Business Strategy Masterclass

1. Business Strategy Masterclass: Welcome to my business strategy masterclass. This is the course I have been longing to create when I was studying for my MBA, Cass Business School in London in the early 1990's way, did that time go? Business strategy was my favorite subject. I did my MBA thesis on business strategy for the James White apple juice business, for which my Finnish students Stephen and I won the tallow Chandler's priors for the best dissertation. My name is John Kelly. I'm a senior 30-year plus investment banker. And yes, I did get my MBA with distinction as it happens in this course, I want to share with you my MBA level business strategy from the setting of objectives, strategy creation. Along the way, we're gonna cover a lot of ground, business models and frameworks, case studies. If you're a student of business, an entrepreneur and investment banker, accountant, or even a lawyer. This course will enable you to consider business strategy objectively and with a critical eye and essential business skill. At the end of this course, you'll be able to evaluate and formulate a business strategy for a firm or a client. The course project consists of a multiple choice quiz to help you reinforce the learning lessons. The details are in the course project area and explained in the last video in the course. In addition to this, we discussed case studies to understand how business strategy works in real life. There are over a dozen models and templates for you to work with attached in the project area. I spent two years studying for my MBA while holding down a full-time investment banking job. This is the course I wish I had taken when I was studying my MBA. So let's get started. I'm really looking forward to working with you in this class, business strategy masterclass. This is just what you've been waiting for if you're looking to improve your knowledge of business strategy. 2. 3 What is Business Strategy: Let's start by asking a simple question. One, I assure you that does not have a simple answer. What is business strategy? In a nutshell, business strategy is an outline of the actions and decisions a company plans to take to reach its business goals and objective. That's very succinct, very easy to say. But what does it actually mean? Strategy? And I'm thinking now in military terms with my former military hat on essentially sets direction, establishing his decision-making parameters largely for tactical decisions, and enables the allocation of resources. And if you think about a military operation, that's exactly what happens. This is strategy is important because it identifies the key steps which are necessary to achieve business goals. It helps you to identify the strengths and weaknesses of your organization. It enables the efficient allocation of resources. It establishes command and control parameters that everyone can understand and sign up to. And it enables a company to establish and maintain. Ultimately, it's competitive advantage. Business strategy evaluation comprises vision, the collection and analysis of business information, the devising of a competitive strategy, the execution of that strategy, and then the evaluation of the results, and then a repeat of the process. But the real challenge of business strategy is the assessment and evaluation of the strategy that is right for the business. This requires extensive analysis and the use of models and frameworks. The challenge of the evaluation process is to identify the right strategy to adopt. Let us just take a look quickly at some examples. You could sell more products. Sales growth, that's great. You could innovate to technological leadership. Think about Apple continually updating its iPhone. You could sell new products. So Apple starts out selling AirPods. You could improve customer service. So Apple has got these amazing genius bars at their stores. You could corner a new market or disrupt an existing market. Well, you only have to think of the original iPhone or the an iPad. You could differentiate your products. Apple sells high-end, sophisticated products. Clearly, the iPhone is a world away from some of the other phones on the market. You could price low price, high, apple price is high. Samsung relatively speaking prices low. You could gain a technological advantage through R&D or acquisition. Will Apple's continually innovating, but at the same time it's acquiring a business. Tim Cook said the other day, about one business every six weeks. So it's really very acquisitive. You could improve customer retention that Apple has got a fantastic, really loyal customer base. And of course, you could then talk about sustainability and green policies and apples talking more about recycling. So these are all policies which you can see can be implemented. The question is, what's the right way to go or how do you devise a series of these strategies to fit your business? The most challenging part of the process is the analysis and the evaluation phase. When you're looking at your industry, your competition, your markets, and internally the capabilities of the firm. That's another way to look at it. You can look at the external forces and you can look at the internal facets of your business. Now at business school, and I speak from experience, I have an MBA with distinction from Cass Business School in London. Business Strategy courses, which I really enjoyed, equip you with the tools, the frameworks, and the models to facilitate strategic evaluation. And that is what this course is going to be all about. I hope that little running gives you a solid idea about what we're talking about when we talk about business strategy. And the direction I want to set this course. 3. 4 Business Vision and the Mission Statement: It wants to talk to you now about something that actually transcends business strategy, which is business vision, and the mission statement. Every business needs to have at its core, a set of values which guide the strategic process. This vision is communicated in the mission statement. The mission statement comprises essentially if three elements, core values, core purpose, and visionary goals. These are independent of the industry, the value chain, and the product lifestyle cycle. It's the completely independent of strategy. They form, if you like, the guiding light that then sets the strategy and from which everything else follows. Core values are at the heart of the firm. Things like excellent customer service, innovation, creativity, integrity, social responsibility. Steve Jobs characterize the Macintosh project. A team as pirates. He wanted to get across to the core value of being outside of the rule of the corporation, being able to set their own rules, break down barriers and boldly innovate. The core purpose is the reason the firm exists and this has to reflect the culture of the firm. Otherwise the employees weren't buy into it. Things light with Honda, the power of dreams with Audi, Washburn, Dirk technique, keeping a head through technology. These communicate the core purpose of the company when it comes to visionary goals. These are the long-term visionary objectives for the firm. Now they may be targets quantitative or qualitative. They may refer to a common enemy like the Pope, Coke versus Pepsi rivalry. They may be a role model. We want to be the Nike of the gym world, whatever it is. Or it may be to do with internal transformation. And if you look at the jaguar company then now aiming to be all electric by 2025. So these are visionary goals which are set for the future. Now, Steve Jobs and his mission statement for Apple in 1980 said to make a contribution to the world by making tools for the mind that advance humankind. That's really inspiring if you can see the sense of future vision that he was communicating there. If you look at the rivalry side of things, then one thing I wanted to just quote with you and again, it shows where industry rivalry can come in. But I thought I'd leave you with a story. When Windows OS was launched, there was a big argument between Apple and Microsoft. Steve Jobs felt that Microsoft had in some way copied Apple's operating system. And the response to that was that the Microsoft CEO came back and he said, Well, Steve, I think there's more than one way of looking at it. I think it's more like we both had this rich neighbor. It's aimed Xerox. And I broke into his house to steal the TV set and found utero the stolen it. But it was, again, this is symptomatic of industry rivalry where Apple and Microsoft Word, so challenging each other side-by-side for quite a long period, having started originally collaborating, Of course. So anyway, I leave that story with you just to keep things interesting. But business vision and the mission statement are at the core of strategy. But if you'd like, they are the, the template that sets the direction for the strategy that we're gonna be discussing in this course. 4. 5 The Strategy Hierarchy within a Firm: Let's take a look now at the strategy hierarchy within a firm. Business strategy can be devised at three levels within a firm at the very top, the corporate level, the next level down, which is the business unit level, and then below that, the functional or department at departmental level. Now while the mass manage the portfolio of his businesses, those businesses essentially compete in the market at a product level and a strategy device for one product line may not be appropriate for another. If we look at Apple, the strategy for the iMac computers may not necessarily be the same strategy for a new product like the AirPods. So they have to take a different approach in the case of each product. At the corporate level, the senior management of the firm are essentially focused on assembling the best portfolio of businesses and product lines with which the firm should compete. So you can see Tim Cook sitting there and he's got his iMac computers, he's got his phone, he's got his iPad, sees God is AirPods. And so we go on. And here's one of his roles is to continually seek to expand that range of products and services. So they've gone into music, they've gone into cloud computing, all these sorts of things. So it's a very much a big picture focus and it's a portfolio approach. Corporate strategy at the senior level focuses on reach, which is the goals, the types of business, the integration and management of those businesses, the competitive scope where Andy in which markets to compete, so which product lines and which markets, activities and interrelationships. Now this is where the senior management or looking at how the businesses can optimize and synergize internally because it's no good having silos of businesses which have no interaction when you can get so much more benefit from them having interconnections between them. Then the practices and the culture and the organization of the Business, Management Policy and the level of control and how they delegate that control down. At the business unit level, strategy is focused more on a product or a division or a profit center. And it's about the coordination of operating units. And the focus here is on developing and sustaining competitive advantage. Business unit strategy is looking at the position versus the competition and how they can compete successfully. Anticipating change in the market. It may be technological change, it may be political change, it may be economic change, but making sure that they adapt and they don't get left behind. And also influencing the competition through optimizing their value chain or doing things like lobbying. Now, Michael Porter's three generic strategies are the three strategies that you can compete at, at this level. And they are essentially cost leadership, differentiation and focus. And these are used to defend against the challenges of Michael Porter's Five Forces. But if we just look at the three generic strategies as a very brief introduction because we're going to look at this later. You can see we're focused on the business scope. And it does the advantage that the company focuses on. Is it low cost or is it product uniqueness? If it's low cost, it's something like Lenovo laptops or product uniqueness. It's like a Macintosh, an Apple laptop. So the two very different. They going for a broad, industry-wide competitive scope or are they going for a narrow market segment? Then depending on what approach they take, you get the different strategies. In a broad industry wide approach, you're looking at a cost leadership strategy or trying to be the lowest cost producer. And if you look at Aldi and Lidl in the retail food retail market, they are very much focused on being industry wide. But going for cost leadership. If you go industry wide, but you're getting for product uniqueness, you're going for differentiation. And this is if you want to keep the food retail market going on, this is to a certain extent where Waitrose tries to position itself. Its prices are by no means the cheapest, but they tried to have their special brands, their unique brands, which enable them to charge more for the same product. If you're looking at a narrow market segment, then you're looking at a focused strategy, but you could still be going low costs, so you could be going very much. I'm aiming at just a segment of the market and trying to be the low-cost producer there. And if you're going for a product uniqueness, but for a negative and narrow segment that you are still going for a focus strategy, but you're aiming to differentiate yourself by the uniqueness of your products. So I hope that gives you an idea of the generic strategies. But this is the sort of all the level of strategy formulation that one finds at this level in the business. The next level down at the functional level, we're talking about business process. We're talking about value chain optimization. And we're really looking at on operational focuses on marketing, finance, operations, HR, R&D, trying to get everything right now the purpose here is to implement the higher-level strategies that have been passed down. So they'd been told to go for a focused differentiation strategy. They have to implement it. So they have to create the action plans and the tactics to achieve the corporate and business level goals. That's a look at strategy hierarchy in a firm. So you can see that within the three hierarchies are the three levels of the hierarchy. There are very different tasks and different strategic approaches required. 5. 6 Introduction to Business Strategy Design: In this section, I want to talk to you about business strategy design. It's all well and good doing all this business in analysis. But we need to understand how we're going to design a strategy and how we're going to go through the process of actually building it out and implementing it. So much of the course is taken up with strategy analysis and formulation. I'm sharing with you a lot of models which will help you think around business strategy to come up with the strategies you need to make your business more successful. But this section focuses on the key issue, which is, is the process for designing the strategy itself. Or put another way, how should we use the strategy models and in what order to devise our strategy that we actually want to implement. In this section, we're gonna start with the business model canvas, which provides us with a building blocks method of formulating our business model from first principles, but still with reference to other strategy analysis frameworks, will then go on to look at lovelier Martin's five-step strategy model, which provides another step-by-step framework for the process of strategy design. And then I'm gonna finish with Hambrick and Friedrich. Since strategy diamond, which again is slightly different angled, slant on step-by-step process formulation to create a business strategy from first principles. This is about helping you empowering you to make better decisions by providing processes and frameworks for that decision-making process itself. And I was in two minds as to whether to put this before a lot of the framework analysis or to put it afterwards. I'm gonna put it before so that you have the understanding of the process. And once you've got that process design concept in your mind, you can then feed in the frameworks to populate it and to fill it out. I hope you find this section interesting. We're looking at business strategy design in its own right. The process of putting a strategy together rather than the analysis of your business to work out which is the right strategy to do. 6. 7 Business Model Design with the Business Model Canvas: If you're looking to design a new business or you want to challenge the assumptions of the design of an existing business, then the business model canvas is an excellent tool to use. And we're going to take a look at this particular model in this lecture. It is an excellent tool for strategic analysis. It was formulated by Alexander Osterwalder and his 2004 thesis, the business model ontology proposition in a design science approach, which is an awfully long way of saying he put together a really neat business model. The purpose of the model is to provide a template on which to build and design your business model. The template sets out the nine dimensions of a business model and challenges you to think through them. Now you can use the Business Model Canvas to design a new business or to review and challenge the assumptions of an existing business. And when formulating your business strategy, this is a really valuable tool to have at your fingertips and we're gonna examine it in some detail. There are nine building blocks on the canvas and I've provided you with a template and detailed notes which you can download as a checklist from the resources section of this lecture, as well as this slide deck as a PDF as well. The nine elements of the Business Model Canvas, our key partners. We're gonna go through all these in some detail. Key activities, key resources, value propositions, customer relationships, channels, customer segments, cost structure and revenue streams. Now what I suggest you do here, rather than me read out what's on the screen to you that you just pause the video here and just read the detail of these nine sections. We're going to go through them in a little bit more detail in a moment. This is what the business model canvas actually looks like. And what it enables you to do is to actually write in the the aspects of your business that fit individual sections of the canvas. And this makes it very much easier than to brainstorm and to formulate your business design. And that's one of the reasons it's so effective. And they say you can find this in the checklist, which you can download with this lecture. Now, let us take a look at each one of these nine facets of the business model canvas. We're going to start with business partners. These are companies or people with whom your business has a strategic relationship. Now, on the one hand, they might be suppliers or they might be distribution partners. The questions you need to look at is what resources does your firm received from them and what key activities are performed by them? What's your company's motivation for working with them? If you think about Porter's value chain, you have your suppliers, the one hand and you have your buyers, your customers at the other. This is also looking at your distribution partners. This is not looking at customers at the moment. What is challenging you to think is, what are these people doing with your firm? How are you working with them? What is the rationale for this relationship? It's important that you cultivate buyer and supplier relationships so that they can focus on their core activities. You get the balance right. You should also look for complimentary business alliances, which can also then be done through joint ventures or strategic alliances with your competitors or indeed with non competitors. But look at opportunities for adding value with complementary business partnerships. The second facet of the canvas is key activities. And these are the activities which are fundamental to your businesses operation. What activities are necessary to deliver your value added? What the activities set you apart from other firms, and how do your revenue streams, distribution channels, and customer relationships differ from other firms? You're trying to identify here how you can design a business, which is one, It's got competitive advantage, but secondly, it's differentiated from its competition. Then of course, you have to look at the issue of improving efficiencies because obviously you want to keep costs low. The third facet is key resources, and this is challenging you to think about the assets which are essential to your business to enable you to deliver value-added products. So what specific assets are essential? Now this might be intellectual property, this might be people, this might be technology, this might be a physical assets. But what resources does your firm depend on to run? And indeed, what resources do you need to maintain customer relationships? You have to then think of the consequences of this. Does your company requires significant capital, physical, physical, intellectual, or human resources? The value proposition of your businesses, of course, is very important. So you need to think this through. What is the fundamental offering that is being offered to your customers? This is the primary driver of your business operations. This is how you are creating value. For Google. It's organizing the world's information. And you need to think about what your business is achieving in this, look back to your vision and your mission statement as well. What are you trying to give to your customers that other firms cannot give? What problem are you trying to solve? How do you offer something different? These are all incredibly important because you have to have something unique. And we talk in other models about unique selling propositions. Well, this is really focusing on trying to identify what that is for your business. The company's value proposition is what distinguishes it from its competitors. Now, this is quite a long sentence, but the value proposition provides value through various elements. So there's quite a lot of them. It could be newness, performance, customization, even just getting the job done. Design, branding status, price cost reduction, risk reduction, accessibility, convenience, or usability. All of these are factors which add value and you might be using a number of these to make your particular product or service stand out. Your value propositions might be expressed in terms of quantitative numbers, in terms of price and efficiency, or in terms of quality, overall customer experience and outcome. So that's quite a lot to think about with the value proposition. And the best way obviously, is to sit around the table and to brainstorm this. Customer relationships is number five, and this is all about your interaction with customers. So we've looked at suppliers and we've looked at distributors, and now this has customers. What type of relationship do you have with your customers? And again, later on in this course, we're looking at Porter's five forces and the power of buyers. And it's important that you've got this thought through. How does your business interact with your customers? How frequently do you communicate? How much support do you provide for them after the sale or indeed during the sale process? There's a whole range of factors which you can bring into this, whether it's personal assistance, a dedicated personal assistant, There's some self-service element to it. Automated services, communities co-creation. There's lots of facets to this customer relationship that you need to think through. Number six is channels which are the methods by which you deliver your products and services to your customers. So how do you deliver your value proposition? How do you reach your customer segments? And you need to consider your supply, your distribution, and your marketing and communication channels. Number seven is customer segments. And this is where you have a detailed understanding of your customer base and how you segmented into different groups. Now this will affect how you're delivering your products and services. And indeed, which products and services you're delivering to which segments. So you need to understand the different types of customers you have and what value are you creating for each segment? Indeed, who are your most important customers? Now, 8020 analysis is quite important here. You need to look and see where 80% of your profits and sales are coming from in terms of your customer base and see what that tells you about. If your customer segments and who your customers are. You need to understand the different types of customers you have. And also particularly need to understand whether you are focusing on a niche or a mass market. And this comes into the generic strategies discussed by Michael Porter when you either have a broad focus on your market or you start having a narrow focus and you just go after particular customer segments. To go on. You can either be mass market, you can be niche market where you're addressing the specialized needs and characteristics of your clients. You need to understand the segmentation, how you split up your customer base. And you need to understand how you can serve multiple customer segments with different needs and characteristics, which is all about diversifying your products and service offerings. And indeed, can you build a multi-sided platform to your market where you serving mutually dependent customer segments. Number eight is your cost structure. How do you spend your money on operations? What are your key costs and what are your drivers of costs? And you need to relate your costs to your revenue streams. So you need to understand exactly where the money's going. Now in terms of your business structures, some of this is gonna be costume, other parts of it will be value-driven. And of course, you're gonna have fixed costs and you're going to have variable costs. And there's opportunities here to see how you can achieve economies of scale and economies of scope, which is when you can reduce costs by incorporating other businesses which have got a direct relationship to your original product. Number nine then is not the last, but it's by no means the least important is revenue streams, which is your source of cashflow. And it's the way your value proposition generates money. Do you have a single or multiple revenue streams? What is your pricing strategy? How do your customers pay you and do you receive multiple forms of payments? So you need to understand your revenue streams in some detail. Now there are some limitations to this model. Firstly, it's static, it doesn't really change. It doesn't capture changes in strategy or the business over time. So you need to keep on challenging it. To a degree. It may focus too much internally and not take into account the external environment of the firm. But we're spending quite a lot of time later on in this course looking at internal and external industry analysis. And also you get a lot of this when you start looking at some of Michael Porter's models as well. But the business model canvas gives you a very good template on which to look at the building blocks of your business and to challenge what they're doing and why they are there. This is an excellent model for fundamental business design, both in terms of a new business and if you're challenging the existing design of your own business as it stands today. And it's something I'd strongly recommend that you get your mind around. It's a very useful tool. And by all means, download the checklist and the templates that I'm going to provide for you. 7. 8 Business Model Canvas Template: I've prepared for you in an easy to download and print out business model canvas template, which you can find attached to this lecture. Now in this lecture, we're just going to very quickly run through what's covered in the business model canvas, which is the nine different segments of key partners, key activities, key resources, value propositions, customer relationships, channels, customer segments called structure and revenue streams. Now you can see them all here on the business model itself. You should use this in conjunction with the checklist, which is available to download with the previous lecture, as well as the detailed notes you'll get from the slide deck, which was in the previous lecture. But I wanted you to have a standalone, very easy to download template, which this is. And you can then use this when you're working with your colleagues to design your business model. That's a just a very quick explanation of what this template is four, and I hope you find it very helpful. 8. 9 Lafley & Martin’s Five Step Strategy Model: I wanted to walk you now through laughing and Martin's five-step strategy model. The objective of this model is to help you formulate an effective business strategy step-by-step. To do this, you need to understand your business, the market in which it operates, and your own capabilities and these factors are addressed by this model. The model was devised in 2013 by AG Lafley, who's the formula CEO of Procter and Gamble, and Roger Martin, the former dean of Rotman Business School of Management. The model sets out five steps, five questions that need to be addressed when formulating an effective strategy. The five questions are, what is our winning aspiration? Where are you going to play? How are you going to win? What capabilities do you need to, when and what management systems are needed? Now I'm gonna take a look at each of these questions in turn. And I'm also going to reference business models which tie into these questions, which will help you when you come to apply this model. Now, these models we are discussing in this course, although most of them we haven't yet got to, but bear them in mind. And remember that all these models tie into one another and that's the best way, the most effective way to apply them. The first question is, what is our winning aspiration? While being realistic? The answer to this question should encompass the firm's vision statement. Perhaps you could simply ask, where does the firm wanted to be in five years time? Now this ties in really well with Porter's generic strategies. Are you going to adopt a niche market or a broad market strategy? Are you going to go for cost leadership or are you going to aim at differentiation? Question two is about where are we going to play? This is looking at target markets, but it's also looking at customer segments that best suit the company's products and services. So what product categories are we going to focus on and which channels are going to best suit the strategy that we want to settle upon. Now to explore this in more detail, you should look at Porter's value chain and the business model canvas as well. Question three is, how are we going to win? Now this requires devising specific strategies at his probably the most complicated question to answer, you need to have a clear understanding of the company's competition and how the firm's products are going to be differentiated in the market. So this is all about sustainable competitive advantage. Understanding the unique selling proposition of your products and services. The USPS consider working through Porter's generic strategies when discussing this question. Question four is what capabilities do you need to when clearly, if you've identify some strategies, you need to have the resources and the abilities in your organization to actually execute them. And that's what this question tries to address. So you're looking at everything from technology, employees, skills, production facilities, financial resources. Again, the value chain sets out a framework which you can actually use to piece together. But I would also take a look at the business model canvas. The final question is what management systems are needed? And this really highlights the issue of command and control, because in order to execute the strategies, the leadership of the organization has to be up to the job. And you need to have a clear communication strategy to ensure that everyone in the organization has been informed about the results of the analysis and the future direction of the firm. If you address each of these questions in the order presented and use the additional models to fill out the OR thinking. You should be able to design a business model for your businesses operations. And the whole idea about this is showing you how to go about designing your business strategy. And these steps will help you through the process. And you have to remember, this is a multifaceted multidimensional analysis that you're trying to put together and I'm trying to guide you through it logically, step-by-step. Lafley and Martins five-step strategy modal will help you with that five questions to design your business strategy in a logical way, but you will need the other models to help you fill out and answer the questions. 9. 10 Hambrick & Frederickson’s Strategy Diamond: In this business strategy design section, let's now talk about Hamburg and Frederick says strategy diamond. The objective of this model is to help ensure that management and taking into account all the important business areas when making strategic decisions. If you go through this logically, it will help you to make better decisions. And I'm also again going to allude to different models that you want to tie in when you're going through the steps in this model. The model comprises five dimensions, arenas, vehicles, differentiators, staging, and economic logic. And the, these are explained by, if you'd start with arenas, where will we be? Active? Vehicles are, how will we get there? The differentiators is how will we win. The staging is what will be the speed or sequence of our moves. And the economic logic is how we'll returns we made. Now you're automatically going to identify some of the key areas here, we're talking about identifying our target markets and customers. We're looking at our channels are routes to market. We're looking at our unique selling propositions. We're looking at the detailed implementation of a plan and we're working out how we're gonna make create value both for ourselves and for our customers. But the framework gives us another step-by-step process that we can apply to our strategic thinking, and that's the value of it. We can look at these questions in more detail one at a time. Starting with arenas. The question is, which markets does the firm want to enter? A lighter? That is, who are the competition and who are the customers? And have we got a customer segmentation for our target customer markets? The next question is, how do you actually target these customers? Which raises the questions of your channels to market. So this whole question of arenas requires a detailed understanding of the external market and a SWOT analysis is probably a good starting point here. Vehicles involved the discussion of what is the most effective market strategy, what's the best way of going to market? Now there's some suggestions here which are alliances, partnerships, ventures, acquisitions, franchising. But it's really a key business design question. How are you going to design your model to address your target market? For this, I think using the business model canvas is very helpful. But also look at the value chain. And if you want to make it even more interesting, if you want to look at the balance of forces in the market, then I'd overlay Porter's five forces as well. The next question is differentiators, which is all about competitive advantage and unique selling propositions. How is the firm going to stand out? Is it on price, quality, brand image, customer services? What are the competitive advantages that it's going to build? Now these are the sorts of questions addressed by Porter's generic strategies. And you would do well to combine this with a SWOT analysis. Staging involves the planning of the sequence, the steps, and the speed of the strategy and implementation. And now you're building a step-by-step model for the execution and rollout of your strategy. It's also crucial that everyone in your organization understands the plan and their role in its execution. This is where the model is taking the analysis into the realm of strategy delivery. The final question is perhaps the most complex, and I'm not sure that it's logically, you shouldn't necessarily look at it as an end question. It sort of overlays everything that's being discussed, which is why it's sitting in the middle of that diamond. And the question is economic logic. Now clearly, profitability is the goal, creating value for your customer and for the firm. But how are you going to do this? Through lower costs, through improving your products and services? Which strategy you are going to adopt. So go to Michael Porter and look at his generic strategies. Are you going low cost or are you a differentiator? Are you going to take a focus strategy? Look to it Porter's five forces. What are the forces which are going to be facing you and how you going to compete against them in order to create value and make profits. And then look at your value chain to see how you can organize your business so that you can make it as efficient and as value creating as possible. Factors involve things like organisational resources, capabilities, the scale of the operation, intellectual property market, the markets you want to tackle, the industry that target customer base. This is why, as I hope you can appreciate, we need these other models to deepen all thinking and make our strategic analysis analysis more complex. They enable us, if you'd like to fill in the gaps and help us to answer these sorts of questions. That's hamburgers and Fredericks and strategy diamond, it's a valuable model for the design process and the strategy design process to help you step through the thinking process so that you can arrive at an effective strategy for your organization. 10. 11 Understanding Life Cycles: One of the most important tools a strategist can use and indeed understand is the whole concept of life cycles. We're going to discuss these in a range of different scenarios. The life cycle model is a core framework which can be applied to a variety of scenarios, industry, business products, even corporate funding. And if you think about it, you can actually come up with even more scenarios that you can put this relatively straightforward and easy to apply model onto. The lifecycle model typically has four or five steps. The first of these is launch, start-up introduction is the concept the beginning of the lifecycle. Then it goes through growth, shakeout, maturity, decline. Sometimes in some of the models you don't need the shakeout model, but we'll see how this effects the different scenarios. We're going to take a look at. The time periods can vary from months to years. And the lifecycle itself is characterized by a bell-shaped curve on a graph, which you can see slightly crudely illustrated. Here. However, the funding and financial life cycles have quite specific characteristics. And the curve inverts because the vertical access now represents risks rather than revenues and profits. So we're going to take a look at each of these life cycles in turn to see what drives them to understand how they work and to see what the differences are as the scale changes. And we're gonna start with the industry life cycle. That's a quick introduction to understanding life cycles. The life cycle model is a very important one and it's not difficult to grasp once you've had the main framework explained to you. 11. 12 Industry Life Cycle: Now we're going to take a look at the industry life cycle of the three scenarios we're looking at. This is the highest level. The lifecycle model, as I've already explained, is a core framework which can be applied to a variety of scenarios. And in this lecture, we're going to focus on the industry life cycle, the very top, the main drivers of the model focused around revenue, profit, and cash. And we're seeing how these change at the different periods of time in the life cycle. At the startup stage, there is relatively limited customer demand because the whole industry is new and it's just getting going. As a consequence, the distribution channels are relatively undeveloped and there's a lack of complimentary products. The consequences of all this is of course, there's very low revenue and the cash flow is very restricted due to the necessary high capital expenditure in order to get the industry started. As the industry moves into the growth stage, profitability starts to rise. There's an increase in product features, which means that the products within the industry have greater customer value. If you think about the early mobile phones, well, in the early eighties they were like bricks and they had relatively few features other than being able to dial a number. If you move forward to today's smartphones, which are incredibly complex minicomputers. You can see the contrast in the explosion of product features and the consequent increase in customer value. Complimentary products also become available. Maintaining the phone metaphor, if you think about iPhone SE and iPhone covers, an iPhone cover is a complimentary product. But as the growth continues, prices started to fall with demand and economies of scale. Again, if you think of these early brick phones, they were incredibly expensive for what they were. But if you moved into the 90s when you had the blackberries and the Inaki is doing so well, relatively speaking, and particularly in terms of functionality, the cost of the phones had come down a great deal, but it did lead to increase demand because the products were more affordable. They weren't only within the reach of the very wealthy. As a consequence, across the industry, revenues rise, cashflow becomes positive and businesses move towards break-even. The shakeout stage. And this is particular to the industry life cycle. And in the water said extends as well to the business life cycle. There is a phase of consolidation where some of the early adopters of growing very well and now start to snaffle up some of their smaller competitors. Businesses become uncompetitive or they lack financial viability and they are either acquired or they are, they simply got a business. Companies merge in order to enhance their competitiveness. And as a consequence of all this growth rates of revenue, cash flow and profit is slowing as the industry is maturing. If you think about things like Google and the explosion of the Internet, google was one of many competitors back at the end of the nineties for search engines. But what's happened? Microsoft got sidelined, and some of the other ones like Netscape simply disappeared because they didn't compete. So you end up with a group of businesses at the center of the industry which tend to dominate, think AT 20. And as a consequence, you get this consolidation of the industry structure. The maturity stage companies are well established, but the market has reached saturation. This means that incumbents work to try to control the level of competition and to create barriers to entry because they're trying to protect what they have. Industry growth has slowed. There's, the pie isn't getting bigger. What they're trying to do is keep as much of the pie as they have tried to protect with what they've got, rather than focusing on the ever-expanding Pi, which is making life easy and profitable for everybody. The strategies change to trying to focus on market dominance rather than just rapid growth. Now at this stage, products are widely available, prices are low and there's little additional capital expenditure or R&D required. As a consequence, maximize revenues, maximize profits, maximizing cash flow. It's also at its peak. As we move into the decline stage because the pie is now getting smaller, the cap competitive intensity increases. Now this will depend on the speed of decline, the height of exit barriers, and the level of fixed costs. But people are fighting now to get as much as they can of a reducing pie that intensifies competition. Strategic options for firms in this stage of the industry life cycle are mergers, focusing their products onto just the most profitable ones and discarding the less profitable products and or divesting unprofitable products. So they're starting to have to make choices about their product mix. And indeed make strategic choices about how they position themselves in industry. And they're fighting to retain an ever, well, they're trying to keep their sales level, but the rest of the market is declining. Which means that they effectively trying to grow their market share in order to stand still. As you can see when we're talking about the industry life cycle, the discussion, is it a very high rate? We're talking across the industry as a whole, and we're looking broadly at what groups of companies and groups of firms are doing. It's the collective behavior of businesses that is important. Now as we go on to examine other lifecycle models, while the structure of the model remains the same, we're going to see the focus of the models change. So that's a, a dive into the industry life cycle. Again, once you've got the framework in your mind, it's very easy to apply it at different levels and just think logically what would be going on. And that framework then helps you to crystallize your thoughts. And that's why these frameworks and models are so valuable. 12. 13 The Business Life Cycle: I wanted to take a look now at the business life cycle. The business life cycle is tracking the progression of a business over time. So we've looked at an industry, but now we focusing it down and we're looking at just a single business. The five stages, of course, because it's the life cycle model are similar. Launch, growth, shakeout, maturity, and decline. Although it's similar, we now have to focus our study on the issues faced by a single business through its life rather than the broader industry issues. This changes very slightly the way that we look at the challenges which are faced by the individual firm. Before we do that though, a word on revenue, cash flow, profits and funding timing through a life cycle. You have to remember because there are different forces working on these. They actually have each, each of these, particularly revenue, cash flow and profits, although they follow the same curve, the same shape of curve, they have different timings in their cycle. So profits always lags sales. So the sales increase very quickly. The increase in the profits comes a little bit later. The time delay between sales growth and profit growth is the same challenge that you don't get the same amount of profit with the same level of growth of sales. The profit growth lags, the sales growth, and cashflow lags both, and of course can be negative. And when it's negative, it requires funding. It actually becomes quite important to understand the interrelationship of these. And you have to remember that these are telling you a story about the financial condition of the company at different points in the life cycle. And you need to interpret that and understand what the consequences of those cashflows as revenue flows, there's profit plays for the business at that particular time. At launch, we have a, let us say a new product for a new business. And of course, initial sales are slow. But here we focus on what the business is doing, which is marketing to its core customers segment. It's focusing on its competitive advantage and the value propositions to get those initial sales going. The company at this stage is loss-making and cashflow is negative because it's got all the startup costs or the a capital expenditure costs or the R&D costs are still very much ongoing. In the growth phase, we're now seeing an acceleration of sales growth. So sales are rushing ahead and the business should now pass the break-even. But the profit cycle lags the sales cycle as I've already indicated. But the good news is during this phase, the business itself becomes cash-flow positive. The shakeout phase, there is still a sales increase, but the rate of sales growth has slowed down. The increase is attributable to, attributable to either market saturation or an increasing competition as more companies come into this particular product market. At this point sales peak, but profits are still growing, albeit they reduce. The rate of growth is reducing because there's been a squeeze on the margins. Cashflow also increases because although the profits and the sales of coming off a peak, there is no need to invest now in capital expenditure R&D. So cash flow actually is freed up because it's not that there's more cash, but there's less cost. At the maturity stage, sales themselves start to decline. Profit. Profit margins are squeezed even further by greater competition. We've seen in the industry life cycle, the pie is getting smaller and the companies and the businesses within that industry start to fight each other to try the hang onto as much market share as possible. Cash flow at this point stagnates, but it's still positive because there's very little capital expenditure going on. There is an inflection point at which companies can reinvent themselves. They've got the cashflow to do it. And if they invest in new technologies, in new markets or new products, they can refresh their growth and actually move on to another phase of growth in other life cycle of growth and avoid the next phase, which is the decline. The decline. All of sales profits and cash flow are in decline. The companies have failed to reposition them felt selves. They failed to take advantage of that inflection point to adapt to changing market conditions. They've lost their competitive advantage for their products and services, and ultimately they'll exit the industry. That is a resume, if you like, of the business lifecycle, we're still using the lifecycle model, but we've taken the level down from industry down to business, and we're looking at how the lifecycle stages affect individual firms rather than the industry as a whole. 13. 14 The Product Life Cycle: Now we're going to take a look at the product life cycle. The product life cycle takes our focus one level lower than the business. And the focus in this particular scenario is very much on revenue and profit. A company introduces a new product to the market. And it will be focusing on really establishing bad product in the market and in particular creating brand awareness. Now the speed with which it is able to establish the product is to a large extent determined by the level of competition it's facing. At this point in this life cycle, the relatively low sales and low profits that the company is having to expand money on R&D and marketing to get the product up and running. As we move into the growth phase happily, there is now increased demand for the product, which leads to rapid sales and profit growth. But remember the sales as they do in the firm, the business life cycle. The sales come before the profits, and the company is still investing in marketing and promotion in order to maximize the potential and the sales and the profits of this product. As the product moves into maturity, the market around it is characterized by increasing competition. More people have come in, more people are competing with that product in that particular product market. This leads to pricing pressure. This leads to the sales beginning to tail off. The certainly the rate of growth has slowed. With the rate of the slowing of the rate of growth of sales. I'm, comes a level of market saturation. So everybody's piling in and trying to get a piece of a market which is still growing, but not growing as fast. And as a consequence, the demand is very much filled. There's more demand, there's more competition and there's more capacity than there is demand, and the markets beginning to get saturated. The product itself meanwhile, has been continually developed. You see modifications, you see improvements to the processes involved in creating the product. You see more efficiencies being driven out as a supply chain. And you see more synergies and more efficiencies being innovated in the product distribution as well. So if you think about Porter's value chain, which we will look at some stage, the whole of the value chain, it because of the competition, because of the need to try to ring more profit out of a slowing product sales, the whole value chain is put under pressure to become more efficient. The product then moves into decline, where the market itself is now beginning to shrink and the market is saturated and there is, albeit still lots of competition. The competition has got a lot tighter because there's less of the pie to fight for. And strategically at this point, the business, the firm needs to make a critical decision. Which is, should they try and stay in the market, retain the product? Or should they try to rejuvenate it? Indeed, should they even continue, could decide to discontinue the product. It is worth observing that the speed and timing of the life cycle is not the same for all products. If a major new competitor comes into a market, this may accelerate the speed of the cycle and move the individual product into decline more quickly. Equally, a well established product may be successful for many years and continue on. The curve becomes much more spread out. This challenges, challenges us to think about a wide range of factors which will affect the product life cycle. Things like product complexity, the level of competition, the existence of substitute products, barriers to entry, changing customer needs, technology innovation. These are all strategic factors which will come into play as we look at other models as well. But they do affect the curve and the timing of the product life cycle. And as you look more deeply into these lifecycle models, these are the sorts of issues you need to be thinking about. That's the product life cycle. Showing you how over time an individual product is affected by these four stages. Introduction, growth, maturity, and decline. 14. 15 Corporate Funding Life Cycle: I now want to take a look at the corporate funding life cycle. This is a different slant on the life cycle analysis that we've done so far. But it also shows you how you can use the same model to look at different issues within a business. So when using the lifecycle model to examine corporate funding, we changed the use of the vertical axis to represent the risk of lending money to the business or funding the business. Instead of, as we have been up to now, measuring revenues, profits, and cash. The start of the process, as always, is the launch. Now here of course, sales are at their lowest. But the business risk, which is what we're looking at now, is at its highest. Essentially debt finance is impossible, which is why very early stage companies look to seed finance, angel finance, venture capital finance, or indeed they bootstrap. Sid simply don't have the ability to raise debt. But as sales increased, the debt capacity starts to rise. The growth phase, the business risk continues to decrease and the debt capacity continues to increase there almost inverse to one another. Profits follow and positive cashflow means that at a later stage in this phase, debt repayment itself as well becomes possible. Products and services are now proving themselves to be competitive in the marketplace and the businesses scaling up. Companies, therefore, because they're scaling up, need to seek further capital to expand their customers and market reach, as well as diversifying their products and services. The shakeout phase sales peak. But there's still quite a lot of growth because there's a lot of competition around. The business is still very dynamic. And debt financing capacity increases strongly because there's a proven business model and this strong cashflow primarily because there's been a big reduction in capital expenditure and R&D. As a consequence of all these positives, business risk itself continues to decline. At maturity, sales start to decline. So now the whole business is under much greater pressure. And as a consequence, business risk continues to be an issue. But although the sales are declining, if you remember, in the products and the business life cycle, this is still very good profitability and there's still good cash-flow. And because the business has got a great track record, the business risk itself continues to decline rather than increase to the point where access to capital and debt is at it's easiest. And that becomes a phase where the company is, if you like, has got the best of both worlds. But as we go into decline, sales declined at an increasing rate. And the company is unable to adapt or change to his environment or extend its life cycle. And consequently, business risks then starts to go up because the profits are being squeezed, the cashflows being squeezed and sales are declining. The funding lifecycle changes the focus of the modal to capital and debt and helps us to understand the impact on debt and financing capacity. It's making us Look, if you'd like through the prism in a completely different way whilst using the same framework. That's why it's interesting to change the access, to change the focus of the scenario. Because it gives you different insights whilst using the same basic framework. 15. 16 External Analysis Using Broad Factors: This section we're going to take a look at the external analysis of the environment of the firm using what is called broad factors analysis. By way of introduction to this section, I want to introduce you to the pest and the PESTEL framework. Now this has nothing to do with an annoying younger brother. This is a system and a framework specifically designed to analyze the external environment of the firm. The model allows us to review the challenges in our markets at a high level. And keeping sight of the big picture is actually quite important here because it can be very easy to lose sight, as they say, of the forest, because of the trees. And by adopting this framework, it forces you to look at a very high-level haven't looked at the big picture so that you understand the broad threats which may be facing the business. The sixth factors are, and we're gonna go into them in a lot more detail in the subsequent lectures. Political P, economic, sociodemographic, technological, environmental, and legal. And as I say, go into some detail on these in the next two lectures. These have a significant impact on a firm's operating environment at particularly opportunities and threats. And of course, in this particular case, they equally present challenges which are faced by the company's competitors, as well. As you will see later with SWOT and tows, the evaluation of the external environment of a firm can be studied from different perspectives. It's this change of perspective which can be so valuable. The more you approach an issue using different models with different emphases, the more you learn about the problem. And that's why it's worth having this basket, this core set of models which you can use as frequently as you like to help you understand the business strategy that relates to your firm. This is just a quick introduction to broad factors analysis to the two models we're going to be talking about in the subsequent lectures, which are passed and pastel. 16. 17 PEST Analysis: Now I want to take a look at pest analysis, or as it's also known, broad factor analysis. Pest analysis or broad factor analysis, is one of the core business models for analyzing the external environment of a firm. The pest stands for P for political, economic, S for sociodemographic, and T for technological. And you can see some examples in the boxes on the screen here. These factors significantly impact a firm's operating environment. Now they show you both opportunities and threats in the external environments. And of course, for those of you who are familiar with the swot analysis, you'll see how the tie-in starts to come in and we'll be looking at SWOT analysis later in the course. A core tool of strategic planning, pest analysis helps you to evaluate threats and opportunities in the market. And it is a key part of any strategic evaluation for both a business and a product line. Let's have a look at the political factors in the pest analysis. First. These form the regulatory environment for the industry, which then directly impacts the firm. Some examples are barriers to international trade, which is what the whole Brexit negotiation and argument was all about. Changes in government regulation, such as we've seen with medicines and the fast tracking of vaccines and the pandemic tax policy. Well, corporation tax seems to change it every budget. And in fact, in the UK, the chancellor has just announced a five-year plan to increase corporation tax from 19 to 25%. Employment laws of course impact everybody. There's been a lot of dispute about 0 hours contracts and whether some of the mobile people like Uber are employing workers properly or whether they are self-employed people. Now of course, that has a big impact on how Uber operates. Tariffs such as applied recently to Scotch whiskey in the US, which is part of a retaliation for things going on in the aerospace industry. Or indeed country-specific political risk, such as recent disagreements between the US and the UK and China about some of its trade policies. Elections can also have an impact as different political parties have different agendas. We've just seen in the US President Biden, a Democrat, has been elected. And this is leading to significant policy changes from those applied by his predecessor, a Republican President Trump. When evaluating a new industry or a new market, a business has to take into account the political and regulatory environment in which it will have to operate. Moving on now to economic factors. Economic factors refer to the macro economic factors in which the firm is trying to operate. Things such as interest rates, foreign exchange rates, inflation, gross domestic product growth rates. We can also take this further and look at economic trends. Monetary policies. Do discretionary income, unemployment rates, credit availability. You have to keep an open mind when looking at pest analysis and always be prepared to ask the question. So what? And always be prepared to delve a little bit deeper. These factors, these economic factors have been brought into the forefront by the COVID pandemic. We've seen across the world lockdowns followed by unprecedented government economic invent, intervention. And this makes this part of the analysis for Strategic Evaluation absolutely critical. How should a business plan is future strategy when faced by these extraordinary circumstances? Social Democratic factors refer to the population demographics and the factors affecting the firm's target customers. We're looking here at things like population growth, education level, health trends, nature and the environment, which of course is, is a really hot issue at the moment. And age cohort trends as populations age, their behavior and particularly their consumption patterns change. Cultural and demographic changes can have a significant impact on the firm. The challenges posed by all types of discrimination, generational sensitivities to climate change and environmental issues. These factors directly affect customer behavior and will impact brand perceptions and purchasing decisions. The firm has to look at the population as a whole and look at things like shared beliefs, lifestyle trends, cultural taboos, immigration. These all have to be taken into consideration when making strategic decisions. Finally, we come to technological factors. Well, there has never been a time when technology has had such a major impact on business decisions. Recent technological developments can make a major impact. Things like the blockchain, the rate of technological diffusion, such as the global spread of smartphones. Research and innovation is going on at a pace. Unprecedented consumer access technology driven by the internet and again, smartphones, digitalization, things like the Internet of Things and the interconnect connectivity of devices connected by the Internet. We've only got to look at how Zoom calls became the norm in lockdown, changing the economic and business behavior throughout the world. Instead of people working in offices, suddenly everybody's working from home and connecting on their computers using Zoom for their meetings and their interactions. And that has been a complete change around. And it's all technologically driven. And firms need to understand how they get to respond to this. These factors then significantly impact barriers to entry and have led to continual change in industry structures. This will tie into Porter's Five Forces model. Now business strategy can be neutralized or reinforced by such changes. And it's up to management to assess, which in summary, pest or broad factors analysis help affirm to evaluate the egg subtle conditions and environment in which it operates. The framework ensures that management's analysis does not miss a crucial factor or skate over a critical issue. The model is not, however, the last word on external analysis, but as we've seen, ties into other models, such as Porter's five forces, such as swot analysis. And we will be examining these later in this course. That's pest analysis. It's an external analysis framework for looking at the environment in which a firm operates. And it's an excellent starting point for any strategic analysis which needs to evaluate these issues. 17. 18 PESTEL Analysis: If I wanted to move on and take a look at PESTEL analysis, now it won't have escaped. You'll notice that the first four letters are the same. And there's a very good reason for this. Pastel is an extension of the pest analysis. It's sometimes spelled PESTLE. It really doesn't matter. And we've already looked at pest in the previous lecture. It's logical, it's a logical extension to come and look at the larger, the broader model and the additional two factors. Now, pastel standards for all we've got the first four political, economic, sociodemographic, technological, and the E is environmental, and the L is legal. And I'm going to explain the two of these in some detail. Now the whole point about having gone off ourselves grounded on pest, is to then extend our understanding of a broader model and particularly some of the issues at which are particularly relevant today, as you will see. And we're going to look at environmental and legal. And let's start then with the environmental factors. And here we're looking at things like climate, temperature, pollution, that sort of thing. Now some industries are clearly more export exposed to environmental issues than others, for example, tourism or farming and agriculture. These strategic challenge is to meet the ecological and climatic issues which are becoming increasingly irrelevant to operating a business. Now these factors include things like the weather, which is a beam somewhat erratic, temperature, climate change, pollution, natural disasters, and critically sustainability. Now the last point has been very much brought into focus by the emergence of CSR policies, corporate sustainability, responsibility. These are increasingly seen as a, an essential policy that accompany has to publicly sign up to. These include things like carbon footprint, print reductions, carbon miles, use of renewable materials, use of renewable energy. Now it's not enough for automotive and fewer companies to be promoting these initiatives. I eat companies who are very much at the forefront of climate change issues. Social and political pressures today mean that sustainable environmental policies have become a non negotiable must have for all businesses. And the alternative, given a very aware customer base is the potential alienation of that customer base if your company is seen to not be supporting green issues, not signing up to climate change, and not putting in place an appropriate CSR policy. The next area to talk about then is legal factors. And here we're talking about regulation, intellectual property, these sorts of things. But I need to make an important distinction. While the P in pastel looks at political factors which affect the relationship between business and the government. The L in pastel discusses legislation which impacts how a business operates. Things like health, health, and safety at work being one of the most obvious legal factors broaden this has gotten discussion simply beyond regulation. It's things like industry regulation, licenses and permits, consumer protection, employment legislation, health and safety, which we've already mentioned. Intellectual property and consumer tax in legislation in product markets where the company is trying to operate. Now in the Brexit scenario, which is a very good example, many EU regulations may now not no, no longer apply in the UK if the UK government chooses to miss apply them, to stop applying them, and indeed to either change them, simplify them or whatever. So the EU government of the UK government has got the ability to change some of these L factors. On the other hand, there's now more red tape as the EU insists on additional paperwork. So there's more L if you'd like to provide ED harris to that, is that their legislation for any goods exported to Europe from the UK. So the L is having a big impact on both sides of the channel. On companies who are operating in the UK alone, and on companies who wanted to export to Europe and indeed vice versa. So you can see how even a simple change like, well, a very complex change like Brexit, the external environment for the business is very much impacted. And this is where the analysis of these legal factors plays its role. That's PESTEL analysis is an extension of the pest analysis. It's a more in-depth examination of the external environment of the firm. 18. 19 PESTEL Analysis Template: I have created this PESTEL analysis template for you so that you can use it. Do your own PESTEL analysis on your own business. To remind you, the six letters stand for political, economic, sociodemographic, technological, environmental, and legal. Now you can download the de