Organizational Alignment Tools McKinsey 7-S framework

7-S
Shared Values What does the organization stand for and what it believes in. Central beliefs and attitudes (Reliance- chori). Strategy Plans for the allocation of a firms scarce resources, over time, to reach identified goals. Environment, competition, customers. Structure The way the organization's units relate to each other: centralized, functional divisions (top-down); decentralized divisional (the trend in larger organizations); matrix, network, holding, etc. (effect of environmental change-technology, globalization) Systems The procedures, processes and routines that characterize how important work is to be done: financial systems; hiring, promotion and performance appraisal systems; information systems. Cost leadership v. differentiation

7-S
Staff Numbers and types of personnel within the organization (Google-media company with focus on engineers). Style Cultural style of the organization and how key managers behave in achieving the organizations goals. Skills Distinctive capabilities of personnel or of the organization as a whole (core competence).
Ethan M. Rasiel, Paul N. Friga - The McKinsey Mind: Understanding and Implementing the Problem-Solving Tools and Management Techniques

Balanced Scorecard - Definition

At the highest level, the Balanced Scorecard is a framework that helps organizations put strategy at the center of the organization by translating strategy into operational objectives that drive both behavior and performance.

A Good Balanced Scorecard Tells the Story of Your Strategy Through A Set of Linked Cause and Effect Hypotheses
Strategic Objectives
Financial
F1 - Improve Returns F2 - Broaden Revenue Mix F3 - Reduce Cost Structure

Strategic Measurements
(Lag Indicators) Return on Investment Revenue Growth Deposit Service Cost Change (Lead Indicators) Revenue Mix

Customer

C1 - Increase Customer Satisfaction With Our Products & People C2 - Increase Satisfaction After the Sale

Share of Segment

Depth of Relation

Customer Retention

Satisfaction Survey

I1 - Understand Our Customers I2 - Create Innovative Products

New Product Revenue

Product Development Cycle

Internal

I3 - Cross-Sell Products
I4 - Shift Customers to CostEffective Channels I5 - Minimize Operational Problems I6 - Responsive Service

Cross-Sell Ratio
Channel Mix Change Service Error Rate Request Fulfillment Time

Hours with Customers

Learning

L1 - Develop Strategic Skills L2 - Provide Strategic Info L3 - Align Personal Goals

Employee Satisfaction Revenue per Employee

Strategic Job Coverage Ratio Strategic Info Availability Ratio Personal Goals Alignment (%)

Strategy Map: Diagram of the cause-and-effect relationships between strategic objectives

Theme Example from Southwest Airlines Balanced Scorecard

Statement of what strategy must achieve and whats critical to its success How success in achieving the strategy will be measured and tracked The level of performance or rate of improvement needed Key action programs required to achieve objectives

Strategic Theme: Operating Efficiency

Financial Profitability Lower Costs Customer Flight is on time Lowest prices Increase Revenue

Objectives
Internal
Fast ground turnaround

Measurement

Target

Initiative

Fast ground
turnaround

On Ground Time On-Time

Departure

30 Minutes 90%

Cycle time
optimization

Learning Ground crew alignment

The Balanced Scorecard Supports a Complete Strategic Management System by Linking Long Term Strategy and Measures to More Tactical Planning & Budgeting
Longer Term (3-5 year) View
Mission Vision Themes/ Goals

Shorter Term (Annual) View

Measures
% patient care revenue growth Targets 02 xx% 03 xx% 04 xx% Initiatives Milestones Accountable Resource Alloc.

Internal Financial Customer

Objectives Grow revenue from patient care

ABC Hospital System will provide excellent care in our selected the needs Serve while areasof specialty excellently patients Strengthen innovation margin and 1.maintaining 2. Improve customer satisfaction share high quality Assure consistent 3.growing

4. Provide operational excellence

Meet access expectations

3rd available appointment (% met)

02 xx% 03 xx% 04 xx%

Access project

Meet monthly target

Mkg. Team

$ xxxx

Assure optimum patient mix

% patient mix

02 = 39% 03 = 40% 04 = 41%

02 xx% 03 xx% 04 xx%

Mix Margins Project

Complete by 2003

Dept. Chairs

$ xxxx

Lear ning

Promote ABC Culture Model

Employee Satisfaction Survey

Evaluate survey response

Deadline met

HR Committee

$ xxxx

Strategic

Tactical

Balanced Scorecard for Mobil N. American Marketing & Refining

Strategic Objectives Financially Strong
F I N A N C I A L F1 Return on Capital Employed F2 Cash Flow F3 Profitability F4 Lowest Cost F5 Profitable Growth F6 Manage risk * * * * * *

Strategic Measures
ROCE Cash Flow Net Margin Full cost per gallon delivered to customer Volume growth rate Vs. industry Risk index

Delight the Consumer Win-Win Relationship

CO UM SE TR -

C1 Continually delight the targeted consumer

* Share of segment in key markets * Mystery shopper rating

C2 Improve dealer/distributor profitability

* Dealer/distributor margin on gasoline * Dealer/distributor survey

Safe and Reliable

I1 Marketing 1. Innovative products and services 2. Dealer/distributor quality

* Non-gasoline revenue and margin per square foot * Dealer/distributor acceptance rate of new programs * Dealer/distributor quality ratings * * * * ROCE on refinery Total expenses (per gallon) Vs. competition Profitability index Yield index

Competitive Supplier

Good Neighbor
On Spec On time

I N T E R N A L

I2 Manufacturing 1. Lower manufacturing costs 2. Improve hardware and performance I3 Supply, Trading, Logistics 1. Reducing delivered cost 2. Trading organization 3. Inventory management I4 Improve health, safety, and environmental performance

Delivered cost per gallon .Vs. competitors * Trading margin * Inventory level compared to plan & to output rate
* Number of incidents * Days away from work

I5 Quality

* Quality index

Motivated and Prepared

L E & A G R R N O I W N T G H

L1 Organization Involvement L2 Core competencies and skills L3 Access to strategic information

* Employee survey * Strategic competing (?) availability * Strategic information availability

The Mobil Story (US Marketing & Refining): 1993-1998

Growth Strategy Improve quality of revenue by understanding customer Financ needs and differentiating ourselves accordingly. Productivity Strategy Maximize utilization of existing assets and integrate the business to reduce total delivered cost.

ial Perspe ctive

Volume Growth

Return on Capital

Custo Exceeds industry by mer 2-2.5% annually Customer Satisfaction Perspe Continuous Interna Product ctive improvement for 3 Customer l Innovation Management Speedpass Active Dealer Quality Perfect Orders consecutive years Perspe Increasing Continuous Continuous ctive at rate of improveme improveme Operational 1M per nt for 4 nt for 4 Quality Capacity Utilization Safety Excellence year consecutiv consecutiv Lost work Continuous Annual Learni e years e years incidents improveme value of ng & Motivated down from nt for 4 lost yield & Prepared Growt Workforce Awareness 150 to 30 consecutiv Strategic reduced h Annual survey year e years from employee per Perspe shows awareness of $175m to

Increased from 6% to (profitability) 16% From last (1993) Reduce Cash Expenses to first (95, Down 96, by 20% 97, 98)
Competitive Position

Improve Cash Flow

From -$500 M/Yr to +$700 M/Yr

Good Environmental Neighbor Number of incidents reduced by 63%

What is the Blue Ocean?

High profit growth at low risk

Industries not in existence today Untapped market demand

Unknown market space
10

Summary
Conventional Logic Blue Ocean Logic
Industry Assumption
Strategic Focus

Industry conditions are given

Build competitive advantages to beat the competition.

Industry condition can be shaped.

Create a quantum leap in buyer value to dominate the market. Go for the mass of buyers and willingly let some existing customers go. Think in terms of embracing key customer value commonalities.

Customers

Retain and expand the customer base through further segmentation and customization. Think in terms of embracing customer differences.

11

Summary
Conventional Logic
Assets & Capabilities

Blue Ocean Logic

Think free from a companys existing assets and capabilities. Ask, what if we start anew? Think in terms of buyers solution even if that transcends the industry. Seek to solve buyers major bottlenecks/chief compromises in using the products/services of the industry.

Think in terms of a companys existing assets and capabilities. Build on what it has.

Product/ Service offerings

Think in terms of products/services offered by the industry. Seek to maximize the value of these offerings.

12

Four Actions to create a Blue Ocean Raise

What factors should be raised well beyond the industry standard?

Eliminate
What factors should be eliminated that the industry has taken for granted?

Create
What factors should be created that the industry has never offered?

Reduce
What factors should be reduced well below the industry standard?

13

Internal Analysis: Resources & Capabilities

OUTLINE
The role of resources and capabilities in strategy formulation. The resources of the firm Organizational capabilities Appraising the profit potential of resources and capabilities Putting resource and capability analysis to worka how-to guide Creating new capabilities.

Does Industry Matter?

Percentage of variance in firms return on assets explained by: Industry effects Firm-specific Unexplained effects variance

Rumelt (1991) McGahan & Porter (1997) Hawawini et al (2003)

4.0% 18.7% 8.1%

44.2% 31.7% 35.8%

44.8% 48.4% 52.0%

Shifting the Focus of Strategy Analysis: From the External to the Internal Environment

THE FIRM
Goals and Values Resources and Capabilities Structure and Systems

THE INDUSTRY ENVIRONMENT

STRATEGY
STRATEGY

Competitors Customers Suppliers

The Firm-Strategy Interface

The Environment-Strategy Interface

Rationale for the Resource-based Approach to Strategy

When the external environment is subject to rapid change, internal resources and capabilities offer a more secure basis for strategy than market focus. Resources and capabilities are the primary sources of profitability- the Honda example

Identifying Organizational Capabilities: A Functional Classification

FUNCTION Corporate Management CAPABILITY Financial management Strategic control Coordinating business units Managing acquisitions

EXEMPLARS ExxonMobil, G IBM, Samsung BP, P&G Citigroup, Cisco

MIS R&D Manufacturing/Ops

Speed and responsiveness through Wal-Mart, Dell rapid information transfer Research capability Development of innovative new products Merck, IBM Apple, 3M

Efficient volume manufacturing YKK Continuous Improvement Nucor, Harley-D Flexibility Zara, Four Se Design Capability Brand Management Quality reputation Responsiveness to market trends Sales Responsiveness Apple, Nokia

Design Marketing

P&G Johnson & Johnson MTV, LOreal

Sales, Distribution

PepsiCo, Pfize

Assessing a Companys Resources and Capabilities: The Case of VW

RESOURCES
Importan ce 6 7 8 7 8 VWs Relative Strength 4 5 8 4 5 CAPABILITIES C1. Product development C2. Purchasing C3. Engineering C4. Manufacturing C5. Financial management C6. R&D C7. Marketing & sales C8. Government relations Importan ce 9 7 7 8 6 6 9 4 VWs Relative Strength 4 5 9 7 3 4 4 8

R1. Finance R2. Technology R3. Plant and equipment R4. Location R5. Distribution

Approaches to Capability Development

1) Acquire and develop the underlying resources. Especially human resources
--Externally (hiring) --Internally through developing individual skills (TSMG, TAS)

2) Acquire/access capabilities externally through acquisition or alliance 3) Greenfield development of capabilities in separate organizational unit (IBM & the PC, Xerox & PARC, GM & Saturn) 4) Build team-based capabilities through training and team development (i.e. develop organizational routines) 5) Align structure & systems with required capabilities

6) Change management to transform values and behaviors (GE, BP)

7) Product sequencing (Intel , Sony, Hyundai) 8) Knowledge Management (systematic approaches to acquiring,
storing, replicating, and accessing knowledge)

Summary: A Framework for Analyzing Resources and Capabilities

4. Develop strategy implications: (a) In relation to strengths--How can these be exploited more effectively and fully? (b) In relation to weaknesses --Identify opportunities to outsource activities that can be better 3. Appraise the firms resources and performed by other capabilities in terms of: organizations. (a) strategic importance --How can weaknesses be (b) relative strength corrected 2. Explore the linkages between through acquiring and resources developing and resources capabilities and capabilities? 1. Identify the firms resources and capabilities

STRATE GY

POTENTIAL FOR SUSTAINABL E COMPETITIV E CAPABILITIES ADVANTAGE

RESOURC ES

Cost of Entry Test If cost of entry > expected returns . No shareholder value Overpayment?
Example: Philip Morris acquires 7-up (4 times the book value)

More attractive an industry, more the cost of entry

22

Better-Off Test Corporation should bring in competitive advantage to the new unit or vice versa. Why? If the benefit is one-time, it is best to sell the unit after extracting benefits does not add value to shareholders
Example: Baxter Travenol and American Hospitality Supply

23

Concepts of Corporate Strategy Major reasons for diversification failures

Failure to address the 3 tests Lack of clarity in the concept of corporate strategy Poor Implementation of the Requires Nostrategies Connection among Business Units
To create value through companys each autonomous unit Depends on connectionare among Business Units 4 Major concepts of corporate strategy Portfolio Management Exploits the relationship between businesses. Restructuring Transferring Skills Sharing Activities

24

Cost Leadership Strategic Choices The cost leader does not try to be the industry innovator The cost leader positions its products to appeal to the average customer The overriding goal of the cost leader is to increase efficiency and lower its costs relative to its rivals

25

Cost Leadership Advantages: Dealing with the 5 Forces Protected from industry competitors by cost advantage Less affected by increased prices of inputs if there are powerful suppliers Less affected by a fall in price of outputs if there are powerful buyers Purchases in large quantities increase bargaining power over suppliers Ability to reduce price to compete with substitute products, low prices may be unattractive to substitutes

26

Cost Leadership Disadvantages

Competitors may lower their cost structures in different ways Competitors may imitate the cost leaders methods Cost reductions may affect demand
Chinese bicycles
27

Wal-Mart v. Amazon HP-Compaq

More tangible than differentiation strategy

Generic Business-Level Strategy: Differentiation Create a product that customers perceive as different or distinct in an important way Advantages
Premium price. E. g. Sony TVs Increased revenues = superior profitability

28

Differentiation Strategic Choices

Quality, innovation, responsiveness to customer needs A differentiator strives to differentiate itself along as many dimensions as possible

A differentiator segments its market into many niches

BMW: prestige, engineering, luxury, reliability, service

Toyota, Kellogg

A differentiated company concentrates on the organizational functions that provide the source of differentiation advantage
R&D important, materials management less so
29

Differentiation Advantages: Dealing with the 5 Forces Customers develop brand loyalty Powerful suppliers are not a problem because the company is geared more toward the price it can charge than its costs
Differentiators can pass price increases on to customers

Powerful buyers are not a problem because the product is distinct Differentiation and brand loyalty are barriers to entry The threat of substitute products exists

30

Differentiation Disadvantages Difficulty in maintaining long-term distinctness in customers eyes

Agile competitors can quickly imitate Patents and first-mover advantage are limited

Difficulty of maintaining premium price

Intangible v. tangible attributes: prestige watches v. HD-DVD players

31

Features of Cost Leadership and Differentiation Strategies

Generic strategy Key strategy elements
Scale-efficient plants. Design for manufacture. Control of overheads & R&D. Avoidance of marginal customer accounts.
Emphasis on branding and brand advertising, design, service, and quality.

Resource & organizational requirements

Access to capital. Process engineering skills. Frequent reports. Tight cost control. Specialization of jobs and functions. Incentives for quantitative targets.
Marketing. Product engineering. Creativity. Product R&D Qualitative measurement and incentives. Strong cross-functional coordination.
32

COST LEADERSHIP

DIFFERENTIATION

Generic Business-Level Strategy: Focus

Serving the needs of a specific market segment
Geographic Type of customer

Cavin Kare, Jumbo King

Bose- high-end audio Tax prep software Intuit- personal finance software (Quicken) After choosing a market segment, a focused company positions itself using either
Low-cost OR differentiation
33

Segment of the product line

Y-Films Body Shop Snapdeal v. Purpleswarms

Why Focus Strategies Are Different

34

Focus Advantages
The focuser is protected from rivals to the extent it can provide a product or service they cannot

The focuser has power over buyers because they cannot get the equivalent product from broadmarket firms The threat of new entrants is limited by customer loyalty to the focuser/small size of niche Customer loyalty/knowledge of customer needs lessens the threat from substitutes
The focuser stays close to its customers and their changing needs

Body Shop v. LOreal Red Bull

35

Focus Disadvantages
The focuser is at a disadvantage with regard to powerful suppliers because it buys in small volume (but it may be able to pass costs along to loyal customers) Because of low volume, a focuser may have higher costs than a low-cost company The focusers niche may disappear because of technological change or changes in customers tastes
Portfolio risk Physical data storage v. cloud computing Diet companies, health fads Get acquired?

Differentiators will compete for a focusers niche once it grows big enough
36

Defining an Industry

A group of companies offering

Industry

products or services that are

similar each other

Rival companies that serve

Competitors

the same basic customer needs

37

Defining an Industry (contd)

Sector

A group of closely related industries

Distinct groups of customers within a market

Market segments

that can be differentiated from each other based on their distinct attributes and demands

Changing industry boundaries

38

The Computer Sector: Industries and Segments

39

Porters Five Forces Model

Source: Adapted and reprinted by permission of Harvard Business Review. From How Competitive Forces Shape Strategy, by Michael E. Porter, Harvard Business Review, March/April 1979 by the President and Fellows of Harvard College. All rights reserved. 40

Risk of Entry by Potential Competitors

Barriers to entry
Brand loyalty Absolute cost advantage
Access to cheaper funds Superior production operations and processes Control of particular inputs required for production because existing companies represent lower risks than new

entrants

41

Risk of Entry by Potential Competitors (contd)

Barriers to entry
Economies of scale
Cost reductions from mass producing a standardized output Discounts on bulk purchases of inputs Advantages of spreading fixed costs over a large production volume Cost savings from marketing and advertising for a large volume of output

Customer switching costs

Government regulation

42

Rivalry Among Established Companies Industry competitive structure

Fragmented vs. consolidated (oligopoly or monopoly) Cost structure- fixed v. variable

Industry demand

Exit barriers
Investments in assets of little or no alternative value or that cannot be sold High fixed costs of exit Emotional attachments to an industry Economic dependence Need to maintain an expensive collection of assets in order to participate effectively in an industry E.g. Steel

43

The Bargaining Power of Buyers

Buyers are most powerful when
The industry that is supplying a particular product or service is composed of many small companies and the buyers are large and few in number Buyers purchase in large quantities The supply industry depends on the buyers for a large percentage of its total orders Switching costs are low It is economically feasible for buyers to play one supplier against another Buyers can threaten to produce the product themselves

E.g. Auto components

44

The Bargaining Power of Suppliers

There are few substitute products

Suppliers are most powerful when

The industry is not an important customer to the supplier Switching costs are high for companies switching to a different supplier Suppliers can threaten to compete directly with buyers by entering their industry Buyers cannot threaten to enter the suppliers industry E.g. PCs and microprocessors
45

Substitute Products

Many substitute products

Are a threat and limit the price that companies in one industry can charge for their product, and thus industry profitability

Few or weak close substitutes

Gives the industry the opportunity to raise prices and earn additional profits

46

A Sixth Force: Complementors

When complementors are important and their number is increasing

Demand and profits in the industry are boosted

When complementors are weak

Industry growth can slow and profits can be limited Hybrid/electric cars

47

Warren Buffett

The fastest way to become a millionaire.

48

Warren Buffett

.. start as a
billionaire, and invest in airline shares!
49

Measures
Rivalry Industry concentration: Herfindahl Index H= i(Si )2 where Si is market share of firm I For market with 2 firms with .5 share each, HI = .5^2 + .5^2 = .5 Oligopoly HI ranges from .2 to .6 50 Substitutes Price-performance ratio improvement Buyer power HI of buyer industry Switching costs

Strategic Groups Within Industries

Companies can position their Formed within an industry when some companies follow the same basic product positioning strategy, which is different from that of other companies in other groups products in terms of distribution channels, market segments, product quality, technological leadership, customer service, pricing

policy, advertising policy,

promotions

51

Strategic Groups in the Pharmaceutical Industry

Insert Figure 2.3

52

Implications of Strategic Groups

A companys closest
competitors are those in its strategic group Each strategic group may face a different set of opportunities and threats
53

The Role of Mobility Barriers

A company may decide to move from one strategic group to another where the five forces are weaker and higher profits are possible

Mobility barriers are similar to industry entry and exit barriers and must be weighed carefully

54

Industry Life Cycle Analysis

The strength and nature of the five forces change as an industry evolves through its life cycle

Managers must anticipate how the forces will changes as the industry evolves and formulate appropriate strategies

55

Stages in the Industry Life Cycle

56

Industry Life Cycle Analysis

An embryonic industry is
one that is just beginning to develop. Growth is slow because of buyer
Barriers to entry at this stage tend to be based on access to key technological know-how, rather than cost economies or brand loyalty. Rivalry in embryonic industries is based on educating customers, opening up distribution channels, and

unfamiliarity with the

industrys products, poor distribution channels, and high prices stemming from the inability of companies to reap economies of scale.

perfecting the design of the product.

Embryonic industries provide a good opportunity for firms to capture loyal customers, capitalizing on the lack of rivalry.

57

Industry Life Cycle Analysis

A growth industry is one where first-time demand is expanding rapidly as new consumers enter the During an industrys growth stage, there tends to be little rivalry. Rapid growth in demand enables companies to expand their revenues and profits without taking market share away from competitors. Growth industries provide opportunities for firms to expand their market share and revenues in a relatively low rivalry situation. Firms entering at this stage avoid

marketplace. Typically,
demand takes off when consumers become familiar with the product, prices fall with the attainment of

economies of scale, and

distribution channels develop.

the high expenses of initial product development.

58

Industry Life Cycle Analysis

An industry shakeout

occurs when the rate of

industry growth slows down as demand approaches saturation
As an industry enters the shakeout stage, rivalry between companies becomes intense, with excess productive capacity and severe price discounting. Many firms exit the industry at this point. Industry shakeout provides an opportunity for those firms that are dedicated to success in this particular industry to consolidate their power, often by acquiring

levels. A saturated
market is one where there are few first-time buyers left. Most of the

the assets of firms exiting the industry.

demand is limited to
replacement demand.
59

Shakeout: Growth in Demand and Capacity

60

Industry Life Cycle Analysis

A mature industry is one

where the market is

totally saturated, growth is very low or near zero, and demand is limited to
As an industry enters maturity, barriers to entry increase and the threat of entry from potential competitors decreases. Intense competition for market share can develop, driving down prices. In mature industries, companies tend to recognize their interdependence and try to avoid price wars if possible. Stable demand gives them the opportunity to enter into price-leadership agreements, reducing the intensity of rivalry and allowing greater

replacement demand.
Most competitors have exited the industry, creating an oligopoly

profitability. However, the stability of a mature industry is always

threatened by further price wars, especially in an economic downturn.

dominated by a few,
large companies.

61

Industry Life Cycle Analysis

In the decline
stage, growth becomes negative. Virtually all
Depending on the speed of the decline and the height of exit barriers, competitive pressures can become as fierce as in the shakeout stage.

Falling demand leads to excess capacity,

causing companies to engage in price wars. The greater the exit barriers, the harder it is for companies to reduce capacity and the greater is

companies exit
the industry.

the threat of severe price competition.

62

Life cycle issues

Limitations of Models for Industry Analysis

The embryonic stage can sometimes be skipped

Industry growth can be revitalized The time span of the stages can vary

Innovation and change

Innovation can unfreeze and reshape industry structure An industry may be hypercompetitive, with permanent and ongoing change
63

Punctuated Equilibrium and Competitive Structure

64

Limitations of Models for Industry Analysis (contd)

Company differences
The importance of company differences within an industry or strategic group can be underemphasized

The individual resources and capabilities of a

company may be more important in determining profitability than the industry or strategic group
65

The Role of the Macro-environment

66

The Macroenvironment

Changes in these forces can have a direct impact on Porters five forces:
Economic Technological

Demographic
Social Political and Legal
67

Strategy in Declining Industries

Leadership

Philip Morris Niche

A company seeks to become the dominant player Buy market share through acquisition Focusing on pockets of demand that are declining more slowly than the industry as a whole Optimizing cash flow No acquisitions, low capital investment, marketing expenses, working capital Selling off the business Strong brand may keep out suitors

Dot matrix printers and PSU banks Harvest Divestment

68

Strategy Selection in a Declining Industry

69