Strategy 2025_Lecture 3 PDF

STRATEGY KEY THEME: STRATEGIC PLANNING PROCESS 1  STRATEGIC PLANNING PROCESS  Strategy-making begins with an idea. Without a guiding idea there can be no sense of direction.  A sound strategic plan should ◼ serve as a framework for decisions or...

STRATEGY KEY THEME: STRATEGIC PLANNING PROCESS 1  STRATEGIC PLANNING PROCESS  Strategy-making begins with an idea. Without a guiding idea there can be no sense of direction.  A sound strategic plan should ◼ serve as a framework for decisions or securing support / approval; ◼ provide a basis for more detailed planning; ◼ explain the business to others in order to inform, motivate and involve; ◼ assist benchmarking and performance monitoring; and ◼ stimulate change and become a building block for the next plan. (Planware)  The way that a strategic plan is developed depends on the nature of the organisation’s leadership, culture of the organisation, complexity of the organisation’s environment, size of organisation, expertise of planners, etc. (ManagementHelp.org) 2  STRATEGIC PLANNING MODELS MODEL Rational Free- Incremental Emergent “Strategy by wheeling strategies design” opportunism Key Formal approach Seize Emphasises Behaviour attribute: to SP opportunities small, slow patterns as they arise changes in determine direction SP Focus: Top-down Continuously That which Context for search for worked in the idea new opps past generation Planning Flexibility No drastic Promotes Risk Adapt- Control innovation Upside: identification ability No Decision- conscious making enforcing More of controlled SProcess Limits Continually can take Experi- innovation in reactive too long = mentation Downside: Past repeat? mode leads to (cost & Dependent on strategic drift time) assumptions 3 STRATEGIC PLANNING PROCESS (2)  To develop a business strategy, an organisation has to decide the following: ◼ What it is good at ◼ How the market might change ◼ How customer satisfaction can be delivered ◼ What might constrain realisation of the plan ◼ What should be done to minimise risk ◼ What actions should be put in place  Managing business strategy involves the entire cycle of planning and control, at a Understanding strategic level: How to compete? the enterprise’s ◼ Strategic analysis Direction & environment ◼ Strategic choice methods of growth? ◼ Implementation of chosen strategies ◼ Review and control (CIMA Strategic Paper E3) 4 Corporate strategy vs business strategy Main focus: Main focus: overall – value compete in the creation market – @ through – business unit profitability & level growth 5 STRATEGIC PLANNING PROCESS MODEL Internal External environment environment assessment assessment Position appraisal Establishing the and analysis to goals and establish existing objectives strategic position Business strategy selection Update analysis Modification Strategy implementation Monitoring and evaluation 6  BENEFITS OF STRATEGIC PLANNING  Clearly defines co’s purpose; helps to set realistic goals & objectives that are consistent with the mission statement in a defined time frame within the company’s capacity for implementation.  Goals and objectives are communicated to all stakeholders. Provides a bridge between management and staff, which also helps to build a stronger team. Also enforces consistency at all levels (objectives, plans, controls are made consistent)  Most effective use is made of the company’s resources, focusing resources on key priorities: may contribute to increased productivity from improved efficiency & effectiveness.  Provides a base from which progress can be measured (better control – targets are explicit).  Helps management to deal with change, by supporting and encouraging flexibility and through regular comparison of the plan to actual events and potential threats and opportunities.  Listens to everyone’s opinions in order to build consensus about where the organisation is going.  May help to identify risks so that the co can respond timeously and appropriately.  Encourages creativity and initiative. 7 PROBLEMS WITH STRATEGIC PLANNING  General limitations of planning models: ◼ Assumes that the future will resemble the past. ◼ All models require assumptions to be made.  Reasons why strategic plans fail: ◼ Addresses high-level initiatives but doesn’t get translated into day-to-day tasks (or mundane goals are set). ◼ Used primarily to produce annual work-plans & to communicate leadership’s intentions; not to form, adjust & implement organisation strategies that will carry out those intentions. ◼ If previous grandiose plans were not brought to fruition, plans may lack buy-in (lack of commitment & discipline). ◼ Leadership may not be fully committed to the process or success of the strategic plan. ◼ Lack of flexibility in plans / Failure to adjust to changes in circumstance or learning during implementation. ◼ Plans are for 3 – 5 yrs.: accurate forecasts in a changing environment is difficult. Competitive environment requires rapid action – co may be on ‘hold’ until strategy planning is complete. 8  STRATEGY KEY THEME: STRATEGIC ANALYSIS TOOLS/MODELS: STAKEHOLDERS 9  STRATEGIC ANALYSIS Stage Comment Key tools, models, techniques Step 1 Mission and/or Mission denotes values, the Mission statement vision business’s rationale for existing; vision refers to where the org. intends to be in a few years time Step 2 Goals Interpret the mission to different Stakeholder stakeholders analysis Step 3 Objectives Quantified embodiments of Measures like dead- mission lines, profitability Step 4 Environmental Identify opportunities and threats PEST analysis analysis Porter’s 5 forces Scenario building Step 5 Position audit Identify strengths & weaknesses; Resource audit or situation Firm’s current resources, products, Value chain analysis customers, systems, structure, Product life cycle results, efficiency, effectiveness Step 6 Corporate Combines steps 4 and 5 SWOT analysis appraisal Step 7 Gap analysis Compares outcomes of step 6 with Gap analysis step 3 10  STRATEGIC PLANNING PROCESS IN THE PUBLIC SECTOR Stage Comment Key tools, models, techniques Step 1 Mandate Determine the Constitution and Legislative mandate of institution Step 2 Mission and/or Mission denotes values, the Mission statement vision business’s rationale for existing; vision refers to where the org. intends to be in a few years time Step 3 Goals Interpret the mission to different Stakeholder stakeholders analysis Step 4 Objectives Quantified embodiments of Measures like dead- mission lines, public needs Step 5 Environmental Identify opportunities and threats PESTEL analysis analysis Porter’s 5 forces Scenario building Step 6 Position audit Identify strengths & weaknesses; Resource audit or situation Firm’s current resources, products, Value chain analysis customers, systems, structure, Product life cycle results, efficiency, effectiveness Step 7 Corporate Combines steps 5 and 6 SWOT analysis appraisal Step 8 Gap analysis Compares outcomes of step 7 with Gap analysis step 4 11  STAKEHOLDER ENGAGEMENT  Who are the co’s stakeholder groups? (see hereafter…)  Stakeholders are groups or individuals that have an interest in an organisation’s strategy. Different stakeholder groups have different levels of power and interest, and management must respond to each in a different way. (Conflict is likely between stakeholder groups due to the divergence of their interests.)  Stakeholders who are consulted for their ideas will, through that very act of inclusion, feel a stronger sense of connection to and enthusiasm for the organisation.  Successful stakeholder management presents the organisation with the opportunity of creating positive, productive and long lasting relationships. However, if the situation is mismanaged, the organisation may damage these relationships creating threats such as resource withdrawal or reputational damage. 12  3 TYPES OF STAKEHOLDERS 1. Internal Interests to Response risk stakeholder defend Managers and  Jobs / careers  Pursuit of own goals employees  Money rather than s/h interests  Promotion  Industrial action  Benefits  Negative power to  Satisfaction impede implementation  Refusal to relocate  Resignation 2. Connected Interests to Response risk stakeholder defend Shareholders  Increase in  Sell shares (e.g. to wealth, measured predator) or boot out by: management ◼ Market capitalisation ◼ P/E ratios ◼ Profitability ◼ Dividends ◼ Yield  Risk 13  3 TYPES OF STAKEHOLDERS 2. Connected Interests to defend Response risk stakeholder Bankers (cash  Security of loan  Denial of credit flow)  Adherence to loan  Higher interest agreements charges  Receivership Suppliers  Profitable sales  Refusal of credit (purchase  Payment for goods  Court action strategy)  LT relationship  Wind down relationships Customers  Good as promised  Buy elsewhere (product  Future benefits  Damage reputation market (e.g. bad publicity) strategy)  Legal action 14  “Non-market” stakeholders 3 TYPES OF STAKEHOLDERS 3. External Interests to Response risk stakeholder defend Government,  Jobs  Tax increases regulatory  Training  Regulation agencies  Tax  Legal action Interest /  Pollution  Publicity pressure  Rights  Direct action groups  Other  Sabotage  Pressure on government Industry assoc  Members’ rights  Legal action / trade unions  Direct action NGOs & civil  Human rights  Legal action society Use stakeholder analysis to: identify people, groups & institutions that will influence your initiative (either positively or negatively); anticipate the kind of influence, positive or negative, these groups will have on your initiative; develop strategies to get the most effective support possible for your initiative & reduce any obstacles to successful implementation of your program. (ManagementHelp.org) 15  MENDLOW’S STAKEHOLDER MAPPING  Purpose: help co. to identify priorities AND manage expectations of stakeholders  Matrix comprising four quadrants which indicate the level of interest of, and power exerted by, the various stakeholders of the co.  Five forms of power are identified: ◼ Position power: linked to position held in the co. ◼ Resource power: results from supplying an important resource ◼ Expert power: skills that the individual possesses ◼ System power: individuals having high visibility or political access (“PQ”) ◼ Personal power: individuals having good communication skills and being well liked Level of interest Low High Required action: Low A = minimal effort (they can be influenced) A B B = keep stakeholders informed (need convincing) Power C = keep stakeholders happy (reassurance) D = stakeholders need to be involved & receive High C D regular communication 16 MENDLOW’S STAKEHOLDER MAPPING Based on the mapping the enterprise’s management will potentially identify who to form alliances with 17  MENDELOW MAPPING EXERCISE SEA HARVEST LIMITED (‘SEA HARVEST’) Sea Harvest, incorporated in 1964, listed on the Johannesburg Stock Exchange (JSE) during 2017. The group has four distinct operating segments:  South African wild-capture fishing and processing operations (fishing rights and TAC are granted by the DFFE);  Australian wild-capture fishing;  Aqua-culture operations using aqua-farming practices based in South Africa; and  Fast-moving consumer goods division (dairy products). Sea Harvest’s cape hake and Australian Shark Bay prawns are MSC certified, carrying the blue MSC logo, being the gold standard in global sustainability fishing. Required: Perform a stakeholder mapping of the Sea Harvest stakeholders using Mendelow. 18  STRATEGY KEY THEME: STRATEGIC ANALYSIS TOOLS/MODELS: COMPETITIVE ENVIRONMENT 19  PORTER’S FIVE FORCES  Some industries are more profitable than others. Why? The answer lies in understanding the dynamics of the competitive structure in an industry.  Competitive position is the market share, costs, prices, quality and accumulated experience of an entity or a product relative to the competition.  The job of the strategist is to understand and cope with competition. Often, however, managers define competition too narrowly, as if it occurred only among today’s direct competitors.  Competition for profits goes beyond established industry rivals to include four other competitive forces as well: customers, suppliers, potential entrants, and substitute products. The extended rivalry that results from all five forces defines an industry’s structure and shapes the nature of competitive interaction within an industry. (Michael Porter) 20  PORTER’S 5 FORCES Bargaining power of suppliers Threat of new Threat of entrants substitute products Competition / Rivalry within an industry Bargaining Degree power of (intensity) of customers rivalry 21  BARGAINING POWER OF SUPPLIERS  Supplier concentration to firm concentration ratio (many buyers and few dominant suppliers – monopoly/oligopoly)  Importance of volume to supplier (the industry may not be a key customer group to the suppliers)  Supplier switching costs (how expensive it is for the supplier to find a new customer) relative to firm switching costs  Degree of differentiation of inputs (undifferentiated means lots of competition for that input)  Impact of inputs on cost or differentiation  Presence of substitute inputs  Threat of new entrants to the supplier’s industry  Supplier competition – ability to forward integrate and cut out buyer  Strength of distribution channel  Employee solidarity (e.g. labour unions) 22  THREAT OF NEW ENTRANTS  Barriers to entry (patents, rights)  Industry profitability (low profits will not attract new entrants)  Falling prices (will dissuade new competitors)  Uncertain markets (will frighten away new entrants)  Absolute cost advantages / Economies of scale (size)  Proprietary learning curve (new co doesn’t have it yet)  Limited access to inputs & resources  Capital requirements (high start-up costs; asset specificity)  Switching costs  Brand identity / Product differentiation / Customer loyalty to established brands / Proprietary products  Access to distribution channels (if restricted entry into market is difficult)  Expected retaliation  Government policy (should prevent monopolies, but utilities considered a natural monopoly – then regulate industry; import taxes / incentives etc.) 23  THREAT OF SUBSTITUTE PRODUCTS (products in other industries)  E.g. cans versus glass bottles, water versus Tab (not Coke v. Tab!) – it is not a direct competitor, but the product (even though it is different) satisfies the same basic need.  Buyer’s switching costs (how easy it is for the customer to change from 1 product to another – e.g. printer cartridges can’t be substituted: cartridge is bound to a specific type of printer and brand name.)  Buyer propensity to substitute  Price-performance trade-off of substitutes  Perceived level of product differentiation  Number of substitute products available in the market  Ease of substitution (e.g. information based products are more prone to substitution)  Quality depreciation 24 BARGAINING POWER OF CUSTOMERS  Bargaining leverage (esp. in industries with high fixed costs – volume is then important)  Buyer volume (buyer purchases a significant proportion of output)  Buyer concentration v. firm concentration ratio (few dominant buyers and many sellers in industry – called monopsony)  Buyer switching costs relative to firm switching costs  How critical the product is to the customer’s own business  Availability of existing substitute products  Importance of product quality to the customer  Buyer price sensitivity (and profitability) & skill of its purchasing staff  Buyers threatening backward integration Use of(can databuy producing firm or rival) analytics?  Buyer information availability  Brand identity  Product differentiation advantage (uniqueness) of industry products (if standardised, can be bought anywhere)  Degree of dependency upon existing channels of distribution 25  DEGREE (INTENSITY) OF RIVALRY  Industry concentration (rivalry more intense where there are many small or equal competitors, more firms compete for the same customers and resources)  A diversity of rivals with different cultures, histories , and philosophies make an industry unstable (rivalry is volatile).  Industry shakeout: intense competition, price wars, etc. to cause company failures and bar new entrants  Powerful competitive strategy / Strategic objectives (competitor may pursue aggressive growth strategy; in mature industry where ‘milking’ of profits take place, rivalry is reduced)  Industry growth (slow growth causes firms to fight for market share)  Fixed costs per value added (high fixed costs: compete on price to increase volume sold: must produce near capacity to attain lowest unit cost)  Intermittent overcapacity  Product differences (the more differentiated the less rivalry there is)  Switching costs (rivalry is reduced where buyers have high switching costs)  Brand identity  High exit barriers (more rivalry where it is expensive to leave industry, e.g. closing down cost / specialised assets)  Sustainable competitive advantage through innovation  Level of advertising expense  High storage costs or highly perishable products (must sell a.s.a.p.) 26  WHY USE PORTER?  By analysing all 5 competitive forces, you gain a complete picture of what’s influencing profitability in your industry. You identify game- changing trends early, so you can swiftly exploit them. And you spot ways to work around constraints on profitability – or even reshape the forces in your favour.  By understanding how the 5 competitive forces influence profitability in your industry, you can develop a strategy for enhancing your company’s long-term profits.  If forces are intense, as they are in such industries as airlines, textiles, and hotels, almost no company earns attractive returns on investment. If the forces are benign, as they are in industries such as software, soft drinks and toiletries, many companies are profitable. (Michael Porter) 27  STRATEGY KEY THEME: HOW TO COMPETE 1. PORTER’S GENERIC COMPETITIVE STRATEGIES 2. RED VS BLUE SKY STRATEGIES 28  A COMPETITIVE ADVANTAGE  A competitive advantage refers to some aspect of the business which is performed perceptibly more effectively by this business than by any of its competitors. Thus a competitive advantage may be achieved by having a lower cost base than competitors or providing a better quality product or, even better still, by doing both at the same time. (CIMA)  In pursuing an advantage over its rivals, a firm can choose from several competitive moves: ◼ Changing prices ◼ Improving product differentiation ◼ Creatively using channels of distribution (e.g. vertical integration) ◼ Exploiting relationships with suppliers  Michael Porter identified three generic strategies that can be implemented at the business unit level to create a competitive advantage: ◼ cost leadership, How we intend on ◼ differentiation, competing in our industry = ◼ and focus. (QuickMBA) strategic choice 29  PORTER: COST LEADERSHIP  Cost leadership means being the lowest cost producer in the industry as a whole. It can be achieved by establishing economies of scale, using the newest (most efficient) production technologies, exploiting the learning curve effect, improving productivity, minimising overheads and relocating to cheaper areas.  Risks of this strategy: ◼ Technological change could mean that existing low-cost technology becomes superseded by newer, cheaper technology. ◼ Inflation or exchange rates may destroy cost advantages.  Conceptual problems: ◼ Doesn’t focus on the market – internal perspective doesn’t ensure market demand. Economies of scale required for low cost, but this means low prices, which require low costs – circular argument. ◼ Only one firm in an industry can really successfully aspire to this strategy. 30  PORTER: DIFFERENTIATION  Differentiation aims to exploit a product or service which is perceived to be unique within the industry as a whole. Such products may be categorised as breakthrough products (products which offer radical performance advantage compared to existing products), improved products (more cost-effective alternatives to existing products), and competitive products (products which offer a unique combination of features).  Differentiation can be achieved by developing a strong brand image, giving the product special features to make it stand out, and exploiting other activities of the value chain such as marketing and sales or service.  Risks of this strategy: ◼ The brand loyalty underpinning differentiation may fail if the cost differential between the price difference with cost leading products becomes too great. ◼ Buyers may value the differentiating factor less, and so may become more willing to buy generic products instead of differentiated products.  Conceptual problems: ◼ Will not necessarily sell product at higher cost – may sell at same price as competing products to increase market share ◼ Differentiate from whom? Who are the competitors? 31  PORTER: FOCUS  Focus (niche) strategy is where a firm concentrates its activity on one or more particular segments of the market [e.g. single persons / the wealthy / moms & tots] and does not try to serve the entire market with a single product. Either cost leadership or differentiation is then pursued. Such a concentrated effort can be more effective, but the segment may be attacked by a larger firm/lose economies of scale.  Two types of focus strategies: ◼ A cost-focus strategy: aim to be a cost leader for a particular segment. This type of strategy is often found in the printing, clothes manufacture and car repair industries. ◼ A differentiation-focus strategy: pursue differentiation for a chosen segment. Luxury goods suppliers are the prime exponents of such a strategy.  Risks of this strategy: ◼ The distinctions between segments narrows so that individual segments are no longer clearly identifiable. ◼ Segment collapses and leaves the firm with no other source of earnings. 32 A RED VERSUS BLUE SKY STRATEGY Red sky strategy Blue sky strategy ◼ Strategy used to compete in ◼ Strategy adopted in markets crowded markets or markets where untapped opportunities where high intensity of rivalry exist – often in a new market (so exists (so called red ocean) – called blue ocean) typically mature or stable ◼ Requires innovation on part of markets ∴ established markets the enterprise ◼ Difficult to differentiate in the ◼ Opportunity to differentiate market ∴ fight for market share ◼ Long-term orientation (growth ◼ Margins under pressure potential) ◼ Short-term orientation (survive ◼ Use of new technologies and and thrive) new business models focused  Pricing? on:  Cost-cutting? Etc.  Operational efficiencies ◼ Focusof strategy = defend /  Cost reduction / cost management improve existing position in the market by:  Optimising existing business processes – through incremental improvements; and 33  Outperforming competition