strategy formulation process

(c) Macmillan & Tampoe 2001 1

The Strategy Formulation Process

Strategic Assessment

Analysis of Resources, Capabilities and Competence


Some commonly used techniques for internal analysis

Single BusinessesResource AuditAnalysis of cost and profit)Benchmarking, Value Chain Analysis, (Supply Chain Analysis)

Multiple Businesses Assessing Parenting Advantage, Portfolio Analysis)

Both Single and Multiple BusinessesCore CompetenciesShareholder Value AnalysisDistinctive Organisational Capabilities


Resource Audit

Resources Physical Human Financial Other

Quality and Quantity Unique resources A good initial analysis


Analysis of Costs and Profit

Current sources of profits and trends Recast standard reporting to give new insights Pragmatic approach to get value from time and

effort spent A good initial analysis


Benchmarking

Objective comparison with best in class Benchmarking clubs common Simple in theory - Hard in practice Observed differences in performance may be due to

differences in parameters Qualitative observations may be more valuable than

quantitative


Value Chain Analysis

Basic Value chain in Elegant in theory Time-consuming in practice Revised value chain to reflect power of

people and knowledge


Value Chain Analysis

The term value chain describes a way of looking at a business as a chain of activities that transform inputs into outputs that customers value.

Customer value derives from three basic sources:activities that differentiate the productactivities that lower its costactivities that meet the customer’s need quickly.

Value chain analysis views the organization as a sequential process of value-creating activities, and attempts to understand how a business creates customer value by examining the contributions of different activities within the business to that value.


The Value Chain

Primary Activities

Secon

dary

Acti

vit

ies

General administration

Human resource management

Research, technology, and systems development

Procurement

Inboundlogistics

OperationsOutboundlogistics

Marketingandsales

Service

Mar

gin

Margi

n


Conducting a Value Chain Analysis

Step 1. Divide the firm’s operations into specific activities or business processes, usually grouping them according to primary and support activities. Within each category, a firm typically performs a number of discrete activities that may represent key strengths or weaknesses.

Step 2. Next, attach costs to each discrete activity. Step 3. Recognize the difficulty in activity-based accounting. Step 4. Identify the activities that differentiate the firm from their

competitors.


Conducting a Value Chain Analysis

Step 5. After documenting the value chain, managers need to identify the activities that are critical to buyer satisfaction and market success. These are the activities that deserve major scrutiny in an internal analysis. The mission should influence managers’ choice of the activities

they examine in detail. The nature of value chains and the relative importance of the

activities within them vary by industry. The relative importance of value activities can vary by a

company’s position in a broader value system that includes the value chains of its upstream suppliers and downstream customers or partners involved in providing products or services.

Step 6. Compare to competitors.


Figure Revised Value Chain

PRIMARYACTIVITIES

INFORMATION SYSTEMS & KNOWLEDGE MANAGEMENT

HUMAN RESOURCE MANAGEMENT

basic skills,know-how,

technologiesstrategic assets

corecompetence

price,place,

promotionproductservice

technical,management,

marketing,sales,

production

revenue,profit,

market share,

customersatisfaction,

loyalty

Firm’s infrastructure

Technology trapping and commercialisation

Strategic Management

SUPPORTACTIVITIES

PROCUREMENT AND SUPPLIER MANAGEMENT

Source: adapted from Porter, M (1985), Martin (1995) to reflect recent developments


Why talking “competencies”?

Ten years, what a difference make! 80s: restructure, declutter, delayer the corporation 90s: identify, cultivate and exploit the core competencies that

make growth possible Rethinking the Corporation

Why? Market boundaries changer quickly, targets are elusive and value capture is at the best temporary

Need: Invent new markets, enter emerging markets, shift customer choice in established markets

All these, require radical change in the management of major companies: focus on a portfolio of competencies (instead of a portfolio of business)


The Core Competence Perspective

Traditional Perspective Core CompetencePerspective

Market share of present markets Share of future opportunities

Strategic Business Unit Focus Corporate Competence

Stand-alone Pattern of alliances

Speed to Market Perseverance towards long-term vision

Adapted from Hamel, G & Prahalad, C.K. (1994) Competing for the Future


Beyond price/performance

Japanese firms provided a good example they have been able to generate a blizzard of features

and functional enhancements that bring technological sophistication to everyday products

The return of “long run” In the short run, a company’s competitiveness derives

from the price/performance attributes of current projects

In the long run, competitiveness derives from an ability to build, at lower cost and quickly, the core competencies that spawn unanticipated products


How competencies support products?End products

1 2 3 4 5 6 7 8 9 10

Business 1 Business 2 Business 3 Business 4

Core product 1Core product 1 Core product 2Core product 2

Core Competence 1 Core Competence 2 Core Competence 3


--- is a cross-organizational boundaries culture Core competencies are the collective learning in

the organization, especially how to coordinate diverse production skills and integrate multiple streams of technologies Sony capacity to… Philips expertise in…

Competence is about Harmonizing streams of technology Organization of work Delivery of value


How to think of competence

Successful companies seem to preside over portfolios of unrelated business in terms of customers, distribution channels, and merchandising strategy…

… because they are able to integrate skills In that context, core competencies provide strategic

flexibility (possibility to enter more markets) … and of course, is difficult to be imitated How many: not more than five, six…


From core competences to core products

The tangible link between core competencies and end products is what we call the core products The physical embodiments of one or more core

competencies Core products are the components or subassemblies

that actually contribute that contribute to the value of the end products

Attention to the difference between core competence – core product – end product


Layers of competition

At the level of core competence, the goal should be to build leadership in in the design and the development of a particular class of product functionality

To sustain leadership in their core competence areas, companies seek to maximize their share in core products

They also need to define a strategic architecture A tree of the corporation organized around core

products and core competencies


Competition for competence

Competition to develop and acquire constituent skills and technologies

Competition to synthesize core competencies Competition to maximize core product share Competition to maximize end product share


Processes, positions and paths Processes

Integration Learning Reconfiguration and transformation

Positions Technological assets Complementary assets Financial assets

Paths Path-dependencies Technological opportunities


The Tests for Core Competence Essential to corporate survival in short and long term Invisible to competitors Difficult to imitate Unique to the enterprise Result from a mix of skills, resources and processes A capability which the organization can sustain over time Greater than the competence of an individual Essential to the development of core products Essential to the implementation of strategic intent Essential to the strategic choices of the enterprise Marketable and commercially viable Few in number


The roots of core competence for a typical manufacturing business

Different products, parts, sub-assemblies

Knowledge based,person specific professional service

Rule or process based provision, of knowledge & functionality

CORE COMPETENCE

Basic technologies, bodies of knowledge, corporate or individual learning, relationship culture, strategic assets, parts, processes, raw materials, supply chain management

Product or Service (as chosen by the customer)


The roots of core competence for typical professional services firms

Staff Skills

Mindset

Inter-personal

Skills

Professionalknowledge

TaskSkills

Personality

Embodiedas Core

Competence

Products &

Services

Collectiveknowledge

of the organisation


Applying Shareholder Value Analysis

Adapted from Rappaport (1986)

ManagementDecisions

Creating ShareholderValue

Shareholder ReturnDividends

Capital Growth

Cash fromOperations

DiscountRate Debt

CorporateObjective

ValuationComponents

Duration ofValue growth

Sales GrowthOp. Profit Margin

Fixed & Working Capital

investment

Cost ofCapital

ValueDrivers

Operating Investment Financing


Assessing Parenting Advantage

Stand-alone influence Linkage influence Central functions and service Corporate development


Portfolio Analysis

Source: Originally Boston Consulting Group. In Widespread use

High Low

High

Low

Market Share

MarketGrowthRate

?


Choosing the right tools for internal analysis

Start with simple techniques Consider all tools and identify those likely to be useful Define the competitive capabilities the enterprise needs Identify the subsystems which support these capabilities Identify core competence relative to competitive capabilities Determine changes to enhance/improve core competence Take a systemic view Adjust the methods of analysis in the light of what is found

strategy formulation process

Documents

assessing parenting advantage

good initial analysis

end products

core products

internal analysis

chain analysis

core competencies

long run