Transcript
Page 1: Entrepreneur 4: Business Strategies & Rapid Growth Strategies

Lecture 4: Business Strategies & Rapid Growth Strategies

Dr Bernard LeongCTO & Co-founder

MPS 812 Course Taught in:

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A companyʼs Strategy consists of the competitive moves & business approaches that the managers are employing to grow the business,

attract and please customers, compete successfully, conduct operations & achieve the targeted levels of organizational performance

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Sustainable Competitive Advantage• A company achieves sustainable competitive advantage when an attractive

number of buyers prefers it products or services over the offerings of competitors and when the basis for this preference is durable.

• Four Strategic Approaches:

• Industry low cost provider - cost based advantage over rivals.

• Outcompeting rivals based on differentiating features (higher quality, wider selection, added performance, value-added services, more attractive styling, technological superiority, goodvalue).

• Focusing on a narrow market niche & winning a competitive edge by doing a better job than rivals of serving the special needs & tastes of buyers comprising the niche.

• Developing expertise & resource strengths that give the company competitive capabilities that rivals canʼt easily imitate or trump with capabilities of their own.

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Identify a companyʼs strategy - What to look for

The patterns of actions & business

approaches that define a companyʼs

Actions to gain sales & market share via lower prices, more performance features, more appealing design, better quality or customer service,

wider production, selection or other such actions.

Actions to respond to

changing market conditions & other external factors.

Actions to enter a new geographic

or product markets or exit existing ones

Actions to capture emerging market opportunities & defend against

external threats.

Actions to strengthen market

standing & competitiveness by merging or

acquisition

Actions to strengthen

competitiveness via strategic alliances &

collaborative partnerships

Actions & approaches used in managing R&D, production, sales

& marketing, finance and key

activities.

Actions to strengthen competitive

capabilities & correct

weaknesses

Action to diversify the companyʼs

earnings & revenues by

entering into new businesses

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Strategy Evolution• Changing circumstances &

ongoing management efforts to improve the strategy cause a companyʼs strategy to evolve over time - a condition makes the task of crafting strategy a work in progress, not an one time event.

• Shaped by management analysis & necessity of adapting and learning by doing.

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Prior version of company strategy

New initiatives plus ongoing strategy elements continued from prior periods.

Adaptive reactions to changing circumstances

Latest version of company strategy

Abandoned Strategy Elements

Proactive Strategy Elements

Reactive Strategy Elements

A companyʼs strategy is a blend of proactive initiatives & reactive adjustments.

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Strategy & Ethics • A strategy is ethical only if:

• It does not entail actions & behaviors that cross the line from “should do” to “should not do” (unsavory, unconscionable or harmful to other people).

• Allows management to fulfill its ethical duties to its shareholders/owners, employees, customers, suppliers, the communities in which it operates & society in large.

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Relationship between a companyʼs Strategy & Business model

• A companyʼs business model explains the rationale for why its business approach & strategy will be a revenue generator. Absent the ability to deliver good profits, the strategy is not viable & survival of business are in doubt.

• Company Strategy: relates broadly to competitive initiatives & action plan for running business which may or may not make profits.

• Business Model: How & why business will generate revenues to cover costs & product attractive profits & return on investment.

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What makes a strategy a winner?

• How well does the strategy fits in a companyʼs situation?

• Is the strategy helping the company achieving a sustainable competitive advantage?

• Is that strategy resulting in better company performance?

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Product and Labour

Microsoft products: proprietary code and employ

a cadre of highly skilled programmers

Red Hat Products: Open Source collaboration with

developers all over the world.

Revenue ModelSell operating system and

software packages and keeping services free

Sells subscription models for large enterprises.

Sales Model Large volume sales

Capitalize on specialized expertise required to use

Linux and also target large enterprises.

Profit Margins(by order of magnitude) > US$B > US$100M

Case Study: Microsoft & Red Hat - Contrasting Business Models10

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Strategy-Making, Strategy Executing Process

Developing a strategic

visionSetting

objectives

Crafting a strategy to

achieve objectives &

vision

Implementing & executing the strategy

Monitoring developments, evaluating performance

& making corrective

adjustments

Revise as needed in light of actual performance, changing conditions, new opportunities & new ideas.

Phase 1 Phase 2 Phase 3 Phase 4

Phase 5

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Phase 1: Strategic Vision

• A strategic vision describes the route a company intends to take in developing and strengthening its businesses. It lays out the companyʼs strategic course in preparing for the future.

• It delineates management aspirations for the business and provide the answer to “Where are we heading towards?”

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External Considerations Internal ConsiderationsIs the outlook for the company promising if it

simply maintains its product/market/customer/technology focus? Does sticking to its current

strategic course present attractive growth opportunities?

What are the companyʼs ambitions? What industry standing should the company have?

Are changes under way in the market & competitive landscape acting to enhance or

weaken the companyʼs prospects?

Will the companyʼs present business generate sufficient growth & profitability in the years

ahead to placate shareholders?

What if any new customer groups or/and geographical markets should the company get

in position to serve?

What organizational strengths ought to be leveraged in terms of adding new products or

services & getting into new businesses?

Which emerging market opportunities should the company pursue? Which ones should not

be pursued?

Is the company stretching its resources thin by trying to compete in too many markets or

segments?

Should the company plan to abandon any of the markets, market segments, or customer

groups it is currently serving

Is the companyʼs technological focus too broad or too narrow? Are any changes

needed?

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Characteristics of an effectively worded Strategic Vision

Graphic Paints a picture of the kind of company that management is trying to create & the market position(s) the company is striving to stake out.

DirectionalIs forward-looking, describes the strategic course that management has charted and the kinds of product/market/customer/technology changes

that will help the company prepare for the future.

Focused Is specific enough to provide management guidance in making decisions & allocating resources.

Flexible Is not a once and for all time statement - directional course has to be adjusted as product/customer/market/technology changes with time.

Feasbible Is within the realm of what the company can reasonably expect to achieve in due time.

DesirableIndicates why the chosen path makes good business sense and is in the long term interests of the stakeholders (especially shareholders,

employees and customers)

Easy to communicate Can be expressed in 5-10 minutes and reduced to a memorable slogan.

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Company Strategic Vision

To extend our position as the most trusted Linux & open source provider to the enterprise. We intend to grow the market for Linux through a complete range of enterprise Red Hat Linux Software, a powerful management platform & associated support and services

Be the global Leader in customer value.

Provide a global trading platform where practically anyone can trade practically anything.

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• To convert the strategic vision into specific performance targets - results & outcomes the companyʼs management wants to achieve.

• Ideally, managers adopt the objective setting exercise as a tool for stretching an organization at its full potential and deliver best possible results.

Phase 2: Setting Objectives

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What kind of objectives to set: Balanced Scorecard

Financial Objectives Strategic Objectives

★An x% increase in annual revenues.★Annual increases in after-tax profits of x%★Annual increases in earnings per share of x%★Annual dividend increases★Larget profit margins★An x% return on capital employed or return on equity (ROE)★Increased shareholder value - in the form of an upward trending stock price and annual dividend increases.★Strong bond and credit ratings.★Sufficient cash flows to fund new capital investment.★Stable earnings during periods of recession.

★Winning an x% market share.★Achieving lower overall costs than rivals★Overtaking key competitors on product performance or quality or customer service.★Deriving x% of revenues from the sale of new products introduced within the past 5 years.★Achieving technological leadership★Have better product selection than rivals★Strengthening company brand name appeal★Have stronger national or global sales and distribution capabilities than rivals★Consistently getting new or improved products.

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Company Examples ofCompany Objectives

Increase sales to 4.2M cars and trucks by 2008 (up to 3M in 2003); cut purchasing costs 20% and half number of suppliers, have zero net debt, maintain a return on invested capital of 20%; maintain 10% or better profit margin.

To achieve long term sales growth of 5-8% organic plus 2-4% acquisitions, annual growth in earnings per share of 10% or better, a return on stockholders equity of 20-25%; double number of qualified 3M products.

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• Masterful strategies comes partly by doing things differently from competitors when it counts: out-innovating them, being more efficient and imaginative, adapting faster and not follow the herd.

• Senior executives together with the CEO craft the strategies for the company.

• Corporate Intrapreneurs are created by top management to encourage teams and individuals to create new product lines and business ventures.

Phase 3: Strategy Making, Strategy Execution Process

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Corporate Strategy(Company wide game plan for managing a set

of businesses)

Business Strategy (One for each business the company has diversified into)

- Strengthen Market Position & build competitive capabilities

Functional area strategies within each business

- Relevant details for managing activity for the business units

Operating Strategies within each business- Low-echelon activities with strategic

significance

Orchestrated by the CEO & senior executives

Orchestrated by general managers of each different lines of

businesses with advice from the heads of

functional area activities

Crafted by heads of major functional activities

within a particular business - in

collaboration with other key people.

Crafted by brand managers, operating managers of plants, distributing centers,

geographic units

In each case of a single business company, these

two levels of strategy making hierarchy merge into one level - business

strategy that is orchestrated by the

companyʼs CEO & other executives.

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• Staff organization with needed skills & expertise.

• Allocating ample resources (cash, materials and distribution channels)

• Policies & procedures in a system to have effective execution.

• Best practices to perform core business functions and pushing for improvement.

Phase 4: Implementation & Execution

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• Installing information & operating systems for each level to carry out their roles and responsibilities.

• Motivating people to pursue target objectives and awards & incentives (healthcare, flexi-benefits).

• Company Culture

• Exerting internal leadership if stumbling obstacles turn up.

Phase 4: Implementation & Execution

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• Monitoring external developments, evaluating companyʼs progress & making corrective adjustments.

• Requires corporate governance in the form of board of directors to monitor and evaluate the execution & implementation of strategy.

Phase 5: Evaluation

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Board of Directors• Role: To exercise strong oversight and

see that the tasks for strategic management are done to benefit shareholders & stakeholders.

• Be inquiring critics & oversee companyʼs direction, strategy & business approaches.

• Evaluate the caliber of senior executivesʼ strategy making and execution.

• Compensation Plan for top executives.

• Oversee companyʼs financial accounting and financial reporting practices

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A breakthrough, public demonstration, product launch or other event that generates significant press and industry interest.

a phase of overenthusiasm and unrealistic projections during which a flurry of publicized activity by technology leaders results in some successes but more failures as the technology is pushed to its limits.

The point at which the technology becomes unfashionable and the press abandons the topic, because the technology did not live up to its overinflated expectations.

Focused experimentation and solid hard work by an increasingly diverse range of organizations lead to a true understanding of the technology's applicability, risks and benefits. Commercial off-the-shelf methodologies and tools become available to ease the development process.

The real-world benefits of the technology are demonstrated and accepted. Tools and methodologies are increasingly stable as they enter their second and third generation. The final height of the plateau varies according to whether the technology is broadly applicable or only benefits a niche market.

Vis

ibili

ty

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Hype Cycle Investment Cycle

How investments can be affected by how mainstreamtechnologies are in the marketplace.

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Mooreʼs “Crossing the Chasm” Theory

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Rapid Strategies for Growth

• Joint Ventures and Strategic Alliances

• Mergers and Acquisitions

• Franchising and Licensing

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Why Growth is necessary?• Economics of Scale.

• Expansion into other markets.

• Acquiring new capabilities.

• Survival

• Less Vulnerable for acquisition or hostile takeovers.

• Increasing earnings.

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Motivation to Go Global

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How to expand?

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How to assemble opportunity for a franchise

• Primary Target Audience

• Demographic Profiles

• Psychographic Profiles: Lifestyles, social class and personality traits

• Geographic Profiles

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Advantages of Franchising: Franchisee

• Entrepreneur does not have to incur all the risks associated with creating a new business.

• Product acceptance: has an accepted name, product, or service.

• Management expertise: managerial assistance provided by the franchisor.

• Capital requirements: up-front support can save entrepreneur significant time and capital.

• Knowledge of the market: offers experience in business and market.

• Operating and structural controls: help in standardization and administrative controls.

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Disadvantages of Franchising• Inability of the franchisor to

provide services, advertising, and location.

• Franchisorʼs failing or being bought out by another company.

• Difficulty in finding quality franchisees.

• Poor management.

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Categories of Franchises• 3 available types of franchises:

• Dealership: act as retail stores for the manufacturer.

• Franchise that offers a name, image, and method of doing business.

• Franchise that offers services.

• Changes that helped evolve franchising opportunities:

• Good health.

• Time saving or convenience.

• Environmental consciousness.

• The second baby boom.

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Considerations for a Franchise

• Has the franchise worked in other markets?

• Has the franchise proven?

• What is the potential profit and market for a franchise?

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Joint Ventures & Strategic Alliances

• Different types: Industry-University joint ventures, International or Regional joint ventures.

• Factors determining success: Correct synergy, same expectations, combining the right set of skills from both or more parties and accurate assessment of the potential market.

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Acquisitions• Benevolent or Hostile

Takeovers?

• Advantages: Established track record, Accumulation of resources - manpower and physical infrastructure, quick expansion.

• Disadvantages: Marginal success record, overvaluation of acquisition, employees exodus or departure.

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Acquisition Process• Timing: can last from 21 days to 3 months for success,

but can drag on for an indefinite period of time.

• Synergy

• Should occur in both the business concept and the financial performance."

• Structuring the deal

• Involves the parties, the assets, the payment form, and the timing of the payment.

• Two most common means of acquisition: (i) Entrepreneurʼs direct purchase and (ii) Bootstrap purchase.

• Locating acquisition candidates involves significant time and effort.

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Mergers• Always question legality of purchase

and country legislation.

• Motivation: Survival, Gain, Diversification & Protection.

• Leveraged buyout: Reasonable Price, Debt Capacity, Appropriate financial package.

• Requires the team to stay on for at least another two to three years.

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Merger Motivation?

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