March 2010 WHAT IS STRATEGY Stephanie McCoy. What is Strategy? “Strategy is about being...

March 2010

WHAT IS STRATEGY

Stephanie McCoy

What is Strategy?

What is Strategy?

“Strategy is about being different”

--Michael Porter

What is Strategy?

Elements of Strategy:• Mission:

Who the Firm wants to be

• Strategic Intent:

What the Firm wants to achieve

• Competitive Advantage:

How the Firm can achieve its strategic intent

Strategic Vision: Mission

Mission defines WHO the firm wants to be• Defines purpose• Timeless and visionary

Strategic Vision: Mission Examples

Whole Foods, Whole People, Whole Planet

Nike brings inspiration and innovation to every athlete* in the world

*If you have a body, you are an athlete

Meritage delivers superior investment returns by combining equity and expertise to build successful communications businesses

Strategic Vision: Strategic Intent

Strategic Intent: WHAT the firm wants to achieve


“If there’s a fork in the road, take it”

-Yogi Berra


THE APOLLO PROGRAM:

“I believe that this nation should commit itself to achieving the goal, before this decade is out, of landing a man on the moon and returning him safely to Earth.”

--President John F. Kennedy, 1962

Why did the Country get so excited?

Strategic Intent Characteristics

• Defines the “what” not the “how”

• Very Long Term

• Captures the essence of winning

• Implies “stretch” not “fit”

• Motivational and directional

• Tool for empowerment, not a tool for centralization

• Think the unthinkable

Strategic Intent Examples

Six Hondas in a two-car garage

Maru-C (translation: Encircle Caterpillar)

1975: A computer on every desk and in every home 1999: Empowering people through great software anytime, anyplace, and on any device

To put a Coke within ‘arm’s reach’ of every consumer in the world

Competitive Advantage

Competitive Advantage is HOW the firm will achieve its strategic intent• Doing something unique and different that

customers value


Value Proposition

Core Competencies

Customer Segmentation

Economic Engine

COMPETITIVE ADVANTAGE


Strategic selection of a sub-segment of an addressable market to create or enhance a competitive advantage

Segment Definition

NONCONSUMERS

UNDERSHOT CONSUMERS

OVERSHOT CONSUMERS

Customers not consuming any product or consuming only in inconvenient settings

Customers who consume a product but are frustrated with its limitations; they display willingness to pay more for enhancements along dimensions most important to them

Customers who stop paying for further improvements in performance that historically had merited attractive price premiums

Customer Segmentation N

ON

CO

NS

UM

RE

RS

UN

DE

RS

HO

T

CO

NS

UM

ER

S

Company Customer Segmentation

Nonconsumer: In creating a bazaar without borders, eBay allowed an exchange of goods without dependency on geography

OV

ER

SH

OT

C

ON

SU

ME

RS

Overshot: Frequent mid level business traveler (i.e. salesperson) who wants low prices and on time flights.

Overshot: Initially rural customers and later inclusive of price sensitive urban shoppers. Value low prices, will tolerate sub par customer service, quality and store amenities

Undershot : Wealthy, health conscious consumer who values organic environmentally friendly products

Undershot : Uber wealthy urban females seeking unparallel shopping “experience”

AppleNonconsumer: Pioneered the creation of the MP3 with legal content in a revolutionary digital format


Value Proposition

Core Competencies


Economic Engine


Value Proposition

Profitability benefit of Value Proposition

Industry Average

Competitor

Premium Differentiated Competitor

Low-Cost Competitor

Sales Price Costs

Neiman Marcus, Whole Foods,

Apple

Wal-Mart, Southwest

Airlines, IKEA


Value Proposition

Core Competencies


Economic Engine


Value Chain & Core Competencies

A value chain is a template that breaks down a company’s entire activity set

Represents steps that must be taken to deliver and support a product/service to end user

Value Chain

FUNDRAISING INVESTMENT SOURCING

INVESTMENT SELECTION

VALUE CREATION

EXITING

Venture Capital Value Chain

Core Competencies

Core CompetencyA core competency is a business activity in which a firm can be BEST IN WORLD

Three tests of a core competency

• Provides potential access to a wide variety of markets

• Makes significant contribution to perceived customer value and benefits

• Difficult for competitors to imitate

Must support the value proposition

Consider outsourcing activities that aren’t core competencies

Core Competencies

SALESMERCHANDISING and MARKETING

CUSTOMER SERVICE

PROCUREMENT

Premium Differentiated Core Competency Profile

Core Competency Description

MERCHANDISING & MARKETING

CUSTOMER SERVICE

•High quality products displayed in unrivaled storefronts to create a luxurious shopping environment

•Full-time art curator and custom designed chairs in the cosmetics department

•Intentionally limits expansion to maintain elite image

•Best in class marketing through luxurious catalogs, interactive website and customer loyalty programs

•Career track for sales associates: full time employment with 200 hours of new hire training and 160 hours of annual recurring training

•Commission-based compensation

•InCircle frequent shopper program provides luxurious gifts for consumers spending in excess of $5,000 annually

Core Competencies

Low Cost Company Core Competency Profile

Core Competency Description

MERCHANDISING

DESIGN

•Furniture displayed in full room settings •In house daycare•Store locations near airports on huge real estate plots

•Modularly designed furniture•Easily warehoused•Easy assembly

DISTRIBUTIONMANUFACTURINGDESIGN CUSTOMER SERVICE

MERCHANDISING SALES

•Modern sleek look•Less expensively transported


Value Proposition

Core Competencies


Economic Engine


Economic Engine

Economic Engine is a single financial measure of the competitive advantage

Profit per X

If you could pick one and only one ratio – profit per X – to systematically increase over time, what X would have the greatest and most sustainable impact on your business?

Economic Engine

Profit per CommentaryKey Economic Shift

CUSTOMER Shift from profit per DIVISION to profit per CUSTOMER

Analyzing profit per customer enabled the ‘razors and razor blade’ model whereby Gillette sells razors at a loss to lock-in customers to its highly profitable recurring revenue stream from disposable razor blades.

Competitive Advantage Impact

Note exploiting core competency in blade technology to their advantage

CUSTOMER VISIT

Shift from profit per STORE to profit per CUSTOMER VISIT

After initially avoiding high real estate costs, Walgreens shift to profit per customer visit led to the strategic insight to pay a premium for high profile store locations with multiple entry ways

Required Walgreens to create core competencies in real estate and product placement

EMPLOYEE Shift from profit per LOAN to profit per EMPLOYEE

Wells Fargo’s profit per employee engine created a lean cost structure well-equipped to face the economic reality of banking commoditization in the face of deregulation.

Did not change the low cost value proposition, but required new core competencies in technology to increase employee productivity and encourage online banking

Leveraging Core Competencies

When a Company is seeking growth and diversification, it must leverage existing core competencies:

Example: Honda

Business Opportunities that leverage core competencies

Honda Core Competencies

Small Engine Design

Moderate Scale Assembly with Outsourcing

Creative Distribution

Small

CarsMisc.

PumpsGener-ators

Out-boards

Lawn Mowers

Snow Blowers

Motor-cycles

Compact Business

Jets

Appendix

Strategic Analysis

Industry Analysis

Competitor Analysis

Company Analysis

Critical Issues

Industry Analysis – Five Forces

Michael Porter’s Five Forces framework analyzes an industry’s attractiveness based upon five elements

Enables a company to devise appropriate plan of action• Position the company to provide the best defense against the most threatening competitive force(s)• Influence the balance of forces through strategic moves• Anticipate changes in underlying forces and choose strategy before others recognize change


THREAT OF ENTRY

POWER OF SUPPLIERS

POWER OF BUYERS

SUBSTITUTES

COMPETITIVE RIVALRY

Supplier group powerful if:

•Dominated by a few companies

•More concentrated than industry it sells to

•Limited competition in supplier products

•Credible threat of forward integration

•Industry is not important to supplier group

Buyer group is powerful if:

•Concentrated or purchases in volume

•Purchases standard/non-differentiated products

•Earns low profits

•Industry’s product unimportant to quality of buyer’s product/service

•Credible threat of backward integration

•Economies of Scale

•Product differentiation

•Capital requirements

•Cost disadvantages independent of size’

•Access to distribution channels

•Government policy

Products that a buyer can choose in place of your offering

Sources of Barrier to Entry•Numerous competitors with equal size/power

•Slow industry growth

•Lack product differentiation

•Low switching costs

•High exit barriers

•Rivals are diverse in strategies, origins and personalities

Intense Rivalry Exists when:


Five Forces Analyses -- Airlines

Force Description RatingImplication for Entrant

THREAT OF ENTRY

Capital intensive, but with leases and route-specific entry options

Low – Medium

POWER OF SUPPLIERS

Concentrated supplier base, long-term leases, significant switching costs

High

POWER OF BUYERS

Buyers have multiple options on most routesHigh

THREAT OF SUBSTITUTES

Personal aircraft, automobiles, trains and buses all serve as substitutes. Advanced communication technology reduces business travel demand

Medium – High

COMPETITIVE RIVALRY

Low growth prospects, many players, cutthroat pricing

High

Neutral

Positive

Negative

Airline industry highly unattractive


Five Forces Analyses – Pharmaceutical Industry

Force Description RatingImplication for Entrant

THREAT OF ENTRY

Capital required for research and development can be significant, but with potential for high payout

Medium

POWER OF SUPPLIERS

Many suppliers with commoditized inputs (e.g. chemicals); low threat of forward integration

Low

POWER OF BUYERS

Buyers often completely price inelastic; patents limit substitutes; near zero threat of backward integration

Low

THREAT OF SUBSTITUTES

Patent protection for multiple years enable monopoly rents

Low

COMPETITIVE RIVALRY

First-to-market competition is intense, but abundant growth opportunities as new diseases/cures are discovered

Medium

Pharmaceutical industry highly attractiveNeutral

Positive

Negative

Competitor Analysis – Smart BombingProcess of identifying all significant current and future competitive threats

How could the competition crush you? How can you crush the competition?

Example: Starbucks Smart Bomb Analysis

Competitive Threat to Starbucks: How Starbucks could respond?

McDonalds develops ‘premium’ coffee blend at lower prices than Starbucks coffee

•Continue to advertise best-in-class product quality•Re-emphasize customer service•Continue to secure convenient real estate access where McDonalds and other food chains cannot locate•Emphasize environmental initiatives and ‘good world citizen’

McDonalds markets one-stop shopping of coffee/breakfast offering

•Develop high quality health-oriented breakfast offerings and/or even hot breakfast to create premium one-stop shopping experience

McDonalds promotes convenience of speedy order and drive thru service; markets towards parents who prefer drive thru

•Expand store locations with drive through optionsIncrease barista (server) to customer ratios during high traffic periods to maximize customer throughput

Competitor: McDonald’s

Competitor Analysis – Smart Bombing

Competitive Threat to Starbucks:

How Starbucks could respond?

Specialty coffee shops aggressively penetrate Starbuck’s premium coffee niche

•Utilize scale economies in purchasing to remain price competitive (at a premium level) while generating unmatched margins•Increase menu variety to appeal to wide ranging customer tastes •Market national penetration to appeal to customers desiring a high quality experience across all locations•Acquire competitors that make significant inroads into consumer base (e.g. Seattle’s Best)

Specialty shops explore new store builds in desirable locations

•Continue to grow new stores to saturate desirable markets

Specialty shops market against perception of poor customer service at Starbucks; claim more intimate customer experience

•Continue to improve customer service training programs•Staff higher percentage of baristas/consumers, particularly during high traffic periods•Create capital expenditure program that ensures stores receive regular improvements; customize store design to particular locations•Develop a ‘coffee only’ sales register during peak periods to increase customer throughput

Competitor: Specialty Coffee Houses

Company Analysis - SWOT

Strengths Weaknesses

Opportunities Threats

Maintain Minimize

Take Advantage Of

Overcome

Critical Issues

What Can Make the Company Widely Successful?

What Can Put the Company Out of Business?

• Typically limited to 5-7 items

March 2010

WHAT IS STRATEGY

Stephanie McCoy

March 2010 WHAT IS STRATEGY Stephanie McCoy. What is Strategy? “Strategy is about being...

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