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Strategy Frameworks Manual Second Edition 15 September 2004 TRANSACTION SERVICES Draft Report Strategy Frameworks Manual Second Edition Transaction Services Back to Home Page Table of Contents Section Page 1 Introduction and Structure 1 2 The Analytical Process 4 2.1 - Ansoff Matrix 6 10 2.3 - BCG Matrix 16 2.4 - Competitor Cost Structures 23 2.5 - Consumer Segmentation Attitudinal or Behavioural Segmentation 29 2.6 - Core Competencies 33 2.7 - Critical Mass Industries 37 2.8 - Disruptive Technologies 44 2.9 - Distribution Strategy 49 2.10 - Drivers of Value/Profit Tree 67 2.11 - Industry Lifecycle 73 2.12 - Parenting Advantage 77 21.3 - Porters Five Forces and Generic Strategies 82 2.14 - Pricing Strategies 88 2.15 - Profit Pools 96 2.16 - RONA Charts 100 2.17 - ROS/RMS Matrix 107 2.18 - S-Curves and Market Penetration 113 2.19 - Sector Charts 118 2.20 - Strategic Positioning Assessment (McKinsey/GE Matrix) 123 2.2 Balanced Scorecard Strategy Frameworks Manual Second Edition Transaction Services Back to Home Page Table of Contents Section Page 2.21 - Value Chains 129 2.22 - Value Curves 136 3 The Project Process 141 3.1 - Market Definition Dartboard 143 3.2 - Retail Store Turnaround Strategy 147 4 Other Useful Tools 151 4.1 - Least Squares CAGR 152 TRANSACTION SERVICES Section 1 Introduction and Structure 1 Strategy Frameworks Manual Second Edition Transaction Services Back to Home Page Purpose of the Manual 2 Section 1 - Introduction and Structure To assist you as Strategy Group practitioners in your work on strategy projects by: Providing an overview of potentially useful strategic frameworks Describing when and where these might be used Explaining how to use them Giving examples of projects/cases where they have been successfully used in the past Suggesting people and sources that can help you further This second edition of the manual describes 24 frameworks in detail The frameworks covered will be expanded over time as the manual develops Strategy Frameworks Manual Second Edition Transaction Services Back to Home Page Structure of the Manual 3 Section 1 - Introduction and Structure This manual is structured to guide you through the strategy making process in a flexible way: Section 2: Analytical Process sets out a number of frameworks which can potentially be used to assist you in your strategic analysis and design. This section includes frameworks for use in the development of: Business Unit Strategy where the process is divided into four key areas: Analysis/Diagnosis Creating Value Capturing Value Sustaining Value Corporate Strategy Functional Strategy Section 3: Project Process sets out a number of frameworks which can potentially be used to help you manage each stage of the strategy process. This section splits the project process into four key stages: Hypothesis Generation Option Generation Option Selection Implementation Section 4: Other Useful Tools will in time grow to include other helpful information and tools to assist you on strategy projects/DDs. At this stage, we have included a section on Least Squares CAGRs TRANSACTION SERVICES Section 2 The Analytical Process 4 Strategy Frameworks Manual Second Edition Transaction Services Back to Home Page The Analytical Process: Where Does Each Framework Fit? Note: Frameworks underlined are fully developed in this second edition of the manual 5 Section 2 - The Analytical Process BUSINESS UNIT STRATEGY CORPORATE STRATEGY BCG Matrix Cash Use/Cash Generation Matrix Marakon Profitability Matrix Parenting Advantage Strategic Position Assessment ANALYSIS/ DIAGNOSIS CREATING VALUE CAPTURING VALUE SUSTAINING VALUE CUSTOMERS Consumer Segmentation Customer Service Management COMPETITORS Pricing Umbrellas RONA Charts ROS/RMS Sector Charts Spider Charts Competitor Cost Structures INDUSTRY/ ENVIRONMENT Critical Mass Industries Disruptive Technologies Industry Lifecycles PEST Porters Five Forces and Generic Strategies Product Lifecycles Profit Pools S-Curves and Market Penetration COMPANY Core Competences Drivers of Value SWOT Value Chain Customer Loyalty Balanced Scorecard Pricing Ansoff Matrix Business Models Customer Service Management Drivers of Value Porters Five Forces and Generic Strategies Strategy Dynamics Value Curves FUNCTIONAL STRATEGY Distribution Strategy Sales Strategy TRANSACTION SERVICES Section 2.1 Ansoff Matrix 6 Strategy Frameworks Manual Second Edition Transaction Services Back to Home Page Ansoff Matrix: What is it? Market Penetration Product Development Market Development Diversification PRESENT PRODUCTS NEW PRODUCTS PRESENT MARKETS NEW MARKETS 1 2 3 4 A tool that helps to evaluate the possible strategic growth directions for a business In summary, there are four basic choices to drive growth: 1. Grow existing products in existing markets 2. Introduce new products into existing markets 3. Enter new markets with existing products 4. Develop new products and introduce these into new markets Section 2.1 - Ansoff Matrix 7 Note: New = new for the business (and not new for the consumer or competition) Strategy Frameworks Manual Second Edition Transaction Services Back to Home Page Ansoff Matrix: How to use it Section 2.1 - Ansoff Matrix This is very much a qualitative tool that helps one to think about potential growth options for a business Always start by defining the existing business and placing it in the top left hand corner Define what each idea/option (1,2,3,4) means in practical terms for the client Assess the feasibility/risk associated with pursuing each option 1. Good start (and lowest risk) for most businesses - leverages existing competencies and resources. Might be difficult due to saturation, regulation or costs. Consolidation is a useful strategy if the product is in later stages of the life cycle 2/3. Whether markets or products should be developed will depend on competencies of the business, i.e. R&D versus marketing. Capital intensive industries tend to develop markets to increase the sale of already developed products. This option is appropriate where a companies core competencies are related more to products than to specific market segments. Developing markets may be difficult in markets with high barriers to entry (e.g. dealer networks) or with low demand. In such situations firms might focus on product development. Product development is more appropriate for firms that are stronger in customer relationships than in a specific product. These firms can leverage their strength to tailor new products to their existing customer base 4. Diversification is the highest risk strategy and is best suited for businesses with flexible cultures that are willing to learn. There are two main kinds of diversification: Leave traditional market and products but remain in your sector: e.g. vertical integration (supermarket owns a food manufacturer) or horizontal integration (supermarket sells financial products) Leave sector: e.g. building of a conglomerate Common Uses Generate ideas for future growth Assess achievability of different growth strategies Decide which growth options a client should pursue 8 1 2 3 4 Current Business Strategy Frameworks Manual Second Edition Transaction Services Back to Home Page Examples: Littlewoods Remote Retailing Ansoff Matrix: PwC Expertise/Other References Section 2.1 - Ansoff Matrix Used to present options for growth to the client Client liked the presentation of the options. However, shortly afterwards the business was acquired by the Barclay brothers Our experts: Chris Temple Oliver Rowson John Boxall Additional References: Harvard Business Review on Strategies for Growth Implanting Strategic Management by Igor Ansoff 9 W e r e c o m m e n d N R R c o n s i d e r i t s b u s i n e s s d e v e l o p m e n t w i t h i n t h i s f r a m e w o r k o f c u s t o m e r s a n d p r o d u c t sN e w C u s t o m e rS e g m e n t sE x i s t i n g ( L i t t l e w o o d s )C u s t o m e r S e g m e n t sE x i s t i n g P r o d u c t s N e w P r o d u c t s26K e y R e c o m m e n d a t i o n s W e b e l i e v e L i t t l e w o o d s p r o d u c t i s g e n e r a l l y n o t d i s t i n c t i v e e n o u g h t o o f f e r o p p o r t u n i t i e s h e r e H o w e v e r , t h e r e m a y b e s o m e e x c e p t i o n s t o t h i s ( e . g . k n i t w e a r ) O p p o r t u n i t i e s i n t h i s a r e a s h o u l d o f f e r h i g h a c c e s s i b i l i t y 2 g r o w t h o p p o r t u n i t i e s r e s i d e h e r e R e f i n e m e n t o f t h e B i g B o o k b u s i n e s s ( n o t i n t h i s s c o p e ) D e v e l o p m e n t o f t h e I n t e r n e t p r o p o s i t i o n ( s e e l a t e r ) T h e o p p o r t u n i t y i n t h e T h r i v i n g s e g m e n t s r e s i d e s h e r e N e w , a u t h o r i t a t i v e b r a n d , p r o d u c t s a n d p r o p o s i t i o n s n e e d e d A c q u i s i t i o n s , j o i n t v e n t u r e s a n d p a r t n e r s h i p s c o u l d a l l h a v e a r o l e O p p o r t u n i t i e s h e r e a r e n a t u r a l e x t e n s i o n s o f e x i s t i n g b u s i n e s s “ T h e C o l l e c t i o n ” r e s id e s h e r e ( s e e l a t e r ) F u r t h e r n e w p r o d u c t p r o p o s i t i o n s t a r g e t e d i n t h e C o p i n g s e c t o r c o u l d a l s o r e s i d e h e r eN R R s h o r t - m e d i u m t e r m g r o w t h a n d p r o f i t g e n e r a t i o n n e e d s t o c o m e f r o m t h e s e s e g m e n t sN R R l o n g t e r m g r o w t h a n d d e v e l o p m e n t n e e d s t o i n c l u d e t h i s s e g m e n tD i s t i n c t i o n b e t w e e n t h e t w o N e w C u s t o m e r s e g m e n t s i s b l u r r e dTRANSACTION SERVICES Section 3 Balanced Scorecard 10 Strategy Frameworks Manual Second Edition Transaction Services Back to Home Page The Balanced Scorecard What is it ? 11 Section 3 - Balanced Scorecard Goals Measures Financial Perspective Goals Measures Customer Perspective Goals Measures Internal Business Perspective Goals Measures Innovation & Learning Traditionally organisations have relied on financial measures to assess performance. Whilst these measures provide a good view of past performance, they tell us little about the future direction of a company KEY POINTS Senior Managers should be involved in debating and drafting the goals and performance measures for each of the different perspectives It is better to have only a few well thought out goals and measures within each of the perspectives rather than a raft of metrics The goals and measures should be integrated and reflect the strategy and vision of the organisation, rather than simply focusing on trying to control the actions of employees The Balanced Scorecard complements this historical financial perspective by also looking at other aspects of the business (as shown) that are the key drivers of future financial performance Strategy Frameworks Manual Second Edition Transaction Services Back to Home Page The Balanced Scorecard Defines a strategys cause and effect relationships 12 Section 3 - Balanced Scorecard VISION AND STRATEGY Financial Perspective If we succeed how will we look to our shareholders ? Learning & Innovation To achieve our vision, how must we learn and improve ? Customer Perspective To achieve our vision, how must we look to our customers ? Internal Perspective To satisfy our customers, at what processes must we excel ? Indicates whether a companys strategy, implementation and execution are contributing to bottom line performance improvement Measures how a company is viewed by its customers, to provide insights regarding its ability to continue gaining, retaining and extracting value from them Manages and monitors the key functions that ultimately affect the Customer perspective of the Company (e.g. delivery lead times) Focuses on the companys ability to continue to identify & improve key processes and therefore continue to deliver value to customers Strategy Frameworks Manual Second Edition Transaction Services Back to Home Page The Balanced Scorecard How to Use It 13 Section 3 - Balanced Scorecard Some commonly used goals and measures are as follows: Customer Perspective Lead Times e.g. to process and deliver orders Quality of service or deliveries - e.g. defect rates Performance & Service - how the company helps to create value for its customers e.g. degree of joint working Cost do customers see the company as high or low cost compared to the value they add? By asking customers to i) define acceptable performance and ii) clarify what they consider to be the most important measures of performance, satisfaction can often be improved by simply shifting resources from areas in which the company is over delivering to those in which it is under delivering Internal Business Perspective Include goals and initiatives for those internal processes that will have the greatest impact on achieving/improving the goals and measures set out within the Customer Perspective. For example: Tighten Quality Control e.g. reduce defect rates Improve Productivity e.g. reduce costs to improve profitability or enable prices cuts Learning and Innovation Perspective Could include goals for: Sales generated from new products, or Participation in knowledge sharing initiatives Management should also consider what measures can be included that will help the company to continue to meet the goals set out within the Internal Business Perspective. For example, initiatives and goals to train the workforce in: Total Quality Management concepts New manufacturing techniques Financial Perspective Typical measurements would include improvements in: Profitability, Growth Shareholder value The financial perspective gives management an indication of whether its focus is correct. A failure to improve financial performance in spite of success in meeting the goals set out in the other three perspectives serves as a warning that either the strategy is wrong or that a crucial area of importance has been overlooked Strategy Frameworks Manual Second Edition Transaction Services Back to Home Page The Balanced Scorecard of a Semi-Conductor Company 14 Section 3 - Balanced Scorecard Financial Perspective Goals Measures Survive Succeed Prosper Cash Flow Quarterly sales growth by Division Increased market share and return on equity Customer Perspective Goals Measures New products Responsive supply Preferred supplier Partnership % sales from new products % from proprietary products On time delivery Share of key accounts total purchases No. of cooperation efforts Learning & Innovation Perspective Goals Measures Technology leadership Production learning Product focus Time to market Time to develop next generation Process time to maturity % of products that account for 80% of sales New product intros vs the competition Internal Business Perspective Goals Measures Technology capability Production excellence Design productivity New product introduction Internal capability vs the competition Cycle time & Unit cost yield Silicon efficiency Engineering efficiency Actual introduction schedule vs plan Each of the goals and measures was underpinned by specific initiatives to help deliver them. The reward structure of the company was also reworked to incentivise employees towards achieving the goals The three levels of financial measures allowed the company to assess whether the current “direction of travel” was consistent with long term value creation By understanding each key customers definitions of on time delivery the company could divert resources away from were it was exceeding expectations to better serve its more demanding customers Having identified these goals it was realised that the current information systems didnt produce the data needed to manage key internal processes efficiently Goals chosen to ensure continued focus on key areas of increasing efficiency and developing new products Strategy Frameworks Manual Second Edition Transaction Services Back to Home Page The Balanced Scorecard When to use it 15 Section 3 - Balanced Scorecard When to Use It We are unlikely to implement a Balanced Scorecard for a client. It is more important that we understand enough of the concept to allow us to critique one, either during a Commercial Due Diligence or a strategy review for a Corporate client Other References “The Balanced Scorecars Measures that Drive Performance” Robert Kaplan and David Norton, HBR February 1992 “The Balanced Scorecard: Translating Strategy into Action” Robert Kaplan and David Norton TRANSACTION SERVICES Section 3.1 BCG Matrix 16 Strategy Frameworks Manual Second Edition Transaction Services Back to Home Page The BCG Matrix: What is it? Section 3.1 - BCG Matrix 17 ? High High Low Low Annual real rate of Market Growth (%) Relative market share (%) A framework that: Enables one to judge the overall health of a portfolio of businesses; or Facilitates the decision making process for the allocation of resources among business units (or products) There are four basic positions that a business unit or product can occupy on the matrix: 1. High market share and high market growth rate Stars 2. High market share and low market growth rate Cash Cows 3. Low market share and high market growth rate Question marks 4. Low market share and low market growth rate Dogs While the Strategic Position Assessment (McKinsey matrix) measures a large number of factors to assess the strategic attractiveness of a portfolio, BCG makes the i