MGX5181 International Business Strategy

Transcription

1 MGX5181 International Business Strategy Week 4 Strategy Formulation and the International Environment Scenario Planning Game theory Conceptual Mapping

2 Objectives To discuss a range of methods for undertaking strategic planning including: Scenario planning Game theory Sensitivity analysis Options Review the use of strategic groups and industry dynamics for international opportunity development

3 Strategic decision making (Following on from week 3) The long term alignment of an organisation with its economic, social and political environment can be undertaken using a number of tools. The most common used are: Country attractiveness (environmental scanning) Macroeconomic analysis and forecasting Once a long term direction has been set a handful of strategic decisions on implementation can be made. Common approaches include: Scenario Planning Game theory Sensitivity analysis Options and other approaches

4 Scenario Planning A scenario is an imagined sequence of future events. The purpose of scenario planning is to develop an understanding of how an industry s underlying dynamics could move it from the present state to each of several alternative futures Scenarios consider not just trends or forecasts, but ways that trends could be upset or events could combine to create a variety of outcomes

5 Scenario levels There are six primary levels of scenarios considered most valuable to strategy development: Grand scenarios cover global issues such as political, legal, sociocultural, economic Regional scenarios government initiatives, effect of GST Industry scenarios such as farm subsidies, food standards

6 Scenario levels Market scenarios including trends, market structures Product and service scenarios technology and manufacturing developments Organisation scenarios including competitor activity and strategic alliances

7 Developing a Scenario Matrix The six scenario levels can be overlaid onto a two axis matrix to determine the level of radical thinking across a spectrum from incremental to divergent. Incremental Scenarios developed from rational projections. Start with historical statistics, trends and cycles that can be extrapolated into reasonable future alternative cases that represent a best case, worst case and expected case. These cases are then broken down into snapshots on a future time horizon, say 2 years, 5 years 10 years from now.

8 Scenario Matrix Continued Divergent Scenarios These are events that break away from traditional trends or cycles eg high impact scenarios such as war, recession, mergers, change of government etc.

9 Steps to scenario planning Many variations on same theme Wack 1985, Schnaars, step model Set the scene Generate and select factors Choose themes and develop scenario details Check the consistency of scenarios Develop and test strategies O Brien, 2004 enhanced to an 8 step model

10 Steps to Scenario Building Step one: Set the Scene Define the scope of the exercise Eg specific problem, is it macro or micro. Eg price of oil might cover macro impact on govt of oil dependence or micro whether and oil company should open up a new oil field Step two: Identifying the key players and driving forces in the environment immediate to the problem Who are the main stakeholders and how do they define success? Who will be affected and what are the key performance indicators. Note: The interests of the main stakeholders are a vital part of the exercise.

11 Steps to Scenario Building Step Three: Generate uncertain & predetermined factors Identify in a general way the three factors which influence outcomes: The driving forces for change The predetermined elements which provide stability The critical uncertainties whose unfolding underpins the existence of markedly different scenarios

12 Components of scenario building There are 3 main components of a scenario which must be identified: The driving forces Those factors which ensure that any system changes, and then mould the nature of the new system and the way in which it changes. The predetermined elements Those factors from the past which continue as before, providing stability to any system The critical uncertainties Those areas where there are markedly different possibilities but whose influence will determine the nature of the new world

13 Steps to Scenario Building Step Four: Reduce factors & specify factor ranges Identify areas of critical importance to outcomes. Step Five: Choose themes and develop scenario details Draft possible scenarios since the main themes or scenario drivers have been identified. There should be clear logic for each scenario a sequence of cause and effect. Scenarios involve a choice of a plot or narrative story which give rise to different future.

14 Steps to Scenario Building Step Six: Check the scenarios for consistency and plausibility. Check for internal logic and coherence of the narrative story. Stories become learning scenarios which should have titles Step Seven: Present scenarios Gain feedback from key stakeholders Step Eight: Assess impact of scenarios Draw out implications to scenarios How realistic are they? Impact on company, Under what situations should these scenarios be used in a project or situation.

15 Steps to Scenario Building Step nine: Develop and test strategies Identify some leading indicators which are easily monitored and can tell us which scenario is to be realised. Signposts. Feedback loop needs to ensure the information coming back can be understood and acted upon in a timely manner.

16 Recent trends There is a trend towards two approaches: Quantitative In the 1980s, the Battelle consulting group developed a product called Interactive Future Simulations. This computer based modelling process was grounded in analytical rigour. Deloitte & Touche took the 1970s work of the Future group and developed a trend-impact analysis model and added some qualitative data. Qualitative Debate over whether this is the best approach

17 Benefits There are many benefits from using scenario planning: Enables companies to quickly respond to changes in the environment Alignment of thinking across the organisation Building teams and getting commitment to strategy Provides a competitive advantage Can builds corporate culture that welcomes change

18 Challenges There are a number of issues that must be addressed to ensure the benefits of scenario planning are achieved: Careful selection of facilitator Weak or inexperienced = danger Team selection Poor cross-selection = group think Team leadership Problem of domination Time consuming Costly Issue selection May choose the wrong things to focus on Resource allocation Having the right resources to act on change

19 Game theory Developed by Johann (John) von Neumann, a mathematician at Princeton University Game theories help decision-makers to make sense (and react to) the actions of others. By posing choice among alternatives in the form of different games, decision-makers can judge to what extent their assumptions about others rationality are valid. McGee, Thomas & Wilson &v=adxrnip89ea

20 Game theory `Game Theory is about making predictions about behaviour if people follow their own best interests, Yet the insistence on rationality can produce interesting paradoxes. ' Stefan Szymanski, senior lecturer in economics at Imperial College Management School. A player locked in competition with a rival, for example, might find it advantageous to be regarded as totally irrational. If he could persuade the rival that he would be prepared to pursue a price war to the extent of ruining his own business, the rival might be less likely to initiate such conflict lest it ruin him too.

21 Example In 1987 the patents protecting Monsanto's NutraSweet - an important ingredient of low-calorie soft drinks like Diet Coke and Diet Pepsi - began to run out. Well before they expired, a rival supplier appeared on the scene. The newcomer announced its intention of manufacturing the sweetener in generic form and proceeded to construct the necessary plant - with tacit support from Coca-Cola. Despite this encouragement, however, when battle was joined and Monsanto responded to competition with aggressive price cuts, Coke (like Pepsi) remained loyal to its traditional supplier. Coke had achieved its end: for under a new agreement with Monsanto - a known and reliable supplier - it was able to buy its sweetener at a far lower price than previously.

22 Further example Powell, 2003:392 gave an example of two firms facing investment opportunities in an existing market. Each firm can invest in process, quality or can make no investment. Investment in the process should reduce price, and investment in quality should improve differentiation. Table below shows payoffs

23 Example continued Company B Company A Invest in process Invest in quality Make no investment Invest in process 50:50 30: Invest in quality 60:40 45:55 80:20 Make no investment 25:75 20:80 30:30

24 Example continued Rules: Payoffs are provided in % to Co B and Co A in that order. If both choose not to invest others can enter therefore A&B will receive only 60% If A went first they logically go for least worse case (quality) where no matter what B does A will receive a 55% payoff. B would likely follow in quality and receive 45% payoff. If B went first then they would still most likely choose quality when they can see the impact of choices A can then make. If B chose not to invest A would choose quality and get an 80% return.

25 Assumptions Players are assumed to be perfectly rational in their behaviours and choices. They are assumed to have perfect knowledge of the rules (shared equally between them) and Assumed they will always want to maximise their returns None of the above may be true however helps you assess options and returns available and make best use of resources and knowledge at your disposal (McGee et al, 2005).

26 HOW MANAGERS CAN USE GAME THEORY: Create common language for modelling strategic situations Classify situations & transfer strategic insights Channel resources Generate specific prescriptions

27 STRATEGIC PRINCIPLES FOR GAME THEORY INTERPRETATION: Use strategic foresight Know yourself as well as others Differentiate between one-time & repeated interactions Managers must unify minds to promote cooperation

28 Why it works According to David Stout, director of the centre for business strategy at London Business School, all businesses are irrevocably self-absorbed. Putting yourself in the shoes of competitors, and focusing on their probable reactions to your moves (and therefore on what moves you can make to provoke certain responses) is called in the jargon 'allocentrism'. `Everything is interdependent, every company's development is a fruition of major moves by it and other companies,' he says.

29 Sensitivity analysis Akin to scenario planning but operates at a more operational level. Tests what if scenarios e.g. what happens if the assumptions underlying a strategic decision are questioned and changed. E.g. Launch a new product with five year horizon. No price increase planned first 2 years then modest rise each year. Test to see what happens at different price rise levels i.e. demand/profit. To complete you need good portfolio of variables into a spread sheet and simulations run on the computer. This mapping of the decision trajectory under different conditions can help reveal impact of such things as demand, cost and competition levels.

30 Options Helps identify options when current strategies are failing or not working as well as projected Called strategic decay by Williamson, Measures of decline include: Reaching limits to profit generation: Diminishing returns Revenue growing faster than profits year after year (working harder to run a growing co but with diminishing return to profit) Higher profits but share value declines (low confidence to sustain profits) Core competencies (strategic assets) begin to depreciate in the amount of profits they generate (eg IP near end, long term contracts finishing) Industry convergence more doing the same as you. Result profit squeezed.

31 Options Con t Formal analysis of options can help. Options strategy relies on two related dimensions: The identification of additional or alternative organisational capabilities that might be needed to meet product or service needs in the future; and The identification of potential future markets and/or new customer behaviours.

32 Options Con t Capabilities Knowledge of new markets Low High Low No options Decision making limited to being reactive and becoming part of others strategies Trading options Aware, but unable to do anything so best option is to trade the information High Bounded options Capable but little awareness of new markets Full set of options Ability to identify and follow strategy options is high

33 Strategic groups and industry Strategic Groups dynamics Concept looks at groupings of firms within an industry McGee, Thomas and Wilson (2005) It is a cluster of firms within an industry following similar generic strategies and having similar market positioning.. It is a way of making sense of different types of competitors and different competitive strategies within the same industry.

34 Strategic groups and industry dynamics Membership of a strategic group rests upon configurations of resources common to group members. These configurations act as mobility barriers. In most industries there are a relatively small number of strategic groups. Strategic group analysis offers a map of an industry based on the most significant dimensions of competitive strategy within that industry.

35 Sources of mobility barriers Market-related barriers Product line User technologies Market segmentation Distribution channels Brand names Geographic cover Distribution systems Firm size Industry supply characteristics Economies of scale: Production; Marketing; Administration Manufacturing process R&D capability Marketing & distribution systems Stakeholder relationships

36 Characteristics of firms Sources of mobility barriers Ownership (public, private) Organisation structure Control system Management skills Boundaries of firms: Diversification Vertical integration Know-how, skills, expertise, routines.

37 Strategic Group Maps Dimensions vary industry to industry therefore axes on strategic group maps will vary for different industries. The strategist must select those axes to accurately capture the factors which drive their particular industry. eg Geographic coverage Market intensity (marketing expenditure as % of sales

38 Strategic Group Maps The purpose of a map is to indicate the positioning of the various strategic groups in the industry and to reflect the resources on which their positions are based. Note: Mobility barriers may decay and others arise in their place.

39 Strategic Space By comparing strategies against maps you identify strategic space. McGee & Segal-Horn,1990,1992) Strategic space captures areas of potential opportunity within an industry, areas which are not yet available but whose potential under developing conditions becomes feasible. A strategic space is a currently unoccupied location on a strategic group map. Strategic space shows new directions for investment to be channelled but says nothing about the intensity of competition in any of the spaces. Issues to consider include: Changing mobility barriers Relative profitability of strategic groups Firms ability to adjust resources Problem of defining an industry