Corporate Strategy Notes PDF

Corporate strategy Lesson 3 – What is strategy Reading - What is Strategy, Porter 1996 Operational effectiveness: Performing these activities better – that is, faster, or with fewer inputs and defects – than rivals. Strategic positioning: Performing different activities from rivals or performing s...

Corporate strategy Lesson 3 – What is strategy Reading - What is Strategy, Porter 1996 Operational effectiveness: Performing these activities better – that is, faster, or with fewer inputs and defects – than rivals. Strategic positioning: Performing different activities from rivals or performing similar activities in different ways. Three key principles underlie strategic positioning: 1. Strategy is the creation of a unique and valuable position, involving a different set of activities. Strategic position emerges from three distinct sources: Serving few needs of many customers. Serving broad needs of few customers. Serving the broad needs of many customers. 2. Strategy requires you to make trade-offs in competing – to choose what not to do. Some competitive activities are incompatible; thus, gains in one area can be achieved only at the expense of another area. 3. Strategy involves creating “fit” among a company’s activities. Fit has to do with the ways a company’s activities interact and reinforce one another. Operational effectiveness is not strategy Operational effectiveness: Necessary but not sufficient. Operational effectiveness and strategy are both essential to superior performance which, after all, is the primary goal of any enterprise. But they work in very different ways. A company can outperform rivals only if it can establish a difference that can be preserved. It must deliver greater value to the customer, or create comparable value at a lower cost or do both. Operational effectiveness (OE): performing similar activities better than rivals perform them. Operational effectiveness includes but is not limited to efficiency. o Competition shifts the productivity frontier outward, effectively raising the bar for everyone. Strategic positioning: Performing different activities from rivals or performing similar activities in different ways. Strategy rests on unique activities. Competitive strategy is about being different. It means deliberately choosing a different set of activities to deliver a unique mix of value. The essence of strategy is in the activities – choosing to perform activities differently or to perform different activities than rivals. Otherwise, a strategy is nothing more than a marketing slogan that will not withstand competition. The essence of strategy is choosing to perform activities differently than rivals do. The origins of strategic position Emerges from three distinct sources are not mutually exclusive and often overlap. 1. Positioning can be based on producing a subset of an industry’s product or services: variety-based positioning.  2. Positioning can be based on serving most or all the needs of a particular group of customers: need-based positioning. 3. Positioning can be based on segmenting customers who are accessible in different ways. Although their needs are similar to those of other customers, the best configuration of activities to reach them is different: access-based positioning. Access can be a function of customer geography or customer scale – or of anything that requires a different set of activities to reach customers in the best way. Strategy is the creation of a unique and valuable position involving a different set of activities. Strategic positioning can be based on customers’ needs, customers’ accessibility, or the variety of a company’s products and services. The connection with generic Strategies: The generic strategies remain useful to characterize strategy positions at the simplest and broadest level. The generic strategies framework introduced the need to choose in order to avoid becoming caught between what I then described as the inherent contradiction of different strategies. Trade-offs between the activities of incompatible positions explain those contradictions. A sustainable strategic position requires tradeoff: Choosing a unique position, however, is not enough to guarantee a sustainable advantage. A valuable position will attract imitation by incumbents, who are likely to copy it in one of two ways. o A competitor can reposition itself to march the superior performer. o The straddler seeks to match the benefits of a successful position while maintaining its existing position. It grafts new features, services, or technologies onto the activities it already performs. Strategic position is not sustainable unless there are trade-offs with other positions. Trade- offs occur when activities are incompatible. Simply put, a trade-off means that more of one thing necessitates less of another. o Trade-offs create the need for choice and protect against repositioners and straddlers. Trade-offs arise for three reasons: o Inconsistencies in image or reputation. A company known for delivering one kind of value may lack credibility and confuse customers or even undermine its reputation – if it delivers another kind of value or attempts to deliver two inconsistent things at the same time. o From activities themselves. Different positions (with their tailored activities) require different product configurations, different equipment, different employee behavior, different skills, and different management systems. o From limits or internal coordination and control. Positioning trade-offs are pervasive in competition and essential to strategy. They create the need for choice and purposefully limit what a company offers. In general, false trade-offs between cost and quality occur primarily when there is redundant or wasted effort, poor control or accuracy, or weak coordination. Strategy is making trade-offs in competing. The essence of strategy is choosing what not to do. Without trade-offs, there would be no need for choice and, thus, no need for strategy. Fit drives both competitive advantage and sustainability: While operational effectiveness is about achieving excellence in individual activities, or function, strategy is about combining activities. Fit locks out imitations by creating a chain that is as strong as its strongest link. Types of Fits: Fit is important because discrete activities often affect one another. A sophisticated sales force, for example, confers a greater advantage when the company’s product embodies premium technology, and its marketing approach emphasizes customer assistance and support. A production line with a high level of model variety is more valuable when combined with an inventory and order processing system that minimizes the need for stocking finished goods, a sales process equipped to explain and encourage customization, and an advertising theme that stresses the benefits of product variations that meet a customer’s special needs. 3 types of fit: o Simple consistency between each activity (function) and the overall strategy. o The activities are reinforcing. o Goes beyond activities reinforcement to what is called optimization of effort. Fit and sustainability: Strategic fit among many activities is fundamental not only to competitive advantage but also to the sustainability of that advantage. It is harder for a rival to march an array of interlocked activities than it is merely to imitate a particular sales-force approach, match a process technology, or replicate a set of product features. Positions built on systems of activities are far more sustainable than those built on individual activities. Rediscovering strategy: The failure to choose. Companies avoid or blur strategic choices for other reasons as well. Conventional wisdom within an industry is often strong. Organizational realities also work against strategy. Trade- offs are frightening, and making no choice is sometimes preferred to risking blame for a bad choice. The role of leadership: The challenge of developing or re-establishing a clear strategy is often primarily an organizational one and depends on leadership. Lesson 4 – The remote environment Hierarchy of company statements Mission vs Vision o Mission defines your purpose. o Vision extends your mission to an ideal future state. Corporate strategy differs from business strategy Companies do not live forever “Only 12% of the Fortune 500 companies from 1955 are still in business, and last year alone, 26% fell off the list.” The Exploring Strategy Framework Layers of the business environment 4 steps to understand the environment o Scanning: General indicators – looking for early warning signals from many trends. o Monitoring: Following specific indicators – An ongoing observation of key important trends (Value drivers). o Projecting: Forecasting the impact of key trends on the organization based on monitored changes over time. o Adapting: Determining what requires change in the organization. How do trends impact firm strategy? Step 1: Scanning Environmental scanning What is a macro trend? “A macro trend is part of a long-term horizon (7-10 years) and affects the whole society. It corresponds to major changes in social, economic, regulatory, and technological matters… that are slowly emerging but affecting society in a deep and sustained manner.” o It is the role of the strategy department to identify these trends and adapt the company’s activity accordingly, according to its capabilities (existing or its ability to develop them) and the sales potential that may result from them. o Unlike a fad or fashion, a macro trend is a major and lasting evolution of society, and it influences behaviors and consumption patterns in depth. To analyze the macro environment and trends: the PESTEL framework o The PESTEL framework is a tool supporting a systematic analysis of the macro- environment. o It enables the organization of current elements and predicted macro developments. o Macro elements impact the entire industry, not only one organization. o They can have a positive or negative impact on the industry… o and affect different companies more or less acutely. o The macro analysis (PESTEL framework) enables to identify of potential threats and opportunities… o It is thereby, a key foundation of the SWOT analysis Step 2: Monitoring Identifying value drivers “The term value driver refers to any factor that enhances the total value created by a business model” In understanding the environment, a valuedriver is: A variable and quantifiable measurement, which managers can keep track of over time. Value drivers and information sources must be valid and reliable The causal link is established: o The identified mechanism links the independent variable and the dependent variable (number of international air passengers → duty-free sales). o Empirical evidence (observable correlation on historical data). The data can be trusted: o Accurate and consistent data over time. o Change of definition and perimeter over the years. Two causal links can be established in two ways Step 3: Projecting (forecasting) o Scenario planning consists of representing plausible and detailed situations for a company according to a combination of anticipative structural trends. o The scenarios are purposeful stories about how the contextual environment could unfold throughout time. o It includes unexpected important situations and problems that exist in some small form in the present day. o Example: the impact of oil prices on the car industry. o General Motors → hybrid How to analyse the market and predict its evolution? o Study past developments. o Calculate average growth rates over a long period. o and the recent period. o Identify possible cyclical (≠seasonal) phenomena. o Identify exogenous factors that can influence the market. o Correlation ≠ causation o Obtain the figures of the evolution of these factors (underpinning our market). o Taking into account the internal dynamics of the market. o Innovation  o Technological breakthroughs o Evolution of the offer o Consumer expectations Good practice Bad practice Invest the time and budget needed to. Beware of excessive optimism. Build a simple yet robust and flexible If needed, define several scenarios (basic, model. pessimistic, optimistic) by identifying: The quality of the projections depends on Factors that can switch from one scenario the validity of the model (considering the to another. most relevant value drivers in their proper proportions. Not its complexity Exceptional factors (often low probability but high impact risks) generally cannot be considered in a forecasting model but must be the subject of a separate risk impact analysis and scenario planning. It depends just as much on the quality and Two brains are better than one. consistency of the data that will be used in the model. Multiply common-sense checks. Key Take-Aways o The general environment is given irrespective of the industry in which a company operates. o Based on the general environment, companies need to interpret and translate general environment development to the organizational context → value driver. o Most general environment developments provide for alternative scenarios as a company’s response. o Increasingly fast general environmental developments call for repeated analysis. Lesson 5 – The industry Definition of an industry o SIC (Standard Industrial Classification (USA): “An industry encompasses a group of companies offering the same products or services.” o The most important definition of the industry was given by Michel Porter in 1979: “a group of competitors producing (or offering) substitutes, that are close enough that the behavior of any firm affects each of the others either directly or indirectly.” Industry? Marker? Industry: o Including competitors, customers or clients and suppliers. An industry is a group of firms producing products and services that are essentially the same. Market: o A market is a group of customers for specific products or services that are essentially the same (e.g. a particular geographical market). Thus, the automobile industry has markets in North America, Europe and Asia. Industry analysis o Growth o Profitability o Porter’s forces Standards characteristics of industries o Industry size and scope o Industry type o Industry Lifecycle Industry types: a question of concentration Industry structure Characteristics Competitive five forces threats o One firm o Often unique product or Monopoly Very low services o Very high entry barriers o Few competitors o Product and services Oligopoly Varies differences varies o High entry barriers o Many competitors o Very similar products or Perfect competition Very High services o Low entry barriers Industry size o Industry size can be expressed in volume (nb of units) or value (CHF, USD…). o Value historical data: beware of exchange rate fluctuation and inflation. Industry lifecycle Zooming into the industry o Segmentation o Strategic group o Strategic canvas Industries are not monolithic o An industry may be too high a level to provide a detailed understanding of the competitive forces and dynamics of the industry. o In this (frequent) case, it is therefore necessary to break down the industry into strategic groups that have a greater level of homogeneity. Strategic groups are organizations within the same industry or sectors with similar strategic characteristics, following similar strategies or competition on similar bases. These characteristics are different from those of other strategic groups in the same industry. Segmentation o Not all consumers share the same characteristics. o They differ from many different points of view (demographics, socio-economics, geography, needs and wants, aspirations…). o Companies to recognize and cater to these differences Focus on differences in customer needs. A market segment is a group of customers who have similar needs that are different from customer needs in other parts of the market. Where these customer groups are relatively small, such market segments are often called “niche”. The dominance of a market segment or niche can be very valuable. Strategy Canvas A “strategy canvas” compares competitors according to their performance to establish the extent of differentiation. Critical success factors: o Highly valued by customers. o Cost advantages o Competitive (dis)advantage. o Vary across industries. Blue ocean thinking: o New market space. o Low competition. o Entrepreneurship & innovation. o Market push Changing the rules of competition Lesson 8 – Internal analysis Hierarchy of company statements Industries are not monolithic An industry may be too high a level to provide a detailed understanding of the competitive forces and dynamics of the industry. In this (frequent) case, it is therefore necessary to break down the industry into strategic groups that have a greater level of homogeneity. Strategic groups are organizations within the same industry or sector with similar strategic characteristics, following similar strategies or competing on a similar basis. Strategy canvas Changing the rules of competition Layers of the business environment Resources and capabilities It has become known as the resource-based view (RBV) of strategy pioneered by Jay Barney at the University of Utah: The competitive advantage and superior performance of an organization are explained by the distinctiveness of its resources and capabilities. Capabilities are “winners” required to triumph over competitors. Distinctive resources and capabilities are required to achieve a competitive advantage. Resources and capabilities are valuable when they create a product or a service that is of value to customers and enables the organization to respond to environmental opportunities or threats. There are three components to consider here: V: Value -> Do resources and capabilities exist that are valued by customers and enable the organization to respond to environmental opportunities or threats? R: Rarity -> Do resources and capabilities exist that no (or few) competitors possess? I: Inimitability -> Are resources and capabilities difficult and costly for competitors to obtain and imitate?  O: Organisational Support -> Is the organisation appropriately organized to exploit the resources and capabilities? Fitting the Pieces together The concept of value chain Resources + Capabilities = Core Competnce Competitive advantage cannot be identified in a vacuum Mission and Vision Mission: A mission defines your purpose Vision: A vision extend your mission to an ideal future state. Lesson 9 – Business strategy, Business model Generic competitive strategies Cost Leadership Cost leadership strategy Involves becoming (one of) the systematically lowest-cost organizations in a domain of activity. EX: Ryanair pursues a relentless low-cost strategy. o Input costs: o Labour cost: Labour-intensive activities in countries with low labor costs (call centers, invoice processing…) o Raw material: Manufacturing operations can be (re-)located close to sources of raw material (metals, agricultural…) in order to save on transportation costs within the internal value chain o Economies of scale: o Increases in scale (volume) can reduce the average cost of operation o Economies of scale can be important wherever fixed costs are high (R&D, rent…) o Economies of scale in purchasing (Ex: large airlines, hotel chains…) o Concept of minimum efficient scale o Experience: o With time and volumes, the company gains experience o This leads to cost reduction (productivity) o Moving up on the experience curve is an incentive to maintaining market share (secondary to generating additional profit through volumes)  o Product/ process design: o Design should be focused on cost saving from the onset o It should then be continuously improved through production innovation and take into account consumer feedback Differentiation: The principal alternative to cost leadership is differentiation. Differentiation strategy involves uniqueness along some dimension that is sufficiently valued by customers to allow a price premium. Within each market, too, businesses may differentiate along different dimensions. In clothing retail, competitors may differentiate by store size, location, or fashion. In cars, competitors may differentiate by safety, style, or fuel efficiency. Building differentiation involves additional costs – Those should not exceed the gain in price Product & service attributes In building a basis for differentiation, it is vital to identify clearly the target customer group on whose needs the differentiation is based This can be the final consumer or/ and an intermediary. Branding and merchandising are a powerful differentiation leverage for companies with products that intrinsically offer limited differentiation potential. Focused strategies Porter distinguishes focus as the third generic strategy, based on competitive scope. A focus strategy targets a narrow segment or domain of activity and tailors its products or services to the needs of that specific segment to the exclusion of others. Focus strategies come in two variants, according to the underlying sources of competitive advantage, cost, or differentiation. Focus strategies require at least 3 segment characteristics Distinct segment needs Distinct segment value chains (The first 2 conditions enable to defense the segment against broader competitors) Viable segment economics (minimum scale required) Examples: Retail industry Strategy is about choice But hybrid strategies can work Interactive strategies What is a business model? A business model describes how an organization creates, delivers and captures value.  The process of business model construction and modification is also called business model innovation and forms a part of business strategy. The term business model refers to a company's plan for making a profit. It identifies the products or services the business plans to sell, its identified target market, and any anticipated expenses. The St Gallen Business Model Navigator Business Model Patterns The Business Model Canvas The Business Model Canvas: Zara Lesson 10 – Corporate strategy: Growth strategies Corporate Strategy vs Business strategy Corporate strategy – definition At the business level, but with choices concerning different businesses or markets. Corporate strategy is about the overall scope of the organization and how value is added to constituent businesses of the organization as a whole. Choices about business areas, industries, and geographies to be active in will determine the direction an organization might pursue growth, which business unit to buy and dispose of, and how resources may be allocated efficiently across multiple business activities. Corporate strategy – key consideration The BCG (Growth Share) portfolio matrix - Stars: High investment needed to keep up with growth should be sustained by high returns associated with high market share - Question marks: requires investment to develop into a star. The organization should ideally invest in several as all will not succeed  - Cash cows: Low investment and high profitability. Proceeds should be used to fund the growth of ‘Question marks’ - Dogs: may be a cash drain and use a disproportionate amount of management time. Usually to be divested - Helps review the portfolio of businesses - Provides high-level guidance on resource allocation between businesses BUT - Difficulty in defining share and growth (depends on the definition (broad or narrow) of the market - Assumes that capital must be generated internally (not the case in all markets) - Linkages between business are not only financial (or they would have little reason to belong to the same parent)… a star may need a dog to be able to operate Ansoff’s corporate strategy matrix Ansoff’s axes can be used for brainstorming strategic options and checking that all four zones have been properly considered. A – Market penetration o No diversification: Business strategy o Objective: usually increase market share and profitability (in the existing market with existing product range) o Does not exclude innovation + Focused resources and clarity of purpose - Non-diversification of risk B – Products and services development o Delivery of modified or new products to existing markets o Requires to master new resources and capabilities o Usually involves high investment… and high-risk C – Market development o Delivery of existing products and services to new markets o New users, new usage occasions o New geographies (within the same country or internationalization) o Often requires limited product development (if only packaging or services adaptation)  o Potentially quicker and cheaper to execute than products and services development D – Unrelated diversification o The organization expands into products AND markets completely different from its own o Benefits to the businesses: ▪ Greater consumer confidence ▪ Better/ cheaper access to finance o Extreme form: conglomerate ▪ No operational or strategic linkages between businesses, only strategic allocation of resources o Conglomerate are often distrusted and show a discount in share price vs the sum of the parts (investors see no way for the business to work together and add value to each other) Diversification drivers - Diversification should always be looked at skeptically - Growth is rarely a good enough reason on its own - Diversification is usually justified by the fact of leveraging on resources or/ and capabilities Economies of scopes: - Efficiency gains through applying resources and capabilities to new markets or products - Ex: University premises during holidays Stretching corporate management capabilities - Applying corporate level managerial capabilities across a portfolio of businesses - Ex: LVMH corporate level capabilities (brand building…) Synergies and poor rationales Synergies: - Synergies are benefits gained when activities or assets complement each other - The combined effect is greater than the sum of the parts “Diversification should always be assessed with shareholder value creation in mind It is generally difficult to identify genuine synergies” Poor rationales for diversification - Risk diversification (especially regarding diversification in product and services development) - Responding to market decline (seeking growth in diversification to make up for lack of it in the legacy business) - Managerial ambition (cf. Barbarians at the gate) Vertical integration (opposite of outsourcing) Vertical integration describes entering activities where the organization is its own supplier or customer. Thus, it involves operating at another stage of the value network. Vertical integration can go in either of two directions:  - Backward integration is movement into input activities concerned with the company’s current business (i.e., further back in the value system). For example, acquiring a component supplier would be backward integration for a car manufacturer. - Forward integration is movement into output activities concerned with the company’s current business (i.e. further forward in the value network). For a car manufacturer, forward integration would be into car retail, repairs, and servicing. Outsourcing is the process by which value chain activities previously carried out internally are subcontracted to external suppliers. Vertical integration vs outsourcing - The rationale for vertical integration is often to capture the profit of suppliers or distributors - (like horizontal diversification) it expands the scope of the business, thereby requiring additional resources and capabilities - The organization must assess: o Its ability to be competitive in new activities o The potential dilution of the profitability level - Outsourcing makes sense when the external party can be more effective (lower cost, better capabilities, economies of scale…) Value creation, the reason of being of the corporation Value-adding activities: - Strategic vision - Facilitating synergies - Centralization of support services - Skills development/ coaching Value-destroying activities: - Management cost - Bureaucratic complexity (slow decision-making, diverts operational managers from business) - Loss of clarity on businesses’ individual performance International strategy - International strategy is a subset of the Market development quadrant in Ansoff’s matrix - In most cases, an international strategy will require some amount of adaptation of the product/service to the new market needs and wants Kotler’s internalization process - In his reference book Marketing Management, Kotler defines the internationalisation process as linear - In practice it is common to proceed by iteration  - Which steps of the process belong to strategy formulation? - Which belong to execution (marketing)? Internationalization must be put in competition with other strategic options - Many strategic options are available to the company - Internationalization is one of them, which must be weighed against the others to assess relevance and timing Potential and probability of success vs risk and investment The liability of foreignness A company entering a market from overseas typically starts with considerable disadvantages relative to local competitors, which will usually have superior knowledge of the local market and its institutions. When firms expand internationally, they thus start with a liability of foreignness and face additional costs of doing business compared with local firms, as these already have established relationships with customers, suppliers, and authorities. Mode of entry pros and cons International strategies - Global integration encourages organizations to coordinate their activities across diverse countries to gain efficient operations. This key problem is sometimes referred to as the global-local dilemma: the extent to which products and services may be standardized across national boundaries or need to adapt to meet the requirements of specific national markets. Lesson 10 – Corporate strategy: Growth strategies How to deliver on a growth strategy? Organic Growth – What and Why The organic development is where a strategy is pursued by building on and developing, an organization’s own capabilities. + - Not availability constraint - Development of knowledge and capabilities - Spreading investment over time - Reversible - Strategic independence (no need to make compromises with an acquired organization) - No need for cultural adaptation - - Usually, it is more time consuming - Does not eliminate a competitor (in the case where it replaces the acquisition of a competitor) - Risk associated with developing new capabilities. Mergers & acquisitions Thus, acquisition is achieved by purchasing a majority of shares in a target company. - An acquisition can be friendly (supported by the target’s management) or hostile (in this case, the acquirer appeals directly to shareholders) - In most cases, the acquirer is larger than the target (by what measure? Turnover, market capitalization…?) - The acquisition is effective (and control changes hands) when 50% + 1 share are acquired Exception of preferential voting rights - The transaction can be paid in cash or shares or a combination - In case the target company’s management does not accept the offer, it will organize its defense (usually supported by strategy consultants)  - Build argumentation supporting management’s view that a fair price has not been offered and that the acquisition would destroy value - Most stock exchanges have disclosure rules that prevent acquirers from crossing certain shareholding thresholds (5%, 10%...) without informing the authorities A merger differs from an acquisition, as it is the combination of two previously separate organizations in order to form a new company. - By nature, mergers are friendly - They usually provide a higher probability of success through management cooperation - Helping avoid culture clashes - Helping and speeding up integration M&A, not a US and Europe phenomenon any longer - M&A activity has historically taken place mostly in the USA and Western Europe - Companies from fast growing developing economies have become very active Strategic motives for M&A Extension -> Companies can expand their reach (geographical, market, product) through acquisitions Consolidation -> ▪ Complementarity: geographical, technology, positioning ▪ Reduce excess capacity ▪ Reduce competition ▪ Gain scale → Purchasing clout, manufacturing scale economies ▪ Sharing resources Resources & capabilities -> Companies may choose to acquire technology through the acquisition of companies (rather than developing them in- house) Speed Reduces uncertainty Particularly common in technology, pharmaceutical (acquiring biotech companies) Financial motives for M&A Managerial motives for M&A The acquisition process - Opportunistic or systematic target search - If friendly sale, there might be a prospectus/ data room - Strategic & organizational fit - Based on due diligence outcome: - target and market assessment - Valuation (DCF) - Reshape the portfolio/ divestment - Managerial and staff integration - Culture alignment Strategic alliances Thus, a strategic alliance is where two or more organizations share resources and activities to pursue a common strategy. Collective strategy is about how the whole network of alliances, of which an organization is a member, competes against rival networks of alliances. Collaborative advantage is about managing alliances better than competitors. Equity alliance -> creation of a new entity with shared ownership. EX: JV Non-equity alliance -> Usually contractual. EX: Franchising, licensing