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					                                        NEKIA
                                  Strategy Discussion


                    November 18, 2005




205 Billings Farm Rd. • Suite 2D • White River Junction, VT 05001
             Tel: (802) 296.8200 • Fax: (802) 296.8300
                          Confidential
           Some Departure Questions…


• What is strategy?


• How would you describe your core business?


• What are the critical trends at work in the markets you
  serve?


• Are you the market leader in your core business, or is
  one of your competitors? Should you care?


• How do you think about growth in your business?


• What characteristics define the perfect investment?


                        Confidential                        2
                    Agenda




 Important Themes in Strategy Development


 The Strategic Value of Market Leadership


 A Growth Planning Framework


 Questions & Open Discussion




                    Confidential             3
            Defining Strategy




 Strategy is the allocation of scarce
  resources


 Strategy is a proprietary set of
  actions that better serve customers
  than the competition to build lasting
  market advantage



                 Confidential             4
     10 Ideas Chief Executives Use all the Time…


1.  Businesses must be grown or sold
2.  Surplus growth is a central objective
3.  Customers always act in their perceived self-interests
4.  Real prices fall against a constant unit of customer value
5.  Market leaders hold the most potential for superior
    returns
6. A growing market begets competition
7. All strategic analysis includes the variable of
    competition
8. Investment in advantaged positions yields superior
    returns
9. Operational excellence is not the same as strategy
10. Many strategies “implode” from lack of internal
    consistency or poor execution




                          Confidential                           5
                    Agenda




 Important Themes in Strategy Development


 The Strategic Value of Market Leadership


 A Growth Planning Framework


 Questions & Open Discussion




                    Confidential             6
        A Question…




What does the Educational
Knowledge Market look like?




          Confidential        7
Understanding Market Structure




      - Important Segments

      - Market Size

      - Growth Rates

      - Competitor Positions




             Confidential        8
                          Market Definition




   Same customers         Shared customers    Different customers
   Same cost structure     and/or              Different cost structure
                           Shared costs




        One                                          Separate
      Business                                      Businesses




   Compete in both         Depends on the      Do not compete in
  segments to take            degree of         both segments
advantage of synergies       competitive
                              advantage
                            conferred by
                               sharing




                                Confidential                                9
                       The Importance of Business Definition


         • Companies that define their business incorrectly make poor strategic decisions…



          Costs                          Customers                       Competitors


 Incur unnecessary costs          Neglect profitable customer      Overlook relevant
                                    segments                          competitive threats
 Forgo opportunities to
  capture synergies                Over-invest in unprofitable      Miscalculate “market share”
                                    customers
 Do not transfer experience                                         Set inappropriate
                                   Forgo opportunities to            performance targets
 Underinvest in important
                                    capture synergies
  R&D initiatives                                                    Overlook relevant capacity
                                   Misjudge relevant market          changes
                                    trends
                                                                     Misjudge true cost position
                                   Overlook relevant
                                    geographies




                                            Confidential                                            10
             Market Segmentation




                     Customer




Technology                                    Product




         Geography                  Channel




                     Confidential                       11
                                                     Another One

                                  School Reform Market ’02-03
                                                                                                                    Coalition
                                                                                                                    of
                                                                                                                    Essential
                                                                                                                    Schools
                                     $123MM                                           $70MM                      $21MM
  100%
             Coalition of Essential Schools
                                                                                                                     ATLAS
                                                                           Middle Start
             Direct Instruction
                Core Knowledge          Other                                             Other                     Other
     80                                                                       ELOB
                       Ventures                                                                                       Action
                                                 Modern Red SchoolHouse           Modern Red SchoolHouse              Learning
                           Galef/DWoK                Accelerated Schools                   Accelerated Schools        Systems
                                                                                                                                 School
     60                                                                                                             ELOB         Development
                                                                                                                                 Program
                                                                                      Galef/DWoK
                                                                                          Ventures                               Talent
                                       Co-nect                                    Turning Points                  Co-nect        Development
     40                                                                                                                          High School
                                  America's Choice                                    Co-nect                    Ventures

                                                                                  Success for All                High Schools
     20                                                                                                           That Work

                                   Success for All                                                               America's
                                                                                 America's Choice
                                                                                                                  Choice
      0
                                   Elementary                                    Middle Grades                     High
                                                                                                                  School

Market Growth Rate,                                                                                                              Total:
                                         8%                                                16%                       8%          $215MM
Two-Year CAGR:



                                                           Confidential                                                                   12
                                                                                                                                                    The Demand Curve


                                                                                                                                                               School Reform Market, 2003


                         Talent Development High School
             $150,000




                              Action Learning Systems
              100,000
Unit Price




                                                                                                                                                                                                    Talent Development Middle School

                                                                                                                                                                                                                                                                      Integrated Thematic
                                         Effective Schools




                                                                                                                                                                                                                                                                      Instruction
               50,000
                                                                                    Modern Red SchoolHouse


                                                                                                             for Direct Instruction
                                                                                                                                      Urban Learning Centers




                             America's
                                                                                                                                                                          Turning Points
                                                                                                               National Institute




                                                                                                                                                                                                                                                                                                                Making Middle Grades Work




                                                                                                                                                                                                   Essential Schools
                                                                       Galef/DWoK




                                                                                                                                                                                                                                      Accelerated
                              Choice




                                                                                                                                                                                                                       Middle Start




                                                                                                                                                                                                                                                    Ventures
                                                                                                                                                                                                      Coalition of




                                                                                                                                                                                                                                        Schools
                                                             Co-nect
                                                                                                                                                               Success




                                                                                                                                                                                                                                                                      Core Knowledge
                                                                                                                                                                                           ATLAS




                                                                                                                                                                                                                                                                                       High Schools That Work
                                                                                                                                                                                                                                                               ELOB
                                                                                                                                                                for All




                                                                                                                                                                                                                                                                                                                 Lightspan
                                                                                                                                                                                                                                                                                                                                    Renaissance




                                                                                                                                                                                                                                                                                                                             AVID
                                                                                                                                                                                                                                                                                                                                     Learning
                   0
                        0%                                                 25%                                                                                                     50%                                                                           75%                                                                         100%



                                                                  Major Competitors Across CSR Award Universe



                                                                                                                                                                      Confidential                                                                                                                                                                  13
            What They Tell Us…



- Aggregate Market Size and Growth Characteristics

- Segment Shares and Growth Rates

- Competitor Scope and Share

- Identities of Market Leaders

- Clues about Competitor Strategies

- Potential Candidates for Partnership/Acquisition

- Occasionally, New Fields of Opportunity




                     Confidential                    14
  Another Question…




Why should you care

about market share?




       Confidential   15
                        Another Question for You…
                       Does Big Co. Lead its Market?


100%                                             100%           4
         3       5         6                                    6
         4                                                      7
  80             2                                 80           1
                           7
         2                                                      2
  60             Big                               60
                 Co.    Big Co.                                 3
       Big Co.
  40                                               40           5

  20             3         5                       20
         1
                                                             Big Co.

   0                                                0
       Market Market Market                             Markets 1, 2 and 3
         1      2      3


                                  Confidential                               16
                        Relative Market Share


• Market Share quantitatively measures an organization’s position in its market
• Generally speaking, the higher the share, the better the position. The “Market
  Leader” has the highest share
• There are two primary ways to calculate…
• The most common is the least useful: Market Share = Revenue / Market Size
  (expressed as a % of total market)
• This first method is limited because it provides no insight into an
  organization’s share relative to its competitors. The second method solves
  that problem
• Relative Market Share = Revenues / Revenues of Most Important Competitor
  (expressed as a multiple, i.e., 1.0X, 0.6X, 3.4X, etc.)
     • Often referred to as RMS
     • For the market leader, the most important competitor is the 2nd largest
       player. For all others, it is the market leader
     • Thus, only one organization in a market has an RMS > 1.0
• According to empirical studies across businesses, there is a strong positive
  correlation between RMS and margins
• Market leaders have the potential to earn the highest margins



                                   Confidential                                    17
                               But Why?
                      The Experience Curve

• This relationship between relative share and profit potential is grounded in an
  idea called the experience curve
• The experience curve is an observed economic phenomenon which says that
  it is the nature of prices to decrease predictably as a function of cumulative
  production (accumulated experience)
• This effect can be observed repeatedly: in rapid growth or low growth
  businesses, in manufacturing and services, and across different value-added
  functions (production & marketing)
• The behavior of costs underlies this relationship
• Effect is driven by three major sources: scale, technology, and learning
• Competitors who have the most accumulated experience have the potential
  for the lowest costs, although poor management can obscure this reality
• Interestingly enough, market share leaders also command the highest prices
• Thus, a point of market share is worth more to a market leader than it is to any
  other competitor in the industry
• Market share, expressed in relative terms, determines long-term profitability
• Within a company, the relationship between profitability and a business’
  competitive position is often dramatic



                                 Confidential                                        18
A Powerful Relationship




      RMS (Log Scale)




         Confidential     19
           The Sensitech Example
U.S. Temperature Monitoring Market, 1998




                                 C
                                       D
       C

   Sensitech                     B

       g                         .5g   .8g



                  Confidential               20
             The Sensitech Example
U.S. Temperature Monitoring Market, 2004




                             F
E


                                               D
    Sensitech                      Sensitech



       .5g                            .3g      -



                    Confidential                   21
                                                                                   Relative Growth



                                   100%

                                              Coalition of Essential Schools                                                                         Reference
Whole School Reform Growth 03-04




                                                                      Accelerated Schools                                                             $25MM
                                                                                                                                      Other
                                   80%     Modern Red                                 Core Knowledge
                                                                        Avid
                                            NE Illinois                                          Audrey Cohen
                                                                                                                                         America's
                                                                                                                                          Choice
                                                                                               School
                                   60%                                                         Development
                                                                                                                         ATLAS
                                                                                               ELOB
                                                                                                                                        SFA/R&W
                                                                                                               Co-Nect
                                   40%                                                                                    Lightspan
                                           Different                       ULC
                                           Ways of
                                           Knowing        Depaul (Urban)           Direct
                                                                                 Instruction
                                            High Schools
                                   20%
                                             that Work



                                    0%
                                      0%                      20%                      40%                   60%         80%                  100%

                                                                                    Design Team Growth 03-04




                                                                                               Confidential                                                      22
                “Mechanics” vs. “Dynamics”



• As we discussed, market leaders have the potential to earn the highest
  margins
• Assuming good management, if companies grow at identical rates their
  margins will maintain constant relationship with one another
• Yet, this rarely happens in nature. In reality, companies grow at different
  rates
     - Companies fail to meet the performance standards they require in
       new products because they willingly over-invest in weak
       competitive positions
     - In so doing, the companies under-invest in advantaged positions
• When competitors grow at different rates, their market shares and cost
  positions change
     - Share declines lead to lower margins
     - Share increases lead to expanding margins
• In the long run, profitability changes are functions of relative growth




                                 Confidential                                   23
                    Agenda




 Important Themes in Strategy Development


 The Strategic Value of Market Leadership


 A Growth Planning Framework


 Questions & Open Discussion




                    Confidential             24
          A Question…




How do you systematically look
          for growth?




            Confidential         25
           The Paradox of Leadership…



• Each point of market share is worth more to a leader
  than a follower
    • Scale and experience curve economics
    • Price premium
    • Reinvestment potential




• The better your core business is performing the more
  likely there is potential for both top and bottom line
  improvement




                        Confidential                       26
The Starting Point…
Your Core Business




       CORE




      Confidential    27
                  Adjacencies
        Growth Opportunities That…



• Reinforce or defend the core business


• Leverage core business capabilities and assets


• Add value to customers in the core business


• Provide potential for leadership economics




                     Confidential                  28
                             Developing New Opportunities

                          Local                                           New-to-world

                                  Process and                  Innovation
                                    systems
           Global                                                                        New-to-
         expansion                                                                       company
                                                         Technology


                         Geography                                        Product / service




  Backward                                                                                        Forward
 integration                                      CORE                                          integration


                                                                             Customer /
                          Capability                                      customer segment

                                                        Channel
Leverage business
    processes                                                                            Microsegmentation of
                                                                                           current segments


                                         Direct                Indirect          New segments
                     Knowledge
                    management                  Confidential                                              29
The Further from the Core, The Lower the Odds



       Unrelated diversification
           (<1% success)


            3 steps (7%)


       2 steps (26%)



   1 step (38%)


     Core




                 Confidential                   30
So, how do you measure economic
 distance from the core business?




             Confidential           31
                        Back to Business Definition…



                   Shared     Shared   Shared           Shared       Shared         Shared
                  Customers    Costs   Channels       Competitors   Capabilities   Technology


Core


1 Step
Adjacencies


2-3 Step:
Adjacencies


Multi-Step
Adjacencies


Diversification


Primary                                                                    Full Share

dimensions                                                                 Partial Share

                                                                           No Share

                                       Confidential                                             32
                          Odds of Success Vary by Vector…


                              27% average

           New
         Business

Forward / Backward
    Integration
          New
         Channel

    New Customer
      Segment

         New
       Geography

     New Products
      & Services          Success                     Failure

                      0      20        40            60         80   100%

  Source: GE Equity
                                      Confidential                          33
               Opportunity Assessment

Relatedness

  High




   Low
         Low                            High
                     Attractiveness
                      Confidential             34
                  The Success Loop

                             Invest in
                             Superior
                             Products


                                                      Acquire
    Expand                                             New
 Organizational                                      Customers
  Resources




                                                           Provide
Financial                                                  Quality
 Surplus                                                   Support




               Sustain                        Generate
            High Customer                  High Customer
              Retention                     Satisfaction




                            Confidential                             35
                    Agenda




 Important Themes in Strategy Development


 The Strategic Value of Market Leadership


 A Growth Planning Framework


 Questions & Open Discussion




                    Confidential             36
Do these ideas relate to your business?




                 Confidential             37
Magritte’s Caution…




      Confidential    38
End of Document




    Confidential   39
Blank Chart




  Confidential   40

				
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