STRATEGIC PLANING
These notes were taken at Rice University in a Management program held in May 2011, that was conducted by Dr. Prashant Kale
What is strategy? A PLAN TO WIN (Is NOT a plan to play!)
What you need? ACHIEVE A COMPETITIVE ADVANTAGE!
More than trying to do things better; the strategy is focused on doing things differently!
Create a unique competitive position. Strategy is making trade-offs in competing: There are positives and negatives when building the design of the strategy and each step needs to be measured.
Strategy should cover: Shareholders, Customers, Employees.
You need to satisfy shareholders : CREATE SHAREHOLDER VALUE
(ROI/Share price, Growth, Profitability) and,
To the customer (Look for best value – Best product at lower price)
Profitability (Shareholders) = Rev - Cost
Increase Revenue (Higher: Price x Volume)
Shareholders:
Look for return on Assets and on Investments
ROS (WALLMART) = 5% (RETURN ON SALES)
RETURN ON ASSETS = PROFIT / ASSETS
SALES TO ASSET RATIO = SALES / ASSETS = 10
Return on Capital is closely related to return on Assets!?
RETURN ON ASSETS = (PROFIT / SALES) X (SALES / ASSETS)
Compare then to the costs of capital associated to the risk!
Fact: Mercedes Bens, Pfizer, Procter, Coke, Mattel (All Strong brands, Global, Market leaders) they all fired the CEO in the past 10 years…
Even the best of the best find it HARD to sustain the performance of the company
Example: 1970 & 80 1980 – 90 1990 - 2000
Photo: Kodak Fuji Nikon, Canon
Telecom: AT&T, ITT NEC, MCI, Alcatel Cisco, Huawei
Strategy:
1) Higher level: Business Strategy
2) Functional Level: Functional Strategy
Steps:
Analysis -> Formulation -> Implementation (Execute) - > Analysis (Evaluate)
One of the most important skills is to ASK THE RIGHT QUESTION!
Systematic approach to address some of the Key Questions.
Colas Case
2 mayor players control 80% of the market
1) High entry barriers (Limited competition)
2) Very strong Brand recognition. If somebody enters, they will retaliate very fiercely!
3) Huge Advertising. (Requires a ton of money: Pepsi and Coke invest 13 BILLION $ a year in Advertising). If some new player enters, this will increase. 40% of the revenue goes to advertising. => Perceptions! Is not the flavor of the Coke, many other taste similar (The formula is NOT an entry barrier)
4) POWER: They control the bottler manufactures. They have all power. Pepsi and Coke can go to any bottler, but the bottler can not do the same. Even they can start bottling themselves. (30% of their capacity is bottled by themselves) // They are manufactured using commodities. The suppliers are also in disadvantage!
5) SUBSTITUTES: They also control the possible substitutes products (as Water, Juices)
6) COMPETITION: Not by price! Cost are based by commodities so it will reduce both company’s margin. Is by advertising.
No much competition: The margins remain without much variation for long periods.
COMODITIES: Are not differentiable! The only important issue is PRICE!
BRAND: Creates differentiation => higher profits
PORTER’S ELEMENTS OF INDUSTRY STANDARD
1) Entry Barriers (Regulations, Capital requirements, Technologies)
2) Suppliers (Suplier Barganing Power)
3) Buyers (Buyers Bargaining Power)
4) Substitutes (What alternatives are available for customers)
5) Competitors (Nature of rivalry)
PROFITABLE INDUSTRY: Unprofitable Industry (DOG!)
· Entry Barriers (High) Low
· Supplier Bargaining Power (Low) High
· Buyers Bargaining Power (Low) High
· Threat of Substitutes (Low) High
· Competitors (Nature of rivalry) (Low) High
The Carbonated Soft Drink business it’s attractive because it offers
GROWTH and PROFITABILITY!
INDUSTRY FRAMEWORK:
Defensive Posture:
· Analyzing understand present situation
· Take actions to defend your position in the industry.
Offensive:
Take actions to CHANGE the industry structure and attractiveness.
Note: When you go to other countries, the industry structure could be different. Coke and Pepsi are working in changing the industry standard to what they have in the US.
CONSOLIDATION can reduce buying power! (Airlines vs low Ticket costs)
Case: SowthWest Airlines
They did great because of the strategy, in spite of being part of a very bad market! 1.000 $ in 1970 became 11.000.000 Dollars!
Airline Industry Analysis
PROFITABLE INDUSTRY:
· Entry Barriers (High) High
· Supplier Bargaining Power High (Unions)
· Buyers Bargaining Power High
· Threat of Substitutes ?
· Competitors (Nature of rivalry) High
Strategy of Southwest Airlines: LOWEST COST!!!
· Attract Non Fliers into Fliers (Low cost in order to compete with ground transportation)
· To be profitable: Lowest cost (More important driver to success of the company). Use secondary airports, less cost (2 $ vs 6 $) saves 100 Million Dollars on Gate fees, less congestion (more timely flights saves 244 Million / 0,8 = 60 Millions $), no seat assignation, No meals, fast turnover (15 minutes), that allows 10 flight per day by plane, REQUIRES LESS AIRPLANES!!! (South western is saving 100 airplanes because of being able to turn around of 15 minutes). It saves 100 x 27 Million, plus savings in additional personnel, No Frills (No food, no business class, no seat assignment, SAVES TIME)
· No reservation system saves 56 MM$
· Sells with some travel agents saves 60 MM$.
· All employees were shareholders, The company is profitable, company is fun place to work, low turnover, more productive employees!
Competitive Advantages:
SHORT TIME FLIGHT à No Frills à LOW TURNARROUND TIME àLOW COST
à LESS PERSONNEL
à ATTRACT NON FLIERS
· THEY USE SMALLER PLANES THAT ARE EASIER TO FILL! (120 seats)
· THEY USE ONE PLANE MODEL (REDUCES TRAINING COST FOR PILOTS AND MAINTAINANCE)
· IF THERE IS ANY FAILURE IN A PLANE, THE REPLACEMENT IS EXACTLY THE SAME (No need to change crew, or to have to make passenger stay because of smaller size of the airplane)
The savings are higher than 450 Million $. The Operating Margin is 183 MM$, meaning than most of the savings is past to the customer. Its important to measure (in $) the competitive advantage!
VULNERABILITY: Having one airplane model: What happens if there is an accident in the Boeing 737, and they are ordered to ground all planes doing investigation. (Note: One reason they selected the Boeing 737 is because of the security record of the airplane)
Why are not other airlines not replicating this model?
Have you created IMITATION BARRIERS: You need to copy all the model!
Some airlines started to copy PARTS of the strategy (No food), but are not able to reach the LOWEST COST advantage of Southwest Airlines, because of combining multiple factors very difficult to follow.
COMPETITIVE POSITION
· Low cost: South west
· Differentiation: BMW , Tiffany’s(Perception and Tangibles: Status, reliability, high quality…). They sale at a HIGHER PRICE, but also have a HIGHER COST (Spend more on R&D, in brand, in stores & distributors…). They DO NOT sale a very high volume: Profit = Price x Volume (Revenue) – Cost . This strategy is difficult to expand. ALLIGMENT: Everything BMW does is ALLIGNING to differentiation.
Firm profitability depends on Industry, and on each company.
Performance depends on the industry factors, and firm specific factors.
Industry factors:
· Political & Legal
· Technological Environment
· Macro economic
· Social-demographic
Porter Company Factors:
· Industry Competitors
· Substitutes
· Suppliers
· Buyers
· Potential competitors
Substitutes are very difficult to spot:
In the mid 1980, FAX was created and took off an important part of the cargo that airlines took from the Postal Service. Also FEDEX took part of the cargo.
Macro Economics: There are companies that work to shape the Macro conditions to benefit the industry.
Strategic Positioning:
Relative Differentiation vs Relative Cost Position
THE MOST PROFITABLE STRATEGIES ARE DIFERENCIATORS OR LOWER COST. The stuck in the middle are LESS PROFITABLE!
RESESSION is the most demanding scenario. Is when the strategy is really tested!!
Check your company:
· Are you’re a Good player in a Good industry?
· A Bad Player in a Good Industry?
· A Good Player in a BAD Industry?
· A BAD player in a Bad industry?
Why do companies Fail to change? Ej. Kodak, Blockbusters, Borders
· Cognitive Inertia: Companies get locked into habitual way of thinking. Kodak focused only in consumables (Film, then CD), not in the printing process.
· Action Inertia: Then the rest of the people keeps doing the same. Unable to act! (Example turn on airline business)
Confirmation bias: we believe that the word is not changing!
How can we combat it!?
· Increase “Awareness” that confirmation bias exists!
· Guard against “Experience” syndrome (Use younger managers)
· Engage in deliberate Analysis (Seek contradictory information, invite views from outsiders (example: Consultants).
The problem of bringing consultants is that you are paying, and therefore many times they do not have the guts to tell you are wrong.
GROWTH
1) Through innovation
2) Local or International expansion
3) New Business (Microsoft with Xbox)
BOOKS FOR (Growth):
· The innovators solutions (Article: Solving the dilemmas of Growth)
· Blue Ocean Strategy
· The Fortune at the bottom
Sustaining Innovation: Adding new value. Keep hearing the customers. Constantly update products and Services. Concentrate in your customers.
Disruptive Innovation: (competitors wont care) – This is more profitable!! But price is an ORDER OF MAGNITUDE LOWER! . It captures
· Low end (want something more simple at lower price)
· Non market (Not consuming the product: Complicated? Expensive?) : Convert Non consumers into consumers: In every business there is almost always MORE NON CONSUMERS than consumers!
The current market participants are going to be disrupted. Think on how Southwest disrupted the airline business!
Everything (The entire business model) needs to be redesigned when considering disruptive innovation: Suppliers, manufacture, how you sell,… !
If its just a product innovation is easier to react, but when we are against disruptive innovation is much more difficult!
Disruptive innovation DOES NOT try to bring better products!
Three phases of disruptive innovation:
1) Create a new market
2) The new market growth at a higher rate than the rest of the industry.
3) You end serving Non Consumer, Low end Consumer, High end Consumers
Blue Ocean:
Red Ocean:
· High Competitors
· Existing Market
· Objective: Beat the competition
· Blood!
Blue Ocean: Is the same of disruptive Innovation! But its more helpful on how to use it.
Gives a tool on how to create a new business model.
Fortune at the bottom of the Pyramid (Prahalad)
Convert Non consumers into consumers (Its exactly the same concept on disruptive innovation, but framed to markets as Africa, Latin America…).
Product innovation is NOT business Innovation!!!
Challenges of existing Companies:
· Identifying: They go to Current Customers! Instead of potential customers. Disruptive innovation focus on Non Customers.
· Managing:
· Nurturing: People think on good ideas but do not support.
Expanding trough diversification:
Microsoft Xbox
Consoles: Is it a good business?
· Growth: Yes high growth.
· Profitability: NO!
There are only two players: Sony & Nintendo
Why only two players?
Entry barriers (HIGH) : Brand, reputation, Technology, Capital, Developers…
No aggressive competition as: Nintendo goes for young people (less than 14), and Sony for older people (+14)… They are “MONOPOLIES” in their own market!
Power of buyers: Low :Wal-Mart is a buyer, but no much power as they are buying from monopolies. End customer also is Low power.
Power of suppliers: Low: Hardware (Processors: IBM & Toshiba) they both benefit. Developers: Low power as there are only two companies. Also Sony and Nintendo both make own developers…
YOU WANT TO ENTER IN A INDUSTRY THAT WILL ALLOW TO MAKE MONEY AFTER YOU ENTER! What will happen after Microsoft enters the market? Will the industry continue to be attractive after our entry!?
Now with one additional player:
· Buyers have a choice (Microsoft and Sony). Now the End Users also have a choice. Now Buyers power goes UP!
· Suppliers: Now they have more power. Somebody as Electronic Arts has a better position to negotiate. Suppliers power goes UP!
The fight is selling GAMES. Its not a business where they can peacefully coexist.
Tests for a Successful diversification:
1) Attractiveness:
a. Is the business attractive and Profitable?
b. Will it continue to be after I entry? (You need growth and profitability)
c. Will I be able to play this game successfully?
2) Better off Test (Synergy test):
a. Will the company have an advantage in the new business.
b. Increased revenue in existing and/or new business. Or Reduced costs in existing and/or new business.
3) Cost of entry test.
a. Will we be making money after some years (ie Net in 5 years.)
MS Strengths:
· Cash: Not useful for games. Maybe some shareholders will prefer receiving dividends than entering this new videogame market
· SW Company (Development, Developers). Not useful for games!
· Installed base: Not useful for games!
· Reputation / Brand
· Leadership
· Intel relations
· Distributor channels: Not very useful for games!
They are entering to win the game!
Cost of entry: (Analyzed in a 5 year term)
2.000 (R&D) + 500 (advertising)
Console sales: 5.000
Cost of entry: - 7.500 Million $
Break Even Point:
They need to sell 590 Million Games to recover the money!
They expect to sell 280 Million Games per year!
They are short in 310 Million Games
So, why did they enter this market?
The reason could be that knowing that the Game Console is more powerful than a PC, the console could become the future device of choice for Home Computing! It is a DEFENSE STRATEGY.
Result: Ms has lost a very significant amount of dollars in consoles! Sony is loosing a lot of money also. It’s a loosing business for both. It’s looks as a BAD decision!
Types of Diversification:
a) Related: Related in terms of end users and customers: Sony (TV, cable channels, and Playstations). You can NOT assume that making good TV will allow you to make a good TV channel. Does NOT work!
b) Related in Products: Coke and tab spirits. Does NOT work!
c) Related in terms of operated recourses skills: Phillip Morris in Bear & Tobacco leverage common distribution channels. Disney in Films and latter onTheme Parks. Their presence in the Movies, let them sales tickets at a premium!
Question: When is GOOD to be Vertically integrated?
GM owned: Iron Mines, Coal Mines, Steel Factory, Assembly Lines, Auto distributors, Avis, Hertz
… Then they started to sell parts of their business and remained with their core.
If the upstream or downstream is competitive, then do not make sense to get in vertical integration.
Unrelated Diversification:
a) Logic behind: “Makes sense to diversify risk”. Result: There is NO synergy! For shareholders this does not makes sense. If they want to diversify, they will do it themselves! Does not make sense at all.
Diversification Discount: P/E is lower than single, unrelated companies.
In emerging economies you see a lot of Unrelated Diversification! In countries with efficient capital markets -and competition-. Without efficient capital markets, there is no available reliable information. In emerging countries, customers are uninformed. Consumers are not well protected!
Groups are with the tendency of getting rid of unrelated businesses.
Linking between Strategy and Implementation
Create a Plan to achieve a competitive advantage
Develop an organization that can execute the plan
Strategy & Implementation:
GOOD Strategy & Implementation
GOOD Strategy BAD Implementation
BAD Strategy & BAD Execution
BAD Strategy & GOOD Execution
Flawed Strategy:
Unrealistic: No action. People do not buy it
Lacks clarity; Some do act. Organization does not know what to do
Its too complex: Organization is Over – Whelmed
To be able to EXECUTE, the strategy must be
Realistic,
Clear,
Simple!
To execute: (7 S)
· Strategy
· Structure
· Systems
· Style
· Staff
· Skills
· Shared Value
Strategy is in part being the devils advocate!
No comments:
Post a Comment