strategy management 1-5

Envisioning Strategy

Business Models Visualized(created for and by students)

© Sunil Mehrotra

Strategic Management Process• Envisioning Strategy

– Definition– Framework– Visual Models

• External Analysis– PEST– PEST Impact Analysis

• Industry Analysis– Industry Structure– Evolution of Industries– Industry Supply Chain– Potential Industry Earnings– Porter’s 5 Forces Analysis– Competitive Intensity– Strategies for minimizing competitive forces– Perceptual Map– Barriers to Entry/Incumbency advantages– DSIR effect

• Company Internal Analysis– Value Creating Processes– Core Competencies– Growth Strategies– SWOT Analysis– Mckinsey 7-S Framework– Change Management– Risk Assessment– Balanced Scorecard– GE Mckinsey Matrix

Envisioning Strategy: Visual Models

www.idiagram.com

1. Visualize2. Think Clearly3. Communicate Effectively4. Understand Deeply5. Share the Vision6. Act Coherently

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The environmentThe environmentThe environment

International lawInternational lawInternational law

GovernmentsGovernmentsGovernments

Standards bodiesStandards bodiesStandards bodies

StakeholdersStakeholdersStakeholders

Supplier’s suppliersSupplierSupplier’’s supplierss suppliers Customer’s customersCustomerCustomer’’s customerss customers

New entrantsNew entrantsNew entrants

CustomersCustomersCustomersSuppliersSuppliersSuppliers

CompetitorsCompetitorsCompetitors

SubstitutesSubstitutesSubstitutes

OrganisationOrganisationOrganisation

A Business Ecosystem

Visual Model

New Paradigm Consulting

Visual ModelComprehensive View

Strategic Management

• Is the process by which an organization– Establishes its goals and objectives both short

and long-term

– Formulates plans and charts a course of action for meeting these goals and objectives in the desired time-frame.

– Implements the actions

– And analyzes progress and results

Strategic Management

• Deals with– How to grow the business

– How to satisfy customers

– How to compete with rivals

– How to respond to changing environment

– How to manage each functional piece of the business

– How to build organizational capabilities and align organization to achieve desired goals

– How to achieve strategic and financial objectives

Mission, Vision and Values

• Vision articulates a view of a realistic, credible, attractive future for the organization…it is the all-important bridge from the present to the future of the organization.

• Mission describes the purpose of the organization. It represents the present.

• Values reflect the organization’s culture and norms of corporate behavior.

Goal, Scope and Objectives

• Goal articulates a desired outcome for the business over a specific time period

• Scope describes the focus of the business– geography, product lines and customer segments.

• Objectives are the measurable and tangible results to be achieved over a specified time period

Strategic Planning

• Planning is not about predicting the future

• Planning is not about writing a detailed road map into the future

• Planning is not about a few people writing a vision statement & then getting ‘buy-in’from everyone else

Strategic Planning

• Planning is about learning

• Planning is about increasing the possibilities for the organisation

• Planning is about discovering how fit the organisation is for its environment

• Planning is about discovering and telling compelling stories about the future

Strategic Planning Framework

External Factors Internal Factors

Analyzingthe

Environment

Analyzingthe

Industry

Analyzingthe

Competition

Analyzingthe firm’s

Strengths &Weaknesses


Architecture,Routines &

Culture

Market OpportunitiesFirm’s Resources &

Capabilities

Matching Market Opportunitiesto firm’s resources and capabilities

•What strategic options does the firm realistically have?•What is the best strategy for maximizing Shareholder value?

Shareholder Returns

Strategic Planning FrameworkExternal Factors Internal Factors

Analyzingthe

Environment

Analyzingthe

Industry

Analyzingthe

Competition





Culture


Capabilities



Shareholder Returns

Market EconomicsAnd

Opportunities

•Direct Competition from Rivals•Bargaining Power of Suppliers•Bargaining Power of Customers•Threat from new entrants•Competition from Substitutes

Market Attractiveness

Cost Position in Served Market

Benefit Position inServed Market

Competitive AdvantageOr Disadvantage

•Profit•Sales•Market Share•ROI•Market Value

Strategic Analysis FrameworkExternal Factors Internal Factors

Analyzingthe

Environment

Analyzingthe

Industry

Analyzingthe

Competition





Culture


Capabilities



Shareholder Returns

•Week 1•Week 2

•Week 3•Week 4•Week 5

• Week 6• Week 7

•Week 8•Week 9•Week 10

•Week 11•Week 12

•Profit•Sales•Market Share•ROI•Market Value

•Week 13

•Week 14

Three Tests of Best Strategy

The Goodness ofFit Test

The CompetitiveAdvantage Test

The PerformanceTest

• A good strategy has to be well matched to Industry and competitive conditions, market opportunities and threats, and other aspects of a firm’s external environment• At the same time, it has to be tailored to the company’s resource and strengths and competitive capabilities

•A good strategy leads to sustainable competitive advantage•The bigger the competitive edge the strategy helps build the more powerful and effective it is

•A good strategy boosts company performance-Gains in profitability-Gains In competitive strength and long-term market position

www.studymarketing.org

Present : From here

Future: To here

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DEFINITION

Strategy (n) – An integrated set of actions designed to achieve a sustainable

competitive advantage

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PURPOSE OF STRATEGY

• Focus execution efforts• Always requires good execution

• Make choices• Investments

• Acquisitions

• People

• Create value

18WHAT ARE THE COMPONENTSOF A STRATEGY?

• Mission

• Goals

• Where to compete/grow– Customers/geographies

• What to offer– Products/services

• How to win vs competition

• Actions and initiatives required

19WHAT MAKES FOR A GOODSTRATEGY?

• Clear and compelling

• Integrated and complete

• Grounded in facts

• Clear short and long term priorities

• Identification of specific actions and resources required

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AGENDA

• What is strategy?

• What is Lulu’s strategy?

• How do we make it better?

5. Share financial success with those who create it

6. Make Lulu platform an ecosystem

7. Mobile cart and customer acquisition

8. Increase licensed content partnerships

Establish the marketplace for digital content where authors make money

from their written works

Global unserved and underserved profit-motivated book creators, Licensed/tier-one rights holders

By 2011:over $2B valuation

+ Gross margin 50%+#1 in our business

Book creation and publishing tools and services, Social Network marketing and commerce,

Ebook tools, Marketplace for any content

“Free” business model Most $ to authors

Engaged reader-writer community, Open MarketplaceReader device ubiquity, Global reach

• International expansion

• Social Network integration (weRead)

• 3rd party book marketplace

• eBook wizard

• Mission:

• Goals:

• Target Markets:

• Differentiator:

• Offerings:

• Actions and initiatives:

Strategy and Performance:“There are three kinds of companies— those that make things

happen, those that watch things happen, and those that wonder what happened.” Anonymous

.

PEST Analysis

Political ChangeEco

nomic

Change

Technological

ChangeSocial Change

OpportunitiesOpportunities

ThreatsThreats

Fiscal PolicyMonetary PolicyTax lawsIntellectual Property protectionCopyright lawsSecurities LawsBusiness climate

GDPGDP growthExchange rateUnemployment rateSkilled laborEducation levelsTrade unionsInfrastructureHealthcare costsRaw materials

DemographicsIncome DistributionSocial stabilityEthnic patternsConsumerismDiscretionary incomeFashions/fadsConsumer trends

New technologiesMaterials technologiesProcess technologiesInformation technologiesCommunication technologiesGovernment incentivesEnergy costsBroadband penetrationTechnology incubation

© Sunil Mehrotra

Strategicresponse

Impact of change

Nature ofchange

Political Change

Economic Change

Social Change

Technological Change

PEST Impact Matrix

Opportunities ThreatsThreats

© Sunil Mehrotra

It is crucial to describe the subject for the PEST analysis clearly so that people, contributing to the analysis, and those interpreting the results from PEST analysis, could understand the purpose of the PEST assessment and its implications

Strategicresponse

Impact of change

Nature ofchange

Political Change

Economic Change

Social Change


PEST Impact example:


© Sunil Mehrotra

PEST Analysis Example:

Political ChangeEco

nomic

Change

Technological

ChangeSocial Change

OpportunitiesOpportunities

© Sunil Mehrotra

InfrastructureTechnologies

EmergingMarkets

DigitalConnections

DemographicsEnvironmentalSolutions

Originations

Strategicresponse

Impact of change

Nature ofchange

Political Change

Economic Change

Social Change




© Sunil Mehrotra


© Sunil Mehrotra

Demographics

Scenario Planning

http://strategicframing.com/strategic-planning-workshop/

Contemplating the Future

Student Examples: Pest Analysis

Breanne HayesApril 2008 MBA Graziadio School of Business and ManagementPepperdine University

Elizabeth Passeretti

April 2008 MBA CandidateGraziadio School of Business and ManagementPepperdine University

PEST Analysis

– The FDA must approve new products before they can be sold in the market, adding to the costly time-lag within the product pipeline.

– Demand for many consumer health products is inelastic as changes in price do not tend to affect sales (consumer health products are used on a daily basis). In times of economic uncertainty, however, it is less likely that consumers will experiment with new product offerings

Impact on J&J

high

medium

Breanne Hayes, April 2008 MBA, Graziadio School of Business and Management Pepperdine University

Political Change

Economic Change

PEST Analysis

– Increased consumer awareness regarding health issues in recent years has contributed to increased spending on health related products. Increased health awareness is what will drive J&J’s expansion into global markets

– The consumer health industry is marked by rapid advances in scientific knowledge. Product offerings are subject to constant improvements in chemistry and industrial technology that allow scientists and engineers to create new products and modify existing ones

Impact on J&J

high

high

Breanne Hayes, April 2008 MBA,Graziadio School of Business and Management Pepperdine University

Social Change


Strategicresponse

Impact of change

Nature ofchange

Political Change

Economic Change

Social Change


PEST example:


FDA approval process

More conservative

Longer time to market

Shorten Product Development Cycle

Aging Population

Caring for the elderly

New growth opportunities

Identify product/market needs to serve the elderly

US economic downturn

Consumer spending down

Generic drugs more accepted

Evaluate acquisitions

New materials for joint replacement

New cost/quality frontier

Potential new competitors

New products Invest in

promising start-ups

© Sunil Mehrotra

Biotech firms are highly sensitive to changes in political power. A Liberal political party will likely reform healthcare so that the government bears more of the costs. The upcoming elections will have a significant impact on the industry. In addition, the industry if highly regulated by government agencies such as the FDA.

High

As most of the costs of drugs are subsidized by third-party payers (Medicare, Health Insurance), people will continue to purchase drugs even in an economic downturn. In addition, many of these drugs are taken out of necessity, not choice so demand is inelastic.

However, third-party payers certainly feel the pain of an economic downturn and may impose cost cutting measures which reduce patient reimbursement and put more of an economic burden on patients. And Biotech firms often depend on single-source suppliers for raw materials and are therefore sensitive to increasing costs.

Medium

Impact

Elizabeth Passeretti April 2008 MBA CandidateGraziadio School of Business and Management,Pepperdine University

Pol

itica

l Cha

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Eco

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Cha

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The aging population greatly increases the patient population which is beneficial for Biotech firms. The unfortunate reality is that more people are suffering from serious illness and need life saving therapeutics.

High

As evident by the very name of the industry, Biotech firms are highly influenced by advances in technology. Technology can greatly improve the likelihood of discovering new treatments as well as improving the manufacturing process.

High

Impact


So

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C

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Tec

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Ch

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Strategicresponse

Impact of change

Nature ofchange

Political Change

Economic Change

Social Change




Democratic party in power

More government control

Pressure on prices

Operational Efficiency to reduce costs

Aging Population

Caring for the elderly

New growth opportunities

Identify product/market needs to serve the elderly

$100+ crude oil price

Commodity prices increasing

Focus on Operational Efficiency

Breakthrough in science.Process improvement technologies

New science and new technologies imminent

Potential new competitors

New start-ups.Disruptive technologies

Invest in/acquire promising start-ups

Pressure on costs

© Sunil Mehrotra

Industry Analysis

Competitors

Suppliers

Customers

Understand Deeply

© Sunil Mehrotra

Industry Analysis•Porter’s 5 Forces Analysis•Competitive Intensity•Strategies for minimizing competitive forces•Incumbency advantages•Value Chain•Potential Industry Earnings•Evolution of Industries•DSIR effects

Spectrum of Competition

MonopolySingle Firm

Dominant Firm•Few large firms•More small firms•Pricing leadership•Protected Niches

Oligopoly•Few Firms•Strategic Interdependence•Profitability determined by behavior

Niche Market•Product Differentiation•Localized competition

Perfect Competition•Many firms•No product differentiation•Price based competition

HighLow

Industry Profitability

© Sunil MehrotraAdapted from: Saloner, Shepard, & Podolny: Strategic Management, Wiley and Sons, 2001

UtilitiesComputer OS

AutomobilesCommercial Aircrafts

Clothing StoresGas Stations

Commodities

Competitive Intensity

Industry Evolution: Traditional ViewIntroduction Growth Maturity Decline

Revenue

OperatingIncome

Losses

Few competitors

Increasing sales and profits

New competitors appear

Saturation

Declining profits

Standardized features

Industry shakeout

Displaced by substitute products

Profitability falls

Only a few large scale players survive

Oligopoly•Few Firms•Strategic Interdependence•Profitability determined by behavior of incumbents

Most industries evolve towards

© Sunil MehrotraAdapted from: http://faculty.msb.edu/homak/HomaHelpSite/WebHelp/HomaHelp.htm

Three major phases of industryevolution

“Cycle time” of evolution is drivenby the pace and magnitude ofmarketplace discontinuities

Cycle-driving discontinuitiesinclude deregulation, technology,shifts in consumer preferences,globalization of markets, etc.

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Mature/VerticallyIntegrated

RecombinantMarketLeaders

The New View:The Cycle of Industry Creative Destruction

http://www.manyworlds.com/

FocusedNew Entrants

The New View:The Cycle of Industry Creative Destruction

IBM DEC SperryUnivac

Wang

Chips

Computer

OperatingSystem

ApplicationSoftware

Sales andDistribution

Superstores Retail

Word Wordperfect

Windows Apple

IBM HP Apple

INTEL

Direct

Others

Linux

Dell

The “mature”Computer Industry

The “recombinant”Computer Industry

AMD

Adapted from: Saloner, Shepard, & Podolny: Strategic Management, Wiley and Sons, 2001

Industry Supply/Value Chain

Suppliers

Manufacturers

Distributors

Retailers

Consumers

© Sunil Mehrotra

Student Examples: Supply Chain


Elizabeth Passeretti

April 2008 MBA Graziadio School of Business and ManagementPepperdine University

Overview of Industry Value Chain:Consumer Health Products

Cotton, Plastics, Chemicals, etc.

Retailers: Pharmacies, Drug Stores, Supermarkets

Wholesalers

Consumers

Incumbent Firms engage in R&Dand Mfg to produce

consumer health productsand OTC pharmaceuticals

NOTE: Incumbent firms compete fiercely for retailer shelf space!

Market size: $480B


Industry Analysis

Industry Supply Chain

Biotech Companies

Hospitals / Pharmacies (39%)

Patients (Consumers)

Drug Wholesalers (61%)

$52 billion market

$67 billion market

Raw materials, Lab equipment, Chemicals

FDA

Payers(Insurance)

Physicians (Customers)

LegendValue = ProductValue = KnowledgeRegulators/Gatekeepers


Supply Chain: Value Added

Profit

© Sunil Mehrotra

Sup

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Ma

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ctu

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Dis

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Re

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Con

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PR

ICE

Materialcosls

Value Added

ValueAdded

ValueAdded

Sup

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Ma

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Dis

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Re

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Con

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Value Added Template

ROI

Asset Intensity

Profitability

Value Added

Adapted from: http://faculty.msb.edu/homak/HomaHelpSite/WebHelp/HomaHelp.htm

Potential Industry Earnings (PIE) Analysis

Industry Demand

Opportunity Cost of Resources

PIE

Quantity Produced by the Industry

Factors effecting demand:•Customer habits•Customer expenditures•Number of substitutes•Number of complementary products•Price reduction by incumbents

Factors effecting costs•Cost reductions by suppliers•Cost reductions by incumbents•Process improvements•Technology advances


PIE Analysis

Price

Quantity

Demand shifting outward

Cost to J&J

J&J is in a position to capture more potential industry earnings as a result of increased consumer demand


Porter’s 5 Forces Impact on PIE

Industry Demand

Opportunity Cost of Resources

PIE

Quantity Produced by the Industry


• Porter’s insight recognizes that the following characteristics are important to profitability of the incumbent:

– The intensity of competition– The ability of suppliers or buyers of

industry products to restrain industry profits

– The behavior of firms producing closely related goods not included in the industry

– Potential for entry into the market by new firms

•Intensity of Competition•Availability of Substitutes•Threat of new entrants•Bargaining power of Buyers

•Bargaining Power of Suppliers

Porter’s 5 Forces Framework

Few large suppliersNo substitutesCustomers are fragmentedSwitching costs to another supplier are highSupplier integrating forward

Economies of scaleDownstream more profitableLow barriers to entry downstream

Concentration of buyersIncumbents are fragmentedProduct is undifferentiatedSwitching to another supplier is simpleProduct is not strategic to the customerCustomers can produce the product themselvesCustomer knows the production costsCustomers can integrate back-words

Economies of scale

High initial investments and fixed costs

Learning economies

Depreciated assets

Brand loyalty

Protected intellectual property

Scarcity of qualified resources

Access to raw material controlled by existing players

Distribution channels controlled by existing players

Existing players have close customer relations

Better pricesBetter performanceSimilar functionality

Many small playersHigh cost to exitUndifferentiated productsCompete on priceLow brand loyaltyLow switching costsSlow/no growth market

www.themanager.org

© Sunil Mehrotra

Impact on Profitability


Bargaining power of Suppliers

Bargaining power of Customers

Threat of New Entrants

Threat from Substitutes

High LowModerate

Profits © Sunil Mehrotra

Threat/Power

IndustryA

IndustryB

Student Examples:Porter’s 5 Forces Analysis

Nicholas Merriam


Matt Kemp


Thomas Weisel Partners


Porters 5 Forces:

• Coffee Growers

• Pastry makers

• Coffee machine makers

Consumers

• Teas

• Juices

• Regular coffeeNicholas Merriam, April 2008 MBA,

Graziadio School of Business and Management Pepperdine University

INTENSE

WEAK

INTENSE

MODERATE

MODERATE

Porter’s 5 Forces:Barriers to entry: Small

firms generally specialize in R&D and cannot realize

manufacturing efficiencies that large incumbents benefit

from

Similarity of products enables easy switching

Generic products capture value from consumers who

are not willing to pay a premium for brand name

products


INTENSE

High

WEAK

MODERATE

MODERATE

Porter’s 5 Forces: Thomas Weisel Partners

Threat of New Entry

Bulge Bracket Banks encroaching into Middle Market

Threat of New Entry

Bulge Bracket Banks encroaching into Middle Market

Supplier’s Power

Investors have power to choose where they place there money, but don’t have ability to organize or know of new opportunities.

Supplier’s Power

Investors have power to choose where they place there money, but don’t have ability to organize or know of new opportunities.

Customer’s Power

Companies are able to choose who they partner with, but are limited by their ability to run a business and shop a deal to investors.

Customer’s Power

Companies are able to choose who they partner with, but are limited by their ability to run a business and shop a deal to investors.


Industry is highly competitive


Industry is highly competitive Mathew Kemp, April 2008 MBA,

Graziadio School of Business and Management Pepperdine University

Strategies for minimizing the power of competitive forces

Adapted from: www.themanager.org

Reducing the threat of New Entrants

Increasing minimum efficient scales of operations

Creating brand image/loyalty

Protection of intellectual property

Alliances with linked products/services

Tie up with suppliers

Tie up with distributors

Retaliation tactics

Cut out intermediaries

Reducing threat of substitutesIncrease switching costsForm alliancesEnter substitute market Accentuate differences

Reducing competitive rivalry withinDifferentiate your productAvoid price competitionReduce industry over capacityFocus on different customer segments

Reducing the Bargaining Power of SuppliersPartneringSupply Chain ManagementIncrease mutual dependencyBuild knowledge of supplier costs/methodsTake-over supplier

Reducing the Bargaining Power of CustomersPartneringIncrease loyaltyIncrease incentives and value addedIncrease switching costsCut out intermediaries

Porter’s 5 Forces and Generic Strategies






Cost Leadership

Better able to compete on price

Better insulated from suppliers

Better positioned to offer lower prices

Ability to deter new entrants by offering lower prices

Can use lower prices to defend against substitutes

Differentiation

Brand loyalty to keep customers from switching

Better able to pass on supplier price increases to customers

Fewer alternatives available to switch to

Customer loyalty can deter new entrants

Customers less willing to accept substitutes

Focus

Rivals cannot meet focused customer needs

Better able to pass on supplier price increases to customers

Fewer alternatives available to switch to

Specialization develops unique competencies difficult for new entrants to match

Customers less willing to switch to substitutes

www.studymarketing.org

Examples:

Product Differentiation minimizes competitive intensity

• Perceptual Maps are a visual display (usually on two dimensions) of how brands are perceived by customers.

• The closer the brands are positioned in this space the more competitive they are to each other.

• Perceptual Maps identify “open spaces” or unmet customer needs.

• Perceptual Maps identify salient attributes of the products on which consumers differentiate brands.

Perceptual Map of Automobile Brands

Adapted from: http://en.wikipedia.org/wiki/Perceptual_mapping

Perceptual Map of the BeerMarket

Premium

Popular with MenHeavy

Special Occasions

Dining Out

Popular with

Women

Light

Pale Color

On a Budget

Good Value Blue Collar

Full Bodied

PremiumBudget

Light

Heavy

•

Meister Brau

Stroh’s

•

•

•

Beck’s

• Heineken

Old Milwaukee

•

Miller •

Coors•

Michelob•

Miller Lite

• Coors Light•

OldMilwaukee Light

•

Budweiser

Less Filling

Adapted from: Prof. Ganesh Iyer, UC Berkeley

Perceptual Map of 2000 Presidential Candidates

Colin PowellJohn McCain

George W. Bush

Alan Keyes

Pat Buchanan

Steve Forbes

Donald Trump

Elizabeth Dole

Jesse Jackson

Bill Bradley

Al Gore

Leader

Opportunistic

ReligiousConservative

Source: 12Americans.com, 2000www.populus.com

TraditionalLiberal

Republican

Democrat

Independent

Student Examples:Perceptual Mapping

Nina Tooley


Perceptual Map Example:Contemporary

Classic

ExpensiveDiscount

Zara

Nina Tooley, April 2008 MBA,Graziadio School of Business and Management Pepperdine University

Contemporary

Classic

Perceptual Map Example:

MatureYoung

Zara

Nina Tooley, April 2008 MBA,Graziadio School of Business and Management Pepperdine University

Barriers to Entry/Incumbency Advantage

• Economies of Scale• Cumulative Investments• Learning economies• Innovation advantage• Promotional advantage• Customer loyalty

advantage• Switching costs advantage• Demand Side increasing

returns advantage

© Sunil MehrotraAdapted from: Saloner, Shepard, & Podolny: Strategic Management, Wiley and Sons, 2001

Economies of scale occur when increased output leads to lower unit costs (lower average costs)

Wal-Mart can sell products more cheaply because its huge buying power gives it economies of scale.

strategy management 1-5

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