MPAcc 801 Business Environment and Strategy

MPAcc 801Business Environment and

StrategyInternal Analysis III

(Activity Analysis of Industrial Firms)01 June 2010

Dr. Norman T. Sheehan, Ph.D, CGA, CMA

MPAcc 801 Spring 2010

Agenda 01.06.10• Feedback on Part I Strategy Projects • Feedback on Half-way Survey• Internal Analysis III (Activity Analysis for

Industrial firms)– Value Chain Analysis (read ‘Creating competitive

advantage’ RP, review Chp 5 ‘Creating business strategies’ RP, plus review articles on BB)

– JetFighter Competition• Please practice making planes prior to class to

get full benefit!



Half-way Student Feedback• What do you like best about the course?

– Interactivity, in-class exercises, hands-on nature, discussions – 33

– Group work and presentation practice – 7– Strategy focus, strategic thinking – 6

• What would you change?– Feedback on first presentation before second – 10– Less readings/content – 9– All is good – 6– Cheaper book – 4

3



Half-way Student Feedback• I like it when the instructor:

– Informs class of current events relating to strategy – 38

– Uses humor effectively – 9– Facilitates discussions – 5

• I dislike it when the instructor:– Lectures – 2– Is the board – 1

4



Half-way Student Feedback• Most helpful assigned reading thus far:

– Porter’s What is strategy? – 9– Magretta’s What is Management? – 8– Oil Patch Banker – 5– Why companies fail – 3– Are you sure you have a strategy? – 2

• Least helpful assigned reading thus far:– OSC Governance Principles – 8

5



Half-way Student Feedback• Main concerns thus far

– None – 9– Applying knowledge to UFE – 8– Too many assignments in next two weeks – 7– Time pressure on presentations – 2

6



Agenda 01.06.10 – Cont’d

Next class Fri, 04 June• Blue Ocean Strategy and Innovation (read ‘Blue

Ocean strategy’ BB, ‘The path to growth’ BB, ‘Using a value creation compass to find “blue oceans”’ BB, review Magretta Chp 7)

• ‘Good Hands Healthcare’ case presentations, discussions, board Q&A– Groups 4,5,6 present the case (15 min), while

groups 1,2,3 hand-in the case and act as the board/provide peer critique

7



Good Hands Healthcare Case Assignment (04 June)

1. Use concepts from the articles ‘Why do strategies fail?’ and ‘When growth stalls’ as well as any other relevant course readings to explain why Good Hands Healthcare is under-performing relative to its rivals. As part of this analysis, use Hambrick and Fredrikson’s (2005) strategy evaluation criteria (#1-5) from Table 1 (pg. 61) ‘Testing the Quality of Your Strategy’ to critique its current strategy. (50 points)

2. Outline the key opportunities and risks for Good Hands Healthcare and then develop a new strategy for Good Hands that takes into account its strengths and weaknesses, changes in its environment, and its aspirations. (50 points)

3. Critique Good Hands Healthcare’s current governance practices and propose changes to bring its governance up to 2010 NYSE governance standards. As part of your critique of and recommendations to improve Good Hands’ governance, propose what the Board should do with its current CEO, George Jackson, and discuss why. (50 points). You will be presenting to Good Hands Healthcare’s Board.

8



JetFighter Exercise• Your team is the senior mgmt group of the small and

financially challenged JetFighter company. Your company has just won an important Government jet fighter contract that needs to be fulfilled immediately. In order to win the contract, your firm agreed to produce at least 5 planes each period.

• The Gov’t inspector will buy all the jet fighters that exactly meet the Gov’t Purchasing Criteria laid out on last page of JetFighter Instructions

• We will have three teams – two groups will build the Basic Training Plane, one group the Deluxe Combat Plane



JetFighter Exercise• Base Plane Price=$5M, Deluxe Plane Price=$10M• Raw materials cost varies by type of plane and

amount purchased (see hand-out)• Your team goal is to earn most profit: Revenue – Cost (Planes Passed*Sales Price) – (Planes Bought*purchase cost)• Planes purchased but not completed or approved

in Period 1, cannot be used in Period 2 as they become obsolete

• There may be small problems with the raw materials, but there are no refunds (sorry)



Steps in JetFighter Part I1. Organizing, Planning & Training – 15 min

• Develop vision/mission, decide strategy, organize production, calculate break-even point and decide how many planes to produce, practice making planes…

2. Production Period 1 – 5 min3. Instructor inspects/buys planes, calculates

profit for each firm – 10 min4. Review of Value Chain and Analysis and

Discussion of how to improve your Period I results



Steps in Activity Analysis1. Identify how the firm creates value – transformation,

mediation, problem-solving 2. Use the correct template to break-down the firm and

its competitors into its value creating activities3. Analyze activities and look for ways to reduce cost

• Analyze activities• Analyze critical drivers for each key activity

4. Analyze activities and look for ways to increase buyer willingness to pay

• Analyze activities• Analyze critical drivers for each key activity

5. Goal is to drive the largest ‘wedge’ between the buyers’ willingness to pay and total cost to produce



Step 1 – Identify the Correct Value Configuration

• Firms compete/create value differently:– Industrial firms (such a Ford) transform inputs into

outputs – use value chain analysis (covered today)

– Knowledge intensive firms (such as consulting firms) solve clients’ problems – use the value shop (covered 18 May)

– Network firms (such as mobile phone companies) connect customers – use the value network (covered 18 May)



Step 2 – Break-Down Firm into Key Value Creating Activities

• The value chain template has generic activity labels

In-goingLogistics

Out-goingLogistics

Production ServiceSales&Marketing

PurchasingTechnology developmentHuman resource managementInfrastructure

Supportactivities

Primaryactivities

Need to allocate the firm’s actual activities to the correct categories



Activities of a PC Manufacturer

In-goingLogistics – HandlingRaw Mats,Inspection, Inventory

Out-goingLogistics –Storing,OrderProcess,Shipping

Production –Assembly,Operation of Plant,Testing,Maintenance

Service –TechnicalSupport,Repairs,ServiceReps

Sales &Marketing –Advt,Promotion,Mgmt ofSalesmen

Purchasing – Acquiring the raw materials

Technology development – Design of product or process

Human resource mgmt – Recruiting, Training, Compensation

Infrastructure – Planning, Organizing, Gov’t relations, Quality



Step 3 – What are Drivers?• Drivers are those contextual factors (e.g.,

where the activity is performed, how many time the activity has been performed, how the activity is performed, etc.) which explain why the cost of an activity is higher/lower than competitors or the value generated by an activity generates is higher/lower than competitors



Step 3 – Identify Key Drivers (Porter, 1985)

– When was the activity started? (Drivers – Learning & Timing)– How large are the activities compared to competitors (Driver – Scale)– How large is the capacity of the activity relative to what is being used?

(Driver – Capacity Utilization)– How is the activity is related/coordinated with other activities in the firm

or or activities in sister units or activities of suppliers/ buyers (Drivers - Linkages and Interrelationships)

– Strategic choices regarding product features, variety, complexity of mfc processes, buyers served, etc (Driver – Policy Choices)

– Where is the activity performed relative to suppliers, customers, etc? (Driver – Location)

– Who performs the activity – is it done in-house or outsourced? (Driver – Integration)

– Gov’t regulations impacting an activity (Driver - Institutional Factors)


MPAcc 801 Spring 2010 Jan Apr Jul Oct

Key Cost Drivers in Value Chains

Time

Unit cost

Learning Driver Scale Driver

Unit cost

Quantity

Units Made

Capacity

Capacity Utilization Linkages DriverSupplier Producer Buyer



Step 4 – Compare to Competitors• Performance is relative!

• Two Level of Comparison:– First Cut

• Compare activity sets

– Second Cut • Compare at level of drivers • If more than one driver use 80/20 rule to

narrow it down – which driver causes 80% of the difference in the activity’s cost/value?



Step 5 – Improve Your Firm’s Position

Generic Strategy

Key Strategic Success Factors

Key Threats

Low Cost Strategy

•Economies of scale•Transfer of best practices to sister units•Economies of scope•Superior low cost production technologies

•Inferior product quality•Rivals adopt newer, lower cost production technologies •Social, economic and political risks of outsourcing production to low cost countries

Differentiation Strategy

•Unique styling/superior product design•Customization•Speed•Convenient access•Unusually high quality•Premium brand image

•Buyers do not perceive diff. or unwilling to pay higher prices•The cost of differentiation exceeds buyer willingness to pay•Over-fulfill buyer needs•Lower cost firms successfully imitate the diff. offering



Step 5 – Improve Your Firm’s Position

• Look for ways to lower the firms’ cost or increase the level of differentiation offered (i.e. try to drive a larger ‘wedge’ between the buyer’s willingness to pay and the total cost to produce the product/service)



Steps in Jet Fighter Part II1. Planning for Period 2 – 20 min2. Production Period 2 – 5 min3. Instructor inspects/buys planes, calculates

profit for each firm – 10 min4. Declaration of a winning group – who earned

the most profit? Winners of 2nd Round get a 10 for the day!!

5. Wrap-up discussion – see Discussion Questions



JetFighter Discussion Questions II

• Did you fulfill your mission/vision? Why or why not?

• Why did the winning firm win? What are the key success factors?

• Outline what you would do to improve your team’s performance in Round 3?

• What are the pros and cons of value chain activity analysis?



Issues with Value Chain Analysis• Value chain does not fit with every firm

• Data intensive

• Complicated and time-consuming analysis, especially at the level of drivers

• Hard to get information



Key Questions in Activity Analysis• Which of the firm’s activities create value (i.e.

what do the customers really pay for)? Can this be increased?

• In which activities are the costs incurred? What affects costs? Can costs be reduced without impacting buyer value?

• Which activities should the firm do itself? What can the firm outsource?

• How are the activities organized? Can it be done more efficiently and/or effectively?



Link to Strategy Project II1. Identify how the firm creates value –

transformation, mediation, problem-solving – choose the correct value configuration

2. Use the suggested template to break-down the firm into its value creating activities

3. Analyze critical drivers for each key activity4. Do steps 2&3 for each of firm’s competitors

• First Cut Analysis – compare at activity level• Second Cut Analysis – compare at driver level

5. Revise Strategy to increase the ‘wedge’

Documents

MPAcc 801 Business Environment and Strategy