Creating Strategy

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					            Developing strategy




27-Jul-12                         1
  Strategy Formulation – the basic steps
             External Analysis
             Competitor
             Customer
             Industry
             Environment


                                         Strategy               Evaluation
                                       Development                              Planning
             Internal Analysis                                  Financial
                                                                modelling       Actions
             Strengths &                   Screening
                                   Strategy                                     Timescales
High Level   weaknesses           Workshops         Detailed    Gap analysis
Objectives   Financial                            Objectives   & feasibility   Resources
             modelling                                          Quantitative   Implications
             Competences                                       customer
                                      Analysis &                research
                                      Refinement


             Concept Design
             Qualitative
             customer research
             Internal (staff)
             research
             External research
Successful strategy is a matter of choice

                 IMPACT ON PERFORMANCE
               Low                           High

        High




FREEDOM
OF CHOICE



        Low
                     Impact on performance
A reminder - the strategic ‘thought process’



                MARKETPLACE




        PLANS                STRATEGY
Setting strategy: let’s start simply…
                          CONTEXT




                         STRATEGY


           CONTENT                         PROCESS

    An effective strategy should address:
     Content - the relevant data and a logical argument
     Process of change, including resources, training etc
     Context in which the strategy takes place
The problems of planning – you can be right,
at the wrong time!


   ‘The probable simplification of the facsimile
   system . . . must sooner or later interfere most
   seriously with the transportation of letters by
   the slower means of the post’

            The US Postmaster General

               Annual Report for 1872
The problems of planning (2):
oil price expectations versus reality
                  100                                        1981
                                                                      Forecasts
                  80
 US$/bbl (1990)




                                                                     1984
                  60

                  40                                                1987
                                                                    1989       1991
                                                                                   1993
                                                                                 1995
                  20
                               Actual
                   0
                        1970    1980    1990          2000          2010      2020
                                               Year

                                                             (Source: International Energy Workshop)
The profit potential triangle

              VALUE                          INTERNAL
             CREATION                       OPERATIONS

                              PROFIT


                            COMPETITIVE
                            ADVANTAGE

    Value creation: greater innovation, greater value, leads to
     greater profit potential
    Internal operations: efficient operations maximise ability to
     meet profit potential
    Competitive advantage: the greater the advantage, the
     greater the profit
                                              (Source: Boston Consulting Group)
Strategy vs tactics
                                STRATEGY
                           (Doing the right things)
                   Ineffective                   Effective
       Efficient

                     DIE QUICKLY           SUCCESS
     TACTICS
 (Doing things
         right)
                                           ALSO-RAN
                      DIE SLOWLY

        Simple


                                                      (Source: M McDonald)
The Ansoff matrix

                            PRODUCTS
                 Existing                  New
      Existing
                    BUSINESS       PRODUCT
                  DEVELOPMENT    DEVELOPMENT
   MARKETS/
 CUSTOMERS
                    MARKET
                                DIVERSIFICATION
                  DEVELOPMENT

         New
The growth/share matrix (Boston Grid)
                       RELATIVE MARKET
                           SHARE
                 Low                       High

        High

               PROBLEM CHILD        STAR
   MARKET
   GROWTH
      RATE
                   DOG           CASH COW

        Low


                                  (Source: Boston Consulting Group)
The barriers vs returns matrix

                      EXIT BARRIERS
               High                    Low

        High
                HIGH, RISKY   HIGH, STABLE
                 RETURNS        RETURNS
   ENTRY
 BARRIERS
                LOW, RISKY     LOW, STABLE
                 RETURNS        RETURNS
        Low
The barriers vs value matrix

                      PURCHASE BARRIERS
               High                           Low

        High
                                 IN DEMAND, high
                                      growth
 PERCEIVED
   VALUE
                DISTRESSED
                                  COMMODITY,
               COMMODITY, few
                                 need to add value
                   growth
                                   or push sales
        Low      opportunities
The cost vs differentiation matrix

                                  COST
                    High cost                Low cost

      Brilliantly
       different
                          NICHE            BEST

DIFFERENCE


                       DISASTER          COMMODITY
       Same as
  everyone else


                                                        (Source: M Porter)
Porter’s five competitive forces
                  Threat of New
                    Entrants




   Bargaining                      Bargaining
                    Industry
    Power of                        Power of
                    Rivalry
   Suppliers                         Buyers




                    Threat of
                   Substitutes

                                        (Source: M Porter)
Competitive focus forces driving industry
competition
                         Potential Entrants

                 Threat of
                 new entrants

                            INDUSTRY          Bargaining
                          COMPETITORS         power of
                                              buyers
    Suppliers                                              Buyers
            Bargaining
            power of       Rivalry among
                           existing firms
            suppliers
                                     Threat of substitute
                                     products or services

                           Substitutes
                                                               (Source: M Porter)
Generic competitive strategies
                      STRATEGIC ADVANTAGE
                  Uniqueness Perceived Low Cost Position
                   By The Customer
  Industry-wide
                                       OVERALL COST
                   DIFFERENTIATION
                                        LEADERSHIP
 STRATEGIC
  TARGET

                                  FOCUS
     Particular
  Segment Only
                                                           (Source: M Porter)
  The cost vs differentiation matrix re-visited
   Michael Porter’s framework can be represented in a more dynamic format


             High
                                           Efficient
                                           Frontier

DIFFERENTIATION

                         Your
                        Position

              Low
                     High                COST                 Low
 The product/service differentiation matrix
                             PRODUCT
                         DIFFERENTIATION
                   Low                High
           High

                   SERVICE          SYSTEM

       SERVICE
DIFFERENTIATION

                  COMMODITY        PRODUCT

           Low
  The risk/return matrix
                         COMPETITIVE
                          POSITION
                  Weak                 Strong
           High

                  EVALUATE        PURSUE

      INDUSTRY
ATTRACTIVENESS

                  REJECT          MAINTAIN

           Low
The strategic game board

             New Game                Selective
                               3.
                      Create and pursue a
    Same Game          unique advantage            Across the
                                             4.
                  2.                                   Board
                                      Exploit unique
           Re-segment the
                                        advantage
           market to create
                                       industry-wide
               a niche
                                1.
                        Do more and better
                           of the same
The decision making matrix
                           RISK
            High                        Low
     High

              SCRUTINISE          OPTIMUM

EXPECTED
REVENUE
                   AVOID          CONSIDER

     Low
The strategy clock (1)
                                      PRICE
             Low                                                      High
                                   Differentiation
      High                                4
                                                         Focused
                      Hybrid                          differentiation
                               3                     5


PERCEIVED
              Low
    VALUE                2                                 6 High
              price
                                                             price*


                            1                         7
                   Low price/                        High price/low
                   Low added            8               value*
       Low           value          Low value*

                                           *Strategies   likely to fail
Interpretation of the strategy clock (2)
       STRATEGY                                 NEEDS/RISKS
1. Low price/low added value   Likely to be segment specific

2. Low price                   Risk of price war, low margins; need to be cost leader

3. Hybrid                      Low cost base and reinvestment in low price
                               and differentiation

4. Differentiation             Perceived added value by user, yielding market
                               share benefits.
   a) Without price premium    Perceived added value sufficient for price premium
   b) With price premium       Perceived added value to a particular segment,
                               warranting price premium

5. Focused differentiation     Higher margins if competitors do not follow; risk of
                               losing market share

6. High price/standard value   Only feasible in monopoly situation

7. High price/low value        Loss of market share
8. Low value/standard price
The directional policy matrix (GE matrix)
                   INDUSTRY ATTRACTIVENESS
                   High          Medium            Low

            High
                   Investment    Selective
                   and Growth     Growth       Selectivity
 BUSINESS
 STRENGTH

        Medium     Selective                   Harvest
                    Growth       Selectivity   Or Divest




                                 Harvest       Harvest
                   Selectivity   Or Divest     Or Divest
            Low
The GE directional policy matrix (2)
                               WEIGHT OF FACTOR
                                -               +
                                -   -    =     ++
                   Factor 1

                   Factor 2

                   Factor 3

                   Factor 4

                   Factor 5

                   Factor 6

                   Factor 7

                   Factor 8

                   Factor 9

                   Factor 10


   The factors, once scored, can be weighted to show relative importance
The Hofer matrix
                    COMPETITIVE POSITION
                         Strong   Average   Weak


        Development                                    = Firm’s market share

                                                   Circle diameter represents
                                                   industry size
              Growth

STAGE OF
 PRODUCT
            Saturation
 MARKET
EVOLUTION
              Maturity



              Decline
The impact/value framework
                                   VALUE
                   Efficiency Effectiveness Innovation

                     Accelerate     Reduce        Create
           Time
                     Business     Information    Service
                      Process         Float     Excellence

IMPACT
                                    Ensure
                     Recapture                  Penetrate
                                    Global
                       Scale                      New
     Geography                    Management
                                                 Markets
                                    Control


                      Bypass       Replicate     Build
                     Intermed-      Scarce      Umbilical
                       iaries     Knowledge      Cords
   Relationships

                                                   (Source: Hammer & Mangurian, 1987)
The product life cycle in principle
Sales




   Introduction   Growth   Maturity   Saturation   Decline




                                                      Time
The product life cycle in reality
Revenue




                                                             Range
                                             Range        Extension (2)
                                 Growth   Extension (1)
     Pre-launch   Introduction
                                                  New Product
                                                    Launch


                                                                          Time
Product life cycle in reality: Persil 1954 - 89
                40


                35             GROCERS
MARKET SHARES




                30


                25


                20


                15


                10


                5


                0

                     54   59   64          69          74        79           84            89
                                                YEAR
                                Original    Auto        Liquid        Total
                                                                 (Source: A C Nielsen Co Ltd 1989)
   Product life cycle in reality: snack bars
        350
                                                  GROCERS
        300

        250

        200

        150
SALES




        100

        50

         0
                                                                   Jul-87




                                                                                                                             Jul-88
             Jul-86



                               Nov-86




                                                                                     Nov-87




                                                                                                                                                 Nov-88
                                                 Mar-87




                                                                                                           Mar-88




                                                                                                                                                                   Mar-89
                                        Jan-87




                                                                                                  Jan-88




                                                                                                                                                          Jan-89
                                                          May-87




                                                                                                                    May-88



                                                                                                                                        Sep-88
                      Sep-86




                                                                            Sep-87




                                                                              YEAR ENDING
                                                              A             B                 C                D             E

                                                             MOVING ANNUAL TOTALS
                                                                                                                                      (Source: A C Nielsen Co Ltd 1989)
The lifecycle strategy portfolio matrix (1)
                EMBRYONIC    GROWTH          MATURE      AGEING

    Dominant

      Strong

   Favourable

     Tenable

        Weak

   Non-viable

                     Wide Range of Strategic Options
                     Caution, Selective Development
                     Danger, Withdraw to Niche or Exit
The product lifecycle and market factors

Key               Unique            Service           Differentiation   Commodity
characteristics   product           differentiation
Message           Explanation       Competitive       Brand values      Corporate

Sales             Pioneering,       Channel           Relationship      Availability
                  innovators        support           focus             based
Distribution      Direct selling,   Exclusive         Mass              Mass market
                  targeted          distribution      distribution      (80:20 applies)
Price             Very high         High              Medium            Low

Competition       None              Few, small        Many              Few, large

Costs             Very high         Medium            Medium/low        Very low

Profit            Medium            High              Medium/high       Medium/low

Management        Visionary         Strategic         Operational       Cost focus
The profit hierarchy
                                Increase
                                  Profit



          Increase                                     Increase
           Volume                                      Margins


                                                       Change
 Expand              Increase              Reduce       Price     Increase
 Market                Share                Costs      Range       Margin

New Markets     Higher Spend               Fixed or    Move or     Higher
  or New           or More                 Variable?   Extend     Value or
Customers?      Customers?                             Range?     Volume?
The profit hierarchy (2)
                               Increase Margins



    Reduce Costs           Change Price Range           Increase Prices

   Lead generation           Volume discounts?      Competitor pricing
                                                      Customer sophistication/
   Sales calls               Loyalty bonuses?        knowledge
   Activation                Annual fees?           Customer satisfaction
                                                      Attrition and intentions to
   Account management        Fixed prices?           repurchase
                                                      Buyer behaviour -
   Re-selling/retention      Sliding scale?          frequency and value




BY CUSTOMER OR                CUSTOMER
                                                       PRICE ELASTICITY
    SEGMENT                KNOWLEDGE IS KEY
  The profit hierarchy (3)
                                                                                                           Improved x-sell
                                                                   Improved segmentation & targeting
                                             New customer                                                  Improved up-sell
                                                                   Enhanced product offering
                           Increase          X-sell                Improved promotion
                           volume
                                             Up-sell               Enhanced servicing and distribution
                Increase
                revenues                                           Improved incentivisation (commissions
                                                                   etc)


                                                 Enhanced product offering
                           Increase price
                           (Reduce price?)       Enhanced servicing and distribution
 Increase
profitability


                           Reduce product
                           specification                                                                         Improved
                                                                                                                 segmentation &
                                                         Customer acq costs      Initial expenses                targeting
                Reduce                                                           Initial commissions
                costs                                                                                            Improved
                           Reduce other variable
                                                                                                                 servicing and
                           costs                         Customer servicing      Maintenance expenses
                                                                                                                 distribution
                                                         costs                   Renewal commissions
                                                                                                                 Improved
                                                       Indirect                                                  incentivisation
                                                       personnel
                           Reduce fixed costs?
                                                       Other overhead
The McKinsey ‘7 S’ framework

                  Structure


       Strategy                Systems


                   Shared
                   values

        Skills                  Style



                    Staff



                                         (Source: McKinsey)
McKinsey’s 7 S’s (1-3)


 Effective organisations harmonize seven issues:

 1. Shared Vision - We know where we are going and it is
                    known by all employees

 2. Strategy       - Clear views on chosen actions (‘if you don’t
                     know where you’re going, all roads lead
                     there’)

 3. Structure      - Ensuring the right organisational structure to
                     carry out the strategy

                                                         (Source: McKinsey)
McKinsey’s 7 S’s (4-7)


 4. Staff     -   The organisation has the right people (numbers,
                  education, motivation etc) to achieve the vision
 5. Skills    -   The organisation has all the necessary skills
                  production, marketing etc) for effective strategy
 6. Systems   -   Not just information systems, but consistent and
                  effective processes - ‘the way we do things round
                  here’
 7. Style     -   Different organisations have different styles



                                                          (Source: McKinsey)
 Porter - the value chain

                    FIRM INFRASTRUCTURE

               HUMAN RESOURCE MANAGEMENT
 SUPPORT
ACTIVITIES        TECHNOLOGY DEVELOPMENT

                        PROCUREMENT

             INBOUND OPERATIONS   OUTBOUND MARKETING   SERVICE
             LOGISTICS            LOGISTICS & SALES




                PRIMARY ACTIVITIES
                                                                 (Source: M Porter)
 Decomposing the economic engine …

                      What is our basic value proposition?
  Concept of          How have we segmented the market?
‘Served Market’       What kind of customers do we serve?
                      Where are our customers?


         Revenue and             Where in the business system do we take profit?
                                 Where do our margins come from?
           Margin                What has determined the size of our margins?
          Structure              What are the major cost and price drivers?


                                             What do we believe we know how to do well?
                  Configuration of           What physical infrastructure supports our business?
                    Skills and               What kinds of skills predominate in our company?
                      Assets                 What is the trajectory of our development spending?

                                                       How alert are we to new value delivery models?
                             Flexibility and           How easily could investment programmes be
                             Adaptiveness               reoriented?
                                                       How easily could the infrastructure be
                                                        reconfigured?
                                                       Which constituencies would most resist change?
                                                                               (Source: Hamel & Prahalad)
  Understanding resource leverage
                                                 Concentrating



               Accumulating                           Conserving                  Complementing



                                                      Recovering



 Converging:     Building consensus on strategic goals         Balancing:    Securing critical complementary assets

 Focusing:       Specifying precise improvement goals          Recycling:    Reusing skills and resources

 Targeting:      Emphasising high-value activities             Co-opting:    Finding common cause with others

 Learning:       Fully using the brain of every employee       Protecting:   Shielding resources from competitors

 Borrowing:      Accessing resources of partners               Expending:    Minimising time to payback

 Blending:       Combining skills in new ways



                                                                                        (Source: Hamel & Prahalad)
       Gap analysis - and what to do about it …
                                        Strategic Alternatives
                        Objective       1. Improve productivity
                                             Reduce costs
                                             Improve the sales mix
Sales/Profits (£)




                               The           Increase prices
                            strategic        Reduce discounts
                              ‘gap’          Increase productivity
                                        2. Market penetration
                        Forecast
                                             Increase market share
                                             Increase usage frequency
                                             Increase purchase values
                                        3. Market development
                                             Geographical expansion
                                             Find new customer segments
                                        4. Product development
                                             Develop new products
                        Time                 Reconfigure existing products
                                        5. Diversification
                                             New products to new markets
Understanding scenario planning
A scenario:   provides ...                      does not provide …

Objective     … deeper understanding of the     … exact knowledge of the
              possible solutions to a problem   future

Result        … options for action with         … instruction for problem
              alternative environments          solving
Procedure     … problem-oriented process of     … collection of data and
              data collection and communication information independent of a
                                                problem
Methodology   … systematic structuring of a     … selective extrapolation of
              problem considering external      individual trends in order to
              influences and assessing future   predict global development
              developments                      decisions



                                                          (Source: Ged Davis, 1999)
How to build scenarios

 4. Bundling of                    5. Scenario
  alternatives                    Interpretation


  3. Descriptor                        6.
  Determinator                    Consequence
                                    Analysis

  2. Influence      7. Friction
    Analysis         Analysis

                                   8. Scenario
     1. Task                         Transfer
    Analysis
                                   (Source: Ged Davis, 1999)
And finally: make your own matrix …

				
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