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8/2/2019 Strategy Formulation Session 4 2009
1/23
The Strategy Design ProcessStrategic Analysis Strategic Choice
Strategy Implementation
and Evaluation
Evaluate
The Current
Situation
Evaluate the
Strategies
Results
Implement the
Strategy
Craft Changes
in Structure
and Processes
Develop Action
Plans, Programs,
and Processes
Analyze Resources and
Internal Capabilities
Identify
Sustainable
Competitive
Advantage
Craft and
Communicate
Vision and Mission
Evaluate and
Select Strategy
Establish the Basis
for Sustainable
Competitive Advantage
Generate Feasible
Alternative
Strategies
Create
Sustainable
Competitive
Advantage
Feedback and Rethinking
Select
Sustainable
Competitive
Advantage
Develop a StrategicControl System
Understand and Critique
Current Strategy
Analyze Industry and
External Environment
Understand
Industry Context
and Competition
Develop Strategic Goals
and Specific Long
Term Objectives
8/2/2019 Strategy Formulation Session 4 2009
2/23
Situation Analysis
1. Industrys dominant economic traits2. Nature of competition & strength of
competitive forces3. Drivers of industry change4. Competitive position of rivals5. Strategic moves of rivals6. Key success factors7. Conclusions about industry attractiveness
Assess Industry & Competitive Conditions
1. Assessment of companys present strategy2. Resource strengths and weaknesses,
market opportunities, and external threats3. Companys costs compared to rivals4. Strength of companys competitive position5. Strategic issues that need to be addressed
Assess Company Situation
IdentifyStrategicOptionsfor the
Company
Selectthe BestStrategyfor the
Company
8/2/2019 Strategy Formulation Session 4 2009
3/23
A strategic group is a group of firms in an industryfollowing the same or similar strategy.
Identifying strategic groups: Identify principal strategic variables thatdistinguish firms.
Position each firm in relation to thesevariables. Identify clusters.
Question 4: Which Companies are inStrongest / Weakest Positions?
8/2/2019 Strategy Formulation Session 4 2009
4/23
Strategic Groups Within the WorldPetroleum Industry
Geographical Scope
0 10 20 30 40 50 60 70 80
VerticalBalanc
e
0
0.5
1.0
1.5
2.0
INTERNATIONALDOWNSTREAMOIL COMPANIES
PRODUCTIONCOMPANIES
INTEGRATED INTERNATIONALMAJORS
NATIONALLY-FOCUSEDDOWNSTREAM COMPANIES
INTEGRATED DOMESTICOIL COMPANIES
Neste Petrofina
ChevronShell
TotalMobil
Exxon
Statoil
PDVSAKuwait
Unocal Arco
Petrobras ENI
Repsol
NipponSun
BP
Texaco
Elf
Phillips
Amoco
Indian Oil
Elf
ENI
DIVERSIFIEDMAJORS
8/2/2019 Strategy Formulation Session 4 2009
5/23
How to Start a Revolution
Re-conceive your product or service Radically improve the value equation Separate form and function Achieve joy of use
Re-define the market space 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
8/2/2019 Strategy Formulation Session 4 2009
6/23
What is a competitive advantage?
How do you know if you have one (or not)?
How can you create one?
8/2/2019 Strategy Formulation Session 4 2009
7/23
Sources of Competitive Advantage
COSTADVANTAGE
DIFFERENTIATIONADVANTAGE
COMPETITIVEADVANTAGE
8/2/2019 Strategy Formulation Session 4 2009
8/23
The Porter Value Chain
FIRM INFRASTRUCTURE
HUMAN RESOURCE MANAGEMENT
TECHNOLOGY DEVELOPMENT
PROCUREMENT
INBOUND OPERATIONS OUTBOUND MARKETING SERVICE
LOGISTICS LOGISTICS & SALES
PRIMARY ACTIVITIES
SUPPORTACTIVITIES
8/2/2019 Strategy Formulation Session 4 2009
9/23
Using the Value Chain to IdentifyDifferentiation Potential on the Supply Side
FIRM INFRASTRUCTURE
HUMAN RESOURCE MANAGEMENT
TECHNOLOGY DEVELOPMENT
INBOUND OPERATIONS OUTBOUND MARKETING SERVICE
LOGISTICS LOGISTICS & SALES
IS that supports fastresponse capabilities
Training to supportcustomer service
excellence
Unique product features.Fast new product
development
Quality ofcomponents &
materials
Defect freeproducts.
Wide variety
Fast delivery.Efficient order
processing
Building brandreputation
Customer technicalsupport. Consumercredit. Availability of
spares
8/2/2019 Strategy Formulation Session 4 2009
10/23
Creating Competitive Advantage
Industry structure matters, but success does notcome just from industry attractiveness
Value = difference between buyers willingness topay 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 potentialprofit for the seller
CA is achieved by driving a wedge between buyerwillingness to pay and value added by the firm(scarcity)
Ghemawat & Rivkin, 2006
8/2/2019 Strategy Formulation Session 4 2009
11/23
Activity Analysis of Value Creation
1.Catalog activities (along the value chain)
2. Use activities to analyze relative costs and costdrivers
3. Use activities to analyze relative willingness ofcustomers 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 infulfilling 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 bundleof benefits to customers, and the role of scope and scale
Ghemawat & Rivkin, 2006
8/2/2019 Strategy Formulation Session 4 2009
12/23
Value NetworksA non-linear model of value creation
8/2/2019 Strategy Formulation Session 4 2009
13/23
Porters Generic Strategies
SOURCE OF COMPETITIVE ADVANTAGE
Low cost Differentiation
Industry-wide COST DIFFERENTIATION
COMPETITIVE LEADERSHIP
SCOPE
Single Segment
FOCUS
8/2/2019 Strategy Formulation Session 4 2009
14/23
The Evolution of Competitive Advantage
How does competitiveadvantage evolve?
External sources ofchange e.g.:Changing customer demandChanging pricesTechnological change
Internal sourcesof change
Resource heterogeneityamong firms meansdifferential impact
Some firms fasterand more effectivein exploiting change
Some firmshave greater creative
and innovativecapability
8/2/2019 Strategy Formulation Session 4 2009
15/23
Drivers of Cost Advantage
PRODUCTION TECHNIQUES
PRODUCT DESIGN
INPUT COSTS
CAPACITY UTILIZATION
MANAGERIAL/ ORGANIZATIONALEFFICIENCY
ECONOMIES OF LEARNING
ECONOMIES OF SCALE
Organizational slack
Ratio of fixed to variable costs Costs of installing and closing capacity
Location advantages Ownership of low-cost inputs
Bargaining power Supplier cooperation
Design for automation Designs to economize on materials
Mechanization and automation Efficient utilization of materials
Increased precision
Increased dexterity Improved coordination/ organization
Indivisibilities Specialization and division of labor
8/2/2019 Strategy Formulation Session 4 2009
16/23
Identifying Differentiation Potential: The Demand Side
THE PRODUCT
THECUSTOMER
What needsdoes it satisfy?
By what
criteria dothey choose?
Whatmotivates
them?
What are keyattributes?
Relate patterns ofcustomer
preferences toproduct
attributes
What pricepremiums do
product attributescommand?
What aredemographic,sociological,
psychologicalcorrelates of
customer behavior?
FORMULATEDIFFERENTIATIONSTRATEGY
Select productpositioning in
relation to productattributes
Select targetcustomer group
Ensure customer /productcompatibility
Evaluate costsand benefits ofdifferentiation
8/2/2019 Strategy Formulation Session 4 2009
17/23
The Evolution of Honda:A Strategy Based on Resources and
Capabilities
1948 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2005
Founding ofHonda motorcompany
50cc 2-cycle engine
4 cycleengines
405ccmotorcycle
Related products:ground tillers, marine
engines, generators,pumps, chainsaws
First product:clip-on engine
for bicycles
The 50ccsuper-cub
N360 minicar
1000ccGoldwing
touringmotor cycle
Acura Cardivision
InsightHybrid
8/2/2019 Strategy Formulation Session 4 2009
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Core Competence Three Tests
Provides potential access to a wide variety ofmarkets and products
Makes a significant contribution to perceivedcustomer benefits of the end product
Is difficult for competitors to imitate
8/2/2019 Strategy Formulation Session 4 2009
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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 newspace
Layers of competitive advantage
Changing the terms of engagement
8/2/2019 Strategy Formulation Session 4 2009
20/23
The Relationships Between Resources,Capabilities and Competitive Advantage
STRATEGY
INDUSTRY KEYSUCCESS FACTORS
COMPETITIVEADVANTAGE
ORGANIZATIONALCAPABILITIES
RESOURCES
TANGIBLE INTANGIBLE HUMAN
FinancialPhysical
TechnologyReputationCulture
Specialized skillsand knowledgeCommunication &interactive abilitiesMotivation
8/2/2019 Strategy Formulation Session 4 2009
21/23
The Profit Potential of Resources and Capabilities
Scarcity
Relevance
Durability
Transferability
Replicability
Property rights
Relative bargainingpower
Embeddednessof resources
THE EXTENT OF THECOMPETITIVE ADVANTAGE
ESTABLISHED
SUSTAINABILITY OF THECOMPETITIVEADVANTAGE
APPROPRIABILITYOF RETURNS
THE PROFITEARNING POTENTIALOF A RESOURCE OR
CAPABILITY
8/2/2019 Strategy Formulation Session 4 2009
22/23
Preparing for the Future: The Role of Scenario Analysi
Stages in undertaking multiple Scenario Analyses:
Identify major forces driving industry change
Predict possible impacts of each force on the industryenvironment
Identify interactions between different external forces Among range of outcomes, identify 2-4 most likely/ most
interesting scenarios: configurations of change forces andoutcomes
Consider implications of each scenario for the company
Identify key signposts pointing toward the emergence ofeach scenario
Prepare contingency plan
8/2/2019 Strategy Formulation Session 4 2009
23/23
Perspectives on Strategic Planning
The essence of strategic planning is the systematicidentification of opportunities and threats that like in thefuture [to] provide a basis for making better currentdecisions (George Steiner)
There are significant benefits to gain through an explicit
process of formulating strategy to insure that at least thepolicies (if not the actions of functional departments) arecoordinated 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 thosewho engage in it feel they are in control (Russell Ackoff)