Original Thinking Applied STRATEGIC MANAGEMENT1. Introduction: What is Strategic Management? 1.1 Origins of Strategic Management 1.2 Defning Strategic Management 1.3 The Levels of Strategy 1.4 How do Strategies come about? 1.5 Section overview 2. Course Approach to Strategic Management 3. Strategic Management Learning Resources 4. Strategic Management Manual Content 5. The Competitive Environment - Industry and Environmental Analysis 5.1 Industry Defnition 5.2 The Arena Map of the Competitive Environment 5.3 The Proft Pool Map 5.4 The Five Forces Framework 5.5 Strategic Groups 5.6 Strategic Imperatives and Key Success Factors (KSF’s) 5.7 Competitor Analysis 5.8 Wider Environmental Analysis 5.9 Megatrends 5.10 Scanning and Screening the Wider Environment 5.11 Sensitivity and Scenario Analysis 5.12 Competitive Environment – Industry and Environmental Overview 6. Company (Corporate or Grand) Strategy 6.1 Vision 6.2 Value Statements 6.3 Mission 6.4 Objectives 6.5 Analysing and Developing Resources and Capabilities 6.6 Company Portfolio Analysis 6.61 Financial Performance versus Market Growth 6.62 The Grow-Share Matrix 6.63 General Electric’s Master Strategy-Business Screen 6.64 The Three Horizons of Growth 6.65 McKinsey’s Portfolio of Initiatives 6.66 Portfolio Synergy 6.7 Routes to Build the Company Introduction 6.71 Mergers, Acquisition and Divestment Strategy 6.72 Strategic Alliances 6.73 Routes to Build the Company Overview 7. Aspects of Implementation 7.1 The 7S Framework – Putting it All Together 7.2 The Balanced Scorecard 7.3 The Management of Change 7.4 Section Overview 8. Introduction to the Advanced Strategic Management Course 11348 10 13 16 18 21 21 33 37 41 51 57 63 66 67 74 77 83 86 89 92 94 104 107 107 111 112 118 123 124 127 131 137 145 151 155 155 162 168 176 179 Strategic Management Course Manual Contents1 Strategic Management 1. Introduction: What is Strategic Management? 1.1 Origins of Strategic Management (SM) The roots of the SM discipline can be traced back to the centuries old study of military strategy. The word ‘strategy’ - comes from the word ‘strategos’ - the head of a district of Athens appointed to lead (agein) an army (stratos).1 The /XFord %nglish Dictionary defnes strategy as “the art of the commander-in-chief; the art of projecting and directing the larger military movements and operations of a campaign”. The purpose of strategy is then to plan hoW a series oF acts Will Be linKed together to achieVe specifed oBJectiVes. ".(.,. (art2, observes that a good strategy brings “the forces into play at the decisive point, under the most favourable conditions possible”. In order to do so the general develops his strategy from what is known of: The enemy’s strength and positioning. The physical characteristics of the battleground. The nature of the arena. The strength and character of the resources under his command. In addition time and the anticipation of changes that alter the balance of forces are critical factors. Various military strategists have outlined sets of principles to help develop successful strategies. One such set of principles is provided by the U.S. army’s Field Manual 3-0 3: 1. Objective Direct eVery military operation toWards a clearly defned decisiVe and attainaBle objective 2. Offensive - Seize, retain, and exploit the initiative 3. Mass - Concentrate the efforts of combat power at the decisive place and time 4. Economy of Force - Allocate minimum essential combat power to secondary efforts 5. Manoeuvre Place the enemy in a disadVantageous position through the »eXiBle application oF 2 Strategic Management combat power 6. Unity of command - For every objective ensure unity of effort under one responsible commander 7. Security - Never permit the enemy to acquire an unexpected advantage 8. Surprise - Strike the enemy at a time or place or in a manner for which he is unprepared 9. Simplicity - Prepare clear, uncomplicated plans and clear concise orders to ensure thorough understanding Numerous military texts, theories and principles have been applied in a business context. Perhaps the tWo most in»uential teXts Being The !rt oF 7ar By Sun TZu 4 and On War by Karl Von Clausewitz5. ,anchester Strategy6 a theory oF military fre poWer has Been Widely applied especially By *apanese companies. "usiness Strategy also employs much oF the same terminology: we set objectives, have leaders, organise in divisions, compete in the arena, and launch campaigns. Whilst there are many similarities between military and business strategy, and lessons to Be learnt there are also many diFFerences. In Business the BattlefeldmarKet is made up of customers who normally have a choice whether to purchase and use products and services. The formal study of SM in a business context began in American business schools in the 1950’s 7. Prior to that date the disciplines focused on the individual business functions of fnance production marKeting and personnel. %ach Being pursued as a separate feld oF study. The increased scale and complexity of business in the post-war era brought with it the need for a multi-disciplinary approach on how to co-ordinate functional activity towards the attainment of overall company objectives. In»uential Writers at the time included Peter DrucKer The Practice oF Management 155 Management By /BJectiVes M"/ - Alfred Chandler, Strategy and Structure, 1962 (Structure follows strategy) - Igor Ansoff, Corporate Strategy, 1965 (Gap analysis, company development routes) They, and others, argued that “a long term co-ordinated strategy was necessary to give a company structure, direction and focus”.83 Strategic Management In the early years the emphasis of the discipline was on strategy formulation at the corporate leVel. ±Strategic Planning² and ±,ong 2ange Planning² Were put frmly on the agenda linking in with the functional disciplines and the more traditional short-term budgetary process. Whilst a major advance there remained much disappointment in many quarters as strategic planning failed to deliver against expectations. ‘Sound’ strategies formulated by staff at the corporate centre in many cases failed to be operationaised.9 With the realisation that strategy could not be divorced from its implementation the shift in recent years has been towards strategy and the management of that strategy as a single process. The primary function of management is to ‘get the job done’ – implement, execute. This requires: - leadership and engagement of staff - planning for different time periods - organising resources optimally - co-ordinating and aligning activity - control by monitoring progress against plan, against targets - maKing modifcations recaliBrating - seeking improvement - communicating and liaising 1.2 Defning Strategic Management !rnoldo (aX1 captures the essence oF SM in the FolloWing siX statements ½ It is the coherent uniFying and integratiVe pattern oF decisions a frm maKes. · It determines and reveals the organisation’s purpose in terms of its long-term objectives, action programs, and resource allocation priorities. · It selects the businesses the organisation is in or considering entering. ½ It is the attempt to achieVe a long term sustainaBle adVantage in each oF a frm²s businesses by responding properly to both the environmental opportunities and threats, and the strengths and weaknesses of the organisation. ½ It engages all the hierarchical leVels oF the frm corporate Business and Functional. ½ &inally it defnes the nature oF the economic and non economic contriButions the frm intends to make to its stakeholders.4 Strategic Management ¯Strategic Management is trying to understand Where you Will ft in tomorroW²s World and deciding where you want to be” – and getting there -Jack Welch, former CEO General Electric SM then encompasses looking to the future, formulating strategies, taking decisions, operational execution, monitoring and control which spans all organisational levels and hierarchy. Effective SM requires that three key processes be integrated and continually adapted: a. Strategy Formulation eXternalinternal analysis and Formulating plans to attain objectives) b. Strategy implementation (the ‘management’) c. Strategy evaluation and recalibration (continuous reassessment, adjustment and reformulation – a strategy is a work-in-progress). The Strategic Management Framework Organisational Alignment Control, Review, Adjustment Strategy Selection Objectives Mission External Environment Internal Environment Past Present Future Implementation Vision Values 1.3 The Levels of Strategy We argue that strategy is relevant to all organisational levels and to all staff and partners. There are hoWeVer fVe Key hierarchical leVels oF strategy Which are the ‘pillars’ of the strategic management process.5 Strategic Management 1. Company (Corporate or Grand) Strategy: - outlines the purpose of the organisation and how it will satisfy stakeholders - sets direction (vision, mission, objectives) - outlines how to do business (values) and governance - decides Which marKetBusiness to Be in Which marKetBusiness not to Be in thereBy defning the scope oF the organisation - decides on the nature of ownership (owned, joint venture, franchise etc.) - designs the formal and informal organisation to align and integrate - develops or improves strategies - builds the portfolio organically, by alliance and acquisition - manages the portfolio - allocates and enhances resource - builds capability and competence - eXploits synergiestransFers sKills - manages performance, risk and control #ompany strategy is concerned With a set oF choices to confgure and co ordinate the whole. When well designed and executed, company strategy adds value by reinforcing, and interacting with, all other levels of strategy. .ote DiVisional or 2egional Strategy is an eXtension oF #ompany Strategy. 2. 2esource and #apaBility Strategy ! suBset oF company strategy is 2esource and #apaBility Strategy. (uman tangiBle and intangible resources work together to create capabilities which in turn underpin the pursuit of competitive advantage in the market place. This area of strategy looks to: - acquire and leverage resource - acquire and strengthen capabilities at all organisational levels, from company wide to individual task. 3. Functional Strategy Functional structures divide an organisation on the basis of the skills needed to carry out Business. /rganising around the Function has the Beneft oF scalereduction in duplication and specialisation. Each functional strategy is supported by sub-strategies. For example the overall marketing strategy will be supported by product-line, brand, promotional and other sub-strategies.6 Strategic Management &unctional strategy acts as the spine For all other leVels oF strategy. "ut therein lies several challenges – how to holistically combine functional strategies to align with company and organisational wide resource and capability strategy? When business level needs are diverse, how to customise functional strategy to support very different needs? IF Functional strategy is not customised then a one siZe fts all approach Will hinder business unit general managers with different requirements. If it is customised to each Business or decentralised to each Business area the Benefts oF scale and specialisation are compromised. 4. "usiness 5nit Strategy The business unit (also referred to as the ‘strategic business unit’, ‘natural business unit’) is a semi autonomous unit within an organisation. It can be defned Broadly i.e. a group oF related Business areas or narroWly one specifc Business area . 7hicheVer defnition is taKen it has a numBer oF characteristics - a manager is normally accountable for its operation - it controls most of the internal resources that impact on its performance - specifc Business strategies can Be deVeloped - it targets a clearly identifaBle set oF customers Within a certain geographic area against a given set of competitors The military strategy eQuiValent oF the Business unit Was .apoleon "onaparte²s ¯corps d’armee” system of corps units. Each corps unit was a ‘mini army’. Within the unit were sub-units, each with different roles and equipment. The corps units gave Napoleon great adVantages in terms oF cohesiVeness moBility and »eXiBility. The business unit can provide a focal point for the organisation – this is where the customer and competitor are Based the Front line. (oW are We going to ±lay out our stall’ to win that customer’s business against competitors is the central question. What is going to be our basis of competitive advantage and how will the other levels of strategy supportenhance 5. Operational ‘Strategy’ The day to day operations of a company involve numerous short term tactical decisions. Strategy is concerned with more substantive large scale decisions over a longer time period. (oWeVer the tWo can start to Blur at the edges When We consider shorter term strategic decisions and longer term operational-tactical decisions, there are no clear dividing lines between formulation and implementation.7 Strategic Management Our preference is to talk about operational strategy, even though the classic strategy literature would call this tactics, for a number of reasons: - as already noted the disappointment With Strategic Planning and ,ong 2ange Planning experienced by many companies was largely attributable to a disconnect BetWeen strategy and operationsimplementation. - Strategy and operations are interconnected and each has a bearing on the other - The danger is that operations could Be seen as a JuniorinFerior partner in the SM process Without good soldierstroops a general²s strategies Will come to nought - "ut perhaps most importantly the 2esource and #apaBility strategy leVel starts internally. When added together the impact of ‘day to day’ tactical choices and actions builds capability and interacts with the other strategy levels. What are We good at internally (oW can We strengthen our resources and capaBilities and leverage them in the market-place? This ‘inward-out’ approach to strategy is equally valid and should be simultaneously considered. § What does the customer want? (Who) § (oW are they going to get an adVantage 7hat § (oW should We do it (oW (The External to Internal) Could be re-expressed as: § 7hat are We good at doing The (oW § Will this give us an advantage? (What) § Who will buy it ? (Who) (Internal to External) "oth perspectiVes are eQually Valid and need to Be adopted simultaneously. ! maJor challenge for many companies is integrating and aligning: - #ompany DiVision 2egion - 2esource and #apaBility - Functional - "usiness 5nit - Operational strategies together in a rapidly changing world whilst retaining speed, agility and creativity.8 Strategic Management An additional complication is that organisations do not work in a vacuum – they are part of an ecosystem. The levels of strategy have to take into account the: - Direct ecosystem of suppliers, competitors, channels, customers, alliance and outsource partners - Indirect ecosystem of complements - Support ecosystem of the wider environment and infrastructure. 1.4 How do Strategies Come About? The simple ansWer is in diFFerent Ways. It may Be a »ash oF inspiration. "ecause oF lucK something happens, we try something and it is successful and a strategy develops. Other times it is By eXperimentation trial and error. "y ±gut Feel² and intuition or more Kindly By pulling on past eXperience using Judgment and re»ectiVe thinKing aBout What may work in the future. ‘Gut feel’ is important, but can be dangerous as it quite often seeks out inFormation to confrm prior assumptions ±Bounded rationality² . Inspiration, luck, experimentation and intuition should not be down-played as Albert Einstein11 observed: “I believe in intuition and inspiration … at times I feel certain that I am right while not knowing the reason … Imagination is more important than knowledge. For knowledge is limited, whereas imagination embraces the entire world, stimulating progress, giving Birth to eVolution. It is strictly speaKing a real Factor in scientifc research.° The customer and competitors are powerful driving forces for creating strategy. The customer has this proBlem this complaint this unsatisfed need can We deVelop an oFFer that Will Be attractiVe to them This customer is oVerserVed can We oFFer a productserVice that will be good enough at a more attractive price? This competitor is ahead of us, what can We do to leap Frog them 2esources and capaBilities also help to create strategies We have developed this technology, how can we deploy it to gain advantage in the market? Our people have this capability, how can we use it to our advantage? Many companies are skilled at ‘stealing strategies’: this company in the U.S. is successful with this strategy, can I employ the same strategy in my country? Change in the wider environment (i.e. regulatory, technological) creates opportunities for the development of new strategies. Data and analysis are the spine of a deliberate strategy formulation process. Quite often the planning cycle is supported by clear guidelines, timelines and manuals with many people participating from all areas of the organisation. Many meetings, presentations9 Strategic Management and discussions are characteristics of the process. There are many attractions to the formal planning approach: - the process is explicit, disciplined, systematic - the process gathers and analyses crucial data - it allows managers to stand back - it improVes understandinginVolVement across organisational units - it fosters widespread thinking - more issues are »ushed out more alternatiVes eXplored - questions are asked and answered - obstacles are anticipated - an increased sense oF purposecontrol is Fostered - it clarifes direction - it can improve ownership - considers contingencies - the process can build camaraderie and a network of relationships. In sum, formal planning provides a framework to help make better decisions and helps to integrate the levels of strategy. Mintzberg 12,13 observes that there are three different types of strategy: - frstly deliBerate strategies as intended By the Formal planning process - secondly ‘unrealized’ strategies – where the intent is not achieved - thirdly ‘emergent’ strategies – where a pattern comes together to form a strategy which was not intended. The emergent strategy results from the interconnection of the organisation with its environment. A form of organisational learning and development takes place. Mintzberg 12,13 concludes that few strategies are purely ‘deliberate’ or purely ‘emergent’, “Strategies, in other words, have to form as well as be formulated.” In developing our strategies we have to pull on luck, inspiration, intuition, experimentation, being creative in hoW We can Better satisFy the customer get ahead oF competitors. ,eVerage our resources and capabilities. Actively scan the world to identify opportunities and ‘steal’ ideas. ! Formal planning system should not sti»e creatiVity rather it should proVide a framework for deliberate and emergent strategies to develop. Peter Drucker14, perhaps summarises it best when he observes: “A strategy is a sense of direction around which to improvise”10 Strategic Management 1.5 Section Overview 1. SM is a relatively new discipline in a business context 2. SM is multi-disciplinary 3. SM is holistic – how does everything come together 4. Strategy is simply your gameplan to get From ! to " 5. Strategy interacts with, but is secondary to purpose and objectives 6. A strategy requires making choices: What are you going to do? What are you not going to do? 7. Strategy takes account of history and the current situation, but is primarily concerned with the future – how to attain purpose, objectives and prosper going forward? 8. There are fVe Key leVels to strategy Which need to Be integrated #ompany 2esource and #apaBility &unctional "usiness 5nit /perational each of which needs to be related to the ecosystem 9. Developing a strategy can be ‘deliberate’ or ‘emergent’, but more usually it is a combination of both 10. The Management of Strategic Management is primarily concerned with implementationeXecution 11. A strategy that cannot be executed is worthless 12. There are three key processes in SM: formulation, implementation, evaluation and recalibration. All three need to be continuously integrated. Section 1 References 1 S. #ummings ¯"rieF #ase The &irst Strategists° ,ong 2ange Planning *une 13 2 ". ,iddell (art ¯Strategy the Indirect !pproach° &aBer ,ondon 15 3 United States Army Field Manual 3-0, Operations - Appendix A, 2008 4 J. Clavell, “SunTzu, The Art of War” ,ondon 1111 Strategic Management 5 !. 2apaport ¯#lauseWitZ on 7ar° Penguin ,ondon 1 6 S. 9ano ¯,anchester Strategy° ,anchester Press 15 7 M. Porter, “The State of Strategic Thinking” - The Economist, May 23, 1987 8 7iKipedia.orgWiKistrategic?management 9 (. MintZBerg ¯The &all and 2ise oF Strategic Planning° (arVard "usiness 2eVieW *an&eB 1 10 !. (aX ¯2edefning the #oncept oF Strategy° Planning 2eVieW May*une 1 11 1uoted in %. 2ousepp ¯#an 9ou Trust 9our (unches° Management 2eVieW !pril 1 12 (. MintZBerg ¯Patterns in Strategy &ormation° - Management Science, Vol 24, No 9, 1978 13 (. MintZBerg ". !hlstrand *. ,ampel ¯Strategy SaFari° - Pearson Education, 2009 14 P. Drucker, “The Practice of Management” "utterWorth (einemann 155 Refection § (oW is SM practiced in your oWn organisation § Are there strategies at each level? § #ompany DiVisional2egional2esource #apaBility § Functional § "usiness 5nit12 Strategic Management a) Are strategies well articulated, communicated, widely understood and committed to? b) Well integrated? (this is not easy, even getting the functions working together can be problematic) c) Seamlessly aligned with Operational strategy (there is often a disconnect between strategy and operations) d) Is progress against strategy continuously reviewed and adjustments made on a timely basis? § (oW haVe strategies come aBout historically - deliberate, emergent, or a combination of the two? Grant introduces The Concept of Strategy in Chapter 113 Strategic Management 2. Course Approach to Strategic Management (SM) 1. The SM Course has been designed for the management of large private sector companies. Whilst much of the Course is applicable to start-ups, small business, public sector, regulatory bodies and the like, these are not our prime concern. 2. SM is a multi disciplinary #ourse. !t Alliance Manchester "usiness School it is viewed as a capstone. SM should not be viewed as being self-contained – it pulls on, and integrates with previous learnings. 3. The Course stresses practical analytic managerial application. To arrive at managerial decisions we: - Assemble data - Analyse data - Create information - Evaluate information - Make managerial decisions - Implement decisions - 2eVieW and recaliBrate 4. The management mindset is paramount: - What am I going to do as the CEO of the company? - What am I going to do as the GM of this business? Can I justify my decisions? Can I outline how to implement my decisions? 5. The Course advocates a factual, analytic, rigorous, systematic approach. 6. The Course adopts the ‘Manchester Method’ of in-depth analysis of your company, your business. Our belief is that the quality of thinking that goes into making strategic decisions is a key explanator of success. - If you are going to be the CEO you should know your company and the environment it operates in inside out. - If you are going to be a GM of a business you should know your business and the environment it operates in inside out. Further you should understand the role of your business in the company’s portfolio and how to leverage – and help build –14 Strategic Management company resource, capability and create synergies. 7. The Course adopts the ‘Manchester Method’ by asking you to consider content and conteXt maKe inFormed decisions and importantly re»ect on the process you haVe gone through. TaKing time to thinK and re»ect is a critical part oF the learning process. 8. The Course adopts the ‘Manchester Method’ of assignment based teamwork. 9. SM has the widest scope – it incorporates all of the other disciplines! There is hence a vast body of knowledge to pull on, both from the literature and from practitioners. (enry MintZBerg1 has codifed this large Body oF literature into ten ±Schools² oF thought Which re»ect management practice 1. The Design School - strategy formation as a process of conception 2. The Planning School - strategy formation as a formal process 3. The Positioning School - strategy formation as an analytical process 4. The Entrepreneurial School - strategy formation as a visionary process 5. The Cognitive School - strategy formation as a mental process 6. The ,earning School - strategy formation as an emergent process 7. The Power School - strategy formation as a process of negotiation 8. The Cultural School - strategy formation as a collective process 9. The Environmental School - strategy formation as a reactive process 10. The #onfguration School - strategy formation as a process of transformation The frst three Schools are more concerned With hoW strategy should Be Formulated. Schools 4 to 9 look at aspects of how strategies are actually formed. The last School, #onfguration comBines Features oF all the preVious Schools.15 Strategic Management #ould We say at the outset that We do not Fully agree With MintZBerg²s codifcation. !pproaches in the literature do not ft neatly into a ±School² and there is a case iF this approach is taKen oF haVing additional Schools. (oWeVer MintZBerg does show that there are different themes in the literature and provides a framework and language to consider the approach of the SM Course. As SM’s approach is pro-active, analytical and managerial it pulls heavily on the frst three Schools hoW strategy should Be Formulated. (oWeVer Schools to which look at aspects of how strategies are actually formed are clearly relevant. (ence in MintZBerg²s terminology We taKe a #onfguration School approach one which pulls on all of the other Schools. As SM stresses managerial application one naturally applies all of the Schools if they are useful to making and implementing decisions. Section 2 References 1 (. MintZBerg ".!hlstrand *. ,ampel ¯Strategy SaFari° - Pearson Education, 200916 Strategic Management 3. Strategic Management ,earning 2esources 2.1 !s an integratiVe #ourse all oF your preVious learnings Be they With M"S or elseWhere are releVant our Bias is to the large priVate sector frm. 2.2 The SM Manual is a key resource. 2.3 /ur #ourse teXt is ±#ontemporary Strategy !nalysis² By 2oBert 'rant. The teXt is the best seller in the area currently and each chapter is supported by brief videos and study questions. The SM Manual refers you to chapters in the text when appropriate. 2.4 The 7orKshop has a Focus on "usiness Models"usiness Strategy. 9our indiVidual post 7orKshop assignment Will Be on "usiness Strategy. The pre 7orKshop readings are sKeWed to "usiness Models"usiness Strategy accessed Via "lacKBoard 2.5 The School is fortunate to have a world class business library. One could spend a liFe time using its resources and only scratch the surFace. The Journals We fnd especially useful for SM in order of preference are: - The (arVard "usiness 2eVieW - The McKinsey Quarterly - ,ong 2ange Planning - The Sloan Management 2eVieW - The Strategic Management Journal - Strategy and ,eadership - "usiness (oriZons "ut there are many others. The net is also a valuable resource with the strategy houses all having on-line publications. When we meet many of the School’s alumni around the world it pleases us greatly that they access on-line, or have on their desks: - The (arVard "usiness 2eVieW - The McKinsey Quarterly17 Strategic Management - The Economist - The Financial Times or The Wall Street Journal It is the way they keep up to date with the business world and leading practitioners contributions. 3. "lacKBoard proVides many inputs WorK schedule eXam tips etc. and importantly a discussion forum for you to use during your studies.18 Strategic Management 4. Strategic Management Manual Content The Manual has been written in the sequence we would advise you to read it – so start at the beginning and work through. The Manual is divided into 3 Sections: - The Competitive Environment – Industry and Environmental Analysis - #ompany ,eVel Strategy - Aspects of Implementation Section 5. The Competitive Environment - Industry and Environmental Analysis In many management sessions we participate in, it is surprising how underdeveloped the collective understanding is of the company’s industry and environment, and hence the implications for strategy. A very dangerous view is quite often taken: ‘We all understand our industry and environment, we have worked in it for years, we have no need to carry out formal analysis or make our understanding explicit. The Course’s approach is to make understanding explicit and rigorous. It is too important to do otherwise as deep rooted understanding of the competitive environment is an essential input for answering many strategic questions: - Which industry should I compete in, which should I not? - What determines industry attractiveness and how is this changing? - (oW is the ecosystem liKely to impact the industry - Should I broaden the geographic boundaries that I target? - Which target customers are most attractive for me to serve? - (oW can I satisFy customer needs Better add Value - (oW should I position against competition - Should I change the industry balance by alliances or acquisition? - What is the case for vertical integration upstream, downstream, outsourcing? - (oW is the enVironment impacting on the leVel and nature oF demand - What type of products and services will be demanded in the future? - (oW is the enVironment impacting on my aBilities and costs to serVe - What opportunities and threats are emerging? - (oW are complements liKely to impact - What risks should I be developing contingencies for?19 Strategic Management These and many other questions are too important to be left to implicit understanding. “The essence of formulating competitive strategy is relating a company to its environment” – M.Porter1 The content of Section 5 initially looks at aspects of industry analysis before turning to the wider environment. As you read the Section we would recommend you adopt the mindset of an industry analyst. - Industry Defnition - The Proft Pool Map - The &iVeSiX &orces - Strategic Group Analysis - Strategic Imperatives and Key Success Factors - Competitor Analysis - Megatrends, Scanning and Screening the Wider Environment - Sensitivity and Scenario Analysis - Overview and Application Section 6: Company Level Strategy As you read this Section we would recommend you adopt the mindset of a CEO of a large private sector company. Companies are led in different ways, would you apply the ideas and concepts of this Section, and if so how? The Section content is: - Components of Classic Company Strategy - Vision - Values - Mission - Objectives - Multibusiness Portfolio Analysis Financial Performance versus Market Growth The Grow-Share Matrix The 'eneral %lectric²s Master Strategy "usiness Screen The Three (oriZons oF 'roWth The Portfolio of Initiatives Portfolio Synergy20 Strategic Management 2outes to "uild the #ompany Introduction Acquisition Strategy, Divestment Strategic Alliances 2outes to "uild the #ompany /VerVieW Section 7: Aspects of Implementation The ‘Management’ of SM is comprehensively covered in the other disciplines. This Section reviews aspects of implementation that aim to assist in combining the disciplines: - The 7S Framework – Putting it All Together - The "alanced Scorecard - The Management of Change Section 4 References 1 M.Porter, “Competitive Strategy, Techniques for Analysing Industries and Competitors” - Free Press, 198021 Strategic Management 5.The Competitive Environment - Industry and Environmental Analysis “The essence of formulating competitive strategy is relating a company to its environment” – M.Porter1 The content of Section 5 initially looks at aspects of industry analysis before turning to the wider environment. As you read the Section we would recommend you adopt the mindset of an industry analyst. - Industry Defnition - The Proft Pool Map - The Five Forces - Strategic Group Analysis - Strategic Imperatives and Key Success Factors - Competitor Analysis - Megatrends, Scanning and Screening the Wider Environment - Sensitivity and Scenario Analysis 5.1 Industry Defnition - the Sector, Arena, Ecosystem, Industry, Market, Market Segment, Market of One A strategy seeks to achieve competitive advantage in the external environment. The competitiVe enVironment should Be defned and the appropriate analysis carried out. Much oF the literature hoWeVer aVoids the topic oF defnition. It is not surprising thereFore to fnd Both the literature and managers using the term ±industry² to stand For Very diFFerent external environment boundaries. A manufacturer of tin plate cans could for example compete in: ‘the packaging industry’, ‘metal container industry’, ‘metal can industry’, ‘tin plate can industry’, ‘two piece tin plate can industry’ and so on. ‘Industry’ cannot be the appropriate term for all these cases! The confusion arises because boundaries can have a different scope in terms of: geographic Vertical22 Strategic Management productserVice customer need Want Function competitors technology And yet one word ‘industry’ is used to describe very different scopes. A further complication is that boundary scope is not static, industries can converge for example. The eXternal enVironment can Be defned Broadly or narroWly. The terminology We employ being: "road Sector: A broad aggregation or a slice of the whole - i.e. manufacturing sector, sports sector, 13-19 year olds Arena: All substitutes that could satisfy a customers need, want or function (the central part of an amphitheatre where combat takes place) - i.e. energy (oil, gas, electric etc.) Ecosystem: (oW complements and the Wider ecosystem come together to create value (i.e: a pc requires chips, an operating system, software etc. to function). A key issue in strategy can be building the ecosystem and ensuring disproportionate value capture (i.e: Intel and Microsoft vs. pc suppliers) Industry: A subset of the Arena which draws boundaries around converged or related suBstitutes Broad defnition one suBstitute or part oF the suBstitute narroW defnition i.e. metal cans Broad oil one suBstitute refning narroW Market: ! suBset oF the Industry defned in terms oF sellers Buyers productsserVices and geography - i.e. retail lubricants in the UK Market Segment: A subset of the market where customers have a similar set of needs Wants Functions andor location i.e. retail lubricants sold at petrol stations Markets of ‘one’ customer Mass customisation, individuals forming or joining communities Narrow There is a continuum that underpins our terminology. We could for example, employ a Broad industry defnition liKe metal cans Which includes materials liKe aluminium and tin plate with very different economics and supply chains), or a23 Strategic Management narroWer defnition liKe tin plate cans. 7here to draW the Boundary is a Function of the question being asked and requires judgment. The best approach is one of curiosity trial and error not accepting the frst defnition proVided especially iF that comes From goVernment statistics . Then fnally Being pragmatic so that the defnitions adopted are the most releVant to the analysis Being perFormed. To analyse the external environment comprehensively we need to consider the full spectrum oF defnitions From Broad to narroW each giVes us a diFFerent insight. IF one takes the analogy of looking at a painting in an art gallery: we view it from a few metres away in order to judge its merit relative to other paintings (Arena). We view the painting by itself to judge its overall appeal (Industry). We examine parts of the painting to consider the quality of the art work (Market or Segment). Each view gives a different insight. The ‘best’ view is one that encompasses all of the views, zooming in and out, all of the bases are covered. ,et us eXamine our terminology more closely. Sector: An aggregation or slice of the whole As a broad ‘aggregation’ or ‘slice’ a Sector’s prospects are tied to macro-environment Factors. (aVing defned the Sector the Key is to eXamine hoW Well the Sector is performing and explain what is driving that performance. - manufacturing is declining in many developed economies as many rapidly developing countries have comparative advantage in the factors of production. (oWeVer a Sector is a Broad aggregation that masKs Very diFFerent leVels oF performance. The question then becomes: ‘What explains success for high cost manufacturers?’ The answers will be varied: - those that dislocate operations - those that engineer artifcial Forms oF competition - those that get protection, subsidy - those that attain higher value added (superior technology, time sensitive customers, provide a total solution, etc.) As a Sector is a broad aggregation, it is usefully sub-divided to consider parts of the Sector’s performance – the subdivision gets us closer to the Arena. For example the ‘Sports Sector’ could be subdivided by: indoor-outdoor, spectator-participative,24 Strategic Management individual-group etc. Sub-sector prospects can now be more closely examined; the analysis progressing to consideration of the Arena. Arena: All substitutes that could satisfy a customers need, want or functionality i.e. energy (oil, gas, electric etc.) Theodore ,eVitt cautioned aBout the dangers oF taKing a ±goods producing² VieW oF a business and argued for the need of a ‘market satisfying’ perspective in his classic article ‘Marketing Myopia’2. 7illiam 2othschild3 supports the view and advocates that ‘Arena Maps’ are drawn to ensure that thinking is not too narrowly based around the good Being oFFered. (e adVocates that the initial Focus should Be on the need Want or Function Being perFormed. (ence in ,eVitt²s terms We do not thinK aBout the train or oil industry But aBout transportation and energy. The Broader !rena defnition encompasses all substitutes that can satisfy the same need, want or function. The Arena Map hence has its Focus on the ±War² and not specifc ±Battles². The Beneft oF such a panoramic VieW is that awareness is heightened of potential opportunities and threats or latent sources of competitive advantage or disadvantage. To determine which substitute a customer has preference for in the Arena: 1. Identify a group of similar customers (Market or Market Segment) 2. Specify their needs, wants or functionalities sought or combine these in Clayton Christensen’s4 term: ‘job to be done’– excluding price Subdivision of the Sports Sector INDOOR OUTDOOR SPECTATOR PARTICIPATIVE I.E. WATCHING T.V. SPORTS EVENTS I.E. PLAYING SNOOKER I.E. WATCHING A FOOTBALL MATCH I.E. PLAYING TENNIS25 Strategic Management 3. Weight the relative importance of their needs, wants or functionalities 4. Score hoW Well each suBstitute satisfes their needs Wants or Functionalities 5. Plot each substitute’s performance against price considering elasticities. Evaluation of Substitutes Performance Substitute Scores in Satisfying Needs Customer Needs, Want or Function Importance Oil Gas Electric 1 2 3 4 5 6 7 Total 100 Overall Performance Scores Relative Price Price Elasticity In the SM Workshop we will use the same analysis to benchmark performance versus direct competitors (rather than substitutes). Whether the analysis is based on substitutes or direct competitors it can be communicated visually via ‘Spider’ plots and ‘Value Maps’, which again we apply in the SM Workshop. On the Spider chart plot how well you satisfy the customer needs, wants, functions or ‘job to be done’ and then overlay substitutes or your direct competitors. The strengths and weaknesses of your positioning are immediately apparent. (Note you may want to weight the importance of each leg of the Spider plot on the diagram.)26 Strategic Management The Value Map collapses your performance score into one number and plots against price. The 7orKshop pre reading ±Mapping your #ompetitiVe Position² By 2ichard D²!Veni provides worked examples. ‘Spider’ Plot of Customer Needs Satisfaction by Substitutes Price Need 2 Need 4 Need 6 Need 1 Need 5 Need 7 Need 3 High Low Positive Value Negative Value Relative Performance Value Map Plot Fair Relative Value Price Low High27 Strategic Management Arena thinking is especially valuable where there are close substitutes (aluminium, steel, plastic containers) or the boundaries between ‘industries’ are starting to blur. With technological change quite often being the key driver many companies are re-setting their industry scope. With the blurring of paper based and digital information Xerox moved to become the ‘Document Company’. Ecosystem- How complements come together to create value In strategy the ecosystem is how everything comes together to create value. The ecosystem has three components: Direct ecosystem suppliers the frms resources and capaBilities competitor positions channels, customers, outsource and alliance partners - Indirect ecosystem: complements which are integral to the value offer (these can be outsourced or provided by alliance partners), the ‘extended family’ - Support ecosystem: the wider environmental setting and infrastructure Key questions when considering the ecosystem are: 1. Is the ecosystem in place, can it be put in place? - Many technological breakthroughs have stalled without the ecosystem in place. Philips and Sony deVeloped hi defnition tV in the early 1²s. 7ithout ±complements² in areas such as studio eQuipment or ±support² in Broadcasting standards frst moVer adVantage was of little value. - In many rapidly developing countries the supply chain, infrastructure and regulations prohibit effective market entry. Firms like McDonalds and Nestle have a history of developing the local ecosystem to enable market entry. 2. (oW to Be part oF a Winning ecosystem Ecosystems compete when mutually incompatible proprietary formats attack the same market. Examples of these ‘standard wars’ include: 6(S *6# MatsushitaPanasonic and !Kai (itachi MitsuBishi Sharp Vs. "etamaX Sony and: Aiwa, Nec, Pioneer, Sanyo, Toshiba Sony "lu ray Vs. ToshiBa (D D6D 7i&i Vs. "luetooth28 Strategic Management When faced with a standards war the strategic choices are: - adopt open or closed standards (Android vs. Apple) - agree a common standard - seek interoperability between standards - co-exist in a duopoly (if there are two ecosystems). Seek to marginalise competitive ecosystem - pursue ‘winner takes all’ strategy. Key inputs into the decision are5: - Is the new format compatible with the historic format? An ‘upgrade’ gives the incumbent with the largest installed base the initial advantage by virtue of customer lock-in Do patents oVer technology or interFaces protect giVe signifcant lead time - Can a dominant alliance consortium be brought together? (both for the direct ecosystem and for complements) 7ill frst moVer adVantage giVe maJor Benefts in terms oF learning scale share oF Voice attract talent, investment and partners? #an crediBility Be estaBlished eXpectations managed "rand strength and reputation - Will initial and subsequent value be delivered? – the ability to keep at the ‘cutting edge’ - Will the support ecosystem (especially regulators) allow a clear winner? Is the fnancial capacity to play this game aVailaBle 3. What is our role in the ecosystem? To create, shape and manage an ecosystem requires many of the advantages just outlined installed Base patents frst moVer etc. etc. . More typically the aim is to lead part of the ecosystem or adopt a niche strategy. . (oW Will Value in the ecosystem Be shared +ey concepts that help to address this Question are the Proft Pool Map and &iVe &orces. ‘Strategic Control’ and ‘Choke Points’ in the ecosystem have to be established and protected. In pc’s Intel (microprocessors) and Microsoft (operating system to grow installed base with high price applications) keep the majority of the ecosystem’s value. To counter the dominance oF the other Both support alternatiVes Intel ,inuX MicrosoFt !MD . Authors Note: J. Forrester in his Systems Theory attempted to show how systems (and ecosystems) were linked. Many sought ‘stability and equilibrium’ of the system – no such thing eXists in the real World ecosystems are dynamic constantly Being reconfgured.29 Strategic Management Industry ! suBset oF the !rena Which draWs Boundaries around conVergedor related suBstitutes Broad defnition one suBstitute part oF suBstitute narroW defnition An Arena is made up of several industries (the energy Arena is made up of oil, gas, electric, etc. industries !n industry is associated With the Basic product andor serVice proVided or offered to the customer (i.e. oil, banking). Within the Arena industries can become converged (close substitutes for each other) or highly related complements With one industry²s productserVices used in conJunction With another industry²s productsserVices . 5nder such circumstances a Broader ±industry² defnition should Be stressed - to take our earlier example: metal cans that we drink beverages from are made of different materials, primarily aluminium or tin plate. The materials have different supply chains, economics, properties, competitors (some focus on one material, some provide Both . 7ith competition conVerged a Broader industry defnition oF ±metal cans² should be stressed. With different supply chains, economics, properties and competition it remains valid to also defne the industry around one suBstitute in the !rena the aluminium can industry the tin plate can industry. In vertically integrated industries, like oil, certain competitors only have operations in parts oF the supply chain. 5nder these circumstances a narroWer industry defnition liKe ±eXploration² or ±refning² may Be appropriate. It is also good practice to defne the industries geographical boundaries. Supply-Side Defnition IF manuFacturers fnd it easy to sWitch their production Facilities to manuFacture one another’s products, then such supply-side substitutability would suggest classifying the tWo frms in the same industry. 7here a frm²s resources are used to produce raW materials i.e. sand a process or technology i.e. refning or a product i.e. chips that has many end use marKet applications then the industry is initially defned in terms oF competitors’ collective output. The focus is on resource and competitive economics. Supply side defnitions are especially appropriate For frms Which are inVolVed up stream or only in parts oF the industry. The Focus oF attention and the industry defnition is on 30 Strategic Management the actiVities they perForm not the Whole chain or the doWn stream productmarKet. !s With VieWing a painting Broad one suBstitute narroW industry defnitions may all Be appropriate simultaneously. Market !n Industry is made up oF MarKets defned in terms oF customers andor products services offered and geographic region. In the banking Industry we have the base Markets of: investment banking, corporate banking, business banking and retail banking – each addresses a different customer target or need. In the tin plate can industry a supplier could sell their output to the beverage, food, pet food etc customer markets. MarKets can Be defned Broadly liKe retail BanKing or more narroWly i.e. priVate BanKing. 7hen defned Very narroWly they Become a marKet segment. -The Network, Multi-Sided Platform Market The Network market, connects buyers and sellers, with one side subsidising the other. ,oss ,eader Proft MaKer Google Metro newspapers ebay Shopping malls Users 2eaders "uyers Shoppers Advertisers Advertisers Sellers 2etailers The side of a Network market that gains more value from the other side’s presence is charged more (has lower price – elasticity). The overall network’s value being the square of the numBer oF users 2oBert ¯MetcalFes ,aW° . &reemium MarKets liKe SKype and SpotiFy seek to grow the number of users by offering free use subsidised by users who are willing to pay for premium content or services. Market Segment A Market Segment consists of a group of customers who have a similar set of needs, wants or functionalities. Private banking could be taken as a very broad Market Segment. More typically however, we view private banking as a market made up of certain customer segments crudely separated on Wealth and income criteria Who seeK diFFerent Benefts 31 Strategic Management from the service offer. The Served Market - Target all or a portion of the market? - The Served Market is the portion of the overall market that a business actively seeks to serVe. It is defned in terms oF - the customers and their needs, wants, functionalities - geography - the products and services offered Whilst a business will have a share of the overall market, positioning is much more concerned with the share of the Served Market the business actively targets. !uthors .ote ! SerVed MarKet Business defnition promotes Focus and the creation oF a distinctiVe strategy tailored specifcally For the customergeographyproduct serVice target. On the other hand such a narrow scope limits the horizons of the business. Jack Welch as the CEO of GE asked each business to “Become number one or two in every market we serve.” Later in his tenure he instructed all business units to re-defne their external scope so that market share fell below 10% - thereby broadening horizons. Gary Hamel6 also argues for defning the business’s product/market scope more broadly into the domain (Arena in our terminology) to extend the opportunity horizon. Rather than focus on one defnition of product/market scope our preference is to consider several scopes simultaneously. Markets of One To most customers hoW We defne the industrymarKet is not releVant this We do For our purposes. It is important to remember that each customer is unique. In industrial markets we sometimes build our business around individual customers with key account teams. With the rise of digital technologies many businesses are now customising their oFFers For indiVidual consumer marKet customers. The (ong +ong idtoWn alloWs customers to customise watches via the internet; Cole National analyses facial features and recommends the top ten glass frames from a catalogue of over 4,000: Fits.me scans body measurements and allows clothes to be ‘tried on’ in the virtual environment; EZface’s32 Strategic Management Virtual Mirror cosmetics kiosk allows people to try on makeup electronically. Whilst many businesses have always customised (i.e. bespoke tailors) the rise of the web and digital technologies haVe opened up many more possiBilities. "y interacting directly With the end user companies such as P' are increasingly co deVeloping products and promotion. Web 3.0 with computer generated information geared to the user will increasingly open up more opportunities. Markets of One to Markets of Many The web allows users to interact and collaborate on a scale never before seen. Individuals and communities Via communicationteXtpicturesVideos generate content Blogs wikis, media sharing sites) – the ‘participatory web’ or ‘Web 2.0’. ‘Markets’ morph from the Virtual. (oW to engage tap into and monetarise these selF created marKets is spaWning new business models, new forms of interaction. Refection (oW Would you defne your organisation²s eXternal enVironment Sector Arena Ecosystem - Direct: Suppliers, Competitors, Channels, Customers, Partners - Indirect: Complements - Wider Environment and Infrastructure Industry Market Market Segment Market of One What is your Served Market? !s preViously noted defnitions can Be Broad or narroW. There is no one ±right² defnition. Discuss defnitions With your colleagues and estaBlish a common VocaBulary. 5se defnitions releVant to the Question Being asKed.33 Strategic Management 5.2 The Arena Map of the Competitive Environment The Arena Map combines different views of the competitive environment into one diagram. For our earlier example of tin-plate cans the Arena would be packaging; the Industries tin plate aluminium glass plastic etc the marKets defned in customer terms Being BeVerages Food pet Food etc. The !rena Map also identifes Strategic 'roups competitors who approach the customer markets with similar strategies; there may be one or several groups. Finally we get to Served Market – the Market you target versus your direct and indirect Strategic Groups. (aVing constructed the !rena Map We seeK to - Quantify each component in terms of revenue and units - IdentiFy Where the proft is Being made - Introduce T2%.DS. 7here Was the !rena Map historically Where is it today hoW is it likely to develop? What are the strategic implications? Sector Arena Industry Industry Industry Industry Your Served Market Customer Markets Competitor Groups Complements Channels Suppliers Support Ecosystem – Environment/Infrastructure34 Strategic Management Key questions in the Arena Map include: - (oW Well are suBstitutes perForming in indiVidual customer marKets and What are the trends? - (oW Well are our industry Strategic 'roups perForming in indiVidual customer marKets and what are the trends? - What are the implications for us? To illustrate the two tabulations that follow consider the packaging Arena: - Size of customer market and share of substitute packaging technologies - Size of customer market and share captured by Strategic Groups. Market Use of Packaging Plot 2eVenue 5nits Proft Growth Trend Customer Market "eer Soft Drinks Food Pet Food Aerosols General MarKet 2eVenue Share % Market Units Share % Technologies Aluminium Tin-plate 2 piece Tin-plate 3 piece Glass Crowns Plastic Fibre Foil Other Strategic Group Market Position Plot 2eVenue 5nits #apacity Proft Growth Trend Customer Market "eer Soft Drinks Food Pet Food Aerosols General MarKet 2eVenue Share % Market Units Share % International Competitors National Competitors 2egional Competitors ,ocal Competitors35 Strategic Management Overview !s a continuum the eXact Boundary defnition is not critical What is more important is that the boundary selected is relevant to the question being asked. . The Section now progresses to outline frameworks that analyse parts of the competitive environment. Section 5-5.2 References 1 M. Porter, “Competitive Strategy, Techniques for Analyzing Industries and Competitors” - Free Press, 1980 2 T. ,eVitt ¯MarKeting Myopia° (arVard "usiness 2eVieW *uly !ugust 1 3 7.2othschild ¯Surprise and #ompetitiVe !dVantage° The *ournal oF "usiness Strategy 6ol .o 3 1 4 #. #hristensen and M. 2aynor ¯The InnoVators Solution° (arVard "usiness School Press 23 5 #. Shapiro and (. 6arian ¯The !rt oF Standard 7ars° #aliFornia Management 2eVieW 7inter 1 6 'ary (amel ¯,eading the 2eVolution° (arVard "usiness School Press 2 The Competitive Environment Defined in terms of: Size Geographic Scope Vertical Scope Product Scope Customer Scope Competitive Scope Technology employed Sector Arena Industry Market Market Segment Markets of `one' customer Ecosystem36 Strategic Management Refection (oW Would you apply the !rena Map to your oWn competitiVe enVironment Key Manual Concepts to Analyse the Competitive Environment: Profit Pool Map The 5/6 Forces Framework Strategic Group Analysis Imperatives and Key Success Factors Competitor Analysis Megatrends -The Wider Environment Political, Economic, Social, Technological, Environmental, Regulatory Scenarios and Sensitivities37 Strategic Management 5.3 The Proft Pool Map The Proft Pool Map1 Was introduced By /. 'adiesh and *. 'ilBert oF "ain #ompany. To construct a Proft Pool Map the frst step is to defne the stages in the Industry. The second step is to determine the reVenue and proftaBility oF each stage. "ain²s plot oF the 5S auto industry Proft Pool Map FolloWs /Verall reVenue For the industry at the time Was 1.1 trillion With proftaBility Billion. Car manufacturers and dealers accounted for almost 60% of the industry’s revenue. Proft on the other hand Was much more attractiVe in leasing and fnancial products such as insurance and loans. Not surprisingly the major manufacturers moved aggressively into these Proft Pools. The U.S. Auto Industry Profit Pool Share of Industry Revenue Operating Margin Auto manufacturing 0 10 15 20 5 25 0 100% New car dealers Used car dealers Auto loans Leasing Warranty Gasoline Auto insurance Service and repair Aftermarket parts Auto rental38 Strategic Management To construct the Proft Pool Map "ain outline Four steps Mapping a Proft Pool Step 1 Defne the pool Step 2 Determine the size of the pool Step 3 Determine the distribution of profts Step 4 Reconcile the estimates TASK Determine which value-chain activities in»uence your aBility to generate profts noW and in the future Develop a baseline estimate of the cumulatiVe profts generated By all proft pool activities Develop estimates of the profts generated by each activity Compare the outputs of steps 2 and 3 and, if necessary, reconcile the numbers GUIDELINES Take a broad view of the value chain; look beyond traditional industry defnitions Seek a rough but accurate estimate Shift between aggregation and disaggregation in your analysis If the numbers don’t add up, check all assumptions and calculations Examine your industry from three perspectives: your own company’s, other players, and the customers Take the easiest analytical routes available; go where the data are ,ooK at your oWn company’s economics frst then looK at large pure players, then at a sample of smaller players Collect additional data if necessary Talk to industry players and analysts to uncover new or emerging business models Try to take at least two different views of pool size – for example company-level and product-level If relevant data are unavailable, use proxies such as productlevel or channel-level sales 2esolVe all inconsistencies; don’t ignore them Don’t disaggregate activities more than necessary Focus on the largest components – for example, large companies, high-volume products; extrapolate smaller components from a sample Think creatively OUTPUT ,ist oF all Value chain actiVities in your proft pool (in sequential order) Estimate of total pool profts usually eXpressed as a range Point estimates of profts For each Value chain activity Final estimates of activity and total pool profts ProftaBility Will Vary By Proft Pool stage and also Within a stage. "ain stress the need to understand proft at each stage By customer group product category geographic marKet and channel (in addition we advocate by competitor). !n industry²s Proft Pools Will not Be static. In the 5S auto eXample the attractiVe proftaBility oF leasing encouraged incumBents to eXpand and attracted neW entrants. Increased capacity escalated competitiVe intensity driVing doWn prices and proftaBility. In determining hoW the Proft Pool is liKely to change 'ottFredson and SchauBert oF "ain239 Strategic Management construct historic and current Proft Pool Maps seeKing to understand What is causing reVenue and proft shiFts. They then monitor Four areas to Judge What the Future Proft Pool trends will be: - #ustomer BehaViourpreFerences - InnoVation in productprocess and Business model - "uyer and supplier poWer - 7ider enVironmental in»uences in the Political, Economic, Social, Technological, Environmental, 2egulatory P%ST%2 - and we would add competitor moves.40 Strategic Management Management Implications of Proft Pool Shifts41 Strategic Management "ain also draW attention to the need to identiFy ±choKe points² in our terminology areas oF ±strategic control² Which in»uence hoW proftaBility Will Be distriButed. #hoKe points include: patents; copyright; ownership of standards; control of supply; control of distriBution etc. 7e return to the area oF choKe pointsstrategic control in the 7orKshop . 'adiesh and 'ilBert conclude ¯(oW a company puts its proft pool insight to WorK Will of course, depend on the company’s competitive situation, capabilities, economics, and aspirations. "uilding an understanding oF the proft pool does not oBViate the need For good strategic thinKing. 7hat it does is put that thinKing on a frm Footing°3 Section 5.3 References 1 /. 'adiesh and *. 'ilBert ¯Proft Pools ! &resh ,ooK at Strategy° (arVard "usiness 2eVieW May *une 1 2 M. 'ottFredson and S. SchauBert ¯The "reaKthrough ImperatiVe° - Collins, 2008 3 /. 'adiesh and *. 'ilBert ¯Proft Pools ! &resh ,ooK at Strategy° (arVard "usiness 2eVieW May *une 1 Refection IF the Proft Pool concept is releVant i.e. We Would not use it in areas liKe proFessional serVices re»ect on hoW to construct the Proft Pool Map For your industry. (oW has the Proft Pool eVolVed oVer time hoW is it liKely to eVolVe 7hat are the implications For your organisation? 5.4 The Five Forces Framework Michael Porter introduced the &iVe &orces FrameWorK in 1 in the (arVard "usiness 2eVieW Which he updated in 21. (e also eXplains the FrameWorK in his teXt #ompetitiVe Strategy, Techniques for Analysing Industries and Competitors2 which remains a best seller. The framework, which builds on industrial organisation economics, is in our experience, by far and away the most widely applied industry concept.42 Strategic Management Porter argues that when analysing industries the temptation is to focus in immediately on eXisting competitiVe dynamics and the resultant leVels oF proft achieVed By industry participants (captured by the frameworks central Force of ‘rivalry among existing competitors² . Porter hoWeVer decomposes proft potential as measured By return on invested capital into its constituent parts of price, cost and investment level and argues that to understand the behaviour of each requires a much broader perspective that draws on the underlying economics of the industry. The underlying economics are explained by relating competitors’ positions to that of ‘suppliers’ and ‘buyers’ whilst being mindful of the potential impact of ‘new entrants’ and ‘substitutes’. Taken in combination the strength of the ‘Five Forces’ explains the level of cost and investment necessary to create value for the buyer and determines who keeps the Value created and hence the long term proft potential For industry participants. The picture of extended rivalry portrayed by the ‘Five Forces’ framework hence views the collectiVe proft potential oF an industry as a Function oF competitors poWer in a negotiating process vis a vis suppliers and buyers coupled with the ability to insulate that proft potential From Being undermined By neW entrants and suBstitutes. ! ±fVe star² industry For proft potential Would Be characterised as one Where competitors Face WeaK suppliers and Buyers haVe signifcant Barriers protecting them From neW entrants Face no suBstitution threat and orchestrate gentlemanly Forms oF competition. "y Way Porter’s Five Forces Framework THE LONG-TERM PROFIT POTENTIAL OF AN INDUSTRY DEPENDS ON THE STRENGTH OF M.E. PORTERS FIVE FORCES THREAT OF NEW ENTRANTS BARGAINING POWER OF SUPPLIERS RIVALRY AMONG EXISTING COMPETITORS BARGAINING POWER OF BUYERS THREAT OF SUBSTITUTE PRODUCTS OR SERVICES • The ‘SIXTH FORCE’: How the wider environment shapes the other 5 Forces How Complements interact to create value43 Strategic Management oF contrast a ±fVe striKe² industry Would Be characterised as one Where competitors are squeezed by powerful suppliers and buyers with pricing undermined by new entrants and substitutes with competition on a cut-throat basis. In order to Be aBle to Judge the poWer and in»uence oF each oF the &orces it is necessary to understand the structural determinants that lie behind them - this is the raw material of industry analysis. !s much as possiBle the structure should Be Quantifed rather than leaving the analysis qualitative. The structural determinants of each Force are now considered in turn. Buyer Power Proft For a company results When a Buyer group is prepared to pay a price For its products and services that exceeds the total costs of delivering them. Powerful buyers can negotiate aWay industry proftaBility By Forcing doWn prices or By adding to the cost Base or investment requirement by demanding higher quality and additional services. A buyer group will intrinsically have a more powerful negotiating position and a propensity to exercise that power under the following conditions: - They are large, few in number and concentrated relative to the seller group. - They operate under conditions of full information. - They can readily switch between sellers with numerous sourcing options available. - They can credibly threaten backward integration (make versus buy) with no threat of forward integration by sellers. "uyers² propensity to eXercise their poWer Will Be heightened When - The purchase is important representing a signifcant element oF cost. - The purchase has little impact on their oWn QualityserVice oFFer approaching that oF a commodity. - Intense competition in their own industry provides the incentive to squeeze sellers. !uthors .ote "uyers may negotiate aWay proft But they are also the source oF proft Supplier Power The inputs into a company which include raw materials, energy, labour and capital are classed as suppliers in the Five Forces framework. When suppliers have a scarce or important resource for the operations of a company they will be in a position to negotiate44 Strategic Management aWay industry proftaBility By demanding higher prices or By Being aBle to oFFer loWer cost products and services. Structural factors which make suppliers powerful are similar to those already outlined for buyers, namely: - The input is scarce i.e. shortage oF material energy laBour or fnance . - The buyer industry is of minor importance. - The buyer industry is heavily reliant on the input for its performance. - The suppliers are large and few in number relative to the buyer industry. - The supply industry is insulated From neW entrantsBacKWard integration and substitution threats. - Suppliers can pose a credible threat of forward integration. - The buyer industry is locked in by a differentiated offer, patents or the like. - The buyer industry faces high switching costs. Threat of Entry The main inducements for entering an industry are normally its growth rate and proftaBility. .eW entrants Bring With them resources and neW capacity. In trying to establish an industry position the danger is that new entrants escalate the level of competitiVe intensity and in so doing Bid doWn proftaBility and the prospects For eXisting incumbents. For above average returns to persist entry barriers need to be in place to insulate position and deter new competitor entry: Industry closed or controlled: - Government regulation protects. - Incumbents control or have secured favourable locations, access to suppliers, distributors and buyers. Proprietary knowledge: - Patents, copyright, experience or learning that are proprietary. "uyer loyaltydiFFerentiation - From past investments coupled to switching costs. (igh cost oF entry - Capital requirement large, up front and unrecoverable. Authors Note: In our experience capital requirements are exaggerated as an effective Barrier to entry. ,arge capital reQuirements mean you Face larger Better fnancially endowed competitors.45 Strategic Management Economies: - Economies of scale give existing competitors lower unit costs. - Economies of scope in shared activities give lower cost, enhanced ability to differentiate. Expected retaliation: Size, resources, commitment and history of responding forcibly. IF the entry Barriers that protect an industry are oVercome and proftaBility undermined a company can stay and fght or seeK to redeploy resources or eXit. The aBility to eXit Will be compromised by factors such as the emotional ties to the business; its importance to the company; interrelationships with other businesses; the amount of sunk investment; the specialised nature of investment and regulatory requirements. The key strategic issue in many industry situations is not entry barriers, but exit barriers. (Managers – and students tend to neglect the issue oF eXitredeployment oF resources. /ne oF our clients on the other hand insists that each business strategic plan includes a Section on how to eXit or redeploy resources rapidly . The strategic trap in the fgure BeloW is For industry participants to have low entry barriers and be locked into the industry with high exit barriers. Threat of Substitutes A substitute product or service meets similar buyer needs to the industry in question. Attention is on the buyer need, want or function performed and not the form - hence in certain applications aluminium is a suBstitute For steel. #lose suBstitutes limit the proft potential of an industry by placing a ceiling on prices. Once beyond this ceiling sales fall off unless buyers are locked in or unwilling to change because of switching costs. In monitoring the threat oF suBstitutes it is important to Judge the priceperFormance trade-off and track the trends in each (refer to Arena analysis). The substitution Value Entry Versus Exit Barriers HIGH LOW LOW HIGH EXIT BARRIERS ENTRY BARRIERS PREMIUM HIGH, STABLE RETURNS WATCHOUT HIGH, RISKY RETURNS SUSTENANCE LOW, STABLE RETURNS WATCHOUT LOW,RISKY RETURNS46 Strategic Management Map shown below shows that whilst aluminium is more expensive than steel in the beverage can market, it has considerable performance-in-use advantages. Under these conditions aluminium offers buyers positive value and will gain at the expense of steel. In response steel suppliers need to reduce price, increase performance, or improve some combination of both to retain business. Rivalry among existing competitors Certain industries are characterised by ‘gentlemanly’ forms of competition and attractive proftaBility. Participants compete in an orderly manner or in Ways that do not disturB the established equilibrium - not having to resort to price based competition. In other industries competition is cut throat With head on con»ict FreQuently Based on price. 2iValry increases When some oF the FolloWing apply - There are numerous equally balanced competitors. - Slow industry growth results in a zero sum game. - There are high fXed or storage costs. - There is overcapacity or capacity is augmented in large increments creating imbalances. - There is a lack of differentiation or switching costs resulting in price based competition. - Competitors pursue the same strategy. - Competitors have different objectives (some seek to grow aggressively, others harvest by putting up prices). - The industry is important to incumbents. - Exit barriers are high.47 Strategic Management The ‘Sixth’ Force - the implications of the Wider Environment and Complements The prospects of an industry are closely tied to the state of, and trends, in the wider enVironment. 2ather than VieW the Wider enVironment as a ±siXth &orce² it is Better to systematically consider its impact on each of the ‘Five Forces’ in turn. In summary the Key Wider enVironmental in»uences can Be classifed under the headings oF Political %conomic Social Technological %nVironmental 2egulatory. In an oVerVieW sense it is useFul to consider hoW the Wider enVironment comes together to in»uence industry demand and cost to serVe BeFore turning to a more specifc considerations oF how it affects each Force in turn. !n additional ±&orce² in the ±siXth &orce² Which in»uences the other &iVe &orces is ‘Complementary’ products and services that make our product or service more attractive. Where complements are closely related (i.e.: hardware and software, photocopiers and paper) value is created by complements working together, individually they are close to worthless. Complements are not necessarily good or bad, we have to understand how they in»uence the &iVe &orces and hoW Value Will Be shared BetWeen the complements. Applying The Five Forces Framework to an Industry There is a great deal of detail and complexity involved when analysing industry dynamics and their relationship to the wider environment. The Five Forces framework handles this compleXity By concentrating on the Key &orces that determine industry proft potential whilst capturing the detail behind each Force by considering its structural determinants. !s the FrameWorK simplifes compleX relationships it is easy to use and easy to aBuse. To gain real insight as opposed to superfcial understanding the FolloWing systematic application procedure is recommended: 1. (aVe a reasonaBle KnoWledge Base on the industry and specifc companies at the outset. 2. Form a general view on the attractiveness of the industry, the strength of each Force, the associated risks. 3. Formally document the structural determinants of each Force. Note: rarely will the structural determinants all be good or bad (star or strike). You may wish to diagrammatically display the importance of each Force as being larger or smaller. . #oncentrate attention on the more signifcant &orces noting the interrelationships between Forces.48 Strategic Management 5. Evaluate how the ‘sixth Force’ of the Wider Environment and Complements affects each of the other Five Forces. 6. Introduce momentum by comparing the Five Forces historically, currently and their likely development in the future (Note: the Forces are affected by both competitive actions, complements and the wider environmental impact). . 2eVisit 2 this time noting Key driVers oF industry attractiVeness hoW they are changing and note the managerial implications and challenges. . &ormally list a frm²s strengths and WeaKnesses against each &orce noW and in the future. . DeBate strategies to manage the frm²s position vis a vis the &iVe²SiX² &orces. The options fall broadly into: a. Seek to defend existing stance by building on strengths or repairing weaknesses. b. SeeK to maKe &orces more FaVouraBle By changing or in»uencing structural determinants. c. Consider repositioning options to where the Forces are weaker and hence more FaVouraBle to the frm. 10. Make recommendations on how the company should handle the Forces constantly monitoring for change. The step by step procedure advocated ensures that facts and judgements are made explicit as a basis for the managerial debate - how to handle the Five Forces. Steps 9 and 10 are the critical steps. Discussion The Five Forces framework is used to understand the underpinnings of competition, the root causes oF proftaBility and hoW a company should deFend in»uence or re position against the &orces. The FrameWorK is normally applied at an industry leVel. (oWeVer it is equally valid to apply the framework at a Market, Served Market, Market Segment or even individual competitor level. 7e fnd that the &iVe &orces FrameWorK helps managers to ±stand BacK² to consider the basic structure of the industry and how they should seek to manage their position. (oWeVer there is a WeaKness to ±standing BacK² not all Buyers are the same immediate versus end users; buyer segments); there are different types of supply sources (materials, energy, labour etc.) and suppliers have suppliers. We put a dividing line through the buyer and supplier diagram boxes to remind managers not to over-simplify. It is also49 Strategic Management useful to combine the Five Forces with a block diagram that lists supply input in order of importance, competitor strategic groups or individual competitors in order of importance and buyer segments or individual buyers in order of importance. The Five Forces framework as described thus far is based on a combative - power view of competition: someone wins, someone loses. This is not always the case. Take for example the residential property market. When activity levels are high (usually when the economy is growing) suppliers of materials such as bricks, cement and labour earn attractive returns. Companies involved in constructing the property also do well as the activity levels give room for new entrants whilst allowing higher supplier costs to be passed onto the end use market. Middle-men like estate agents thrive in a seller’s market and buyers at the end of the chain accumulate wealth as property prices increase. When activity leVels WeaKen hoWeVer the Whole chain collapses. "uyers see property prices Fall creating negative equity; estate agents do not have the turnover to cover costs; construction companies are forced to cut back with land banks falling in value and suppliers are forced to retrench and cut prices. The comBatiVe ±I 7in 9ou ,ose² VieW oF Business also needs to Be treated With caution. Many popular management approaches such as TQM, JIT, supply-chain management, preferred supplier selection and time-based management draw much more on a collaborative view of business. The focus is on maximising the system wide co-operation in relationships between buyers and suppliers to create a ‘Win-Win’ situation. Take for example the extreme case of a company being dependent on one supplier and one buyer. The combative view would argue ceteris paribus that the level of dependence exposes the company to great risK and high Buyersupplier poWer. /n the other hand this leVel oF Focus has potentially many Benefts to all parties deVelopment eFFort is customised and targeted; the need for marketing and administration is reduced; smoother scheduling will reduce working capital requirements and increase production runs. If the additional Benefts can Be Fairly shared and relationships maintained there is much to commend the collaborative view. That this approach to Business has much to commend it is confrmed By eXamining the proft conseQuences oF Being dependent on a FeW customers in the PIMS data base3. The most proftaBle Businesses in the fgure BeloW are those that haVe the most concentrated customer bases (there is naturally a wide distribution around the average).50 Strategic Management Whether one considers chain-collapse or collaboration as opposed to a combative approach to business the Five Forces framework remains an excellent vehicle to understand the determinants oF industry proftaBility and hoW a company should seeK to handle its industry circumstances. Authors Note: The Five Forces framework is sometimes criticised by academics for being static and not helping to eXplain hoW profts Will Be shared BetWeen competitors and complements. We have little time for such criticism. - What were the Five Forces historically? How have they changed (and why)?How are they likely to change? How should you defend, infuence, seek to reposition? (no longer static!) - The Five Forces framework was clearly not designed to explain how proft will be shared between competitors and complements. However, it does give insights by asking which competitor is better positioned to manage the 5/6 Forces. In addition, as already noted, the framework can be applied at different levels: industry, market or individual competitor. Risk in the Five/Six Forces "anKs are concerned With the risK their clients Face in the industry. %ach oF the &orces is audited for risk.51 Strategic Management "uyers Concentration of buyer power; ease of switching; loyalty; relationship quality; health of buyers business or spending power, prospects etc. Suppliers Concentration of supplier power; ease of switching; availability; cost and Quality competitiVeness risK oF ForWard integration supplier proftaBility etc. Competitive Intensity ,eVel oF groWth cyclicality seasonality utilisation price trend proft achieved; share trend; converged competition, ability to sustainably compete etc. Substitutes Availability; price:performance stance; value proposition; ease of switching etc. New Entrants "arriers to entry Barriers to eXit aBility to redeploy resource aBility to variabilise cost structure etc. Environmental #ountryregion staBility Business cycle sensitiVity Political %conomic Social Technological %nVironmental and 2egulatory risK on demand and cost. Complements negotiating power. Section 5.4 References 1 M. Porter, “The Five Competitive Forces That Shape Strategy” (arVard "usiness 2eVieW *anuary 2 2 M. Porter, “Competitive Strategy, Techniques for Analyzing Industries and Competitors” - Free Press, 1980 3 !uthors research on the Proft Impact oF MarKet Strategy PIMS dataBase Refection Apply the Five Forces framework to your industry – or market, or your own business. 5.5 Strategic Groups The frms in an industry With diFFerent histories resource profles and outlooKs may diFFer markedly in their strategic approaches and the dimensions on which they seek to gain competitiVe adVantage. 7hen a numBer oF frms adopt a similar strategic approach on similar dimensions they are termed a ‘Strategic Group’. An industry may be made up of one, or more usually several such groups. With more than one strategic group in situ it is useful to understand the basis of each groups approach and assess the relative merits of the approaches taken. Strategic Group analysis is the intermediate stage between industry and company analysis. It alloWs the oVerall industry analysis insights to Be fne tuned By addressing questions such as: - Which Strategic Groups are more attractive and why?52 Strategic Management - Which Strategic Groups are strengthening position at which Strategic Groups expense? - What barriers are keeping Strategic Groups apart? Are these barriers weakening, and if so with closer proximity which group will be more advantageously placed? - What are the critical requirements for successful participation in each Strategic Group and how are they evolving? - Are there opportunities to shift between groups or break out to create a new group? (oW are Strategic 'roups seeKing to shape the Future industry eVolution Mapping Strategic Groups IndiVidual frms and ultimately the Strategic 'roups they Belong to can Be distinguished By classiFying them according to their scope resource profle the strategy pursued and type oF competitiVe adVantage sought. The fgure BeloW proVides a listing oF some oF the factors that can be employed to differentiate competitive approaches and construct a simple two axis Strategic Group Map. When customer attributes are selected a Perceptual Map results as used in Marketing. For clothing retailers a perceptual map might be constructed With Price (igh to ,oW and Style Traditional Vs. &ashionaBle . Factors that help to distinguish Strategic Groups1 Scope taken: - Geographic spectrum from local, regional, national, international, global. - #ustomer Focus adopted large medium small heaVy userlight user nationalinternational Focus on trade (push) versus focus on end user (pull). - Product scope narroWBroad range depth Versus Breadth standardised Versus customised. Competitive stance: - 1ualityserVice oFFer premium mass marKet economy Full serViceunBundled BrandedunBranded. - 2elatiVe price high aVerage loW. - Value offer (combines quality and price). - Discretionary eXpense marKeting 2D neW products high or loW. - 2elatiVe costtechnology position loWmediumhigh leaderFolloWer. 2esource profle - 2elatiVe siZe sharehighaVerageWeaK. - Degree of vertical integration: forward to customer and backward to supply. - #ommitment oF fnance people and materials large scale to minor player. - "acKing By parent or goVernment insignifcant to suBstantial inVolVement. Selecting the factors to draw a Strategic Group Map is a creative, iterative process. The aim is to clearly show the different competitive approaches in the industry. The understanding gained when conducting the overall industry analysis should help pinpoint which select list of factors will be useful in separating out types of competitor and competitive53 Strategic Management approach taken. Several factors may be used to separate Strategic Groups; when this is the case we construct Spider Plots or collapse factors into a composite dimension (The Value Map plots price against a composite dimension of performance). A chemical manufacturer we worked with plotted competitors on the composite dimensions Manufacturing and Market Position. Manufacturing Position was judged by factors such as: scale of operation; announced capacity additionclosure relatiVe cost plant ageeFfciency upstream integration technology employed etc. Market Position was judged by factors such as: global share; geographic coVerage share trend maJor accounts Wonlost relatiVe price aBility to provide solution etc. The Gartner Magic Quadrant2 and Forresters Wave3 are popular composite dimension Strategic 'roup displays used to position technology players in a specifc marKet. The Gartner Magic Quadrant qualitatively rates technology providers on two dimensions: ‘Completeness of Vision’ and ‘Ability to Execute’. Strong Weak Weak Strong Market Position Manufacturing Position54 Strategic Management ,eaders: score well on both dimensions and are well positioned to satisfy current and future needs. Challengers: execute well, or serve a segment well, but do not demonstrate an overall grasp of future market direction Visionaries: understand tomorrow’s markets but as yet do not execute well Niche Players: typically focus on a segment or are new participants yet to build overall Vision or Execution ability. 'artner haVe mentioned a fFth category Strategic 'roup ±Deep ,asting In»uence on #ulture² Which is plotted aBoVe and to the right oF the ,eaders Quadrant. Social media providers such as Facebook will no doubt be positioned in the new category. The Gartner Magic Quadrant Tata Consultancy Services Ability to Execute Completeness of Vision Niche Players Visionaries Knightsbridge Solutions Bearing Point Cap Gemini IBM Business Consulting Services Accenture Deloitte Consulting Hitachi Palladium Group Satyam Computer Services Navigator Systems Cognizant Technology Solutions Rapidigm Wipro Technologies Infosys Technologies Conversion Services International Challengers Leaders High Low55 Strategic Management To qualitatively rate each dimension Gartner have the following guidelines: Completeness of Vision Market Understanding Ability of the vendor to understand buyers' wants and needs and to translate those into products and services. Vendors that show the highest degree of vision listen and understand buyers' wants and needs, and can shape or enhance those with their added vision. Marketing Strategy A clear, differentiated set of messages consistently communicated throughout the organisation and externalised through the Web site, advertising, customer programs and positioning statements. Sales Strategy The strategy for selling product that uses the appropriate network of direct and indirect sales, marketing, service and communication affiliates that extend the scope and depth of market reach, skills expertise, technologies, services and the customer base. Offering (Product) Strategy The vendor's approach to product development and delivery that emphasises differentiation, functionality, methodology and feature set as they map current and future requirements. Business Model The soundness and logic of the vendor's underlying business proposition. Vertical/Industry Strategy The vendor's strategy to direct resources, skills and offerings to meet the specific needs of individual market segments, including verticals. Innovation Direct, related, complementary and synergistic layouts of resources, expertise or capital for investment, consolidation, defensive or pre-emptive purposes. Geographic Strategy The vendor's strategy to direct resources, skills and offerings to meet the specific needs of geographies outside the `home' or native geography, either directly or through partners, channels and subsidiaries as appropriate for that geography and market. Ability to Execute Product/Service Core goods and services offered by the vendor that compete in/serve the defined market. This includes current product/service capabilities, quality, features sets, skills etc., whether offered natively or through OEM agreements/partnerships as defined in the market definition and detailed in the sub-criteria. Overall Viability (Business Unit, Financial, Strategy, Organisation) Viability includes an assessment of the overall organisation's financial health, the financial and practical success of the business unit, and the likelihood of the individual business unit to continue investing in the product, to continue offering the product and to advance the state of the art within the organisation's portfolio of products. Sales Execution/Pricing The vendor's capabilities in all pre-sales activities and the structure that supports them. This includes deal management, pricing and negotiation, pre-sales support and the overall effectiveness of the sales channel. Market Responsiveness and Track Record Ability to respond, change direction, be flexible and achieve competitive success as opportunities develop, competitors act, customer needs evolve and market dynamics change. This criterion also considers the vendor's history and responsiveness. Marketing Execution The clarity, quality, creativity and efficacy of programs designed to deliver the organisation's message in order to influence the market, promote the brand and business, increase awareness of the products, and establish a positive identification with the product/brand and organisation in the minds of buyers. This `mind share' can be driven by a combination of publicity, promotional, thought leadership. Word-of-mouth and sales activities. Customer Experience Relationships, products and services/programs that enable clients to be successful with the products evaluated. Specifically, this includes the ways customers receive technical support or account support. This can also include ancillary tools, customer support programs (and the quality thereof), availability of user groups, service-level agreements. Operations The ability of the organisation to meet its goals and commitments. Factors include the quality of the organisational structure including skills, experiences, programs, systems and other vehicles that enable the organisation to operate effectively and efficiently on an ongoing basis.56 Strategic Management Gartner stress that there is no ideal position on the Magic Quadrant. Different positions appeal to different customer requirements. Given the qualitative nature of the scoring and the in»uence on potential customer decision maKing it is not surprising to fnd many of the providers plotted disagreeing with their location in the Magic Quadrant Plot. The Forrester Wave3 qualitatively rates technology providers in a similar manner. &orrester defne and eValuate the criteria For #urrent /FFering and Strategy. #lients can alter criteria and weights. Typical criteria to judge Strategy on include: product vision, sales and implementation strategy channel partnerships fnancials installed Base employee base and cost. Section 5.5 References 1. M. Porter, “Competitive Strategy, Techniques for Analyzing Industries and Competitors” - Chapter 7: Structural Analysis within Industries - The Free Press, 1980 2. S. Bresciani, ‘Gartner Magic Quadrant and Hype Cycle’ Case study: reference 908-029-1 3. S. Bresciani, ‘Gartner Magic Quadrant and Hype Cycle’ Case study: reference 908-029-1 Forrester Wave Strategy Weak Strong Current Offering Weak Strong Risky Bets Contenders Strong Performers Leaders57 Strategic Management Refection What are the key Strategic Group Maps for your competitive situation? What insights are to be gained? Authors Note: Comparing Gartner Magic Quadrant plots over time highlights change in competitor positions. 5.6 Strategic Imperatives and Key Success Factors (KSF’s) Strategic imperatives and KSF’s at an industry or strategic group level seek to identify the ‘recipe for success’. A strategic imperative is a high level requirement of success, a KSF more specifc. The KSF’s for a ‘Stalemate’ heavy asset commodity producer seeking to attain low cost may include: Superior technology Process innovation capability Quality in manufacture (igh utilisation oF fXed assets ,oW cost plant locations ,oW cost product design (igh laBour productiVity ,oW distriBution costs ,oW oVerhead Financial strength (oWeVer this type oF thinKing in isolation is Very dangerous in strategy. The danger is all competitors have the same strategic imperatives and the same KSF’s and converged, commoditised, destructive forms of head to head competition result. Strategic Imperatives and KSF’s are related to the external situation but should be driven by a company’s chosen strategy. For example, in the ‘Stalemate’, our chosen strategy may not be ‘overall low cost’ but Be product innoVation or eXpanding the productserVice oFFer to proVide the customer with a total solution. More simply our imperative may be to engineer a ‘competitive58 Strategic Management understanding’. In each case the KSF’s will be radically different. (ence at this stage oF the analytic process We are Just starting to consider What competitive approaches and ‘recipes for success’ there are. The decision of what our strategic imperatives and KSF’s are can only be taken when we have decided on our strategy. /ur preFerence is to set FeW strategic imperatiVes. (aVing FeW in numBer promotes focus on what are the key drivers of our strategic approach. When it comes to KSF’s most companies we work with select between 5 to 7. The average human being can keep 7 factors in focus simultaneously. Our preference with KSF’s is however to select as many as are needed to fairly adequately describe the key drivers of the strategic approach. This could Be a FeW Which has the Beneft oF Focus and ease oF communication. More typically however 10-20 KSF’s result. Such a number is too large for most managers to retain so a management process needs to Be put in place. In &rance the TaBleau de "ord has long Been used to this end. In the last tWenty years the "alanced Scorecard has also gained great popularity in outlining a strategy in terms of KSF’s. Prior to the Scorecard many companies employed Management By /BJectiVes M"/ methodologies. Though only at a tentative stage it is useful to explore KSF’s in more depth. Thompson and Strickland1 provide a comprehensive, but not exhaustive list of ‘types of KSF’s’ which is reproduced below.59 Strategic Management Types of Key Success Factors Technology-Related KSFs Scientifc research eXpertise important is such felds as pharmaceuticals medicine space eXploration other ¯high tech° industries). Production process innovation capability. Product innovation capability. Expertise in a given technology. Manufacturing-Related KSFs ,oW cost production eFfciency achieVe scale economies capture eXperience curVe eFFect . Quality of manufacture (fewer defects, less need for repairs). (igh utiliZation oF fXed assets important in capital intensiVehigh fXed cost industries . ,oW cost plant locations. Access to adequate supplies of skilled labour. (igh laBour productiVity important For items With high laBour content . ,oW cost product design and engineering reduces manuFacturing costs . &leXiBility to manuFacture a range oF models and siZestaKe care oF custom orders. Distribution-Related KSFs ! strong netWorK oF Wholesale distriButorsdealers. Gaining ample space on retailer shelves. (aVing company oWned retail outlets. ,oW distriBution costs. Fast delivery. Marketing-Related KSFs A well-trained, effective sales force. Available, dependable service and technical assistance. !ccurate flling oF Buyer orders FeW BacK orders or mistaKes . "readth oF product line and product selection. Merchandising skills. !ttractiVe stylingpacKaging. Customer guarantees and warranties (important in mail-order retailing, big ticket purchases, new product introductions). Skills-Related KSFs Superior talent (important in professional services). Quality control know-how. Design expertise (important in fashion and apparel industries). Expertise in a particular technology. Ability to come up with clever, catchy ads. !Bility to get neWly deVeloped products out oF 2D phase and into the marKet Very QuicKly. Organisational Capability Superior information systems (important in airline travel, car rental, credit card, and lodging industries). Ability to respond quickly to shifting market conditions (streamlined decision-making, short lead times to bring new products to market). More experience and managerial know-how. Other Types of KSFs &aVouraBle imagereputation With Buyers. Overall low cost (not just in manufacturing). Convenient locations (important in many retailing businesses). Pleasant, courteous employees. !ccess to fnancial capital important in neWly emerging industries With high degrees oF Business risK and in capital intensive industries). Patent protection.60 Strategic Management The list is useFul in Forcing one to Be specifc and eXplicit For a particular situation. %ach category should be reviewed and the more relevant factors extracted. Take for example ±6olume² patented pharmaceutical drugs. "road strategic imperatiVes Would include - Single minded pursuit of leadership. - Clear number one status. - Financial power, resource and commitment to match aspirations. - Constantly seek to raise the stakes by: 'reater eXpenditure on marKeting 2D neW products to achieVe higher Quality. - Provide an offer the customer cannot refuse (unique and more effective therapeutic treatment). - Seek to control distribution. - Willingness to pre-empt. ,ong term VieW oF pay oFF. - Secure and manage the ‘virtuous cycle’. The Thompson and StricKland list can noW Be used to »esh out the detail. "eFore reading on please reVieW the list and select What you consider to Be the 1 most important KSF’s for a patented drug. KSF KSF’s selected 1 2 3 4 5 6 7 8 9 10 There is no ±right ansWer² it is a matter oF Judgement and the great Beneft is that the list makes this judgement explicit. Our view would be: Technology Is clearly important in the industry. &irst rate ±scientifc research eXpertise² 1 is reQuired to deVelop superior drugs in the frst instance BacKed By ±innoVation capaBilities² (2) and ‘expertise in given technologies’ (3). Manufacturing: Typically only accounts for a small proportion of a pharmaceutical drugs total cost. The key is to have ‘quality of manufacture’; better still if protected by process patents (4).61 Strategic Management Distribution: To achieve global mass market distribution ‘a strong network’ (5) will be needed often managed or ‘owned by the company’ (6) to ensure standards are adhered to and technical support given. Marketing: To support users a ‘well trained, effective sales force’ (7) needs to be in place that is ‘available, giving dependable service and technical assistance’ (8). SKills related The Key sKill is the ±aBility to get neWly deVeloped products out oF the 2D phase and into the market very quickly’ (9). /rganisational capaBility To deliVer on the +ey Success &actors already specifed and in general to have ‘more experience and managerial know how’ (10). Other: The critical factor is the ‘patent’ (11) without this the power volume formula begins to fall apart. Favourable therapeutic image is important to get access to the customer 12 . &inally this is a high staKes game Which reQuires access to fnancial capital13 . We chose 13! All the factors are important - some more so. Could we stress the list is not comprehensive. A good case could be made for factors such as being able to work with regulatory agencies (getting drug approval with bodies like the FDA); creating and managing alliances with competitors in order to achieve the KSF’s; having a strong new drug pipeline; ability to acquire and integrate effectively; having bio-tech capability and so forth. The KSF’s are also not static. Consider what happens when the drug goes off patent and becomes a generic – Stalemate, ‘me-too’ forms of competition ensue. With low cost and operational eFfciency the +S&²s perhaps the most important category oF Factor in the Thompson and Strickland list becomes manufacturing backed by distribution. In the other types of factors the ‘overall low cost’ position (not just in manufacturing) is clearly critical. !s +S&²s change the frm needs to master neW sKills iF it does not competitiVeness is not maintained. The paradox in many situations is that the more successful you are on certain +S&²s the more diFfcult you Will fnd to change to others. In our eXample the high cost marKeting and research pharmaceutical company Would haVe enormous diFfculty in making the transition to a low cost lean and mean generic supplier - radically different +S&²s culture organisation systems and resource profle are noW reQuired. MoVes in this 62 Strategic Management direction are likely to be via acquisition or alliance. Can we stress, however, we still have to select our strategy so this exercise has only set our ±sighters². In addition can We stress the Thompson StricKland list Whilst a good starting point, is far from being comprehensive, customisation to your own situation is required. Once we have selected the KSF’s for our strategy the next step is to articulate Key Performance Indicators (KPI’s). What are those indicators that improve the KSF? KPI’s are frequently supported by Performance Indicators (PI’s) that keep a KSF on track. In assessing +PI and PI perFormance +ey 2esult Indicators +2I²s and 2esult Indicators 2I²s are set. In the 1²s²s many companies managed their chosen strategies through the ImperatiVe +ey Success &actors +ey PerFormance Indicator +ey 2esult Indicator process. From our experience far less do so today. It remains in our view a powerful process to guide the execution of a strategy – it helps to build the bridge between strategy and implementation. 1. State strategy - set objectives 2. Outline strategic imperatives - set objectives 3. Outline Key Success Factors - set objectives 4. Specify Key Performance Indicators, Performance Indicators - set objectives, progress indicators, assign responsibility, develop action programmes, commit resource 5. &eedBacK 2eVieW oF +ey 2esult Indicators and 2esult Indicators IncentiVe Mechanism Note: the steps interact with each other Section 5.6 References A. Thompson and A. Strickland, “Strategic Management, Concepts and Cases” - Irwin, 1999 Refection What are your KSF’s?63 Strategic Management 5.7 Competitor Analysis “It is from the character of our adversary’s position that we can draw conclusions as to his designs and will therefore act accordingly” - Karl Von Clausewitz To Formulate a strategy in the frst instance reQuires an understanding oF the game how to play and how to win. One’s own position and that of competitors is critical to understand in deciding how to position. Strengths and weaknesses emerge. Positioning a business to draw upon its strengths whilst exploiting competitive weakness is at the heart of competitive strategy and the pursuit of advantage. M. Porter1 argues that the objective of competitor analysis is: To deVelop a profle oF the nature and success oF liKely strategy changes each competitor might make. - Understand each competitor’s probable response to the range of feasible strategic moVes other frms could initiate .ote 'ame theory . - Understand each competitor’s probable reaction to the array of industry changes and broader environmental shifts that might occur. The emphasis in each case is gaining an insight into the future. Predicting what types of strategy will be successful, which will not; what actions to take, what actions to avoid; whether the game is moving to ones strengths or weaknesses, and as Karl von Clausewitz observes ‘once the opposition’s designs are known one can act accordingly’. Despite the clear need to know the enemy as oneself, competitor analysis in many companies is not systematically and continuously carried out. Strategy often being based on implicit assumptions, myths and hearsay – or simply an internal focus. It would Be Foolhardy to fght a War Without intimate KnoWledge oF the enemy and the same is true in business. A good question to ask of a company’s staff is; ‘have any of you worked For a competitor² IF the ansWer is aFfrmatiVe the neXt Question is ±has anyone picKed your brain to learn more about your previous employer?’ Quite often the answer is, ‘no’ (competitive or individual legal restrictions may prevent this question from being asked). Other companies seek to recruit competitors’ staff just for this purpose. 7e see the Key Benefts oF understanding competitors as Being that it - ensures an external orientation - introduces realism, avoids dangerous assumptions64 Strategic Management - asks and seeks to answer the question how to get advantage? - Provides a method to learn (elps set oBJectiVes monitor progress - Avoids complacency Competitive understanding can be powerful motivator. For many people the three key job motivators are: - Doing the job the way you believe it should be done - Doing the job better than competitors - Doing the job the way the customer wants it !t %merson2 eVery shop »oor employee must Be aBle to ansWer Four Questions 1. Who is the enemy? 2. Do you understand the economics of your job? 3. What cost reduction are you currently working on? (to ensure Emerson extends its lead or catches up with competitors) . (aVe you met With your managers in the last siX months In part to reVieW the frst three questions) (aVing conducted an in depth competitor analysis it is useFul to Formally audit the frm²s relative position against the Key Success Factors of its strategy and its relative strengths and weaknesses. A useful check sheet to this end has been provided by M. Porter3 and is reproduced in the fgure BeloW. Section 5.7 References 1. M. Porter, Competitive Strategy, Techniques for Analysing Industries and Competitors, Chapter 3: A Framework for Competitor Analysis - Free Press, 1980 2. C. Knight and D. Dyer, “Performance Without Compromise” (arVard "usiness School PuBlishing 25 3. M. Porter, Competitive Strategy, Techniques for Analysing Industries and Competitors, Chapter 3: A Framework for Competitor Analysis - Free Press, 1980 Refection Who are your key competitors? Do you understand them well enough?65 Strategic Management What are your strengths and weaknesses? (refer to M. Porter’s check sheet) Areas of Competitor Strengths and Weaknesses P2/D5#TS Standing of products, from the user’s point of view, in each market segment. "readth and depth oF the product line. D%!,%2DIST2I"5TI/. Channel coverage and quality. Strength of channel relationships. Ability to service the channels. M!2+%TI.' !.D S%,,I.' Skills in each aspect of the marketing mix. Skills in market research and new product development. Training and skills of the sales force. /P%2!TI/.S Manufacturing cost position - economies of scale, learning curve, newness of equipment, etc. Technological sophistication of facilities and equipment. Flexibility of facilities and equipment. Proprietary know-how and unique patent or cost advantages. Skills in capacity addition, quality control, tooling, etc. ,ocation including laBour and transportation cost. ,aBour Force climate unioniZation situation. Access to and cost of raw materials. Degree of vertical integration. 2%S%!2#( !.D %.'I.%%2I.' Patents and copyrights. In-house capability in the research and development process (product research, process research, basic research, development, imitation, etc.). 2D staFF sKills in terms oF creatiVity simplicity Quality reliaBility etc. Access to outside sources of research and engineering (e.g., suppliers, customers, contractors). /6%2!,, #/STS Overall relative costs. Shared costs or activities with other business units. Where the competitor is generating the scale or other factors that are key to its cost position. &I.!.#I!, ST2%.'T( #ash »oW. Short and long term BorroWing capacity relatiVe deBteQuity ratio . New equity capacity over the foreseeable future. Financial management ability, including negotiation, raising capital, credit, inventories, and accounts receivable. /2'!.I:!TI/. Unity of values and clarity of purpose in the organization. Organizational fatigue based on recent requirements placed on it. Consistency of organizational arrangements with strategy. '%.%2!, M!.!'%2I!, !"I,IT9 ,eadership Qualities oF #%/ aBility oF #%/ to motiVate. Ability to co-ordinate particular functions or groups of functions (e.g., manufacturing with research co-ordination). Age, training, and functional orientation of management. Depth of management. Flexibility and adaptability of management. #/2P/2!T% P/2T&/,I/ !Bility oF corporation to support planned changes in all Business units in terms oF fnancial and other resources. Ability of corporation to supplement or reinforce business unit strengths. /T(%2 Special treatment by or access to government bodies. Personnel turnover.66 Strategic Management 5.8 Wider Environmental Analysis Introduction We have touched on the wider environment in many of our previous Sections. Whilst the wider environment is constantly in our thinking, it is important to formally, and explicitly consider its current and likely future impact. We advocate a formalised scan and screen: What is happening in the Wider enVironment and hoW Will it specifcally impact on - The level and nature of demand? - Our costs and ability to operate? 7hat Key opportunitiesthreats are indicated Both For eXisting and potential business) (oW specifcally Will our strategy and +ey Success &actors Be aFFected (oW are competitors liKely to Be aFFected and hoW are they liKely to respond - What response is called for? - What are the key uncertainties and risks? The world around us is complex with a myriad of intertwined trends that create game changing opportunities and threats. Anticipation of what the future holds allows us to prepare: -“We must study the present in light of the past for the purposes of the future” – John Maynard Keynes - “To be forewarned is to be forewarned” (an early warning radar provides an advantage) - “He who takes no heed of what is distant will fnd sorrow close at hand” - Confucius - “Skate to where the puck will be” – Wayne Gretsky 9et it is sometimes diFfcult to get managers to stand BacK and consider the Future. (amel and Prahalad1 estimate that on aVerage senior management spend less than 3 of their time building a perspective on the future shared by the management team – the overwhelming focus is on the current and short term. We “always need to strive to do what we’re doing better ... but that’s not nearly enough... We think an awful lot about what the world will look like in fVe to ten years and hoW We need to anticipate that and get in Front oF it° Kenneth Freeman, CEO Quest Diagnostics, (US leading clinical laboratory spun out of Corning)67 Strategic Management Whilst the future is not written, and episodic events heighten uncertainty, there are also clear Megatrends that will impact all of society (J. Naisbitt): broad directional trends We can Be sure oF. "ut eVen For Megatrends We are not sure hoW We Will react to such trends, and the reactions will be different by different stakeholders such as governments, companies and individuals). 5.9 Megatrends The Manual only skims over some of the Megatrends all around us. Always think of your existing business and the opportunities to create new businesses as you consider the relevant Megatrends to help you ‘catch the wave’ or ‘tailwind’. Megatrends in Economic Activity and Population · The world’s population has grown from 2.5 billion in 1950 to some 7 billion currently and is projected to be 9 billion by 2050 · The triad of the US, Western Europe, Japan with less than 10% of the world’s population still dominates economic activity (In industries like pharmaceuticals the triad accounts for over 80% of revenue) · China and India account for 36% of the world’s population and with economic growth haVe Bought nearly tWo Billion non consumers into the gloBal marKet many at the ±"ase of the Pyramid’) ½ "2I# countries haVe 1 oF the World²s population ½ The triad has an ageing population #hina and 2ussia liKeWise haVe a shrinKing pipeline. In 2020 it is estimated that the average age in China and the US will be 37, 45 in Western Europe and 48 in Japan. In contrast the average age in India will be 29. ¯The World has arriVed at a rare strategic in»ection point Where nearly halF its population "2I# haVe Been integrated into the gloBal marKet economy many oF them With highly educated WorKers° #raig "arrett #%/ Intel “Asia’s rise is the economic event of our age. Should it proceed as it has over the last few decades, it will bring the two centuries of global domination by Europe and subsequently, its giant North American offshoot to an end”- Financial Times, 9.22.2003 “When I was growing up, my parents used to say to me: ‘Finish your dinner – people in #hina are starVing.² I By contrast fnd myselF Wanting to say to my daughters ‘Finish your homework – people in China and India are starving for your job.’” - Tom Friedman, New York Times columnist68 Strategic Management Implications ·Many countries in the triad face a pensions ‘time bomb’: ageing population, longer life spans, shrinking labour force · Countries with an ageing workforce face a major productivity challenge. When GDP groWth is eXplained By the ratio oF population groWth productiVity improVement "#' analysis2 indicates the scale of the challenge: o US GDP growth in the 1970’s was in a population:productivity improvement ratio of 80:20. To maintain GDP growth the ratio now needs to shift to 30:70. Western Europe needs to have GDP growth 100% supported by productivity improvement and Japan needs to have productivity move to 160% to compensate for a shrinking workforce. · Ageing populations will require increased healthcare · Ageing populations will require more long term care (exacerbated by trends in family structure). The OECD estimates that care spending in OECD countries will have to at least double, if not treble, by 2050 from the current levels of 1.5% of GDP. !uthors .ote !s should already Be clear demographic trends Vary signifcantly By region · The paradox of ‘health and wellness’ There are clear trends to sports and ftness healthier eating i.e organic Foods natruceuticals); concern over diet. At the same time obesity, diabetes and the like continue to rise. - Companies are capitalising on trends: Nestle’s objective is to be recognised as the world leader in ±.utrition (ealth and 7ellness² ±'ood &ood 'ood ,iFe². ½ The consumption potential oF "2I# countries With 1 oF the World²s population and economic growth is vast (car ownership in China is 50-60 cars per 1,000 people compared with 870 per 1,000 in the US. The Chinese car market at 20 million units in 2011 is already the world’s largest (US 13 million units) and is forecast to double to 40 million units by 2020 (Source: strategy + business, July 18th, 2011). · Companies are tapping into this potential with foreign direct investment o In China currently over 50 factories are opened daily by foreign-owned companies ½ 2eaching ±"ase oF Pyramid² consumers reQuires products at a much loWer price than in developed markets with creative forms of distribution: o ‘Frugal Engineering’ only incorporates the essential features of a product to do the job69 Strategic Management at a ‘good enough’ level o In "raZil .estle oFFer single serVe ±micropacKs² through 2 micro distriButors and 5 door to door sales people. ! »oating supermarKet is used to reach remote regions oF the Amazon o In India, to insure against power outages small retailers need a generator. Few can afford (onda²s generator and BanKs do not oFFer unsecured loans to small retailers. To secure sales (onda groups together 2 retailers Who contriBute 22 monthly to a lottery pool. Each month one retailer gets a generator, after 20 months all have a generator. o In #hina (aier the leader in home appliances realises that For many a Washing machine is an eXtraVagant luXury. To increase sales (aier marKets a multi purpose Washing machine which can also clean vegetables, make cheese from goats milk etc. o In rural Africa Safaricon offers the M-Pesa mobile phone banking service (M stands for mobile, Pesa is Swahili for money). Shops and agents sell telecom airtime as virtual cash. · The urban world is shifting east. McKinsey3 calculate that the top 600 urban centres generate oF gloBal 'DP and this ratio is liKely to hold For the neXt 15 years. (oWeVer McKinsey expect 136 existing urban centres to be replaced by urban centres from the rapidly developing world – 100 from China alone. McKinsey also see the importance of the world’s 23 Megacities (population 10 million plus) reducing as a global GDP growth driver and 577 middle-weight cities (population 150k – 10 million) contributing more than half of global growth to 2025. · Urbanisation in rapidly developing countries will require major expenditure on infrastructure and housing. o In China 26.4% of the population lived in cities in 1990, 49.7% in 2010 (a migration of 13 million a year, 270 million in total (J. Anderlini, F.T. July 21, 2011). It is estimated 75% will live in cities by 2050 with over 200 cities having a population of over a million. China aims to add an average of 8 million low cost homes to the housing stock each year for the foreseeable future. (Note: China’s “hukou” or household registration system classes all citizens as being either urBan or rural. 2ural citiZens are mostly denied urBan serVices liKe healthcare education social security Benefts etc. This creates a tWo tier social structure loW cost laBour and a large »oating population Which could migrate BacK to rural areas iF there Was no urBan employment. The state oWns all land maKing it diFfcult For Farmers to sell or trade land. Discussions to abolish the hukou system and privatise land are frequently revisited.) · If rapidly developing countries maintain economic growth global over-capacity in many70 Strategic Management industries will result, in many it already has. ½ #ountry defcits especially For the 5S and trade imBalances imply maJor structural readjustment Megatrends in the Environment · Population and economic growth require energy, water, resources and agriculture. Demand:supply economics tells us price will rise as demand exceeds supply. Extreme price volatility and a rising trend in the price of many commodities is likely to continue. · The availability, control and access to many resources has become a key strategic issue for many countries, industries and competitors. Oil, OPEC policy and Middle East staBility has long Been a Focus oF attention. The fnite reserVes oF rare earth minerals concentrated in China has risen up the agenda (though major new deposits are coming on stream . 2esource depletion and the supplydemand Balance is in eVidence in many other commodities. · Concern with environmental sustainability has many strands: climate change (global Warmingdimming melting ice caps rising sea leVels changed Weather patterns (impact for agriculture, drinking water); increased incidence of natural disasters; resource conservation (waste management) etc. often backed by regulation is impacting society and the business environment. The energy landscape is being transformed with major investments in: wind, wave, solar, biomass, geothermal and fuel cell sources. 2esearch at /XFord 5niVersity into a hydrogen Fuel replacement For oil iF successFul and commercialised, would transform the energy landscape further. Traditional energy suppliers, utility distributors, manufacturers (i.e. hybrid and electric cars) and end users are all being impacted. ½ #orporate Social 2esponsiBility #S2 is an umBrella term For goVernance ethics Fraud environment, citizenship – being fair and acting responsibly. Society and regulators increasingly call For #S2. The puBlics gaZe is enhanced By inFormation transparency and ease oF communication. The Business case For #S2 in terms oF shareholder return is Far From being proven by research – but the business case in terms of the preferences of increasing numBers oF employees and consumers is unQuestionaBle. #S2 in many companies is Far more than ‘window dressing’ – it has a major impact on decisions, investment and work practices – practices which are being spread internationally.71 Strategic Management Megatrends in Technology and Science ½ The ±internet oF eVerything² digitisation and the ±gloBal grid² connecting fVe Billion consumers with low cost communication is reshaping society, human behaviour and strategies in every sector. A boundaryless world allows individuals to connect to a global audience (‘punch above your weight’) or form their own communities (apart from where communication is BlocKed or fltered . 6irtual access is coupled With the democratisation oF inFormation. Some oF the many ramifcations include - Industry boundaries and geographic regions blur 2educed Barriers and transaction costs promote trade outsourcing ¯The 7orld is &lat° e procurement and e sales enhance productiVity "#'2 calculate a 1 increase in e-procurement leads to a 2.6% increase in productivity, a 10% increase in e-sales increases productivity by 3.1%) %Xchange is Facilitated By sites such as !liBaBa and e"ay - Information increases price pressure - Information speeds commoditisation Small segments the ±,ong Tail² #. !nderson Become economic to reach - There is less need to travel (one of our clients has reduced travel budgets in the last two years by 45% through the use of videoconferencing) - Internal and external networks can be created to increase collaboration and knowledge exchange - Consumers can become co-creators (i.e: Wikipedia; Facebook users translating the site into other languages P'²s #onnect and DeVelop programme aims to haVe 5 oF its innovations come from outside the company) - Friedrich4 by linking population with technology has coined the phrase ‘Generation #². "orn aFter 1 'eneration # are #onnected #ommunicating #ontent #entric #omputerised #ommunity oriented alWays #licKing. "y 22 oF the 5S %urope "2I# population will be Generation C – comfortable with digital channels and interaction. Management of this ecosystem becomes a key determinant of competitive advantage. Sloan stress the need to ±,%!D² ,isten haVe a Formal process to monitoranalyse - Experiment: engage customers via pilots, tweets, promotions etc and gain feedback - Apply: make it easy for customers to link and measure impact - Develop: a social medium within the marketing mix · Cloud computing provides software services accessed via the internet rather than residing on your hardware. The ‘pay for use’ approach can be more convenient and cost72 Strategic Management effective (and is increasingly used elsewhere: car rental per minute, hotel room per hour, jet engine per hour etc.) ½ Smart deVicessensors create inFormation and monitor meters to use electricity When lower cost; track parcels; insurance providers like Progressive (“Use less, pay less”) and Norwich Union (“Pay as you drive”) price insurance based on where the vehicle was driven and mileage (tracked by satellite or periodic uploading from on board computer); remote monitoring of patients in medicine etc. ½ ±"ig Data². The amount oF data aVailaBle For analysis has eXploded. .eW Value streams are available for competitors with the ability to collect, store and analyse the data. The retailer Tesco launched its loyalty ‘Clubcard’ in 1995. Over 50% of UK households have the Clubcard. Dunnhumby (a Tesco subsidiary) analyses six million customer transactions daily (over a hundred shopping baskets a second). Each product is coded with 45 pieces of data price BrandoWn laBel ethnictraditional etc. Tesco analytics proVide many Benefts From understanding customer proftaBility Buying patterns loyalty targeted promotion etc. ,ord Mac,aurin Tesco²s Former chairman oBserVed ¯7hat scares me aBout this is you know more about my customers after three months than I knew after 30 years.” As Tesco moves into adjacent markets like banking the analytics advantage could prove decisive. Credit card and insurance providers with data mining adopt a ‘test and learn’ mindset #apital /ne is reported as running oVer 5K tests per annum to tailor productsprices to the individual. Automated algorithms drive decision making. ½ Digital FaBrication eFfcient at small scale promotes decentralised manuFacturing 3D printers that build objects layer by layer or programmable subtractive tools that carve shapes from materials (tools include: laser cutters, computer numerical controlled (CNC) routers, milling machines, plasma-water cutters). ½ .anotechnology manipulates matter at an atomicmolecular leVel. The potential to create new materials and devices that can be used in all walks of life holds much promise – also much concern over safety. · The ‘life science revolution’ has allowed us to genetically modify foods. Mapping the code of human life with the Genome has diagnostic and genetic engineering implications. As the disciplines of biology, chemistry, medicine, physics and engineering converge there are a multitude of possible applications. !uthors .ote &irms liKe MicrosoFt and chip designers liKe !2M are inVesting in potential applications. One long term vision is that you buy a bio sensor from the local store, strap it onto your body; it monitors the body’s condition – this is already possible – but it also conducts diagnosis)73 Strategic Management Section 5.9 References 1. '. (amel and #.+. Prahalad ¯#ompeting For the &uture° (arVard "usiness 2eVieW *uly !ugust 1 2. #. +alapesie et al The "oston #onsultancy 'roup ¯The #onnected +ingdom° October, 2010, www.bcg.com 3. Urban world: Mapping the economic power of cities McKinsey Quarterly, March 2011 . 2. &riedrich et al ¯'eneration #° - strategy + business, Issue 62, February 22nd, 2011 !dditional 2eading There is so muchÝ "#' haVe a series oF Megatrend insights on their website which they periodically update Refection “The real voyage of discovery consists not in seeking new landscapes, but in having new eyes” – Marcel Prost 1.Do you your management team spend suFfcient time considering the implications oF Megatrends? 2. Do you have a collective view of the long term of your competitive environment? 3. What Megatrends is your organisation exposed to - overall? - by business area? . (oW Will they impact the eXisting Business 5. What new business opportunities are emerging?74 Strategic Management 5.10 Scanning and Screening the Wider Environment Over and above Megatrends we have to be sensitive to many other trends and consider their implications. To promote consideration a ‘Scan and Screen’ process is advocated. In scanning the Wider enVironment the frst step is to suBdiVide it into more manageaBle elements. The literature recommends subdividing on the P.E.S.T. criteria: Political: Factors such as: government stability; government policy to other nations and regions; business related policies re: allocation of funding, stimulus packages, suBsidiesprotection terms oF tradeQuotastariFFs discrimination taXation incentives, areas of de-regulation, corruption. Economic: &actors such as actiVity leVels in the economycycles groWth employment disposable income). Structure of the economy. Conditions for business: inFrastructure interest rates in»ation eXchange rates unemployment. Social: Factors such as: population demographics (size, growth rate, age structure, geographic distribution and density, income level, family structure, educational and sKill leVel . (oW people liVe Values attitudes preFerences BelieFs toWards life, work, leisure. Technological: Factors such as: the role of central bodies, institutions, suppliers. The speed of change in product and process development cycles. The cost and adoption of new technology. /ur preFerence is For a slightly fner suBdiVision adding tWo eXtra categories in the frst instance: Environmental: Factors such as: geography; climate; natural resources (land, materials, water, energy); pollution; waste and its disposal. 2egulation: Factors such as: legislation at an international, regional, national, local level that relates to industry (i.e. standards), company (i.e. anti-trust), employees (i.e. health and saFety consumer rightsprotection i.e. trading standards .75 Strategic Management International PESTER Impact 7here should the scan start gloBal regional or local P%ST%2 Simply all Bases haVe to be covered, but it depends on the competitive environment being considered. With fragmented competitive environments we invariably start locally and then scan and screen for regional and global impact. For a global industry we tend to start globally and then narroW in to regions and then fnally eXamine the specifc local impact. !ll perspectives have to be considered, it is just the start point and emphasis that alters. We also recommend an International category is added to the P%ST%2 categories to ensure impacts are considered from the global competitive environment. Relating PESTER to your Competitive Environment In addition to the P%ST%2 categories it is sometimes useFul to add categories that relate much more closely to the industry being analysed. For example, in the case of ‘military aircraFt² a category in the Wider enVironment For ±deFence² or much more specifcally For ±military aircraFt competitors² helps to Focus the scan and frmly maKes the linKage to previous industry and arena analysis.76 Strategic Management Each category should be scanned in brainstorming fashion to screen for relevant factors and forces driving change and potential opportunity and threat. It cannot be stressed strongly enough that the aim is not to generate long lists of interesting asides under each category but rather to identify those factors that are, or are likely to, impact on the industry and the strategy oF the frm the insights gained haVe to Be oF releVance to decision takers. When scanning and screening the wider environment it is important to consider a time dimension. (oW has the Wider enVironment - Impacted historically (explanation of drivers of trends)? ,iKely to impact currently and in the short term ,iKely to impact medium term typically the planning horiZon ,iKely to impact long term long term Megatrends In addressing these questions patterns or interrelationships of factors drawn from the different categories will start to emerge that when clustered together are seen as the drivers for change. Taking our earlier example of aluminium largely substituting for tin plate beverage containers in the U.S.A., the key supporting drivers were: consumer preference for attractive packaging (Social); state regulation on recycling (Political, 2egulation %nVironmental %conomic deVelopment oF tWo piece aluminium can technology with ring-pull tops (Technological, Social). 7ith the releVant driVers oF change identifed the thought process turns to a consideration of: - The probability of occurrence? - What imminence? - Intensity of impact? 2esponse called For to counter VulneraBility or capitalise on opportunity The companies’ response can be reactive or proactive. In our earlier example of beverage cans, tin plate companies could attack the change agents (seek to stop recycling legislation in»uence maKe tin plate cans more attractiVe deFend or enter the aluminium industry position to eXploit . !s With the ±&iVe &orces² FrameWorK iF the frm cannot ±in»uence² ‘defend’ or ‘position to exploit’ its strategy and Key Success Factors come into question. As should be clear, thinking about how the wider environment affects business is not a once a year process but is an ongoing activity - what’s going on out there and how could it affect my business in the short, medium and long term? Even then uncertainty will77 Strategic Management remain, the point being that the number of unforeseen surprises reduces markedly and issues are put on the taBle By completing a Formal scan and screen eXercise. "y Being sensitive to the forces driving its likely future the company can put itself on a more prepared footing and be better able to exploit the opportunities available. Refection Scan and Screen your wider environment. What are the implications for demand, cost, ability to operate, risk? What response is called for? 5.11 Sensitivity and Scenario Analysis ‘the future is not written’ ! systematic analysis Will Better prepare an organisation For its liKely Future. (oWeVer uncertainties will remain and unanticipated shocks are ever present (natural disasters, Wars epidemics . In the fnal analysis management need to accept that the Wider environment and competitors actions are to some extent unpredictable, and on occasion we may totally misread the future. The need is to constantly review a strategy and adjust and reformulate as necessary whilst developing contingencies for more profound departures from the anticipated. Agility, speed of minor and major strategy adjustment are traits of excellent organisations. ‘Tunnel vision’ and ‘blinkered thinking’ are always to be avoided when considering the likely future. 5.11 Sensitivity and Scenario Analysis Sensitivities Many BanKs that We WorK With looK Very closely at a client²s fnancial position. 7hen granting a term loan oVer say a fVe year period the Key credit issue is the client²s aBility to pay BacK the loan. &uture cash »oWs are eXamined But as the Future is uncertain the robustness of the loan decision is tested by sensitivities. What if sales are 20% lower, prices 2 loWer Will the client still Be aBle to pay BacK the loan "anKs are concerned with the ‘break even margin of safety’ – the point at which the loan cannot be paid back. "anKing coVenants and monitoring are set up to manage the BanKs position accordingly. !uthors .ote &or certain types oF loans BanKs do little iF any cash»oW analysis and Just look for security. Similar to the banks we advocate sensitivities to be considered at least once a year in the annual planning round – if not more frequently. Once a future ‘base case’ has been78 Strategic Management established we challenge it – what if demand, prices are 20% lower or higher? What if costs are 20% lower or higher? This devil’s advocate type of questioning not only tests the robustness of a strategy but it also stimulates managers thinking about contingencies. For unstable environments (typically associated with technology) we use plus or minus 40%. The reaction of many management teams is: ‘that will never happen’ – but history tells us it does. One of our technology clients experienced an 80% decline in industry size in a siX month period a disaster scenario. 2ather than use sensitiVities We preFer to use scenarios to test response to major shocks to the system. A commodity extraction client of ours considers a worst case scenario called ‘the perfect storm² in eValuating inVestment decisions. (istory shoWs eXtreme price sWings tied to the commodity supply:demand cycle. Fixed capital investments have long lives, often over several cycles. The client takes a conservative stance only approving investments Which continue to Be proftaBle in a ±perFect storm² currently at 1 For a Barrel oF oil. The reaction may be that we will never see oil prices that low again and this management team are too risK adVerse mayBe But they sleep easier at night. (oW confdent are you in predicting the price of oil in real terms in 20 years time?) Scenarios Scenario analysis had its origins in World War II war games; the aim being to prepare for a range of possible outcomes in advance – rehearsing for alternative futures. In business a plan typically develops a single view of the future and a single point forecast – we seek certainty in an uncertain future. The danger is that management develop ‘tunnel’ or ‘blinkered’ vision – ‘the lamp post effect’ (when the drunk has lost his keys they look For them under the lamp post Where the ground is lit . Scenario analysis Forces the feld of vision to be widened to consider alternative plausible futures. Scenario analysis is not about forecasting, its aim is to promote understanding, give insight and anticipate the implications of different outcomes. Shell1 Were one oF the frst companies to comprehensiVely apply scenario analysis. Many other oil companies adopted scenario analysis shortly afterwards, as did the French nuclear industry and many extraction companies, as already noted, invariably have at least a worst case scenario (the perfect storm). The common thread in these early practitioners is fXed asset intensity With a long liFe hence the need to consider the long term and alternative futures.79 Strategic Management The "ain surVey oF ±management tools² used By companies shoWed that only a minority used scenario analysis historically – it was a ‘niche’ application. This is also our experience. Comprehensive scenario analysis takes time and many companies have yet to master other ±management tools². 2ecent "ain surVeys hoWeVer indicate that the maJority oF companies now use scenario analysis. It seems that shocks like natural disasters, terrorist attacKs and the fnancial meltdoWn haVe reinForced the need to consider the implications of alternative futures to supplement single point forecasts. Scenario thinKing is especially Benefcial When - Uncertainty is high (hence scenarios do not need to be long term) The industry is eXperiencing signifcant change 2adically diFFerent Futures are plausiBle - Costly surprises have occurred in the past - New opportunities have not been perceived historically Scenarios are built around a key issue or critical choice. Our preference is to initially consider the critical uncertainties in the wider environment, industry and competitive actions going forward. A critical uncertainty is an event which may go one way or another: Environmental Uncertainties i.e.: - Election of right or left wing government - Trade liberalisation or trade blocks - Currency appreciation or depreciation - etc. Industry Uncertainties i.e.: 2ecycling legislation introduced or stalled - FDA bans lead seaming or not - Aerosol propellant banned or not - etc. Competitive Uncertainties i.e.: ,eading competitor aggressiVely eXpands or diVests - Competitors merge or do not Suppliers ForWard integrate or "uyers BacKWard integrate or not - etc. /nce the critical uncertainties haVe Been identifed their impact imminence triggers and in»uences should Be considered some also assign proBaBilities. !n 5ncertaintyImpact grid usefully summarises the thought process. A simple two by two grid of two uncertainties creates four scenarios. (Note: a similar approach to Perceptual Mapping). Each scenario is ‘brought to life’ by giving it a name and an associated story. One of our80 Strategic Management students eXamined genetically modifed crops in 2ussia. Osterwalder2 outlines the following four pharmaceutical scenarios. Several two by two plots are normally created around the critical uncertainties before pragmatically narrowing down to a handful of scenarios that clearly need to be considered. Some decide to take the most optimistic scenario, a base case scenario which relates the plan and the most pessimistic scenario. 7hilst such an approach simplifes its Focus is Healthcare Scenarios for Pharma* The Healthy Patient -Customer relationship required? -Partners to build capability? -Relationship mgt with doctors Re-inventing Pharma -New value propositions -New activities/capabilities -How to build/acquire Business as Usual -Implications given pipeline/ generics? My Medicine -How to build patient relationship? -What channels most appropriate? -What activities/capabilities to develop? Treatment remains the main revenue generator Prevention is the main revenue generator * Adapted from A. Osterwalder & Y. Pigneur Personalised medicine remains a niche Personalised medicine widely adopted81 Strategic Management on the extremes, and in our experience management tend to discount the extremes and return to the base case all too quickly. We would recommend that at least four scenarios are considered – each having a ‘story’ with a ‘future-back’ consideration of the triggers and Key in»uences that haVe shaped it. ! ±story² is easier to understand than piles oF quantitative and qualitative data). 7ith scenarios identifed the Key Questions For management are - What are the triggers and early warning indicators we need to monitor to identify which scenario is developing? - What can we do to ensure a favourable scenario outcome results? (hence the importance oF identiFying scenario triggers and in»uences (oW roBust is our strategy to the diFFerent scenarios - What ‘no regret’ moves are consistent with all scenarios? - If a harmful scenario results what will be our contingency actions? - Should we develop a portfolio of strategic ‘options’ to ‘hedge’ against any eventuality? Schwartz 3 summarises the steps involved in scenario analysis: 1. Pinpoint the issue (the arena and timescale) 2. %staBlish the local macro economic in»uences that haVe Bearing on the decision note enaBlersinhiBitors in P%ST%2 3. %staBlish maJor gloBal in»uences note enaBlersinhiBiters . #lassiFy in»uences into those Which are Key usually 2 or 3 and those Which are less certain 5. Identify axes on which different scenarios are based 6. Add details to scenarios (probabilities can be assigned) . 2eVieW results impact on alternatiVe strategies 8. Search for early warning signals that a scenario is unfolding (monitor driving forces and levels of uncertainty) Authors Note: Schwartz raises the possibility of assigning probabilities to a scenario. Even iF We haVe confdence in our aBility to predict proBaBilities the danger is that management discount low probability scenarios all too quickly. In our experience companies employ scenario analysis in very different ways: - An oil company develops scenarios with a central team. The scenarios are presented to divisions together with planning assumptions (demand, supply, price, etc.) for them to take into account when drawing up divisional plans. Whilst such an82 Strategic Management approach does not engage the wider management team in scenario development, it does haVe the Beneft oF Forcing consideration oF hoW roBust a strategy is to the different scenarios, ‘no regret moves’, consideration of contingencies and options etc. In Shell (not the oil company in this example) an insider observed: “The scenario team were bright and their work was of a very high intellectual level” (oWeVer neither the high leVel ±'roup scenarios² nor ±#ountry leVel scenarios² produced with operating companies really made much difference when key decisions were taken.” .ote the 'loBal and ,ocal scenario leVels a scenario Will haVe diFFerent implications geographically). - Companies like Siemens involve management across the organisation in scenario development and discussion - One of our clients does not attempt to formally integrate scenario analysis into the planning process. 2ather eVery tWo three years they haVe a scenario session that serVes as a forum for a cross section of executives to develop different scenarios and discuss the implications For the company and specifc lines oF Business. The scenario session proVides the vehicle for participative learning and debate. - One CEO calls for a scenario meeting whenever key uncertainties emerge. The discussion centres on the implications of different scenarios, what actions to take (such as acQuisitionalliance and typically the deVelopment oF detailed contingency plans. Overview The Future is not Written. Systematic analysis Will help prepare For the liKely Future. "ut we should not accept the views of our analysis. Continual monitoring and recalibration is reQuired. %Ven then uncertaintiesshocKs remain. SensitiVities and scenarios help management aVoid the illusion oF certainty ±tunnel VisionBlinKered thinKing² deVelop contingencies. To handle the uncertain future, management should: - Take their best view - Seek to shape the market Maintain agility to »eXiBly respond to unForeseen eVents driVen By contingencies sensitivities - Possibly take a portfolio of options to hedge risk’ ‘We cannot predict the weather over the long term with certainty, but we can build boats that can withstand 99.999% of its variations’ (oWeVer in our eXperience the maJority oF management teams haVe targets Budgets 83 Strategic Management deadlines and in order to ±play the game² deVelop ±tunnel VisionBlinKered thinKing². The corporate centre and senior management quite often do not want to consider uncertainties, they want managers to deliver the numbers – they look for certainty in an uncertain world. Section 5.11 References 1. P. Wack, “Scenarios: Uncharted Waters Ahead” (arVard "usiness 2eVieW Sep /ct 15 2. !. /sterWalder and 9. Pigneur ¯"usiness Model 'eneration° - John Wiley, 2010 3. P. SchWartZ ¯The !rt oF the ,ong 6ieW Planning For the &uture in an 5ncertain World” – Doubleday 1991, Paperback 1996 Refection IF demand price cost Fellincreased By What contingency strategy Would you adopt 7hat scenario stories haVe you got around Key uncertainties (oW can these stories Be shared to Widen the feld oF Vision 7hat Would Be the implications iF "2I# 'DP stagnated 5.12 Competitive Environment – Industry and Environmental Analysis Overview 7e hope that you haVe WorKed out that Alliance Manchester "usiness School²s approach to Strategic Management is Factual analytic systematic rigorous. Manchester MBA’s understand their industry inside out are neVer satisfed until they do. This takes time – which is a precious commodity. Manchester’s view is simple – understanding the competitive environment is too important not to make the time. The challenge however is Quite oFten not the Freeing up oF the time and doing analysis refleting – but getting the organisation to adopt the same mindset. In our experience in many companies the analysis of the competitive environment is piece-meal at best. The focus quite often is far too skewed to the internal, management are too busy with operations. The challenge is to do good analysis, get organisational debate and buy-in, but then to remember that the future is not written.84 Strategic Management ! criticism oF the analytic approach is that it sti»es creatiVity ±analysis paralysis². !t the outset in Section 1.4 we outlined the importance of intuition, ‘gut feel’ and luck. Our VieW is simple an analytic FrameWorKBacKBone promotes creatiVity When the conteXt is handled correctly. ±#hance FaVours the prepared mind² Pasteur. ,ucK is Quite oFten a function of preparation meeting opportunity: - Gary Player, a world class golfer and bunker player was in the bunker on the 18th hole on the last round of the tournament. If he ‘got down’ in one he would win the tournament, in two it would be a tie for the leadership and a play-off, in three and he would come second. After studious preparation, Player holed his bunker shot in one, and won the tournament. A spectator shouted out, “You were lucky”. To which Gary Player replied, “It’s funny, the more I practice, the luckier I get”. To repeat an observation in Section 2: “Our belief (and the Manchester Method) is that: the quality of thinking that goes into making strategic decisions is a key explanator of success.” This quality of thinking is promoted by practice, and having the time to practice in an unreasonaBle World oF con»icting demands and constraints . Refection After each Section the ideal would have been to apply the Section to your own organisation. .oW is the time to put your analysis together and re»ect. (oW Would you use the concepts and FrameWorKs outlined Industry Defnition !rena Maps The Proft Pool Map - The Five Forces Framework - Strategic Groups - Strategic Imperatives and Key Success Factors - Competitor Analysis 7hat Megatrends are liKely to impact your industrycompanyBusiness - What does your Scan and Screen of the Wider Environment reveal? - What are your contingencies to manage Sensitivities and Scenarios? What are the managerial implications? What managerial decisions and actions would you recommend?85 Strategic Management The Grant text covers the Competitive Environment in Chapters 3 and 4: Chapter 3: Industry Analysis: The Fundamentals Chapter 4: Further Topics in Industry and Competitive Analysis Whilst much of the material covered is common we encourage you to quickly read these chapters to reinforce learnings and gain additional perspectives. Grant then has three Chapters that examine strategy in different industry contexts: Chapter 8: Industry Evolution and Strategic Change Chapter 9: Technology-based Industries and the Management of Innovation Chapter 10: Competitive Advantage in Mature Industries These chapters have many insights especially if they examine your own industry context.86 Strategic Management 6. Company (Corporate or Grand) Strategy As you read this Section we would recommend you adopt the mindset of a CEO of a large private sector company. Section 1.3 outlined company strategy is concerned with: - outlining the purpose of the organisation and how it will satisfy stakeholders - sets direction (vision, mission, objectives) - outlines how to do business (values) and governance decides Which marKetBusiness to Be in Which marKetBusiness not to Be in thereBy defning the scope oF the organisation - decides on the nature of ownership (owned, joint venture, franchise etc.) - designs the formal and informal organisation to align and integrate - develops or improves strategies - builds the portfolio organically, by alliance and acquisition - manages the portfolio - allocates and enhances resource - builds capability and competence eXploits synergiestransFers sKills - manages performance, risk and control #ompany strategy is concerned With a set oF choices to confgure and co ordinate the whole. When well designed and executed, company strategy adds value by reinforcing, and interacting with, all other levels of strategy. .ote DiVisional or 2egional Strategy is an eXtension oF #ompany Strategy. The ‘classic’ components of a company strategy or plan are: - Vision, Values, Mission - Objectives - External audit - Internal audit - Summary portfolio positioning - Evaluation of: assumptions issues and challenges optionsalternatiVes - Strategy selection: outline of where the company intends the portfolio to be at the end87 Strategic Management of the planning horizon 2esource and #apaBility deVelopment 2esource allocation - Integration of hierarchical strategy levels %Xpected fnancial results and contingencies - Control, review, adjustment and reward mechanisms Note: There are feedback loops and interaction between the components. Company strategy links to other strategy levels in the organization. Many companies do not adopt a rigorous and formal process to develop their company strategy. Other companies do, but often there is dissatisfaction with the end result (re: Section 1.1 ‘disappointment with Strategic Planning’).Some of the literature, and many managers we speak to, are critical of ‘weighty’ company plans: ‘they sit on the shelf gathering dust until it is time to put a fresh one together’. This could be due to the three Key processes oF SM not Being in place Section 1.2 strategy and operations implementation are de coupled. "ut Quite oFten it is a misunderstanding oF the role a company plan serves: “Plans are nothing, planning is everything’ - D. Eisenhower A ‘weighty’ company plan is simply a record of a process, information, decisions made and how those decisions are to be implemented and reviewed. If the ‘classic’ components of a company strategy we have outlined are covered comprehensively, a ‘weighty’ plan will result. The plan is not intended to be a communication document that is widely circulated. Those who have been involved in making the decisions and crafting the plan however, know it very well; it is the basis from which they evaluate progress. With a ‘weighty’ plan in place the need is to translate it into a user friendly format that is easy to communicate and get Buy inoWnership From those Who haVe to implement. The Key is to regularly review progress against plan, making the plan a ‘living document’. Authors Note: On occasion we are asked what is the difference between company and business strategy. - Company strategy, as just outlined, is concerned with holistically moving the entire organisation forward. The mindset is that of the CEO and senior management team. Company strategy is skewed to large decisions such as ‘what business to be in, what business not to be in’. "usiness strategy is concerned With managing the Business today and preparing For the 88 Strategic Management future achieving company objectives. The dividing line between company and business strategy blurs on occasion as the centre gets involved with business unit decisions. A reasonable ‘rule of thumb’ to distinguish company from business strategy is to ask, “Can the general manager of the business make the decision?” – if they cannot company strategy comes to the fore. Some of the confusion arises when companies are involved in only one business area (i.e. a Budget airline . (ere We use company and Business strategy approaches simultaneously. "ut the ±rule oF thumB² guides us can a general manager decide to open a neW huB Buy a plane change seat confguration acQuire a competitor These are company strategy decisions. When companies are small senior management quite often carry out company and business strategy simultaneously. Section 6 covers the company strategy component, the Workshop focuses on business strategy. Vision, Value, Mission Statements Introduction There is confusion in the literature and in many managers’ minds as to what exactly Vision, Value and Mission Statements are. Many companies do not have these explicit statements, they do not see the need as they ‘know’ what they are trying to achieve and how to do it. For those companies that have these explicit Statements they are quite often VieWed as Vague platitudes or a P2 eXercise. &urther they are Quite oFten VieWed cynically as they say one thing, but business is done in quite another way. We think this is a pity, when well crafted and cascaded, we believe such Statements can be a focal point to set the organisation’s direction, give management a frame of reference for taking decisions and guide on hoW to do Business. 7e defne each Statement as FolloWs - Vision: an inspiring view of a desirable future state - Value: guides on how to conduct business, what is important, sets norms for behaviour - Mission: a frame of reference for all major management decisions that incorporates Vision and Values but also adds Purpose, Strategy and organisational implementation. In combination Vision, Value and Mission statements outline the core ideology of a company and how it should be achieved now and in the future.89 Strategic Management 6.1 Vision “If you don’t know where you are going, any road will take you there” - attributed to the Koran “Cheshire Pass,” she (Alice) began ... “Would you please tell me which way I ought to go from here?” “That depends on where you want to go to,” said the cat ,eWis #arrol “You cannot plan your leadership position in twenty years time – but the chances of it happening by luck are even less likely” 'ary (amel The literature uses different words for Vision, most notably “Strategic Intent”, “Driving &orce° and ¯"ig (airy !udacious 'oals°. 7hicheVer term is used a 6ision is an ±inspiring view of a desirable future state’. The role of a Vision statement is to provide a long term direction for the organisation – what to aim for. Pascale and Athos1 observe that “Great companies make meaning for their people” appealing to the heart and mind. To illustrate they recount the story of the three stone masons, all doing the same job on a construction site, but when asked what they are doing the answers varied: ¯BreaKing rocKs the frst replied earning a liVing came the second response helping to build a cathedral replied the third”. A Vision that captures the heart and mind has emotional and commercial appeal. It helps to get people out of bed in the morning and gives meaning to their jobs. The organisational challenge provided acts as a rallying cry to bind the company together to commercially move forward. Vision Statements tend to be brief, memorable and inspiring; people understand them straight away: ¯Democratise the automoBile° (. &ord early 1²s Develop “the people’s car” – a robust car for the average family – Volkswagen 1920 ¯"ecome the most poWerFul. The most serViceaBle the most Far reaching World fnancial institution there has ever been” – Citicorp 1915 “Crush Adidas” – Nike 1950 “Kill Xerox” – Canon 195090 Strategic Management “Encircle Caterpillar” – Komatsu – 1960’s “Put a man on the moon” – J.F.K. ¯"ecome numBer one or tWo in eVery marKet We serVe and reVolutionise the company to have the strengths of a big company combined with the leanness and agility of a small company” – GE 1980 Visions stress an aim (i.e. Ford, Volkswagen, Citicorp, J.F.K., GE) or a competitive target (i.e. Nike, Canon, Komatsu) Setting Vision In setting Visions the literature 2,3 and practitioners recommend: - Setting a goal, 10-30 years away - If we were sitting here in 20 years time what would we like the company to look like? The time period selected allows management to ‘dream’, current reality does not constrain imagination. !Fter deBating alternatiVe Futures the fnal 6ision is descriBed in as much detail as possible: - Exactly what would we look like once we have attained our dream? 7ith the fnal state concisely articulated the neXt Question is What maJor platForm Would we have to attain before we reach our end state? Again this is described in as much detail as possible. Then the same question is asked again and again, until we get back to the present day. The end result is a Strategic Staircase3, a set of major milestones, or platforms, to get to our Vision. The Strategic Staircase Current Strategic Position Major milestones - platforms - ‘phases of battle’ Vision Attainment Time Outline Resources and Capabilities required for each step91 Strategic Management The steps of the Staircase represent major milestones – hence steps do not necessarily have the same time frame. To attain each step will require action plans to come to fruition supported by resource and capability development. Whilst one step is being focused on the secondary agenda is to build strategy, resource and capability for the next step – momentum, building for the future is paramount, all ‘bite-size’ pieces of a ‘master-plan’ moving forward. In theory starting with today and working forward should get us to the same end point. (oWeVer it rarely does. 7e Face reality today and fnd it diFfcult to thinK outside the BoX. The medium term plan Focuses on step one. "ut liFe does not stop aFter step one. Our decisions and strategies today should be consistent with where we want to end up eventually. We look at the steps as our ‘phases of battle’ to win the war. In our client experiences, and reading the literature (especially on Japanese companies) there tends to be great stress placed on accumulating resources and capabilities ahead of time to support the next ‘phase of battle’. Decisions today support different time-frames. Staircases typically set oBJectiVes For geographic and productserVice eXpansion the Ansoff routes) but also for resource and capability development. Discussion We are strong advocates of Vision and the Strategic Staircase. Once a company Vision is put in place it sets the framework for Visions to be developed at other organisational levels at Function Business and department the 6ision cascades. (oWeVer many companies and managers do not adopt the approach, they argue that short term pressures and reality today ‘swamp’ the need for longer term considerations. This may be true – but if you only manage for today you are unlikely to prosper, become world class tomorrow. Sceptical managers re»ect on hoW their company operates today short term fre fghting and cannot make the leap. Alternatively the uncertain changeable environment they operate in, or the severe challenges they face, force them to take a short term focus. ¯The last thing I"M needs is a 6ision° ,ou 'erstner #%/ I"M in the midst oF a turnaround92 Strategic Management The turnaround challenge I"M Faced and Which 'erstner admiraBly addressed is in our view, exactly what a Vision is for: Step 1 Viability analysis – where are the opportunites, what are we good at doing, where is the core sales, cashfow umbrella to defend? Step 1B What is our envisioned future to survive short term, but also to prosper long term? Step 1C Focus on restructuring Step 2 Stabilisaton Step 3 Return to proftable growth Step 4 Accumulate resource and capability to capitalise on emerging opportunites Step 5 Take command of our future destny “Vision is knowing where to go, picking the technologies that are going to be important, and then being able to invest in them as a key ingredient of industry leadership” "ill 'ates Not every dream, or Vision materialises. Attainment requires sustained effort mobilising all the organisational resources and a large slice of luck. The future, and our companies position in that future, is not pre-ordained. A Vision should be revisited periodically, perhaps eVery tWo three years to checK its continued Validity. "eFore it is fnally attained (as with NASA putting a man on the moon), a new Vision needs to be put in place – if it is not, no stretch, challenge remains. Authors Note: the Staircase concept is useful for other applications: !Fter your M"! What is your indiVidual Staircase IndiViduals liKe companies diFFer. Some ‘roll with the punches’, others try and steer a course. One approach is not necessarily more successful than the other as Dr. Spencer Johnson4 points out, “they keep moving your cheese”. Our preference remains for the proactive approach. - The Staircase is powerful in helping to develop a structure, be that for a presentation, an examination answer, a report, a project or more simply an argument. Structure gives ‘handles to hold onto’ and helps facilitate structured thought within an overall context. 6.2 Value Statements Values are deeply held beliefs that underpin behaviour, our culture, the ‘way things are done around here². 6alues and cultures are compleX diFfcult to manage. Schein5 sees three base levels of culture (like layers of an onion) from the:93 Strategic Management - Visible: What you see, hear, feel - Espoused: Philosophies, goals - Mental models: Shared, taken for granted assumptions about the nature of things and how to succeed Mental models are ‘invisible’, the ‘iceberg’ in our cultural make-up. This is one of the main reasons change is so diFfcult We haVe to change people²s BehaViour and unconscious mental models. The academic research6 indicates that when company culture is aligned to the needs of key stakeholders (customers, employees, shareholders) long term performance is enhanced. Authors Note: One of our clients has developed a scorecard to monitor how well the company and individual business streams satisfy these three key stakeholders. Many companies are striVing to deVelop a strong company culture6alue set also reFerred to as %mployee "rand to unite the company and it²s suB cultures Which are necessary to giVe allegiance in the frst instance to company and staKeholder needs rather than sub-unit interests. To this end Value Statements have grown in popularity with our client base in recent years. Authors Note: Could we stress your culture and Values are what they are. They should be built on. Only when the Value set does not support the strategic intent should it be tampered Withmoulded. ! culture can taKe generations to Build WeeKs to destroy. 1uite oFten those Who destroy it do not realise they are doing so until it is too late. The frst Question is What 6alues BelieFs BehaViours haVe you at present (oW do these support or weaken your ability to implement your strategies going forward? If change is needed attempt as much as possible to build on historic strength. Values take two basic forms: - Foundation Values: which we term ‘permission to play’ Values – what is right and what is wrong. Foundation Values often include: honesty, respect, openness , trust, integrity and the like. If foundation Values are breached it is typically a serious transgression – this is not the way to behave, serious sanction follows. Many companies have a formal code of conduct or code of business principles. The code typically spells out the companies Foundation Values in detail.94 Strategic Management - Performance Values: seek to strengthen the bases of competitive advantage going ForWard. (oW do We hope to get an edge 7hat are the BehaViours that Will help us attain our objectives? Foundation Values are held by the entire organisation. Performance Values may vary by organisational unit – marketing is likely to have very different Performance Values as When compared to 2D. Strong &oundation 6alues are needed to Bind together Very different Performance Values. In developing a Value Statement Collins and Porras7 recommend that a small set (typically 3-6) of timeless guiding principles are spelt out. In helping to decide these Values they suggest: 7hich fVe people Would you select From the company to list the 6alues - What would you tell your family and friends are the core Values you hold at work? If Foundation and Performance Values are employed 3-6 Values may be too few. Our preference is to summarise Values on one sheet of paper, spelling out: - Foundation Values, with a brief, but precise, sentence on each - Performance Values, with a brief, but precise, sentence on each - an explanation on why they are important (on the sheet of paper or elsewhere) - a mechanism to measure performance and set incentives to live by the Values (on the sheet of paper or elsewhere) Our preference is to start with very few Values. Once these are embedded into behaviours, additional Values can be drip fed into the list, gradually over time. In our experience, Value Statements can serve as one of the glues that binds the organisation, equally they can perhaps attract more cynical comment than any other statement. #an We stress that a 6alue Statement must re»ect the Way you Function or intend to function, on a day to day basis or credibility will be lost. To ensure Value Statements are valid, they must be measured, and reward and sanction imposed against the measurements. 6.3 Mission The intent of a Mission Statement is to guide major managerial decisions for the organisation today and in the future. A Mission incorporates Vision and Value statements.95 Strategic Management Our preferred Mission framework is the ‘Ashridge Mission Model’ developed by Andrew Campbell et al 8,9 Campbell sees two distinct schools of thought on mission: one which captures the commercial logic of the organisation and one which captures the emotion, in combination the heart and mind oF the enterprise. (e argues that a strong mission must encompass both schools of thought if it is to effectively guide both policy and behaviour. To this end he developed the Ashridge Mission Model, which we have added to as shown in the fgure BeloW. ,et us eXamine each component oF the !shridge Mission diamond in turn Purpose: a fundamental question is what is the purpose of the organisation, what does it exist to do? Many managers look at us strangely when we ask this question, and after a polite delay most answer, ‘to make money of course’. We agree. In the last resort the purpose of most companies is to survive and make money for their investors (the SM #ourse has a large priVate sector company as its suBJect matter . (oWeVer iF the only purpose of a company is to make money, what is that company espousing to its staff, its customers, its partners and the communities where it works? If you are to work for a company for a large part of your life should it mean more than making money? Shareholder value is undoubtedly critical, but is that the purpose of a company? In the The Ashridge Mission Model ‘Why the Company exists’ ‘Competitive position and distinctive competence’ ‘What the Company believes in’ - Organisational Alignment Structure, Systems, Staff, Skills PURPOSE STRATEGY VALUES BEHAVIOUR STANDARDS LEADERSHIP96 Strategic Management UK the vast majority of equity in the Footsie 100 is held by pension funds. On average pension Funds hold their stocK For less than a year. They commit to a fnancial inVestment but typically they are not loyal, are passive analysts of a company’s performance. Is that the reason companies eXist to satisFy fcKle inVestors Many companies taKe this VieW FeWer since the fnancial meltdoWn sometimes it is little more than ±lip serVice² But Quite oFten they adopt 6alue "ased Planning methodologies in an attempt to meet the demands of investors (‘lead steers’). Other companies see shareholder value as the end result oF satisFying a constituency oF staKeholders rather than Focus on the ±proft result² the Focus on the driVers oF proft. “I think many people assume, wrongly, that a company exists simply to make money. 7hilst this is an important result oF a company²s eXistence We haVe to go deeper to fnd the real reasons oF Being° D. PacKard (P Founder “People want to be part of something larger than themselves. They want to be part of something they are really proud oF that they Will fght For that they trust° (oWard SchultZ StarBucKs “On the face of it, shareholder value is the dumbest idea in the world. Shareholder value is a result, not a strategy ... Your main constituencies are your employees, your customers and your products” - Jack Welch10 The key stakeholders of a company are customers, employees, partners, communities operated in and inVestors. IF customers can Be satisfed By eXceptional perFormance By employees and partners, whilst being responsible in the communities they operate in, the end result should be attractive return for investors. As already noted in Section 6.2: research6 indicates when company culture is aligned to the needs of key stakeholders (customers, employees, shareholders) long term performance is enhanced. WPP the world leader in marketing communications services exists: ¯To deVelop and manage talent to apply that talent throughout the World For the Beneft oF clients to do so in partnership to do so With proft.° the three Key staKeholders are addressed) Canon state their purpose as Kyosei – ‘the spirit of co-operation’ between individuals, the organisation, customers, suppliers, competitors, government, environment – all to work for the common good.97 Strategic Management Stakeholder Analysis &reeman11 defnes a staKeholder as ¯!ny group or indiVidual Who can aFFect or is aFFected By the achieVement oF a frm²s oBJectiVes°. !s staKeholders impact the frm and the frm impacts stakeholders, in both positive and negative ways, it is important to understand and manage relationships (sometimes this is a legal requirement). Stakeholder analysis and management is especially important when major strategic decisions are being taken: Who are the Key decision taKers and in»uencers and hoW Will the decision impact internal and external stakeholders? Stakeholder analysis involves the following steps: 1. Identify and list relevant stakeholders (i.e.: regulators, interest groups, customers, suppliers, partners, competitors, channels, owners, bankers, unions, employees, etc.) .ote For internal decisions list those inVolVed in maKing and in»uencing the decision and those impacted by it) 2. 2anK the importance oF each staKeholder it may Be appropriate to suB diVide stakeholder groups or list individuals) (Note: stakeholder importance will vary by issue being considered) 3. Outline each stakeholders expectations . 2anK staKeholders By the poWer they haVe to pursue eXpectations 5. Outline each stakeholder’s level of interest in the issue or topic being considered . .ote Status !dVocate &olloWer IndiFFerent "locKer /pponent .ot Interested . #onsider hoW predictaBle staKeholder BehaViourreaction Will Be From certain to uncertain) 8. Outline the nature of the relationship (from co-operative to unco-operative) 9. What urgency of action is required? 10. What are the linkages between stakeholders? (This quite often leads to a ‘spaghetti’ map) What coalitions are present?. 11. Determine how to manage individual stakeholder relationships, communicate, in»uence and align interests. A stakeholder worksheet records judgments and outlines actions to be taken. Colour coding is useful when Worksheets review numerous stakeholders (i.e. red equals important, urgent, hostile etc.)98 Strategic Management Stakeholder Analysis Worksheet Stakeholder Importance (Primary, Secondary, etc.) Expectations Power Interest Status Predictability 2elationship Urgency StaKeholder ,inKages #oalitions Stakeholder Management Initiatives With the stakeholder worksheets completed the various judgments can be cross-tabulated. Mendelow12 provides two such cross tabulations (Note: practitioners frequently use 3x3 cross tabulations) The ‘Powerful Unknown’ stakeholder could be a supporter or a resister. Efforts should be made to clarify the stakeholders views and if a ‘resister’ seek to either gain support or steer a course to neutralize or avoid the exercise of their power. Stakeholders with less power should not automatically be ignored; they as a collective group may have power or Be aBle to in»uence more poWerFul staKeholders hence the need to consider staKeholder linkages). Shareholder Power: Predictability Matrix* High Low Low High Predictability Power Powerful + Predictable Powerful Unknown Can be Manageable Managed * Adapted from Mendelow99 Strategic Management Key stakeholders who are actively interested in the issue are naturally the main focus of attention in Mendelow’s Power:Interest Matrix. The Clarkson Principles13 provide general guidelines for managing stakeholder relationships. With the Clarkson Principles considered management should develop their own principles and approach within the context given. Stakeholder Power: Interest Matrix* High Low Low High Level of Interest Power Key Stakeholders Keep satisfied Keep Informed Minimal Effort * Adapted from Mendelow The Clarkson Principles for Stakeholder Management 1 Managers should acknowledge and actively monitor the concerns of all legitimate stakeholders and should take their interests appropriately into account in decision-making and operations. 2 Managers should listen to and openly communicate with stakeholders about their respective concerns and contributions and about the risks that they assume because of their involvement with the corporation 3 Managers should adopt processes and modes of behaviour that are sensitive to the concerns and capabilities of each stakeholder constituency 4 Managers should recognise the interdependence of efforts and rewards among stakeholders and should attempt to achieve a fair distribution of the benefits and burdens of corporate activity among them, taking into account risks and vulnerabilities 5 Managers should work cooperatively with other entities, both public and private, to insure that risks and harms arising from corporate activities are minimised and, where they cannot be avoided, appropriately compensated 6 Managers should avoid altogether activities that might jeopardise inalienable human rights (e.g., the right to life) or give rise to risks which, if clearly understood, would be perfectly unacceptable to relevant stakeholders 7 Managers should acknowledge the potential conflicts between (a) their own role as corporate stakeholders and (b) their legal and moral responsibilities for the interests of stakeholders, and should address such conflicts through open communication, appropriate reporting and incentive systems and where necessary, third party review.100 Strategic Management 7hen there is con»ict BetWeen the staKeholder and the frm Thomas 1 outlines fVe con»ict management stances to resolVe the con»ict or get a satisFactory outcome depending on management’s assertiveness and the co-operativeness of the relationship. - Assertive:Unco-operative – Competitive: seek to overcome opposition (the Single Sovereign Model) - Assertive:Co-operative – Collaborate: co-operate to satisfy both parties - Unassertive:Unco-operative – Avoid: decide not to engage, withdraw obstacles - Unassertive:Co-operative – Accommodate: be prepared to make concessions - Compromise: Share The analysis and management of stakeholders should be an ongoing process, or at least frequently revisited in the management mind set. As the environment changes and decisions are taken, stakeholder impacts, both positive and negative, will alter. !uthors .ote "eFore maKing a maJor decision internally We recommend you fll in the Stakeholder Analysis Worksheet – it ensures you have thought through the implications for the stakeholders involved and impacted. Many experienced managers do this automatically they ±sound out² the netWorK Build coalitions in»uence. Such managers tend to be more effective than those who just concentrate on doing the job well (political sensitiVity . The eXternal staKeholder analysis should also Be completed and re»ected on for major decisions. Modes of Conflict Management Assertive Unassertive Unco-operative Co-operative Co-operativeness Assertiveness Collaborative (Integration) Competitive (Domination) Compromise (Sharing) Accomodate (Appeasement) Avoidant (Neglect)101 Strategic Management Purpose continued Other companies go beyond stakeholders and see their purpose as being a higher ideal. Many religious movements have a higher ideal (and Mission) which helps to unite disparate stakeholders. Companies with higher ideal statements include: - Sony: To experience the joy of advancing and applying technology for the beneft of the public - 3M: To solve unsolved problems, innovatvely - Nike To experience the emoton of competton, winning, and beatng compettors - Walt Disney: To make people happy - McKinsey: To help leading corporatons and governments be more successful A higher ideal is pursued, but never reached. Its intent is to guide and inspire – in this respect it relates closely to 6ision. (igher purpose an ideal is something that proVides a ‘Strategic Theme’ to unite the organisation, this is what we stand for, this is how we do business (Values), this is what we are attempting to achieve (Vision) – it is the guiding compass which captures the ‘heart and mind’ – commercial and emotional logic. Refection So what is the purpose of your company: to make money, to satisfy stakeholders, to attain a higher ideal? The intents are not mutually exclusive, all can be combined together. Once purpose is articulated it serves as a guide to strategy development. Strategy Section 1.3 outlined the key pillars of strategy in an organisation. All the pillars need to be integrated and aligned within the SM process. Vision Section 6.1 considered Vision. Vision links Purpose and Strategy (author’s addition to framework) Values Section 6.2 considered Values. The key questions are: what are the company Values, how to get indiViduals to giVe their allegiance to the company frst and Foremost rather than themselves or their department, business or function? Do we break rocks, earn a living, or help to build a cathedral?102 Strategic Management Behaviour Standards – Organisational Alignment - Structure, Systems, Staff and Skills (author’s customisation) The 7S Framework is employed in the Manual’s ‘Aspects of Implementation’ Section to consider how we can align our organisations to their Purpose, Vision, Strategy and Values in the Ashridge Mission diamond. Leadership (author’s addition to framework) In our view it is primarily leadership that brings the Ashridge Mission diamond together – brings it to life. When all four pillars of the diamond are in place the commercial and emotional drive of an organisation are in place. Drafting Vision, Value, Mission Statements We see the drafting of these Statements as the responsibility of senior management. Once drafted, other organisational levels have a context to develop their statements. External Statements tend to be short – they are communication devices (but some are very long). Internal statements tend to be longer: i.e.: this is our Mission and this is how we will achieve it. The Mission Statement tends to be reviewed annually, but seriously re-tested much more infrequently. Purpose tends to hold over time and Vision and Values are typically more duraBle. Strategy and "ehaViour Standards /rganisational !lignment tend to be less robust. The key questions for senior management are: - should such a formal, explicit approach be adopted? - if it is, should it be for internal or external use, or both? - should it be closely held within the ‘inner circle’ or widely shared in the organisation? - should it be developed at one or more levels of the company? - how will it be brought to ‘life’? (communicated, evaluated?) "ut perhaps most importantly iF Statements are deVeloped and communicated the organisation must function, or intend to function in accordance with its precepts – or credibility will be lost. !uthors .ote In %urope the "ain surVey oF management tools reports that Mission Statements are the most, or second most widely used ‘management tool’ for major companies. Many leaders and senior managers apply the ideas from this Section, without having been exposed to them, it seems to be a natural instinct or insight. Our preference is to make insight and instinct explicit and systematic.103 Strategic Management Section 6.1-6.3 References 1. 2. Pascale and !. !thos ¯The !rt oF *apanese Management² 7arner "ooKs 12 2. *. #ollins and *. Porras ¯"uilding 9our #ompany²s 6ision° (arVard "usiness 2eVieW Sep /ct 1 3. M.(ay and P. 7illiamson ¯Strategic Staircases Planning the #apaBilities 2eQuired For Success” ,ong 2ange Planning 6ol .o 11 4. S. Johnson, “Who Moved My Cheese?” - Penguin, 1998 5. E. Schein, “Corporate Culture” *ossey "ass 1 . *. +otter and *. (esKett ¯#orporate #ulture and PerFormance° - Free Press 1992 . *. #ollins and *. Porras ¯"uilt to ,ast SuccessFul (aBits oF 6isionary #ompanies° 2andom (ouse 1 8. A. Campbell et al, “A Sense of Mission” (utchinson 1 9. A. Campbell and S. Yeung, “Creating a Sense of Mission” ,ong 2ange Planning 6ol 2 .o 11 10. Jack Welch, “The Future of Capitalism” - March 2009 interview with the Financial Times 11. 2. &reeman ¯Strategic Management ! StaKeholder !pproach° - Pitman, 1984 12. I. Mitroff, “Stakeholders of the Organisational Mind” *ossey "ass 13 13. The Clarkson Principles for Stakeholder Management 6alue "ased Management.net 2 1. +. Thomas ¯#on»ict and #on»ict Management° reFerenced By T. 'ladWin and I. 7alter ¯Multi nationals 5nder &ire ,essons in the Management oF #on»ict° - John Wiley, 1980 Refection 7e haVe already asKed you to re»ect aFter our Section on ±Purpose². 'iVen the importance oF 6ision 6alue Mission could We asK you to re»ect again For the #%/ and senior management We BelieVe there is no area oF re»ection as important as this.104 Strategic Management 6.4 Objectives /BJectiVes set the target. ,ogically oBJectiVes should Be linKed to a company²s 6ision Values, Mission and Strategy and cascade throughout the organisation to ensure alignment. "oth top doWn and Bottom up. (oWeVer oBJectiVes are set in many Ways in practice especially By those companies that haVe not clarifed their Mission or Strategy. 1 Some companies picK a fgure out oF ±thin air². (ead /Ffce Wants to achieVe a 1 return on sales, it’s up to management to deliver. 2 Other companies have to strive to achieve stakeholder wishes: ‘the investors expect this return by next year, we have to achieve it’. 3 Other companies look at last year’s performance and add a percentage. This is easy to do, easy to communicate and the objective requires improvement (which investors are looKing For . (oWeVer the oBJectiVes set are not linKed to the realities in the eXternal and internal environments. 4 To overcome these drawbacks other companies extrapolate forward with adjustment: ‘the industry is moving into a cyclical downturn and in order to improve we will have to grow share by 5% and increase prices by 5%’. Extrapolations with adjustments quite often lack realism. 5 Other companies set their objectives by benchmark: we expect the industry to grow by 5%, our target is to grow by 10%; our leading competitor grew by 5% last year, our target is to grow by 10% next year. 6 Many companies use a negotiation process: senior management want ‘x’, line management argue they can realistically achieve ‘y’. A compromise is eventually reached, invariably skewed to senior management’s starting position – “if you are not up to deliVering the perFormance We are looKing For We Will fnd someone Who is°. Crafting a practical set of realistic objectives requires a holistic approach and takes time. A company needs clarity on its direction and the strategies to get it there. Much work and discussion is entailed in developing, integrating and cascading objectives to all parts oF the organisation. (igh leVel oBJectiVes such as groWing marKet share need to Be translated into specifcs sales reVenue and share per segment customer product etc. In setting objectives good practice indicates: 1. Objectives should be set and integrated for different organisational strategy levels: Company and its ‘span-breakers’ of division and region 2esource and #apaBility "y Function For each business unit For operations105 Strategic Management 2. /BJectiVes should haVe a clear description oF the fnal outcome 3. Three types oF oBJectiVes should Be set fnancial strategic and operational. Strategic objectives need to be translated into operational objectives. Strategic objectives are eValuated in fnancial terms. 4. Few objectives help focus and communication 5. Objectives should have clear deadlines over different time periods (short, medium and long term). Short term objectives need to be linked to medium and long term objectives. . /BJectiVes should Be measuraBle and Quantifed. IF Quantifcation is not practical then proxy measures need to be used 7. Objectives should be written down 8. Contradictory objectives should be avoided as much as possible. If contradictory objectives remain clear priorities and sequencing needs to be spelt out 9. Objectives should be communicated so that every person understands the objectives that are relevant to them and see their importance 10. Objectives are better understood, bought into, when people are involved in the objective setting process 11. 2esponsiBility and accountaBility For an oBJectiVe has to Be set 12. The objective owner needs to have the authority and access to the resources necessary to attain the objective 13. Objectives should be challenging, but achievable (our preference is to set objectives as a ‘contract’. These are our targets, this is what we will evaluate performance against. (oWeVer as circumstances change our preFerence is to Formally reVieW the ±contract on a quarterly basis. Alternatively rather than setting objectives on an all or nothing basis some objectives can be set on a continuum – achieving 90% of a stretch objective should not be viewed as a failure. 14. Progress against objectives, milestones, needs to be formally assessed at regular intervals (Gantt charts outlining tasks and due dates are useful) 15. Attainment of objectives should be supported by the appropriate reward 16. Whether objectives are achieved or not, it is important to learn. If we did this again hoW Would We do it diFFerentlyBetter The points made can Be summarised as SM!2T oBJectiVe setting SPECIFIC M%!S52!",% !#(I%6!",% 2%!,ISTI# TIM%,9106 Strategic Management 7e haVe said that FeW oBJectiVes help Focus and communication. (oWeVer too FeW objectives can be dangerous. Take the following examples: ‘I want to grow the company by 20% a year.’ When this growth target exceeds a strategy’s natural momentum, growth is achieved by: - expanding geographic reach - adding products and services to the range All too quickly the company has moved away from its strategy, it has achieved the growth, But proftaBility has declined. In our eXperience the easiest Way to groW QuicKly is to acQuire But the maJority oF acQuisitions With the Beneft oF hindsight are shareholder value dilutive. ±2eturn on capital needs to increase From 15 to 2² easy maKe accounting adJustments to reported proftaBility or Write doWn the investment. ‘Cash generation needs to increase to pay down debt’ sell assets stop inVesting economise on Business deVelopment MarKeting and 2D and put prices up. /BJectiVes need to taKe into account the fnancial strategic and operational. To repeat crafting a practical set of realistic objectives requires a holistic approach and takes time – but having clarity of target to align different organisational levels is essential. The "alanced Scorecard When applied Well is in our VieW a poWerFul management process to this end. Refection (oW does your oBJectiVe setting process compare against the 1 ±good practice² indicators Grant Chapter 2: ‘Goals, Values and Performance’ offers additional insights, particularly in considering economic proft and perFormance. 6.5 Analysing and Developing Resources and Capabilities 2esources WorKing together create capaBilities. #apaBilities alloW tasKs to Be perFormed conVerting resources into products and serVices. The ±2esource "ased 6ieW² considers the internal enVironment as the spring Board For strategy deVelopment. 2. 'rant is a leading proponent oF the 2esource "ased 6ieW.107 Strategic Management Please read: #hapter 5 !nalyZing 2esources and #apaBilities !nd 2e»ect on the chapter²s study Questions 6.6 Company Portfolio Analysis Introduction The ‘Presidents Paradox’ is deciding which business in a multi-business, multi-market, multi-product portfolio to prioritise for investment and which to starve of resource when individual business managers are better informed and perhaps better able to judge intrinsic worth. The answer to the question is partly a function of mission, objectives, style, a deep rooted understanding of how to win, market attractiveness and the ability to evaluate the relative merits of different portfolio activities. To assist in this task a number of portfolio evaluation techniques have been developed by practitioners and consultants. This Section reviews the more popular approaches. Subdivision of the Company (aVing carried out the oVerall fnancial analysis it noW Becomes appropriate to suBdiVide the company into its constituent parts. There are many ways to subdivide a company, we recommend at minimum a subdivision by organisational boundaries (division, business); geographical region; product class and if appropriate by customer group. The ideal to be aimed at is to haVe the Full fnancial details aVailaBle For each constituent part trended overtime. Where this type of information is not readily available - to an external analyst for example - a ‘guesstimate’ should still be made; forming the best view of how the company suBdiVides in terms oF at least sales proftaBility and inVestment. !dditional inFormation especially cash»oW and numBer oF employees serVes to signifcantly enhance the insights gained. Authors Note: It surprises us that many bankers extend facilities to companies armed With the oVerall fnancial position But not KnoWing Where the numBers come From. ! company could Be proftaBle oVerall and yet haVe Four out oF fVe products loss maKing no proBlem until proftaBility disappears in the last productÝ 7ithout the subdivision bankers are not in a position to accurately assess risk. Put it another way, would you put your own money into a company without understanding where its108 Strategic Management sales profts and cash come From !t minimum then We Would adVise the company Be suBdiVided as shoWn in the fgure BeloW The portFolio ±common siZed² and trended. Worksheet to Subdivide the Company Current Year Absolute Values £m Number "5SI.%SS Sales Proft Cash Investment Employees A 80 15 6 40 2000 " 40 1 (1) 40 800 C 10 0 (2) 15 150 D 10 (1) (2) 15 200 Total Company 140 15 1 110 3150 Percentage Values (%) "5SI.%SS A 57 100 600 36 64 " 29 7 (100) 36 25 C 7 0 (200) 14 5 D 7 (7) (200) 14 6 Total 100 100 100 100 100 2epeat steps For 'eographic Product #lass and #ustomer #lass SuBdiVisions Trend Analysis "5SI.%SS ! T-3 T-2 T-1 Current Year Forecast NextYear S!,%S 85 83 80 80 50 P2/&IT 10 10 13 15 (5) #!S( 4 5 12 6 (5) INVESTMENT 50 50 40 40 38 %MP,/9%%S 2400 2400 2200 2000 1600 +ey 2atios 2eturn on Sales 11.7 12.0 16.2 18.8 (10.0) 2eturn on InVestment 20.0 20.0 32.5 37.5 (13.2) InVestmentSales 58.8 60.2 50.0 50.0 76.0 #ash»oWInVestment 8.0 10.0 30.0 15.0 (13.2) Proft%mployee K 4.2 4.2 5.9 7.5 (3.1) Sales%mployee K 35.4 34.6 36.3 40.0 31.3 InVestment%mployee K 20.8 20.8 18.2 20.0 23.8 2epeat steps For "usinesses " # and D In the example given it is clear that the portfolio is skewed to business ‘A’ accounting for £80m of the company’s £140m sales base - in percentage terms: 57%. Of more signifcance in the current year the Business giVes 1 oF the proft stream is the only cash generative activity and as the ratios show is strengthening its performance whilst tightening the investment base and shedding labour. It is the core business, the jewel of the crown. The rest of the portfolio is dependent on it. Next year forecasts however109 Strategic Management show a very different picture, sales collapsing, loss making, a cash drain with continued tightening of the investment base and employee headcount. If the forecast comes to pass the company’s overall position becomes very weak - it has businesses at break-even or loss making at the same time draining cash. Once the trended subdivision of the portfolio is complete we recommend that at least the following questions be addressed: 1. (as the portFolio got reasonaBle BalancerisK spread By Business product customer geography. - Note: a core business portfolio philosophy will not result in a balanced portfolio 2. 7here is the core in terms oF sales proft cash»oW. - Note: senior management are likely to protect the core and prioritise the core until prospects are unattractive, if the core does well it is the growth engine of the company. 3. Which areas are performing well, performing poorly, and why? 4. What explains historic portfolio momentum? 5. (oW does the S.7./.T. assessment VieW the portFolio Areas of Strength? Areas of Opportunity? Areas of Weakness? Areas of Threat? (risk) Note: Strategy should play to strength and opportunity as much as is possible. 6. What key issues and challenges are faced? 7. What are the key portfolio linkages and synergies? 8. What is the expectation and role for each portfolio element? . (oW can the parent addsuBtract Value 10. If only incremental improvements in quality, cost, productivity are achieved, where will the portfolio be in 3-5 years? Is this satisfactory? Is there a gap? 11. What are the key portfolio development options? 12. (oW Will the portFolio Be regenerated 7here Will it Be at the end oF the planning horizon? All of the questions, and others, are important, but the key question is question 12 – how will the portfolio be developed going forward? What strategies will be adopted for each part of the portfolio? What, if any, parts of the portfolio will be developed, exited from? To help address these key issues several of the more popular portfolio frameworks are now reviewed.110 Strategic Management Portfolio Evaluation Displays Introduction Portfolio matrices display the portfolio, they provide transparency, help facilitate thinking and discussion. "ut please do not assume they giVe you an ansWer as to What to do. The maJority oF portFolio matrices consider marKetindustry attractiVeness competitiVe positionBusiness strength and fnancial perFormance. "y displaying the entire portFolio (be it business units, products, geographic region, customer group etc.) they are powerful communication tools that assist the strategic discussion in several areas: Setting strategic and fnancial targets - Allocating resource - Identifying growth and divestiture candidates - Identifying portfolio gaps, major issues faced, priority areas for acquisition (elp in assigning roles core groWth proft area BlocKingfreWall position etc. The Section reVieWs fVe matrices - Financial Performance versus Market Growth "#' 'roW Share the frst Widely used portFolio matriX 'eneral %lectric²s Master Strategy "usiness Screen the ±TraFfc ,ights² . This matriX or adaptations of it, is the matrix we see companies use most commonly – but again rarely as comprehensively as outlined in the Section Portfolio matrices provide a snapshot. It is important to introduce a time dimension, either on one chart, or by using a series of charts: a) Where was the portfolio historically? b) Where is the portfolio currently? (by comparing a) with b) we can review historic strategies and track portfolio momentum) c) Natural momentum of portfolio if no major actions are taken – are we on course, or is there a gap?111 Strategic Management d) Target portfolio at the end of the planning period (plans have the detail of how to get there) The last two frameworks in the Section automatically introduce the important time dimension: "aghai²s Three (oriZons oF 'roWth FrameWorK stresses the need to Balance diFFerent time horizons in developing the portfolio Mc+insey²s PortFolio oF InitiatiVes FrameWorK Builds on the Three (oriZons insights and uses initiatives as the unit. Many of our clients, especially in professional services, use a similar approach (sometimes referring to initiatives as projects – and the project portfolio) 6.61 Financial Performance versus Market Growth In reVieWing the company²s portFolio We are immediately interested in fnancial performance and market growth prospects. Financial Performance can be gauged by Various measures such as return on capital cash»oW or operating margin as used in the matrix below. Market Growth can be taken at a point in time or averaged over a period – both historic and forecast. Each portfolio unit is positioned in the matrix, typically displayed as a circle (bubble) proportional to the sales revenue generated. Financial Performance vs. Growth Rate Average Annual Market Growth Rate (%) Operating Margin (%) -10 -5 5 0 10 15 20 -10 -5 0 5 10 15 20112 Strategic Management There are many possible variations for the axes of the matrix. One such variation is to plot the circles to display the proft aVailaBle in the marKet the Proft Pool eQuals marKet siZe x average margin) and shade each circle with a pie to represent the units share of market proft pool aVailaBle. Competitive benchmarking and momentum considerations can be introduced by plotting matrices with axes such as: Unit Operating Margin vs. Industry Operating Margin 5nit 'roWth 2ate Vs. MarKet 'roWth 2ate (An example of a momentum chart is given in the next Section on the Grow-Share Matrix) 6.62 The Grow-Share Matrix The 'roW Share MatriX shoWn in the fgure BeloW Was introduced By the "oston #onsulting 'roup. It Was the frst portFolio FrameWorK to Be Widely used and remains popular today. The framework has made a major contribution to strategic thinking with its concepts and terminology now well embedded in the language of SM. (aVing suBdiVided the company into Business units or products geographic areas position in customer groups etc.) each is plotted on the matrix graphically by a circle proportional to its sales revenue. Boston Consulting Group Grow-Share Matrix Competitive Ratio (Sales versus leading competitors sales) High Market Growth Rate (Cash Use) Large Negative Cash Flow Modest + or - cash flow Large Positive Cash Flow Modest + or - cash flow High 1.0 Low Low ?113 Strategic Management MarKet 'roWth on the Vertical aXis Was "#'²s proXy For marKet attractiVeness. This built on classic product life cycle ‘S curve’ theory which sees products moving through emBryonic groWth maturity and decline sales reVenue stages With proftaBility and cash»oW usually adVancing as sales groWth sloWs doWn. The cut oFF BetWeen What is high and low growth for a market relates to the market development stage: high is ‘embryonic’ or ‘growth’; low is ‘mature’ or ‘decline’. In practice the cut point between the two is normally set at 3-5% higher than the growth rate of the economy or the industry (as market growth is being considered) or simply at 5 or 10%. /n the horiZontal aXis "#' use #ompetitiVe 2atio your marKet share diVided By that oF the leading competitor as a proXy For competitiVe adVantage. "#' selected the descriptor as they had found in their Experience Curve Theory that as accumulated volume increased so costs went down in a fairly predictable linear manner when plotted on a semi-log scale. The implication Being that iF a frm could accumulate Volume QuicKer than its competitors its costs Would Be loWer and it Would haVe the potential to earn higher profts. 7ith a competitiVe ratio aBoVe 1. the frm has the highest marKet share and hence highest sales volume which when held over time results in the greatest accumulated volume position. As should be already apparent the attraction of matrix is its simplicity - it is based on two descriptors which serve as proxies for market attractiveness and competitive position. "usinesses are easily plotted and readily compared graphically on the Basis oF sales revenue. As should also be apparent, the simplicity of the approach lays it open to criticism (we return to this point at the end of the Section). "#' argued that one should eXpect the cash»oW perFormance oF Businesses in the diFFerent Quadrants oF the matriX to Be Quite diFFerent. (igh groWth aBsorBs cash as Businesses add fXed and WorKing capital to support the added sales reVenue Whilst growth itself implies the need for additional discretionary expenditure in marketing, research and neW product deVelopment. ,oW groWth marKets in contrast With the investment cycle largely played out and products and services well established, should be far less demanding in terms of cash. These generalisations, for that is what they are, are generally supported when examining the PIMS business unit data base. Strong market position should give a business the ability to be more cash generative as it potentially will Beneft From eXperience curVe eFFects economies oF scale and scope as Well as haVe the ability to leverage its position in terms of price. The converse applies for weakly positioned businesses – but this is a ‘huge’ generalisation.114 Strategic Management The Four "#' Quadrants hence haVe the FolloWing general characteristics and cash »oW implications: • The Question Mark: High Market Growth/Low Competitive Ratio The Question Mark is also referred to as the ‘wildcat’, ‘problem child’, ‘adolescent’, ‘sweepstake’ or ‘double or quit’ quadrant. A business in this position has great opportunity to expand sales revenue by just keeping up with the market growth. On the other hand it is likely to require substantial cash injections especially as the business does not have the associated cash»oW Benefts high share conVeys it is in a cash trap. /F eQual concern is that as the marKet matures the Business could fnd itselF as a marginal competitor in a market going nowhere and with an escalation in competitive intensity be shaken out of the market by its more powerful adversaries. To avoid this danger the business needs to investigate the feasibility of strengthening its position to that of the ‘Star’ whilst buoyancy remains and competitor’s positions are not entrenched. To grow share in a groWth marKet Will hoWeVer reQuire signifcant cash hence iF the route is not FeasiBle or cash unavailable an orderly withdrawal should be considered - the ‘double of quit’. • The Star: High Market Growth/High Competitive Ratio "usinesses in the Star Quadrant should haVe the aBility to generate cash by virtue of their strong share position but need to plough this back to keep up with market growth and support their competitive position. • The Cash Cow: Low Market Growth/High Competitive Ratio With a dominant share position in a market with the investment cycle largely played out the Cash Cow should be highly cash generative. Even after supporting its position aggressively surplus funds should be available to be reinvested elsewhere. The Cow has great potential to be ‘milked’. • The Dog: Low Market Growth/Low Competitive Ratio A business in the Dog position is weakly positioned in an ex-growth market situation. Whilst the market situation does not call for substantial cash injections the business is unlikely to be able to generate much cash either. Under these circumstances the business uses what little cash it generates and is again regarded as a cash trap. !t the time the matriX Was introduced many companies set »at fnancial targets and hurdles For each oF the Businesses in the portFolio. "#' in turn argued that this lacKed 115 Strategic Management realism - if a Cow and a Question Mark were both asked to be cash neutral, the Cow would haVe diFfculty using its surplus Funds Whilst the 1uestion MarK Would Be condemned to not supporting its position and ultimately haVe to WithdraW. /ne oF the maJor Benefts oF the diVersifed portFolio the aBility to channel Funds to areas oF more productiVe use Would Be negated. The generalised linKage BetWeen share strategy proftaBility inVestment reQuirement and cash»oW "#' dreW attention to is shoWn in the FolloWing fgure. "#' 1uadrant Implications 15!D2!.T M!2+%T S(!2% ST2!T%'9 P2/&IT!"I,IT9 I.6%STM%.T 2%- 15I2%M%.T NET #!S(&,/7 #!S( #/7 (/,D (I'( ,/7 (I'( ST!2 (/,D or '2/7 (I'( (I'( .%5T2!, 15%STI/. M!2+ D/5",% or 15IT ,/7 (I'( or ,/7 NEGATIVE DOG 2%D5#% ,/7 ,/7 .%5T2!, The natural ‘success sequence’ for a balanced portfolio was to use surplus cash from today’s winners (Cows) to develop tomorrow’s winners (Question Marks) and promote them to Stars, which with maturity become Cows - the balanced cash-regenerative portfolio. The ‘disaster sequence’ being to use surplus funds from Cows to support Question Marks which are unable to promote their position and become Dogs - throwing good money after bad. To capture the dynamics of managing the portfolio over time the basic Grow-Share Matrix is used in conjunction with a share momentum graphical display as shown in the fgure BeloW. "usinesses to the right oF the diagonal line are increasing sales Faster than market growth and hence gaining share; those to the left of the diagonal losing share. The Share Momentum Plot Losing Share Gaining Share Historical Market Growth of Business (Five Year Period) Historical Market Growth (Five Year Period)116 Strategic Management ! Key issue to address at this stage is What is the groWth rate the frm can sustain "#' used the following formula to establish the long-term growth rate around which the fnancial policies oF the frm could Be co ordinated G = D/E (R - i) p + R(p) where: G = Maximum sustainable long-term asset growth rate. D/E = DeBt%Quity ratio. R = Desired return on assets adJusted For in»ation . i = Current cost of debt. p = Earnings retention rate (%). Criticisms of the Grow-Share Matrix 'iVen the simplicity oF the "#' approach as already stated it is open to criticism. The more frequently mentioned criticisms include: #ompetitiVe 2atio may Be a poor proXy For competitiVe adVantage the relationship BetWeen relatiVe marKet share and proftaBility does not necessarily hold. The approaches Focus is on marKet share strategy ignoring other dimensions such as vertical integration or mechanisation strategies. ! Business could dominate upstream stages But Be poorly placed doWnstream in terms of market share. The marKet and hence competitiVe ratio may not haVe Been defned appropriately. MarKet groWth may Be a poor proXy For marKet attractiVeness. There may not Be a close relationship BetWeen groWth and cash»oW. There can only Be one #oW and one Star iF the #ompetitiVe 2atio cut point oF 1. is adhered to (practitioners tend to use different cut-points and substitute market share For #ompetitiVe 2atio . !s cash can Be raised eXternally a portFolio need not Be Balanced. &reedom oF action is constrained iF Business units haVe interrelationships With other portfolio businesses. #ompleXity in strategic control systems and culture are implied By one company 117 Strategic Management managing businesses with such different characteristics. The laBels employed haVe negatiVe connotations Mead #orporation employed the terminology "ond #oW SaVings !ccount Star SWeepstaKe 1uestion MarK Mortgage (Dog). In seeKing to optimise the Whole the centre runs the risK oF demotiVating the eFForts oF certain units and potentially creates con»ict you²Ve taKen cash From me to help them out; my role is to run down the business?). All of these criticisms are valid, the framework should not be used naively and insight should not be confused with dogma. Used appropriately it remains a powerful graphical summary which considers: The role competitiVe share strength and groWth opportunity oF indiVidual Businesses. PerVasiVe portFolio issues such as Balance and groWth potential. It is interesting to observe that different companies use the matrix in different ways. Some seek to play the balanced portfolio. Others are content to run a portfolio of Cash Cows - but where is the future growth you may ask? Easy, they reply, we wait for a Cash #oW company to maKe a diVersifcation moVe to a 1uestion MarK that goes Wrong (disaster sequence) and then acquire them cheaply keeping the Cash Cow and selling on other businesses - which in large part pays for the acquisition. Such companies thrive on failed company strategies. Other companies build their portfolio by acquiring Dogs - not expensive to buy, but if you acquire several cheaply in the same industry and integrate them you potentially end up with a Cow (or a very big Dog as the integration process runs into diFfcultiesÝ . 6enture capitalists actiVely seeK out 1uestion MarKs Which they BelieVe haVe the potential to Become Stars. #ertain companies and priVate eQuity frms are eXpert at energising traditional Dog Businesses to produce Very attractiVe proftaBility and cash»oW. The game can Be played Very diFFerently it relates strongly to your mission style and growth vector. !uthors .ote The 'roW Share MatriX should not Be used to predict cash »oW BehaViour #ash #oWs do not necessarily generate cash. The Key drags on Business cash»oW in the PIMS business unit database are: Forced Use of Cash (igh MarKet 'roWth (igh in»ation (igh seasonality118 Strategic Management Capital Structure (igh leVel oF inVestment ,arge unit oF capacity addition (igh replacement cost - Increasing investment ,oW leVels oF capacity utilisation Competitive Position ,oW marKet share ,oW relatiVe marKet share - Increasing share ,oW leVel oF relatiVe perceiVed Quality ,oW leVel oF relatiVe price Decision Use of Cash (igh relatiVe and aBsolute marKeting eXpenditure (igh relatiVe and aBsolute 2D spend (igh relatiVe and aBsolute leVel oF neW product actiVity Market Growth and Competitive Ratio do not explain cash-fow behaviour! If you feel uncomfortable plotting a ‘Cash Cow’ as a Cow when it is a cash drain use another matrix, with one of the axes being: ‘cash use, cash generation’. 6.63 General Electric’s Master Strategy - Business Screen 'eneral %lectric oF the 5S introduced the Master Strategy "usiness Screen portFolio matriX. The grid also KnoWn as the ±TraFfc ,ights² Was deVeloped in collaBoration With the consultants Mc+insey #ompany. The approach deVeloped Built on preVious Formats such as the Grow-Share Matrix and laid the foundations for several subsequent matrices. 2ather than use proXies For Judging industry attractiVeness and Business strength the '% matrix addresses these directly assessing each as being high, medium or low resulting in a nine cell matriX as shoWn in the fgure BeloW.119 Strategic Management 7illiam 2othschild1 Who WorKed in '%²s strategic planning actiVity suggested fVe categories oF Factors Be reVieWed in Judging industry attractiVenessBusiness strength as shoWn in the fgure BeloW. 2othschild²s ,ist oF &actors 5sed to Determine Industry !ttractiVeness "usiness Strength Attractiveness of your industry Strength of your business Market Factors Size (dollar, units, or both) Size of segments Growth rate per year – Total market Specifc Segments Diversity of market Sensitivity to price, service, features, and external factors Cyclicality Seasonality Captive customers Share (in equivalent terms) Share of key segments Your annual growth rate – Total market Specifc segments Your participation 9our in»uence on the marKet Your sales lag or lead Extent to which your sales are captive 2ating General Electrics Master Strategy - Business Screen - Traffic Lights HIGH MEDIUM LOW BUSINESS STRENGTHS INDUSTRY ATTRACTIVENESS Invest/Grow Selectivity/ Earnings Harvest/ Divest LOW MEDIUM HIGH120 Strategic Management Competitive Factors Types of competitors Degree of concentration Changes in type and mix Entries and exits Position changes in share Functional substitution Degrees and types of integration 7here you ft hoW you compare Segments you have entered or left Your relative share change Your vulnerability Your own level of integration 2ating &inancial Economic Factors ProftaBility 2atios Dollars Contribution margins ,eVerage Factors such as economies oF scale "arriers to entry or eXit Both fnancial and nonfnancial Capacity utilization 9our proftaBility perFormance 2atios Dollars Your contributed value Any competitive advantage you possess Problems you would have in entering or exiting Your utilization 2ating Technological Factors Maturity and volatility Complexity Differentiation Patents and copyrights Technology required Process of manufacturing Ability to cope with change Depths of your skills Types of your skills Your position Your resources 2ating Socio-political Factors Social attitudes and trends ,aWs and goVernment agency regulations In»uence With pressure groups and government representatives (uman Factors such as unioniZation and community acceptance Your company’s responsiveness and »eXiBility Your company’s ability to cope Your company’s aggressiveness Your company’s relationships 2ating /Verall 2ating Practitioners tend to develop their own list of factors, customising to the type of industries they operate in. Shell in chemicals for example, developed a similar nine cell grid (the Directional Policy Matrix) with factors to consider including the risk of synthetic substitution and feedstock situation.121 Strategic Management /nce the Factors are selected they are typically Judged on a fVe point scale The factor assessments in composite then indicate the appropriate placing in the matrix. ! more ±scientifc² approach is to assign each Factor a Weighting out oF a total oF 1 and then multiply through by the rating of 1 to 5. With a possible range of 100 to 500; scores below 233 are low, between 233 and 366 medium, above 366 high. A business’ position in the matrix suggests its strategic thrust and level of resource support. Where both the industry attractiveness and business strength are high the Business is a prime candidate For resource support green on the TraFfc ,ights . 7here both the industry and business strength are unattractive the indication is to limit or reduce resource commitment red on the traFfc lights . In the intermediate positions on the leFt to right diagonal Be selectiVe With resource support amBer on the TraFfc ,ights . More specifc guidelines Were deVeloped By !.T. +earney as shoWn BeloW. Extremely Unattractive Unattractive Neutral Attractive Extremely Attractive Industry Attractiveness Major Disadvantage Disadvantage Neutral Advantage Major Advantage Business Strength122 Strategic Management A.T. Kearney’s G.E. Matrix Guidelines "usiness Strengths Industry Attractiveness (igh Medium ,oW (igh - Grow - Seek dominance - Maximise investment - Identify growth segments - Invest strongly - Maintain position elsewhere - Maintain overall position SeeK cash »oW - Invest at maintenance level Medium - Evaluate potential for leadership via segmentation - Identify weaknesses "uild strengths - Identify growth segments - Specialize - Invest selectively - Prune lines - Minimize investment - Position to divest ,oW - Specialize - Seek niches - Consider acquisitions - Specialize - Seek niches - Consider exit - Trust leader’s statesmanship - Sit on competitor’s cash generators - Time exit and divest When all the businesses in the portfolio are plotted on the matrix clear investment priorities are indicated which subsequently link into resource allocation plans. With the position of a business decided, the next step is to track momentum and set a desired position on the matrix - set objectives. Consistency between desired position, resource allocation, managerial systems and control is now developed. Discussion The strength of the GE Matrix approach is that it is multi-factor and comprehensive. Its drawback over other techniques, such as the Grow-Share Matrix, is that it is more complex (-especially if different factors are used to customise the analysis for the various industries and businesses in the portfolio). Moreover, a much greater degree of judgement is needed in selecting factors, weighting them (if weightings are employed) and rating them. The process is systematic but the result open to different interpretations. In part to address these concerns, GE built an extensive internal business database and developed sophisticated modelling techniques to more formally assess a business’ circumstances. This initiatiVe Was the Forerunner oF the Proft Impact oF MarKet Strategy PIMS program 123 Strategic Management and its multi-company business unit database. Can we repeat: do not assume a position on a matrix gives you an ‘answer’ – there are many more considerations. 6.64 The Three Horizons of Growth also reFerenced as 7eed Seed &eed (oriZons Introduced By "aghai oF Mc+insey2 the Three (oriZons oF 'roWth FrameWorK prompts management to consider growth over different time periods: Horizon 1 Current core businesses that account for the majority of today’s performance. Here the focus is on improving performance (exploitaton) and seeking to extend (i.e. grow market share, move into adjacencies) Horizon 2 Contains the company’s emerging business opportunites which have the promise to generate signifcant revenue and proft in the future. The imperatve is to build, which may take signifcant investment in the shortterm Horizon 3 Is concerned with longer term exploraton of growth avenues: idea generaton, research initatves, experiments, prototypes, pilot projects etc. The imperatve is to create a portolio of viable optons. Mc+insey argue that the Three (oriZons need to Be managed simultaneously Balancing eXploitation and eXploration. IF the portFolio is heaVily sKeWed to (oriZon 1 current performance may be attractive but the company will be starved of future growth options (Authors Note: Unless the company adopts a growth by acquisition policy.) McKinsey also The Three Horizons of Growth - M. Baghai, The Alchemy of Growth Time (years) Horizon 3 Create Viable Options Horizon 2 Build emerging businesses and capabilities Horizon 1 Extend and Defend Core Business Profits124 Strategic Management point out that each (oriZon needs diFFerent metrics Ways to manage and capaBilities !uthors .ote The Three (oriZons pull heaVily on liFecycle thinKing Which is also one oF the Fundamental ideas Behind the "#' 'roW Share MatriX. 6.65 McKinsey’s Portfolio of Initiatives 2ather than plot a Business or product portFolio the Mc+insey PortFolio oF InitiatiVes3 plots a company’s initiatives that can have a major impact on performance. McKinsey fnd that a company typically has 2 maJor initiatiVes in its portFolio. InitiatiVes should be categorised by priority, size, potential impact, timeframe and organised into themes. The aXes oF the matriX pull on the Three (oriZons oF 'roWth insights (oriZon 1 (oriZon 2 (oriZon 3 ,eVel oF FamiliarityrisK Familiar Somewhat Familiar Uncertain Initiative timeframe Current Earnings 2-3 years (medium term) 3 years + (long term) Imperatives Maintain Excellence ,eVerage DeVelop Create Options Horizon 1 Horizon 2 Horizon 3 Metrics ROIC NPV Option Value People Maintainers Builders Visionaries/ Champions Capabilities Platform assembled Being acquired/ developed Clarifying requirements McKinsey’s Portfolio of Initiatives Level of Familiarity/ Risk Familiar Somewhat Unfamiliar Uncertain For Current Earnings Mature in 2-3 years Mature in 3+ years Time to Maturity 1 2 3 4 5 6 7 8 9 Plot Initiatives Cost/Benefit Impact & Priorities125 Strategic Management !s With the Three (oriZons FrameWorK the PortFolio oF InitiatiVes MatriX addresses balance between exploitation and exploration. If initiatives are clustered around ‘box 1’ (familiar, current earnings) there is little focus on building long term health. If initiatives are clustered around ‘boxes 6 and 9’ there is little focus on protecting and improving the existing core. Initiatives in ‘box 3’ relate to long term investments (i.e. constructing a new plant). Initiatives in ‘box 7’ are for current earnings but have uncertainty – under these conditions a portfolio of initiatives may be needed and scenario methodologies employed. McKinsey recommend that initiatives be clustered into themes or convoys that are to have major impact on the company (i.e. performance and health; exploitation and exploration) Possible themes include: McKinsey recommend (as is good practice with any portfolio matrix) that the Portfolio of Initiatives is monitored and reviewed on a regular basis – perhaps monthly; and a full audit to reaccess the Initiative Portfolio take place perhaps every six months. The Initiative Portfolio is not static – initiatives are started, completed or aborted. Authors Note: The literature often refers to organisational agility: the ability to rapidly redeploy resources to capitalise on opportunities or handle proBlemsthreats. ! PortFolio of Initiatives management process, when well executed, should promote organisational agility. Authors Note: Portfolio matrices can be used at different organisational levels. Whilst the classic portfolio application is company wide we are strong advocates of using the same methodology for the: - division - region - country - business (i.e. product, customer etc.) Types of Initiatives – Performance & Health * Improve performance * Control risk * Improve capabilities * Extend product/service reach * Extend geographic reach * Move into adjacencies * Build new business * Build new capabilities * Shape the portfolio: M&A/Divestment * Organisational restructuring * Ecosystem management126 Strategic Management Weaknesses in Portfolio Displays 1. Portfolio matrix displays are high level summaries. Each matrix provides a different insight. Our preference is to use two or three portfolio matrices to capture more insights. 2. Portfolio positions are often open to debate – the market and business can be defned diFFerently diFFerent Factors and Weightings selected to Judge aXes liKe industry attractiveness and business strength. Authors Note: When working with a chemical company we witnessed the ‘battles’ BetWeen head oFfce and line management aBout Where to position Business units the position on the matrix was to be an input into the resource allocation decision. 3. Portfolio positions provide a ‘snapshot’. The time dimension needs to be factored into displays: where was the portfolio historically, where is it now, what is our future targeted portFolio position The Three (oriZons oF 'roWth and PortFolio oF InitiatiVes matrices automatically factor in the forward looking time dimension. 4. Most portfolio matrices are weak in comparing established versus emerging business areas. Three (oriZons oF 'roWth and PortFolio oF InitiatiVes matrices haVe strengths in these areas. !uthors .ote I"M²s #%/ ,ou 'estner Formed a team to eXamine Why I"M did not or Was slow to capitalize on promising opportunities. The teams six key explanators were: - Incentives were tied to short term results - The focus was on existing markets and customers (hence not exploring gaps, adjacencies) (igh proft eXpectations that FeW start ups could match 2eliance on hard data to JustiFy the Business case neW marKets haVe no hard data - The resource allocation process favoured large investments in established business areas rather than taking many small bets or sequencing investment I"M deVeloped managers not entrepreneurs !s a conseQuence I"M created the %merging "usiness /pportunity management process to identify growth opportunities that required cross functional integration. The Corporate InVestment &und proViding resources For these initiatiVes. The I"M approach Was Based on the Three (oriZons oF 'roWth concepts. 5. PortFolio matrices do not automatically access risKreturn. "anKs and insurers looK at portfolio risk weighted assets, but in our experience few companies do. A risk weighting and different hurdle rates are easily superimposed on or added to portfolio matrices.127 Strategic Management 6. The portfolio matrices of Section 6.6 do not directly consider the resource and capability portfolio approach of Section 6.5. To ensure balance we would advise an external market portfolio display is backed up by an internal resource and capability portfolio display. 7. A key question is what type of business is the corporate parent good at managing, adding value to, what type of business is it not good at managing? Portfolio displays provide transparency, help facilitate thinking and discussion. But please do not assume they give you an answer as to what to do. Perhaps the biggest weakness of many portfolio displays is that of not considering synergy. 6.66 Portfolio Synergy The weakness of many portfolio matrices is that they do not explicitly address the issue of inter-relationships between elements of the portfolio. Yet many consider that the central Justifcation oF the diVersifed company is hoW the parent adds Value to stand alone entities by fostering relationships between entities which results in the 2+2=5 equation. If the parent fails to foster these interrelationships, and subtracts value from the entities under its control, the equation could become: 2+2=3 ! fnancial conglomerate looKs For little more than fnancial synergies and the competencies of deal making and ‘carrot and stick’ performance management. Other companies fnd their central rationale in Being aBle to unlocK synergies Be that By managing vertical integration linkages, economies of scope, shared competencies and capabilities or shared resource, both tangible and intangible. M.E. Porter’s text, Competitive Advantage4, has three chapters on inter-relationships between business units, and a further chapter on the role of complementary products. The ideas he puts ForWard are an eXtension oF "raXton !ssociates ideas on ±actiVity sharing’ which can be considered on Porter’s simple two by two matrix.128 Strategic Management So when should two businesses, two departments, two product areas etc. work closely together to unlock synergies, when should the relationship be at arm’s length? On the simple framework just outlined the answer should be fairly obvious – but the company landscape is littered With Failed attempts to unlocK ±apparent synergies². ,et us giVe you an example: In essence banking is made up of four lines of business: investment banking, corporate banking, business banking and retail banking. There are many variants for each line of business and many good reasons to straddle between the ‘silos’. However, the core Served Market, resource profle, capabilities, cost structure, culture etc. between the ‘silos’ is very different. The norm is to recognise this, run the bank as four ‘silos’ and overlay a strong bank culture and co-ordinate the ‘silos’ to work effectively together where there is overlap. However, some banks do not see it this way. They merge: Investment banking + Corporate banking Corporate banking + Business banking Business banking + Retail banking The argument is invariably that there is some overlap/straddling and by merging cost will be saved. Five years later the bank splits the silos apart again. This has happened in every major banking market we have worked in. There is a strong case to do this if certain conditions are met – but invariably they are not. The percentage of sharing between the ‘silos’ in terms of: - assets, costs, capabilities, intangibles is low, and the sensitivity to sharing is low. All that tends to result is 2+2=3, an increase in Complexity, Confusion and Culture129 Strategic Management clash. A one-size fts all approach to different resource and capability requirements simply does not work in the majority of cases. There are undoubtedly certain areas that can be put together (back offce), but a full merger of the silos is doomed to failure unless: - the amount of sharing is redesigned to be high - the sensitivity to sharing is redesigned to be high Even if this is possible, the question of transformational change and effective integration of silos remains. The eValuation steps are Very simple iF you fnd yourselF in the position oF considering whether to merge two entities together or keep them apart and employing co-ordination mechanisms; what percentage is shared, or could be redesigned to share, in terms of: 2esources human - organisational fnancial - physical - intangible Costs Capabilities And then: What is the sensitivity to sharing? We have a preference for ‘common sizing’. Should Chanel diversify from perfume to high quality silk scarves for cost synergy reasons? Stop! – think – what is your answer? 100 75 10 100 15 75 Purchases % shared 15 80 90 0 10 Marketing and distribution Overhead Perfumes Scarves Cost Synergy130 Strategic Management The ansWer is oF course that the maJority oF costs are shared and there are maJor Benefts to sharing economies oF scope . So cost synergy Will result. "ut #hanel is a reVenue not cost focused competitor. If cost synergies damaged the ability to generate revenue diluted the Brand the moVe Would not Be a good idea. (oWeVer For many customers it seems the more products Chanel add to the range, the stronger their life-style brand becomes and the more cost-synergies they get (a ‘double whammy’). "ut cost considerations should not Be the only things considered as they are all too oFten. /ur simplifed diagram reFerred to resources capaBilities intangiBles as Well. %ach needs to Be common siZed and eValuated. In our eXperience a Key intangiBle is culture ft. Overview "e Wary oF portFolio charts or analysis that does not consider synergies this is one oF the central rationales oF the diVersifed company The appeal of ‘silos’ is that there is clear responsibility, accountability – but then the company is just a collection of silos – the pieces do not add up to more than the whole – investors can diversify their portfolio, they look for company parents to unlock additional value via synergies. Section 6.6 References 1. 7. %. 2othschild ¯Putting It !ll Together° - amacom, 1976 2. M. "aghai et al ¯The !lchemy oF 'roWth° - Perseus Publishing, 1999 3. ,. "ryan ¯*ust in time strategy in a turBulent World° - McKinsey Quarterly, Jun 2002 4. M. E. Porter, “Competitor Advantage” - The Free Press, 1985131 Strategic Management Refection 1. Common size your portfolio 2. Select at least one portfolio matrix and plot your portfolio and its momentum 3. Consider the 12 portfolio questions in the introductory Section Grants Chapter 14: ‘Implementing Corporate Strategy: Managing the Multibusiness Firm’ has a brief Section: ‘Managing the Corporate Portfolio’ which covers portfolio frameworks. 6.7 Routes To Build The Company - Introduction A company faces fundamental choices as to how to allocate resource and seek to enhance and Build the portFolio oF actiVities oVer time. ! company²s purposeMission 6ision and Values guide these choices as does the historic momentum of its strategy. In considering momentum the frst step is to chronologically list the Key eVents in a company²s history that have bought it to its current position, paying particular attention to: · Market areas entered or withdrawn from. · Products launched or deleted. · Facilities added or closed. ½ "usinesses started or shut doWn. · Alliances made or withdrawn from. · Acquisitions attempted or secured. · Key changes in personnel. · Stated strategic direction and policy. · Periods of success or failure. ½ 2esources and capaBilities deVeloped or lost. With a company’s landmarks listed the underlying rationale behind each major event now needs to be considered - what has been driving the company’s development over time? The insights given serve to get behind the stated and unstated company strategy of the company, help understand momentum and importantly tune into the ‘personality’ of the company - the scars left by previous mistakes which are unlikely to be repeated; the hot buttons to be avoided and the successes likely to be built on. "oth the historical deVelopment oF the company and the Future groWth choices it Faces 132 Strategic Management can Be useFully summarised on the !nsoFF ±ProductMarKet² matriX shoWn in the fgure below. The Ansoff matrix shows that a company has four basic routes to growth: 1. Current products, current market growth vector. (ere the company stays close to home seeKing to groW By increasing marKet penetration. Strategies to increase market share, product use and customer loyalty are emphasised. The route has much to commend it: there is an existing business base to build on; experience, skills and resources are in place. A strengthened market position has the potential to improve operating economics especially if economies of scale are pronounced. Against this, the pursuit of strength in a core business exposes the company by having little spread - all the eggs are in one basket. 2. Current products, new market growth vector. (ere the company seeKs to groW By eXtending its eXisting product eXpertise into neW market areas. The use of new distribution channels, attacking new geographic regions or new target segments within the existing market enlarges the sales potential the company has to aim for. On the other hand the danger is that the company spreads itself too thinly - breadth without depth. 3. Current markets, new product growth vector. (ere the company seeKs to groW Within eXisting marKets By Broadening the product oFFer. Additional product features, an expanded product line, add services, or new products The Ansoff Product/Market Matrix Market Present Product New Source: H. Igor Ansoff, Corporate Strategy, 1965 New Market Penetration Market Development Product Present Development Diversification133 Strategic Management extend the company’s scope with the existing customer class. With a wider range of products on offer the approach is predicated on capturing greater customer sales whilst blocking potential beach-heads for competitors to exploit. Potentially economies of scope are enhanced by sharing the cost, resource and capability structure between products (i.e. common distribution, marketing, production, etc.). On the other hand the danger is that complexity is introduced into the range with many marginal product offerings and the company remains dependent on the same end use market. (Note: Moving from a productserVice oFFer to a customer solution Quite oFten reQuires an eXpanded Business model and neW capaBilities to proVide the ±one stop shop². 2adical moVes in this direction Would Be termed related diVersifcations . 4. New products, new market growth vector. (ere the company seeKs to groW By diVersifcation into neW marKets With neW products Where it has no tracK record. DiVersifcation moVes can Be concentric related to eXisting operations) or conglomerate (unrelated). In the former a company may vertically integrate forward (a canning company entering the beer market) or vertically integrate backwards (a beer company entering the canning industry) or move to closely related areas which have the characteristics of a new business rather than a new product (beer company moves into soft drinks). In the latter the company moves into totally unrelated areas (beer company into gold mining) attracted by the industry prospects. Such conglomerate diVersifcation may Be prompted By surplus Funds BelieF in general management ability or simply by the view that the grass is always greener on the other side of the fence and the opportunity is present. Many such apparently unrelated diVersifcations are in Fact Based on applying eXisting competencies or technologies to neW marKet settings. 'enerally hoWeVer unrelated diVersifcation is considered as the riskiest growth route. 2isK tends to increase as We moVe From the Familiar to the unFamiliar. IF contours are superimposed on the Ansoff matrix growth options a very simple approximation of risk is indicated (could we stress that this is a very crude way to start to evaluate risk). Embarking on higher risk options should have the promise of higher return.134 Strategic Management The Ansoff growth options can be re-expressed as follows: !uthors .ote the !nsoFF groWth routes can Be pursued organically By allianceJoint Venture or By merger and acQuisition. There is alWays the outsource retrencheXit option available. Risk Contours in the Ansoff Matrix Present New Product Market Present New Unrelated Diversification Related Diversification Geography New Products Product Extensions New Customers Segment Channels Increased Use Company Development Alternatives MARKET PRODUCT FORWARD BACKWARD RELATED UN-RELATED ORGANIC ALLIANCE ACQUIRE/EXIT DIVERSIFICATION VERTICAL INTEGRATION COMPANY CHOICES HORIZONTAL INTEGRATION135 Strategic Management Ansoff Options ‘Gap Analysis’ If a company continues with its current strategy making incremental improvements in quality, cost and productivity where will the company end up in terms of revenue and proftaBility oVer the planning period 7hen this traJectory Falls short oF company oBJectiVes a ±gap² is indicated as shoWn in the fgure BeloW. (oW the ±gap² Will Be closed is the Basis oF the company²s strategy going ForWard. ! strategic plan should Be specifc in outlining hoW each option Will contriBute to closing the ±gap² in fnancial terms. Revenue, Profit Objectives Company Performance Year Gap Analysis Revenue, Profit for ‘Business as Usual’ 1 2 3 Trajectory GAP Gap Analysis Options Productivity Improvement Change Asset Base Sales Growth Cost Reduction Improved Utilisation Increased Price Realisation Improved Sales Mix Increased Usage Take Competitors Customers New Segments Convert New Users Existing Markets New Markets Existing Assets Market Penetration Market Development Product Development Asset expansion Alliance/Joint Venture Merger and Acquisition Vertical Integration Diversification New Business Models Divestment Resource redeployment Profit, Margin, Cash Focus Growth Focus136 Strategic Management When evaluating growth strategies McKinsey stress the need to consider: - Operational skills:capabilities that the company or business has that can be capitalised on PriVileged assetsresources that competitors Will fnd diFfcult to match - Growth skills: the capabilities needed to support the growth options selected - Special relationships: which can open up or create new options (i.e. government relationships) The McKinsey growth options pull on the traditional Ansoff options but in addition consider: - New Industry Structure: can the industry be altered by vertical integration, alliance or acQuisition !lternatiVely can resources or actiVities Be reconfgured to reinVent approaches and business models in the industry? Generic Options and Investment Structures for a Growth Strategy New competitive arenas New industry structure New geographics New delivery approaches New products and services Existing products to new customers Existing products to existing customers How? Acquisitions Joint Ventures Minority Stakes Strategic Alliances Marketing Partnerships Organic Investment Increasing Risk Industry Strategic Options Same Change Same New Activity Industry Structure IMPROVEMENT -Value to customer -More efficient INNOVATIVE -New products -New segments ALTER BALANCE -Acquire -Alliance -Integrate REINVENTION - Invent new Space137 Strategic Management The company deVelopment alternatiVes in the fgures aBoVe are naturally not mutually exclusive. Moreover, each route can be pursued organically, by acquisition or by alliance . With arguments for and against each route, different risks faced and different skills necessary to succeed, the correct choice of growth vector(s) is critical if the company is to prosper With the Beneft oF hindsight these are the decisions that tend to maKe or BreaK a company’s fortunes. The following Sections consider the major growth options: Vertical Integration, Merger, Acquisition, Divestment and Strategic Alliances. Grant’s text considers two of the company development routes: Please read: Chapter 11: Vertical Integration and the Scope of the Firm Chapter 13: Diversifcation Strategy And refect on each chapter’s study questions. Section 6.7 considers the role of Merger, Acquisition, Divestment and Alliance strategy which Grant’s text covers in Chapter 15: External Growth Strategies: Mergers, Acquisitions and Alliances. 6.71 Mergers, Acquisition and Divestment Strategy Growing a company by acquisition has two important advantages: repositioning can be achieved relatively speedily and ultimately there is no loss of control. Against these advantages an acquisition incurs a bid premium over market valuation if the target is a Quoted company. Premiums diFFer signifcantly depending on the attraction oF the candidate but on average are in the order of 20% for agreed deals and 30% for contested deals. In addition the acquiror incurs transaction costs and has to base decisions on incomplete information - post acquisition reality can be quite different to that expected. IF one accepts an eFfcient marKet the acQuiror frm needs to fnd or Be aBle to unlocK suBstantial hidden Value that is not re»ected in the marKet price For the acQuisition not to be dilutive. This is a tall order. The motivations for acquisition are wide ranging. ‘What you need depends on what you got’; your mission, operating philosophy, company and business strategy all come into play138 Strategic Management when evaluating potential candidates and the attractiveness of their industry settings. The central rationale often cited for acquisition is that of enhancing shareholder value or strategic intent. The supporting planks given include the pursuit of growth, return, portFolio Balance and risK spread. More specifcally acQuisition logic is concerned With strengthening bases of competitive advantage or capitalising on windows of opportunity. Notwithstanding the appeal and logic of the case for acquisitions study after study shows that on average acquisitions dilute shareholder value for the acquiring company - the hidden value if found does not compensate for the bid premium. M. Porter’s1 study for example tracked the acquisition performance of 33 large USA companies over a thirty-six year time period. The sample on most counts would be described as excellent, companies oF the ilK oF DuPont %XXon '% I"M Procter 'amBle 3M and 8eroX. .onetheless their acQuisition perFormance Was and there is no other Way to descriBe it appalling. 2ather than concentrate on post-acquisition shareholder value movements which are arbitrary (minor impact of acquisition to total company activity; changed market circumstances; what would have been the situation if they did not acquire etc.), Porter simply observed What suBseQuently happened to the acQuired companies. (e Found that on aVerage 56.5% of acquisitions were subsequently divested and a startling 74% divested when the acQuisitions had Been initially made in a totally unrelated feld to the parents scope oF operations. The sobering implication is that these sample companies had diluted billions oF dollars oF shareholder Value By their »aWed acQuisition programmes. 7hat is the proBlem Perhaps 7arren "uFFet #hairman oF "erKshire (athaWay summarises it Best Many managers were apparently overexposed in impressionable childhood years to the story in which the imprisoned, handsome prince is released from the toad’s body by a kiss from the beautiful princess. Consequently, they are certain that the managerial kiss will do wonders for the proftability of the target company. Such optimism is essential. Absent that rosy view, why else should the shareholders of company A want to own an interest in B at a take-over cost that is two times the market price they would pay if they made direct purchases on their own? In other words investors can always buy toads at the going price for toads. If investors instead bankroll princesses who wish to pay double for the right to kiss the toad, those kisses better pack some real dynamite. We have observed many kisses, but very few miracles. Nevertheless, many managerial princesses remain serenely confdent about the future potency of their kisses, even after their company backyards are knee-deep in unresponsive toads. ! #,2 study inVestigated fFty maJor deals With a Value oF oVer 13 Billion. They Found in line with other studies, that the acquiring management considered 54% of such139 Strategic Management acQuisitions to haVe Been Failures. The fVe Key reasons giVen For either Failure or success are contrasted below: Causes of Failure Causes of Success Targets management attitude and cultural differences. 1 Detailed post acquisition integration plans and speed of implementation. Poor post acquisition integration. 2 Clarity of acquisition purpose. ,acK oF target or industry KnoWledge. 3 'ood cultural ft. Poor target management. 4 (igh degree oF co operation. ,ittle acQuisition eXperience. 5 Knowledge of target and industry. It is interesting to oBserVe that in Both categories three oF the fVe eXplanators oFFered relate to post acQuisition integration eFFectiVeness iF attitude cultural ft co operation and management ability are not in situ the acquisition runs the risk of building on castles of sand. "eFore deciding on integrating running as a separate unit or partially integrating Campbell3 advises that eight questions are addressed: 1. Is the activity focused on a different product or market segment? 2. Does the activity depend on a different source of advantage? 3. Does the activity require a different culture? . (oW diFfcult are the synergies to achieVe at arms length 5. What is best for accountability? 6. Do we have the people? . (oW important is »eXiBility 8. Are there any constraints? Acquisition then is not to be taken lightly, it offers no sort of panacea. Not only does it typically dilute shareholder value it invariably leaves devastation in its wake with the norm being over half of the targets senior management being replaced within three years. The key to successful acquisition is being able to identify and successfully unlock hidden value. The ‘better off test’ seeks to answer how much a company is worth on a stand alone Basis and then specifcally identiFy What additional Value can Be created By putting it under the umbrella of a different parent. To be able to systematically address how value can be created Parsons4 advises that the following steps be completed:140 Strategic Management a. Dominant Business Logic: In determining the role acquisition is to play and how individual targets are to be evaluated frst reQuires an introspectiVe selF analysis the ±What you need depends on What you got² and ±Where you Want to get to² M! is a suB set oF company strategy. !t this stage eXperienced practitioners lay doWn Formal acQuisition target eValuation guidelines to ft and be consistent with the developed company strategy. A U.K. conglomerate for example operated with the following guidelines:5 - Potential high margin business. - Not making the best return on assets. Predominantly defnaBle niche Businesses. Small enough to ft into company structure. - Unlikely to be involved in mass production, mass retailing or heavy engineering. - For U.S.A. targets management experience in well established niche businesses with the potential to gain market position. Another acquisitive conglomerate6 laid down six main acquisition criteria: 1. The target should be among the market leaders in established markets. 2. It should sell every day, low technology products. 3. It should haVe suFfcient assets to BacK the purchase price . 4. It should be potentially cash generative. 5. It is an underperformer relative to its industry standard. 6. It has a history of underinvestment. Dominant Business Logic Identification Value Creation Financial Logic Implementation Action141 Strategic Management b. Identifcation Phase: The identifcation phase looKs closely at the industry prospects applying Section 5 oF the Manual. The emphasis is fnally on the competitiVe structure and the generation of preferred candidates for more in-depth evaluation. c. The Value Creation Phase: Concerns itself with how value will be unlocked. The candidate is looked at on a stand alone Basis and then again as part oF the enlarged organisation to determine specifcally how value will be added. The evaluation draws heavily on an understanding of what are the Key Success Factors and how competitive advantage will be enhanced. We observe six central acquisition philosophies used to unlock value, which can be broadly subdivided as Being fnancial or strategic. 1. The ±2estructuring² philosophy is predicated on the aBility oF Being aBle to spot an underValued company structure the parts are Worth more than the Whole. (istorically companies liKe (anson Trust Focused on this approach. Initially the gain is achieVed By unbundling assets or businesses and then imposing tight controls on the remainder. The approach is well illustrated by the following extract7: Hanson Trust acquired Imperial Group, the tobacco, brewery and food conglomerate for £2.5 billion. By the end of the year Hanson had raised £2.34 billion by way of disposal of the brewery and food businesses. It retained the tobacco business, a mature cash generative business which, on its own, was valued at over £1 billion. Hanson pulled off a similar feat with SCM of the USA, with disposals of $1.6 billion exceeding the purchase price of $930 million in the same year. 2. The ±"ottom ,ine² philosophy again seeKs to Buy Well But adds Value primarily By energising the acQuired company. #ertain fnancial conglomerates and priVate eQuity frms adopt this approach. ! company that has lost its Way is acQuired. Typically it is downsized, tight controls instituted and managerial talent either promoted or bought in. Great operational autonomy is given the new team as long as demanding targets are met. 7ith Quite oFten an eQuity staKe in place coupled With signifcant Bonuses a new sense of urgency develops - the classic ‘carrot and stick’. You can get extraordinary performance from ordinary people if the climate is right - and if they do not deliver they can be replaced. 3. The ±"anKer² philosophy seeKs to Bring Funds to play. It is predicated on fnding attractiVe companies Without the fnancial muscle to eXploit their potential. 7ith developed stock markets and established venture capitalists such opportunities are perhaps becoming rarer. Several companies are however, well known as having an142 Strategic Management open door - always willing to listen to proposals. A successful example of this type of philosophy is Stephen 2uBin²s oF Pentland acQuisition oF a 55 staKe in 2eeBoK secured for 43,000 sterling. Over a period of ten years Pentland extracted nearly 400 million sterling - multiplying the original investment nearly 10,000 times. Pentland, however, also bought other skills like sourcing to the arrangement which are captured by the next philosophy. 4. The ‘Skill Transfer’ philosophy takes on much more of a strategic rather than a fnancial element. The oBJectiVe is to leVerage the company²s or targets strengths or sKills. &or eXample one oF P'²s Key competencies is the aBility to distriBute Fairly loW value items around the world. For a small acquisition it brings to the party the leverage of global distribution and marketing capability. Many companies acquire candidates in order to be able to implode their skills or technologies into their own organisations. 5. The ±Synergy² acQuisition seeKs to comBine companies in the same feld to produce the 2 2 5. +eys to unlocKing shared Beneft are the aBility to pool resource and avoid duplication; focus on each other’s strengths; gain access to each other’s customers, technology etc. and to increase critical mass leveraging scale effects whilst spreading risk. The danger, as with all the acquisition philosophies is that 2 + 2 = 3. Value is not unlocked but diluted. 6. Timing: ‘buy when valuations are low’. Certain companies have an uncanny knack of acQuiring What turn out suBseQuently to Be under Valued companies. "erKshire (athaWay is often cited as one such company. In commodity markets valuations tend to be highly cyclical re»ecting the commodity cycle. #ompanies With a fnancial Warchest are Well placed to expand by acquisition at the bottom of the cycle – but ‘calling’ the cycle is never easy. The acquisition philosophies are not mutually exclusive. In practice the more of them that can be bought into play the more the chance is that the acquisition will succeed in unlocking value. d. The Financial Logic Phase: A valuation range is generated from the previous stage - what it’s worth. Deciding on what to pay or oFFer is Quite another matter. ! ±WalK aWay² price needs to Be frst decided the point which you are not prepared to go beyond. In helping to decide the worth of the candidate several models are quite often used: the low information intensive based on: ‘Sales Multiples’; ±%arnings² P.%. 2atio ±!ssets² marKet replacement cost oF assets ±MarKet"ooK 6alue² multiple and the more sophisticated employing ±Discounted #ash &loW² ±&ree #ash»oW against &inancing² ±Discounted #ash &loW 2esidual 6alue and /ption 6alue². %ach oF the calculations need to take account of items like pension position, tax and other liabilities, accountancy convention and so forth. With the valuation range determined the method143 Strategic Management oF payment is Factored in deBt eQuity cash deFerred considerationmilestone payment. e. The Implementation Logic Phase: !s the #, and many other studies confrm successFully integrating tWo organisations is Fraught With diFfculty. Potential Benefts can Be QuicKly lost as cultures clash people leave, systems prove incompatible. Moreover the great danger is that the process distracts attention from the customer market and competitors capitalise - potential becomes little more than a collapsed souF»m. To ensure eFFectiVe integration eXperienced acQuirers liKe '% #isco and priVate eQuity frms liKe !pollo haVe dedicated integration teams Who start the process in earnest during due diligence, rather than after the deal is done. 8 f. Action Phase: The timing of an acquisition move is often critical to its eventual success whether it is a friendly or hostile bid. The aim is always to secure acquisition opportunities before the market or competitors realise their true worth. A company is most vulnerable to a predatory attack when its share price has stalled or a series of downbeat announcements have been made in quick succession. Many acquisitive companies keep a ‘watch list’ - companies they would like to acquire but currently their market capitalisations are too high to warrant a move. Any substantial market downgrading signals an opportunity to strike. A number of intermediaries typically assist in the acquisition process and in closing the deal merchant BanKers fnanciers laWyers accountants and consultants. 7ith their Fees often heavily skewed to a successful outcome their natural wish is to complete the deal at all costs. To counter the momentum that can build up in the thrill of the chase the ‘walk away’ price needs to be adhered to - common sense needs to prevail over adrenaline. Even companies which have an outstanding record of creating value by acquisition have made, with hindsight, poor moves. Many elementary errors can be avoided by careful preparation But it is diFfcult to legislate For sKeletons in the closet or an unFortunate turn of events. It is also true that many companies and key individuals have an uncanny ability to ±smell² a good deal Without the need For rigorous analysis. The WinWin is naturally to put latent feel together with careful evaluation. This if nothing else serves to justify the ego and give a rationale for deal making which can take on megalomaniac proportions - certain companies like Unilever at times in their history have been acquiring more than one company a week.144 Strategic Management Divestment Companies constantly evolve and reshape their portfolios. Acquisition is one route, divestment another. The reasons for divestment include: the Business no longer fts With Future company strategy - the company is reshaping the portfolio to pursue more attractive opportunities Funds are needed to shore up the Balance sheet When times are diFfcult you may haVe to sell the crown jewels) - the company is in danger of being marginalised in this business area by stronger incumbents - the company no longer has the parenting skills to add value - an attractive offer, ‘too good to refuse’ is made – the area for divestment is worth more to another parents company portfolio. Whatever the reason divestment of parts of a company’s portfolio should be periodically reviewed in line with the company strategy and future prospects. ManKins oF "ain tracKed the acQuisitiondiVestment record oF 2 companies oVer a tWenty year period. (e Found acQuisitions outnumBered diVestments By almost a ratio of 3:1. Acquisitions are made to support company strategy (hence you tend to hold onto them), divestments quite often signal a change in company strategy – or a failed strategy. Companies tend to hold onto businesses which are prime candidates for divestment for too long. +oller1 researched fFty large diVestments. (e Found that tWo thirds had under perFormed For a consideraBle time BeFore diVestment. 2aVenscroFt and Scherer11 Found that on average under-performance lasted seven years before divestment. A number of reasons explain the reluctance to divest: - Divestment may signal failure in company strategy and management ability - The business area makes a contribution to spreading overhead - Even when considered non-core the business may offer stable return and can be ‘milked’ to fund other parts of the portfolio - Management are reluctant to ‘shrink’ the company - Emotional barriers are often present: management have a history of working for and with the business - If the business is performing poorly the exit multiple is likely to be low, the temptation is to seek to enhance performance before divestment – often ‘throwing good money after145 Strategic Management bad’. The Business is integrated With other areas oF the company²s actiVities diFfcult to disentangle - The cost of exit is prohibitive, has tax implications or crystalises a loss To overcome these barriers to divestment the annual strategic review should candidately access divestment options. Mankins recommends that a dedicated divestment team is formed – this makes sense as many companies have dedicated acquisition teams. The team would seek to build a database of potential buyers, conduct reverse due diligence and plan for any deintegration. 6.72 Strategic Alliances ! strategic alliance Brings together tWo or more frms to pursue a Business opportunity or need. The appeal oF the arrangement is that specifc inter organisational assets or capaBilities can Be rapidly comBined Without haVing to resort to the fnancial commitment and bid premia entailed by acquisition. Flexibility is maintained as the arrangements can also be dissolved much more readily than with an acquisition. On the other hand alliances do lack total control, they rely on other partners and can be limiting vehicles when issues like cost cutting, consolidation of resource overlap come to the fore. In recent years there has been a surge in alliance activity and the number continues to proliferate in all manner of horizontal, vertical and conglomerate tie-ups. They are backed by a wide variety of ownership forms ranging from the informal to legally distinct entities supported by equity participation in the traditional joint venture mode. The increased interest in the alliance route results from the realisation that the company cannot do or excel at everything by itself. Trends to globalisation; the convergence in technologies bringing once distinct industries together and the need to develop seamless relationships with suppliers and buyers are all providing impetus to the pursuit of collaborative advantage. In areas with high uncertainty, risk and new business options, alliances help to Keep options open and spread risK. .ot surprisingly "#' research shoWs that nearly a third of alliances come from the technology and communications sectors. Outsourced business services are likely to account for the highest proportion of alliances currently. Notwithstanding the appeal and activity in alliances their track record to date is somewhat mixed. Various research studies12 show that less than half are considered successful for all alliance partners, and only in two-thirds of cases does one partner146 Strategic Management consider the moVe Benefcial giVen the inherent costs oF co ordination compleXity and control. Motivation for the Alliance ,orange and 2oos13 see that there are Four Broad generic motiVes For Forming the alliance as shown below. When the company is strongly placed in a core portfolio activity the motivation is to ‘defend’ and insulate the position. The alliance seeks to enhance competitive advantage by, for example, seeking to add to existing competencies, technologies or to extend market reach. When the activity is core but the company is weakly positioned it is forced to play ‘catch-up’ - seeking alliance partners to strengthen competitive advantage. When the activity is of minor importance to the company but it has strong position the danger is that inadequate attention and resource is devoted to the area. Under these conditions the ±remain² motiVation seeKs to attract partners Who By haVing a Better ft With the activity are more prepared to allocate resource and develop the position held. When the activity is peripheral to the company and weakly positioned it has little future as a stand alone operation. Under these circumstances ‘restructuring’ alliances can serve as an exit route or pass the situation to others with a better chance of extracting value for the company By radically reconfguring the position. With the generic motivation for the alliance established a more detailed understanding Alliance Motivations Market Position High Low Leader Follower Importance to Parent Portfolio Defence Catch-Up Remain Restructure147 Strategic Management of how partners can potentially bring value to the relationship is now necessitated. The key areas for creating value are similar to value creation in acquisitions, but this time without full control: Access: To partners geographic region (overcoming entry barriers), customers, technologies, capabilities, staff or other skills. Risk spread: By pooling resources the investment requirement is either reduced for each partner or a much more aggressive investment approach can be taken. Risk may also be hedged simply because an opportunity is too good to leaVe uneXplored But insuFfcient resource is available to properly test its feasibility. Critical Mass: To attain the size to effectively compete on the global stage. !dded Benefts may include the promotion oF industry standards or alignment of complements. Concentration: Reducing the number of direct competitors by engineering mutual interdependence. Leverage: Attaining scale and scope economies to drive cost down and broaden the business base. Deintegration: The ability to focus on each other’s distinctive strengths, link different stages of the vertically integrated chain. Learning: Accelerate learning ability and hence reduce time to market; improVe proft potential enhance oWn capaBilities to support competitive advantage.148 Strategic Management With the rationale of the alliance established attention turns to the issue of how to structure relationships so that input and outputs are Fairly distriButed oVer time. ,orange and 2oos outline Four Base alliance types that serVe to guide the type oF relationships entered into as shoWn in the fgure BeloW. In the ‘Ad-hoc pool’ type of alliance the partners are motivated by a quick hit - a minimum oF resource is put in and all Beneft is taKen out such arrangements are temporary in nature. In the ‘Consortium’ alliance the partners are more committed putting in more resource oVer a longer time Frame But still seeK to eXtract all Beneft once the alliance has served its purpose. The ‘Project- based joint venture’ requires a minimum of resource to set up but this time the majority of the alliances input is retained and reinvested until the proJect is complete and then the Benefts are distriButed. In the ±&ull BloWn Joint Venture² the partners BacK the alliance With signifcant resource and the outputs are largely retained with a view of building a strong separate entity over the long term. Forming the Alliance As alliances are a subset of corporate strategy their role in building the company’s portfolio should be outlined and managed. Types of Alliance Relationships Parents Inputs of Resources Sufficient For To Parent Retain Short Term Operations Long Term Adaptations Parent's Retrieval of Output Ad Hoc Pool Consortium Project Based Joint Venture Full Blown Joint Venture149 Strategic Management Five key areas need to be considered: 1. Outline corporate strategy 2. Screen, identify potential partners - categorise approaches made 3. Select - can we work together? defne Value creation opportunity 4. Negotiate the relationship – how it will work - what form of governance? - triggers for exit? - responsibilities, accountabilities, resource commitment; procedure and process alignment 5. #ontinuously manage monitor and eValuate strategic and fnancial perFormance against value creation opportunity - be wary of ‘free rider’ problem To ensure successFul collaBoration 2osaBeth Moss +anter1 adVises that the eight ±I²s² Be adhered to: 1. IndiVidual %Xcellence "oth partners haVe something oF Value to contriBute and good motivations for entering the alliance. 2. Importance The alliance fts a maJor strategic oBJectiVe partners Want to Fulfl. 3. Interdependence: The partners need each other, together they are better off than individually. 4. Investment: Partners are prepared to invest in each other and show tangible signs of long term commitment. 5. Information: Communication is reasonably open with partners having full knowledge oF respectiVe oBJectiVes data and potential areas oF con»ict as the situation eVolVes. 6. Integration: The partners develop close linkages and ensure operations run smoothly - the Japanese ‘nemawashi’ - watering the roots to ensure the consensus process is maintained. 7. Institutionalization: The alliance is put on a formal footing with clear responsibilities and decision processes established. 8. Integrity: The alliance partners behave toward each other in honourable ways that justify and enhance mutual trust.150 Strategic Management Given the dangers of hidden agendas, Trojan horses to hollow out one partners ability the need is for ongoing vigilance to ensure the business case remains valid and the political process between partners is managed. To try and ensure their alliance was successful over time Ford and Mazda15 articulated the following seven success contributors: 1. Ensure top management involvement from both sides. 2. Meet often and informally. 3. Use a third party advisor. 4. Keep your independence. 5. Do not permit proJects Where one party is sacrifced. 6. Use a steering committee that continuously supervises the alliance. 7. Assume that there are cultural differences (which need to be managed). The Fact remains hoWeVer that the Winlose or loselose alliance outcome is Far more common than the WinWin. !ttractiVe Well thought through Well managed alliances BreaK doWn as the situation changes Partners² interests diVerge the symmetry oF Beneft is not maintained; more advantageous routes present themselves or simply the alliance no longer serves the purpose for which it was formed. If an alliance is challenging between two organisations then the complexities are multiplied as several companies seek to collaborate with each other - yet these alliance networks are increasingly evident in the business world. Increasingly it is not a question of company against company but of alliance network against alliance network with companies scrambling to get into bed with the right club. Casseres16 sees that these clubs differ from the Japanese Keiretsu (which tend to be long standing based on broad relationships to help group companies) in that they are much more focused on a business need or opportunity. The airline industries sharing of computer reservations or code sharing to provide a global network is much more targeted than the Keiretsu with direct competitors co-operating for the common good. The success of the networked alliance, as with a two partner alliance is dependent on a strong common purpose, strong individual network links, but moreover a stronger club than formed by other competitors. When a company has numerous alliances formed at different times, for different reasons, straddling different parts of the organisation the alliance portfolio needs to be regularly assessed and developed. The role of alliances within the company’s strategy should Be clearly stated and the eXpected contriBution defned. %ach alliance should then Be assessed and developed against explicit objectives.151 Strategic Management Philips has a dedicated ±!lliance /Ffce² to manage or support Four types oF alliance. Corporate Alliances: The Philips centre selects 10 core alliances to support long-term goals. Each alliance is sponsored by a board member and each has a dedicated manager or team draWn From the alliance oFfce to oVersee all dealings. Relationship Alliances: Are typically long lasting and span several areas of Philips operations. The central alliance oFfce is again responsiBle For alliance management. Strategic Alliances: typically focus on areas such as creating new products, service lines of business. These are managed by the relevant business area with support from the alliance oFfce. Business Alliances: are mainly tactical or operational in nature and are managed by the releVant Business area With support From the alliance oFfce. Companies like Siebel Systems employ a Scorecard to help review and manage each alliance. The Scorecard has diFFerent perspectiVes i.e fnancial strategic operational relationship and cultural ft . /BJectiVes and metrics are set and regularly reVieWed For each perspective. 6.73 Routes to Build the Company Overview Company strategy fundamentally needs to decide: - What business and market to be in, which business market not to be in? - What scope of activity to have? Philips Alliance Typologies High Low Low High Long-term Value Of Alliance to Philips Synergy Relationship Corporate Business Strategic152 Strategic Management - Which business areas, resources and capabilities to prioritise in the portfolio? - Which development routes to pursue, and to what extent? In answering the questions, management are guided by: (istory Vision, Value, Mission, Stakeholders, Objectives Company Style and Parenting Advantage The external evaluation The internal evaluation Evaluation of the portfolio Evaluation of the relative merits of the development routes We recommend that new development opportunities be considered within the context just given, and screened and evaluated on factors such as: Size of opportunity Attractiveness of opportunity Entry barriers Financial ability to take opportunity Ability to build or acquire resource !Bility to Buildattain capaBility Strengths of existing and likely competitors ,iKely competitor reaction Ability to build sustainable competitive advantage #ultural organisational systems ft Ability to leverage customer base Channel leverage ,eVerage From and to other parts oF the portFolio Exit barriers, ‘fall-back’ position153 Strategic Management Ultimately, the risk reward relationship needs to be factored in and the urgency to act considered. 7hen seVeral opportunities need to Be eValuated they can Be profled side By side using the colour coding 2ed !mBer 'reen. TentatiVely When an opportunity has a seQuence of Greens it looks highly promising. Analysis does not stop here, how can the Greens be turned into 'olds 7hen an opportunity has a seQuence oF 2eds it does not looK promising. (oWeVer the Key Question is can 2eds Be turned into 'reens in some Way alliances and acquisition can transform the overall evaluation. The question then becomes are such partners or targets available, and at what cost? Section 6.7 – 6.73 References 1. M.Porter, “From Competitive Advantage to Corporate Strategy” (arVard "usiness 2eVieW May *une 1 2. cited in: “The Essence of Mergers and Acquisitions”, P. Sudarsanam, Prentice (all 15 3. A. Campbell, “A tough choice: to split up or stay together” - Financial Times, 8th August, 2006 . !. Parsons ¯(idden 6alue +ey to SuccessFul !cQuisition° Screening Opportunities Factor No-Go (Red) Neutral (Amber) Go (Green) Size of Opportunity Attractiveness Entry Barriers Financial Ability Ability to Build or Acquire Resource Ability to Build/Attain Capability Competitor Strength Competitor Reaction Ability to Build Competitive Advantage Cultural, Organisational, Systems Fit Customer Base Leverage Channel Leverage Portfolio Leverage Exit Barriers Overall Risk: Reward Urgency to Act154 Strategic Management The McKinsey Quarterly, Summer 1984 5. cited in: “The Essence of Mergers and Acquisitions”, P. Sudarsanam, Prentice (all 15 6. Financial Times, 6.5.1994 7. Financial Times, 18.9.1991 . 2. !shKenas and S. &rancis ¯Integration Managers Special ,eaders For Special Times° (arVard "usiness 2eVieW .oV Dec 2 . M. ManKins et al ¯(oW the "est DiVest° (arVard "usiness 2eVieW /ctoBer 2 1. ,. DraniKoFF et al ¯DiVestiture Strategy²s Missing ,inK° (arVard "usiness 2eVieW May 22 11. D. 2aVenscraFt and &. Scherer Mergers Sell /FFs and %conomic %Ffciency° "rooKings Institution Press 1 12. +. (arrigan ¯Managing For *oint 6enture Success° ,eXington "ooK 1 13. P. ,orange and *. 2oos ¯Strategic !lliances &ormation Implementation and %Volution° "lacKWell 12 1. 2. +anter ¯#ollaBoratiVe !dVantage° (arVard "usiness 2eVieW *uly !ugust 1 15. P. ,orange *. 2oos P. "ronn ¯"uilding SuccessFul Strategic !lliances° ,ong 2ange Planning 6ol 25 .o 12 1. ". #asseres ¯'roup Versus 'roup (oW !lliance .etWorKs #ompete° (arVard "usiness 2eVieW *uly !ugust 1 Refection As the CEO, how would you build the company going forward? Grant considers the additional challenges of managing strategy in an international context in Chapter 12: ‘Global Strategy and the Multinational Corporation’.155 Strategic Management 7. Aspects of Implementation Introduction ‘A strategy you cannot implement is worthless’. Strategic Management must seamlessly unite strategy and implementation. Strategy is a large topic but Implementation is larger – and it is where 90%+ of the effort goes. Implementation however pushes us into disciplines liKe (uman 2esources /rganisational Design Management !ccounting InFormation Systems /perations Management &inance MarKeting etc. !n M"! course is needed to cover the disciplines comprehensively. The Aspects of Implementation Section outlines the S FrameWorK Which holistically helps ±put it all together² and the "alanced Scorecard which helps in operationalising the framework. The Section concludes with observations on the Management of Change. 7.1 The 7S Framework – Putting it All Together ,eading and managing a large organisation eFFectiVely in a compleX eVer changing enVironment is no easy tasK. ,eaders and managers need a FrameWorK to help them ±put it all together’, which is both holistic and comprehensive. We know of no better framework than the 7S model 1,2,3,4 which has been our ‘mental organising scaffold’ for many years. It has provided us with the architecture and route map in analysis, countless discussions, and consultancies. We strongly recommend it to you – it is elegantly simple, it breaks the complexities into manageable pieces, yet it puts all of the pieces together. We have alWays considered the true test oF an M"! is can they rigorously apply the S FrameWorK in a ‘real-life’ managerial situation. The FrameWorK Was deVeloped By a team led By Tom Peters and "oB 7aterman oF Mc+insey #ompany. The central idea oF the FrameWorK is that iF Strategy and Implementation are to Be eFFectiVely aligned leVers haVe to Be in harmony they haVe to Be consistent ft reinforce each other, in sum be aligned with both the internal and external environments. The FrameWorK is aFFectionately reFerred to as the ±happy atom² to re»ect the inter connectedness of all 7 of the levers. No one lever is regarded as being more important than the others – and there is no preferred sequence for consideration – all have to pull together and be in balance. The ‘hard’ S’s of the framework are: Strategy, Structure, Systems. The ‘soft’ S’s of the framework are: Staff, Skill and Style. The central S of Shared Vision is both ‘hard’ and156 Strategic Management ‘soft’ (In the original framework Shared Vision was referred to as ‘Superordinate Goals’, and then subsequently ‘Shared Values’). When all of the 7S’s are aligned an excellent organisation is the end result. Strategy Strategy is the gamelan to get From ! to ". Section 1.3 outlined that there are fVe Key levels of strategy which need to be integrated and aligned. Structure A company’s organisational structure should be like the bones of the body – without the bones in place alignment of organisational units will not take place. The key in structure is to divide tasks into manageable pieces and decentralise to achieve focus and empowerment. At the same time there is a need to centralise in order to co-ordinate and integrate so the Body moVes as one. 2. 'rant²s #hapter considers /rganiZation Structure and Management Systems: The Fundamentals of Strategy Implementation. Systems Systems are aKin to the »esh or nerVous system oF the Body. They giVe an organisation substance and make it work. Tom Peters 5 sees them “as the language that shapes the character of the organisation” that provides a “clear window on how things really work around here”. A company has a multitude of formal and informal procedures and processes that are used to “make the organisation go, day by day, and year by year”. Key areas of systems include (2 IT MISinFormation +noWledge Management Strategic Planning and #ontrol i.e. "alanced Scorecards Budgets resource allocation and #ommunications Systems (the lubricant of organisation). The informal system, or social capital, is the network of relationships that in»uence and help people to get the JoB done. InFormal systems are closely connected with the ‘S’ of Style or Culture. 1. Directional Systems: Are concerned with aligning the organisation toward the same end. The Mission purpose 6ision and 6alues oF a company is translated to specifc objectives and policy guidelines - how to do business and to what level of performance. ! FeW select fnancial and non fnancial oBJectiVes that are closely monitored help to send clear signals and allow attention to be focused on what is important. They should be realistic whilst providing stretch. The analogy Tom Peters uses is that of putting a 5foot 10inches man that cannot swim in water. If the level is 4foot 6inches there is no challenge and complacency sets in. IF the leVel is Feet aFter much »oundering the man 157 Strategic Management drowns. It is the same with objectives, when set unrealistically high they become a “joke, a game, eventually a nightmare”. The correct level to ensure stretch is probably around Feet attainaBle iF you Keep on your toes. (oW oBJectiVes Will Be attained is spelt out in the strategic and operational plans. These are reinforced by policy guidelines on how to appraise investments, allocate resources and set budgets. 2. Process Systems: Are used to ensure an ongoing organisational need is monitored or to manage a large task. Committees or project teams set up the overall architecture, break the process up into manageable pieces, provide measurement and follow up. For the oVerall process and each oF its suBdiVisions specifc and easily measuraBle standards milestones or due dates are set. This enables ‘small wins’ within a larger process to be achieved. 3. Day to Day Management Systems: Are designed to ensure that the organisation consistently adheres to set standards and procedures by setting rules and operational guidelines. Frequent feedback and review monitors performance and corrects deviations. 2eWard and reinForcement are poWerFul organisational shaping leVers as are sanctions. Internal control systems safeguard assets and provide reliable information for timely decision-making. Peters observes: “If there is a variable in our model that threatens to dominate the others, it could well be Systems”. Staff “Our staff are our most important asset” #ollectiVely staFF proVide the (uman #apital oF the organisation ¯the KnoWledge skills, competencies and other attributes embodied in individuals or groups of individuals acquired during their life and used to produce goods, services or ideas in marKet circumstances° (uman #apital interacts With all the other S²s and is closely tied to Social Capital (relationships, cultural norms and behaviour). For the majority of companies (uman #apital is the Key intangiBle and intangiBles account For the maJority of most quoted companies valuations – yet staff are recorded as a cost, not an asset, in fnancial statements. This is sometimes unFortunate With proft under pressure costs are invariably cut. !s the organisation seeKs to get the right person in the right JoB at the right time ±(uman #apital 2eadiness² is a Key metric - What are the key business needs currently and moving forward? (oW do We attract recruit deVelop Best utilise and retain Valued staFF (oW do We engage and align staFF eFfciently and eFFectiVely Both indiVidually and collectively? 7hat JoB specifc KnoWledge sKills BehaViour is needed indiVidually and By JoB Family158 Strategic Management (oW do We compare against our (uman #apital 2eadiness targets 7hat is our benchstrength by job family and in terms of pipeline? There are numerous staFF leVers to consider in Building (uman #apital 2eadiness (oW to attract the right type oF talent (oW to recruit IF you recruit the Wrong person it is diFfcult to rectiFy the initial poor decision. (oW to socialise integrate people (oW to deVelop With WorK eXposure placements training and deVelopment - What mentors, role models to have? (oW to design the JoB so that a meaningFul contriBution results that pulls on the individual’s strengths? (oW to deVelop careers (oW to giVe FeedBacK perFormance manage appraise 7hat fnancial and non fnancial reWards to oFFer (oW to communicate 6ision 6alues Mission set cultural norms and oBJectiVes (oW to engage get the Best out oF people in line With the organisation²s goals. These and other staff levers need to be thought through and proactively managed if (uman #apital is going to Be enhanced and leVeraged. ! (2 and /rganisational "ehaViour course is needed to cover how to manage the levers effectively. Individuals for the most part need to work with others, in teams. Effective team work is a cornerstone of the Manchester Method. “None of us are as smart as all of us.”8 Teams however, do not always work well together, in order to do so we advocate: - Make sure the right people are in the team with the right mix of abilities and complementary skills9 (aVe a clear Vision oBJectiVes milestones "uild commitment to a common purpose indiVidual and collectiVe responsiBility accountability "uild camaraderie "e committed to each other²s groWth and success - Ensure appropriate time and resource "uild the netWorK to partners Who can help Unit cohesion is critical. In the military why are people willing to die? S. Marshall10 found that the number one explanator was ‘group integrity’: “in a group truly committed to159 Strategic Management each other no one Will Be the frst to run so they stand and fght together°. Skills Skills refers to the organisational competencies and capabilities (considered by Grant in Chapters 5 and 6) that set an organisation apart from competitors. The 6 other S’s of the 7S framework can be employed to build a competency. Take for example the competency of innovation, possible levers in the other S’s might include: Shared Vision: - stated purpose to innovate - clear innovation targets set - leadership to stress innovation Strategy: geared to neW Business and productserVice models early liFe cycle resource commitment to support innoVation i.e. 2D spend Structure: - aligned to innovation with new product and technical forums, task force problem solving - venturing style-‘play-pens’ - network of relationships to generate ideas Systems: - allocate peoples time to developing innovations signifcant reWards For innoVation Staff: - recruitment of people who think outside the box - formal training for innovation and mentoring - Entrepreneurship prized Style: - experimentation – ‘give it a try’ not ±fre iF Fail² - role models, symbols, stories 7ith the S²s aligned the competence groWs. To paraphrase Prahalad and (amel²s analogy, each S is a root of the tree, the trunk the competency. Style Section 6.2 considered Values or culture. ‘The way things are done around here.’ Values, culture and behaviours develop over time shaped by what people say and do, relationships within the Social Capital framework. Each of the S’s interacts with Style – both shaping Style and Being in»uenced By Style. Shared Vision (Superordinate Goals, Shared Values) In Shared Vision (or Superordinate Goals), we include Vision (Section 6.1), Mission (Section 6.3) and Objectives (Section 6.4). In sum, ‘the fundamental ideas around which a company is built, led and managed’. Using the Framework The 7S framework can be used broadly to address organisation wide issues or much more narrowly concentrating in on a part of the organisation. Whichever use it is put160 Strategic Management to We recommend that in the frst instance each oF the S²s is indiVidually audited BeFore systematically examining the linkages between all of the S’s. Notwithstanding the apparent simplicity of the framework the task can become quite complex: Strategy has many levels and it can be implicit or clearly outlined; formal and informal Structures are employed: there are a multitude and different levels of Systems; Staff have different grades, responsibilities and are in the line or in support; Skill sets and the competencies that underpin them can be numerous; several Styles or cultures are often in evidence; Shared Vision may be held with intensity or diffuse and implicit in the organisation. (aVing eXamined each S and the linKages BetWeen them the analysis reVeals Whether the leVers are consistently pulling together or diVerging in signifcant respects. 7here inconsistencies are identifed they need to Be either designed out oF the system or mechanisms set up to manage and hence resolve the inconsistency. The ‘Eighth S’ The ‘eighth S’ is Sequential Management of the other seven. It is the critical S in managing oVerall change. !n organisation Wishes to moVe From ! to " change is implied. To Facilitate that change the frst Question to address is ±What actions in each oF the indiVidual S²s Will Be needed² /nce these leVers are identifed a change Blueprint is deVeloped coVering all oF the S²s and their interconnections. IF only fVe actions are reQuired For each S there are thirty fVe leVers in all plus their linKages. To taKe all these actions simultaneously would in all likelihood lead to great confusion. Some actions need to come before others; the elapsed time between actions differs. ‘Sequential Management’ develops a natural ordering and progression in the change process. Momentum and follow up are designed into the blueprint up front. This allows for co-ordination; the removal of blockages; the securing of endorsement and commitment; communication; the assignment of responsibility, accountability and follow-up. We return to change management in Section 7.3. Authors Note: We have witnessed several banks use the 7S framework effectively: · One bank used the framework to get agreement in the senior executive team as to what the bank stood for, what its strategy was and how it would execute it. · Another bank used the framework to re-engineer a part of the organisation so that it could make decisions and deliver certain services ninety percent quicker than it had historically. · A third bank which operated on a multi-country basis used the framework as the basis of redesigning the organisation to offer certain services on a global basis.161 Strategic Management We have equally seen many failed change initiatives which could have benefted from the use of the approach. One senior executive lamented to us that his company was entering into a major re-organisation again, for the fourth time in seven years. After complaining about “the lack of consistency”, “no-one knowing whether they were coming or going” and the “reinventing of the wheel” he told us the following story: ‘It’s like going to Trafalgar Square with a loaded shotgun and fring at the pigeons. A few are killed, a few are wounded, the rest fy away - but return shortly afterwards. You may ask yourself what has been achieved? Well it’s like a reorganisation in our company. Some people are killed off, others wounded and scarred, the rest are still there, but like the pigeons everyone’s sitting in a different place!’ Structure had been changed, but without change in the other levers the change process is doomed to failure - what goes around, comes around. “We trained hard ... but it seemed every time we were beginning to form up into teams we would be reorganised. I was to learn later in life that we tend to meet every new situation by reorganising; and a wonderful method it can be for creating the illusion of progress while producing confusion, ineffciency and demoralisation” - Petronius Arbiter, 210 BC (quoted by Robert Townsend in ‘Up the Organisation’.) Section 7.1 References 1. Thomas Peters and 2oBert 7aterman ¯In Search oF %Xcellence° (arper 2oW 12. 2. 2.7aterman T. Peters and *. Phillips ¯Structure in .ot /rganisation° "usiness (oriZons *une 1. 3. T. Peters, “Putting Excellence into Management” "usiness 7eeK *uly 21 1. . 2.7aterman and ,.9oung ¯SpeaKing oF %Xcellence° - McKinsey Quarterly, Winter 1984 5. T. Peters ¯Mastering the ,anguage oF Systems° - Organisational Dynamics, Summer 1980. . S. 7estphalen ¯2eporting on (uman #apital /BJectiVes and Trends° Paper presented at the Interntional Symposium ±Measuring and 2eporting Intellectual Capital: Experience, Issues and Prospects, 9-10th June, 1999162 Strategic Management . 2. +aplan and D. .orton ¯Strategy Maps° (arVard "usiness School PuBlishing 2 . 7. "ennis and P. "iederman ¯/rganiZing 'enius° Perseus "ooKs 1 . 2.M. "elBin ¯The Management Teams 7hy They Succeed or &ail° "utterWorth (einemann third edition 21 Refection – please take considerable time to refect on the following: 1. Audit your organisation, or part of it on the 7S’s !re the S²s Well aligned do they ft and reinForce IF not What actions need to Be taKen 2. Consider how different the S’s will need to be if your overall organisation is to be: a. Operationally excellent, cost effective b. Customer intimate c. A product leader d. A brand leader 3. Consider how different the S’s will need to be to: a. Manage today²s Business eFfciently and eFFectiVely b. Develop and build business for tomorrow 7.2 The Balanced Scorecard Where a medium-long term strategic plan is developed it serves to guide resource allocation decisions and in the short term is translated into a budget. Although there is a linkage between plan and budget there is also an implicit tension - one focuses on the medium-long term, the other on the short term. When the budget is out of line with the plan how is the trade-off handled? The strategic plan review is typically some time oFF and the non fnancial milestones indicated are oFten diFfcult to measure precisely or haVe »eXiBle due dates. "y contrast the Budget is in real time. The controller²s oFfce Focuses in on hard fnancial measures and ratios. MoreoVer eXecutiVe Bonuses are Quite oFten tied to short term fnancial perFormance. InVariaBly the trade oFF is made in FaVour oF the Budget reality noW not What might Be. ,ong term considerations aBout strategic health become decoupled from concerns about short term operating performance. This is a serious proBlem the linKage BetWeen strategic and fnancial control has Been BroKen. The proBlem may Be eVen more acute on closer eXamination fnancial outcome measures in and of themselves do not necessarily serve as a good proxy for short term strategic vitality: they can readily be manipulated by taking actions that undermine long term163 Strategic Management strategic health (i.e.: cutting back on investment, reducing expenditure, raising prices). To avoid these dangers and more explicitly link strategic and operational considerations together 2oBert +aplan and DaVid .orton introduced the "alanced Scorecard"S# Which is shoWn in the fgure BeloW 123. The FrameWorK starts in the centre By deVeloping ±6ision² and ±Strategy² For identifaBle business units. Once agreed they are translated into strategic objectives in four key areas: &inancial #ustomer Internal and ±continuous improVement ,earning and 'roWth². In combination these are seen as the key drivers of strategy attainment. Financial perspectives whilst not directly linked to the drivers of competitiveness are important to incorporate as they represent the outcome of strategy as viewed by shareholders and give the foundation to reinforce existing and future operations. In selecting appropriate fnancial measures one should asK What do eXternal shareholders look for? Measures can then be subdivided into those that address existing performance 2/S 2/#% #ash »oW success trends in income and reVenue groWth peer group benchmarks) and those which enhance market valuation and link more directly to the other perspectives (level of productivity, cost reductions, etc.). The business’s performance in the external market is gauged through the Customer Perspective. The strategy outlines a customer value proposition. Within this the customer requirements are understood and weighted. The business’s performance is then rated Versus competitors against this Beneft Bundle leading to an oVerall assessment oF Value The Balanced Scorecard Vision And Strategy Customer Perspective ™To achieve our vision how should we appear to our customers? Objectives Measures Targets Initiatives Internal Business Process Perspective ™To satisfy shareholders & customers what business processes must we excel at? Objectives Measures Targets Initiatives Learning And Growth, Innovation Perspective ™To achieve our vision how will we sustain our ability to change and improve? Objectives Measures Targets Initiatives Financial Perspective ™To succeed financially how should we appear to shareholders? Objectives Measures Targets Initiatives164 Strategic Management for money. It is also important to consider how to build the business position going ForWard. The eXternal perspectiVe is then closely coupled With the Key Internal "usiness Processes needed to deliver value. These internal drivers need to be subdivided so that they can be effectively translated to local level initiatives. The fourth perspective is concerned with improving and regenerating the business’s capaBilities. #ontinuous ,earning and InnoVation is reQuired iF the Business is to groW and maintain its vitality. A focus for learning is provided by organisational challenges like reducing cycle time or setting targets for the level of new product activity. Internal learning and capability improvement is facilitated by programs for education and training; I.T. improvement, research and development and via ‘best in class’ benchmarking. In most oF the ,earning and 'roWth "S# perspectiVes We see the staFF and leadership element is stressed. The key drivers of the strategy should now be translated into strategic objectives for each oF the perspectiVes. +aplan and .orton recommend that a Fairly select list oF Four or fVe objectives per perspective is utilised (sixteen to twenty in all) to help focus organisational effort on the critical dimensions. Once developed effective measurement systems have to Be put in place to monitor the leVel oF achieVement against targets. 5sers oF the "S# advise targets to be framed in terms of outputs and not inputs: standards achieved, effort expended. Once targets are set they have to be translated into action programs. At this stage the emphasis is on decomposing the action program to suFfcient detail so that individuals can relate their own efforts to the outcome. The process is summarised in the Figure below. THE BALANCED SCORECARD Statement of ision 1. Definition of 2. Mission tatemen 3. Vision Statemen If My Vision Succeeds, Will I look to? What the Success What the Measuremens? What the Action Programs? To My To My With My Management Processes With My Ability to Innovate and Financia Perspectiv Custome Perspectiv Interna Perspectiv Innovation and Learnin The Balanced Scorecard - Linking Measurement to Strategy165 Strategic Management Discussion Strategy and the control of that strategy are two parts of the same issue; yet in many instances they Become decoupled. #ontrol inVariaBly translates to fnancial control a focus on the numbers in the operating budget with inadequate attention paid to the key strategic underpinnings. Given the problem it is easy to see why Kaplan and Norton’s "S# has achieVed great popularity since its introduction in the early 1²s. It has many attractions: It is elegantly simple. It integrates the Key driVers oF strategy From diFFerent perspectiVes eXternal internal improvement, performance. ,ong term and short term are linKed. Trade oFFs are readily apparent in the interrelationships and consistency promoted. #orrelations BetWeen cause and eFFect are more eVident. The "S# proVides a Focus Which can Be readily communicated and translated at group business, department and individual level as outlined below. Cascading the Balanced Scorecard ,iKe any management process the "S# can Be eFFectiVe or ineFFectiVe We haVe witnessed both. Where it has been effective it is invariably driven by leadership and senior management and cascaded throughout the organisation. One of the companies we worked with cascaded in the following top-down manner: Step 1 Company Scorecard Stress on Purpose 6alues and fnancial targets FeW measures Step 2 Division Similar to company Scorecard but more detailed and tailored to each division (but still less than a dozen measures) Step 3 Functional "usiness &unctions had tWo customer targets companydiVision and business unit The most detailed Scorecards with 25-30 measures on average. Step 4 Department Each department, location within the business had a Scorecard Step 5 Team Each team had a Scorecard (few measures) Step 6 Individual Individual Scorecards (few measures which were closely tied to the performance management system) The cascading "S# process in this instance tooK tWo years to implement. Much consultation and discussion took place, especially at Step 3 – where the process got ‘bogged down’ Because oF data shortage. "usiness teams some For the frst time eXplicitly stated their strategies. /BJectiVes and measures Were set For each perspectiVe. "ut in many cases the data and information to support the measures was not available (i.e.: customer proftaBility share oF customers² total Business staFFsKill ratio By JoB Family etc. The question needs to be asked, how was strategy being implemented historically without166 Strategic Management the appropriate performance metrics for that strategy? The company²s "S# process has since eVolVed additional perspectiVes For suppliers partners and the community are now in evidence. Key partners and suppliers are asked to deVelop their oWn "S# to ft into the company²s "S#. In practice each organisational Building BlocK noW has a "S#. PerFormance Management has eVolVed to 3 appraisal. When we talk to new managers, who were not present when the process was introduced, they looK QuiZZically at us When We mention the "S#. The company neVer reFerred to it as such in the frst place and today it is Just the spine oF seVeral management processes. The cascading "S# process in this case had many Benefts the greatest in our VieW Being alignment, communication and focus on the performance metrics which drive strategy. “The problem with communication ... is the illusion that it has been accomplished” – 'eorge "ernard ShaW. The communication FeedBacK and alignment Benefts oF the "S# process in this case were noteworthy. The Balanced Scorecard and the 7S Framework The S FrameWorK holistically puts all oF the pieces together. The "S# helps to operationalise the management oF those pieces. +aplan5 BelieVes ¯that the "S# is not only fully consistent with the 7S framework, but can also enhance it in use.” In this we are in Full agreement. +aplan compares the S FrameWorK and "S# as FolloWs167 Strategic Management 7S Framework: Balanced Score Card Strategy Describes and measures the strategy including balance between short-run cost savings and long term revenue growth, the customer outcomes expected from a successful strategy, the customer value proposition at the heart of the strategy, and the critical internal processes that create and deliver the differentiated customer value proposition Structure !pplying "S# to diVerse decentralised units alloWs alignment across these units and to the corporate value proposition that enables synergies to be created, along with accountability for contributing to local and global performance Systems /rganisations use the "S# to design their communication reporting and eValuation systems For their uniQue strategy. !lso the "S# alloWs organisational systems such as incentive and reward, planning, budgeting, and resource allocation to be focused and aligned on successful strategy implementation Staff The "S#²s learning and groWth perspectiVe identifes the critical JoB Families that haVe the greatest impact on the strategy, and establishes measures for the knowledge, skills and experience of staff performing the most strategic internal processes. Skills The "S#²s internal process perspectiVe measures the organisational sKills competencies and processes that are most critical for the strategy to be effectively executed Style-Culture The "S# proVides the agenda For leadership meetings and Keeps eXecutiVes Focused on the most important tasKs For strategy implementation. Specifc measures in the organisational capital component of the learning and growth perspective enable an organisation to specify and measure the leadership style and skills it desires. Adherence to values and cultural norms can be measured within the learning and growth’s organisational capital component Shared Vision #ommunicating the "S# throughout the organisation creates shared understanding and commitment about the organisation’s long term objectives and its strategy for achieving them. Section 7.2 References 1. 2. +aplan and D. .orton ¯The "alanced Scorecard Translating Strategy into !ction° Mc'raW (ill 1 2. 2. +aplan and D. .orton ¯The Strategy &ocussed /rganisation° (arVard "usiness School PuBlishing 21 3. 2. +aplan and D. .orton ¯Strategy Maps #onVerting IntangiBle !ssets into TangiBle Outcomes” (arVard "usiness School PuBlishing 2 . 2. +aplan and D. .orton ¯!lignment 5sing the "alanced Scorecard to #reate Corporate Synergies” (arVard "usiness Press 2 5. 2. +aplan ¯(oW the "alanced Scorecard #omplements the Mc+insey S Model° Strategy and ,eadership 6ol 33 .o 3 25 There is consideraBle additional reading on the "S#. /ne article We especially liKe is 2. +aplan ¯Mastering the Management System° (arVard "usiness 2eVieW *anuary 2.168 Strategic Management Refection Strategy and operationsimplementation need to seamlessly ft. 7hen Well eXecuted the "S# process can help this seamless integration. 1. Does your organisations strategy and operations seamlessly ft 2. (as strategy Been clearly defned and the metrics to driVe that strategy Been clearly laid out? 3. Are metrics and action programmes regularly reviewed? If your answer was negative to the questions above perhaps you should consider introducing a management process such as the "S# eFFectiVely. 7.3 The Management of Change “It’s not the strongest of the species that survives, nor the most intelligent, but the one most responsive to change” - Charles Darwin The only constant is change and the pace of change is accelerating. Managing change effectively is a critical capability; one which research indicates we need to improve on: - only 30% of change programmes succeed1 - only one in three transformations succeed2 - only 38% of transformations are completely or mostly successful3 Whilst managing change effectively is no easy task and there are no universal recipes for success a systematic, thoughtful approach improves the odds of success for planned change. "alogan outlines a seVen step process For managing change Analyse competitive position: changes needed Identify desired future state Identify change approach: design choices Design transition process: phasing of change interventions Manage transition: leadership issues Evaluate change outcomes Analyse change context: critical change features Why and what of change How of change 1 2 3 4 5 6 7169 Strategic Management Step 1 Diagnoses the changes needed Step 2 The current and desired future state once the change has taken place are outlined. The 7S framework can be employed to outline both positions. Step 3 considers the change context employing the Change Kaleidoscope5. The organisation operates in an ecosystem which has to be initially considered. What are the ecosystem implications on the change process? The Kaleidoscopes outer ring then considers the eight specifc organisational conteXtual Features oF the change situation. The inner ring oF the +aleidoscope proVides a menu oF fVe design choices open to change agents when implementation takes place. The Kaleidoscope analogy is used to remind us of the multi-faceted constantly evolving nature of change management. The Outer ring contextual features are: 1. Time to change urgency: the speed with which change needs to be achieved. 2. Scope: the degree of change required and how wide ranging is the change – from realignment to transformation. 3. Preservation: what needs to be protected and maintained (i.e. staff, competencies, ways of working, culture etc.). 4. Diversity: in values, norms, attitudes of staff groups affected by change. With high diVersity a one siZe fts all change approach is liKely to Be inappropriate. 5. Capability: individuals ability to cope with change; managers ability to help staff through the transition. 6. Capacity: availability of organisational resources to manage change (i.e. staff, time, The Change Kaleidoscope* - Organisational Change Context Time to change urgency Scope Preservation Diversity Capability Capacity Readiness Power Implementation Options Change type Change start-point Change style Change intervention Change roles - Constraint n neutral + enabler * Exploring Strategic Change, J. Balogun & V. Hope Haily170 Strategic Management fnance . 2eadiness For change eXtent to Which staFF are aWare oF the need to change understand the extent and implications of change; are committed and motivated towards achieving change. Management often over-estimate readiness and capability for change. . PoWer oF the change initiatorchange agent Versus other staKeholders Who haVe an in»uence on the change process. Each of the eight contextual features should be assessed as being an enabler, neutral or a constraint to change. ,eWins &orce &ield !nalysis assists the eValuation. %ach Force is rated For its importance and strength on a fVe point scale and the totals for ‘driving forces’ (enablers) and restraining forces (constraints) calculated. Attention then turns to how to strengthen supporting forces and ‘freeze’ them in place, and how to ±unFreeZe² resisting Forces and WeaKen their in»uence on the change process. The Kaleidoscope’s contextual features need to be monitored as the change process alters the enablers and constraints faced and their importance. Step 4 ‘Identifying change approach:design choices’ is addressed by the inner ring of the +aleidoscope Which outlines fVe design choices For change agents to consider Force Field Analysis – Kurt Lewin Each force is scored according to their ‘magnitude’, ranging from one (weak) to five (strong) Forces FOR Change Forces AGAINST Change Change Issue Driving Force 1 Driving Force 2 Driving Force 3 Restraining Force Restraining Force Restraining Force 5 3 2 2 4 1 Change Equilibrium No Change Total:10 Total:7171 Strategic Management 1. Change Type: the Time and Scope of the change considered in the outer ring of the Kaleidoscope. 2. Change start point: where should the change initiative start? Should it be top-down, bottom-up, led by a best practice area, be piloted etc? 3. Change style: Kotter and Schlesinger7 see that people resist change for four main reasons: - self interest - misunderstanding (inadequate information, communication) - low tolerance to change - different assessments of the situation To counter resistance they set out six change approaches: - Up front education and communication so that employees see the logic of the change effort - Participation and involvement. When employees are involved in the change effort they are more likely to buy into the change - Facilitation and support to help employees deal with fear and anxieties (i.e. counselling, training) - Negotiation and agreement: providing incentives to employees not to resist change - Manipulation and co-option: give resisters a symbolic role in the change effort without decision making power - Explicit and Implicit co-ercion: force employees to accept change by making clear that resisting change will have its consequences. (ershey and "lanchard argue that leadership style should Vary depending on FolloWers Incremental (Long) Fast (Short) Small (realignment) Large (transformation) Size of Change Speed of Change (time available) Adaptation - series of steps - staged initiatives Evolution - proactive, gradual - inter-related initiatives - planned blueprint - sequential Reconstruction - simultaneous change on many fronts - forced intervention - short, sharp shocks Revolution - simultaneous change on many fronts - relax historic criteria - promote esprit de corps172 Strategic Management competence and attitude to change. They outline four leadership styles: ‘Tell’, ‘Sell’, ‘Participate’ and ‘Delegate’. 4. Change Intervention: what levers and mechanisms should be employed to promote change ,eVers include systems such as incentiVes and perFormance management symbols, culture and power. 5. Changing roles: who has responsibility and accountability for leading and implementing change? Step 5 With the Kaleidoscope evaluated Step 5 ‘Designs the transition process: phasing of change interventions’. Section 7.1 outlined the ‘Eighth S’ of the 7S framework: Sequential Management of the other seven S’s. With the levers and mechanisms of the change management process identifed a change Blueprint is deVeloped. SeQuential Management develops a natural ordering and progression in the change process. Step 6 ‘Manages the transition: leadership issues’ to put the blueprint into action. Staff responsibility and accountability need to be assigned and appropriate resource and time devoted to the change process. Step 7 ‘Evaluates change outcomes’ – has the change process achieved its aims? It is important to re»ect Why things WorKed Well Why things did not WorK Well to gain insight and lessons for the next planned change management initiative. John Kotter9,10,11 points out that change takes time, often going through a series of phases. With elapsed time errors creep into the process, he cautions against eight key problem areas: High Low Low High Subordinates Ability Subordinates Willingness Participate Delegate Tell Sell173 Strategic Management 1. Error 1: Not Establishing a Great Enough Sense of Urgency: The need for change needs to be communicated widely and forcibly. Kotter argues that people will stay in their comfort zones unless exposed to the facts and the majority convinced that the status quo is unacceptable.(Note: elsewhere Kotter gives many examples of how important experiencing the reality is – as opposed to just being exposed to Facts and fgures and PoWer Point presentations . 2. Error 2: Not Creating a Powerful Enough Guiding Coalition: The key stakeholders need to ‘buy in’. Without their support the critical mass which is needed to develop the sense of urgency will not result. 3. %rror 3 ,eading a 6ision Change for changes sake will not capture the imagination. A clear lead needs to be given to an end state which is both compelling and appealing. 4. Error 4: Under communicating the Vision by a Factor of Ten: Change will not happen without constant reinforcement of the need to change by all key stakeholders. The ‘do as I say’ and not ‘do as I act’ pitfall needs to be avoided at all costs. "ehaViour especially at senior leVels needs to change to reinForce the need to act differently. 5. %rror 5 .ot 2emoVing /Bstacles to the .eW 6ision Even if willing to change obstacles will prevent effective changed behaviour. The 7S’s need to be confronted and redesigned to smooth the transition process. 6. Error 6: Not Systematically Planning for and Creating Short-Term Wins: A major change takes time. Momentum can soon become stalled without tangible evidence of progress. ‘Small Wins’ need to be designed into the process: milestones which show that improvement has been made; each of which can be celebrated before the next is moVed onto. 7e haVe Found the simple "eneft%FFort FrameWorK helps immensely in identifying short-term wins – ‘the low hanging fruit’174 Strategic Management 7. Error 7: Declaring Victory Too Soon: A promising start can soon regress into the old ways of doing things. The new way needs to be bedded down and built on and related to the last of the errors: 8. Error 8: Not Anchoring Changes in the Corporate Culture Change is transitory unless it becomes the basis of the new modus operandi - the way things are done around here. Kotter goes on to observe that many more errors are evident in large scale change. If these major ones are handled and an effective 7S framework put in place we believe the cornerstones oF eFFectiVe change Will Be in place. "ut While the marBle is KnocKed into shape fne chiselling Will alWays Be needed. Change however is frequently unplanned, organizations react and evolve as events unfold, individuals take the intiative. Kanter12 argues: “Companies that stay ahead of change are ones in which people see change as something they themselves accomplish and not something that is imposed on them. They see lots of opportunities to take the intiative” – they have a change metabolism. Benefit:Effort – Setting Priorities Low High Highly Desirable Potential Analyse Further Potential Quick Wins Implementation Effort and Cost Benefit High Low Medium 3 2 1 1 Medium 2 Least Desirable175 Strategic Management The impact oF change at an indiVidual leVel should not Be oVerlooKed. 2esistance to changing the known, the status quo, ‘the way things are done around here’ is only natural. Individual reactions to change will vary, the managers task is to have empathy and help individuals to move from the negative to the positive: - negative: fear, anxiety, stress, resentment, confusion, uncertainty, loss of self esteem - positive: enthusiasm, excitement, an opportunity to learn new skills, acquire new knowledge Section 7.3 References 1. *. +otter ¯,eading #hange° (arVard "usiness School Press 1 2. C. Aiken and S. Keller, “The Irrational Side of Change Management” - McKinsey Quarterly, April 2009 3. *. Isen ¯DriVing 2adical #hange° - McKinsey Quarterly, November 2007 . *. "alogan ¯Strategic #hange° - Management Quarterly, January 2001 5. *. "alogun and 6. (ope (aily ¯%Xploring Strategic #hange° Prentice (all 2 . +. ,eWin ¯Defning the &ield at a 'iVen Time° Psychological 2eVieW 5 13 . *. +otter and ,. Schlesinger ¯#hoosing Strategies For #hange° (arVard "usiness 2eVieW &eBruary 1 . P. (ersey and +. "lanchard ¯Management oF /rganiZational "ehaViour° Prentice (all 1 . *. +otter ¯,eading #hange 7hy TransFormation %FForts &ail° (arVard "usiness 2eVieW March !pril 15. 1. *. +otter ¯,eading #hange° Mc'raW (ill 1 11. *. +otter and D. #ohen ¯The (eart oF #hange° (arVard "usiness School PuBlishing 22 12. 2.M. +anter ¯!n InterVieW With 2osaBeth Moss +anter° - strategy + business, 1st July, 1999176 Strategic Management Refection (oW Well haVe planned changes Been implemented at your organisation - What have been the key differences when change management has worked well and worked poorly? 7.4 Section Overview Strategic Management is an integrative discipline; by its nature it pulls on and overlaps with other disciplines when we consider implementation. ,eadership and Management sets the agenda and FrameWorK For Strategic Management. &redericK Taylor²s scientifc management principles1 led to a command and control model oF organisation in the immediate post War era. ,eaders at the apeX oF a hierarchical organisation shaped strategy and passed it down to be implemented by people in a machine–like manner. The process separated strategic thinking from implementation. The command and control model has its appeal in stable environments but is increasingly bought into question by the malaise that besets the industrial world of today. Steven Dichter2 sees that it adds to cost sloWs response time and sti»es initiatiVe at the time when the need is for entrepreneurship, creativity and empowerment by many passionate champions. In the new model Strategic Management, leadership and the planning framework are relevant to all individuals: all either contribute to or carry out the imperatives. The integration of organisational hierarchies and narrowing of strategic choice results ultimately in plans and budgets. Control in many organisations is however, almost synonymous With fnancial control. The real danger is that strategy at the operational leVel is decoupled From the control process. The "alanced Scorecard deVeloped By +aplan and Norton (Section 7.2) provides a valuable framework to ensure integration and coordination is Kept in place By constantly reVieWing opposing perspectiVes fnancial external, internal and improvement. Perhaps the greatest contribution the Scorecard makes however, is to give ownership and a direct link to the strategy for the individual at the other end oF the spectrum to the command and control model oF scientifc management. Steven Dichter3 similarly argues that the organisation of the future will require leadership177 Strategic Management at all leVels With lots oF people doing lots oF little things right. (e contrasts the demands of the old and new model as follows: Old New Supervisor ----------> Customer focus Meet objective ----------> Continuous improvement (ierarchical relationships ----------> Team relationships Vertical, static structure ----------> &lat »eXiBle structure Compliance ----------> Empowerment Control oriented ----------> Vision and value driven Managing Change (Section 7.3), or moving from the old model to the new model is no easy matter. !ltering the architecture oF organisation is not suFfcient as many haVe found to their cost. The 7S framework helps to structure the complexities of the process. Only when the S’s of Shared Vision, Strategy, Structure, Systems, Staff, Skill and Style all pull in the same direction is the organisation aligned and the change process secure. The challenge facing both companies and individuals in the future is well expressed by Tom Peters various writings. The following extracts and adapts from his seminal presentation ‘The World Turned Upside Down’4: The world is beset by a degree of uncertainty, ambiguity and madness never before seen. It is a crazy time ... Uniformity has given way to broader choices, mass markets have splintered ... Organisations are not designed to deal with change. Yet all bets are off, the need is to organise For a Very diFFerent Future ... 2ather than manage the mess the issue remains the integrity of the product - one lives by it or dies by it ... There is no magic; the answer is to focus on customers with high quality, responsiveness and value added delivered by the people centred company ... Winners will be focused on niche, speciality targets oFFering Quality and innoVation andor Be »eeter oF Foot By Being radically doWn sized autonomous and non-hierarchical units within a larger company. Winners will: · Focus on the higher value added. ½ "e totally customer responsiVe. · Deliver high relative perceived quality. · Stress the service component. ½ (aVe »at organisations.178 Strategic Management ½ "e frst. · With the result coming from people. ½ ,eadership By many passionate and committed champions. Winning comes from people, quality, responsiveness, constant adaptation, extraordinary commitment from large numbers of passionate champions. Every person is totally responsible. ,iKe Tom Peters We Would argue eVery person should linK into and Be responsiBle For at least a part of the strategic management process. We hope that the SM Course serves you well to this end. Section 7 – 7.4 References 1. &. Taylor ¯Scientifc Management° (arper 2oW 1 2. S. Dichter, “The Organisation of the 90’s” - The McKinsey Quarterly, 1991 number 1 3. S. Dichter, “The Organisation of the 90’s” - The McKinsey Quarterly, 1991 number 1 4. T. Peters, “The World Turned Upside Down” Thames TeleVision Industry 9ear ,ecture Series ±The "usiness oF %Xcellence² Grant Chapter 16 considers ‘Current Trends in Strategic Management’179 Strategic Management 8. Introduction to the Advanced Strategic Management Course We hope you have been stimulated by the Strategic Management Course, especially after the Workshop. For many of you it will serve as a valuable foundation for project stage and your managerial careers. !t M"S For &ull time M"! students We haVe For many years offered a follow-on SM Course, the Advanced Strategic Management (ASM) 11 day Elective. ASM is for students wishing to broaden and deepen their understanding and application of SM. The !SM &ull time M"! %lectiVe is consistently oVer suBscriBed the Vast maJority oF &ull time M"! students Want to do it and is Very highly rated. In the *uly 212 semester the !SM %lectiVe Was piloted to 'loBal M"! students in a three day 7orKshop With considerable pre-Workshop preparation required. The pilot was a great success being rated at 4.91 out of 5.0. For this we thank the talented students that made the experience a success – they collectively put a lot in and got a lot out of it. Some of the student comments were: ¯&or me !SM Was the apeX oF the M"!° “I thought it was brilliant and really shone a light into “pulling it all together”. I found you very motivational in your approach and also demanding …” “Thankyou so much, really enjoyed SM and ASM was more than I could have hoped for. It certainly is T(% capstone course and has implications no matter Where you come From° “As a capstone course and building on SM this exposure and experience has provided a real toolkit for application and enhancing my career” ¯"est 7orKshop attended along With Strategic Management ° ¯/ut oF all the modules during my M"! I liKed these modules SM and !SM the most° ASM Aims SM is a capstone #ourse that integrates the M"!. 7ith so much material to coVer the core Course can only cover a limited number of concepts and managerial approaches. The ASM Course builds on the foundation laid in the core by introducing additional concepts and approaches to both broaden and deepen understanding and application of SM. Note: ASM assumes you are familiar with SM concepts and approaches. SM and ASM are integrated Courses.180 Strategic Management ASM Additional Concepts and Material in the Manual ASM Additional Material: Auditing a strategic position – the Strategic Position and Action %Valuation FrameWorK 2oWe et al*agiello !ssociates a poWerFul concept Which We use in the majority of our executive sessions). Competitive Environment SM Course Concept ASM Additional Concept Arena Map – Jagiello Associates Proft Pool Map "ain Five Forces – Porter Strategic Groups 2adar Map Mercer 'roup Activity Chain – Jagiello Associates ,andscape Mercer 'roup %nVironments MatriX "#'*agiello !ssociates ASM Additional Material: ½ "uilding the strategic Fact Base For decision taKing *agiello !ssociates ½ #omBining core conceptsFrameWorKs *agiello !ssociates ½ #ameos on the Industry #ost #urVe Mc+insey 'ame Theory ,earning and %Xperience #urVes "#' Share Proportionality "#' PIMS etc. Company Strategy SM Course Concept ASM Additional Concept !nalysing 2esources #apaBilities - Grant ch 5 Portfolio Grids – various 2outes to "uild a #ompany - Vertical Integration – Grant ch 11 !dditional insights From the literature consultants Jagiello Associates Four additional portfolio grids !dditional insights From the literature consultants Jagiello Associates ASM Additional Material: - New Ventures, Venture Capital, Private Equity Business Strategy ASM Additional Material in the Workshop: Structural attractiVeness oF Business fndings From the Proft Impact oF MarKet Strategy PIMS Business unit dataBase. Insights on proftaBility cash»oW share gain "enchmarKing "usiness proft eXpectation using fndings From the PIMS dataBase The "usiness Model #anVas /sterWalder - Core Objectives – Chatterjee #ameos on Time "ased #ompetition "#' Mass #ustomisation Pine 2e»ection Aspects of Implementation181 Strategic Management ASM Additional Material: - What does it take to be an Excellent Company? - The Paradox of Success The 2ole oF ,eadership - Observations on Successful Managers - Styles of Managing the Company - Parenting Advantage - Designing Effective Organisations ASM Assessment % A. Workshop Group Assessment Workshop Class Participation 20 10 ". Post 7orKshop IndiVidual !ssignments 1. DeVeloping a neW Business /2 (oW to improVe an existing business on one managerial challenge i.e. (oW to groW share (oW to improVe innoVation (oW to Boost productiVity etc. etc. 2. Special Interest Topic 30 40 100 Assessment Detail A. ASM Workshop Group Assessment 30 (20 + 10) The 7orKshop #ase is !ssociated "ritish &oods !"& . !"& With oVer 1 Billion sales has a diVerse portFolio oF fVe diVisions Sugar numBer 2 gloBally 6alue &ashion #lothing (Primark is the Value Fashion leader in the UK and Ireland and expanding aggressively into Europe); Grocery has many well known international brands like Twinings Tea; /Valtine MaZola oil "lue Dragon and PataK sauces *ordans cereal 2yVita crisp Bread and signifcant positions in Bread in the 5+ and !ustralia With Brands liKe +ingsmill Ingredients (a leading global player in yeast, bakery and high value ingredients) and Agriculture (supports farmers, processors, retailers and is involved in trading). 1. 9ou Will Be asKed to Familiarise yourselVes With !"& materials prior to the 7orKshop 2. You will be allocated into a team some six weeks prior to the Workshop to prepare a one hour presentation For the third day oF the 7orKshop on one oF fVe BrieFs - divisional strategy for Sugar - divisional strategy for Primark - divisional strategy for Grocery182 Strategic Management !"& company strategy !"& Key challenges issues opportunities going ForWard and InitiatiVes to taKe 3. The one hour presentation including 1! Will account For 2 oF the #ourse grade typically minutes presentation 2 minutes 1! 4. 10% of the Course grade will be a class grade determined by the success of the Workshop class participation and the success oF the fnal day meetingpresentations We Will all Be in role play during presentations and 1! . B. Post Workshop Individual Assignments As an Elective Course the aim is to give you freedom to select topics that are relevant to your own situation. Many of the pilot ASM student individual assignments addressed areas releVant to their fnal M"! proJect. "oth indiVidual assignments can address different parts of your intended project. Individual Assignment 1 – 30% ASM Course Grade - Due 3 weeks after the Workshop Target 2 Words plus diagramstaBulations. MaXimum length 15 pages Subject: a. Outline the development of a new business model (most students select a new venture idea they are interested in pursuing on an individual basis rather than a new business model for their company). /2 b. Make a difference to an existing business model on one managerial challenge (i.e.: how to grow market share; how to speed the innovation cycle; how to boost productiVity hoW to implement the "alanced Scorecard etc. etc. Individual Assignment 2 – 40% ASM Course Grade - Due 6 weeks after the Workshop Target 3 Words plus diagramstaBulations. MaXimum length 2 pages SuBJect Special Interest Topic supported By at least fVe releVant reFerences. Select any strategic issue or topic of interest and relevance to you: - Additional issues to address from Assignment 1? 2eleVance to proJect stage183 Strategic Management - Personal area of interest? - Issue raised by Workshop case? - Area within ASM you would like to examine more closely? Workshop Content Day One · Introductions · Strategic Position and Action Evaluation (Space) · Concepts that promote thinking on new business models · ASM additional concepts on the Competitive Environment · ASM additional concepts on Company Strategy and Implementation Day Two ½ "usiness Strategy - Findings from the PIMS business unit database !ssessing earnings potential For 5 Business units using PIMS fndings - Plotting the business unit portfolio PIMS insights on cash »oW and share gain The #/!2 Model The "usiness Model #anVas 2e»ection on Time "ased #ompetitionMass #ustomisation Day Three ½ 'roup assessed presentations 1! ½ ,eadershipManagement %Xcellence and Managing #hange ASM Content Overview The Course requires time and commitment to get the most out of it for yourself and to help you fellow students (some of the assessment is team based). Could we ask only students that have the time and are committed to sign up. If you do not make ASM we hope SM serves you well, if you make ASM we hope you will fnd it all the 'loBal pilot students Found it to Be. +ind 2egards Kevin Jagiello