Competitive and Corporate Strategy

Transcription

1 Competitive and Corporate Strategy What is Strategy? Professor Nicolaj Siggelkow

2 Different Types of Strategies Seven (7) different types of strategies as described by Henry Mintzberg (Strategy Safari) Ask yourself what type of strategy the organization has in which you are currently working

3 Different Types of Strategies (Henry Mintzberg) 1. The Planned Strategy Leaders formulate clear plan The plan is spelled out in detail, with budgets, schedules etc. Implementation (translation into collective action) should happen with a minimum of distortion Those not involved in planning, mainly implement; little decision discretion Controls are put in place to monitor implementation Found in more stable environments, or when planning horizons are long Organizations that must commit large quantities of resources to a mission (Examples: Exxon, Intel, GSK)

4 Different Types of Strategies (Henry Mintzberg) Vision 2. The Entrepreneurial Strategy The force for consistency in action is a vision articulated by a leader Actions are not necessarily spelled out but are monitored as to whether they are consistent with the vision Found in small firms; or in larger firms in crisis (IBM under Louis Gerstner) The strategy can adapt (more quickly than in the planned strategy) as only a new vision needs to be articulated Entrepreneurial Strategies might evolve into planned strategies

5 Different Types of Strategies (Henry Mintzberg) Ideology 3. The Ideological Strategy When a vision is held collectively, one might call it an ideology Creates a pattern in behavior, a strategy Actively and positively embraced by the members of the organization (Mary Kay beauty consultants; direct sales; $3billion sales) Harder to change than individual vision

6 Different Types of Strategies (Henry Mintzberg) 4. The Umbrella Strategy Leaders set general guidelines for behavior but give other actors freedom to implement (e.g., design high-end products ) All strategies have an umbrella piece since you can never fully control others Allows more actors to react to environmental changes/cues The boundaries are deliberate; some of the implementation is emergent. Less prescriptive than the entrepreneurial or planned strategy Leadership still monitors that boundaries are respected Leadership might decide to change the boundaries

7 Different Types of Strategies (Henry Mintzberg) Planning & Hiring Processes 5. The Process Strategy Leadership puts in place processes that affect how and what strategies emerge These are strategy planning processes and hiring processes Rather than create strategies, create processes that allow others in the firm (in different divisions and at different levels in the firm) to create strategies. Can happen at different levels

8 Different Types of Strategies (Henry Mintzberg) 6. The Consensus Strategy Many different actors converge on the same theme or pattern without need for central control. More common in volunteer organizations; standard setting organizations

9 Different Types of Strategies (Henry Mintzberg) 7. The Imposed Strategy External individuals or groups (or government) directly force the organization into a pattern in its stream of actions. (e.g., during war time; or an activist outside investor may force a firm to sell off a division, etc.) (All of the other strategies are also constrained by environmental factors)

10 Summary 1. The Planned Strategy 2. The Entrepreneurial Strategy 3. The Ideological Strategy 4. The Umbrella Strategy 5. The Process Strategy 6. The Consensus Strategy 7. The Imposed Strategy

11 Competitive and Corporate Strategy What is Strategy? (Cont.) Professor Nicolaj Siggelkow

12 Mission, Vision etc. Mission Why we exist (e.g., help people achieve financial goals for retirement) Values What we believe in and how we will behave (put our client s interests firs) Vision What we want to be (research based and easy-to-use use app-enabled financial technology company that provides guidance and support and makes managing portfolios easy) Strategy - What our competitive game plan will be Balanced Scorecard (Robert Kaplan, David Norton) How we will monitor and implement that plan Collis & Rukstadt 2008

13 Strategy What a company: might do (environmental opportunity) can do (strengths, weaknesses) wants to do (values of managers) should do (social responsibility)

14 Strategy is the pattern of decisions that determine and reveal objectives, purposes, goals produce principal policies and plans to achieve these goals and define the range of businesses the company is to pursue, the kind of economic and human organization it is or intends to be, and the nature of the economic and non-economic contribution it intends to make to its shareholders employees customers and communities. K E N N E T H A N D R E W S 14

15 Key Elements of a Strategy Strategies have to address at least four issues: 1. What is our ultimate objective and goal? (Size? Profitability? Time frame) 2. Why do customers come to us? What is our advantage when it comes to customers? 3. What is the source of our competitive advantage, i.e., what is our advantage relative to competitors? (How can we make a customer come to us and still be profitable?) 4. The Scope over which these advantages apply: What products or services are we providing? What customers are we going after? Different customer segments Where are these customers located? Countries? Regions? Cities? Urban/suburban etc.

16 Competitive and Corporate Strategy Basic Financial Measures Professor Nicolaj Siggelkow

17 Basic Financial Measures Revenue = P * Q = i P i Q i Total Cost = Variable Cost * Q + Fixed Costs Profit = P*Q TC = (P VC)*Q F Average cost = TC/Q = VC + F/Q Profit = (P AC)*Q =(P-TC/Q)*Q = P*Q-TC P-AC = margin P VC = the operating margin

18 Basic Financial Measures Gross profit margin = (Revenues COGS)/Revenues Return on revenue: how many $ of sales do you need to achieve 1$ of profit? Profit/Revenue = [(P-AC)*Q]/[P*Q ]= (P-AC)/P Other measures give us an idea of how much investment is needed to generate $1 of profit. Assets = Equipment + Buildings + Inventory + Cash Equity = Funds contributed by the owners or shareholders + retained earnings Total (or Invested) Capital = Equity + Debt

19 Profitability Ratios ROA = Profits/Assets ROE = Profits/Equity ROIC = Profits/Total Capital Many profit measures: EBIT = earning before interest and tax EBITDA = earning before interest, tax, depreciation [tangible assets], and amortization [intangible assets] Net income (after tax)

20 Other Important Ratios for Strategic Analysis Advertising intensity = Adv/revenue R&D intensity = R&D/revenue Asset turnover = Revenue/total assets (1$ of assets creates how many $ of revenue) Inventory turnover = COGS/Average Inventory Debt to equity ratio ( leverage ) = Debt/Equity

21 Competitive and Corporate Strategy Positioning Professor Nicolaj Siggelkow

22 Positioning The two most fundamental ways firms can position themselves Differentiation Low-cost leadership

23 (Inverse) Demand curve P Higher demand at lower prices; lower demand at higher prices P1 P2 Q1 Q2 Q

24 Profit P Given P and AC you can illustrate the profit of a firm P1 Profit AC Q1 Q

25 Positioning P P1 If you make your product more attractive, you shift up the demand curve (Apple, Coca Cola) => allows you to charge a higher price Profit Differentiation strategy AC Q1 Q

26 Positioning P P1 If you make your product more attractive, you shift up the demand curve (Apple, Coca Cola) => allows you to charge a higher price Profit Differentiation strategy AC Q1 Q

27 Positioning P P1 If you make your product more attractive, you shift up the demand curve (Apple, Coca Cola) => allows you to charge a higher price Profit Differentiation strategy AC Q1 Q

28 Profit P Alternatively, to increase profits, you might become more efficient and lower your costs (WalMart) P1 Profit AC Q1 Q

29 Profit P Alternatively, to increase profits, you might become more efficient and lower your costs (WalMart) P1 Profit AC Q1 Q

30 Price Cost Tradeoff But usually there are tradeoffs: when you try to increase the attractiveness of your product, you often increase costs; when you lower your costs, you decrease the attractiveness. Industry average Differentiator price margin cost D price D cost The cost leader has lower cost, but also lower price; but the price reduction is less than the cost reduction = again higher margin Differentiator = had to invest = higher cost; but the cost difference is smaller than the price difference = higher margin

31 Price Cost Tradeoff But usually there are tradeoffs: when you try to increase the attractiveness of your product, you often increase costs; when you lower your costs, you decrease the attractiveness. Industry average Differentiator price margin cost D price D cost Cost Leader The cost leader has lower cost, but also lower price; but the price reduction is less than the cost reduction = again higher margin Differentiatior = had to invest = higher cost; but the cost difference is smaller than the price difference = higher margin

32 Positioning Low Cost Differentiator Broad Scope Narrow

33 Example Positioning: Auto industry Low Cost Differentiator Broad Scope Narrow Pick an industry and plot the participants; now; 5 years ago; in 5 years

34 Competitive and Corporate Strategy Value and Cost Drivers Professor Nicolaj Siggelkow

35 Value and Cost Drivers Value drivers Technology (features) Quality Customization (product and service) Brand (buying image; life-style; Apple & Coke) Reputation (trust; Disney) Service delivery (e.g., Amazon; Starbucks) Return policies Network effects (e.g., LinkedIn, Facebook; video games)

36 Network Effects A customer s value goes up in the number of users LinkedIn, Facebook Nintendo, World of Warcraft Platform strategies Providing a platform for suppliers and customers to meet Ebay, Uber, AirBnB Big force to push for winner-take-all or strong consolidation

37 Cost Drivers Firms that position themselves as cost leaders have to worry about cost drivers Cost drivers Production, distribution, service costs; adv, R&D Low input costs (labor, oil, location) Capacity utilization Economies of scale

38 Economies of Scale Average cost = TC/Q = VC + F/Q Economies of scale = AC decline as Q increases AC Q

39 Economies of Scale Two sources: F is being spread over a larger Quantity; so if F is large, Economies of Scale can be large. For instance Microsoft operating system.

40 Economies of Scale AC With Low Fixed costs With High Fixed costs Q

41 Economies of Scale Two sources: F is being spread over a larger Quantity; so if F is large, Economies of Scale can be large. For instance Microsoft operating system. VC might decline with Q: e.g., the firm might get a better deal from a supplier. For instance, Apple gets a good deal on glass for ipads. If Economies of Scale are large, firm size (output) matters a lot! Large firms will benefit and get larger. If Economies of Scale are not large, smaller firms can survive.

42 Cost Drivers Cost drivers Learning curve; experience curve Organizational practices (and policies) (e.g., wages, spending on R&D, adv., CapEx) Vertical integration (can go either way in terms of costs; outsourcing, offshoring)

43 Exercise For your own organization, think about the different value drivers for your customers. For which value drivers do you have the biggest advantage/disadvantage vis-à-vis your competitors? Are there Network effects in your industry? How large are economies of scale in your industry? What are the different cost drivers for your organization? For which cost drivers do you have the biggest advantage/disadvantage vis-à-vis your competitors?

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