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1
The Strategy Formulation Process
Strategic AssessmentAnalysis of Resources, Capabilities and
Competence
2
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
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Resource Audit
Resources Physical Human Financial Other
Quality and Quantity Unique resources A good initial analysis
4
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
5
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: activities that differentiate the product activities that lower its cost activities 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.
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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
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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.
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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 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.
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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
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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 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)
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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
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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 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
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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
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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 of technology Organization of work Delivery of value
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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
22
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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Figure 10.5 The roots of core competence for a typical manufacturing business
(C) Mahen Tampoe February 6, 1996
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)
24
Figure 10.6 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
(C) Mahen Tampoe February 6, 1996
25
Figure 10.7 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
26
Assessing Parenting Advantage
Stand-alone influence Linkage influence Central functions and service Corporate development
27
Figure 10.9 Portfolio Analysis
Source: Originally Boston Consulting Group. In Widespread use
High Low
High
Low
Market Share
MarketGrowthRate
?
28
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