7031SR- GROUP- 1
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Topic7EvaluatingYourCompany1.pptxMN7031 Topic 7 – How Is Your Company Performing and What Is Your Strategy?
londonmet.ac.uk
Maurizio Sammarco
Module Overview
Business Simulation – Cesim Global Challenge
1. How and Why Do Businesses Grow?
2. How Do We Diagnose Company Strategy?
5. How Do We Make Sense of the VUCA External Environment?
8. Does Your Simulation Company Need A New Strategy?
10. Why DO Firms Undertale Acquisitions, Mergers and Alliances?
7. How Is Your Simulation Company Performing?
11. How Do Companies Innovate Successfully?
12. Does Strategic Alignment Matter?
4. Why Are Some Industries More Profitable Than Others?
3. How Does A Company Create Competitive Advantage?
6. How Do We Identify future opportunities and threats?
9. Summative Assessment Presentations
Strategic Diagnosis
External
Internal
Global
National
Regional
Local
PESTEL
5 Forces
Blue Ocean Theory
Industry Lifecycle
Competitor Analysis
Scenario Planning
Resource Based View
Core Competencies
Organisational Structure
Culture
Systems
Market Analysis
Red Queen Theory
Theories and Frameworks
Business Model
We will look at competitors in a later topic.
Industry (or Sector)
Development stage
Markets and Competitors
Market Segments
Scope of activities
The Organisation
Resources
Capabilities
Competencies
Politics
The Macro-environment
Concentration
Value network
Products and/or services
Critical success factors
Resource commitment
Economics
Social
Technological etc.
Business Model
Business Model – How A Firm Makes Profit
Resource Base:
Manufacturing plants – number and location, environmental impact
Technologies and Features
People (HR)
Brand/Reputation
Activity System:
Use of outsourcing
Logistics
Product Offering
Techs
Features
Price
The Simulation Value Chain
R&D Headcount, Training and Policies
Component Suppliers
In-house R&D or Licence
Product
Price
Promotion
Make or Buy
Capacity
Plant Location
Plant Activity
Priorities
Financing
Tax
Environmental Impact
Product and Service Offerings
The key question is which products and services should be developed and which markets should be served
Companies that do not focus on a limited set of product-market combinations risk:
low economies of scale
Reduced experience curve effects
slow organisational learning
unclear brand image
unclear corporate image
high organisational complexity
limits to flexibility
Resources, Capabilities and Competencies
Resources, Capabilities and Competencies and the Link to Strategy
Hill et al, 2015
Able to do things
Able to do things successfully or efficiently
Distinctive Competencies
Competitive advantage is based upon distinctive competencies. Distinctive competencies are firm-specific strengths that allow a company to differentiate its products from those offered by rivals, and/or achieve substantially lower costs than its rivals.
Resources
A company’s resources can be divided into two types:.
Tangible resources are physical entities, such as land, buildings, manufacturing plants, equipment, inventory, and money.
Intangible resources are nonphysical entities that are created by managers and other employees, such as brand names, the reputation of the company, the knowledge that employees have gained through experience. We could also include the intellectual property of the company, including patents, copyrights, and trademarks.
Valuable resources are more likely to lead to a sustainable competitive advantage if they are rare, in the sense that competitors do not possess them, and difficult for rivals to imitate; that is, if there are barriers to imitation.
Capabilities
Capabilities refer to a company’s resource-coordinating skills and productive use.
These skills reside in an organisation’s rules, routines, and procedures.
More generally, a company’s capabilities are the product of its organisational structure, processes, control systems, and hiring strategy. They specify how and where decisions are made within a company, the kind of behaviours the company rewards, and the company’s cultural norms and values.
Resources, Capabilities, and Competencies
The distinction between resources and capabilities is critical to understanding what generates a distinctive competency.
A company may have firm-specific and valuable resources, but unless it also has the capability to use those resources effectively, it may not be able to create a distinctive competency. Additionally, it is important to recognize that a company may not need firm-specific and valuable resources to establish a distinctive competency so long as it has capabilities that no other competitor possesses.
In sum, for a company to possess a distinctive competency, it must—at a minimum— have either:
(1) a firm-specific and valuable resource, and the capabilities (skills) necessary to take advantage of that resource, or
(2) a firm-specific capability to manage resources (as exemplified by Nucor).
Distinctive competencies shape the strategies that the company pursues, which lead to competitive advantage and superior profitability. However, it is also very important to realise that the strategies a company adopts can build new resources and capabilities or strengthen the existing resources and capabilities of the company, thereby enhancing the distinctive competencies of the enterprise.
I worked for 10 years for Capgemini, a firm that had a wide range of technology capabilities that enabled it to provide the design and build large and complex IT systems successfully. These capabilities, combined with the intangible resources of the firm, gave Capgemini a distinctive competence in Systems Integration. At the time. however. Capgemini lacked the ability to win large IT service contracts and was losing market share in services to EDS.
I moved to EDS to understand the companies deal making Competence, which was very strong, but embedded in a relatively small number of people. Unfortunately the EDS delivery capability, particularly System Integration, was far less strong than Capgemini.
Ultimately Capgemini acquired the deal making competence mainly through selective recruitment of key people, but EDS failed to with a number of over-ambitious projects because it lacked the necessary capabilities and some key resources; for example the right project management culture, to create the necessary delivery competence.
Types of Firm Resources
Not All Resources Are Equal
Asian Plants
Techs 3 and 4
Short Term Debt
High Debt
Low Share Price
US Plants
Two Perspectives On Shaping The Business Model
Strategic Analysis of A Firm
Holistic Models
An alternative approach is to start by looking at the ‘big picture’ before drilling down to explore particular components in more detail.
This might be by a series of executive and senior management interview to gain an overview of possible problems as perceived from above.
Management
practices
Work unit
climate
Motivation
Individual and
organizational performance
Structure
Systems
(policies and procedures)
Tasks and individual roles
Individual needs and values
External
environment
Leadership
Mission
and
strategy
Organization
culture
Strategy Diagnosis – An Iterative and Incremental Process
Start with the 7 areas in the diagram, beginning with financial performance over the last 5 years:
Is the business profitable?
Is it growing or declining?
How does it compare with the rest of its industry?
Share price and capitalisation
Investigate the other 5 areas
The process of diagnosis may lead to questions in other areas e.g.:
Leadership
Ownership
Information Systems
Acquisition Integration
Culture
Sustainability
Etc..
Strategy
Diagnosis
Financial Performance
Competencies
Industries, Product Offerings and Market Segments
Resources – Tangible and Intangible
Business Model and Value Network
Capabilities
Competitive Advantage
The Components of Competitor Analysis
PORTER, M.E., 2004. Competitive strategy. 1. Free Press export ed. edn. New York, NY [u.a.]: Free Press.
Competitors Response Profile
Future Goals
Current Strategy
Assumptions
Capabilities
Strengths
Weaknesses
About itself
About its industry
How is the business competing?
All levels of management
Multiple dimensions
Sources of Competitive Advantage
Hill et al, 2015
What Is Quality and How Does A Firm Deliver It Consistently?
Strong governance to define the organisation's aims and translate them into action
robust systems of assurance to make sure things stay on track
a culture of improvement to keep getting better.
Fit for purpose
Intangibles
Four factors help a company to build and sustain competitive advantage:
superior efficiency
quality
innovation
and customer responsiveness
I am going to focus on quality and innovation.
Firstly quality – a simple way to understand quality if “fitness for purpose”. Does the product have the necessary attributes to satisfy my needs?
When customers evaluate the quality of a product, they commonly measure it against two kinds of attributes: those related to quality as excellence and those related to quality as reliability.
From a quality-as-excellence perspective, the important attributes are things such as a product’s design and styling, its aesthetic appeal, its features and functions. This is an are that Apple particularly understand.
With regard to quality as reliability, a product can be said to be reliable when it consistently performs the function it was designed for, performs it well, and rarely, if ever, breaks down. Apple in recent years have been less successful in this respect, as have a number of highly respected firms – Boeing, Toyota and Samsung currently to name but a few.
When products are reliable, less employee time is wasted making defective products, or providing substandard services, and less time has to be spent fixing mistakes—which means higher employee productivity and lower unit costs. Thus, high product quality not only enables a company to differentiate its product from that of rivals, but, if the product is reliable, it also lowers costs.
Innovation refers to the act of creating new products or processes. There are two main types of innovation: product innovation and process innovation.
Product innovation is the development of products that are new to the world or have superior attributes to existing products.
Process innovation is the development of a new process for producing products and delivering them to customers.
Innovation is linked very much to culture. In an organisation where there is a strong desire for centralised control, innovation will be less likely to occur. There is a tension then between control and creativity.
Positioning A Business
Where and How to compete?
Bases of competitive advantage:
Price, Features, Bundling
Efficiency
Quality
Innovation
Customer responsiveness
Availability
Image and relations
Porter’s three generic competitive advantages:
operational excellence
product leadership
customer intimacy
Stuck in
the Middle
Efficiency and Economies of scale
Efficiency - Measured by the quantity of inputs that it takes to produce a given output
Economies of scale: Reductions in unit costs attributed to a larger output
Ability to spread fixed costs over a large production volume and produce in large volumes
To achieve greater division of labor and specialization
Diseconomies of scale: Unit cost increases associated with a large scale of output
Learning Effects
Cost savings that come from learning by doing
More significant when a technologically complex task is repeated, as there is more to learn
Diminish in importance after a period of time
Triggered by changes in a company’s production system
Simulation
Developing and launching new products or features
Manufacturing a new phone
Commissioning new plants
Experience Curve
Systematic lowering of the cost structure, and consequent unit cost reductions - occur over the life of a product
A product’s per-unit production costs decline each time its accumulated output doubles - accumulated output - Total output of a product since its introduction
Useful in industries that mass-produce a standardised output
Hill et al, 2015
Examples of Price Declines
What’s Your Strategy?
SALES REVENUE
There are clearly two strategies in the game, which are visible from the turnover:
1. Volume-directed, based on economies of scale and learning effects in production that enable lower pricing.
2. Premium-price strategy, based on the launching of new technologies and higher pricing that covers the higher production costs.
Which of these two strategies is better, or any intermediate strategy in between, depends on the implementation of the strategy and the development of the markets.
The relevant target is to maximize the profit, i.e. the difference between turnover and costs.
VARIABLE PRODUCTION COSTS
Production costs are influenced by the location of plants, the capacity usage and the learning curve (production of new technologies is initially more expensive until learning curve starts reducing the average production costs).
Initially there are plants only in the U.S. and hence the variable production costs are all incurred in the USA. It is possible to reach lower production costs in Asia, especially in older technologies. Starting the production of a new technology in Asia is poor judgment, because initial competence is lower there and thus initial production of a new technology is costly. However, utilizing the lower production costs in Asia through more established technologies is worthwhile in Asia.
R&D
As the technological evolution forms an essential part of the simulation, R&D decisions are of great importance. There are two ways of developing new products: own development and technology license purchases. Difference between these two is in the costs and time-to-market. In-house R&D yields results with one period delay, whereas licensed technology becomes available immediately.
License purchases are paid as a lump sum. No annual fees are related to license purchases. Moreover, using in-house resources to develop technologies and features does not make license purchases more affordable.
It is notable that all R&D costs are expensed to the income statement immediately during the period when the investment is made. This can cause large fluctuations in the periodical results.
ADVERTISING
Marketing expenses are completely under the management's control through decisions. The amount spent on promotion should be in line with the company's volume of operations and the product contribution margin. A useful rule-of-thumb is:
[Marketing budget = product contribution margin*elasticity]
The advertising elasticities of demand in this case range from 0.1 to 0.3. Therefore, the amount spent on advertising should be on average 10-30% of product contribution margin.
Companies that have chosen an aggressive technology-strategy should also use relatively large investment-like advertising efforts when launching new products. This helps to create a positive image of the product to customers, and also has long-term effect. Despite the long-term impact, all advertising costs are expensed during the period when the investment is made.
Marketing affects not only the demand for the product being advertised but also the company's image in the particular market area. There are positive long-term effects associated with advertising.
OPERATING PROFIT (EBIT)
EBIT, earnings before interest and taxes, indicates the company's operating efficiency. Generally a team that has the highest EBIT relative to the capital employed makes the best results in the simulation, assuming that they have not jeopardized the future cash flows in order to maximize short-term wins. It should be noted that in the short-run (one or two periods) differences in marketing and R&D efforts affect the EBIT a great deal. These investment-like costs are reported as costs in the year in which they occur even though they have long-term impact. Normally the effect of these factors towards the end of the game tends to be much less than in the first few rounds.
NET FINANCING EXPENSES
Financing costs depend on the chosen leverage and the effectiveness of treasury management (one can move and repatriate funds to and from Europe and Asia). Interest rates vary between countries and the moving cash between group companies can be used to place the company debt wherever it is the cheapest. This requires both careful sales budgeting and cash flow budgeting.
It is easy to get into a situation where you have excess cash in some areas and debt in other areas. In such a situation the company is losing the difference between the cost of debt and the interest rate earned for cash (i.e. takes debt in one area and saves it in a bank account in another area).
Management of the debt-to-equity ratio is important. The objective is not to minimize the explicit financing expenses, which could be done with 100% equity. The leverage effect of debt should be taken into account when aiming for a high share price. The company can use share issues and buybacks to manage the company capital structure. Additional leverage can be searched through buying own shares when they are undervalued and selling when they are overvalued. Note that shares can be repurchased only if the company has accumulated sufficient funds in retained earnings.
Equity is an expensive method of financing growth. Not only will you dilute your control of the business, but the investors will also expect healthy returns. Injecting money into a business is a risky prospect for an investor, so they’ll typically expect to see a return of at least 10 percent to compensate for the risks. Debt can usually be sourced at a much lower rate.
Financial leverage has value due to the interest tax shield that is afforded by the U.S. corporate income tax law.
The use of financial leverage also has value when the assets that are purchased with the debt capital earn more than the cost of the debt that was used to finance them.
Blue Ocean Strategy
Companies can build competitive advantage by redefining their product offering through value innovation - creating a new market space
Blue Ocean - Wide open market space where a company can chart its own course
Red Ocean – fiercely competitive
W. Chan, K, & Mauborgne, R 2005, 'Blue Ocean Strategy: FROM THEORY TO PRACTICE', California Management Review, 47, 3, pp. 105-121, Business Source Complete, EBSCOhost, viewed 10 August 2016.
A New Value Proposition
Reduce
Create
Raise
Eliminate
Bibliography
De Wit, R & Meyer, R, (2017) Strategy, An International Perspective, Andover, Hampshire: Cengage Learning, 6th ed.
Prahalad, C. K. and Hamel, G. (1990) ‘The Core Competence of the Corporation’, Harvard Business Review, 68(3), pp. 79–91. Available at: http://0-search.ebscohost.com.emu.londonmet.ac.uk/login.aspx?direct=true&db=bth&AN=9006181434&site=ehost-live (Accessed: 10 May 2021).
Joseph, G. (2009) ‘Mapping, Measurement and Alignment of Strategy using the Balanced Scorecard: The Tata Steel Case’, Accounting Education, 18(2), pp. 117–130. doi: 10.1080/09639280802436731.
Osterwalder, A, & Pigneur, Y 2010, Business Model Generation : A Handbook for Visionaries, Game Changers, and Challengers, John Wiley & Sons, Incorporated, Chichester. Available from: ProQuest Ebook Central. [11 July 2019].
‘Porter’s generic strategies’ (2005) A to Z of Management Concepts & Models, pp. 272–277. Available at: http://0-search.ebscohost.com.emu.londonmet.ac.uk/login.aspx?direct=true&db=bth&AN=22366647&site=ehost-live (Accessed: 12 April 2021).
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