Fundamentals of Business Strategy PDF - Rotman School of Management

Fundamentals of Business Strategy PROFESSOR RICHARD POWERS National Academic Director Directors Education Program Rotman School of Management University of Toronto Strategy 20 40 Talent 10 60%...

Fundamentals of Business Strategy PROFESSOR RICHARD POWERS National Academic Director Directors Education Program Rotman School of Management University of Toronto Strategy 20 40 Talent 10 60% 20 Oversight 40 30 Routine 30 10  What is in your Company DNA Who are you? - Company characteristics such as size, capital structure and level of productivity Where are you? - Your company’s performance relative to the market What do you do? - Your strategic choices, resource allocation, operational and commercial excellence and capital expenditure (McKinsey Strategy Practice, McKinsey & Company)  STRATEGY FUNDAMENTALS Typically, profit is driven by three factors; - Industry Structure - Competitive Position Relative to the Market - Overall economic trends  The Strategy Cycle Goal Setting Industry Analysis Execution & Strategy Company Adjustment Framework Analysis Strategy Formulation  Long-Term Long-Term Sustainable Sustainable Competitively Competitive Differentiated Differentiated Advantage Advantage (LTS)CDA LTSCDA  Understanding Industry Profitability Porter’s “Five Forces” Porter’s framework dates back to 1980s, but is still most widely-used tool for evaluating industry structure Threat of new entry Supplier Rivalry among Customer power existing competitors power Threat of substitutes Joan Magretta, Understanding Michael Porter: The Essential Guide to Competition and Strategy. Harvard Business School Press  COMPETITIVE POSITION To achieve LTSCDA, you need to make decisions that maintain a defensible, competitive position that yields positive returns and avoid decisions that do not!  Questions for Management Is our industry becoming more or less attractive? - Are firms profitable or struggling? - Are there new products or technologies that are shaking up the industry? - Any new players? What about the external environment? - Industry dynamics? - Socio-political factors? - Industry tends?  Types of Competitive Advantage Industry Average Willingness to Pay Industry Average Costs Incurred Industry Successful Successful Competitor average differentiated low-cost with dual competitor competitor competitor advantage  Types of Competitive Advantage Industry Average Willingness to Pay Industry Average Costs Incurred Industry Successful Successful Competitor average differentiated low-cost with dual competitor competitor competitor advantage Where Does Profitable Growth Come From? Business 86% 14% Launches Revenue Impact 62% 38% Profit Impact 39% 61% Me-Toos & Value Improvement: 86 : 62 : 39 Value Innovation: 14 : 38 : 61  Successful Strategy = Building Long Term Sustainable Competitive Differentiated Advantage = The Art of Defying Gravity! Some sobering research findings: The typical ‘half life’ of competitive advantage and superior return on investment is roughly three years One third of companies that were in the top quartile of performance in a given year would drop out of the top quartile the next year ASKING GOOD QUESTIONS CAN STOP THIS FROM HAPPENING! Source: Collis and Rivkin, “Strategic Decline” The Directors’ Top Ten Tools - LTSCDA Discovering and exploiting LTSCDA is a three part process PAST What evidence is there of LTSCDA ? who are we ? where have we been ? what are our core competencies ? PRESENT Tool 1 : Buffett’s What forces are at work in our environment ? Law What are industry trends ? How are we doing ? Who are our competitors and what are they doing ? FUTURE Where should we go and how will we get there ? What are our alternatives ? How will we commit ? Tool 2 : Momentum Analysis Tool 3 : Core Competence aka “activity sets” Discovering and exploiting LTSCDA is a three part process PAST What evidence is there of LTSCDA ? who are we ? where have we been ? what are our core competencies ? PRESENT What forces are at work in our environment ? What are industry trends ? What are the sources (if any) of our LTSCDA ? Who are our competitors and what are they doing ? FUTURE Tool 5: VRIO Tool 5: VRIO Valuable Rare Inimitable Tool 4 : Porter’s 5 Organized Tool 6 : GE/McKinsey 9-box Company/Industry analysis  Discovering and exploiting LTSCDA is a three part process Tool 9 : Blue Oceans PAST What evidence is there of LTSCDA ? who are we ? where have we been ? what are our core competencies ? Tool 10 : 10x changes aka ToolPRESENT 7 : Core adjacenciesWhat forces Toolare 8 : at work in our environment 3 horizons ? Black Swans What are industry trends ? How are we doing ? Who are our competitors and what are they doing ? FUTURE Where should we go and how will we get there ? What is our “strategic inventory” in the ‘cores’? What are our alternative adjacencies ? How will we commit ?  Think of these four tools….. Which of the factors that the industry takes for Eliminate granted should be eliminated? Which factors should be reduced well below the Reduce industry’s standard? Which factors should be raised well above the Raise industry’s standard? Which factors should be created that the Create industry has never offered?  52 Another way to analyze Blue Ocean potential is the value chain High CdS BLC LLC Low © Kim and Mauborgne Questions Directors Should 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 (Robert Simons, HBR) 1. Who is our primary customer? 2. How do our core values prioritize shareholders, employees and customers? 3. What critical performance variables are we tracking? 4. What strategic boundaries have we set? 5. How are we generating creative tension? 6. How committed are we to employees helping each other? 7. What strategic uncertainties keep us and management awake at night?  Complementary Strategic Tools Still need to think about customer values, value proposition, activities and investments Forces you to look at all elements of strategy together This is where board members can add value Thank You