Strategy Dynamics Essentials Kim Warren

What does Strategy Dynamics do? E.g. product replacement for a medical device Problem: License for current product will be lost new, better product has zero brand awareness TOTAL loss of old product sales will drop approx 25 million turnover Current strategy unlikely to be financially justified Solution: Intense demonstrations of new product to specialists (KOLs) to build awareness quickly Benefits disseminated to 10,000 doctors in training events, run by specialists over 9 months Training + 50 sales-force campaign shifts doctor preference quickly Total cost = 5 x current planned strategy, about 10million pays back almost in year 1

Blockbuster Inc. s Performance History Figure 1.1

Contrasting questions for strategy to answer Industry-based strategy question: How do we get a good profit position? Firm-centred strategy question: How do we drive sustained profit growth? How can Starbucks achieve margins of 11.5% vs 9.5% and keep them at 8% in tough times? How can Starbucks deliver sustained profit growth of 15% p.a. and not fall back in tough times? [strictly free cash flow ]

Strategic positioning : e.g. the Southwest Airlines activity system True, and useful, but unchanged in >30 years replicated by numerous rivals Analysis of the company s value chain would also prove distinct from that of full-service airlines also true and useful, but also unchanged and replicated. So what has strategic management been doing since 1975? [CEO Herb Kelleher was winner of the 2003 life-time achievement award by the Strategic Management Society.] Michael Porter, 1996, What is Strategy?, Harvard Business Review, Nov/Dec, 61-78.

Strategic positioning : e.g. the Southwest Airlines value curve True, and useful, but unchanged in >30 years replicated by numerous rivals W Chan Kim & Renée Mauborgne, 2005, Blue Ocean Strategy, Harvard Business School Press: Boston MA.

The industry value-chain, e.g. an airline Businesses at each stage try constantly to... 1. cut costs (their own, or from upstream suppliers) 2. persuade those downstream to buy more, or pay more How does all this affect the profitability of airlines generally?... and how can we do better than others? 8

The five forces that affect industry profitability... Rivalry between competitors Power of suppliers Threat of new entrants Profitability of the industry Power of customers Availability of substitutes What effect do these forces have? 9

Amazon.com operating profits and cash flow, 1997 2008 Figure 1.4

Generalized strategy life cycle, illustrating extensions and strategic-change events Figure 1.2

Illustrative profitability distribution among firms in an industry Figure 1.3

Starbucks profit history and alternative futures One-off costs Figure 1.6

Starbucks Hypothetical profit history and alternative futures Figure 1.7

Starbucks: 2011 update Pushed prices up +2% margin = $200m/yr Would investors have preferred this trajectory + saving $300m? Added 530 too many stores : cost >$300m WHY? investor [analyst?] pressure for unsustainable performance. NOTE: there is no requirement in the professional training for investment analysts to learn about the link from strategy to performance.

Growth in users and call traffic for Skype s VoIP service Figure 1.8

History and alternative futures for the number of cases of poliomyelitis worldwide Figure 1.9

Functional, business-unit, and corporate levels of strategy Figure 1.10

Five-year history and plausible objectives for low-fare airline Ryanair Figure 1.11

Class 1: Try it yourself Each class applies the same tasks to both the restaurant case, and a case chosen by your group Use Worksheet 1 for the restaurant case to choose Principal and Supporting Objectives for the early start-up period Choose an appropriate time-scale Set a numerical scale, and draw out the time-chart(s) Use Worksheet 1 for a case you know or can find out about An organisation you have worked for, or a well-known company (Pick a simple organisation, focused on one main activity) Specify a Principal Objective for this organisation and (optionally) a Supporting Objective essential to achieving the Principal Objective Be sure to set an appropriate time-scale, including history Set a numerical scale, and draw out the time-chart(s)

Worksheet 1, example

Using the Sysdea software You must be registered with Sysdea to do this, then log in to Sysdea at https://app.sysdea.com/ Watch the Tour on how to use the software (button at top-right) To set strategic objectives for the restaurant case: click here to get the Sysdea Worksheet 1 template model when the model opens, click Shared Simulation at top-left give the model a name, such as Joe s restaurant, Worksheet 1 click the two Principal Objective variable, set a Min and Max valuescale, and sketch a time-chart to reflect your chosen aims repeat for your choice of a suitable Supporting Objective Save the model! Repeat for your group s chosen case.

Sharing your Sysdea models Setting a model to be shared lick the tool icon under Sharing click Share Model copy the link that appears send the link to others save your model! Receiving a shared model log in to Sysdea click the link sent by the person sharing their model with you the model opens in Run mode (you can t edit it) to save an editable copy to your own account, click Shared Simulation and accept the invitation to save your own version

Ryanair: plausible objectives, from 2009 25

Causal Structure of Ryanair Profits for Year Ended March 2009 Figure 2.1

Explanation of Ryanair Profits, 2005 2009, and plausible future to 2014 Figure 2.2

How customers drive sales for Ryanair Figure 2.3

How resources drive Ryanair s costs, e.g., routes Figure 2.4

Resources driving service performance in a voluntary organization Figure 2.5

Standard categories of tangible resources Tangible resource Chipmaker Law firm Airline Consumer brand Charities Demand-side Final customers PC buyers Clients Customers Consumers Beneficiaries Intermediaries Computermakers Resellers Supply-side Capacity Stores Staff (examples) Suppliers Production staff Professional staff Product range Chip-types Legal services Aircraft Retailers Production plant (Physical assets) Service staff Sales force Volunteers Airports Routes offered Brands offered Services offered Cash Cash Cash Cash Cash Cash Table 2.1

Class 2: Try it yourself For the restaurant case identify and define tangible resources (fewer than the airline case!) use Worksheet 2 to link your Principal Objective back to these Resources you may need to include your Supporting Objective in this causal structure sketch time-charts in each Variable or Resource in this structure, setting appropriate Min and Max values try to set up a Formula in each variable, giving a definition of how its value depends on the items linked into it For the case you chose for class 1 define the resources that drive performance use Worksheet 2 to draw out the connections from the Principal Objective for this organisation, back to the Resources driving that performance (identified in your Table) optionally, try to define a Formula for each item to make the model work

Tangible resources for the restaurant (not all may be needed, or significant) Tangible resource Define these resources in your case Scale today Target by (date) Demand-side Final customers Intermediaries (optional) Supply-side Capacity Staff (examples) Suppliers (optional) Product range Cash Other (define)

Tangible resources for your case (not all may be needed, or significant, or you may need 1-2 more) Tangible resource Define these resources in your case Scale today Target by (date) Demand-side Final customers Intermediaries (optional) Supply-side Capacity Staff (examples) Suppliers (optional) Product range Cash Other (define)

Using the Sysdea software for either the restaurant or your own case Add your performance objectives into Worksheet 2: click here to get the Sysdea Worksheet 2 template model when the model opens, click Shared Simulation at top-left give the model a name of your own, such as My Restaurant Worksheet 2 or My Company Worksheet 2 open your previous model of Worksheet 1 select your Principal and Supporting Objectives and Copy them (Ctrl-C) in Worksheet 2, check the time-scale matches Worksheet 1 delete the Principal and Supporting Objectives, and paste in those you copied from Worksheet 1 (Ctrl-C), To draw out the links from performance back to resources: follow the steps in this class to complete the causal links between the Objectives you pasted in and the resources that drive them delete, add, or re-arrange items as necessary to do this Save it!

Worksheet 2 Replace the Objectives here with copies from Worksheet 1

Stick to the discipline in your model Make sure your definitions of resources and all other variables are specific and measurable Put numbers on everything, even if you have to estimate (but say so if this is the case!) Make sure all links are rigorous if B and C link to A, then it must be possible to calculate or estimate A, given values for B and C If possible, add calculations to make sure this is correct

Tasks: Day 1 A. Carry out steps 1 and 2 for the restaurant case 1. sketch out realistic objectives for the first 20 weeks of the business 2. lay out the causal relationships from resources to performance, including how those resources might grow over time and try to add equations for those relationships B. Carry out steps 1 and 2 for your own case 1. sketch out realistic objectives for an appropriate time-scale, including history 2. lay out the causal relationships from resources to performance C. Read Chapters 3 and 4, and consider how they work for your case