CT9 Prep

CT9 Prep 

Find articles showing strategic concepts being used in real life o

How the financial services industry is structured

o

How a company is positioning it self to its target customers as meeting their needs

o

What competitive advantage a company is using

o

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1.

Evidence of the strategic choices a co mpany has made e.g. market segments it targets, h ow it makes its money etc.

Note thoughts in the template: How do financial services companies create value for customers  – what underlying needs are they satisfying?

Think about:

2.

3.

4.

5.

a.

The need for security

b.

The need to fulfil desires

c.

The need to meet responsibilities

d.

Other….

What sources of advantages can financial services companies use to create value for customers?

a.

E.g. superior assets such as….

b.

Strategic relationships such as….

c.

Distinctive Distinctive capabilities such as…

How do financial services companies capture value from the customer for providing services? i.e. in which ways can they generate profits?

a.

They earn money on a regular basis by….

b.

They earn money from specific transacti ons when…

What industry specific factors have been changing the levels of profits financial services companies can gain from specific types of products or segments of the market?

a.

Profit margins being squeezed by….

b.

Overall sales volumes are being affected by…

What external (Macro-environmental) factors are having an impact on customer needs and the companies in the financial services industry?

1 Introduction 1.1

What is strategy?

1.1.1

Creating and Capturing Value

The objective of business strategy is to maximise the value of the company. Companies need to find needs to meet for customers. They should meet needs they are competitive at. This is so that they can derive t he most benefit for the value they create. Competition reduces the benefit derived from providing value. Good strategy avoids competitive positions where: 

There isn’t much value to be created in the first place.

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The value is hard to capture because the needs are too easy to meet.

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You don’t have the ability to serve.

The other part of good strategy is to identify your competitive advantage  – identify and serve customers better and cheaper than competition. Companies must choose competitive positions and competitive advantages that offer the optimal balance between achievability and attractiveness in the present and future. 1.1.2

Competitive Positioning

Deciding what value to deliver and to whom. Customer needs vary. Segmenting markets a llows companies to identify customers with similar needs to satisfy them more accurately. A combination of choices about which: 

customers you will and won’t serve

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products and services to provide

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distribution channels to use

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geographic markets to cover

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How far to be vertically integrated

Business look for attractive positions i.e. ones that are large and/or growing and protected against competitive pressures. 1.1.3

Competitive Advantage

A company has competitive advantage when customers perceive a difference in value between its products and those of a competitor. Competitive advantage can be copied – hence we need sustainable competitive advantages. This can result from: 

Superior assets e.g. patents, sales/distribution network, brand, location

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Distinct capabilities e.g. innovation, management of information

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Privileged relationships – add complementary strengths

These act to reinforce each other. 1.1.4

The Business System

Sources of competitive advantage underpin the functions a company must perform to deliver value in its chosen competitive position. This collection of functions is known as the Business System. These functions range from Inbound Logistics, Development, Operations, Logistics, Market ing & Sales and Service.

Multinationals need to decide whether they will replicate their entire business system in each location or just those elements that need to be performed locally. E.g. 1 service centre for economies of scale. We will use the Business System to analyse our sources of competitive advantage i.e. a company’s sources of  advantage are embedded in the business system. Understanding our customer’s business system allows us to identify a broader set of needs. 1.1.5

Strategy In An Uncertain World

Companies may not know what the optimal strategy is. Businesses need to create strategic options . There are several types: 

Building flexibility - costly

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Wait and see – may be too late

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Testing viability of alternative strategies - costly

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Diversification – some enterprises fail

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Forming alliances – split the profits

1.2

How are strategic decisions made?

Strategy is important as it is a plan for building your relative strengths and matching them to external opportunities – a plan to meet objectives by exploiting your relative strengths. Traditional strategy decision making process: 

Analyse the industry

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Analyse the competition

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Analyse your company

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Formulate strategy

There are problems with this approach: 

Doesn’t tell us how to treat the current strategy

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Tends to be used as a checklist

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Doesn’t encourage creativity

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Doesn’t focus on important issues and objectives

Strategic decision making is a dynamic iterative process: 1.

2.

Diagnose key issues facing the company a.

Need to make sure we don’t miss any

b.

Prioritise the issues

Generating ideas about how to improve competitive position a.

Shifting to new positions

b.

Improve existing positions

3.

Generating ideas about how to build and leverage sources of competitive advantage

4.

Selecting and refining strategy

Take new information into account.

1.3

Organisational Context

Company culture may drive business decision making. The company strategy must be reflected in culture – the beliefs and attitudes affecting how decisions are made across the organisation. Company culture create differences in 

how companies view competitors and their own capabilities

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the level of risk they are prepared to take in responding to opportunities or threats.

Types of culture: 1.

2.

3.

4.

Defensive

a.

Slow to respond to changes

b.

Slow to make more radical changes than change price or quality

c.

Slow to adapt to changing markets

Innovators

a.

Suited to dynamic conditions

b.

Risk taking cultures

c.

Find new opportunities  – need resources

Fast Followers

a.

Reject high risk of developing from scratch – keen to adapting existing

b.

Greater visibility & return – learn from mistakes, added features,

Slow Reactors

a.

May see trouble coming but carry on regardless

b.

Indecisive

Structure also influences a company’s ability to act.

Dictates decision making up and down the structure. Three major types of issue in an organisational structure: 1.

Imbalance of power – caused by gradual changes

2.

Manipulation of power – to serve the interests of a limited group

3.

Transparency of power – is the balance of power/structure as it seems?

Need to know:

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Who the ultimate decision makers are

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Who influences the process of decision making

1.4

Problem Solving

Strategic decision making process has 4 phas es. There is a process behind these that li nks the stages together  – our evolution of the understanding of our industry. This is composed of: o

Complex questions can be divided up into sub-questions

o

Sub-questions are answered using specific analyses

o

1.4.1

Result is a number of  facts – which are combined using synthesis. This can suggest new questions. These may lead to more questions.

Disaggregating and prioritising questions

May need to take a systematic approach to breaking down questions using logic. May work through several layers of question to identify key ideas. Ensure there are no gaps. Ensure sub-questions are mutually exclusive and tackle the most important ones first. 1.4.2

Analysis

The process by which questions are answered and turned into fact. Need to decide on: 

Analytical tools

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What data

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Sources of data

Parsimony, and use back-of-fag pack calcs to check results. 1.4.3

Synthesis

Process of combining 2 or more facts to produce other facts, hypothesis or questions. Two types: 

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Deductive Synthesis o

The new facts are implicit in the old ones

o

Reducing information down using deductive logic

Creative o

Strategist provides insight that helps to create the new fact or hypothesis

2 Diagnosis 2.1

Objectives

2.1.1

Financial Objectives

Strategy is a plan for meeting objectives. Need to define objectives  – common view that objective is to maximise value of the company. No single measure of value e.g. 

Profit – doesn’t take into account the money investors tied up in assets used to achieve profit

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Return on investment – doesn’t account for future

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NPV – Requires discount rate, probabilities

Understanding financial objectives helps to generate and evaluate ideas about operational, strategic and financial actions taken. 2.1.2

Non-Financial Objectives

Are often just as important as financial objectives – they can be indirect creators of financial value. E.g. level of  employee skills, technological progress & social objectives. Need to understand these for effective decision making.

2.2

Competitive positioning

Begins with who our customer are and whether we are meeting their needs. Customer needs change over time – make sure we keep up. To succeed a company also has to capture the value it creates. 5 competitive forces can squeeze the value created: 1.

Rivalry between competitors – forces prices down

2.

Bargaining power of inputs – costs increase

3.

Bargaining power of customers – can push down prices

4.

Barriers to entry – can lower prices if they are light.

5.

Substitutes – can reduce prices and limit market size depending on strength

2.3

Competitive advantages

They come from the resources owned by the company: 

Superior assets

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Strategic relationships

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Distinctive capabilities

Can potentially arise at each stage of the business system. Tests of true competitive advantage: 

Strong relative to competition

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Relevant to meeting customer needs

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Difficult for others to copy

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Allows you to capture the value created

No advantages last forever but some are more sustainable. Sustainable advantages are: 

Difficult to: o

Identify

o

Imitate

o

Substitute

o

Transfer

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Durable

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Scarce

2.4

Future Changes

Systemic shocks can be to the detriment of the firm  – need to keep an eye on systemic i ssues and position the business and strategy to take advantage of changes. Four types of external shock relevant to strategy: PEST 1.

Political

2.

Economic

3.

Social

4.

Technological

Need to use PEST  – think through the implications of changes for the 5 forces affecting the industry. Also think through the implications for t he sources of advantage required to succeed in t he future.

2.5

Generating Ideas  – Positioning

2.5.1

Existing Positions

Key element of a company’s strategy is it’s competitive position. To cho ose a position we need to understand our current position – we need to segment the industry to understand our competitive position.

Most segmentation matrices have axes: 

Product type vs.

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Customer type, geography or distribution channel

1.

Understand customer needs  – identify how you can create value

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Explicit needs e.g. shelter, warmth

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Implicit needs e.g. acceptance

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Latent needs e.g. lose weight  – customers don’t realise they have them Indentifying needs involves qualitative and quantitative techniques.

2.

Prioritise needs – eliminate those that are unimportant or easy to meet

Select important needs for the customer so that meeting these will maximise value creation. Also identify those needs that are difficult to satisfy. Then eliminate those that are difficult to satisfy and not important or those that are not important and easy to satisfy. Finally we combine needs that depend on t he same resource or capability.

2.5.2

What new positions can we identify?

Involves finding new customers or needs to satisfy. This may allow us to create new competitive positions by: 

Meeting some needs better than before

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Identifying new combinations of needs

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Reducing the extent to which some needs are met

2.5.3

Positioning as a substitute

Can identify industries where your product could act as a substitute. Try to reduce switching costs for potential new customers. Improve your price/performance in ways that are relevant to the new application. Only consider potential industries that are attractive, and where you have a potential advantage. 2.5.4

Positioning against complements

May be able to supply complements to your products. Can often increase value by bundling with products. May be possible to sell products at a loss or reduced profit to cross-sell at higher prices. 2.5.5

Redefining the customer

Multiple parties may influence the b uyers of products.

2.6

Which positions should we investigate further?

Create a short list of competitive positions. The 5 forces model predicts how much value you create for customers will be lost to: 

Suppliers

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Customers

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Rivals

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Substitutes

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New entrants

Need to assess attractiveness of competitive positions, including the impact of shocks and new developments. For the remaining attractive competitive positions, we need to identify the key success factors  – a set of  advantages that allows a company to better meet needs. Assess the fit with your capabilities and resources. Should include potential capabilities but be realistic. For each possible competitive position, we will have assessed how: 

Attractive they are – using 5 forces

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Achievable they are – using capabilities and fit with competitive advantages

Our shortlist will contain positions that are attractive and achievable. Can plot each competitive position on a graph of attractiveness vs. achievability.

2.7

Generating ideas: advantage

Companies create value using a collection of activities called the value chain. Competitive advantage comes from the scarce assets & resources, capabilities and relationships that allow these activities to be carried out. We can improve specific activities through benchmarking. Benchmarking can help build competitive advantages e.g. Xerox benchmarking to Japanese companies found R&D took half as long.

We may not be able to create competitive advantages in time – can use partnerships. Potential partners should: 

Provide exclusivity

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Share assumptions about how to do business

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Be clear as to the balance of power and benefit

Competitive advantage is a relative concept – Can identify and then exploit competitor’s weaknesses. Understand: 

Areas where the competitor won’t create resources and advantages

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Areas where the competitor can’t create resources and advantages

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The assumptions that make the competitor blind to certain resources, advantages or competitive positions.

Ask why and how competitor strengths arise.

2.8

Pushing back against competitive forces

Can push against customer power by: 

Price discrimination – capture customer surplus through product variance or pricing

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Create switching barriers – leaving penalty

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Control buyer concentration – limit large buyers and coordinated buyers, Introduce new channels.

Can push against supplier power by: 

Redesign product or process  – readily available components

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Increase the competition for business  – identify alternative suppliers or nurture new ones

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Change negotiation – pick key suppliers e.g. discount

Can push against new entrants by: 

Raising barriers – reduce incentives; reduce profitability of the industry

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Signal fast action if needed – e.g. excess capacity

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Build same relative advantages – strategic assets, capabilities and relationships

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Structural barriers – close gaps in product range, block channels, gov policies.

Can push against substitutes by: 

Improving value delivered to customers

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Shifting competitive positioning – new segments where substitutes can’t meet needs

3 Communicating Strategy 3.1

No surprises

Unveiling a major change can be r isky. Key members of audience should know what you are going to say before you start – syndicate ideas with key influencers in advance. Good discussion can help to uncover real reasons for resistance.

3.2

No suspense

Audience must know the big picture of what you are going to say  – don’t keep them in suspense. Top-level statements are half the battle – not the whole battle. Long drawn-out arguments are hard to follow. Spend most time on the areas likely to affect the outcome of the meeting. 

Give conclusions up front

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Use a hierarchical structure to keep message manageable

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Each point should summaries the points below