Innovation and Strategy Formulation PRELIM MATERIALS PDF

SCHOOL OF BUSINESS AND MANAGEMENT Accountancy and Finance Department COURSE NUMBER ACCTG 705 COURSE TITLE INNOVATION AND STRATEGY FORMULATION...

SCHOOL OF BUSINESS AND MANAGEMENT Accountancy and Finance Department COURSE NUMBER ACCTG 705 COURSE TITLE INNOVATION AND STRATEGY FORMULATION PRELIM MATERIALS PART 2 Introducing new products and services Products Launch: 8 STEPS 1. Goal 2. Social media can help, but not necessary 3. Building email list 4. Take and share photos 5. Have other people help 6. Good product launch that gets to talk about 7. Talking and promoting 8. Use product launch formula and launch Product Launch Part II 1. Plan early Branding Logo Design language 2. Pricing 3. Marketing 4. Advertising 5. Sales and distribution 6. Customer service 7. Web social media Key Note: Communicate internally Driving intra-organizational innovation Building an innovative organization: KEY ELEMENTS shared vision and commitment to innovation innovation leadership appropriate structure key individuals effective team-working high involvement innovation creative climate innovative culture Technology and Innovation Strategy Business Model Innovation 1. Innovation stems from ideas nobody has before 2. Big success requires big resources 3. Innovation on fascinating technologies Steps to create your own business model 1. Initiation 2. Ideation 3. Integration 4. Implementation Basis on your business model What Who Value How Lesson II: STRATEGY FORMULATION The Nature of Strategic Management Strategic Management It means using and organizing a firm’s resources to make sure that its objectives and goals are met. involves the utilization or planned allocation of resources to implement major initiatives taken by executives on behalf of stakeholders to improve performance of firms in an environment. a process that involves building a careful understanding of how the world is changing as well as a knowledge of how those changes might affect a particular firm. setting goals, planning how to reach them, organizing your firm to maximize opportunity is the key when starting business Strategies Strategies are developed and used to make sure the business can be the very best it can be. is a complex concept that involves many different processes and activities within an organization. involves goals and objectives that an organization needs to achieve to be successful in the marketplace it provides the direction that an organization wants to move toward to be more successful. The Business Vision and Mission, Objectives, Goals Mission statement why does the company exist? what is the reason for organization’s existence? well-written mission statements effectively capture an organization’s identity and provide answers to the fundamental question – “who are we? it is an umbrella under which all strategic management functions occur. Vision Statement what do we want to achieve in the future? who do we want to become? Warren Bennis “Vision animates, inspires, transforms purpose into action.” vision is one key tool available to executives to inspires the people in an organization.  Goals define what you want to achieve target areas 1. growth 2. profitability 3. retention 4. efficiency 5. customer service usually, goals expressed as a percentage example: o increase revenue by 10% and decrease overhead by 5% Objectives actions to achieve the goals example: o acquiring 5 new customer every month o find cheaper office premises o outsourcing activities Value Statement how are we going to behave and what do we believe in? defines values constrains how the organization pursue its goals important for new recruits why are values statement important for a firm? o they demonstrate to their employees and other stakeholders the important principles that the organization lives by what do values statement have to do with strategic management? o an organization should seriously consider their values statement when developing its strategies and goals. If a potential strategy conflicts with one of its values, they need to drop or modify that strategy to ensure the company conforms to their corporate values as they move their organization forward. The External Assessment Porter’s Five Forces Model 1. Threat of Potential New Entrants new competitors barriers to entry o economies of scale - as the number of customers, a firm serves increases, the cost of serving each customer tends to decrease. o product differentiation - a new entrant would struggle to match the differentiation that years of advertising have created for various brands. o cost entry o switching cost firms that are not currently considered viable competitors in the industry but that may become viable competitors in the future. new entrants tend to reduce the profit potential of an industry by increasing its competitiveness 2. Bargaining Power of Supplier suppliers provide inputs that the firms in an industry need to create the goods and services that they in turn sell to their buyers. Power of Suppliers: o powerful if it is dominated by a new company or is more concentrated than the industry that is supplies o powerful if there is no substitute for what the supplier group provides o powerful if industry members rely heavily on suppliers to be profitable o if industry members face high costs when changing suppliers o if their products are differentiated o if it can credibly threaten to compete in the industry if motivated. 3. Threat of Substitutes substitutes are offerings that differ from the goods and services provided by the competitors in an industry but that fill similar needs to what the industry offers. How strong of a threat substitute are, depends on how effective substitutes are in serving an industry’s customers.  4. Bargaining Power of Buyers Power of Buyers o when there are relatively few buyers compared to the number of firms supplying the industry o when the industry’s goods or services are standardized or undifferentiated o when they face little or no switching costs in changing vendors o when the good or service purchased by the buyers represents a high percentage of the buyer’s costs, encouraging ongoing searches for lower- priced suppliers. o if it can credibly threaten to compete in the industry if motivated o when the good or service by buyer group is of limited importance to the quality or price of the buyer’s offerings. 5. Rivalry among competitors a. how many competitors b. product differentiation c. switching cost competitors are numerous or are roughly equal in size and power the growth rate of the industry is slow competitors are not differentiated from each other fixed costs in the industry are high exit barriers are high excess capacity exists in the industry capacity must be expanded in large increments the product is perishable ✓ Understanding the intensity of rivalry among an industry’s competitors is important because the degree of intensity helps shape the industry’s profit potential. External Factor Evaluation Matrix (EFE) Matrix it evaluates the external position of the organization or its strategic business intent it is a strategy tool that is used to examine a company’s external environment and to identify the available opportunities and threats  EFE is a matrix that companies use to identify the key external opportunities and threats that are affecting or may affect their specific company How the EFE works? o we get these factors from analyzing the external environment of the company o each key factor should be assigned a weight ranging from 0.0 (low importance) to 1.0 (high importance) o the sum of all the weights to 1.0 Competitive Profile Matrix (CPM) identifies a firm’s major competitors and their particular strengths and weaknesses in relation to a sample firm’s strategic position. The Internal Assessment Internal Factor Evaluation Matrix (IFE) IFE Matrix evaluates the internal position of the organization or its strategic intent Strategies In Action Establish Long-term objectives Strategies: Definition represent the actions to be taken to accomplish long-term objectives the alternative strategies that an enterprise could pursue Categorized into four: 1. Integration ▪ also called vertical integration ▪ it allows a firm to gain control over distributors, suppliers, and/or competitors a. forward integration - involved gaining ownership increase control over distributors b. backward integration - seeking ownership increase control of a firm suppliers - appropriate when a firm’s current suppliers are unreliable, too costly or cannot meet the firm’s needs. c. horizontal integration - seeking ownership increase control over competitors 2. Intensive  require intensive efforts if a firm’s competitive position with existing products is to improve. a. market penetration - seek to increase present products in present markets b. market development - introducing present products or services into new geographic areas c. product development - increase sales by improving products and services 3. Diversification a. related diversification - when value chains possess competitively valuable, cross-business and strategic fits b. unrelated diversification - value chains are dissimilar, no competitively valuable, business relationship exist 4. Defensive a. retrenchment - turn-around - occurs when organization regroups cost and assets reduction to reverse declining sales and profits b. divestiture - occurs when sell a division or part of an organization - often used to raise capital for strategic acquisitions or investments c. liquidation - occurs when you sell all of a company’s assets for their tangible worth - a recognition of defeat Michael Porter’s Five Generic Strategies strategies allow organizations to gain competitive advantage a. Cost Leadership – Low cost ▪ offers products or service to a wide range of customers at the lowest price available in the market. b. Cost Leadership – Best Value ▪ offers products or service to a wide range of customers at the best price-value available on the market c. Differentiation ▪ unique and directed at consumers who are relatively price- insensitive d. Focus – Low cost  ▪ a strategy that offers products and services to a small range of customer at the lowest price available on the market e. Focus – Best Value ▪ a strategy that offers products and services to a small range of customer at the best price value available on the market Means for Achieving Strategies 1. Cooperation among competitors 2. Joint venture/partnering two or more companies form a temporary partnership for the purpose of capitalizing opportunity 3. First mover advantages benefits achieve by entering a new market or developing a new product 4. Outsourcing and Reshoring growing new business involves companies taking over the functional operations such as: a. human resources b. information system c. payroll d. accounting e. customer service f. marketing Nature of Long-Term Objectives - objective should be: quantitative measurable realistic understandable challenging hierarchical obtainable congruent among organizational units o provide direction o aid in evaluation o establish priorities o reduce uncertainty o minimize conflicts o aid both the allocation of resources and the design of jobs STRATEGY ANALYSIS AND CHOICE SWOT ANALYSIS IN PRACTICE (STARBUCKS) Strength o consistent with differentiation strategy o example Starbucks: o strong brand recognition o clients love the atmosphere in Starbucks o Starbucks is present all over the world o superb supply chain management Weaknesses o product is not customized to local tastes o not easily affordable in all countries o high employee turnover Opportunities o easy access to new countries o agreements with movie producers Threats o Saturation of the US market o healthier lifestyle treats SWOT ANALYSIS (TESLA) Strengths o the most recognized electric car producer in the world o innovator’s spirit o first-mover in the industry o originality o aesthetically pleasing design o positive pleasing design o positive customer experience Weaknesses o negative cash flows are a problem Opportunities o Economies of scale ▪ increasing volumes of production and hence lowering the cost of production o Economies of scope ▪ producing different types of vehicles will probably be more efficient when the range of products Tesla offers  expands and R&D costs can be shared between different models o Factory Automation Threat SPACE ANALYSIS OR SPACE MATRIX SPACE stands for Strategic Position and Action Evaluation Helps us identify internal and external factors that affect our business where do we stand today and in what direction we’re headed? Plotted across an X axis and Y axis FOUR QUADRANTS – STRATEGIC POSITIONS o Quadrants 1 (top right): Aggressive position - your industry is attractive and stable, and you have competitive advantage which you must strive to retain. Threat of new entrants’ present o Quadrants 2 (top left): Conservative position - the industry is potentially stable, but the growth rate is low. The company however is financially stable o Quadrants 3 (bottom left): Defensive position - the industry is unattractive, your company lacks financial strength and competitive products. o Quadrants 4 (bottom right): Competitive position - the industry here is attractive and relatively unstable. The company here has some competitive advantage. Focus on financial stability. BCG MATRIX is a method of analyzing a company’s portfolio of products to determine where each product is in its life cycle. Internal and External (IE) Matrix – Stage 1 is a strategic management tool based on the analysis of internal and external business factors based on two key dimensions 1. The IFE total weighted scores on the X-axis 2. The EFE total weighted scores on the Y-axis  IE Matrix can be divided into three major regions that have different implications o First region (Cells, I, II or IV): Grow and Build strategy - it involves strategies that focus on Intensive (market penetration, market development, and product development) or integrative (backward integration, forward integration, and horizontal integration. o Second region (Cell, III, V, VII): Hold and Maintain Strategy - strategies should focus on market penetration and product development o Third Region (Cells VI, VIII, IX): Harvest or Divest Strategy - strategies should focus on retrenchment and divestiture. Differences between BCG and IE Matrix the axes are different the IE requires more information about the division than the BCG Matrix Strategic implications of each matrix are different Internal and External Matrix – Stage 2: The matching Stage IE is strategic management tool which is used to analyzed the current position of the division and suggest the strategy for the future for the best result. The Grand Strategy Matrix a popular tool for formulating alternative strategies Based on two evaluative dimensions 1. Competitive position 2. Market (industry) growth appropriate strategies for an organization to consider are listed in sequential order of attractiveness in each quadrant of the Grand Strategy Matrix o Quadrant 1 - market development - market penetration - product development - forward integration - backward integration - horizontal integration - related diversification o Quadrant II - market development - market penetration - product development  - horizontal integration - divestiture - liquidation o Quadrant III - retrenchment - related diversification - unrelated diversification - divestiture - liquidation o Quadrant IV - related diversification - unrelated diversification - joint ventures The Quantitative Strategic Planning Matrix (QSPM) there is only one analytical technique in the literature designed to determine the relative attractiveness of feasible alternative actions. Six steps required to develop a QSPM o make a list of the firm’s key external opportunities and threats and internal strengths and weaknesses in the left column of the QSPM o Assign weights to each key external and internal factor. These weights are identical to those in the EFE Matrix and IFE Matrix o examine stage 2 (matching matrices, and identify alternatives strategies that the organization should consider implementing o determine the attractiveness scores (AS) defined as numerical values that indicate the relative attractiveness of each strategy considering a single external or internal factor. o compute the total attractiveness scores. Total Attractiveness Scores (TAS) are defined as the product of multiplying the weights (STEP 2) by the AS (STEP 4) in each row. o compute the sum TAS. Add TAS in each strategy column of the QSPM. The Sum Total Attractiveness Scores (STAS) reveal which strategy is most attractive in each set of alternatives. Positive Features of the QSPM o can be examined sequentially or simultaneously o requires strategies to integrate pertinent external and internal factors into the decision process. Limitations Features of the QSPM o It always requires informed judgements regarding AS scores, but quantification is helpful throughout the strategic planning process to minimize halo error and various biases. o It can be only as good as the prerequisite information and matching analyses on which it is based.