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The Strategy Design Process

Strategic Analysis
Identify Sustainable Competitive Advantage

Strategic Choice
Select Sustainable Competitive Advantage

Strategy Implementation and Evaluation


Create Sustainable Competitive Advantage

Understand Industry Context and Competition

Craft and Communicate Vision and Mission Develop Action Plans, Programs, and Processes

Analyze Industry and External Environment

Develop Strategic Goals and Specific Long Term Objectives

Evaluate The Current Situation


Analyze Resources and Internal Capabilities Establish the Basis for Sustainable Competitive Advantage

Evaluate and Select Strategy

Craft Changes in Structure and Processes

Implement the Strategy

Develop a Strategic Control System Understand and Critique Current Strategy Generate Feasible Alternative Strategies Evaluate the Strategies Results

Feedback and Rethinking

Situation Analysis
Assess Industry & Competitive Conditions
1. Industrys dominant economic traits 2. Nature of competition & strength of competitive forces 3. Drivers of industry change 4. Competitive position of rivals 5. Strategic moves of rivals 6. Key success factors 7. Conclusions about industry attractiveness

Assess Company Situation


1. Assessment of companys present strategy 2. Resource strengths and weaknesses, market opportunities, and external threats 3. Companys costs compared to rivals 4. Strength of companys competitive position 5. Strategic issues that need to be addressed

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 strategic variables that distinguish firms. Position each firm in relation to these variables. Identify clusters.

Strategic Groups Within the World Petroleum Industry

2.0

Statoil

Vertical Balance

1.5

PRODUCTION COMPANIES PDVSA Kuwait

INTEGRATED DOMESTIC OIL COMPANIES DIVERSIFIED MAJORS INTEGRATED INTERNATIONAL MAJORS Exxon Shell

1.0

Unocal Indian Oil

Petrobras Elf Elf Repsol Sun

Amoco Arco Phillips

0.5

EN ENI I

Chevron Total Texaco

BP Mobil

Nippon

Neste

INTERNATIONAL DOWNSTREAM Petrofina OIL COMPANIES

0 0

10

20

30

40

50

60

70

80

NATIONALLY-FOCUSED DOWNSTREAM COMPANIES

Geographical Scope

How to Start a Revolution

Re-conceive your product or service


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 Rescale the industry Compress the supply chain Drive convergence between industries

Re-define the market space


Re-draw industry boundaries


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

Sources of Competitive Advantage

COST ADVANTAGE
COMPETITIVE ADVANTAGE DIFFERENTIATION ADVANTAGE

The Porter Value Chain


FIRM INFRASTRUCTURE HUMAN RESOURCE MANAGEMENT TECHNOLOGY DEVELOPMENT PROCUREMENT
SUPPORT ACTIVITIES

INBOUND LOGISTICS

OPERATIONS

OUTBOUND LOGISTICS

MARKETING & SALES

SERVICE

PRIMARY ACTIVITIES

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 LOGISTICS

OPERATIONS

OUTBOUND LOGISTICS

MARKETING & SALES

SERVICE

Quality of components & materials

Defect free products. Wide variety

Fast delivery. Efficient order processing

Building brand reputation

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 buyers willingness to pay and sellers 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


1. 2. 3.

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
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?

4.

Explore options and make choices


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

Porters Generic Strategies

SOURCE OF COMPETITIVE ADVANTAGE


Low cost Differentiation

Industry-wide

COST

DIFFERENTIATION

COMPETITIVE
SCOPE Single Segment

LEADERSHIP

FOCUS

The Evolution of Competitive Advantage


How does competitive advantage evolve?

External sources of change e.g.: Changing customer demand Changing prices Technological change

Internal sources of change

Resource heterogeneity among firms means differential impact

Some firms faster and more effective in exploiting change

Some firms have greater creative and innovative capability

Drivers of Cost Advantage


ECONOMIES OF SCALE 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

ECONOMIES OF LEARNING

PRODUCTION TECHNIQUES

PRODUCT DESIGN

INPUT COSTS

CAPACITY UTILIZATION

MANAGERIAL/ ORGANIZATIONAL EFFICIENCY

Identifying Differentiation Potential: The Demand Side


What needs does it satisfy?

THE PRODUCT

What are key attributes?


Relate patterns of customer preferences to product attributes What price premiums do product attributes command?

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

By what criteria do they choose? THE CUSTOMER

What motivates them?

What are demographic, sociological, psychological correlates of customer behavior?

The Evolution of Honda: A Strategy Based on Resources and Capabilities

50cc 2-cycle engine Founding of Honda motor company 405cc motor cycle

4 cycle engines

Related products: ground tillers, marine engines, generators, pumps, chainsaws

Insight Hybrid

1948 1950

1955

1960

1965

1970

1975 1980 1985 1990 1995 2005

First product: clip-on engine for bicycles

The 50cc super -cub

N360 mini car

1000cc 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

Scarcity Relevance Durability

THE PROFIT EARNING POTENTIAL OF A RESOURCE OR CAPABILITY

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)

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