The Strategy Design Process Strategic Analysis Strategy Implementation

The Strategy Design Process Strategic Analysis Strategy Implementation and Evaluation Strategic Choice Identify Sustainable Competitive Advantage Understand Industry Context and Competition Create Sustainable Competitive Advantage Select Sustainable Competitive Advantage Craft and Communicate Vision and Mission Develop Action Plans, Programs, and Processes Develop Strategic Goals and Specific Long Term Objectives Analyze Industry and External Environment Evaluate The Current Situation Analyze Resources and Internal Capabilities Evaluate and Select Strategy Craft Changes in Structure and Processes Implement the Strategy Establish the Basis for Sustainable Competitive Advantage Develop a Strategic Control System Understand Critique Current Strategy Generate Feasible Alternative Strategies Feedback and Rethinking Evaluate the Strategies Results

Situation Analysis Identify Strategic Options for the Company Select the Best Strategy for the Company

Question 4: Which Companies are in Strongest / Weakest Positions? A strategic group is a group of firms in an industry following the same or similar strategy. Identifying strategic groups: • Identify principal strategicvariables that distinguish firms. • Position each firm in relation to these variables. • Identify clusters.

Statoil INTEGRATED DOMESTIC OIL COMPANIES 1. 5 PRODUCTION COMPANIES 1. 0 PDVSA Petrobras Elf Repsol 0 Nippon 0 Sun 10 NATIONALLY-FOCUSED DOWNSTREAM COMPANIES 20 INTEGRATED INTERNATIONAL MAJORS DIVERSIFIED MAJORS Kuwait Amoco Arco Phillips Unocal Indian Oil 0. 5 Vertical Balance 2. 0 Strategic Groups Within the World Petroleum Industry Exxon EN ENI I BP Chevron Total Texaco Shell Mobil INTERNATIONAL Neste DOWNSTREAM Petrofina OIL COMPANIES 30 40 50 Geographical Scope 60 70 80

How to Start a Revolution Re-conceive your product or service ◦ ◦ ◦ Re-define the market space ◦ ◦ ◦ Radically improve the value equation Separate form and function Achieve joy of use Push the bounds of universality Strive for individuality Increase accessibility to your products Re-draw industry boundaries ◦ ◦ ◦ Rescale the industry Compress the supply chain Drive convergence between industries

What is a competitive advantage? How do you know if you have one (or not)? How can you create one?

Sources of Competitive Advantage COMPETITIVE ADVANTAGE COST ADVANTAGE ct u d pro st r a il co Sim wer o at l fro m Pri ce un pre iqu mi ep um rod uc t DIFFERENTIATION ADVANTAGE

The Porter Value Chain SUPPORT ACTIVITIES FIRM INFRASTRUCTURE HUMAN RESOURCE MANAGEMENT TECHNOLOGY DEVELOPMENT PROCUREMENT INBOUND LOGISTICS OPERATIONS OUTBOUND LOGISTICS PRIMARY ACTIVITIES MARKETING & SALES SERVICE

Using the Value Chain to Identify Differentiation Potential on the Supply Side IS that supports fast response capabilities Training to support customer service excellence Unique product features. Fast new product development FIRM INFRASTRUCTURE HUMAN RESOURCE MANAGEMENT TECHNOLOGY DEVELOPMENT INBOUND OPERATIONS LOGISTICS Quality of components & materials Defect free products. Wide variety OUTBOUND MARKETING LOGISTICS & SALES Fast delivery. Efficient order processing Building brand reputation SERVICE Customer technical support. Consumer credit. Availability of spares

Creating Competitive Advantage Industry structure matters, but success does not come just from industry attractiveness Value = difference between buyer’s willingness to pay and seller’s opportunity cost Added value = marginal value created by the firm (value that would be lost by its absence) The larger the added value, the larger the potential profit for the seller CA is achieved by driving a wedge between buyer willingness to pay and value added by the firm (scarcity) Ghemawat & Rivkin, 2006

Activity Analysis of Value Creation Catalog activities (along the value chain) Use activities to analyze relative costs and cost drivers Use activities to analyze relative willingness of customers to pay 1. 2. 3. • • Who is the real buyer? What do buyers want and what are they willing to pay for? What is the relative success of our firm and competitors in fulfilling customer needs Relate success back to activities – are the activities customers need the ones we are good at? Explore options and make choices 4. • Understand competitors, their likely reactions, the bundle of benefits to customers, and the role of scope and scale Ghemawat & Rivkin, 2006

Value Networks A non-linear model of value creation

Porter’s Generic Strategies SOURCE OF COMPETITIVE ADVANTAGE Low cost Industry-wide COST Differentiation DIFFERENTIATION LEADERSHIP COMPETITIVE SCOPE Single Segment FOCUS

The Evolution of Competitive Advantage How does competitive advantage evolve? External sources of change e. g. : • Changing customer demand • Changing prices • Technological change Resource heterogeneity among firms means differential impact Some firms faster and more effective in exploiting change Internal sources of change Some firms have greater creative and innovative capability

Drivers of Cost Advantage ECONOMIES OF SCALE ECONOMIES OF LEARNING PRODUCTION TECHNIQUES PRODUCT DESIGN INPUT COSTS CAPACITY UTILIZATION MANAGERIAL/ ORGANIZATIONAL EFFICIENCY • Indivisibilities • Specialization and division of labor • Increased dexterity • Improved coordination/ organization • Mechanization and automation • Efficient utilization of materials • Increased precision • Design for automation • Designs to economize on materials • Location advantages • Ownership of low-cost inputs • Bargaining power • Supplier cooperation • Ratio of fixed to variable costs • Costs of installing and closing capacity • Organizational slack

Identifying Differentiation Potential: The Demand Side THE PRODUCT THE CUSTOMER What needs does it satisfy? By what criteria do they choose? What are key attributes? Relate patterns of customer preferences to product attributes What price premiums do product attributes command? What motivates them? What are demographic, sociological, psychological correlates of customer behavior? FORMULATE DIFFERENTIATION STRATEGY • Select product positioning in relation to product attributes • Select target customer group • Ensure customer / product compatibility • Evaluate costs and benefits of differentiation

The Evolution of Honda: A Strategy Based on Resources and Capabilities 50 cc 2 -cycle engine Founding of Honda motor company 1948 1950 First product: clip-on engine for bicycles 405 cc motor cycle 4 cycle engines 1955 Related products: ground tillers, marine engines, generators, pumps, chainsaws 1960 The 50 cc super -cub 1965 1970 N 360 mini car Insight Hybrid 1975 1980 1985 1990 1995 2005 1000 cc Goldwing touring motor cycle Acura Car division

“Core” Competence – Three Tests Provides potential access to a wide variety of markets and products Makes a significant contribution to perceived customer benefits of the end product Is difficult for competitors to imitate

Strategic Intent Global leadership over a long time horizon An obsession with winning at all levels of the firm A sustained, challenging, focused BHAG ◦ Stable over time ◦ Attracts personal effort and commitment ◦ Guide for resource development and allocation Avoiding “recipes” for imitation Creating competitive advantages faster than competitors can imitate them, creating “new space” Layers of competitive advantage Changing the terms of engagement

The Relationships Between Resources, Capabilities and Competitive Advantage COMPETITIVE ADVANTAGE INDUSTRY KEY SUCCESS FACTORS STRATEGY ORGANIZATIONAL CAPABILITIES RESOURCES TANGIBLE INTANGIBLE • Financial • Physical • Technology • Reputation • Culture HUMAN • Specialized skills and knowledge • Communication & interactive abilities • Motivation

The Profit Potential of Resources and Capabilities THE EXTENT OF THE COMPETITIVE ADVANTAGE ESTABLISHED THE PROFIT EARNING POTENTIAL OF A RESOURCE OR CAPABILITY Scarcity Relevance Durability SUSTAINABILITY OF THE COMPETITIVE ADVANTAGE Transferability Replicability Property rights APPROPRIABILITY OF RETURNS Relative bargaining power Embeddedness of resources

Preparing for the Future: The Role of Scenario Analysis Stages in undertaking multiple Scenario Analyses: Identify major forces driving industry change Predict possible impacts of each force on the industry environment Identify interactions between different external forces Among range of outcomes, identify 2 -4 most likely/ most interesting scenarios: configurations of change forces and outcomes Consider implications of each scenario for the company Identify key signposts pointing toward the emergence of each scenario Prepare contingency plan

Perspectives on Strategic Planning “The essence of strategic planning is the systematic identification of opportunities and threats that like in the future [to] provide a basis for making better current decisions” (George Steiner) “There are significant benefits to gain through an explicit process of formulating strategy to insure that at least the policies (if not the actions of functional departments) are coordinated and directed at some common set of goals” (Michael Porter) “Planning is the substitution of error for chaos” (Anonymous) “Most corporate planning is like a ritual rain dance: It has no effect on the weather that follows, but it makes those who engage in it feel they are in control” (Russell Ackoff)