Foundation Business Simulation

Strategy

StrategyStrategy

Strategy and Tactics differ mainly around time scale.

In Foundation®, a 5-8 year Strategy is supported with annual tactical decisions.

Strategic Plan should consist of:

1. Vision and Mission Statement

2. S.W.O.T. Analysis (or Environmental and Internal scans)

3. Tactical and Functional Area Plans

IntroductionA strategy is one of four organizational time drivers.

Time In Years

Mission Statement (timeless)

Strategy (3-5 years)

Operational Intents (1 year)

Tactics (Day to day)

Strategy

From where in the organization strategy should emerge?

Michael Porter argues for a top-down view.

Strategy is designed at the top of the organization, with the goal of positioning resources and building relationships in a unique way.

Porter's Generic Competitive Strategies

Focus

Strategy (differentiation)

Focus

Strategy (low cost)

Narrow

(Market Segment)

Differentiation Strategy

Cost Leadership Strategy

Broad

(Industry Wide)

Product UniquenessLow Cost

Advantage

Target Scope

Cost Leadership Objective

Create a sustainable cost advantage over competition to either:

1. Under-price competitors to gain market share2. Earn higher profit margin by selling at market price

Characteristics: Uses knowledge gained from past production to lower production

costs Reduce costs versus competitors by efficiently performing value

chain activities Low level of differentiation – standardized product Add new product features only after the market demands them Aim for average customer Tight control of overhead and R&D State of the art facilities

Cost Leadership Advantages:

Cost advantage protects from new entrants. Can reduce price to protect from competition

Risks: Overly aggressive in price cutting (reduced prices not offset by

increased sales) Fixation on reducing costs at expense of responding to changing

market Technological breakthroughs - competitors may leapfrog the

technology, nullifying the firm's accumulated cost reductions. Competitors may imitate the technology

Differentiation Objective

Incorporate differentiating features that influence buyers to prefer firm’s product or service:

1. Create value for buyers that are not easily matched or cheaply copied

2. Spend less on differentiation than the price premium that can be charged

Characteristics: Include unique features Key is perceived quality (whether real or not).

Actual product quality Service after sale

Rapid innovation thru R&D

Differentiation Advantages:

Perceived quality and brand loyalty insulate company Price increases from powerful suppliers can be passed on to customers

Buyers have only one source of supply. Brand loyalty protects from substitutes. Brand loyalty is a barrier to new entrants.

Risks: Charging a price premium that buyers won’t support Adding features customers don’t value - customer tastes may

change Imitations are a threat today because of production technology How long can the firm sustain a particular differentiation

advantage?

Focus (Cost or Differentiation) Objective

Concentrate attention on a narrow segment of the total market:

1. Choose niche where buyers have distinctive preferences or unique needs

2. Develop unique capabilities to service target segment

Characteristics: Firm must build competitive advantage into specific, difficult to

mass produce value chain segment Superior service Greater selection to specific niche

Focus (Cost or Differentiation)

Advantages: Power over buyers since focuser may be only source of supply. Customer loyalty protects from new entrants and substitute

products. Easier to stay close to customer and monitor his needs.

Risks: The firm may be at mercy of powerful suppliers since focuser buys

in small quantities. Small volume means higher production costs Change in consumer tastes or a technological change could cause a

focuser's niche to disappear. Cost leaders or big differentiators may produce products that

satisfy customers' needs - the focuser is subject to constant attack.

Porter CurveROIROI

Market ShareMarket Share

HighHigh

HighHighLowLow

ROIROI

MarketMarket ShareShare

HighHigh

HighHighLowLow

Porter Curve

• Firms with High ROI / Low Overall Market Share would likely have a clearly defined focused strategy

• High Overall Market Share / High ROI firms would likely have a strong position in both market segments –risky, but effective when executed properly

Porter Curve

ROIROI

MarketMarket ShareShare

HighHigh

HighHighLowLow

• Firms in the middle have a less definable identity, and a hard time competing. They might have a number of “sofa-bed” product lines: Not great sofas – not great beds.

BCG Growth/Share Matrix

Mar

ket

Gro

wth

Mar

ket

Gro

wth

Low

Low

Hig

hH

igh

MarketMarket ShareShare

HighHigh LowLow

• The Boston Consulting Group Growth-Share Matrix was developed in the 1960’s as a tool to assess a firm’s Strategic Business Unit (SBU) or product

• Long-term success is achieved by having a mix of high-growth potential products that require lots of cash, and low-growth products that generate the required $$

BCG Growth/Share Matrix• Star products occupy strong positions in high growth markets

• Cash Cows occupy strong positions in low growth markets

• Question Marks have low market share in segments with strong growth

• Dogs are low market share products positioned in low potential markets

Mar

ket

Mar

ket

Gro

wth

Gro

wth

Low

Low

Hig

hH

igh

MarketMarket ShareShare

HighHigh LowLow

??

Capstone Strategies Strategies are declared in corporate

mission statements Foundation firms may develop and

execute any strategy (or none at all - though that isn’t advisable). Basic strategies include:

Overall Cost Leader Cost Leader with Focus (Low

Tech or Product Life-Cycle) Differentiator Differentiator with Focus

(High-Tech or Product Life-Cycle)

STRATEGYSTRATEGYMission StatementMission Statement

PERFORMANCEPERFORMANCEASSESSMENTASSESSMENT

Success MeasurementsSuccess MeasurementsAnalyst ReportAnalyst Report

Round Analysis - StarRound Analysis - StarSummarySummary

INDUSTRY AND MARKETINDUSTRY AND MARKETANALYSISANALYSIS

S.W.O.T AnalysisS.W.O.T AnalysisCompetitor AnalysisCompetitor AnalysisCompetitive AnalysisCompetitive Analysis

FUNCTIONAL PLANNINGFUNCTIONAL PLANNINGR&DR&D

MarketingMarketingProductionProduction

HR HR FinanceFinanceTQMTQM

Overall Cost Leader An overall cost leader will attempt to be the low-cost producer in

both segments of the market. They will have good profit margins on all sales while keeping prices low.

Firm Profile: More likely to re-position products than introduce new ones to the

market Capacity improvements are unlikely to be undertaken (may run overtime

instead) Automation may be pursued to increase margins Investments will be financed with debt and/or stock issues Tend to spend less on promotion and sales Focus on Market Share, Profits, and Stock Price

Cost Leader With Low-tech Focus

A low-tech focused cost leader seeks to dominate the low-tech market segment. Their aim is to set prices below all competitors - and still be profitable.

Firm Profile: Multiple product lines in the low-tech segment Invest heavily in automation Spend heavily on Promotion (less on Sales as staff has more than one

product to pitch to prospects) Investments financed with debt and/or stock issues Focus on ROS, ROE, and Profits

Cost Leader With Product Life-cycle Focus

A product life-cycle focused cost leader will seek to minimize costs through efficiency and expertise. Products will be allowed to age and change in appeal from high-tech to low end buyers.

Firm Profile: Low R&D spending (very little re-positioning, introduce new product

every 2-3 years) Invest in automation early in the product’s life-cycle High spending on promotion and sales Focus on ROE, ROS, and Profits

Differentiator A Differentiator will seek to create maximum awareness and

brand equity. They want to be well known as makers of high quality/highly desirable products.

Firm Profile: High R&D spending to keep products fresh Maintain a presence in both market segments Spend heavily on advertising and sales to create maximum awareness

and accessibility Prices tend to be higher Focus on Market Share, Profits, and Stock Price

Differentiator With High-tech Focus

A high-tech differentiator seeks to be known far and wide as the top producer of the best performing state-of-the-art products.

Firm Profile: Multiple product lines in high-tech segment Minimum focus in low-tech segment High promotion and sales investments to create maximum awareness

and accessibility High R&D expenditures to continually introduce new product lines

and keep existing products fresh Unlikely to invest in increased automation or production capacity Focus on ROA, Asset Turnover, and ROE

Differentiator With Product Life-cycle Focus

A product life-cycle differentiator seeks to be well-known as a top producer of good performing products in each of the targeted segments.

Firm Profile: Multiple product lines in both segments High promotion and sales investments to create maximum awareness and

accessibility High R&D expenditures to continually re-position product lines as they

transition from high-tech to low-tech Unlikely to invest in increased automation or production capacity Focus on ROA, Stock Price, and Asset Turnover

Strategies Evolve

Today’s shift is Today’s shift is tomorrow’s tomorrow’s nightmarenightmare

• Poor tactics undermine a good strategyPoor tactics undermine a good strategy• Good tactics can overcome a poor strategyGood tactics can overcome a poor strategy

Summary

There is no "magic bullet," guaranteed winning strategy. Each simulation has a unique competitive dynamic.

Successful firms will focus on: Planning Strategic alignment Teamwork Competitor analysis Tactical adjustments.