4 Quiz: Pass/Fail = 50%Which of the following are not elements of strategy:A) ResourcesB) GoalsC) PlansD) All are elements of strategy2. Intuition is:A) Most reliable when based on long experienceB) Can not be used with rigorous analysisC) Never wrongD) Useless when thinking about strategy3. Business goals and priorities are theoretically decided by:A) Partner ownersB) Proprietor ownersC) ShareholdersD) Any of the above, depending on the structure of the business4. Which is not one of Michael Porter’s three generic strategies?A) Niche or Focus strategyB) Peaceful coexistenceC) DifferentiationD) Cost leadership5. According to Booz and Company, successful innovation is most likely to involve A) Substantial research and development expensesB) Well paid and intelligent managersC) Engaging customers to shape innovationD) Consulting firms6. When a business owner or partner has unlimited liabilityA) The owner or partner’s personal assets may be used to settle claims against the businessB) The owner can only lose the amount invested in the businessC) Owner’s or partners may lose an unlimited amount of moneyD) Both A and C.
5 DefinitionsUnlimited liability: personal assets can be taken to pay losses or debts of the business.Limited liability: financial liability of owners is limited to amount of investment.Sole proprietorship: business owned and operated by one personOwner has unlimited liability for business losses and debtsIssue of business continuity makes getting loans difficultPartnership: proportional sharing of profits and losses. Unlimited liability, except in the case of a limited partner.Corporation: organization that acts and has rights of a person. Shareholders and officers are protected from personal claims in most cases.Stock: a security that signifies ownership in a corporation, and a claim on earnings and assets. Liability is limited. In event of bankruptcy, shareholders have lowest claim on assets. Note: “publicly traded”Venture capital (VC): money provided to a start up or pre-IPO business in the form of a high rate loan or an investment in the business.IPO (initial public offering): first time sale of stock.Privately owned/publicly owned: company that does not/does have shares traded on a stock exchange. Note liquidity and reporting aspects of public ownership.
6 Role of Strategic Market Management Marketing is in the best position to understand customers, competitors, environments, and trendsMarketing has lead role in understanding brand portfolio, distribution channels, and new product developmentMarketing ought to be voice of the customer within the organizationBusiness strategy makes no sense without marketingMarketing strategy depends on business competenciesThe marketing function often spans all areas and functions of the organization
7 Booz & Co. R&D Survey 2011 http://www. booz Study of 1,000 public companies that spent the most on research and development in 2010Total for the 1,000 $550 bbComputing and electronics 28% of all R&D expenditureHealth care (pharmaceuticals) 22%Automotive 15% of all R&D expendituresChina and India HQ companies = 2% of total R & DSpending doesn’t correlate successful innovation“There is no statistically significant relationship between financial performance and innovation spending, in terms of either total R&D dollars or R&D as a percentage of revenues.” according to Booz & CoMost innovative firms were Apple, Google, and 3MSamsung and Toyota were big spenders and innovativeThe key finding: culture is key to innovation successAccording to 3M: “Our goal is to get the voice of the customer all the way back to the basic research level and the product development level, to make sure our technical people see how their technologies work in various market conditions.”
8 Booz & Co. R&D Survey 2011 http://www. booz Need Seekers, Market Readers and Technology DriversNeed Seekers consistently strive to be first movers and proactively engage customers to shape new innovations, and align innovation and business strategies (3M)Market Readers adopt a second mover strategy and emphasize incremental change (Samsung)Technology Drivers stress technology achievement and both incremental and breakthrough change (Google)If you align innovation strategy and culture to your business model, build the right capabilities, and execute, you can prevail no matter which strategy you followThere may be no more critical source of business success or failure than a company’s culture. It is more important than strategy and leadership. According to Booz & Co.:Companies whose strategic goals are clear, and whose cultures strongly support those goals, possess a huge advantage“Connect with the customer, find out their articulated and unarticulated needs, and then determine the capability at 3M that can be developed across the company that could solve that customer’s problem in a unique, proprietary, and sustainable way. Our businesses are all interdependent and collaborative.”
9 Booz & Co. R&D Survey – 2011*Most often cited strategic goals of innovation are:Superior product performanceSuperior product qualityCultural attributes:Strong identification with the customerPride in productsNeed seekers: Gaining insights on customers needs is the responsibility of all customer-facing employees.Silicon Valley companies are almost twice as likely as average companies to have capabilities that provide a superior understanding of the stated and unstated needs of their end customersTechnological advances that lead to products and services that gain traction in the marketplace come through superior insight into customers, as well as the development of practical value propositions that will win those customers business6/10 of the most innovative were need seekers2/10 of the biggest spenders were need seekers*http://www.booz.com/media/uploads/BoozCo-Global-Innovation Culture-Key.pdf
10 Booz & Co. R&D Survey Top 12 R&D in 2010 Excluding Health Rank listRank allCompanyR&D $BB% salesRegion14Microsoft8.714US26Toyota8.5Asia37Samsung7.98Nokia7.8Europe59General Motors7.011Intel6.61512Panasonic6.1VWIBM6.01017Honda5.719Cisco5.31320Siemens5.2
11 Booz & Co. R&D Survey 2011 Innovation As part of this year’s study, Booz & Co. surveyed almost 600 innovation leaders in companies around the world, large and small, in every major industry sector.As noted, almost half of the companies reported inadequate strategic alignment and poor cultural support for their innovation strategies.Possibly even more surprising, nearly 20 percent of companies said they didn’t have a well defined innovation strategy at all.
12 Booz & Co. R&D Survey Top 10 Innovative Companies in 2010 RankCompanyR&D $BB% salesSpend rank1Apple$1.82.7702Google$3.812.83433M$1.45.4864GE$3.92.6325Microsoft$14.014.06IBM$6.06.0157Samsung$5.95.98P&G$2.52.5619Toyota3.910Facebookna
13 Strategy Defined Many definitions of business strategy Johnson and Scholes: "Strategy is the direction and scope of an organization over the long-term: which achieves advantage for the organization through its configuration of resources within a challenging environment, to meet the needs of markets and to fulfill stakeholder expectations".Alfred Chandler's definition: "determination of the basic long-term goals and objectives of an enterprise, and the adoption of courses of action and the allocation of resources necessary for carrying out these goals."Business dictionary:1. A method or plan chosen to bring about a desired future, such as achievement of a goal or solution to a problem.2. The art and science of planning and marshalling resources for their most efficient and effective use. The term is derived from the Greek word for leading an army.Harvard Business School: You can't develop a strategy for your business without first thinking through mission and goals. Likewise, you can't develop a coherent strategy in isolation from decisions concerning the network of partners with whom the business will co-create and capture value. By focusing on all four elements, and sequencing them in the right way, the process of crafting strategy can be demystifiedAll have in commonGoalsResourcesPlans
15 Strategy or Strategic Planning Strategic planning is a process typically done in large companies when they perceive the need to changeWe will focus more on strategy, or how to achieve long range goalsStrategy is often thought of as ‘how to achieve competitive advantage’But many businesses simply want to co-existAll businesses need to have goals and plans
16 Sole Proprietorships Need Strategy Example sidewalk vendor in BangkokRents space in front of a businessBuys food for cooking and resaleHas a helper, or twoOwns some basic equipment, purchased with family fundsSkilled cook, good location, good price = many customersBut:Business and family funds are comingledRevenue from business goes to family consumptionExpenses are ‘lumpy’ (due only at certain times)Problem arises when bills for rent or supplies are due, when equipment needs maintenance or replacement, or at paydayNeed to understand resources of the business and marketingIf co-existence is the aim, still have “5 Forces” long term issues
18 Strategy for Whom? We will focus on strategy for owners This might differ from strategy of managersIllustration from banking:Think of bank loan marketingEasy to make loans that will go bad in two yearsShort term profit in the loans, losses appear laterLending officer gets bonus based on his salesBut he works against owner interestsThink of bank customer serviceBranch manager can show bigger profit by cutting staffCustomers wait, or face surly overworked staffIf the bank had brand that said ‘great service’ the brand suffersHow would an owner, or management that works for owners prevent this?In general, managers often have incentive to achieve short term profit by wasting brand equity where owners want to preserve B/E
19 Business Purpose Why does a business exist? In theory, a public company exists to benefit shareholder ‘owners’A partnership or sole proprietorship exists to benefit owners (and in return they have unlimited risk)What happens when unlimited risk becomes limited?Company strategy may change, actions may become more riskyExample of investment banking firms in USA, 1999Some early investors want to ‘cash out’ by selling a companyManagement and owners of public companies may have different interestsManagers can employ strategies that further manager interestManagers might be most interested in protecting their positionsFight ‘hostile’ merger or acquisition that is in interest of shareholdersJeff Bezos owns 19% of all AMZN stock ($20BB). Which type of strategy would AMZN use?
20 Apple and Amazon Two of the Three Generic Strategies. Michael Porter wrote about three basic strategies for competitive advantageCost leadershipDifferentiationNiche (or Focus) strategyAmazon’s strategy is cost leadershipApple’s strategy is differentiationEach has profoundly different approachesSee: “So Amazon unnerved investors” Word documentDifferences in approach to marketsDifferences in how resources are deployedYet each creates barriers to entryBusinesses may use niche strategy to compete with giants
21 Integrating Intuition & Analysis The strategic management process attempts to organize quantitative and qualitative information under conditions of uncertainty (Fred David)Strategy can be a formal planning process or informalIntuition is based on:Past experiencesJudgmentFeelings (often the ego leads to poor judgment)Intuition is useful for decision making in conditions of:Great uncertaintyLittle precedentHighly interrelated variablesSeveral plausible alternativesIntuition and analysis complement each other
22 There is no Substitute for Knowing the Business Maurice Greenberg CEO, AIG, Inc.,AIG’s legendary risk management was mostly in the head of one man: Hank GreenbergHe would get raw data. He made assessments.AIG became an extremely complex organization with hundreds of subsidiariesWhat happened when Maurice Greenberg left AIG?The new CEO did not understand risks taken by distant units. The culture did not support succession.AIG Collapse (word document)
23 Structure of a Global Company ParentProduct line A(subsidiary)Country ACountry BCountry CProduct C
24 How are Resources Allocated? Budgets are typically organized annuallyCan be thought of as communication documentsPriorities are arranged within the framework of a strategic planResources are identifiedManagement allocates resources according to prioritiesMechanisms are set up for monitoring actual v budgetMost companies have quarterly or rolling ‘reforecasts’How are budget priorities established?A formal strategic plan is used to set global priorities, in some casesResources allocated by negotiation at the highest levelsDetailed assessment of strategic variables may occur within budget processStrategy is created or modified with information from all areasOften begin with ‘wish lists’ at lowest levels of hierarchyEnds with explicit or implicit broad company strategyMost organizations have flexible budgets – can redirect resources
25 From “Only the Paranoid Survive” Andy Grove We live in an age in which the pace of technological change is pulsating ever faster, causing waves that spread outward toward all industries. This increased rate of change will have an impact on you, no matter what you do for a living. It will bring new competition from new ways of doing things, from corners that you don't expect.If you run a business, you must recognize that no amount of formal planning can anticipate such changes (strategic inflection points).Does that mean you shouldn't plan? Not at all. You need to plan the way a fire department plans: It cannot anticipate where the next fire will be, so it has to shape an energetic and efficient team that is capable of responding to the unanticipated as well as to any ordinary event.
26 Course CorrectionOrganizations typically review budget variances monthlyPeriodic re-forecasts (streamlined budget exercises) might be supplementedWhen variances point to unforeseen issuesWhen new opportunities or threats ariseHow are these opportunities or threats discoveredMany times through variance analysis (for example sales versus expected)Other times from external sourcesWe will discuss innovation at length laterCourse corrections or resetting strategic priorities might occur outside of normal planning cyclesOften found in conjunction with review of quarterly results (in the case of public companies)
27 Why do thriving small businesses fail? Often they lack information about their resourcesFormal bookkeeping does not happen or is sloppyPersonal and business expenditures are mingledOr they under-estimate need for capitalRevenue and expenses have cyclesRevenues might spike before a holidayExpenses have cyclesPay employeesPay for materialsMonthly rents, etcFalse sense of wealth before expenses loom or failure to borrow before crisis (the worst time to borrow is during crisis)Without having a sense of future income and expenses, the owner or manager ‘misallocates’ resourcesTo survive, a business must be forward looking
28 Successful Businesses have Plans and Goals Bank lending facilities require long range plansVenture capitalists are demanding about strategy & calibration of plansWise investors look for goals and plansHow does a company plan to earn a profit (or generate capital)?When does a company plan to generate profit or pay back loans?Government demanded a strategic plan for automobile companies before injecting capital inSole proprietorships need to consider the future (money for college, legacy for children?) and how to get there
29 Eastman Kodak Company Background information Founded in 1880s, once an iconic US firmIn 1976 Kodak sold between 85-90% of all film and cameras in the USAFuji of Japan took market share in 1980s (economy segment)In 1994 Kodak 20th ranked US company by salesKodak spins off Eastman Chemical, now thrivingApple launched a digital camera made by KodakKodak stops selling film cameras in 2004, becomes biggest retailer of digital cameras in 2005Falls to 7th biggest digital camera retailer by 2010Declares bankruptcy in 2012
30 Eastman Kodak Company Transition from Film Gross margins in the film business estimated at 75%Compare with computers and peripherals at 33%George Eastman wanted ‘rapid succession of changes and improvements’Kodak had technological lead in film backed by patentsVertical integration and cost leadershipFilm sales immensely profitableDigital imaging a disruptive technologyKodak executives aware of digital camera trend from 1993*CEO Fisher from Motorola and Bell Labs hired 1993, a technologistResistance by customers (film development business)Resistance from investors (legacy business as ‘cash cow’)Company culture resistance (film business, not imaging)Public image of support for film business through 1990sCEOs aware of competitive environment, no barriers to entry in digital, lower marginsCollaboration with Canon in 2000 (professional segment)Collaboration with Fuji, HP, IBM, others to develop digital image storageBy late 1990s Kodak was leader in digital color management and electronic image sensors due to huge digital R&D effort**http://www.blackwellpublishing.com/grant/docs/06Kodak.pdf
31 Eastman Kodak Company What Went Wrong? Conflicts between film and digital began to ebb around 2005More collaborative cultureTen years elapsed since CEO Fisher began determined push to digitalLeader in digital sales in 2005Losing money on each cameraLegacy labor costs*Vertical integration impossible in digital business (JVs, alliances instead)Diminished film business (would have been used to subsidize transition)Tried to buy time by selling film in developing marketsBut Asian film sales dropped as rapidly as elsewhereFalls to seventh rank in digital camera sales in 2010Capable competitors Canon, Sony, Samsung, and Nikon in Asia and othersPace of change in digital camera business rapid and unpredictable, with rapidly declining pricesCould Kodak’s culture adapt to digital’s pace of change?Did they miss a product cycle in 2007?What happened in their R&D organization? Marketing?*Http://www.consultingcase101.com/kodak-to-improve-profit-margin-for-digital-cameras/
32 Objectives of Strategic Market Management (from McLoughlin p. 14) Precipitate consideration of strategic choicesAssess opportunities and threatsOrganizations fail because strategic decisions were made too lateHelp a business cope with changeForce a long range viewMake the resource allocation decisions explicitThese decisions are too often political or the result of inertiaPromising businesses may get too few resourcesAid strategic analysis and decision makingProvide a strategic management and control systemProvide both horizontal and vertical communication and coordination
33 The Strategy Planning Cycle Identify issues facing the firm (challenges, trends)Bring together people from all functional areasAdapt planning cycles to the businessDiffering regular intervalsTrends or events can trigger strategy reviewCreate a strategy performance systemProgress goals (milestones)End objectivesIdentify barriers and ways around barriers
35 What is a Business Strategy? The Product-Market Investment Strategy – Scope of the BusinessProducts offered, not offeredOften the most important strategic choiceA resource allocation decisionMarkets servedCompetition a business chooses to engage or avoidVertical integrationScope dynamicsProduct expansion (new products to existing markets)Market expansion (bring existing product to new markets)Diversification (Enter new product markets)Strategic investment choicesInvest to grow or enter new marketsInvest to maintain existing positionMinimize investment (milk the business)Liquidate or divest (get rid of) the businessAssets and Competencies (to achieve Strategic Competitive Advantage)Resources such as brands or customer base that is strong relative to competitorsCompetency: What does a business unit do well that has strategic importance?Avoidance of disadvantage might be enough3535
39 Criteria to Select Business Strategies Strategic Market Management 7th Edition – David AakerCriteria to Select Business StrategiesIs the ROI (return on investment) attractive?Is there a Sustainable Competitive Advantage?Exploit assets and competenciesNeutralize weaknessesWill the strategy have success in the future? (scenario testing – is it adaptable?)Is the strategy feasible (within the organization’s capabilities)?Does the strategy fit with the other strategies of the firm?PPT 1-39
40 Overview of Strategic Market Management External AnalysisCustomer AnalysisCompetitor AnalysisMarket/submarket AnalysisEnvironmental AnalysisInternal AnalysisPerformance AnalysisDeterminants of strategic optionsSWOT Strategic Analysis Outputs etcCreating, Adapting, and Implementing StrategyFigure 2.1PPT 1-40
41 Why Strategic Market Management? Strategic Market Management 7th Edition – David AakerWhy Strategic Market Management?Precipitate the consideration of strategic choices.Help a business cope with change.Force a long-range view.Make visible the resource allocation decision.Aid strategic analysis and decision making.Provide a strategic management and control system.Provide both horizontal and vertical communication and coordination systems.PPT 1-41
49 But: self interest and greed are distinct According to Fred David: “Strategic Management is Gaining and Maintaining Competitive Advantage”Competitive advantage is “Anything that a firm does especially well compared to rival firms”But: self interest and greed are distinctSelf interest often means helping othersGains from greed are usually short term
51 External Opportunities and Threats Analysis of TrendsSocial, Economic, DemographicCulturalPolitical, Legal, GovernmentalTechnologicalCompetitorsLarger companies may have people designated to monitor external threats and opportunitiesLobbying seeks to influence government