Entrepreneur 4: Business Strategies & Rapid Growth Strategies

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

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

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

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 marketin 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

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

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

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

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

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

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

Strategy-Making, Strategy Executing Process Phase 1 Phase 2 Phase 3 Phase 4 Crafting aDeveloping 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

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

External Considerations Internal Considerations Is the outlook for the company promising if itsimply maintains its product/market/customer/ What are the companyʼs ambitions? Whattechnology 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 begeographical 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 thinthe 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 toothe markets, market segments, or customer broad or too narrow? Are any changes groups it is currently serving needed? 13

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

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

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

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 customerof 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 thanform of an upward trending stock price rivalsand 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 salesinvestment. and distribution capabilities than rivals★Stable earnings during periods of ★Consistently getting new or improvedrecession. products. 17

Examples ofCompany 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

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

Corporate StrategyOrchestrated 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 theOrchestrated 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 capabilitiesfunctional area activities Crafted by heads ofmajor 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

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

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

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

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

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 technologys 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

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

Mooreʼs “Crossing the Chasm” Theory 28

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

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

Motivation to Go Global 33

How toexpand? 34

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

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

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

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

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

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

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

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

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

Merger Motivation? 44

Entrepreneur 4: Business Strategies & Rapid Growth Strategies

by Bernard Leong

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