SCHOOL OF BUSINESS ADMINISTRATION BA 495– John A. Hengeveld Spring 2004 Welcome to BA495 Business Strategy and Policy John A. Hengeveld

SCHOOL OF BUSINESS ADMINISTRATIONSCHOOL OF BUSINESS ADMINISTRATIONBA 495– John A. Hengeveld Spring 2004BA 495– John A. Hengeveld Spring 2004

Welcome to BA495Business Strategy and Policy

John A. Hengeveld


Agenda for Today – short day…

• Chapter 4-5 of Grant• Discussion of Simulation/Q&A


Strategic Process MAPGenerate Strategic

Alternatives

TOWS

Analyze StrategicFramework

ExternalAnalysis

InternalAnalysis

KSF

R/C

Competitive MappingCustomer Value DriversSustaining ProfitabilityGlobal Framework

CompetencyRent Earning PotentialResource/Capability Map

CRITERIA

Sel

ect S

hort

Lis

t v C

rite

ria

StrategicDue Diligence

DraftImplementation

Congruence

R/C Review

CompetitiveResponse

RiskIdentification

And Reduction

Sel

ect S

trat

egic

Dir

ecti

on

StrategicImplementation

OrganizationalStructure

Process

ChangeManagement

ImplementationPlan

RiskMitigation

Implementation

ClassicStrategic

Approaches


ROCE

Return on Sales

Sales/Capital Employed

Sales mix of products

Avoiding markdowns throughtight inventory control

Max. buying power to minimizecost of goods purchased

Max. sales/sq. foot through:*location *product mix*customer service *quality control

Max. inventory turnover through electronic data interchange, closevendor relationships, fast delivery

Minimize capital deploymentthrough outsourcing & leasing

Identifying Key Success Factors by Analyzing Profit Drivers: Retailing

Identifying Key Success Factors by Analyzing Profit Drivers: Retailing


The Contribution of Game Theory to Competitive Analysis

The Contribution of Game Theory to Competitive Analysis

Main value:1. Framing strategic decisions as interactions between competitors2. Predicting outcomes of compeittive situations involving a few

players

Some key concepts:1. Competition and Cooperation—Game theory can show conditions

where cooperation more advantagfeeous than comeptition2. Deterrence—changing the payoffs in the game in order to deter

a comeptitor from certain actions3. Commitment—irrevokable demployments of resoruces that

give criditability to threats4. Signaling—communication to influnece a comeptior’s decision

Problems of game theory:Useful in explaining past competitive behavior—weak in prediucting future competive behaoir.What’s the problem? — Multitude of models, outcomes highly sensitive to small changes in assumptions


PREDICTIONS

• What strategy changes will the competitor initiate?

• How will the competitor respond to our strategic initiatives?

OBJECTIVESWhat are competitor’s current goals?Is performance meeting there goals?How are its goals likely to change?

STRATEGYHow is the firm competing?

ASSUMPTIONSWhat assumptions does the competitorhold about the industry and itself?

RESOURCES & CAPABILITIESWhat are the competitors’ key strengths and weaknesses?

A Framework for Competitor Analysis A Framework for Competitor Analysis


Segmentation Analysis: The Principal Stages

Segmentation Analysis: The Principal Stages

• Identify key variables

and categories.

• Construct a segmentation matrix

• Analyze segment attractiveness

• Identify KSFs in each segment

• Analyze benefits of broad vs. narrow scope.

Identify segmentation variablesReduce to 2 or 3 variablesIdentify discrete categories for each variable

Potential for economiesof scope across segmentsSimilarity of KSFsProduct differentiation benefitsof segment focus


The Basis for Segmentation: Customer and Product Characteristics The Basis for Segmentation: Customer and Product Characteristics

Opportunities forDifferentiation

Opportunities forDifferentiation

Characteristics of the Buyers

Characteristics of the Buyers

Characteristics of the Product

Characteristics of the Product

Industrial buyersIndustrial buyers

Household buyersHousehold buyers

Distribution channelDistribution channel

Geographicallocation

Geographicallocation

*Size*Technical sophistication*OEM/replacement

*Size*Technical sophistication*OEM/replacement

*Demographics*Lifestyle*Purchase occasion

*Demographics*Lifestyle*Purchase occasion

*Size*Distributor/broker*Exclusive/ nonexclusive*General/special list

*Size*Distributor/broker*Exclusive/ nonexclusive*General/special list

*Physical size*Price level*Product features*Technology design*Inputs used (e.g. raw materials)*Performance characteristics*Pre-sales & post-sales services

*Physical size*Price level*Product features*Technology design*Inputs used (e.g. raw materials)*Performance characteristics*Pre-sales & post-sales services


Segmenting the European Metal Can IndustrySegmenting the European Metal Can Industry

Food Fruit Juice Pet food Soft drink Beer Oil

Steel 3-piece

Steel 2-piece

Aluminum 2-piece

General cans

Composite cans

Aerosol cans


Segmenting the World Automobile MarketSegmenting the World Automobile Market

REGION US& Canada W.Europe E.Europe Asia Lat America Australia Africa

Luxury Cars

Full-size sedans

Mid-size sedans

Small sedans

Station wagons

Passenger minivans

Sports cars

Sport-utility

Pick-up trucks


0

5

0

10

15

20

25%

100%Share of industry revenue

Auto loans

Leasing

Warranty

Gasoline

Auto insurance

Aftermarket parts

Auto rentalO

per

atin

g m

arg

in

Auto manufacturing

New car dealers

Used car dealers

Service & repair

Vertical Segmentation & Industry Profit Pools—The US Auto Industry

Vertical Segmentation & Industry Profit Pools—The US Auto Industry


SEGMENT

Low price bicycles sold primarily through department and discount stores, mainly under the retailer’sown brand (e.g. Sears’ “Free Spirit”);

KEY SUCCESS FACTORS

* Low-costs through global sourcing of components & low-wage assembly.* Supply contract with major retailer.

Leading competitors: Taiwanese & Chinese assemblers,some U.S manufacturers, e.g. Murray Ohio, Huffy

Medium-priced bicycles sold primarily under manufacturer’s brandname and distributed mainly throughspecialist bicycles stores;

*Cost effieciency through large scale operation and either low wages or automated manufacturing.*Reputation for quality (durability, reliability) through effective marketing to dealers and/or consumers.* International marketing & distribution.

Leading competitors: Raleigh, Giant, Peugeot, Fuji

*Quality of components and assembly, Innovation in design (e.g. minimizing weight and wind resistence).*Reputation (e.g. through success in racing, through effective brand management).*Strong dealer relations.

Similar to low-price bicycle segment.

High-priced bicycles for enthusiasts.

Children’s bicycles (and tricycles) soldprimarily through toy retailers (discount toy stores, department stores, and specialist toy stores).

Segmentation and Key Success Factors in the U.S. Bicycle Industry Segmentation and Key Success Factors in the U.S. Bicycle Industry


Strategic Group AnalysisStrategic Group Analysis

A strategic group is a group of firms in an industry following the same or similar strategy.

Identifying strategic groups:• Identify principal strategic

variables which distinguish firms.

• Position each firm in relation

to these variables.• Identify clusters.


Broad

PRODUCT RANGERANGE

Narrow

National GEOGRAPHICAL SCOPE Global

NATIONALLY- FOCUSED, SMALL, SPECIALIST

PRODUCERS e.g., Bristol (U.K.), Classic Roadsters

(U.S.), Morgan (U.K.)

NATIONALLY FOCUSED, INTERMEDIATE LINE

PRODUCERS

e.g. Tofas, Kia, Proton, Maruti

REGIONALLY-FOCUSED BROAD-LINE PRODUCERS

e.g. Fiat, PSA, Renault,

PERFORMANCE CAR PRODUCERS

e.g., Porsche, Maserati, Lotus

LUXURY CAR MANUFACTURERS

e.g., Jaguar, Rolls Royce, BMW

GLOBAL SUPPLIERS OF NARROW MODEL RANGE e.g., Volvo, Subaru, Isuzu,

Suzuki, Saab, Hyundai

GLOBAL, BROAD-LINEPRODUCERS

e.g., GM, Ford, Toyota, Nissan, Honda, VW, Daimler

Chrysler

Strategic Groups in the World Automobile Industry Strategic Groups in the World Automobile Industry


Geographical Scope

0 10 20 30 40 50 60 70 80

Ver

tica

l Bal

ance

00.

51.

01.

52.

0

NATIONALPRODUCTION COMPANIES

INTEGRATED INTERNATIONAL

MAJORS

NATIONALLY-FOCUSEDDOWNSTREAM COMPANIES

INTEGRATED DOMESTICOIL COMPANIES

Chevron Royal Dutch-Shell Gp.

Exxon-Mobil

Statoil

PDVSA

Kuwait Petroleum

Petronas

Petrobras

RepsolNippon

Tosco

BP-Amoco

TexacoPhillips

Pemex

Indian Oil

ENI

INTEGRATED OIL MAJORSINTERNATIONALUPSTREAM,REGIONALLYFOCUSEDDOWNSTREAM

IranNOC

E.g. Neste

PhillipsENI

Elf-Fina-TotalRepsol INTERNATIONAL

DOWNSTREAM OIL COMPANIES

INTERNATIONALUPSTREAMCOMPANIES

Enterprise

PremierOil

YPF

Strategic Groups Within the World Petroleum Industry Strategic Groups Within the World Petroleum Industry


Analyzing Resources & Capabilities

Analyzing Resources & Capabilities

• The role of resources and capabilities in strategy formulation.

• The resources of the firm• Organizational capabilities• Appraising the profit potential of resources and

capabilities

• Creating new capabilities.

OUTLINE


THE FIRM

Goals and Values

Resources andCapabilities

Structure and Systems

THE INDUSTRYENVIRONMENT

•Competitors•Customers•Suppliers

STRATEGYSTRATEGY

The Firm-Strategy

Interface

TheEnvironment-Strategy

Interface

Shifting the Focus of Strategy Analysis:From the External to the Internal Environment

Shifting the Focus of Strategy Analysis:From the External to the Internal Environment


Rationale for the Resource-based Approach to Strategy

Rationale for the Resource-based Approach to Strategy

• When the external environment is subject to rapid change, internal resources and capabilities offer a more secure basis for strategy than market focus.

• Resources and capabilities are the primary sources of profitability


1948 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995

Founding ofHonda motor

company

50cc 2-cycle engine

4 cycle engines

405ccmotorcycle

Related products:ground tillers, marineengines, generators,pumps, chainsaws

First product: clip-on engine

for bicycles

The 50ccsuper-cub

N360 minicar

1000ccGoldwing

touringmotor cycle

Acura Cardivision

The Evolution of Honda Motor Company The Evolution of Honda Motor Company


Precision Mechanics

Fine Optics

Micro-Electronics

35mm SLR cameraCompact fashion cameraEOS autofocus camera

Digital cameraVideo still camera

Plain-paper copierColor copier

Color laser copier Laser copierBasic fax

Laser faxMask aligners

Excimer laser alignersStepper aligners

Inkjet printerLaser printer

Color video printerCalculator

Notebook computer

Canon: Products and Core Technical CapabilitiesCanon: Products and Core Technical Capabilities


Carborundummining

Carborundummining

SandpaperSandpaper

ScotchtapeScotchtape

Road signs& markings

Road signs& markings

Post-it notesPost-it notes

Audio tapeAudio tape

Surgical tapes& dressings

Surgical tapes& dressings

VideotapeVideotape

Acetate film

Acetate film

Floppy disks & data storage

products

Floppy disks & data storage

products

PharmaceuticalsPharmaceuticals

Housewares/kit-chen products

Housewares/kit-chen products

AbrasivesAbrasives AdhesivesAdhesivesNew-product

development &introduction

New-productdevelopment &introduction

Thin-film technologies

Thin-film technologies

PRODUCTSPRODUCTS

CAPABILITIES

CAPABILITIES

Materials sciencesMaterials sciences

Health sciencesHealth sciences

MicroreplicationMicroreplication

Flexiblecircuitry

Flexiblecircuitry

Evolution of Capabilities and Products: 3MEvolution of Capabilities and Products: 3M


STRATEGY

INDUSTRY KEYSUCCESS FACTORSCOMPETITIVE

ADVANTAGE

ORGANIZATIONALCAPABILITIES

RESOURCESTANGIBLE INTANGIBLE HUMAN

•Financial•Physical

•Technology•Reputation•Culture

•Skills/know-how•Capacity for communication & collaboration•Motivation

The Links between Resources, Capabilities and Competitive Advantage

The Links between Resources, Capabilities and Competitive Advantage


Appraising ResourcesAppraising Resources

RESOURCE CHARACTERISTICS INDICATORS

Financial Borrowing capacity Debt/ Equity ratioInternal funds/ generation Credit rating

Tangible Net cash flowResources Physical Plant and equipment: Market value of

size, location, technology fixed assets.flexibility. Scale of plantsLand and buildings. Alternatives for fixedRaw materials. assets

Technology Patents, copyrights, know how No. of patents owned.R&D facilities. Royalty income

Intangible Technical and scientific R&D expenditure.Resources employees R&D staff

Reputation Brands. Customer loyalty. Company Brand equity. Productreputation (with suppliers, customers, price premium.government) Recognition.

Human Training, experience, adaptability, Employee qualifications,Resources commitment and loyability of customers pay rates, turnover.


Firms with the Highest Ratios of Market Value to Book ValueFirms with the Highest Ratios of Market Value to Book Value

Juniper Networks 58.5 Computer software and servicesOracle (US) 56.2 Computer software and servicesTIM (Italy) 45.0 TelecommunicationsBroadcom 42.6 Computer software and servicesNokia (Finland) 42.0 Telecom equipmentYahoo (US) 41.3 Computer software and servicesCisco Systems (US) 31.9 Telecom equipmentAmerica Online (US) 34.0 TelecommunicationsUS West (US) 28.9 TelecommunicationsGlaxo Wellcome (UK) 25.4 DrugsSun Microsystems (US) 24.4 ComputersCharles Schwab (US) 24.2 Financial servicesL.M. Ericsson (Sweden) 24.1 Telecom equipmentWarner Lambert (US) 23.0 DrugsEMC (US) 21.5 ElectronicsAmgen (US) 21.4 DrugsDell Computer (US) 21.0 ComputersColegate Palmolive (US) 20.8 Personal care productsSmithKline Beecham (US) 20.6 DrugsSAP (Germany) 19.4 Computer software and servicesPfizer (US) 19.4 DrugsEli Lilly (US) 18.8 DrugsSprint PCS Group 18.3 TelecommunicationsSoftbank (Japan) 18.2 Computer software and services

Source: BusinessWeek, July 2000


The World’s Most Valuable Brands, 2000The World’s Most Valuable Brands, 2000

Rank Company Brand Rank Company Brand value value($bn.) ($bn.)

1 Coca-Cola 72.5 8 Disney 33.6

2 Microsoft 70.2 9 McDonald’s 27.9

3 IBM 53.2 10 AT&T 25.5

4 Intel 39.0 11 Marlboro 22.1

5 Nokia 38.5 12 Mercedes 21.1

6 Genera Electric 38.1 13 Hewlett-Packard 20.6

7 Ford 36.4 14 Cisco Systems 20.0

Source: Interbrand


Identifying Organizational Capabilities :Functional Approach

Identifying Organizational Capabilities :Functional Approach

FUNCTION CAPABILITY EXEMPLARSCorporate Financial management Exxon, Coca ColaManagement General Electric,

Strategic Control Emerson Electric, GECoordinating decentralized ABB, Shellbusiness unitsManaging Acquisitions Nationsbank, ConAgra

MIS Speed and responsiveness through American Airlinesrapid information transfer LL Bean

R&D Research capability Mereck, AT&TDevelopment of innovative new products Sony, 3M

Manufacturing Efficient volume manufacturing Briggs & StrattonContinuous Improvement Nucor, MotorolaFlexibility Benetton

Design Marketing Design Capability Apple, Swatch,Brand Management Proctor & Gamble,

PepsiCoSales & Distribution Promoting reputation American Express

Responsiveness to market trends The GapSales Responsiveness Microsoft, GlaxoEfficiency and speed of distribution Federal ExpressCustomer Service Walt Disney


The Value Chain: The McKinsey Business System

The Value Chain: The McKinsey Business System

TECHNOLOGY PRODUCT DESIGN MANUFACTURING MARKETING DISTRIBUTION SERVICE


A Hierarchy of Capabilities: A Telecom Manufacturer

A Hierarchy of Capabilities: A Telecom Manufacturer

A u tom atedth rou g h -h o lecom p on en t

in sertion

P rin tedc ircu it-b oard

assem b ly

M an u fac tu rin gcap ab ility

op era tion scap ab ility

N ew p rod u c td eve lop m en t

cap ab ility

C u s tom ersu p p ort

cap ab ility

M an u a lin sertion o f

com p on en ts

Te lse tassem b ly

M ateria lsm an ag em en t

cap ab ility

R & D an dd es ig n

cap ab ility

S u rfacem ou n tin g o fcom p on en ts

W aveso ld erin g

S ys temassem b ly

P rocessen g in eerin g

cap ab ility

M IScap ab ility

P rod u c ten g in eerin g

cap ab ility

M arke tin gan d sa lescap ab ility

Tes ten g in eerin g

cap ab ility

H u m anresou rce m g t.

cap ab ility

Q u a litym an ag em en t

cap ab ility

CROSS FUNCTIONAL CAPABILITIES

BROAD FUNCTIONAL CAPABILITIES

ACTIVITY RELATED CAPABILITIES (Operations related only)

SPECIALIZED CAPABILITIES (Manufacturing related only)

SINGLE-TASK CAPABILITIES (Only those related to PCB assembly)

INDIVIDUALS’ SPECIALIZED KNOWLEDGE


Appraising VW’s Resources and CapabilitiesAppraising VW’s Resources and Capabilities

Relative

Strength

Strategic Importance

Superfluous Strengths Key Strengths

Zone of Irrelevance Key Weaknesses

1

1

5 10

5

10


Amoco’s Appraisal of Organizational Capabilities(illustrative only)

Pe

rform

an

ce

Superior

Parity

Deficient

Not important

Needed to play

Needed to win

5

6

9

4

2

3 11

101 8

1

1. Effective deal making

2. Rapid new product development

3. Relentless cost forms

4. Product quality5. JV management 6. Superior EH&S

management7. Managing culturally

diverse workforce8. Fast decision

making9. Customer

segmentation10.Capture synergies

across divisions11. Effective

procurement

ImportanceImportance

Key strengthsKey strengths

Key weaknessesKey weaknessesSuperfluousstrengths

Superfluousstrengths

Inconsequentialweaknesses


7

SCHOOL OF BUSINESS ADMINISTRATIONSCHOOL OF BUSINESS ADMINISTRATIONBA 495– John A. Hengeveld Spring 2004BA 495– John A. Hengeveld Spring 2004 2

Distinctive Capabilities as a Consequence of Childhood Experiences

Distinctive Capabilities as a Consequence of Childhood Experiences

Company Capability Past HistoryExxon Financial Exxon’s predecessor, Standard Oil (NJ)

management was the holding co. for Rockefeller’s Standard Oil Trust

RD/ Coordinating Shell a j-v formed from Shell T&T founded to

Shell decentralized sell Russian oil in China, and Royal Dutch global empire founded to exploit Indonesian reserves

BP “Elephant Discovered huge Persian reserves, went on to

hunting” find Forties Field and Prudhoe Bay

ENI Deal making in The Enrico Mattei legacy; the challenge of politicized managing government relations in post-war environments Italy

Mobil Lubricants Vacuum Oil Co. founded in 1866 to supply patented petroleum lubricants


Approaches to Capability Development

Approaches to Capability Development

1) Linking strategy to Human Resource Management--developing individual competencies

2) Greenfield development in separate organizational unit (IBM & the PC, Xerox & PARC, GM & Saturn)

3) Product sequencing (Intel , Sony, Hyundai)

4) Change management to transform values and behaviors (GE, BP)

1) Linking strategy to Human Resource Management--developing individual competencies

2) Greenfield development in separate organizational unit (IBM & the PC, Xerox & PARC, GM & Saturn)

3) Product sequencing (Intel , Sony, Hyundai)

4) Change management to transform values and behaviors (GE, BP)


Product Sequencing to Build Capabilities: Hyundai

Product Sequencing to Build Capabilities: Hyundai

•Assembly•Production engineering•Local marketing

•Assembly•Production engineering•Local marketing

•Auto styling &design•Casting & forging•Chassis design•Tooling•Body production•Export mktg.

•Auto styling &design•Casting & forging•Chassis design•Tooling•Body production•Export mktg.

•FWDengineering•CAD/CAM•Assemblycontrolsystems•Advancedcomponenthandling

•FWDengineering•CAD/CAM•Assemblycontrolsystems•Advancedcomponenthandling

•Hydrodynamics•Thermodynamics•Fuel engineering •Emission control•Lubrication•Kinetics& vibration•Ceramics•Electronic controlsystems

•Hydrodynamics•Thermodynamics•Fuel engineering •Emission control•Lubrication•Kinetics& vibration•Ceramics•Electronic controlsystems

•Large-scale design integration•Global logistics•Lifecycle engineering

•Large-scale design integration•Global logistics•Lifecycle engineering

SKD CKDFord Cortina

SKD CKDFord Cortina PonyPony Accent

AvanteSonanta

AccentAvante

Sonanta

ExcelExcel

ProductsProducts

CapabilitiesCapabilities

‘Alpha’engine

‘Alpha’engine

1968 1970 1974 1985 1994-95


4. Develop strategy implications: (a) In relation to strengths--How can these be exploited more effectively and fully? (b) In relation to weaknesses --Identify opportunities to outsourcing activities that can be better performed by other organizations. --How can weaknesses be corrected through acquiring and developing resources and capabilities?

3. Appraise the firm’s resources and capabilities in terms of:

(a) strategic importance(b) relative strength

2. Explore the linkages between resources and capabilities

1. Identify the firm’s resources and capabilities

STRATEGY

CAPABILITIES

RESOURCES

POTENTIAL FOR SUSTAINABLE COMPETITIVE ADVANTAGE

Summary: A Framework for Analyzing Resources and CapabilitiesSummary: A Framework for Analyzing Resources and Capabilities


R/C Strategic Analysis


Appraising the Capabilities of a Business School

Appraising the Capabilities of a Business School (illustrative only)

Re

lati

ve

Str

en

gth

Superior

Parity

Deficient

Not important

Critically important

5

6

9

3

2

4 8

10 7

1

C1 Alumni relationsC2 Student

placementC3 TeachingC4.AdministrationC5 Course devlpmntC6 Student

recruitmentC7 ResearchC8 Corporate

relationsC9 MarketingC10 ITC11 PRC12 HRM

Importance

Key weaknessesKey weaknesses

Key strengthsKey strengthsSuperfluousstrengths

Superfluousstrengths



11

12


Essential Step: Get to Action

1

1 10

10 Superfluous Strengths Key Strengths

Key WeaknessesZone of Irrelevance

Rel

ativ

e S

tren

gth


Divestiture?? Plan Leverage

Most CRITICAL ZONE OF ACTION


Essential Step: Get to Action

1

1 10

10 Superfluous Strengths Key Strengths

Key WeaknessesZone of Irrelevance

Rel

ativ

e S

tren

gth


MOVE LEFT

Move U

P

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SCHOOL OF BUSINESS ADMINISTRATION BA 495– John A. Hengeveld Spring 2004 Welcome to BA495 Business Strategy and Policy John A. Hengeveld