The 4th lecture focus on business strategy and models, rapid growth strategies (franchising, mergers & acquisitions), and an introduction to Moore's "Crossing the Chasm", Gartner's Hype Cycle and Porter's 5 Forces.

1. Lecture 4: Business Strategies &
Rapid Growth Strategies
Dr Bernard Leong
CTO & Co-founder
MPS 812 Course Taught in:
1

2. A companyʼs Strategy consists of the competitive moves & business
approaches that the managers are employing to grow the business,
attract and please customers, compete successfully, conduct operations
& achieve the targeted levels of organizational performance
2

3. Sustainable Competitive Advantage
• A company achieves sustainable competitive advantage when an attractive
number of buyers prefers it products or services over the offerings of
competitors and when the basis for this preference is durable.
• Four Strategic Approaches:
• Industry low cost provider - cost based advantage over rivals.
• Outcompeting rivals based on differentiating features (higher quality, wider
selection, added performance, value-added services, more attractive
styling, technological superiority, goodvalue).
• Focusing on a narrow market niche & winning a competitive edge by doing
a better job than rivals of serving the special needs & tastes of buyers
comprising the niche.
• Developing expertise & resource strengths that give the company
competitive capabilities that rivals canʼt easily imitate or trump with
capabilities of their own.
3

4. Identify a companyʼs strategy - What to look for
Actions to gain sales & market share
Action to diversify via lower prices, more performance
features, more appealing design, Actions to
the companyʼs
better quality or customer service, respond to
earnings &
wider production, selection or other changing market
revenues by
such actions. conditions & other
entering into new
external factors.
businesses
Actions to
Actions to enter a
strengthen The patterns of new geographic
competitive
capabilities & actions & business or product
markets or exit
correct approaches that define existing ones
weaknesses a companyʼs
Actions & Actions to
Actions to
approaches used strengthen Actions to capture
strengthen market
in managing R&D, competitiveness emerging market
standing &
production, sales via strategic opportunities &
competitiveness
& marketing, alliances & defend against
by merging or
finance and key collaborative external threats.
acquisition
activities. partnerships
4

5. Strategy Evolution
• Changing circumstances &
ongoing management efforts to
improve the strategy cause a
companyʼs strategy to evolve
over time - a condition makes
the task of crafting strategy a
work in progress, not an one
time event.
• Shaped by management
analysis & necessity of
adapting and learning by doing.
5

6. Abandoned Strategy Elements
Proactive Strategy Elements
New initiatives plus ongoing strategy
elements continued from prior periods.
Prior version of Latest version of
company strategy company strategy
Adaptive reactions to changing
circumstances
Reactive Strategy Elements
A companyʼs strategy is a blend of proactive initiatives & reactive
adjustments.
6

7. Strategy & Ethics
• A strategy is ethical only if:
• It does not entail actions & behaviors
that cross the line from “should do” to
“should not do” (unsavory,
unconscionable or harmful to other
people).
• Allows management to fulfill its ethical
duties to its shareholders/owners,
employees, customers, suppliers, the
communities in which it operates &
society in large.
7

8. Relationship between a companyʼs
Strategy & Business model
• A companyʼs business model explains the
rationale for why its business approach &
strategy will be a revenue generator.
Absent the ability to deliver good profits,
the strategy is not viable & survival of
business are in doubt.
• Company Strategy: relates broadly to
competitive initiatives & action plan for
running business which may or may not
make profits.
• Business Model: How & why business will
generate revenues to cover costs &
product attractive profits & return on
investment.
8

9. What makes a strategy a winner?
• How well does the strategy
fits in a companyʼs
situation?
• Is the strategy helping the
company achieving a
sustainable competitive
advantage?
• Is that strategy resulting in
better company
performance?
9

10. Microsoft products:
Red Hat Products: Open
proprietary code and employ
Product and Labour Source collaboration with
a cadre of highly skilled
developers all over the world.
programmers
Sell operating system and
Sells subscription models for
Revenue Model software packages and
large enterprises.
keeping services free
Capitalize on specialized
expertise required to use
Sales Model Large volume sales
Linux and also target large
enterprises.
Profit Margins
> US$B > US$100M
(by order of magnitude)
Case Study: Microsoft & Red Hat - Contrasting Business Models
10

11. Strategy-Making, Strategy Executing
Process
Phase 1 Phase 2 Phase 3 Phase 4
Crafting a
Developing a strategy to Implementing
Setting
strategic achieve & executing
objectives
vision objectives & the strategy
vision
Phase 5
Monitoring
developments
Revise as needed in light of actual performance, changing
, evaluating
conditions, new opportunities & new ideas.
performance
& making
corrective
adjustments
11

12. Phase 1: Strategic Vision
• A strategic vision describes the
route a company intends to take
in developing and strengthening
its businesses. It lays out the
companyʼs strategic course in
preparing for the future.
• It delineates management
aspirations for the business and
provide the answer to “Where
are we heading towards?”
12

13. External Considerations Internal Considerations
Is the outlook for the company promising if it
simply maintains its product/market/customer/
What are the companyʼs ambitions? What
technology focus? Does sticking to its current
industry standing should the company have?
strategic course present attractive growth
opportunities?
Are changes under way in the market & Will the companyʼs present business generate
competitive landscape acting to enhance or sufficient growth & profitability in the years
weaken the companyʼs prospects? ahead to placate shareholders?
What if any new customer groups or/and What organizational strengths ought to be
geographical markets should the company get leveraged in terms of adding new products or
in position to serve? services & getting into new businesses?
Which emerging market opportunities should Is the company stretching its resources thin
the company pursue? Which ones should not by trying to compete in too many markets or
be pursued? segments?
Should the company plan to abandon any of Is the companyʼs technological focus too
the markets, market segments, or customer broad or too narrow? Are any changes
groups it is currently serving needed?
13

14. Characteristics of an effectively worded Strategic Vision
Paints a picture of the kind of company that management is trying to
Graphic create & the market position(s) the company is striving to stake out.
Is forward-looking, describes the strategic course that management has
Directional charted and the kinds of product/market/customer/technology changes
that will help the company prepare for the future.
Is specific enough to provide management guidance in making
Focused decisions & allocating resources.
Is not a once and for all time statement - directional course has to be
Flexible adjusted as product/customer/market/technology changes with time.
Is within the realm of what the company can reasonably expect to
Feasbible achieve in due time.
Indicates why the chosen path makes good business sense and is in
Desirable the long term interests of the stakeholders (especially shareholders,
employees and customers)
Easy to communicate Can be expressed in 5-10 minutes and reduced to a memorable slogan.
14

15. Company Strategic Vision
To extend our position as the most trusted Linux &
open source provider to the enterprise. We intend to
grow the market for Linux through a complete range
of enterprise Red Hat Linux Software, a powerful
management platform & associated support and
services
Be the global Leader in customer value.
Provide a global trading platform where practically
anyone can trade practically anything.
15

16. Phase 2: Setting Objectives
• To convert the strategic vision
into specific performance targets
- results & outcomes the
companyʼs management wants
to achieve.
• Ideally, managers adopt the
objective setting exercise as a
tool for stretching an
organization at its full potential
and deliver best possible results.
16

17. What kind of objectives to set: Balanced Scorecard
Financial Objectives Strategic Objectives
★An x% increase in annual revenues. ★Winning an x% market share.
★Annual increases in after-tax profits of x ★Achieving lower overall costs than rivals
% ★Overtaking key competitors on product
★Annual increases in earnings per share performance or quality or customer
of x% service.
★Annual dividend increases ★Deriving x% of revenues from the sale
★Larget profit margins of new products introduced within the
★An x% return on capital employed or past 5 years.
return on equity (ROE) ★Achieving technological leadership
★Increased shareholder value - in the ★Have better product selection than
form of an upward trending stock price rivals
and annual dividend increases. ★Strengthening company brand name
★Strong bond and credit ratings. appeal
★Sufficient cash flows to fund new capital ★Have stronger national or global sales
investment. and distribution capabilities than rivals
★Stable earnings during periods of ★Consistently getting new or improved
recession. products.
17

18. Examples of
Company
Company Objectives
Increase sales to 4.2M cars and trucks by
2008 (up to 3M in 2003); cut purchasing
costs 20% and half number of suppliers,
have zero net debt, maintain a return on
invested capital of 20%; maintain 10% or
better profit margin.
To achieve long term sales growth of 5-8%
organic plus 2-4% acquisitions, annual
growth in earnings per share of 10% or
better, a return on stockholders equity of
20-25%; double number of qualified 3M
products.
18

19. Phase 3: Strategy Making,
Strategy Execution Process
• Masterful strategies comes partly by
doing things differently from
competitors when it counts: out-
innovating them, being more efficient
and imaginative, adapting faster and
not follow the herd.
• Senior executives together with the
CEO craft the strategies for the
company.
• Corporate Intrapreneurs are created
by top management to encourage
teams and individuals to create new
product lines and business ventures.
19

20. Corporate Strategy
Orchestrated by the CEO
(Company wide game plan for managing a set
& senior executives
of businesses) In each case of a single
business company, these
two levels of strategy
making hierarchy merge
into one level - business
strategy that is
orchestrated by the
Orchestrated by general
companyʼs CEO & other
managers of each Business Strategy (One for each business the
executives.
different lines of company has diversified into)
businesses with advice - Strengthen Market Position & build
from the heads of competitive capabilities
functional area activities
Crafted by heads of
major functional activities Functional area strategies within each
within a particular business
business - in - Relevant details for managing activity for the
collaboration with other business units
key people.
Crafted by brand
managers, operating Operating Strategies within each business
managers of plants, - Low-echelon activities with strategic
distributing centers, significance
geographic units
20

21. Phase 4: Implementation & Execution
• Staff organization with needed skills
& expertise.
• Allocating ample resources (cash,
materials and distribution channels)
• Policies & procedures in a system
to have effective execution.
• Best practices to perform core
business functions and pushing for
improvement.
21

22. Phase 4: Implementation & Execution
• Installing information & operating
systems for each level to carry out
their roles and responsibilities.
• Motivating people to pursue target
objectives and awards & incentives
(healthcare, flexi-benefits).
• Company Culture
• Exerting internal leadership if
stumbling obstacles turn up.
22

23. Phase 5: Evaluation
• Monitoring external
developments, evaluating
companyʼs progress & making
corrective adjustments.
• Requires corporate
governance in the form of
board of directors to monitor
and evaluate the execution &
implementation of strategy.
23

24. Board of Directors
• Role: To exercise strong oversight and
see that the tasks for strategic
management are done to benefit
shareholders & stakeholders.
• Be inquiring critics & oversee
companyʼs direction, strategy &
business approaches.
• Evaluate the caliber of senior
executivesʼ strategy making and
execution.
• Compensation Plan for top executives.
• Oversee companyʼs financial
accounting and financial reporting
practices
24

25. The real-world benefits of
the technology are
demonstrated and
accepted. Tools and
methodologies are
increasingly stable as they
enter their second and
a phase of overenthusiasm and third generation. The final
unrealistic projections during which height of the plateau
a flurry of publicized activity by varies according to
technology leaders results in some whether the technology is
successes but more failures as the broadly applicable or only
technology is pushed to its limits. benefits a niche market.
Visibility
Focused experimentation and solid hard work by
an increasingly diverse range of organizations lead
to a true understanding of the technology's
applicability, risks and benefits. Commercial off-
the-shelf methodologies and tools become
available to ease the development process.
The point at which the technology
becomes unfashionable and the
press abandons the topic, because
the technology did not live up to its
A breakthrough, public overinflated expectations.
demonstration, product launch or
other event that generates
significant press and industry
interest.
Time
25

26. 26

27. Hype Cycle Investment Cycle
How investments can be affected by how mainstream
technologies are in the marketplace.
27

28. Mooreʼs “Crossing the Chasm” Theory
28

29. 29

30. 30

31. Rapid Strategies for Growth
• Joint Ventures and Strategic
Alliances
• Mergers and Acquisitions
• Franchising and Licensing
31

32. Why Growth is necessary?
• Economics of Scale.
• Expansion into other markets.
• Acquiring new capabilities.
• Survival
• Less Vulnerable for acquisition or
hostile takeovers.
• Increasing earnings.
32

33. Motivation to Go Global
33

34. How to
expand?
34

35. How to assemble opportunity for a franchise
• Primary Target
Audience
• Demographic Profiles
• Psychographic
Profiles: Lifestyles,
social class and
personality traits
• Geographic Profiles
35

36. Advantages of Franchising: Franchisee
• Entrepreneur does not have to incur all the
risks associated with creating a new
business.
• Product acceptance: has an accepted name,
product, or service.
• Management expertise: managerial
assistance provided by the franchisor.
• Capital requirements: up-front support can
save entrepreneur significant time and capital.
• Knowledge of the market: offers experience in
business and market.
• Operating and structural controls: help in
standardization and administrative controls.
36

37. Disadvantages of Franchising
• Inability of the franchisor to
provide services, advertising,
and location.
• Franchisorʼs failing or being
bought out by another company.
• Difficulty in finding quality
franchisees.
• Poor management.
37

38. Categories of Franchises
• 3 available types of franchises:
• Dealership: act as retail stores for the
manufacturer.
• Franchise that offers a name, image, and
method of doing business.
• Franchise that offers services.
• Changes that helped evolve franchising
opportunities:
• Good health.
• Time saving or convenience.
• Environmental consciousness.
• The second baby boom.
38

39. Considerations for a Franchise
• Has the franchise worked
in other markets?
• Has the franchise proven?
• What is the potential profit
and market for a
franchise?
39

40. Joint Ventures & Strategic Alliances
• Different types: Industry-
University joint ventures,
International or Regional joint
ventures.
• Factors determining success:
Correct synergy, same
expectations, combining the
right set of skills from both or
more parties and accurate
assessment of the potential
market.
40

41. Acquisitions
• Benevolent or Hostile
Takeovers?
• Advantages: Established track
record, Accumulation of
resources - manpower and
physical infrastructure, quick
expansion.
• Disadvantages: Marginal
success record, overvaluation
of acquisition, employees
exodus or departure.
41

42. Acquisition Process
• Timing: can last from 21 days to 3 months for success,
but can drag on for an indefinite period of time.
• Synergy
• Should occur in both the business concept and the
financial performance."
• Structuring the deal
• Involves the parties, the assets, the payment form,
and the timing of the payment.
• Two most common means of acquisition: (i)
Entrepreneurʼs direct purchase and (ii) Bootstrap
purchase.
• Locating acquisition candidates involves significant
time and effort.
42

43. Mergers
• Always question legality of purchase
and country legislation.
• Motivation: Survival, Gain,
Diversification & Protection.
• Leveraged buyout: Reasonable Price,
Debt Capacity, Appropriate financial
package.
• Requires the team to stay on for at least
another two to three years.
43

44. Merger Motivation?
44