes that we must be good at, in order to win business from customers and survive the competitive pressures of our rivals. We can find answers to these problems by asking and answering another set of questions:

The answers to 3 questions often help pinpoint an industrys KSFsOn what basis do customers choose between competing brands of sellers?What resources and competitive capabilities does a company need to have to be competitively successful?What shortcomings are likely to place a company at a significant competitive disadvantage?Identifying Industry Key Success Factors

Access to distribution to get a companys brand stocked and favorably displayed in retail outletsImage to induce consumers to buy a particular companys product (brand name and attractiveness of packaging are key deciding factors)Low-cost production capabilities to keep selling prices competitiveSufficient sales volume to achieve scale economies in marketing expendituresExample 1: KSFs for Bottled Water Industry

Example 2: KSFs forReady-to-Wear Clothing IndustryAppealing designs and color combinations to create buyer appealLow-cost manufacturing efficiency to keep selling prices competitiveStrong network of retailers/company-owned stores to allow stores to keep best-selling items in stockClever advertising to effectively convey a specific image to induce consumers to purchase a particular label

A more sophisticated approach to KSFsThe Academic, Robert Grant, has developed a new way of looking at KSFs.

IdentifyingKSFs(Grant, 2005)

Identifying KSFsGrant therefore writes about three elements:General Prerequisites for successWhat do customers want?How do we survive competition?

Example: Photocopier paper ManufacturingPhotocopier paper has to meet very tight specifications in order to work it must have a very precise size A4 measurement, to the nearest 1/10th of a mmIt must meet tight tolerances for thickness, weight, amount of moisture and surface finishIf it doesnt meet these criteria, it sticks in the machine, and so on

Example Photocopier PaperThese are what Grant calls the General Prerequisites for success dont get these right and you dont even get to play the game!

Example Photocopier PaperWhat do customers want?Well, that technical specification that makes the General Prerequisites means that the product has become a commodityGenerally with commodities (non-differentiated products), customers are only interested in lowest price, availability and speed of delivery

Example Photocopier PaperHow to do this and survive competition?Get to be very large and efficient in manufacturingSell globally to gain economies of scaleHave a near perfect distribution systemHave a really good sales/ordering/delivery system

KSF problemsThe problem is, anyone with any sense working in the industry will know all of this, and generally speaking we find that in large, mature and sophisticated markets (think, in the UK, grocery retailing, brewing and running pubs, cinemas, etc, retail banking), the costs and systems of delivery, etc., done vary much between the big players

KSF problemsSo we sense that there are other, super-KSFs which firms must get to be good at, in order to give themselves a competitive edge over other rivals.We will look at this in a couple of weeks time, through resources and capabilities

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