The Strategy Formulation Process

Strategic Assessment Analysis of Resources, Capabilities and Competence

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Some commonly used techniques for internal analysis Single Businesses

Resource Audit Analysis of cost and profit) Benchmarking, Value Chain Analysis, (Supply Chain Analysis)

Both Single and Multiple Businesses

Core Competencies Shareholder Value Analysis Distinctive Organisational Capabilities

Multiple Businesses

Assessing Parenting Advantage, Portfolio Analysis)

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Resource Audit

Resources Physical Human Financial Other Quality and Quantity Unique resources A good initial analysis

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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

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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

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Value Chain Analysis

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

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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:

Value chain analysis views the organization as a

activities that differentiate the product activities that lower its cost activities that meet the customers need quickly.

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.
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The Value Chain

Secondary Activities

General administration Human resource management Research, technology, and systems development Procurement Inbound Operations logistics Outbound Marketing logistics and sales Service

Primary Activities

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Conducting a Value Chain Analysis

Step 1. Divide the firms 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.

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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 companys 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.

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Figure Revised Value Chain

Firms infrastructure

SUPPORT Technology trapping and commercialisation ACTIVITIES Strategic Management INFORMATION SYSTEMS & KNOWLEDGE MANAGEMENT technical, price, basic skills, customer PRIMARY core management, place, know-how, ACTIVITIES technologiescompetence marketing, promotion satisfaction, loyalty sales, product strategic assets production service revenue, profit, market share,

HUMAN RESOURCE MANAGEMENT

PROCUREMENT AND SUPPLIER MANAGEMENT

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

Rethinking the Corporation

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The Core Competence Perspective

Traditional Perspective Market share of present markets Strategic Business Unit Focus Stand-alone Core Competence Perspective Share of future opportunities Corporate Competence Pattern of alliances

Speed to Market term vision

Perseverance towards long-

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

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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 companys 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
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How competencies support products?

End products

10

Business 1

Business 2

Business 3

Business 4

Core product 1

Core product 2

Core Competence 1

Core Competence 2 Core Competence 3

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--- 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 Organization of work Delivery of value

of technology

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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

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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

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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

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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

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Processes, positions and paths

Processes Integration Learning Reconfiguration and transformation Positions Technological assets Complementary assets Financial assets Paths Path-dependencies Technological opportunities
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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
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The roots of core competence for a typical manufacturing business

Product or Service (as chosen by the customer)
Different products, parts, sub-assemblies Rule or process based provision, of knowledge & functionality Knowledge based, person specific professional service

CORE COMPETENCE
Basic technologies, bodies of knowledge, corporate or individual learning, relationship culture, strategic assets, parts, processes, raw materials, supply chain management
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The roots of core competence for typical professional services firms

Collective knowledge of the organisation

Mindset

Personality

Interpersonal Skills

Staff Skills

Embodied as Core Competence

Products & Services

Task Skills

Professional knowledge
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Applying Shareholder Value Analysis

Corporate Objective Valuation Components Value Drivers
Creating Shareholder Value Shareholder Return Dividends Capital Growth

Cash from Operations

Discount Rate

Debt

Duration of Value growth

Sales Growth Op. Profit Margin

Fixed & Working Capital investment

Cost of Capital

Management Decisions

Operating

Investment

Financing

Adapted from Rappaport (1986)

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Assessing Parenting Advantage

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

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Portfolio Analysis
Market Share
High Low

High

Market Growth Rate

Low

Source: Originally Boston Consulting Group. In Widespread use

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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

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