Enterprise Process Analysis Lecture 2 Strategy Reading D-1 & D-2

SUMMARY OF LECTURES 2 TO 7 L2 Strategy L3 Internet L4/5 B2C B2B L7 ERP Value Chain L6

Strategy What is Strategy??? Strategy comes from the greek word ‘strategos’ meaning “general” Though originally used in war terminology, strategy in business takes the form of a plan designed to help an organisation outperform its competitors - this is achieved by creating new opportunities rather than beating rivals Michael E. Porter (Reading D-1) defines strategy as: “Strategy is the creation of a unique and valuable position, involving a different set of activities”

Strategy What is Strategy??? Strategy is also about “making trade-offs in competing. The essence of strategy is choosing what not to do” Strategy is also about “creating fit among a company’s activities” Strategy goes far beyond the pursuit of best practices. It involves the configuration of a tailored value chain - the series of activities required to produce and deliver a product or service than enables a company to offer a unique value

Strategy - a misled word? Root of problem is the failure to distinguish between operational effectiveness and strategy You may have heard of terms like TQM (total quality management), benchmarking, time based competition, outsourcing, partnering, reengineering, change management which have been coined to address productivity, quality and speed In the bid to stay competitive, managers have now moved towards such management tools BUT inevitably move father away from viable competitive positions.

Operational Effectiveness versus Strategy Both are essential to superior performance but they work in different ways Operational Effectiveness (OE) means performing similar activities better than rivals perform them OE includes but is not limited to efficiency. OE basically includes any activity that allows companies to utilise its inputs better and producing better products faster However, strategic positioning (SP) refers to how a company can perform different activities from rivals or performing similar activities in different ways.

Operational Effectiveness versus Strategy Example, Company A produces brown bread roll at a cost of $2 and selling price of $4 at a turnover rate of 100 rolls per day To achieve OE., Company B produces the same brown bread roll at a cost of $1.20 and selling price of $4 at a turnover rate of 120 rolls per day However, to achieve SP, Company B needs to either produce a special kind of brown bread or perhaps mass-produce the brown bread to increase production

So what are companies really doing? Companies are embracing OE through programs such as TQM, time-based competition, and benchmarking However, imitators have been quick to follow over a long period of time and hence you lose your competitive edge What you need is a strategic outlook - yeah, ok, but how do I invent a strategy?

Firm-Specific Resources and Capabilities Competitive Market Dynamics Firm-Specific Resources and Capabilities SWOT Perspective Mission Position Business Strategy Plan Performance Goals and Measures Patterns Actions Hierarchy of Business Strategy

Strategic Analysis A SWOT analysis is undertaken to provide a snapshot of a company’s current performance to that of its competitors The left hand side gives the positive features and the right hand side gives the negative features.

Strategic Analysis Strengths Weaknesses Opportunities Threats

Competitive Market Dynamics Analysing Opportunities and Threats Answering the questions: What is the nature of the market? Who are the major competitors? What are the rules of the game? How great is the potential for profit? Porter’s “five forces” model is a useful framework:- Threat of new entrants Bargaining power of suppliers Bargaining power of customers Availability of substitute products or services Rivalry in the market

Firm-Specific Resources and Capabilities Analysing Strengths and Weaknesses Answering the questions: Looking at the Balance Sheet (Statement of Financial Position) to analyse the type of assets Assets is a resource, owned or controlled by the entity that will yield future economic benefits, e.g. plant, equipment, cash, inventory Type of Assets Current Assets-Cash, Marketable securities, Accounts receivable etc. Non-Current Assets-Plant, Equipment etc. Intangible Assets-Copyrights, Patents, Goodwill etc. Intangible Resources-Distinctive internal capabilities, market franchises etc

4 ‘Ps’ of strategy : Mission Strategy as Perspective Creating a Mission: Mission refers to the broad purpose or reason that a business exists At the most basic level, a company’s mission is recorded in its legal charter or Articles of incorporation However, senior managers may pass down their ideals and core values to their employees A mission statement provides an overarching perspective to all activities of a firm.

4 ‘Ps’ of strategy : Business Strategy Strategy as Position Answering the questions: How do we create value for our customers? How do we differentiate our products and services from those of our competitors? >>>Adopt one of 3 strategic moves

Strategic Moves Adoption of one of the three Porter (1980) strategies with respect to competitive position gives a firm indicator of the ability to dismiss pressures exerted by competitors: Industry leadership (esp. cost leadership) Product differentiation Niche marketing

Strategic Moves 1) Industry leadership through- Cost leadership Technological superiority High quality Economics of large scale production These factors allow the firm to resist competitive pressures through price cutting and because the competitors cannot match the technological expertise that has been created

Strategic Moves 2) Product differentiation Manufacturing of multiple products each branded and fiercely promoted Competitors are forced to compete simultaneously on many fronts Competitors must overcome brand loyalty through price cutting

Strategic Moves 3) Niche marketing To target niche markets, ignored by larger and less flexible operators, companies can compete strongly Focusing on cost or quality and responding to customer needs in a restricted market

4 ‘Ps’ of strategy : Performance Goals and Measures Strategy as Plan Business need to set up plans to communicate intended strategy to all in organisation Goals are the ends or results that management desires to achieve in implementing the business strategy E.g. Increase Market Share, Reduce Expenses, Open New Stores etc. Need to set measures of scale to determine extent to which firm has met goals

4 ‘Ps’ of strategy : Actions Strategy as Pattern Potential for new strategies to emerge in organisations Could be due to changing patterns of action in their business E.g. Changing focus from production of chips to production of high-value-added microprocessors (Intel Corp)

So…what strategic options do companies have? First, strategic positioning can be based on producing a subset of an industry’s products or services – variety-based positioning. E.g. (Reading D-1) Jiffy Lube International and Vanguard Group – customers visit these businesses to access a superior value chain for a particular type of service Second, strategic positioning can be tailored to meet the needs of a particular group of customers – needs-based positioning. E.g. (Reading D-1) Ikea, Beverage Companies, Bessemer Trust and Citibank– these businesses meet the needs of its target customers and not just a subset of them

Strategic Positioning Thirdly, strategic positioning can be made to segment customers who are accessible in different ways – access-based positioning. E.g. (Reading D-1) Carmike Cinemas – providing theatre entertainment to a small community

Sustainable Competitive Advantage To achieve sustainable competitive advantage, trade-offs are essential. There are essentially three types of trade-offs Firstly, inconsistencies in image or reputation. Companies which have known to deliver a kind of product may confuse customers Secondly, trade-offs arise from activities themselves. Different positions require different product configurations, different equipment, different employee behaviour, different skills, and different management systems Thirdly, trade-offs arise from limits on internal coordination and control – companies that try to do everything and anything confuse employees who make everyday decisions

Sustainable Competitive Advantage Fit is also essential to maintain sustainable competitive advantage. Fit drives both competitive advantage and sustainability There are three types of fit First-order fit is simple consistency between each activity and the overall strategy e.g. Vanguard Second-order fit occurs when activities are reinforcing e.g. Neutrogena Third-order fit occurs when coordination and information exchange across activities to eliminate redundancy and minimise wasted effort e.g. Gap stores