Strategy Fundamentals: Business Strategy Concepts

• Fundamentals of Business Strategy presented by Professor Richard Powers.
• Powers is the National Academic Director of the Directors Education Program at Rotman School of Management, University of Toronto.

Board Oversight Priorities

• According to the NACD's 2024 Governance Outlook, strategy is a key area for board improvement.
• Oversight of both strategy execution and development are very important to boards over the next 12 months.
• Of those surveyed, 45% of people think strategy execution is very important, 36% think it is important, 12% moderately important, 5% slightly important, and 2% not at all important.
• Of those surveyed, 45% of people think strategy development is very important, 35% think it is important, 14% moderately important, 5% slightly important, and 2% not at all important.

Company DNA

• Company DNA consists of these characteristics:
  • Who your company is i.e. its size, capital structure, and productivity.
  • Where your company is relative to the market.
  • What your company does i.e. its strategic choices, resource allocation, and capital expenditure.

Strategy Fundamentals

• Profit is typically driven by industry structure, competitive position relative to the market, and overall economic trends.

The Strategy Cycle

• The Strategy Cycle flows as follows:
  • Goal Setting leads to Industry Analysis
  • Industry Analysis leads to Company Analysis
  • Company Analysis leads to Strategy Formulation
  • Strategy Formulation leads to Execution & Adjustment, which goes back to Industry Analysis

LTSCDA: Long-Term Sustainable Competitive Differentiated Advantage

• To achieve this advantage, decisions are required that maintain a defensible, competitive position that yields positive returns.

Porter's Five Forces

• Porter's Five Forces framework dates back to the 1980s.
• It is a tool for evaluating industry structure.
• The Five Forces include:
  • Threat of new entry
  • Supplier power
  • Customer power
  • Threat of substitutes
  • Rivalry among existing competitors

Questions for Management

• Is the industry becoming more or less attractive, looking at firm profitability, new products/technologies, and new players?
• Consider the external environment by looking at industry dynamics, socio-political factors, and industry trends.

Competitive Advantage Types

• Industry average competitor: average willingness to pay vs. average costs incurred.
• Successful differentiated competitor: high willingness to pay vs. average costs incurred.
• Successful low-cost competitor: average willingness to pay vs. low costs incurred.
• Competitor with dual advantage: high willingness to pay vs. low costs incurred.

Sources of Profitable Growth

• Business launches: 86% come from me-toos & value improvement, 14% from value innovation.
• Revenue impact: 62% from me-toos & value improvement, 38% from value innovation.
• Profit impact: 39% from me-toos & value improvement, 61% from value innovation.

Keys to Successful Strategy

• Successful strategy involves building Long Term Sustainable Competitive Differentiated Advantage; it defies gravity.
• The typical "half-life" of competitive advantage and superior return on investment is roughly three years.
• 1/3 of top quartile companies drop out of the top quartile the next year.
• Asking good questions can help prevent strategic decline.

Director's Top Ten Tools

• Analyze the Past:
  • Buffett's Law: bad economics usually overwhelms good management.
  • Momentum analysis: learning from history shows if there is evidence of LTSCDA.
  • Core competence: what differentiates the company?
• Assess the Present:
  • Porter's 5 Forces: studying the competitive landscape.
  • VRIO: checklist for LTSCDA.
  • GE/McKinsey 9 box: sorting out businesses.
• Design the Future:
  • Core adjacencies: grow from strengths.
  • 3 horizons: invest in a pipeline of opportunities.
  • Blue Ocean: the search for new space through value innovation.
  • 10X changes & Black Swans: looking out for game-changing events.

Discovering LTSCDA: Three-Part Process

• Past - What evidence is there of LTSCDA?
  • Who are we?
  • Where have we been?
  • What are our core competencies?
  • Tool 1: Buffett's Law
  • Tool 2: Momentum Analysis
  • Tool 3: Core Competence a.k.a. "activity sets"
• Present - What forces are at work in our environment?
  • What are the industry trends?
  • What are the sources of LTSCDA?
  • Who are our competitors and what are they doing?
  • Tool 4: Porter's 5 Company/Industry Analysis
  • Tool 5: VRIO (Valuable, Rare, Inimitable, Organized) analysis
  • Tool 6: GE/McKinsey 9 box
• Future - Where should we go and how will we get there?
  • Tool 7: Core adjacencies
  • Tool 8: 3 horizons
  • Tool 9: Blue Oceans
  • Tool 10: 10x changes a.k.a. Black Swans
  • What is our "strategic inventory" in the cores?
  • What are our alternative adjacencies?
  • How will we commit?

Blue Ocean Strategy

• Red Ocean Strategy vs. Blue Ocean Strategy:
  • Red strategy = competing in existing market space, beating the competition, exploiting existing demand, making the value-cost trade-off, and aligning strategy choice of differentiation or low cost.
  • Blue strategy = creating uncontested market space, making the competition irrelevant, creating & capturing new demand, breaking the value-cost trade-off, and simultaneous pursuit strategy of differentiation and low cost.
• Creating a Blue Ocean Strategy involves these 4 steps:
  • Eliminate: Which factors that the industry takes for granted should be eliminated?
  • Reduce: Which factors should be reduced well below the industry's standard?
  • Raise: Which factors should be raised well above the industry's standard?
  • Create: Which factors should be created that the industry has never offered?

Questions for Directors to Ask

• Past:
  • How much CDA do we have?
  • What are its sources?
• Present:
  • What is the current competitive environment?
  • How is it changing?
• Future:
  • What does our pipeline look like?
  • Can we execute and adapt?

Stress Test Your Strategy

• Key Questions:
  • Who is our primary customer?
  • How do our core values prioritize shareholders, employees, and customers?
  • What critical performance variables are we tracking?
  • What strategic boundaries have we set?
  • How are we generating creative tension?
  • How committed are we to employees helping each other?
  • What strategic uncertainties keep us and management awake at night?

Corporate Vs. Parenting Strategy:

• Corporate Strategy looks at "What businesses should we be in and how should we manage those businesses?"
• Parenting Strategy looks at "How do we Compete?"

Portfolio Strategy considers

• What businesses or markets to enter
• How much to invest in each business

Parenting Strategy considers

• How to select, interact with and guide the managers of these businesses
• How to structure the group and what activities to centralize at the corporate level.
• Considers what activities to centralize at the corporate level i.e. legal, finance & treasury, HR, investor relations, strategy, purchasing, sales, risk, internal audit.

Growth

• Growth requires a pipeline of opportunities across 3 horizons:
  • Horizon 1: Defend & extend current businesses
  • Horizon 2: Nurture growth in Emerging businesses
  • Horizon 3: Seed options for future businesses