9 Strategy development
Chinese real estate bubble
- 70% of chinese wealth is in real estate - China lives in dictatorship, they are afraid the dictator will take away their wealth, so they bring it out of the country and and the second best option is buying a house --> reason for Chinese buying houses Ticking time bomb: The personal mortgage debt is really high --> not sustainable. Will the economy and houses prices continue the same rate? Once the price falls (your loan is more than your house value) you need to pay the bank more money back. E.g. in Spain, people left the key in the house and left. House belongs to the bank now, but they lost money and people don't have a house.
Strategic Alliances (External Growth)
- Companies turn to partners to co-operate in developing products or services. - Both of the parties gain advantages of such a collaboration. Motives for strategic Alliances: 1. Cost reduction 2. Improving customer offerings 3. Co-specialization 4. Learning
Preconditions for a Successful Strategic Alliance
- Contractual arrangement to distribute profit and costs, rights and duties - Good interpersonal cooperation, compatibility between the partners. - Bridging the gap between the cultures. - Performance expectations / clear goals, organizational rules and structure of leadership. - Simple and flexible structures. - Senior management support (of the partner company) (makes access to new network easier). - Trustworthiness through character (integrity, openness, discretion, calculable behavior, competent partnership). - Mutual respect
Strategic Alliances, advantages and disadvantages
- Difficult to find right partner (trust etc.)
Learning view (Mintzberg 1994)
- Emergent or adaptive process which is appropriate for businesses in rapidly changing sectors - The essence of the learning view: adaptation, reacting to unexpected events, experimenting with new ideas on the ground - Emergent strategies are those that result from actions taken one by one that converge in time in some sort of consistency pattern -> you planned but in the meantime you learned so you adopt because there are always unexpected events (new competitors, finance problem). A realizable or realised strategy evolves.
Feasibility Can a strategy be made to work in practice?
- Financial feasibility (cash flow or break even analysis) - Forecasting - Resource deployment
Hybrid Strategy (non Porter)
- Focusing on different segments - They have different strategies within each brand
D: Diversification (1/4)
- Horizontal Integration: Developing related or complementary activities. - Vertical Integration: Moving backwards or forwards into activities related to the organization's products or services. - Unrelated Diversification: Developing into new markets outside the present industry.
Types and Examples of Strategic Alliances
- Joint ventures: Cisalpino (joint venture of the SBB and Italian FS) - Network: One World, Star Alliance - Franchising: (Coca Cola), McDonalds - Licensing: Microsoft Software - Subcontracting: ZHAW Cafeteria, Cleaning Companies, temporary employment companies (Manpower, Adecco) - Co-production: Renault - Nissan / Fiat - Chrysler, two competitors producing together and have different brands - Sponsoring: FIFA, Olympics
Political view (Lindblom 1959)
- Like the learning view, the political view draws on the concept of bounded rationality and satisficing behavior (following the first viable option) - It is an iterative, incremental process, characterized by restricted analysis and bargaining between the players. - It is not a comprehensive, objective process but a limited comparison of options restricted to those that are politically acceptable and possible to implement. --> you have a bargaining, you look for a political accepted strategy. You need to adapt you the politically acceptable standard (you cannot change all your employees through robots)
Case study: frog group REPEAT
- Managing directors are responsible for positioning their business units in the market and against their competitors. They review the strategic with the team. - CEO served as CEO of competition before, he let them out of a strategic crisis thanks to his communication skills - Dr. Watkins worked internationally in consumer good companies - Company first cancels, then show cream, then car care products, then cleaning and care products for carpets, then bathroom and WC cleaners, they bought dry-cleaning retail - Scandal which was backed be the media: hazardous shoe spray --> product line recall - rumours of US investor taking over FROG holding AG - Ecoclean SWOT: - Strength: Experience, good structure, good inhouse developmnent, good image and good reputation --> high trust/ diversified/ CEO knows competition/ CFO has international knowledge --> good management that understands the market/ good financials --> they could get easily loans/ ecologic product - Weakness: not focused (dry-cleaning company that does not make money)/ falling shares --> less money and trust/ hazardous product --> company depends on these products/ bureaucracy for all the products/ difficult to manage a company like this/ there is a insider whistleblowers that talks to the press! - Opportunity: Demand for Ecoclean/ they dont depend on one market --> diversified/low share price --> other companies might buy FROG --> get liquidity/ retailer "might" recall product but he has not --> he is open for discussion - Threats: Media/ whistleblower/ --> reaction by the consumer, they might boycott --> destruction of image/ risky products/ low shares --> someone might buy company, what would buyer do with company/ state attorney could do an inquiry --> fines or persecution/ pay for health damage of affected people TOWS: SO: You can restructure the company and promote the Eco product/ find new solution for supplier or be your own supplier (retail or online) because you have good finance WO: To promote the new ecological product ST: Good communications skills of CEO! --> to regain trust, apologies WT: you could offer payment for people with health issue/ sign a insurance police on liability (insurance pays on fine)/ minimise hazardous material --> find the strategic way to go forward
A: Existing Markets and Products
- Market penetration: To increase the market share, (easier in a growing than in a mature market) --> could be achieved by reducing price (Ryanair), increasing advertising (GEOX) or improving distribution (Amazon). - Consolidation: 1. to protect the company's share in existing market, 2. in growing market through improving efficiency (AMD) and / or service to retain customers (DHL) 3. in declining markets by acquiring other companies (Microsoft - Nokia) or demerger (Daimler - Chrysler). - Withdrawal: If unable to match rivals' abilities (IBM (could not compete anymore and sold the hardware business to Lenovo and are specializing on other things) - LENOVO)
C: Market Development
- New Segments: Convincing new groups of customers, by age, income, lifestyle (P&G targets poorer customers) - New Territories: From local to national or international - New Uses: e. g. lightweight material developed for use in spacecraft is also used in manufacture of golf clubs - With New Capabilities: e.g. Internet Shopping
Acceptability To which extent is the performance outcome of a chosen strategy in line with the expectations of the stakeholders? Will they embrace it?
- Return (deals with the benefits expected by the stakeholders (financial and non- financial: e.g. shareholders would expect the increase of their wealth, employees would expect improvement in their careers and customers would expect better value for money). - Risk (deals with the probability and consequences of failure of a strategy - financial and non-financialwhat-if-analysis). - Stakeholder reactions (Shareholders could oppose the issuing of new shares, employees and unions could oppose outsourcing for fear of losing their jobs, customers could have concerns over a merger with regards to quality and supportstakeholder mapping).
Michael Porter: What strategy is
- Separate strategy from the other issues - If you define a step of a plan as strategy it won't work - How are going to be unique etc. is a strategy
Strategy at Corporate Level
- The strategy at the corporate level
Strategic management
- adapt the organization to its business environment - provides direction - involves strategy formation (content) and strategy implementation (process) - partially planned and partially unplanned - done on several levels: 1. overall corporate strategy 2. individual business strategies. - conceptual and analytical thought processes - is fluid and complex --> unstructured non-repetitive responses
Strategy at Functional Level
- level of the operating divisions and departments - The strategic issue at this level are related to business processes and value chain - Functional level strategies in R&D, manufacturing, marketing, human resources and finance involve the development and coordination of resources through which business unit level strategies can be executed efficiently and effectively.
Directions Through Ansoff Matrix
- summarizes the possible directions of a strategic development Strategy can aim for: - Growth: Expanding the number of products and entering new markets. - Stability: Remaining with the same products in the same market / customer segments. - Renewal: Leaving some markets followed by entry into others. look at graphic A: Market Penetration Consolidation Withdrawal B: Product / Service Development C: Market Development - New territories - New segments - New uses D: Diversification - Horizontal - Vertical - Unrelated
Planning view (Anstoff 1965):
- systematic process, following prescribed sequences of steps and makes extensive use of analytical tools and techniques - strategic decision requires an explicit and formalized approach - Events and facts can be expressed or observed objectively and people respond rationally to information - Developed during a period of stability for centralized bureaucracy --> you plan a strategy/ plan, then you implement it and in the end you evaluate it
Understanding goals
- the meaning of strategy - the connection between a firm's strategy and its valuation - the three perspectives on the strategic processes - the TOWS - Analysis - the strategic directions according to Ansoff - the strategic directions according to Porter - the different methods of strategy development - the three success criteria of strategic options
Strategy development
- to bring business idea successfully to the market - to reach the goals a plan of action must the designs - we need to succeed mainly against (potential competitors) - we need to think in advance
Why do women and men differently?
- women more left - men more right - A big topic is abortion or women's health - Americans often vote the candidate on his view on abortion
Strategy derives from...
- word strategy comes from the greek word for general, the so-called strategos, who guides an army, the so-called stratos. - How a battle is fought is a matter of tactics; the terms that it is fought on and whether it should be fought at all is a matter of strategy.
TOWS
--> What comes out of SWOT hence, you first do the SWOT analysis to do the TOWS analysis Threats Opportunities Weaknesses Strengths
Direction Through SWOT & TOWS-Analyses
1. Conduct SWOT -Analysis 2. Develop and evaluate with the output strategic alternatives, to make the most of internal strengths and external opportunities 3. The strategic recommendations result from the TOWS - Analysis. Look at graphic - SO: use strength to take advantage of opportunities ST: use strength to avoid threats - WO: take advantage of opportunities by overcoming weaknesses - WT: minimize weaknesses and avoid threats --> find the strategic way to go forward
Company Examples for the Three Generic Strategies
1. Cost leadership: Lidle, Dacia --> you need high market share, you can only be cost leader if you sell a lot 2. Differentation: Apple, Miele 3. Focus: Rolles Royces, Volg (people in country site), Iceland (only sells frozen goods)
5 P's of Strategy (Mintzberg 1987)
1. Plan: Strategy developed in advance and with a Purpose: PESTEL, SWOT, Brainstorming, Practical Business Planning, Project Management 2. Ploy: Outsmarting Competitors: Impact and scenario analysis 3. Pattern: Learn from the past: Pattern of action creating a strategic advantage: USP analysis, Core Competence Analysis 4. Position: Position in the marketplace: Competitive advantage analysis, SWOT, PESTEL, Porter's five forces, Core Competence VRIO, USP analysis 5. Perspective: Substantial influence of organized
Three Perspectives on the Strategy Process
1. Planning View 2. Learning View 3. Political View
Feasibility Some important questions in reference to resource deployment:
1. Staying in business 2. Competing successfully
The Three Generic Strategies of Porter
1: Cost Leadership Strategy: Company uses low price as the main competitive weapon. They typically sell a standard no-frills product and try to minimize cost. This requires economic of scale (achieved when producing something in large quantities reduces the cost of each unit). --> outsourcing --> low quality --> economic of scale (produce a lot) --> you need high market share, you can only be cost leader if you sell a lot 2: Differentiation Strategy A company offers a product or services that is perceived as unique or distinctive on a basis other than price. 3: Focus Strategy A company competes by targeting very specific segments of the market.
Failed Mergers & Acquisitions
50% of the mergers don't work. With every merger there is a lot of money to be made --> a lot of mergers happen (good for managers and influence)
Strategy definition
Actions that managers take to attain the goals of the firm. --> Way of organising major resources to enhance performance.
Strategy Development - Directions
Direction + Methods Directions: TOWS + Anstoff Matrix + Porter
Mergers & Acquisitions (M&A) (External Growth), advantages and disadvantages
Expanding own resources and competencies by acquiring, or merging with another company. Thanks to mergers you don't have to imitate something you want to sell, you buy the other company and it is yours.
Internal Development (Organic Growth), advantages and disadvantages
Exploiting or redeploying relevant resources that the company has or can employ, especially when having outstanding products. --> it is a slow grow (bring in people, develop new strategies, product)
Levels of Strategy
In large enterprises strategies are developed at Corporate, Business and Functional level.
Successful Mergers & Acquisitions
Mergers are nice for managers because they get a extra bonus. WHen they merge, they have more people, conncetion, knowhow --> are more influencial Google buying Youtube and Facebook buying Whatsapp.
Strategy Development - Methods
Method: 1. Organic growth 2. M&A 3. Strategic allience
B: Product and Service Development
Product and service deveoplment: - allows a company to retain the relative security of its present markets while altering products or developing new ones - In fashion industry, consumer electronics, financial services continuous change of products meet perceived changes in consumer preferences - Car manufacturers compete by adding features and extending their model range. Many new ideas fail (initially) commercially (Smart, A-class at Daimler), so that product development is risky and costly.
«Stuck in the middle»
Solution: respond flexible Company stuck in the middle will disappear because they are not selling enough (no economic scale) --> no big market but also not differentiation
Development of Strategic Options and Their Assessment
Success criteria to assess strategic options: - Suitability - Acceptability - Feasibility
Acceptability
The expected performance outcomes of a strategy.
Success Criteria for a Strategic Option
The selected strategic option needs to be evaluated in regard to: - Suitability within the context - Acceptability of the expected outcome - Feasibility due to existing resources
How not to mix up strategy and planning
The strategy is about choosing what NOT to do: − Which costumers not to serve − What products or services not to offer − Which activities not to perform --> not being all things to all people Planning: -
Strategist
They clarify PURPOSE, reduce UNCERTANTY, LINK short-term actions to long-term goals and provide CONTROL, to enhance performance
Firm strategy to maximise value
They want to maximize value for the owners and stakeholders = share price goes up - Managers must pursue strategies that increase the PROFITABILITY (reduce cost or and add value and raise the price) of the enterprise and its rate of PROFIT GROWTH (you sell more or enter new markets) over time. - They can do this with EXPANDING internationally
Horizontal Integration (3/4)
Two producers that do the same, one buy the other --> less competition. E. g Facebook that bought WhatsApp
Think different, Steve Jobs
What is apple and what do we stand for? People with passion can change the world for the better. The ones that are crazy enough to think they could change the world are the ones that do. In the whole video you dont see a computer. It is emotional and personal. Emotions are extremely important for sale. You belong some where, in one line with Gandhi and Martin Luther King. --> differentiation strategy
Suitability
Whether a strategy addresses the circumstances in which an organization is operating. Deals with the overall rationale of the strategy. Question: Does the strategy "make (economic) sense", or: Would it work? Would the organization obtain economies of scale or economies of scope? - Fit with the future trends and changes - Use of opportunities, minimizing risk - Exploit the strategic capability - Meet expectations of stakeholders
Feasibility
Whether an organization has the resources (funding, people, time, information) and competences to deliver a strategy
Vertical Integration (2/4)
You produce something --> you buy the producer of the raw material (backwards integration) or you buy the retailer (forward integration) Both are vertical steps
Feasibility
a measure of how suitable the development of a system will be to the organization
Ansoff Matrix
directions of a strategic development
redeploy
reorganize, relocate, reassign
Directions Through Porter's Competitive Strategies
three generic strategies that a firm can use to develop and maintain competitive advantage: 1. cost leaderhsip: you are the cheapest 2. diferetation: you product is different 3. focus: you focus on one segment, one group of possible clients
unify, unifying, unification
to join together into one group, to make one
