strategy execuon

Strategyexecu,onValidMBALeadershipprogramme15thAugustus2018Prof.Dr.E.Huizenga

Define the core

Whatwe’lltalkabout–strategicdiscipline

2!

Companies expand from a strong core into adjacencies by applying

a repeatable formula

Sustained profitable growth requires

focus on battlefields and leadership

economics

A melting core forces redefining

the business through hidden

assets

Expand

Today’sprogrammeisbasedonthemanagementconceptsfromthesebooks

3!

•  The basics: business definition

•  Core business - reaching full potential

•  Moving beyond the core – the art of repeatable adjacencies

•  When the core is melting

Strategicdiscipline

Where to play? Business definition and why strategic moves sometimes fail

Sometimes good companies make bad decisions

Company expanded from a strong core (toothpaste) into adjacencies but not applying a logic nor repeatable formula

Cosmopolitan enters the yoghurt market. From release to removal … in 18 months

Focus on the correct battefield?

Microsoft Zune digital media players introduced in 2012

8!

Adjacent to the core business? But being too late in the market … 2 years after iPod

Jimmy Dean Sausage Company since1969 is a household name in the US breakfast kitchen

9!

Our roll sausage is made from premium quality pork, and every breakfast food we make is created to help people start off their morning rightly…

10!

Jimmy Dean knows its customers and core business. JD commands 53% of the $1.1 billion segment for so-called frozen breakfast items, increasing its revenue in that segment 6.3% (2014).

11!

Progresive car insurance - what is their business definition?

12!

Progressive's CEO Peter Lewis: "We're not in the business of auto insurance. We're in the business of reducing the human trauma and economic costs of automobile accidents in effective and profitable ways."

Finding your next Core – Chris Zook (HBR)!

13!

What is Business Definition?!

14!

Business definition describes the core and the economic boundaries of the battlefield within which companies

compete

Business activities beyond these core boundaries have little influence on strategic success or failure within them

Business Definition

Ø  Indicates whether two business segments should be operated as one or as separate businesses

Ø  Allows to determines the relevant market share

Ø  Is key to assess the basic economics of your business: relative market share drives profitability

15!

Companies that define their businesses incorrectly make poor strategic decisions. Many companies define their businesses too broadly to be useful and at the same time overlook competitors who are successfully

leveraging more narrowly defined economics against them (cherry picking)

Relative Market Share = best indicator of leadership!

16!

Relative Market Share for the market leader is

expressed relative to the number 2 player

Market leader’s revenueNumber 2 player’s revenue

Other player’s revenueMarket leader’s revenue

Relative Market Share is expressed relative to the

market leader

Consequences of incorrect Business Definition

17

Costs Competitors

•  Incur unnecessary costs

•  Forgo opportunities to capture synergies

•  Do not transfer experience

•  Underinvest in important R&D initiatives

•  Overlook relevant competitive threats

•  Miscalculate “market share”

•  Set inappropriate performance targets

•  Overlook relevant capacity changes

•  Misjudge true cost position

Customers

•  Neglect profitable customer segments

•  Over-invest in unprofitable customers

•  Misjudge relevant market trends

•  Overlook relevant geographies

Examples of incorrect Business Definition!

18!

American Express

Allegis

Saatchi & Saatchi

Charge cards and credit cards are separate

Charge cards and credit cards are one business - plastic money

Charge card division lost money due to poor cost position and misguided marketing efforts

Airlines, hotels and rental cars are one business - caring for travelers worldwide

Airlines, rental cars and hotels are three separate businesses

The combination provided little value to customers: Allegis was split up

Advertising and consulting are one business - service to global business executives

Advertising and consulting are separate businesses

Company suffered severe losses due to inability to transfer experience, lack of focus, and tainted image

Company A better business definition

Consequences of incorrect business

definition

How management defined the business

Complexity of Business Definition!

19!

Is it one business or not? One Business Separate Businesses

•  Touring quality microphones and speakers

•  Lady Gaga and rappers use both

•  Similar distribution channels

•  Different manufacturers (Audio Technica vs. Bose)

•  Little manufacturing process knowledge is transferable

•  Limited direct cost sharing

•  Cross pens and BIC pens

•  Beer and distilled spirits

•  Both used for same function, writing

•  Similar raw materials•  Some manufacturing steps shared

•  Brand name sharing opportunities•  Same distribution channels•  Sold by same salesforce

•  High perceptual barriers to customers

•  Limited customer base overlap

•  Limited benefits of shared R&D

•  Key manufacturing processes are different

•  Different raw materials

Ø  A few logical arguments are not robust enough to delineate businesses

To delineate the economic boundaries, use the !Business Definition matrix!

20!

High

Cost Sharing

Low Low Customer Sharing

One business (charge cards and credit cards)

One business with potential for differentiation or niche position (cross pens and BIC pens)

Separate businesses with potential for cost leadership (oil and refinery by-products)

Separate businesses (beer and distilled spirits)

Separate businesses with potential for bundling (touring quality microphones and speakers)

One business with potential for substitution (milk cartons and glass milk bottles)

High

Degree of customer sharing

21

Do different products currently (or potentially) fulfill the same customer needs?

-  Product utility analysiso  Do products offer similar

value along non-price attributes (e.g., scissors and knives cut cloth well)?

o  Is product bundled with other products (e.g., razors and blades)?

-  Cross-price elasticity analysis

Do you share many of the same customers?

-  Who makes the purchase decision?

-  Who uses the product?-  What else is

purchased with the product?

Functional substitutionCustomer base overlap Perceptual barriers

Do customers perceive significant differences among the products?

-  Value perceptiono  Functional valueo  Ease of doing

businesso  Individual &

network value o  Inspirational value

Degree of cost sharing

22

•  Shared suppliers•  Shared raw materials•  Shared inbound logistics

•  Same distribution channels

•  Common marketing + advertising•  Same sales force

•  Shared info systems•  Shared general management

•  Gasoline and petrochemicals•  Standard to luxury car models on

common platform

•  Cigarettes and candy (Philip Morris)•  Electronic connectors & wire and cable

•  Healthy Choice frozen dinners and cereal

•  Soda and orange juice (Coca-Cola)

•  BankBoston checking accounts and savings accounts

Branding + Price Realization

Distribution Channels

Administrative Support

Sales and Marketing

R&D

Manufacturing

Purchased Materials

Procurement

•  Similar or shared manufacturing-  facilities-  processes

•  Vitreous china toilets and sinks (Kohler)•  Forgings for Hammer Heads and

wrenches

•  Multiple applications of same R&D effort

•  Tape and Post-it Notes (3M)•  Combustion chamber design in Diesel

engines

•  Shared brand image driving premium price realization

•  Walmart versus category specialists•  Northern Europe truck markets

Value chain steps How sharing occurs Examples

Team exercise - PepsiCo, Inc. is a multinational food, snack, and beverage corporation

23!

•  PepsiCo has interests in the manufacturing, marketing, and distribution of grain-based snack foods, beverages, and other products

•  #5 business categories

24!

High

CostSha

ring

Low

Low CustomerSharing

Onebusiness(chargecardsandcreditcards)

Onebusinesswithpoten@alfordifferen@a@onornicheposi@on(crosspensandBICpens)

Separatebusinesswithpoten@alforcostleadership(oilandrefineryby-products)

Separatebusiness(beeranddis@lledspirits)

Separatebusinesswithpoten@alforbundling(music-touringqualitymicrophonesandspeakers)

Onebusinesswithpoten@alforsubs@tu@on(milkcartonsandglassmilkboHles)

High

25!

Business definition – VALID (30 min)

High

CostSharing

Low

Low CustomerSharing

Onebusiness(chargecardsandcreditcards)

Onebusinesswithpoten@alfordifferen@a@onornicheposi@on(crosspensandBICpens)

Separatebusinesswithpoten@alforcostleadership(oilandrefineryby-products)

Separatebusiness(beeranddis@lledspirits)

Separatebusinesswithpoten@alforbundling(touringqualitymicrophonesandspeakers)

Onebusinesswithpoten@alforsubs@tu@on(milkcartonsandglassmilkboHles)

High

BusinessDefini,onMatrix:…………………………………………………

•  Describethebusinessdefini@onofVALID:•  ……………………………….…….…….…….…….………….…….…….…….…….………….…….…….…….…….………….…….…….…………………………………………..…•  ……………………………….…….…….…….…….………….…….…….…….…….………….…….…….…….…….………….…………………………………………..…….…….…•  ……………………………….…….…….…….…….………….…….…….…….…….………….…….…….…….…….………….…………………………………………..…….…….…•  Posi@onthebusinessesaccordingtoyourideasinthebusinessdefini@onmatrix.





Strategic discipline

How to define your ‘core’ business ?!

29!

Customers

Products

Capabilities / Value chain parts

Channels

Assets

Core

Most profitable

Most critical

Most differentiated

Most critical

Most important

1.  2016!

Core vs. non-core expansion path!

•  Desperate divestitures

•  Specialty Sports Stores

•  Office Supply stores•  Czech + Slovakian

Department stores•  Big Kmart incl. home

fashion and children’s apparel

•  (no serious investment in supply chain IT)

•  Book Stores•  Home

Improvement stores•  Drug Stores

1970: 200 stores

Aggressive expansion of Kmart stores

First Kmart store opened

Filed for Chapter 11 Bankruptcy

Wal-Mart overtakes

Kmart as #1 US retailer

•  Brazil•  U.K.

•  Germany•  Asia

•  Wholesale suppliers•  Deep discounter

•  Mexico•  Canada

•  Wholesale Club•  Supercenter format•  Discount retailers

•  Satellite network for real-time inventory &

sales tracking1970: 32 stores

Focused on small and midsize towns

First Wal-Mart store opened

Ranked #1 in revenue

on Fortune 5001

1962 1970 1980 1990 2002

How to reach full potential in your core!

1. The dimensions used to assess the core, can vary! 31!

Customers

Products

Capabilities / Value chain parts

Channels

Geographies1

Core

Ø  Building superior loyalty (=retention, cross-sell and referral)

Ø  Designing new experience around unmet needs

Ø  New-to-world featuresØ  Patents

Ø  High regional density

Ø  Channel dominanceØ  Partnerships with

leading channel participants

Ø  GEM in online

Ø  Experience build-upØ  Cost leadershipØ  Agile governance

Relatedness to the core drives success!

Source: Profit beyond the core, C. Zook! 33!

0

10

20

30

40%

1 1.5 2 2.5to 3

3.5to 4

4.5to 5

Steps away from core

Odds of success

SuccessRate

34!

But it goes both ways

Adjacencies closer to the core have more success

But the core remains fit by smart adjacencies

2 3

1

Wimbledon equipment (1987)

Equipment

Customer

Backward integration

Forward integration

Footwear

Apparel

Channel Geography New business

Golf balls (2001)

Footballs

Basketballs Bags

Shirts/shorts

Athletic wear

Running shoes

Basketball Tennis (1982)

Soccer Golf shoes (1987)

Cycle

Canada Mexico, Latin America

Europe

Asia

Tennis wear (1985)

Soccer strips Golf clubs

35!

Example Nike

Sold off

2

1

3 4 5

6

7

John Frye Boots (1987)

Ellesse USA(1988)

Avia (1987)

Boston Whalers Boats (1989) Shaq Line (1993)

Footwear

Rockport walking shoe (1988)

Ralph Lauren Footwear (1996) Logo Athletics (2000)

Greg Norman Golf clothes (1990)

“The Pump” (1990)

Other shoes

Customer

Backward integration

Forward integration

Soft goods

Channel Geography New business

NFL uniforms (2000) Other

products

Weeboks (1986)

Aerobic Shoe (1982) Tennis (1983)

Basketball (1985)

36!

Example Reebok

37!

The outcome…!

0

3

5

8

10

$13B

Revenues

Nike Reebok

12.3X

2.2X

0

5

10

15

$20B

Market value

Nike Reebok

38X

1.2X 2002 1987

38!

Ø  Strategic clarity

Ø  Reduced complexity – less new parameters

Ø  Ability to reach deep understanding

Ø  Speed of execution

Advantages of a repeatable, adjacency formule

CEO, Jos Nelissen: ‘... We are inspired by Darwin. It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is the most responsive to change...’. !!

39!

Company origins!

•  1956 The family company Nelissen Pluimvee, founded, originally a combined company for horticulture and egg production. !

!Over the years, the focus shifted towards the production of eggs.!

•  1990 The son Jos Nelissen and his wife took over the company. !

Together they developed the company into one of the largest egg production companies in the Netherlands.!

•  1995 The quest for growth began and the properties of eggs fascinated them, making them wanting more than just produce !and sell eggs. !

40!

Description of the Core Business!

•  In 1990 the company was named Globus Egg and had a 8% market share in The Netherlands growing to 18% in 2006. !

•  The Netherlands is the world's number one exporter in Europe, distributing at large volumes. Their core market is the retail market (supermarkets).!

•  The company delivers to retailers like Ahold, Aldi, Lidle, Carrefour and has market shares of 10% in France, 18% in Belgium and 12% in Germany!

•  The best performing companies in the European market are those with:!•  Distribution power !•  The capability to manage the value chain from egg production up to the retail market. !

•  The company was a 1st mover and among their core capability is their use of a high quality assurance system and managing a demonstrable quality in the value chain. Among their assets was their knowledge of the nutritious value of eggs.!

•  They developed a high tracking and tracing system, with a method that even traces back to the raw materials of the feeding. Tracing of the origins and the residues from goods and raw materials is a main topic in the agricultural markets. !

•  The company introduced a process innovation and developed a new logistics system which reduced 50% of the logistics costs with a smart use of the stock pallet systems. But the idea was in no time taken over by the competition.!

41!

The team question: Can you think beyond the core of eggs? !

You have to present to the management team your growth strategy beyond the core of the egg business!

Brainstorm on the following question:!Ø  Which new business would you like to explore (away from the core)? !

First, take 30 minutes to sketch ideas to go beyond the core!!Assign one person who will present the team ideas!

43

Customersegments

Markets&Products

Capabili,es/Valuechain

Channels

Assets

BeyondthecoreintheEggbusiness

•  Businessdefini@on–describewithkeywordsthecorebusinessoftheeggbusinessonthe5dimensionsanddrawaline•  Next,sketchthegrowthstrategythatyourteamproposes

Beyond the core - Does a deeper understanding of assets lead to more breakthroughs? Explore the assets like e.g. nutrition value!

Reinvent industryPrevent ‘elderly'

blindness

Strategy of ‘More and Similar

Think differentnutritional value





Strategic discipline

Signs that you have to redefine your core!

46!

2. Industry profit pool shrinks or shifts

3. New model threatens core

1. Growth formula stalls out


47!

1. Growth formula stalls out

Acquiring other cell phone companies faster and more effectively than competitors running to an end

2. Industry profit pool shrinks or shifts


48!

Ø Newspaper category shifts to online channel

3. New model threatens core


49!

50!

What changed the video rental industry?

Redefine the core - “The hidden assets”!

51!

Ways to redefine your core!

52!

Likely paths

1. Underdeveloped adjacency paths

2. Underexploited capabilities

3. Underserved client segments

53!

Dometic’s redefinition:

•  Use of hidden assets

•  Gradual transformation

•  Leadership economics (RMS)

•  Repeatable formula

3. Underserved client segments!

54!

W o o d s t o c k 1 9 6 9

P o w e r e d b y

strategy execuon

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