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Definitions定义
strategy [strat'iji],策略[stratocaster电吉他的霁],
noun generalship, or the art of conducting a campaign and manoeuvring an army; any long-term plan; artifice or finesse generally.名词将才,或者进行一项运动的艺术和操纵一个军队;任何长期计划;诡计或手腕一般。
stratagem [strat'jm],战略[stratocaster电吉他的jm],
noun a plan for deceiving an enemy or gaining an advantage; any artifice generally. [French stratagème, from Latin, from Greek strategema a piece of generalship, trick;名词计划欺骗敌人或获得一个优势;任何技巧一般。[法国stratageme,从拉丁语,从希腊strategema一块将才,技巧
Strategy策略
Def: “An integrated set of actions that leads to a sustainable competitive advantage”Def:“一整套导致一个可持续的竞争优势”
Works well in a traditional industry characterised by low uncertainty在一个传英国战略管理学课件统行业的工作特点是低的不确定性
But: When uncertainty is high an alternative definition would perhaps be但是当不确定性是高的另一种定义方式可能会
“A handful of decisions that drive or shape most of the company’s subsequent actions, are not easily changed once made and have the greatest impact on whether the company’s strategic objectives are met”“少数决策驱动或形状大部分公司的后续行动,不容易改变了曾和有最大的影响是否符合公司的战略目标,”
Sustainable Competitive Advantage可持续的竞争优势
Why Value Based Management?为什么基于价值管理?
New management approaches for improving organizational performance
T.Q.M
De-layering
Empowerment
Reengineering
Some Successes
Failure frequently due to performance targets that were unclear or not properly aligned with the ultimate goal of creating value.
Failure due to lack of foresight e.g. Kodak recent bankruptcy filing
Value-based management (VBM) tackles this problem.
Value
Precise and unambiguous metric upon which an entire organization can be built.
Simple Principles
Company value determined by its discounted future cash flows.
Value is created only when companies invest capital at returns that exceed the cost of that capital.
VBM extends these concepts by focusing on how companies use them to make both major strategic and everyday operating decisions.
Aligns a company’s overall goals
Analytical techniques
Management processes
Focusing decision making on the key drivers of value.
VBM
NOT staff-driven exercise
Focus - better decision making at all levels in an organization
Expects managers to use value-based performance metrics for making better decisions.
Managing the balance sheet AND income statement
Balancing long AND short-term perspectives.
VBM successfully implemented = superior returns
Equivalent to restructuring to achieve maximum value on a continuous basis.
High impact resulting in improved economic performance
Value Drivers
Def: the key processes and capabilities that enable a company to generate and sustain high value strategies over time.
Strategic Value Drivers:
the processes that enable business units to achieve a more valuable customer offer and operating configuration than competitors.
Overcoming and outperforming competitors
Institutional Value Drivers:
Developing superior organisation capabilities
Overcoming internal barriers to value creation
Value Drivers II
VBM aligns corporate goals, performance measures, and management processes with the key drivers of value
Decision making at all levels
Right information
Appropriate incentives
Make value-creating decisions.
VBM provides individual managers or business unit heads with the information to quantify and compare the value of alternative strategies.
Result choice of value-maximizing strategy.
Requirements
Solid analytical understanding of which performance variables drive the value of the company
Whether more value is created by
increasing revenue growth
or
improving margins
Ensure strategy focuses resource and attention on the right option.
The Value Mindset
First embrace value maximization as key corporate financial objective
Focus directly on creating value
Set goals in terms of DCF value, the most direct measure of value creation.
Translate targets into short-term, objective financial performance targets
Tailor objectives to different levels within the organization
Tailored Objectives
Business unit manager - objective can be explicit value creation measured in financial terms.
Functional manager’s goals expressed in terms of
Customer service
Market share
Sales force productivity.
Manufacturing manager could focus upon
Cost per unit
Cycle time
Defect rate
Product development
Time to develop a new product
Number of products developed
Performance versus the competition
Why D.C.F ?
Need
Take a long-term view
Manage company balance sheet.
Only discounted cash flow valuation handles both adequately
Focus on this year’s net income or on return on sales
Myopic
May overlook major balance sheet opportunities
I.e. working capital improvement or capital expenditure efficiency.#p#分页标题#e#
Decision making heavily influenced by choice of performance metric
Value Drivers
VBM requires a deep understanding of the performance variables that will actually create the value of the business—the key value drivers.
Value driver - any variable that affects the value of the company
In practice value drivers need to be clear
Allowing managers to identify which have the greatest impact on value
Assign responsibility for them to specific individuals
Result-the organization meets its targets.
Value Drivers
Useful at three levels:
Generic - where operating margins and invested capital are combined to compute ROIC
Business unit - where variables such as customer mix are particularly relevant
Grass roots - where value drivers are precisely defined
Linked to specific decisions for front-line managers
Implementation
Key value drivers
Significant impact on value
Monthly measurement
Important line management.objective
Not static BUT regularly reviewed.
Identifying key value drivers
Can be difficult
Requires organization to consider processes in a different way
Existing reporting systems often don’t supply the right information.
Mechanical approaches based on available information and purely financial measures rarely succeed.
Success requires creativity
Scenario analysis allows comparison of different sets of assumptions on value
Linkage
Value drivers do not act in isolation
Increasing price may increase value?
Or
result in substantial loss of market share
When seeking to understand the interrelationships among value drivers, scenario analysis is a valuable tool.
Allows assessment of impact of different sets of mutually consistent assumptions on the value of a company or business unit
Four essential management processes that together govern the adoption of VBM
Develop a strategy to maximize value at company or business unit level
Translate strategy into short- and long-term performance targets defined in terms of the key value drivers.
Develop action plans and budgets to define the key steps to take over the next year and beyond to achieve targets.
Introduce performance measurement and incentive systems to monitor performance against targets and encourage employee commitment
Corporate Strategy
What business are we in ?
How can we exploit potential synergies across business units
How shall we allocate resource between business units ?
In a VBM context, senior management devises a corporate strategy that explicitly maximizes the overall value of the company, including buying and selling business units as appropriate.
A strategy built on a thorough understanding of business-unit strategies.
Business Unit Strategy
Strategy development entails identifying alternative strategies
Valuing them
Choosing the one with the highest value.
Chosen strategy explicitly pinpoints how the business unit will achieve competitive advantage resulting in value creation
Strategy grounded in a thorough analysis
Market
Competitors
Unit’s assets and skills
VBM Strategy Elements
Assess the results of the valuation
Key assumptions driving the value of the strategy
Assumptions separately analysed and challenged
Weigh the value of the alternative discarded strategies
Qualify the reasons for rejecting them.
VBM Strategy Elements II
Clearly state resource requirements
VBM often focuses business-unit managers on the balance sheet for the first time.
Human resource requirements should also be specified
VBM Strategy Elements III
Summarise strategic plan projections
Focus on the key value drivers
Supplement with analysis
of the return on invested capital over time
relative to the competition
Analyse alternative scenarios to assess the effect of competitive threats or opportunities.
Target setting
Base your targets on key value drivers
Include both financial and non-financial targets.
Tailor the targets to the different levels within an organization
Senior business-unit managers targets based on overall financial performance and unit-wide non-financial objectives.
Functional managers need functional targets
Link short-term targets to long-term ones
Link to Time Frame
Set linked performance targets
10 years
3 years
12 months
10 year targets express company goals
3 year targets define how much progress necessary within that time o to meet corporate goal.
12 month target is a working budget for managers.
Internal Value Metrics
The Underlying Philosophy
The primary objective of a company should be the maximisation of shareholder wealth
Criteria based on shareholder value should be employed in determination of business strategy
Models are based primarily upon discounted cash flow (NPV) analysis
The value of an organisation as determined by the stock market is assumed to derive from the present value of future operating cash flows discounted at the cost of capital
Why Is Shareholder Value Increasingly Important?
Four Main Factors
The emergence of an active market for corporate control in the 1980’s
The growing importance of equity based features in the pay packets of senior executives
Increased share ownership
Growing recognition than many social security systems may be heading toward insolvency
Net Present Value
The value of the whole organisation is the sum of the NPV’s of cash flows for all its divisions and parts
Any operations or projects that earn more than the company’s cost of capital will create shareholder value
An approach that has led to the development of a number of “value based management” systems promoted by consultancy firms
Shareholder Value Analysis (SVA)s
Developed by Rappaport (1986)
Simplified concept of cash flow discounting
Debt = Market value of debt i.e long-term loans & overdrafts + mkt value obligations i.e preference shares
In practice equivalent to balance sheet book value of debt
Corporate Value
Rappaport p 33
Corporate Value = Debt + Shareholder Value
Corporate Value = Present value of cash flow from operations + residual value + marketable securities
Shareholder Value = Corporate Value - Debt
Rappaport Value Drivers
Sales growth rate
Operating profit margin
Tax rate
Fixed capital investment
Working capital investment
The planning horizon
The required rate of return
SVA - Assumptions
Relatively smooth change in various cash flow elements from year to year as ALL related to sales level
To estimate future cash flow Rappaport assumes
A constant % rate of growth in sales
Operating profit margin is a constant % of sales
Tax rate is a constant % of operating profit
Fixed & working capital investments are related to increase in sales
Present Value of Cash Flow From Operations
Cash flow from operations = the difference between operating cash inflows and outflows.
Represents cash available to compensate debtholders and shareholders
Step 1
Estimate cash flow from operations for each year during the forecast period
Step 2
Discount cash flows back to net present value [NPV] by the cost of capital or the weighted average cost of debt and equity capital
PV (CFO) =
PV CFO = PV of cash flow from operations
c1 = cash flow arising in time period 1
k0 = the company’s weighted average cost of capital
n = number of periods in the immediate forecast period
IIFC
Incremental Investment in Fixed Capital
= Total capital investment - Depreciation
SVA
Advantages
Relatively easy to understand and apply
Consistent with the value of shares on the basis of discounted cash flow
Makes explicit the Rappaport value drivers for management attention
Value drivers can be used to benchmark against the
Drawbacks
Constant percentage increases in value drivers lacks realism
Can be misused in target setting
Data availability not compatible with some current systems
Application of SVA
Applicable at different levels of business
Corporate
Division
Operating Unit
Project
Product Line
Customer
Strategy & SVA
Quantitative Evaluation of Alternative Strategic Options in Terms of Value Creation Aids Decision Making
Consider each appropriate strategic option
Continuation of current strategy – base case
New operating strategy
Acquisition
Disposal
Rappaport – Corporate Value
Corporate
Value
Economic Profit
Def:
Economic Profit is the amount earned by a business after deducting all operating expenses and a charge for the opportunity cost of the capital employed.
Economic Profit
Performance Spread Approach
Economic Profit = Performance spread x Invested capital
Economic Profit = [Return on capital – WACC] x Invested capital#p#分页标题#e#
Where performance spread is the difference between the return achieved on invested capital and the weighted average cost of capital
Economic Profit
Profit less Capital Charge Approach
A capital charge equal to the invested capital multiplied by the rate of return required by investors is deducted from the operating profits after tax
Economic Profit = Operating profit before interest and after tax – Capital charge
Economic Profit = Operating profit before interest and after tax – Invested capital x WACC
Economic Profit
Advantages
Can be used to evaluate strategic options that produce returns over a number of years
Easier to use than SVA because utilises existing accounting & reporting systems
Focuses on profit rather than cash flow therefore easier to understand and adopt by managers
Disadvantages
Balance sheet does not reflect invested capital
not designed to provide info on present economic value of assets
Easy to manipulate and apply arbitrary judgements
High EP and negative NPV can go together
Short term EP vs Long term NPV
Danger in over reliance on EP
Difficult to allocate revenues, costs and capital to business units
EVA – Economic Value Added
Developed by US firm Stern – Stewart
Aims to overcome problems of Economic Profit
Widely marketed and accepted
EVA = Adjusted invested capital x [Adjusted return on capital – WACC]
Or
EVA = Adjusted operating profits after tax – [Adjusted invested capital x WACC]
EVA
Advantages
Adjustments to profit & capital figures meant to refine Economic Profit
EVA like EP based upon familiar accounting concepts
Arguably more accurate than standard accounting figures
Basic standard that helps managers better understand cash consequences of their actions
Removes conservatism & recognises value of intangible assets such as training and R&D investments for example
Disadvantages
Up to 164 time consuming adjustments
Many equally subjectively based
Perspectives on Income
Shareholder – profit after tax = net income available for distribution to shareholders
Combined perspective of shareholders and debt-holders = amount available for either interest or dividend payments = NOPAT [Remainder after deducting tax at corporate rate from operating profit]
EBITDA – Earnings before interest, tax, depreciation and amortisation. [Operating profit with non-cash flow expenses of depreciation and amortisation added back in]
EBITDA
Rationale
Unavoidable subjectivity in calculation of depreciation and amortisation.
More reliable earnings measure is closer to cash flow therefore excludes D & A
Depreciation & Amortisation expenses are not cash flows they represent allocation of historical costs not expectations of future capital expenditure.
Measures a company’s flexibility to respond to changing market conditions. [better measure than operating profit of the cash flow that a company is making available for new investment]
Often used by venture capitalists
Residual Value
= the value after the forecast period
May be very substantial
Dependent upon future expectations
Harvest
Going concern
Assumptions of Perpetuity
Company generating returns above capital cost eventually attracts competitors
Entry of competitors will eventually drive returns down to minimum acceptable I.e cost of capital
Therefore after the forecast value growth period the business will earn on average the cost of capital on new investments
Residual Value II
Present value of a = Annual Cash Flow
Perpetuity Rate of Return
Perpetuity Residual =
Value
Use of Internal Metrics
Don’t select just one metric
Use of cash flow and economic profit prevents problems related to short term actions at the expense of long term corporate wealth
External Value Metrics
Key Drivers of Shareholder Value
Growth
Exceeding growth expectations of your sector or peers
Return on capital
Investing in those activities whose returns exceed the cost of capital
Total Shareholder Return
(TSR)
Shows total return on shares over a period of time
Includes dividend returns and share price changes
If calculated over a number of periods, annualised rate can be used
TSR Strengths
Easy to understand & calculate
Measurements do not rely on accountancy values but simple market figures
Can isolate the period when maximum value was created
Not skewed by size of firm
Reflects measures of success closest to heart of company’s investors – what they have gained (or lost) from investing on one company versus another
Management Today - March 1997 “…now used as the basis for calculating the major component of directors’ bonuses in over half of FTSE 100 companies…”
TSR
Developed by the Boston Consulting Group
Remember
Relate return to risk
Percentage not absolute measure
Sensitive to time period chosen
TSR Limitations
A performance measure should do more than record when a share price goes up or down.
Cut through the noise explain how and why management are creating value
Share prices are driven by many factors other than management performance
Market or sector changes can have a profound effect
Share prices in short term are driven more by differences between actual performance and expectation
Delivery of “surprises” produce higher or lower total shareholder returns as compared to the mkt
Maisters Law
Satisfaction = Perception - Expectation
McKinsey Treadmill Model
Speed of the Treadmill
Expectations for future financial performance implicit in share price
Managers beat expectation – accelerate treadmill = above average returns
Better U perform – the more the market expects = run faster just to keep up
Difficult to deliver at expected level
Accelerating the treadmill hard
Consistently doing so virtually impossible!
The Result in TSR
High Performing Companies
Extraordinary management may deliver only “average” share price increases
Result – Strong performing management under rewarded for their efforts
In turnaround
Less expected
Beating expectation easy in the beginning
Market re-rates performance expected for all future years
Multiplier effect – share price reflects present value of all changes in expectations for all future years cash flows
Result TSR overvalued – Management highly rewarded for marginal performance
Market Value Added MVA
Developed by Stern Stewart
MVA Strengths
Measures wealth created over life of the business
Measures absolute gain in money
Encourages managers to invest in projects that result in growth of earnings
Issues with Market Value Added (MVA)
Accurate estimation of amount of cash invested
Is R&D an investment (asset) or an expense (in P&L)
Goodwill on acquisitions?
When was value created?
Last year, next year, at present?
Created by whom? Present managers or past? Deserved?
Rate of return?
Is the company still exceeding cost of capital on investments?
MVA is an absolute measure (in £s)
If have larger capital base may end up at top of league table (or at bottom) – skewing effect
Comparison between different sized firms difficult.
Market to Book Ratio MBR
Rather than take arithmetic different between current value and market value (as in MVA), MBR is Market Value divided by Capital Invested
MBR =
Illustration of Market to book ratio (MBR)
MBR Strengths
Measures wealth created over life of the business
Adjusts for size of business
Typically larger companies dominating MVA rankings have lower positions in in MBR rankings
By including both debt & equity, market to capital effectively neutralises any leverage differences across companies
MBR Issues
Much the same as (MVA)…
Accurate capital investment figures can be difficult to obtain
Is rate of return on capital higher or lower relative to the cost of capital?
Don’t know during which period, under which management team value was created
Can be distorted by inflation
MVA & Market to Capital Ratio
-ve’s
Rely on accounting data
Affected by asset ownership decisions
Outsourcing?
+ve’s
Useful complement to TSR
Measure different aspects of a companies performance
Expectations of absolute levels of performance
Future performance relative to capital invested
Productivity
Market Share
What market are you measuring?
Anti-ulcerants
H2 Antagonists
Proton Pump Inhibitors
#p#分页标题#e#
Which specific segments or sub-segments?
What products compete with/are directly substitutable for your own?
Different companies define their market differently?
Market share or relative market share?
Market Share and Analysis of Corporate Performance
Cannot be reduced to a single number!
Should consider
Financial market assessment of the company
Company’s underlying performance
Expected future performance as reflected in it’s market value
Achieving Top Quartile Performance
Consistently
Requires
Strong competitive position
Participation in attractive industries
Effective management to realise the full potential of 1+2
Outperforming Consistently Very Difficult
Industry factors
Competitive pressures
BOTH limit managements ability to increase value in the long term
Principles of Value Creation
Increase return from existing assets [profitability]
Make incremental investments that have a rate of return above the company’s cost of capital [growth]
Free up cash and return it to investors when profitable investments are not available [free cash flow]
Actions 1 & 2 drive capital gains performance.
Action 3 creates value by
Funding dividends
Share repurchases
Reduction of excessive debt
Key Questions
Does the business earn a return above its cost of capital?
Is the return improving?
Are there opportunities for growth through investment?
Does management have a plan?
Is the potential already reflected in the share price?
Introduction to Strategic Management
The Nature of Strategic Management
What is Strategy?
Levels of Strategy
Corporate Strategy
Business Unit Strategy
Operational Strategy
Definitions
strategy [strat'iji], noun generalship, or the art of conducting a campaign and manoeuvring an army; any long-term plan; artifice or finesse generally.
stratagem [strat'əjəm], noun a plan for deceiving an enemy or gaining an advantage; any artifice generally.
[French stratagème, from Latin, from Greek strategema a piece of generalship, trick;
Strategy
Def: “An integrated set of actions that leads to a sustainable competitive advantage”
Works well in a traditional industry characterised by low uncertainty
But: When uncertainty is high an alternative definition would perhaps be
“A handful of decisions that drive or shape most of the company’s subsequent actions, are not easily changed once made and have the greatest impact on whether the company’s strategic objectives are met”
SOME KEY TERMS
Vision: Desired Future State of the Organisation
TERM DEFINITION A PERSONAL EXAMPLE
Mission Overriding premise in line Be healthy and look good with the values or expectations
of stakeholders
Goal General statement of aim or purpose Lose weight
Objective Quantification (if possible) or more Lose 10 pounds by 1 September
precise statement of the goal
Strategies Broad categories or types of action Diet and exercise
to achieve objectives
Actions/tasks Individual steps to implement strategies Eliminate desserts/snacks/butter
(perhaps related to operational issues Limit alcohol to 1 drink/day or identified individuals) Swim every day
Control The monitoring of action steps to: Weigh first thing every morning: if
reinforce objectives satisfactory progress, do nothing if not,
Hopefully leading to: consider other strategies and actions
assess effectiveness of strategies and actions
modify strategies and/or actions as necessary
Rewards A payoff for reaching the objective Buy a new suit
ISSUES IN STRATEGY FORMULATION AND IMPLEMENTATION
A strategy will involve taking a view on the environment and the future (strategic analysis)
The scope of strategic management is organisation wide - implications for resources and structure (strategic capability)
Strategic decisions involve decisions and planning (strategic choice)
Strategic analysis and choice usually involve some kind of top-level decision (senior management) - strategy formulation
Strategy implementation - usually involves lower levels in the organisation (eg. operations/middle management/salesforce)
WHAT DOES SUCCESSFUL STRATEGY FORMULATION AND IMPLEMENTATION INVOLVE?
Understanding the organisation’s key competencies (the internal environment) - strengths & weaknesses, resource capability, boundary of the firm
Understanding the external environment and (a) the degree of strategic ‘fit’, and (b) the scope for ‘stretch’
Understanding the industry’s ‘strategic drivers’
Formulating strategies that are appropriate (decision making) - understanding how decisions are made
Implementing strategies to achieve ‘sustainable competitive advantage’
Monitoring, controlling and evaluating outcomes
Other?..... Luck (?)
Sustainable Competitive Advantage
Value Drivers
Def: the key processes and capabilities that enable a company to generate and sustain high value strategies over time.
Strategic Value Drivers:
the processes that enable business units to achieve a more valuable customer offer and operating configuration than competitors.
Overcoming and outperforming competitors
Institutional Value Drivers:
Developing superior organisation capabilities
Overcoming internal barriers to value creation
4 Operational Options For Increasing Corporate Wealth
Improve operating efficiency
Rationalise existing operations
Exit uneconomic businesses
Growing profitability
Lowering the cost of capital
Strategic Analysis
Market Condition
Analysing the Environment
Customer-based Segmentation
Resources, Competence and Strategic Capability
Analysing The Environment
PEST Analysis
Political/ legal
Economic Factors
Social/cultural Factors
Technological Factors
Understanding The Sensitivity/ability of An Industry and Its Distinct Business Segments to Shifts in PEST
Impact varies with industry and business segment
The ability to sustain the impact also varies
THE 5 FORCES MODEL - MICHAEL PORTER (HARVARD) “Competitive Strategy” (Free Press, 1980)
The model is a method of analysing positioning in the market place It can be a useful way of looking at the degree of competition in the market both from existing and potential competitors and from substitute products and services It looks at the role of both buyers and suppliers, as well as immediate and potential competitors
PORTER’S 5 FORCES MODEL
Porters 5 Forces Model Applied to Pharmaceuticals
Criticisms of Porters Model
Combines exogenous and endogenous forces acting upon an industry
Makes 3 tacit but crucial assumptions
That an industry consists of a set of unrelated buyers, substitutes and competitors that act independently and at arms length.
That wealth will accrue to players that are able to erect barriers against competitors and potential entrants. Therefore the source of value is structural advantage.
That uncertainty is sufficiently low that you can accurately predict participants behaviour and choose a strategy accordingly.
In Reality
Co-dependent systems cross industry structures such as alliances or economic webs
Privileged relationships exist where some firms single out others for special treatment because of financial interests such as in Japanese kieretsu’s or through family ties.
Turbulence is increasing in many industries (see handout Schumpeterian Shocks in the Pharmaceutical Industry)
A COMPLEMENTARY APPROACH - THE CONCEPT OF ‘GENERIC STRATEGIES’ - Michael Porter
Core Competencies The Internal Drivers of Value Creation
Value Chain Analysis
Resources
Core Competencies
Identification of Key Strategic Issues SWOT Analysis
THE CONCEPT OF CORE COMPETENCES
Hamel and Prahalad (1990): “an area of specialised expertise that is the result of harmonizing complex streams of technology and work activity”
Teece (1986) “firm-specific techniques and scientific understanding”
‘the competences which underpin the organisation’s ability to outperform competition’ (Johnson & Scholes, p.144)
USE OF CORE COMPETENCES
- ‘stick to the knitting’?
- or ‘stretch’?
Competence or Capability?
Capability
Something an organisation does well at subunit or local level
Capabilities address how well an organisation performs or executes specific activities#p#分页标题#e#
Organisations may have a large number of specific capabilities
Individual capabilities sometimes change rapidly and dramatically
Competence
A corporate wide phenomenon
What an organisation does well across multiple business units or product sectors e.g Honda & Engines
The product of multiple capabilities built from several different activities or processes.
Organisations usually only have a small number of competences
Much less likely than capabilities to undergo sudden or dramatic change
HAMAL AND PRAHALAD’S TESTS TO IDENTIFY A COMPANY’S CORE COMPETENCES
a core competence provides potential access to a wide variety of markets
a core competence should make a significant contribution to the perceived customer benefits of the end product
a core competence should be difficult to imitate
Leverage of resources and competences: through concentration, accumulation, complementation, conservation and recovery of resources.
But Core Competence has it’s Critics
Core competence has too often become a feel good factor that nobody fails”
Competences appear elusive why?
No clear basis for identifying them.
No established way of gauging progress towards them
Core Competence
An alternative definition
“ A core competence is a combination of complementary skills and knowledge bases embedded in a group or team that results in the ability to execute one or more critical processes to a world class standard”
Such a Definition Specifically Excludes
Many skills or properties often cited by organisations as core competences. Patents, brands, products and technologies do not qualify; neither do broad management capabilities such as strategic planning, flexibility and teamwork; nor high level corporate themes such as quality, productivity and customer satisfaction.
Two Groups of Core Competence
Insight/foresight competences that enable a company to discover or learn facts or patterns that create first mover advantages.
Technical or scientific knowledge that creates a string of inventions e.g. Canon – Optics, Sir James Black work for SKB
Pure creative flair in developing successful products e.g. Walt Disney
Frontline execution competences where the quality of an end product or service can vary appreciably according to the activities of the frontline personnel.
Astra sales force
Strategic Determinants of Value Creation
Value Chain. Activities & Alliances to Add Value
Techniques for Measuring Profit & Value
Value Drivers
“ the key processes and capabilities that enable a company to generate and sustain high value strategies over time “
THE VALUE CHAIN Michael Porter
The value chain is concerned with the ‘value drivers’ but can be looked at in terms of the ‘cost drivers’.
The objective is to determine where value (or cost) is created so as to maximise sustainable competitive advantage
The value chain is about managing linkages.
See Porters Book – Competitive Advantage (1985) Free Press
THE PORTER VALUE CHAIN
ECONOMISING ON TRANSACTION COSTS
Organisational Forms Between Markets & Hierarchies
STRATEGIC ALLIANCES
“A mode of inter-organisational relationship where partners make substantial investments in developing a long-term collaborative relationship to achieve a common objective”
Strategic Alliance
Joint Ventures
Collaborative Networks
Cross Selling Arrangements
Technology Sharing Arrangements
Patent Licensing Deals
A Myriad of Options
MOST PROMINENT SECTORS FOR ALLIANCES
- automobiles
- aerospace
- telecoms
- computers
- electrical products
- airlines
- pharmaceuticals.
THESE ARE ALL INDUSTRIES CHARACTERISED BY:
appreciable entry barriers
globalisation
scale and scope economies
rapid technological change
high risk
declining product life
cycles
WHY STRATEGIC ALLIANCES?
declining political and trade barriers
increased globalisation of markets and technologies
pool financial strengths
defensive alliances in face of environmental flux and takeover threats
TO SUCCEED THERE NEEDS TO BE STRATEGIC FIT AND CULTURAL FIT
THE STAR ALLIANCE
Star Alliance is the world's first and largest airline alliance.
Founded in 1997 by 5 airlines, Air Canada, Lufthansa, Scandinavian Airlines System, Thai Airways International, and United Airlines.
Has since grown considerably
Include
UNITED AIRLINES
LUFTHANSA
ALL NIPPON AIRWAYS
ANSETT AUSTRALIA
AUSTRIAN AIRLINES
LAUDA AIR
MEXICANA
SAS
SINGAPORE AIRLINES
TYROLEAN AIRWAYS
AIR NEW ZEALAND
AIR CANADA
THAI AIRLINES
VARIG
McKinsey Analysed 2100 Alliances
Alliances Long term success rate 50%
Alliance Effect on Share Price
Large alliances do affect market capitalisation (co. perceived value)
Alliances are better received than Merger and Acquisitions in fast moving uncertain industries
Electronics
Mass Media
Software
Preferred Choice
Companies trying to build new businesses
Enter new geographical markets
Access new distribution channels
Simple Contractual Alliances rather than more complicated equity Joint Ventures
Polygamy is good – multipartner alliances or consortiums are generally well received
Results
52% of Large Alliances Caused the Share Price to Rise or Fall by More than One Standard Deviation
Of these 70% were increases
Defined Large As
Created a top 10 player
Involved assets of more than $500m
Or included sale of equity stake
Why Big Alliances Were Successful
Big Deals Attract the Scrutiny of the Market
Company more likely to invest significant management resource in thinking through the strategy
Careful scrutiny of partner
Developed an appropriate deal structure
Communicated the purpose of the deal to the market
Alliances Favoured Over M&A
For reducing risk and building businesses in turbulent markets
For unifying multiple partners
When the alliance is simple
Alliances vast majority either win:win or lose:lose
Contrast acquisition where the seller gains while the acquirer overpays and thus loses share value
However, with pharmaceutical companies investing billions of dollars in mergers we need to be aware of the risks
Media Companies
Technology rapidly transforms the way media companies can reach an increasingly global audience
Alliances allow them to leverage their content
Intangibles such as cartoon characters, and customer relationships
Enter new geographical areas
Expand in several different directions simultaneously
Why pay an acquisition premium and endure the rigours of post merger integration when you can capture most of the upside with less risk
Alliances For Growth
Alliances give companies a way to leverage their existing skills while quickly and flexibly acquiring the capabilities of others
Alliances generally involve less capital commitment and risk than acquisitions
When To Use Alliances?
..when your organisation needs…
New Capabilities
New Channels
Vehicle of choice for companies seeking to expand sales through new distribution channel
Especially in mature businesses where customer acquisition costs can be much lower for alliance than stand alone
Eg Abbey National & Safeway collaborated to offer Safeway customers in store financial services
New Geographies
Corning teamed up with Asahi Glass & Samsung to build a Mexican factory to manufacture glass components for Colour TV tubes
Multi Partner Alliances
Give partners targeted access to specific assets of the partners
M&A highly impractical when 3 or more partners wish to combine some of their assets
Multi Partner Alliances Good For Setting Standards?
UK Company Psion
Developed an operating system for PDAs
Needed to have system adopted by industry leaders
A standard operating system would stimulate their market for hardware
Psion joined forces with Ericsson, Motorola & Nokia to create Symbian - a joint venture to support the adoption of Psions operating system
Network Builders
Network builders use alliances to position themselves at the centre of a web or network in which they can leverage intangible capital without owning expensive assets
Joint Ventures
Take longer to get going than contractual alliances
JVs don’t last forever
Median lifespan 7 years
Arrangements to unwind often don’t run smoothly
Generally can achieve most value in simple deal structure at lower cost with less complexity
Analysts often sceptical of any deal that may complicate the parent company’s future strategic options eg Astra Merck (In 1994 Astra the company formed a joint venture with Merck to market ulcer treatment drug)
A JV can compromise the ability to sell the company at a fair acquisition price and many JVs are steps towards a sale by one of the partners
FAILURES LIKELY WHERE:#p#分页标题#e#
Poorly negotiated
No real long-term bonding/mutual interest/no long-term commitment
Inflexible/no learning
Cultural conflict
Distrust
One partner attempts to gain
at the expense of the other
WHY FAILURE?
What is the other party gaining from us? Need to be 2 way!
Scepticism: Booz-Allen survey, 17% of US managers feel they are effective, 31% dangerous
Outlive their purpose: median life span 7 years. But nearly 80% of joint ventures are purchased by one of the parties.
OVERVIEW: WHICH IS BEST COLLABORATION OR COMPETITION?
Firms are reassessing their organisational boundaries
Firms are using forms of contracting that do not fall neatly into markets or hierarchies
The boundary of the firm needs to be continuously re-assessed.
Market Position, Strategic Investment & Value Creation
Good Strategy
Clear
Unambiguous
Precise definition
Markets
Products
Links to Porter’s Generic Strategies
The right investment decisions
Why Are Some Markets More Profitable Than Others?
Porters 5 Forces
Buyer power drives down price
Supplier power drives up costs
Competition erodes share & saps energy
Substitutes provide cheaper alternatives
New entrants offer
More for less – sell at a discount
A different better proposition – at parity or a premium
Protected Niche or Exposed to the Competition?
What Protects Markets
From Invaders?
Entry Barriers
High Research and Development Costs [e.g. Pharmaceuticals]
High Sales Force Costs [e.g. Pharmaceuticals]
Access to Distribution [e.g. Groceries, Alcohol]
Brand Equity
High & Cumulative Advertising Costs [e.g. Coca Cola, Brooke Bond, Persil]
Proprietary Knowledge [e.g The Human Genome]
Patents
Why Commitment Is Important?
Involved or committed?
Exit Barriers
Sunk costs
Proprietary Equipment
Investment in technology
Investment in capabilities
Research costs
Reputation
Legal Constraints
Redundancy
Different legal position in other countries
Markets Aren’t Equal
Different Positions =
Different potential
Different levels of competition
Different rules of engagement
Entry Barriers = Mobility Barriers
Markets have
Preferable high profit positions
Hard fought low margin positions
Strategic Groups
Def
A strategic group is the group of firms in an industry following the same or a similar strategy along the strategic dimensions. [Porter 1980 p129]
A strategic group is a set of firms competing within an industry on the basis of similar combinations of scope and resource commitments. [Cool & Schendel 1987]
Strategic groups are defined as clusters of firms within an industry that have common specific assets and thus follow common strategies in setting key decision variables [ Oster p 80]
Clusters of firms within an industry that share certain critical asset configurations and follow common strategies. [Oster p 398]
Strategic Groups and Strategy
"Formulating competitive strategy in an industry can be viewed as the choice of which strategic group to compete in. " [ Porter p149]
"The presence of mobility barriers means that market shares of firms in some strategic groups in an industry can be very stable, and yet there can be rapid entry and exit (or turnover) in other strategic groups in the industry".[Porter p134]
"The broadest guidance for the formulation of strategy is stated in terms of matching a firm's strengths and weaknesses, particularly its distinctive competence, to the opportunities and risk in its environment" [Porter p149]
Strategic Dimensions
1. Specialisation - degree to which it focuses its efforts in terms of width of line, target customer segments and geographical markets served.
2. Brand identification - the degree to which it seeks brand identification rather than competition based on price or other variables. Achieved via advertising, sales force etc.
3. Push versus pull - degree to which it seeks to develop brand identification with the ultimate consumer directly versus the support of distribution channels.
4. Channel selection - the choice of distribution channels ranging from company owned channels to specialty outlets to broad line outlets.
5. Product quality - level of product quality in terms of raw materials, specifications, adherence to tolerances, features etc.
6. Technological leadership - degree to which seeks technological leadership versus
follower or imitation.
7.Vertical integration - extent of value added as reflected in degree of forward or backward integration.
Strategic Dimensions 2
8. Cost position
9. Service - degree of provision of ancillary service with its product line.
10. Price policy
11. Leverage - the amount of financial and operating leverage it bears.
12. Relationship with parent company
13. Relationship with home and host government.
These dimensions provide an overall picture of the firms position.
Why Strategic Groups Are Important?
Strategic groups differ in terms of profitability [implication which peer companies are a valid comparison?]
Entrants may enter the group with the lowest barriers then progress towards optimal positions [Evolutionary pathways]
Strategic groups react differently to environmental shocks [Some are better positioned than others]
Members of the same group are likely to have similar assets and pursue similar strategies but may differ in terms of implementation [What factors drive the winners?]
Movement between groups tend to be into adjacent groups [Competitive strategy is a question of which companies have the resources to move into your group and challenge your position
The PC Industry’s Profit Pool
Entry Strategies
“Loose Brick”
Weakest point
Lowest competition
Low barriers
Acquisition
Move from Strategic Group to Strategic Group
Enter
Assess competition
Build resources & competences
Move on
The Pharmaceutical Industry’s Value Curve
Value Drivers
VBM requires a deep understanding of the performance variables that will actually create the value of the business—the key value drivers.
Value driver - any variable that affects the value of the company
In practice value drivers need to clear
Allowing managers to identify which have the greatest impact on value
Assign responsibility for them to specific individuals
Result-the organization meets its targets.
Value Drivers
Useful at three levels:
Generic - where operating margins and invested capital are combined to compute ROIC
Business unit - where variables such as customer mix are particularly relevant
Grass roots - where value drivers are precisely defined
Linked to specific decisions for front-line managers
Implementation
Key value drivers
Significant impact on value
Monthly measurement
Important line management.objective
Not static BUT regularly reviewed.
Strategic Determinants of Value Creation
Adding Value Via Merger & Acquisition
M& A Activity A Record Last Year
> 28,000 deals
$3.2 trillion
Increase in value of
⅓ over previous years deals
6 x the value of deals in 1994
Sheer number suggests a variety of purposes behind the agreements
Recent Mergers & Acquisitions in the Pharmaceutical Industry
10 Largest Drug Company Mergers
Stop Press
Pfizer announced a merger with Wyeth (American Home Products) this week for $68 billion.
When Pfizer was an industry powerhouse they avoided mergers.
In the last decade they took over Warner Lambert and Pharmacia.
Last year the CEO and CFO were fired
This merger will lose shareholder value but watch the discussions
In the quality Sunday newspapers to see how they justify it!
Reasons For Consolidation
Late 1980s
Eg SKB & BMS
Scale
Scope
Sales Force Efficiencies
Share of Voice
Direct relationship Number of Details to Sales
1990s
Government Intervention
Reduced Prices
Greater Generic Competition
Increased Buyer Power Pressures
Equalled slow growth & reduced margins
Concentration on core business
Innovation key to success
Some value chain integration
Cost synergies
#p#分页标题#e#
Market Added Value vs Average R&D Spend in Previous Six Years
Healthcare executives face a complex range of acquisition and alliance opportunities
Deals Can Create Value
Only if
The right deal is struck
Integration is tailored to the situation
Integration is managed well
“If a deal is misconceived, no degree of brilliant post merger integration will clean up the mess”
Shareholder Perspective
Average corporate control transaction puts the market capitalisation of their company at risk and delivers little or no value in return.
Deals Part of An Expansionist Programme
Seek to boost market share through consolidation
By moving into new geographical regions
Adding new distribution channels for existing products and services
Transformative Deals
Move companies into new lines of business
Remove a chunk of an otherwise healthy portfolio
Structure of the Deal Matters
Mergers & Asset sales deliver baseline
Acquisition – boost the announcement impact of the deal on the acquirers stock by 2.7% of mkt cap
Striking result considering acquirers generally pay a hefty acquisition fee
Always clear which company controls the post merger integration process
Much more likely the full synergies of the deal will be captured by acquisition
Avoids the lengthy power struggle that often ensues between management teams in merger
JV or Alliance
Impact lags behind average by 3.1% of mkt cap
Investment community view
Incomplete asset combinations that create few immediate synergies
Can limit a company’s strategic options
Sap the attention of managers
Number of exceptions BUT
All else being = “partial deals are more likely than others to diminish a company’s value”
Even If Well Thought Through
“Many a slip twix cup and lip”
Many key operational decisions must be made in the months following announcement
Easy to get caught up in the excitement and demands of deal and fail to think through what is to come
CEOs under pressure from shareholders, boards and often the investment community to justify their strategies
Must also manage the regulators who can make or break the deal
Collapse of WorldCom- Spirit merger
Collapse of Alcan, Algroup & Perchiney merger
M & A Opportunity
To refashion a company’s working arrangements from front line operations to headquarters.
Reconfigure the value chain
Success Factors
Pursue actions aimed at expanding the company’s current lines of business
DON’T take the company into entirely new activities
All being = Better to acquire than merge
Better to merge than ally
If competing in a growing or fragmented industry expect better deal opportunities than you would expect in a mature or consolidating industry
If your company is an underperformer and it announces a well conceived deal you can expect a larger boost to your share price than a top performer
Clearly communicate where the value will come from particularly if synergies are not obvious
“Postmerger pricing can contribute as much as 30% of value of all synergies realised by merger deals”
Marn.M et al (2000) The Hidden Value in Post Merger Pricing McKinsey Quarterly 4 39-45
Post Merger Pricing
Subtle Art
NOT simply raising prices across the board
BUT – even small changes in pricing can have a dramatic effect across the board.
Assess Pricing From A Number of Angles
Do the prices of the merged company accurately reflect changes in benefits to it’s customers?
Do the discount rules make sense after the merger?
Are pre merger price structures congruent with changes in operations and distribution?
What messages will a change in price structure send to our competitors?
Align price with new value
Any company’s pricing policy is to charge as Much as customers will pay for the benefits conferred by its products providing such benefits are differentiated in quality and price from the competition
Mergers can add benefit by …
Improving the quality of products and services
Adding attributes and services to products
Improving terms and conditions of ownership
Make take time
Customer service and sales support may initially suffer during integration until the sales forces and customer service facilitators of the merging companies become familiar with the product range and learn to work together
Mergers Can Destroy Value
By Failing to Align Prices with Enriched Customer Benefits
Destroying Value As Easy As 1,2,3
The Hidden Effect of Accumulated Discounts
A company’s price structure comprises NOT just list price but all other relevant factors e.g. discounts, allowances & bonus
Left uncontrolled such less visible factors mount up
“Off Invoice” discount can equal 15% of more of recorded sales volume especially if it sells through distributors and retail
Merging companies often have different price structures. What happens if both structures remain in force post merger?
The Difference Between Bonus and Discount
Merging Companies Don’t Often Analyse Each Organisations Discount Structure
Because they don’t understand how much they give away to customers in accumulated discounts
Logistics may give discount on freight
Marketing on number of lines ordered
Accounts on speed of payment
A merger between suppliers may give larger discounts to customers who haven’t increased the size of their order
Co A & Co B each offer 2% on order 250k to 1m. 4% > 1m
Retailer buys 950k from A & 250k from B
Gets 2% extra when merge as now ordering 1.2m
Result 24k given away !!!
Merged companies destroy value by ignoring the effect on discounts available to predecessors shared customers
Using Price Structures To Fuel Post Merger Demand
2 Tyre Companies Merging
Offered retail dealers a 1 stop shop
Larger size allowed provision of improved marketing & merchandising support
BUT nothing in old price structure prevented dealers from taking advantage of additional support but still buy tyres from competitor
Tyre Company Introduced A New Performance Based Dealer Partnership Programme
Encouraged dealers to stock full breadth of company’s extended product line
Rewarded dealers that purchased multiple brands and who committed a larger percentage of their business to the new company
Rewards that smaller competitors with narrower product lines couldn’t offer
Discovering & Adopting Better Pricing Practices
2 companies of similar size can generally realise large savings through elimination of duplicate functions post merger
Mergers of unequals can provide a valuable opportunity to improve pricing practices, policies and systems throughout the company
Set The Intensity of Competition
While supply & demand for industry output set the ceiling and floor of price ranges
Competitive conduct within an industry influences where within that range prices actually fall
Changes that a merged company makes to it’s marketing strategy & pricing can alter the intensity of competition
Seize The Day
Distributors, customers, employees and competitors expect a merger to bring change
As soon as customers & distributors of the merged company encounter its terms they view them as the NEW pricing structure
Employees accept as the norm whatever practices and processes are in place at the outset
As time goes by it is MORE difficult to change price
A pricing plan must therefore be an integral part of an overall merger design if the potential to gain up to 30% of available synergies is to be realised
Mergers Fail For 3 Principle Reasons
The strategy is misguided
Over optimism
Failure of integration management
Consider Alliance
In Fast Moving Industries
When venturing into uncharted terrain
When M&A is not feasible
BUT
Avoid Joint Ventures
Implementation
The Key to Success?
Implementing Strategy
Structure Drives Performance
Strategy = Structure = Implementation
INTERNAL DIMENSIONS OF ORGANISATIONS
Formalisation
Specialisation
Hierarchy of Authority
Centralisation
Complexity
Support Ratios
THE DYNAMIC NATURE OF ORGANISATIONS
SMALL TO LARGE
ORGANISATION:
Increase in Formalisation
Increase in Specialisation
Decrease in Centralisation
Increase in Support Ratios
STABLE TO UNSTABLE ENVIRONMENT:
Decrease in Formalisation
Decrease in Centralisation
Flattening of Hierarchy
FORMAL STRUCTURE
Prescribed by management
Reflected in the organisational chart
Designates formal reporting relationships#p#分页标题#e#
Identifies the formal grouping of individuals
Influenced by the external context, goals, technology and size of the organisation
ARCHETYPES OF ORGANISATIONAL STRUCTURE
TRADITIONAL (‘TIGHT’) MECHANISTIC:
vertical structure is dominant
centralised decision-making
specialisation of tasks
lack of horizontal integration
ARCHETYPES OF ORGANISATIONAL STRUCTURE
CONTEMPORARY (‘LOOSE’) ORGANIC:
horizontal structure is dominant
decentralised decision-making
multi-tasking
strong horizontal integration
important role played by informal links
Matrix Structure
MATCHING STRUCTURE & EXTERNAL CONTEXT
From ROSABETH MOSS KANTER, WHEN GIANTS LEARN TO DANCE (1988)
Agility in the global economy
Emphasis on the importance of people, customer service and innovation
(Features often lost during “downsizing”)
From ROSABETH MOSS KANTER, WORLD CLASS (1995)
The intangibles common to companies that maintain their global excellence. The 3 Cs:
- concepts (knowledge& ideas)
- competence (ability to operate at highest standards)
- connections (best relationships - vital for access to global resources)
“Managing means managing an entire context. If you strip out one element and apply one methodology, it won’t work.”
FORCEFIELD ANALYSIS: AN EXAMPLE
Forces for change:
- client focused; flexible; learning organisation; continuous
improvement; networking........
Forces acting against change:
- procedural; lack of decision making; complacency; past success .......
Formulation and Implementation of Strategic Choice
Evaluating Strategy Formulation Process
ROLE OF CULTURE/HISTORY
The way we do things around here - no longer appropriate - challenging the paradigm
Strategic drift
Path dependency/lock in
Lack of leadership
Role and power of stakeholders
THE CULTURAL WEB OF AN ORGANISATION
WHY DOES STRATEGIC REVIEW OFTEN OCCUR ONLY IN A “CRISIS”?
MINTZBERG & INCREMENTALISM
CONTROL SYSTEMS
WHY CHANGE FAILS
misunderstanding the nature of change: a journey not a destination/ not an event
lack of planning & preparation
no clear vision
poor communication
fear of failure
employee resistance/lack of training
lack of top team commitment
past baggage: “we tried this before and it didn’t work”
‘The Ten Keys to Successful Change Management’
J. Pendlebury, et.al., 1998
defining the vision
mobilising
catalysing
steering
delivering
obtaining participation
handling the emotional dimension
handling the power issues
training & coaching
communicating effectively
What if it doesn’t happen?
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