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Stratstafford12 copy

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Stratstafford12 copy

  1. 1. Organisational Strategy Workshop, Oct 2012 Ross Thompson BA (Lancaster), DPM, MBA (Manchester) ACIS , Chartered Secretaryross.thompson@northampton.ac.uk 1
  2. 2. Contents• Introductions• Assignment!• SESSION 1 – What is strategy?• SESSION 2 – Internal Analysis• SESSION 3 – Real Options in strategy• SESSION 4 – Implementation issues 2
  3. 3. Your tutor• Career • 17 Years business experience to Director level in a variety of marketing, finance and management roles. • Many consulting assignment roles; former Director of a consultancy. • MBA from Manchester Business School. • Chartered Secretary. • Research interests in: strategy, graduate employability and money laundering. 3
  4. 4. How we work• Materials available on STRM002 website on Nile. – Reading – Exercises – Links – etc. – And assignment details 4
  5. 5. Reading• 2 key books: Johnson, G., Scholes, K. and Whittington, R. (2009) Exploring Corporate Strategy, 8th ed., PH Grant, R., (2010) Contemporary Strategy Analysis, 7th 5 ed., Wiley
  6. 6. Reading• Other key reading detailed in assignment notes and workshop guide.• The Blackwell Encyclopaedia of Strategic Management is also useful as is the website: – Valuebasedmanagement.net 6
  7. 7. Session 1 – What is Strategy• Reading: – J and S, ch 1 – Grant ch 1 – Porter, M. (1996) What is strategy? , HBR, Nov-Dec (on web) 7
  8. 8. Session 1 - Exercise• Look at the two contrasting viewpoints of strategy by Porter and Barney (clips). Now formulate your own view of strategy 8
  9. 9. Strategy• My preferred approach is to consider it a process comprising the steps of: 1. Objective setting. 2. Internal firm analysis. 3. Industry and competitor analysis. 4. Establishing a competitive position, e.g., price leadership or differentiation. 5. Choosing some strategic options. Planning. 6. Operationalising strategy. nb strategy is the setting operations is the doing 7. Evaluation and implementation. 9
  10. 10. Strategy• Note differences between: – Corporate Strategy – deciding which businesses/product groups to launch, divest, grow etc. – Business Strategy – deciding how to develop those business or strategic business groups (SBUs). 10
  11. 11. Session 2 – Internal analysis• Resource School suggests: – Competitive Advantage (CA) accrues from developing internal capabilities or competencies; in other words: • “find what you are good at and maximise the capability” • Works in corporate and personal life• Often known as the Inside Out approach compared to the Outside in approach espoused by Porter et al who stress importance of external/economic factors. 11
  12. 12. Session 2 – Internal analysis• Reading – J and S ch 3 – Grant chs 5/6 – Barney, J. (1991) Firm resources and sustained competitive advantage, Journal of Management, 17 – Grant, R. (1991) The resource based theory of competitive advantage, CMR, Spring – Hamel. G. and Prahalad, C. (1990) Core Competences of the organisation, HBR, 68 (on web) – Kay, J. (1993) Foundations of Corporate Success, OUP 12 – Porter, M.E. (1996) What is Strategy?, HBR, Nov-Dec (on web)
  13. 13. Session 2 – Internal analysis• Linked to concept of economic profit and economic valuehttp://www.sternstewart.com/• economic profit = accounting profit – the opportunity cost of capital (debt + equity)• or = PAT – (capital employed x WACC) – where: • pat = profit after tax (but before interest) • wacc = weighted average cost of capital 13
  14. 14. Session 2 – Internal analysis• So challenge is to find:• those capabilities, deriving from resources at a firm’s disposal that produce returns in excess of the cost of capital. This is the concept of economic rent. 14
  15. 15. Session 2 – Internal analysis• Objective is to find rent generating resources, assets and capabilities.• Rent is associated with Ricardo the economist who found that certain types of land yielded above average agricultural returns. Analogous to modern day premier retail locations.• Makes sense to hunt and cultivate these resources as they offer 15 Competitive advantage (CA).
  16. 16. Session 2 – Internal analysisAssets/*resources Competences CATangibleintangible * In accounting terms = assets 16
  17. 17. Strategic Capability/Resources TerminologyThreshold Resources needed to meet customers’ minimum requirements. Needed to continue to existresourcesThreshold Activities and processes needed to meet customers’ minimum requirements. Needed tocompetences continue to existUnique Resources underpinning competitive advantage. Difficult for competitors to imitateresources or obtain.Core Activities underpinning competitive advantage. Difficult for competitors to imitatecompetences or obtain 17
  18. 18. Core Competences (Hamel and Prahalad, 1990)• (Related to Resource School/RBV)• Derives from learning about what you (firm) can do well.• Must be able to extend this knowledge though, e.g., beyond firm departments, into new products and SBUs.• Trick again is configuring these resources or competences which might be: – skills – routines – assets 18 – alliances/relationships
  19. 19. • 3 tests of Core Competences 1. Must give access to markets - marketable 2. Must generate customer benefits – be worth something 3. Must hard to imitate – competitors should not be able to copy• therefore need to be specific; marketing is not a CC! branding 19 might be
  20. 20. Note imitation reduction caused by: VALUABLE unique locations e.g. shops RARE path dependencies- intricacies in NON IMITABLE operationsNOT SUBSTITUTABLE causal ambiguity – hard to u/stand operating systems! Social complexity – e.g. relies of large and complex network of staff, suppliers etc.Barney’s VRIN€ MODEL 20
  21. 21. Implications• Best not to outsource core competences/rent generating resources• can outsource non core areas• core business (product grouping) is not the same as core competence• possible to stretch core competences over other industries e.g. Universities to hotels which is dome by several such as Manchester. 21
  22. 22. Criticisms of RBV• Fails to take account of effect of knowledge management techniques.• Fails to account for role of managers.• Insufficiently detailed.• Fails to account for developing resources.• Cannot act in exclusion to the outside in school.• Fails to take account of economies of learning and the effect of the experience curve in CA 22
  23. 23. Internal Analysis : Value Chain – Identifies strategically Firm infrastructure: systems, procedures, administration, relevant activities. communication. – if largely pursuing MASUPPOR HRM: recruitment and retention, training, skills, pay policy, differentiation RG I industrial relations, productivity. strategy, look to add quality / USPs in each Technology (including IT): patents, sophistication, choices, N area.T cost, technical skills. – if pursuing cost Procurement: bargaining power over suppliers. leadership, look to cut costs in each area Inbound Operating Outboun Marketing Service logistics : d : : Can of course P R I M A RY : • processing logistics: attempt to do both, IN •sales •customer •sourcing •deliveries care as in JIT / TQM RG •manu- •promotion raw facture •warranty systems. materials •distribution •pricing MA •make or •dealers •ware- buy •lead times •advertising – Value is the amount Y housing buyers are willing to •assembly •branding •reputation pay for product or 23 •packaging service NB Not all areas of the Value Chain will be equally profits occur when important. value exceeds cost.
  24. 24. Activity System (Porter, 1996) ExamplePorter conceived in similar theory to the RBV when he outlined the activity system.It is a map of all the key operating procedures in a firm showing the relationships. 24The more intricate these are, the more difficult it is to copy.
  25. 25. Session 2 - Exercise1. Using the Manchester United case material use the value chain to identify Manchester United’s core competencies.2. How might these strengthened? 25
  26. 26. Session 3 – Real Options• Reading- – Luehrman, T. (1998) Investment Opportunities as Real options, HBR, 76 (4) – Luehrman, T. (1998) Strategy as a portfolio of real options, HBR, 76 (5) YOU MUST READ THIS – BOTH AVAILABLE ON THE WEB – There is also a short section in Grant and J and S. 26 – www.real-options.com/resources_links.htm
  27. 27. Introduction to real options(also called management or strategic options)We all have options:•Getting married?!!•Having children•Study or work?And businesses have options:•Delay/stall•Expand•Switch resources 27•New products•New markets etc
  28. 28. Introduction: Real options V Financial optionsReal Options Financial OptionsOption (not requirement) to make a business choice/ option to buy(call) or sell (put) a derivative or non-real asset e.g. invest in a project,product etc. at a given time (European) or in a period (American)Therefore views business a series of call options SO REAL OPTIONS ARE OPTIONS WITHIN OPTIONS/STRATEGIES 28 EG ONE PARTICULAY INVESTMENT (OPTION) MAY HAVE HIDDEN OPTIONS EG TO DELAY.
  29. 29. Introduction to real options• Differ from financial options (derivatives) as they involve real assets e.g. launching a new product/ pursuing a new strategy.• Becoming increasingly important in “choppy” and innovative economic times e.g. internet and digitisation(now): – strategies increasingly have to be altered; – businesses need to be more adroit/responsive; – and therefore need to constantly appraise ie,value, their options.• Business strategies with hidden – real – options maybe therefore valuable as they reduce risk. 29
  30. 30. Types of Options in Business STRATEGYAcquire R and Dassets NPDBuy/mergewithCompetitors Change inputsAcquire new mix 30technology Cost savings
  31. 31. Types and uses of real options1, Delay optionsConventional NPV/DCF techniques assumea now or never and linear approach to investment. Frequently though, investment can be delayed and this decision may affect chances of success/profitability, e.g., as better information comes on board. 31
  32. 32. Types and uses of real options1, Delay options cond•Most frequent in new product development situations wherethe competition is locked out ,e.g., via entry barriers suchas patents and when the market is uncertain.•Example: – A drug firm has a patent on a new drug and delays investment until the costs of borrowing come down thus enhancing profitability. 32
  33. 33. Types and uses of real options2, Abandonment options•Again the npv approach assumes continuity throughout product life. Butin reality there may be the scope to abandon the project if say costs areprohibitive. This will then impact project profitability.•Example/Exercise•A firm spends £50 000 on new project that yields cash flows of £15,000per year for 5 years. If it is hit with a further, unplanned costs of £20000 in year 1 the project is now unprofitable and it would make sense toabandon the project – if possible – as less money will be lost.•Demonstrate this advantage assuming a cost of capital of 10%. 33
  34. 34. Types and uses of real options3, Flexibility options•In many commercial organisations it may be possible toalter: – input mixes e.g. supplies (with new cost); – customer/channel choices; – Business location; – Etc.•All of which will impact profitability. 34
  35. 35. Valuing real options- Black Scholes (Luehrman)• The Black Scholes method is the way of calculating financial option values (calls).• Many academics have used variants of this approach to value real options.• This means using quite tricky mathematics – and this may explain why many strategists shy away from studying real options (Grant, 2010).• FOR THIS MODULE DO NOT WORRY ABOUT CALCULATIONS – INSTEAD UNDERSTAND WHAT REAL OPTIONS ARE, WHY THEY MAY BE VALUBLE AND HOW TO SPOT THEM. 35
  36. 36. Valuing real options- Black Scholes (Luehrman) Black Scholes elements Real Option equivalents• Stock Price • Present Value of the project (PV S) S• Exercise Price • Project cost (PV C) X• Time to expiry • Length of term(t) t• Risk free rate • Time Value of Money rf• Variance of returns • Project risk (SD) SD per year These 5 variables can then be simplified further into: 36 Value to cost ratio: PV S/PV C or S/X Volatility: SD x √ t .
  37. 37. Valuing real options- Black Scholes• Calculating volatility tricky – how to: – Make an estimate e.g. indexes have an SD of about 20%, manufacturing stocks are about 40%. – Use historical data on investment returns. – Use implied volatility based on volatility of financial options in similar classes of businesses. 37
  38. 38. Once we have calculated value to cost and volatility we can plot them on an Option Space Grid to give us indications of what weshould do(Luehrman). You can do this without calculations 38
  39. 39. Using the gridNote option value increases as we move right and down: Value to Cost VALUE Volatility 39
  40. 40. Real Options – the verdictAdvantages Disadvantages• Richer than npv – factors • Complicated maths. in more elements to • Some figures might be hard to investment decisions. identify e.g. cost of capital. • Hard to get precise figures e.g.• In particular recognises the for volatility; therefore it is a ability to delay projects. good idea to carryout sensitivity analysis, e.g., change volatility• Suitable in today’s choppy figures. economic climate. • Proxies e.g. suitable financial options may be hard to identify.• Becoming more popular. • Can be hard to spot embedded• Many uses – see earlier options. examples. 40
  41. 41. Session 3 -ExerciseFor a company that you are familiar with, reflect uponsome of the strategies available to develop the corporate.1.Assess whether or nor these strategies include: delay,abandonment or flexibility options.2.Use the options grid to assess when some of thesestrategies should be enacted. 41
  42. 42. Session 4 – Implementation of strategy• For this session we will focus upon implementing strategy and preventing it from wandering off course (strategic drift) 42
  43. 43. Session 4 - reading• Grant ch 2 and 17• J and S ch 10, 12• Kaplan, R. and Norton, D. (1992) Balanced scorecard – Measures that drive Performance, HBR, April-May (on the web; this is the first of five articles published by the authors in the HBR)• Rumelt, R (2011) Good Strategy, Bad Strategy, Random House• http://www.mckinseyquarterly.com/Strategys_strategist_An_interview_with_Richard_Rume (register first - excellent commentary on Rumelt)• http://www.anderson.ucla.edu/faculty/dick.rumelt/Docs/Papers/EVAL2.pdf – (Rumelt criteria)• See also: – 2gc.com • For Balanced scorecard resources esp. for 3 rd generation 43 – scorecardshttp://www.balancedscorecard.org/BSCResources/AbouttheBalancedS corecard/tabid/55/Default.aspxo
  44. 44. Session 4 - Implementation• This session focuses upon ensuring your strategy – whatever it is – does not wander of course. To do this we must measure and evaluate it.• We shall focus upon: – The Balanced Scorecard (Kaplan and Norton) – Rumelt’s criteria 44
  45. 45. The BALANCED SCORECARD How do we look to Financial perspective shareholders?How do customerssee us? GOALS MEASURES Internal businessCustomer perspective perspectiveGOALS MEASURES GOALS MEASURES Innovation and learning perspective GOALS MEASURES What must we excel at? Can we continue to improve and create value? 45 Source: The Balanced Scorecard - Measures That Drive Performance. Robert S. Kaplan and David P. Norton. Harvard Business Review. Jan/Feb 1992. Pages 71 - 79.
  46. 46. Balanced Scorecard• The key to the BSC is to:• Select performance dimensions (originally Kaplan and Norton envisaged 4 – but you can add/amend)• In each dimension you need 2-5 metrics or measures to measure each dimension.• Key is to design accurate, realistic and practical measures that the firm can operationalise. 46
  47. 47. Balanced Scorecard• Key is to balance the measures/metrics: 1. Qualitative and quantitative 2. Leading (forward looking) or lagging (looking at the past – e.g. as in accounting reports) 3. Internal (firm) or external (industry) REMEMBER YOU TAILOR DIMENSIONS 47 AROUND THE FIRM AND CONTEXT
  48. 48. Balanced Scorecard• It is important that:• There are clear linkages between dimensions and the metrics in each dimensions: it is normal to establish goals in each dimensions and then find matching metrics.• The BSC cascades throughout the organisations: corporate level; business/SBU level; department level; personal level via appraisal systems.• The BSC is united under an overarching aim or mission. See the 2gc.com website and look at the material under 3rd generation scorecards. 48
  49. 49. FOR EACH DIMENSION EG FINANACIALSTIPULATE GOALS AND METRICS AND ENSURE LINKAGE 49
  50. 50. Learning & Growth Perspective:Possible Measures Revenues from new products R&D resources & costs Investment in training Suggested improvements per employee Employee age profile Employee turnover rates % full-time permanent employees Staff flexibility / job coverage Staff surveys 50
  51. 51. Financial Perspective:Possible Measures Revenues per employee Cost ratios Market value Value added per employee Return on net assets Revenues / total assets Profit margin Contribution / revenue Cash flow 51
  52. 52. Customer Perspective:Possible Measures Market share # customers Sales closed / sales contacts Customer loyalty index Average duration of customer relationship Service expense per customer Customers lost / churn ratio Customer survey ratings 52
  53. 53. Internal Business Process Perspective:Possible Measures Administrative expense On-time delivery % Lead time (product development, order to delivery, suppliers) Productivity improvement Decision turnaround time Service expense per customer IT capacity & expense Error rates 53 Environmental impact of product use
  54. 54. Strategy Review, Evaluation, & Control Consistency Rumelt’s Consonance 4 Criteria Feasibility Advantage 54
  55. 55. Strategy Review, Evaluation, & ControlConsistency• Strategy should not present inconsistent goals & policies 55
  56. 56. Strategy Review, Evaluation, & ControlConsonance• Need for strategies to examine sets of trends 56
  57. 57. Strategy Review, Evaluation, & ControlFeasibility• Neither overtax resources or create unsolvable sub- problems 57
  58. 58. Strategy Review, Evaluation, & ControlAdvantage• Creation or maintenance of competitive advantage 58
  59. 59. Session 4 - ExerciseDesign a Balanced Scorecard for Manchester United;use the original four dimensions and devise 2-3metrics for each one. Be prepared to justify yourchoices. 59

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