No universal accepted

definition of strategy

Strategist: The role of a general in command of an army

or
How an organisation matches its own capabilities with the
opportunities in the marketplace in order to accomplish
its objectives

Can be a plan or ploy to beat competitors –

or exploit uncovered new needs
Chandler’s thesis

 A new strategy requires a new or

at least refashioned structure if
the enlarged enterprise is going
to be operated efficiently….
Unless structure follows strategy,
inefficiency results.
 Find options..
 PESTEL factors: Political, Economical, Social,
Technological, Environmental, Legal
 SWOT: Strengths, weaknesses, opportunities, threats
(distinctive competitive edge, core competence, resource
base)
 Porters five forces: Buyer, Supplier,
Entrants, Substitutes, Rivalry
 PLC: The product life cycle
 Value drivers
…and choose

 Competitive positioning: Exploit people’s

needs and create economies of scale
and scope
 Create complementary product range
 Create synergies
 Avoid risks if possible
Well-known strategies (1)
 Porters marketing strategies: 1) Cost-
leadership, 2) focus on a narrow
segment and 3) differentiation in
quality, service, design or positive
brand image
 Miles and Snow’s four strategic types:
1) Defender, 2) Analyser, 3) Prospector
and 4) Reactor
Well-known strategies (2)
 Logistic strategies: JIT, location strategy,
layout strategy, supply-chain strategies,
pull- or push strategy.
 Diversification strategies: Vertical- or
horizontal integration
 HRM strategies for creating motivation and
commitment
 Exercise

Consider a change from a differentiation

strategy to cost-leadership for a limited
number of products in mass production.
A number of problems and options will
occur with respect to technology, tasks,
people and organizational structure.
Which?
Managing the strategy

Can financial value be put on

a business strategy?
Then it must be by achieving
extra return on capital.
The Business Value System
A value driver is:
Anything either internal or external to a
business which directly or indirectly
contributes to cash inflows

A cost driver is:

Anything either internal or external to a
business which directly or indirectly
contributes to cash outflows
Value driver (examples)
 Strength of customer loyalty and demand
 Quality of the product
 Perceived value seen from customer
 Service accompanying the product
 Complementary product range/mix
 Brand differentiation
 Volume and margins
Cost driver (examples)

 Complexity of product range (lack of

harmony)
 Lack of efficiency/effectiveness
 Demanding customers
 Lack of product quality
Value creation and destruction
Customer value
Customers
bargaining Creation of
power gives value
customer
surplus
Price
Operating cost
Lack of buyers
power and lack
of efficiency
 The product:
Hygiene factors and motivators
 Hygiene factors: Quality and
features that must be met because
they are expected by the customer
as minimum.
 Motivators: Better quality and
unique features that make our
products better than competitor’s
products.
Value creation and destruction
 The value will be destroyed if hygiene factors
are not met (Lack of basic elements or
features).
 High competitive pressure increase
consumers surplus
 Differentiation can be a motivator (Superior
resale value). Motivator activities excite
customers and create value more than cost.
Hygiene factors and motivators
(critical factors) in a supermarket chain

 To achieve measurable superior service compared

to competitors through staff training and resulting
behavioural change.
 To achieve one-stop shopping through store
location, product range
 Extended opening hours
 To secure lower-cost supplies through computerised
logistic systems
 Home deliveries
The value driver

 The number of customers who defect from

competitors in seeing us as their preferred
shopping destination.
 The effect will be bigger turnover and/or better
margins
Destruction of value:
The mobile phone example
100 £ for - 10 £ for trade-in of old
buying a new model for a new and better
model assuming that the
customer is going to use
the telephone operator for
at least 6 month
Olympic relay (stafet) running team

 Customer value: Number of (gold) medals

 Critical success factor: To run faster, fast and
safe baton (depeche) exchange.
 Threshold features: Meet qualifying standard,
pass drug test, be selected into national team
 Threshold resources: Equipment, medical
facilities, the right food
 Unique resources: Exceptional body, heart
and lungs, World-class coach
Exercise

 State threshold features (also called

hygiene factors) and CFSs for a car, a
mobile phone operator’s service and a
washing machine.
 Which CFSs are particularly valued?
 Which CFSs are used to distinguish
between providers?
Value from shareholders point
of view
 Shareholder will not accept poor paybacks.
E.g. Mr. Schrempp at Daimler-Benz requires
every business to make a return of at least 12
per cent on capital employed or the business
will face closure or expect to be floated/sold.
 Capital employed = Fixed assets + working
capital (Current assets – current liabilities).
Shareholder value analysis
 Measure of net present value of
future earnings.
 Any change should be evaluated on
its future net cash flows, the time
value of money and al direct and
indirect cash flows taken into
account.
 Exercise
The required rate of return is 12% and the planning horizon is 3 years
after which effects are neglected.
A staff training programme causes the following change in after tax cash
flow:

Year 0 - 200
Year 1 + 150
Year 2 +100
Year 3 +50
What is ”economic value added” (EVA). In this case equal to
the net present value (NPV) of the project?
Should we run the campaign?
 Exercise
The required rate of return is 12% and the planning horizon is 2 years
after which effects are neglected.
A soccer team acquires a new player which is expected to generate cash
flows through participation in European Cup and increased sales of
merchandise:

Year 0 - 100
Year 1 + 60
Year 2 + 60
What is ”economic value added” (EVA). In this case equal to
the net present value (NPV) of the project?
Should we buy/hire the new player?
The value action pentagon

Increase return
on existing Positive spread if actual
capital return > required return
Lower the Raise
investment => NPV > 0
required
rate of in positive
return Value spread units

Extend Divest assets

planning from negative
horizon spread units

Annual value creation = Investment x (actual return – required return)

 Required rate of return
 The required rate of return will be
higher if the business option is more
risky (The amount invested is 200).
Option A (probability) Option B
Return –250 (0,2) Return 200 (0,3)
Return +400 (0,8) Return 300 (0,7)
Expected: 270 Expected: 270
Required rate: 15% ? Required rate: 12% ?
What is your opinion?
Three steps of
value-based management
1 Mission statement
with value for shareholders at its core

2 Measuring shareholders value

e.g. for the entire corporation, business unit or specific
investment option

3 Actively managing to create shareholders value

e.g. identifying and understanding the sources of value, target setting, allocating
resources, measuring performance, reward systems, culture
 The roots of strategic capability

Strategic capability
Redundant competences Threshold competences Core competences
Inadequate resources Threshold resources Unique resources

… Create failure, .. To outperform competitors .. To create new opportunities

and stay in business
require repositioning

New What do customers value? New customers

customers
Threshold features (CSFs) New arenas
Exit or find particular valued and used to changing the rules
other segments distinguish between providers of the game
The hunt for value

 Strategy and financial analysis are equal

partners.
 Strategic and financial analysis can help
to shape strategic development.
 Not all the value of the strategy can be
captured in financial numbers.
Market share and shareholders value
Shareholder Value

Market share
It can be too expensive to gain market share.
Adapted from McTaggart, Kontes and Mankins, 1994
Case: Manchester United

 Explain figure 2.8 and 2.9 page 46-47.