Imperial College Business School Strategic Management - Introduction to Strategy PDF

STRATEGIC MANAGEMENT BUSI70800 Introduction to Strategy James Eteen 11 September 2024 © James Eteen, 2024. All rights reserved. This presentation has been provided to support your studies at Imperial. You may print and/or download a single copy for your personal, educational use. Further redis...

STRATEGIC MANAGEMENT BUSI70800 Introduction to Strategy James Eteen 11 September 2024 © James Eteen, 2024. All rights reserved. This presentation has been provided to support your studies at Imperial. You may print and/or download a single copy for your personal, educational use. Further redistribution of teaching materials, including making copies available on the internet, is not permitted. Today’s Learning Objectives 1) Introduce the module 2) Build a foundation of how to think about Strategy 3) Assess the effectiveness of strategies in retail Imperial College Business School Imperial means Intelligent Business 2 1) Introduction to The Module Imperial College Business School Imperial means Intelligent Business 3 We will have ten lectures together: 1 Introduction to Strategy 7 Collaboration Strategies Playing to Win, 3Cs, 7Tests | Carrefour, Ocado, Aldi Collaboration, Exchange | Apple, OpenAI Guest 2 Platforms & Flywheels Lecturer 8 Strategies for Disruption QUIZ 1 Disruption Curve | B2B Healthcare QUIZ 3 HelloFresh, LinkedIn, Epic Games Guest 3 Market Sizing 9 Sustainability & Circularity Lecturer TAM-SAM-SOM | Five Guys, Revolut, Chase Circular Economy | Lego, Nespresso NOT ASSESSED AS 4 Sources of Competitive Advantage 10 Strategy & Consulting PART OF QUIZZES; IT Positioning, Timing | Beyond Meat, OpenAI Strategic Analysis, Charts, Ethics | think-cell WILL HELP WITH TEAM REPORT ASSIGNMENT 5 Blue Ocean Strategy Strategy Canvas | Nintendo, Citroen Ami QUIZ 2 6 Mergers & Acquisitions Mars/Hotel Chocolat, AT&T/Time Warner Imperial College Business School Imperial means Intelligent Business 4 What to expect: ▪ A partial set of pre-lecture slides a day or so before the lecture (to help you prepare) but not give away any answers! ▪ A full set of post-lecture slides after both stream lectures are complete. Usually with changes to highlight key learning points or simplify the content ▪ If anything is unclear, please let me know before/after lectures or via email Imperial College Business School Imperial means Intelligent Business 5 Prepare & participate! WIDER READING ~1 HR PER DAY SUPPLEMENTARY READINGS CORE READINGS SHOW UP! PREPARE FOR THE LECTURE PARTICIPATE IN THE LECTURE Imperial College Business School Imperial means Intelligent Business 6 The “meat” of our lectures: working in self-selected groups The Big Mac The Quarter Pounder One major group working Two (or more) smaller session on a specific case sessions on a theme (e.g. today) Imperial College Business School Imperial means Intelligent Business 7 We will discuss the coursework assessment as the module progresses You will be assessed as: ▪ Groups (coursework report due 21 October, 4pm) ▪ Individuals (3x timed quizzes, each covering 3 lectures); dates and times posted on the Hub Imperial College Business School Imperial means Intelligent Business 8 2) How to Think About Strategy Imperial College Business School Imperial means Intelligent Business 9 What is a “strategy”? Imperial College Business School Source: Mission Impossible: Fallout, Paramount Pictures, via yarn.co Imperial means Intelligent Business 10 What is Strategic Management, and how do I teach it? Strategic Management = Strategy Strategy ≠ Planning Strategy = coherent guiding policy, set by CEO, drives actions Strategy = starts with a challenge* always Strategy formulation does not usually, despite what many will have you believe, start with a long-term goal* *Hold that thought! Imperial College Business School Imperial means Intelligent Business 11 Sources: adapted from Richard Rumelt, The Crux, and adapted from Roger L. Martin and AG Lafley, Playing to Win. (Guess!) match the AMBITION to the company 1) To create a better everyday life for the many people 2) When it really matters 3) To inspire humanity – both in the air and on the ground 4) To accelerate the world's transition to sustainable energy 5) To elevate the world's consciousness Imperial College Business School Imperial means Intelligent Business 12 Match the AMBITION to the company 1) To create a better everyday life for the many people 2) When it really matters 3) To inspire humanity – both in the air and on the ground 4) To accelerate the world's transition to sustainable energy 5) To elevate the world's consciousness Imperial College Business School Imperial means Intelligent Business 13  The single company ambition/goal/vision/mission almost always emerges from corporate communications/PR to post-rationalise the direction of the firm taken. It is NOT the first step in “imagining” a new strategy! Nor is a SWOT analysis! More about that in Lecture 10 Imperial College Business School Ergo: We need to re-draw Roger Martin’s Strategy Cascade Imperial means Intelligent Business 14 Strategy is the responsibility of the CEO; the CEO is held accountable by the shareholders to deliver value “Strategy is the exercise of power to make parts of the system do things they would not do, if left to themselves. Important changes always mean shifts in power and resources. Strategy means asking…people [to] do things that break with routine and focus collective effort and resources on new purposes.” Richard Rumelt Therefore, Strategy consultants want to work directly for the CEO. A new CEO will often set out a new strategy and 100-day plan in response to the challenges that led to the departure of the previous CEO… Imperial College Business School Imperial means Intelligent Business 15 3) How to Create a Winning Strategy Imperial College Business School Imperial means Intelligent Business 17 There is a lot of bad strategy practised today…what might be some of the warning signs? More buzzwords than clarity Unwillingness to invest significant enough resources to reinvent the business model in response to market/industry changes Internal stakeholder priorities placed ahead of customer needs Belief that competitors can’t/won’t respond Financial goals as a proxy for Strategy Imperial College Business School Source: Strategy Calculator by Richard Rumelt Imperial means Intelligent Business 18 Strategy is not a “tick-box exercise”, nor is it merely a process ▪ Strategy is a theory to be tested. A set of interrelated and powerful choices that (may) position a firm to win ▪ Strategy results from tough choices on what to and not to do ▪ High quality, granular, thinking on where to play and how to win should drive resource allocation and action plans ▪ Overwhelming force applied to a small number of priorities often beats “initiative overload”, in my experience Imperial College Business School Imperial means Intelligent Business 19 Strategy is… …choice. Strategy is not a long planning document; it is a set of interrelated and powerful choices that positions the organisation to win*. In pursuit of the problem to solve, or ambitious opportunity**: 1) Where will we play? 2) How will we win where we have chosen to play? 3) What capabilities must be in place to win? 4) What management systems are required? *Source: Adapted from Roger L. Martin Imperial College Business School Imperial means Intelligent Business 20 ** We can debate whether the problem or opportunity is the same as the business goal/vision/mission/ambition/aspiration What scenarios do each of these three points represent? 1 ? ATTRACTIVENESS (Where to Play?) 2 ? 3 ? ABILITY TO COMPETE (How to Win?) Imperial College Business School Imperial means Intelligent Business 21 How best to demonstrate good vs bad strategy? Grocery retail is a great place to start when exploring strategic choices and shifting business models ▪ Grocery retail has always been a competitive battlefield ▪ Covid-19 was a catalyst for incredible innovation ▪ Legacy (store) business models were challenged – and now (perhaps…) seem to be rebounding ▪ $billions in capital have been invested in new business models ▪ We will look back on “Pre-Covid” vs. “Covid” vs. Post-Covid” as a defining period in international grocery retail Imperial College Business School Imperial means Intelligent Business 22 4) “Carrefour 2022” (Bompard’s strategy, published in 2018) Imperial College Business School Imperial means Intelligent Business 23 You will have read Carrefour’s 2022 Strategy announcement (published in 2018) Imperial College Business School Imperial means Intelligent Business 24 You will have read Carrefour’s 2022 Strategy (published in 2018) Imperial College Business School Source: www.carrefour.com Imperial means Intelligent Business 25 What problem(s) was the new Carrefour CEO seeking to solve? Imperial College Business School Imperial means Intelligent Business 26 What problem(s) was the new Carrefour CEO seeking to solve? Carrefour Net Sales and Net Income (Global), 2014-2017 € (Millions) % 80,000 2.6 Net Margin 79,000 78,315 2.4 Global Net Sales 78,000 2.2 Global Net Income 76,945 77,000 76,645 2.0 1.8% 76,000 1.8 1.6% 75,000 74,706 1.6 74,000 1.4 73,000 1.1% 1.2 72,000 1.0 71,000 0.8 5,000 0.6 4,000 0.4 3,000 0.2 2,000 0.0 1,000 -0.2 1,367 1,223 -0.5% 894 0 -362 -0.4 -1,000 -0.6 2014 2015 2016 2017 Imperial College Business School Source: Carrefour, accessed via Statista. Net Margin calculated from the Net Sales and Net Income data provided. Imperial means Intelligent Business 27 UCLA organisational theorist (and McKinsey alum) Kenichi Ohmae’s concept of the 3Cs can be used to test a strategy 3Cs remind us that the resources of the Company......should be aligned to delight Customers......to beat the Competition Imperial College Business School Source: Kenichi Ohmae, organisational theorist, 1982 Imperial means Intelligent Business 28 Strategy is about decisions and often, trade-offs Where to play: How to win: CUSTOMERS ← Value COMPETITORS ▪ Categories ▪ Differentiation, or ▪ Markets ▪ Cost (“Price") Leadership ▪ Segments STRATEGY COMPANY (RESOURCES, CAPABILITIES, CULTURE, SYSTEMS, ETC.) Imperial College Business School Source: Adapted from Kenichi Ohmae Imperial means Intelligent Business 29  In groups, assess the Carrefour 2022 Strategy: ▪ Highlight what you think were Good and Bad elements 12mins ▪ Explain why you judged the elements as you did [groups] ▪ Suggest what Carrefour could have done instead (with the benefit of hindsight) Imperial College Business School Imperial means Intelligent Business 30 Let’s see what Carrefour had to say about strategic results: Claim 2019: ▪ Acceleration in sales growth to +3.1% (like-for-like sales vs. prior year) ▪ 2019 ROI expected to increase significantly to c.€2,090m Fact: in 2019, Carrefour sold 80% equity of Carrefour China to local retail conglomerate Suning.com at €620 million, marking the company's exit from China and ending the Tencent collaboration. As of January 2023, there was only one Carrefour-branded store (operated by Suning) remaining. In some ways a good strategy for Carrefour, as Covid-19 and eCommerce in China later destroyed the appeal of large-format stores. Claim 2020: “In the first half of 2020, Carrefour Group posted LFL sales growth 7.0% and a 29.1% increase in recurring operating income. These results have strengthened confidence in the success of the Carrefour 2022 transformation plan. The group is on track to reach its strategic objectives for 2022” Question: would Carrefour have achieved such results without the profitable “Covid-bump” in 2020? Imperial College Business School Sources: Carrefour, IDG Imperial means Intelligent Business 31 Growth in sales and margins from 2020 – success… Imperial College Business School Imperial means Intelligent Business 32 …or was it? Carrefour lost relative % share to two key rivals Grocery Market Share (%) of Key Players, France 2018-2020 (%) 23.0 E.Leclerc 22.7 22.5 Lidl Carrefour 22.0 +8% 21.5 21.5 21.1 21.0 20.5 20.4 20.1 20.0 -4% 19.6 19.5 6.5 6.4 6.0 6.0 +19% 5.5 5.4 5.0 AUGUST AUGUST AUGUST 2018 2019 2020 Source: Kantar Worldpanel via Statista Imperial College Business School Imperial means Intelligent Business 33 Immediate cost-cutting benefits, revenue benefited from a “Covid-bump” and on this basis were viewed positively ▪ What is the Strategy in simple terms? ▪ How do people in the organisation know that they are delivering successfully? ▪ Tough to cost-cut to competitive advantage in the mid-tier… ▪ Reinvestment of cost-cutting into online was limited – what was the “big play”? ▪ Where was the adoption of business model innovation? ▪ Click & Collect suits the company (“big box” hypermarket assets) but only some of the customers ▪ eCommerce = 6% of sales (2021) vs. 10% est. France avg. ▪ Price cuts have been reactive (imitation: discounters) ▪ Store managers given more autonomy in 2022 (imitation: Leclerc) Imperial College Business School Source: Carrefour at crossroads in battle to win back French shoppers | Financial Times (ft.com) Imperial means Intelligent Business 34 Carrefour’s 2022 Strategy disappointed many market analysts Carrefour’s 2022 Strategy summary of analyst comments: 1) Focus on food quality and limited eCommerce offer perceived to lag competitors; lacks price cut specifics 2) Insufficient investment to counter the direct eCommerce (Amazon) and discount threats (LeClerc; Aldi, Lidl) 3) A “catch up to the rest” strategy Imperial College Business School Source: http://www.carrefour.com/sites/default/files/cp_plan_de_transformation_23_01_2018_en_0.pdf Imperial means Intelligent Business 35 7) Strategic Choices in eCommerce Imperial College Business School Imperial means Intelligent Business 36 Pick-from-store with own-brand van delivery to the home was the default eCommerce grocery model from c.1995 Imperial College Business School Imperial means Intelligent Business 37 eCommerce trivia from my early consulting career What was the first UK grocery retailer to set up a dedicated eCommerce “ The first UK supermarket to trial the concept of a specific store for online goods was Sainsbury's, which operated a distribution centre at Park Royal in London during the early 2000s, but the retailer closed the outlet because of a low order quantity.” ” warehouse? Imperial College Business School Imperial means Intelligent Business 38 Ocado’s multi-decade fixed cost investment https://www.ocadogroup.com/solutions/online-grocery/ Imperial College Business School Imperial means Intelligent Business 39 What is the average UK grocery Operating Margin (%) 15%? 12%? 10%? 7%? 3% 5%? 4%? For a £50bn revenue retailer, a 3% margin 3%? would represent a £1.5bn profit 2%? Important Note: Operating Margin is calculated from Pre-Tax Operating Profit. After taxes, Net Profit will be lower. Imperial College Business School Imperial means Intelligent Business 40 Operating Margins by retailer: Tesco (2024) 4.2% Aldi (2023) 1.2% Carrefour (2023) 2.2% (included for comparison) Ocado (2023) -9.42% Imperial College Business School Imperial means Intelligent Business 41 Ocado’s only (recent) profitable year was in peak Covid*! Lock Down! Source: The Guardian Imperial College Business School *According to Ocado’s website, 2024 is looking very positive, however! Prior to that it was a decade ago (2014). Imperial means Intelligent Business 42 Instacart: the “Uber of grocery shopping” in the US (No stock, no stores, no warehouse – just “contractors” in a decentralised model) Imperial College Business School Sources: https://www.youtube.com/watch?v=PksAfCz6akw&feature=youtu.be and Adam Alter, NYU Stern Imperial means Intelligent Business 43 A strategic choice for a retailer – the business model Variable Cost Fixed Cost ▪ Local area served by “pick-from-store” ▪ Dedicated sites on a large scale ▪ Human workforce ▪ Highly automated robot operations ▪ Product range limited to store stock ▪ Huge range of products available Examples: Examples: Either model can be operated in-house or partnered (or both!) Why might one retailer favour one model over the the other? Consider the pros/cons of both models and the 3Cs context. Imperial College Business School Imperial means Intelligent Business 44 Retailers have struggled with omnichannel grocery profitability Imperial College Business School Source: www.wired.co.uk/article/supermarket-future-alibaba Imperial means Intelligent Business 45 It took over ten years for our strategy to be proven right! In 2013, Aldi was growing at >12% per year. Every year. Through new store openings. Hypotheses: ▪ an eCommerce strategy would divert critical resources (capital) ▪ there was insufficient space to scale up click and collect sufficiently ▪ home delivery would subsidise the same people that would visit the store ▪ shoppers would buy small baskets, generating insufficient profits ▪ shoppers valued the impulse buys from in-store middle aisle offer (WIGIG) Covid came along, and eCommerce was embraced in 2020: ▪ via Deliveroo partnership for home delivery (ended 2022) ▪ via Click and Collect from Aldi stores (ended 2024) Aldi became the #4 grocer in the UK in 2022. Aldi is growing its revenues by over 17% year-on-year Primarily through new store openings. Imperial College Business School Source: www.wired.co.uk/article/supermarket-future-alibaba Imperial means Intelligent Business 46 Good Strategy or Bad Strategy? ▪ Inspired by success of Deliveroo/Uber Eats delivery partnerships with discount & convenience grocers (e.g. CoOp, Aldi) ▪ Aims to deliver within one hour from point of order completion ▪ Trial was initially in London 2021 ▪ Smaller regional warehouses ▪ Continues the M&S food partnership (as well as Ocado own brand) Press release - Ocado Zoom launches trial of electric assisted and pedal-powered vehicles | Ocado Retail Imperial College Business School Imperial means Intelligent Business 47 Which grocery delivery companies were VC investors piling into during 2021? Imperial College Business School Imperial means Intelligent Business 48  What business model(s) do you think these entrants adopted? Why? Imperial College Business School Imperial means Intelligent Business 49 My 7Tests of Strategy – once the draft document emerges Have we identified the key challenge(s) to solve with this strategy, and is the overall resolution 1 coherent across all its constituent parts? 2 Are we targeting the right markets and categories, with future growth potential ("where to play")? 3 Do we have a highly differentiated offer or a cost leadership position ("how to win") that will achieve competitive advantage in our chosen fields of play? What business model(s) will deliver the strategy and what resources will we require: assets 4 (people and capital), capabilities (skills, knowledge), systems (structures, culture and technology)? Note: If undertaking Corporate Strategy, add: "Do we have the right portfolio of businesses?" 5 Are we exploiting external resources (suppliers and partners) to their full potential? 6 Is the strategy sufficiently flexible, and if not, do we believe the benefits outweigh the risks? 7 Are we realistic about the cost to change, and the time it will take? Imperial College Business School Sources: adapted from many inputs, including Richard Rumelt, Roger Martin, Goutam Challagalla (IMD), Chris Bradley (McKinsey & Co.) Imperial means Intelligent Business 50 The importance of choice in formulating strategy: “You need to be uncomfortable and apprehensive: True strategy is about placing bets and making hard choices” Roger Martin Imperial College Business School Imperial means Intelligent Business 51 Recommended readings: The Crux. Richard Rumelt or Good Strategy, Bad Strategy: the difference and why it matters. Richard Rumelt Playing to Win: How Strategy Really Works. Roger Martin & A.G. Lafley Contemporary Strategy Analysis. R.M. Grant A Plan is Not a Strategy. Roger Martin https://www.youtube.com/watch?v=iuYlGRnC7J8 Follow Roger Martin's Playing to Win blog series on Medium Follow Scott Galloway’s blog series No Mercy No Malice Imperial College Business School Imperial means Intelligent Business 52  SEE YOU ON FRIDAY! We will be joined by MSc Management alumnus David Zuo, Senior Product Manager at Epic Games, be ready to talk Fortnite, AI and business models! Imperial College Business School Imperial means Intelligent Business 53