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 detailed notes from the previous lecture with the PDF from that lecture. I propose you should do that. And then you can use this template to go through each of these factors one by one. With political, you need to look at the political issues which are likely to impact your business. Then you should go through the economic issues, the sociodemographic issues, technological issues. Now those are all in the pest analysis. We're covering two birds with one stone here. And then we go on to the EMBL of the pastel, which is the environmental and finally the legal. So this gives you a template which you can print out. You can brainstorm with your colleagues and come up with your own ideas, your own strategies. As a result of conducting the analysis. The templates there for your convenience and to make it easier for you to conduct a PESTEL analysis. Having learned about it in the course. 19. 20 CASE STUDY EXERCISE PESTEL Analysis of Starbucks: Welcome to this case study exercise, a PESTEL analysis of Starbucks. Now, the purpose of this exercise is for you to use the pastel template I provided in the previous lecture and in this section, and conduct your own PESTEL analysis of Starbucks, the multinational coffee chain. Now the idea is that I want you to print this out and to think about these six factors in the PESTEL analysis. And make at least one or two notes on each of these six factors that you're thinking about. How these factors affect Starbucks. Now I have created, in the next lecture my own PESTEL analysis of Starbucks, a solution, if you like. But there are no right or wrong answers and you're probably going to have some great points that I have missed or not thought of. The whole idea is for you to apply the PESTLE analysis to a situation. And then I'm going to give you my version of it so you can compare with your thoughts with mine and get some idea of how the model works. I definitely want you to try the exercise to see what you've learned before watching and downloading my solution to the case study, I think it'll really help you to get a grasp of this model and to understand how these case studies work. And indeed also to better learn how to apply the model to real situations. So good luck with that. Enjoy the exercise. And I'm sure you're going to come up with some great points. And then when you've done that, you can have a look at the next lecture and watch the next video and see what I've come up with. 20. 21 CASE STUDY PESTEL Analysis of Starbucks: I want to take you through my version of a case study on Starbucks. Using the PESTEL analysis. Starbucks operates in a highly competitive markets where it's competitive and not just other multi-site firms, but also single niche coffee shops, which can often differentiate themselves too, when customer loyalty on a very local basis. So basically it's up against every other coffee shop. Coffee consumption continues to grow, although I think the market has certainly reached maturity. There's a limit afterward or how many coffee shops you can have on the High Street. Starbucks has, however, used its technology to its advantage. It accepts Apple Pay and it offers discount coupons in its smartphone apps. As the millennial market becomes more inviting, environmentally and socially aware, Starbucks has to respond to these important trends with ethical sourcing, fair trade, and sustainability, sustainable easily disposable cups. These are the things that the Particularly Gen X and the millennial feel are important issues and it stopped buck doesn't address them, then it'll alienate that segment of the market. We can use the pastel analysis framework to review Starbucks is external environmental challenges. And when I say environmental here, I mean the environment in which the business operates, not the sixth on the PESTEL analysis. Let's start with political now, raw materials sourcing, fair trade coffee particularly, is a major focus for governments both in the US and in the countries from which starbucks imports it's coffee. Starbucks has to make sure that it's aware of the political issues to do with a US multinational operating in developing countries, particularly working with farmers where Starbucks has all the expertise and has the buying power. Think about Porter's five forces. It has the buying power against the farmers, could exploit them if it was intended to do so. And this is where fair trade is so important. Increasing social activism also makes ethical sourcing a challenge because Starbucks is being focused upon by these activists who then go and lobby government or make up an influential proportion of the voters who elect the government, which makes the government pay attention to the issues. Starbuck has to be aware of these pressures and respond accordingly. And regulatory pressures within its home market are increasing with greater strict scrutiny on business process, particularly for those companies operating most nationally. And it's even down to minimum wages and fair working conditions in terms for its IT staff. In places like the US and the UK, there are a lot of political issues that Starbucks has to be on top of in order to be successful in its market. Economic well, the most obvious one, and I'm recording this in March 2021. The most obvious one of these is the pandemic, which hasn't impacted most food and beverage and hospitality businesses. And Starbucks is no example, with many of its cafes having been closed for an extended period. Now, it's true that this is probably hit smaller and single outlet firms harder because they don't have Starbucks is scale and financial strength. But nonetheless, they've had to operate in very, very difficult market conditions. And post-pandemic, the markets may offer Starbucks and opportunity to consolidate their market share, particularly if a lot of the smaller companies have gone out of the market. Sociocultural issues. Well, downward pricing pressure from competition in a mature market means that Starbucks needs to find ways to reduce its prices and costs fine. But it also needs to address the lower-income segments of the market. As its market matures, as the, particularly the baby boomer generation who are great consumers have coffee, grow older, it needs to adjust to that. And part of that is the fact that green and sustainable are important issues to Starbucks is customer base and Starbucks has to be seen to be embracing these. And as I mentioned, the baby boomers are moving into retirement. Starbucks has to be aware of the maturing of it. I'm the customer age cohorts and refocus itself and make sure it appeals to the younger generation who are coming up who have the disposable income to buy their coffee. On the technological side, Starbucks was an early partner with Apple, which has enabled it to benefit from mobile payments and for maps, the mobile payments provide additional facility for customers to make payments. It makes it easier to buy coffee, which is a good thing. And Starbucks early on offered free Wi-Fi and it's shops encouraging people to serve and work while enjoying Starbucks coffee and food. On the environmental side, starbucks, to make sure that it maintains its customer loyalty. It cannot afford to be criticized for its environmental policies, particularly in the developing countries from which its sources, its Coco. The legal side, Starbucks has to make sure that it complies with all environmental sustainability and fair trade legislation in many countries in which you don't break. But it also has to make sure that it complies with all the appropriate legislation in the countries where it sells coffee in the US and in the UK and in Europe and all the other places. It has quite a high hurdle to jump to make sure it stays completely clear of any legal control versus Starbucks operates in a mature market with a stable external environment and a strong customer loyalty, loyalty base. It has to keep up with social, sustainable, and environmental trends to maintain that customer loyalty. And it also needs a post-pandemic recovery strategy. That's my view of a Starbucks using the PESTEL analysis and creating a case study from it. And I'd be fascinated to know because I'm sure there are other points. I'd be fascinated to know what points you've come up with that I haven't thought of. 21. 22 CASE STUDY PESTEL Analysis of Global Aviation Industry: Now I wanted to share with you my analysis of the global aviation industry using the PESTEL framework. Now, I'd start by saying that Warren Buffett would tell you that the aviation industry has one of the worst investment records of any industry he's looked at. Which of course is not a great starting point. At one time or another, most airlines have gone bust only to be resurrected because having a national flag carrier airline is perceived as important by most governments. Putting aside the pandemic which we will come to the airline industry is highly competitive, facing increasing operating and fuel costs, for the most part, is heavily used in unionized. This is all a recipe for very tough operating conditions. But what can the PESTEL framework helps us to identify about the industry, gonna look at each of these six factors in turn. Well, politically, the industry is very heavily regulated with many constraints on the airlines place there, but also put with a bias in favor of the passenger. Clearly, safety is a major issue, but because they have such economic power, a lot of the regulation is designed to protect the rights of the passengers. You've seen during the COVID pandemic, there had been a lot of cancellations. And this is really just highlighted. How much protection passengers have in terms of rights refunds from the regulatory protection, even though a lot of the airlines have struggled to meet the regulatory requirements because of the near impossible economic conditions imposed by the pandemic. However, on the supply side, the industry has been deregulated, which has enabled new no-frills, low cost carriers to enter the market, thereby increasing competition. There. In a sense, the airlines have got a double-whammy when it comes to the political environment. In economic terms, the last 20 years have not been kind to the industry either. You've only got to list the dot-com bust recession, the attacks on line 11, the 2008 financial crisis and subsequent recession. And then if that wasn't bad enough, the impact of the pandemic, which is pretty well closed down. Global airline travel for the last 12 months. Certainly to any extent, airlines globally are now on their economic knees. Iag, which is the operating owner of BA British Airways and I barrier has just launched in £800 million bond issue to help it survive the pandemic as an example. So you combine this with existing market conditions of high competition, high fuel prices, unionized labor demands, and increasing maintenance costs. And this makes great extraordinarily difficult market in which to operate. The sociocultural side, the retirement of the baby boomer generation, combined with the rise of the millennials, has seen a shift away from luxury travel. The baby boomers are still traveling and they have in their retirement to considerable amount of I'm discretionary income. But they're traveling patterns haven't been replaced by the up-and-coming generation, Gen X and millennials. Millennials are more environmentally conscious as well, which conflicts with the industry, which of course has got inevitably very significant carbon footprint. The pandemic, just to make things worse, has shown how easy it is to work from home and have meetings over Zoom, which raises the question of whether business travel will ever be the same again. On the technological side, of course, the industry is committed to updating its fleets, which are largely least operate more advanced and more fuel efficient aircraft. So they're green Iraq craft. Clearly, a lot has been done, but more can be done in the front office side with mobile ticketing and using technology to make the whole flying experience easier for passengers. Ba now has an app you can have in your phone, you can use it. I've used it to check-in instead of printing a boarding pass and eat ticketing came in a long time ago. So gone are the days where the airlines send you a paper ticket for your flight. And of course, since 911 security has required a major technology investment to try to overcome or at least contain the threats. Creative by international terrorism. On the environmental side, well, this is not a good story either. Climate change and the carbon footprints are two major issues that the industry cannot ignore. Aviation companies have obviously had to try to become more environmentally conscious and adopt more economic, less fewer consumptive aircraft. But they're fundamentally in a business which is not environmentally friendly. It also puts pressure on passengers to travel less, not helped by green taxes. I say green in inverted commas because they're convenient taxes applied by revenue hungry governments, which in my opinion have very little to do with being green and everything to do with taxes and raising revenue. On the legal side and increasing level of lawsuits relating to operating issues, delays, and safety has consistently made the legal environment tougher and more expensive for airlines. And this has only been encouraged by governments and regulators. It's very hard in my view, having done that analysis with the PESTEL factors to see how the current structure of the airline industry can survive post-pandemic industry conditions were difficult before COVID. Now, most airlines are probably close to insolvency and it's difficult to predict the level of recovery and passenger numbers in the next few years, particularly in the lucrative business travelers segment. That's some thoughts from me on the global aviation industry built around the PESTEL framework. I hope you found the thoughts useful, but the main point of this isn't to enlighten New on the aviation industry, is to show you how the framework can be applied to a case study to basically improve your understanding both of the framework and how to apply it. 22. 23 CASE STUDY EXERCISE PESTEL Analysis of Global Aviation Industry: Now I want to turn your attention to a case study exercise where I would like you to use the PESTEL analysis to study the global aviation industry. This is an exercise where you can use the pastel template that I provided in this section. And you can make your own notes and thoughts about the PESTEL factors when applied to an analysis of the global aviation industry. Now, I encourage you strongly to make at least one or two notes on each of the six factors in the PESTEL analysis noted here. The political, the economic, the sociocultural, technological, legal, and environmental. Aviation was difficult before the COVID pandemic. And this is an opportunity to assess the state of the industry is external environment using pastel to try to evaluate what will happen next. Now, I've prepared my own PESTEL analysis, which you can watch and download in the next lecture. But I strongly encourage you to do your own thinking before you do so. Now of course, there is no correct answer to this. Do make your own notes and then watch my video and download my slide deck and have a look and see how many issues you have identified that I have missed. And I'm sure there are gonna be some good luck with your analysis and I really hope you enjoy the exercise, a little case study exercise. We're using the PESTEL analysis to take a look at the external environment of the global aviation industry. 23. 24 Strategic Options from Internal and External Analysis: In this section of the course, we are looking at ways to derive strategic options to formulate strategies from a combination of internal and external analysis. Now the whole idea of this is to use models, use frameworks to analyze both the internal and the external environment around a firm. And then to use the results from that to come up with strategic options for the firm. And it also demonstrates how these models connect together. So the first of the models we can look at in this section is the very well-known swot analysis, which you can see on the screen here. For internal and external analysis, this is the perfect starting point. It's the best known model. And we'll take you through exactly the parameters of the model, how it works, and indeed how to implement it. Not only will the review of the model discuss the various facets to it, but I am going to take you through some examples of how you go about successful implementation of the SWOT analysis. The second model that follows on from this, the toes or Taos matrix analysis. It's a bit like swot 2 because basically what it does is it takes the four facets, the four factors of SWOT. As you can see on the screen here, combines them in order to use these combined factors to generate strategic options. And that's explained in the lecture on the Taos matrix analysis. The third model that we're going to take a look at is the soar analysis. And you can see here that with soar we've still got strengths and opportunities. But the weaknesses and threats have been replaced by ambitions and results. And both sore and taus are focused on the formulation of strategic options from sought. And you're gonna see that explained in the model in this course. These models demonstrate one of the central themes of this course, which is that many of these strategic models and frameworks are at their most effective when used in conjunction with other models. And wherever I see that opportunity, I'm trying to explain it to you, but you'll certainly see it in this section as we start with SWOT and then we see how swot relates to tau's and it relates to soar and how you can get and derive strategic options from both sore and taus. So it's like a little happy triumvirate, like a triangle of three great models. And we use them in conjunction to get the best out of them. So that's what this section is going to be about, is deriving strategic options from a combination of internal and external. Now analysis of the environment that surrounds the firm. 24. 25 SWOT Analysis: Take a look now at that favorite of strategic analysts, the SWOT analysis. Swot analysis explores both the internal and the external challenges to a firm. And it does this under four headings. These are strengths, weaknesses, opportunities, and threats. And as you can see from this, the strengths and the opportunities are positive factors. The weaknesses and threats are negative factors. Then if you look on the other axis, the strengths and weaknesses are internal factors and the opportunities and threats are external factors. And having this perspective on the model is actually very significant and very important. The model was originally introduced in the 1860s by Albert S Humphrey and has become, I think it's fair to say, almost a ubiquitous found everywhere tool for strategic analysis. The model focuses on internal strengths and weaknesses of the firm and the external opportunities and threats. This is also sometimes referred to as an internal external analysis. The model is most frequently used at the early stage of the strategic planning process. Now, I mentioned that because when we look at the towers model, you'll see that the emphasis is slightly different. The idea is to develop an easy to understand assessment of the environment of the firm from which all aspects of the planning process can be coordinated and the team members can all develop a similar, identical, same worldview. So you align everybody's understanding of the swot, of the strengths and weaknesses, the opportunities and threats. Swot analysis can apply to a product allocation and industry or indeed a person who in fact, you can pretty well apply it to anything you'd like. It has particularly similarly similarities. And I remember this from my days as an army officer to many tactical analysis where you're basically evaluating your situation and you consider the enemy forces, which are the threats. You consider your own forces which are, you're effectively your opportunities, your strengths, and you go on like that. So the analysis is a very valid one because it's covering the four key aspects of the business that you need to understand. It's also worth highlighting that the internal strengths and weaknesses are current or backward-looking. The external opportunities and threats are forward-looking. So there is a temporal layer to this analysis as well. It enables us to consider the current capabilities of the firm and frame them in the context of the future of the business. Now if we turn to the internal analysis, the strengths are what give the firm its competitive advantage, while weaknesses are factors which require improvement. Some of these internal factors might include culture, brand image, brand awareness, operational capabilities and efficiencies, market position and market share, financial resources and capacity, organizational structure and key employees. External factors examine the potential opportunities affirm might exploit in the future. Threats are things which might hinder the successful implementation of a strategies prevent the achievement of targets and goals. Some of these external factors might include changes in society, customers, competitors, economic environment, the government legislation and regulation, suppliers, partners, market trends. Now you know how I like to link these models together. In this external analysis, we can see a clear overlap with pest and PESTEL analysis, as well as tie-in to Porter's Five Forces. I believe it's really important that you understand the interrelationships between these models and frameworks. Because this helps you to become a more sophisticated and analysts. And it helps you to develop layers and depths to your strategic appraisal. That's a look at SWOT analysis. You're probably familiar with it. It would be quite unusual if you're working in a business strategy environment, do not come across it, but you do need to consider some of the facets of the model to make sure that you get the right interpretation. Things like the temporal factors, the internal and external out of the externalities to model. These are important facets which you need to grasp. 25. 26 Conducting A SWOT Analysis: And talk briefly now about implementation and conducting a SWOT analysis. Conducting a swat analysis is actually a pretty straightforward process. You need to discuss some key questions with your colleagues that address the four dimensions of the model. We're going to discuss some of these in this particular lecture, but I want you to be prepared to devise your own questions and be prepared to challenge accepted wisdom within your firm when you're conducting this review. In a sense, nothing is on is off the table. You should be prepared to have a discussion about anything in the context of these four factors. When you're looking at strengths, you're looking at advantages from an internal and customer perspective. What are the unique resources in your firm? What is your firm's unique selling propositions? What our customer attitudes and loyalties, how did they contribute to positives around the business? And do you have access, for instance, to things like low-cost resources? These are just example questions, but you need to be prepared to brainstorm and come up with your own ideas. In terms of weaknesses, again, we're focusing on disadvantages from an internal and customer perspective. So what does the company not do? Well, what weaknesses do your customers, customers perceive about your business? What negative factors affect your product and brand image? When we turn to opportunities, I want you to focus on a future external perspective. You're looking at the marketplace, trends in your, in your markets and affecting your products, technology and product evolution, socio-demographic changes that can be taken advantage, the advantage of. Now, remember and go back to the past and PESTEL analysis and think, how can you take advantage of the factors that you identified in those frameworks? Again, having these tie-ins to these other models is a really important aspect, which is 2D strategic analysis. When you look at threats, again, keep your focus on the external factors and with a future perspective. Consider the issues raised by PESTEL analysis. How can these be interpreted as threats? What potential ie future? Do these factors have to negatively impact your firm? Now again, I want to raise another model in your minds, but we'll discuss this model in much more detail later in the course. But I want to just show you again how this analysis can overlap with Porter's Five Forces, which you can see here illustrated on the screen. You're looking at the power of suppliers, the power of customers, the threat of new entrance, and the threat of substitution and competitive rivalry in the center. So how can these factors present threats to your business in the future? And indeed, you could actually turn it around and say, how can these be opportunities? You know, how, in what way does our firm have strengths that would enable us to deal with these issues and what weaknesses expose us to suffering from any of these five forces. So again, you have this layer of swot analysis. You put it over something like Porter's Five Forces and you end up getting a multi-dimensional strategic analysis which starts to draw you into much more depth and sophistication. That's a little worried about conducting a swat analysis. It makes sure you focus on the issues and the focus of the model. But don't be afraid to bring in other models to reinforce and develop and make your analysis more sophisticated in order to basically get the best results out of the whole strategic planning exercise. 26. 27 SWOT Analysis Template: Following on from our discussion of swot, I have prepared a SWOT analysis template for you to use with your colleagues. It's got a white background, so it's very easy to print out. And you can go through the swot analysis around a table and brainstorm the four factors. Just to recap, swot analysis stands for strengths, weaknesses, opportunities, and threats. The model focuses on the internal strengths and weaknesses of the firm and the external opportunities and threats. You must keep that in mind. You can conduct this analysis for your entire business or for a division, or even just a product within the firm. I wanted you to go through. I'm not gonna read all this again. I want you to go through each step of these one-by-one, sit around a table and brainstorm the basically the competitive forces on the opportunities and the strengths your firm has on the weaknesses. It has to come up with lists of issues where you can score and then you can then interpret those points in order to create strategies. So here we've got the weaknesses. Put your notes on the right-hand side. You bought the opportunities, and you've got the threats. Given you a few notes just to remind you from the previous lecture, from this analysis, the question is, what conclusions can you draw? How can you use your strengths? And how can you overcome your weaknesses? How can you take advantage of future opportunities while minimizing threats? What strategies are you going to derive from your firm using this analysis? That's the swot analysis template. It's very straightforward, but you can download it, print it off or easily, and then you can use this as a template to formulate your own strategies using the SWOT analysis. 27. 28 TOWS Matrix Analysis: Let's take a look now at the towels or toes. Matrix analysis. Taus is another internal, external analysis framework. While similar to swot, you'll see it's basically an anagram of Swat or it's swot in reverse, threats, opportunities, weaknesses, strengths. It's very much different in its focus because whereas swot is an evaluation of the environment, the Taos model is focused on strategy generation. In a sense, you can look at towers as a second stage to a SWOT analysis, where you combine the swot findings to derive potential business strategies. Let me explain what I mean. If you look at the standard SWOT analysis which you have here on the right, the Taos model, which was developed by Heinz vinylic. Basically use the four dimensions to evaluate strategic options, and this is what it looks like. So we basically still have the strengths and weaknesses and the opportunities and threats. But the model combines these four dimensions in order to generate thinking about strategic options. Unlike the SWOT model, which starts with internal factors first, the Taos model, as you can see from its lettering TO threats and opportunities, starts with the external environment. First, we look at strengths and opportunities. We're asking how the company can exploit its strengths to take advantages of opportunities. It can identify, for instance, how can Apple exploit his brand image with its customers by maybe launching a new product? So the strength is the brand image, the opportunities in new product. Maybe it's AirPods of which I have set here and I'm very happy with them. Thank you very much. The strategy has the greatest chance of success because it's combining two positives. Weaknesses, stroke opportunities, the WO strategy reverses the previous logic. Is there an opportunity that we can take advantage of in order to address a weakness in our business. Now, for example, if market conditions are positive, could we raise additional equity capital from the stock market to strengthen a week balance sheet? The opportunity is strong market conditions in the stock market. Weakness is a weak balance sheet. So how can we take advantage of that opportunity to address a weakness? When we turn our attention to strengths and threats, here, we're looking to minimize a potential threat by using an existing business strength. So let's go back to Apple. Apple has a lot of competition, which is a threat. And it has reinforced its product offerings. We're back to AirPods again with investing in R and D, which is a great strength of the business in order to come up with new products. So it's the combination of the strength, which is the R&D and its ability to generate new products in order to address the threat, which is the risk of competition. The final one is perhaps the most defensive strategy. And here the firm is trying to reduce weaknesses to mitigate the impact of potential threats. For instance, at the moment, there is a nightmare scenario on the High Street, on Main Street with bricks and mortar retailers. And many of these major retailers are seeking to renegotiate leases or closed shops, which are weaknesses in their business model. In the face of the downturn, to high street sales, which has been made much worse by the lockdown and the pandemic, which is the threat. You can see how these work in combination to come up with the strategy. The model can be used therefore to create a list of strategic options, which can then be considered in the light of the firm's mission statement, vision, and broader goals. One weakness of the Taos analysis is that the strategies device may be somewhat generalized. But we've already seen that by using other models in combinations, you can actually address shortcomings in one model and you can arrive at more in-depth and more sophisticated analysis by using these models in combination. In the case of the Taos matrix analysis, I would recommend using it in combination with the Ansoff Matrix and with Porter's generic strategies of which more coming up in this particular course. So that's the Taos matrix or the tows matrix. I didn't how you prefer to pronounce it. It's another internal, external model, but it's, I feel like swot analysis stage to enabling you to start to derive business strategies by using the four factors in combination. 28. 29 TOWS Analysis Template: A prepared this template which you can download as a PDF from the resources section of this section to enable you to conduct a Taos analysis. Remember, the Taos analysis compares alternative strategic approaches for the firm. And it also considers the interaction of internal and external forces. So for each of these factors, I want you to brainstorm how you can make the most of this analysis for the strength opportunities segment. How can you use the firm's strengths to take advantage of future opportunities? This is the most positive strategy. How can you address and overcoming existing weaknesses to enable the firm to take advantage of future opportunities. So that's sort of defensive, but also looking forward in a positive way. How can you use the firm's strengths to ensure the firm can tackle and nullify future threats so that these threats don't affect the successful achievement of the firm's goals. You're using threats to nullify, using strengths to nullify threats. And finally, how can you minimize your existing weaknesses so that they do not expose the firm to risk from future threats. Those are the four strategic analyses boxes you need to brainstorm. And I provided you with this PDF so you can brainstorm units around the table and see what competitive strategies you can come up which address these four factors using this analysis. So this is my template for you. I hope you find it useful. It'll give you an opportunity to conduct this analysis as an exercise with your colleagues. 29. 30 SOAR Analysis: I wanted to take a look now at SWOT analysis. We're keeping in the same family of frameworks as the swot analysis and the toe towers model, toes model. You will see how sore links into this as we go through this lecture. Saw analysis is another step forward from our original SWOT analysis. We've still got an S and we still got her know which is strengths and opportunities. The focus, as with towels or toes, is again on strategy creation by removing the negative connotations of weaknesses and threats and replacing them with the a and the r, which is ambitions and results. Here you can see the soil analysis mapped out. You have strength and opportunities and you have ambitions and results. The strengths quadrant asks the question, what does the company do well, so this links straight back into SWOT analysis. And particularly as we're trying to devise strategy, you should be thinking about this question in the context in the light of the company's competition. And you really want to be trying to identify unique characteristics which enable the company to compete with opportunities to model seeks opportunities in the external environment. And it's asking, what can the firm take advantage of? Things like gaps in the market, product improvements? How can we turn market trends to our advantage? Again, it's very similar to the SWOT analysis, but it's also similar to the tortoise tells announces a tows analysis because you're looking very much at the strategic opportunities presented in the external environment. When we look at the ambitions part of the soar analysis, we're asking where the company wants to be in the future. And this viewpoint needs to tie in particularly to the company's mission statement and for the vision of the firm. The issues we're trying to address really are to identify future goals and achievements that the company can aspire to. The results focuses on tangible outcomes. And this is where strategies can be more specifically formulated than with the tote towels model. The benefits of soil analysis is that you can develop a culture of continuous improvement if you're continually repeating the analysis, it helps to focus the strategy team on future outcomes with very specific strategies. It can be used to engage all members in a firm. The consequence improvements in strategy can lead to better staff engagement and higher morale. And of course, with continuous improvement comes enhanced operational efficiencies and performance. To implement saw is, it's pretty straightforward. You need to have a core team who are going to lead the project. You define the objectives and the outcomes you want to achieve in relation to the soar analysis. You brainstorm the four quadrants together and then you need to organize and clarify your results. From those results, create an action team. It's also important that as you implement, you continue to continually monitor your progress to try to improve your implementation processes and to make sure that the results are continuing to feed through. Saw is a valuable extension of the SWOT and tows analysis. And it can build on the work done with the first two models. And yet again, we're seeing the advantages of integrating several models into our strategic analysis in order to get different perspectives and different viewpoints. That soar analysis very much in the SWOT and the taus, Taus analysis family. And you can see how the ambitions and results feeds into the S and the O, which is common with towers and it's common with swot. 30. 31 SOAR Analysis Template: I've created this sort analysis template to enable us to conduct your own soil analysis with your colleagues. Remember, soar analysis is another step forward from swot. It focuses on strategy creation. But instead of looking at the negative connotations of weaknesses and threats, it's replacing them with more positive things, ambitions and results. For strengths. You need to sit down and brainstorm. What does your firm do well, which differentiates it from its competitors? When you look at opportunities, what future opportunities can you identify that you can take advantage of to increase your success? What ambitions can you identify which will build on your existing strengths and mitigate your existing weaknesses. Then finally, what outcomes, what specific and tangible outcomes can you identify which will enable you to measure the success of your strategies and your goals. These are sheets you can brainstorm on, but I want you to sit around with your colleagues and actually come up with specific strategies that you think can meet these factors and these address these issues. That's your SWOT analysis template. I've made it very easy for you to download and print out, and therefore enables you to put into action what you're learning in this course. 31. 32 CASE STUDY EXERCISE SWOT Analysis of Amazon: In this case studied exercise. I would like you to conduct a SWOT analysis of Amazon. Now this is an opportunity for you to use, for you to use the SWOT template that I've provided for you. And to conduct this strengths, weaknesses, opportunities, and threats analysis of the Amazon business. Now you can rearrange it as wide as you like. Amazon is such an enormous operation that there's all sorts of different points to be made in all sorts of different dimensions. And I'm gonna be thrilled and excited to see what you come up with. The purpose of this exercise is to get you to think about Amazon in a strategic context and identify your own factors for the SWOT analysis. I'd like you to do a little bit of thinking. Now, the next lecture contains my swot analysis of Amazon. And once you've put a few notes down on the template, then watch the next lecture and see what I come up with. Uv can also download my slide back, of course as well. There is no right or wrong answer with Amazon. And because the business is so complicated, there's a huge scope for discussion as an interpretation, as I actually highlight in my lecture. So enjoy the exercise. I really think applying these templates and actually having a go at doing these case studies is really good practice for you. I'm always trying to provide you with at least a some sort of comparable solution. So you can see where my mind has gone, where my thinking is. So enjoy the exercise and good luck with your SWOT analysis. That's a case study exercise where I would like you to conduct a SWOT analysis of Amazon. So you get the opportunity to practice using the SWOT framework. And this will help you to understand and apply the model. 32. 33 CASE STUDY SWOT Analysis of Amazon: I want to consider a case study of Amazon using a swot analysis. Now, I'm conscious of the fact that Amazon is a highly complex company. It's the world's largest online retailer, but it also has a whole range of other businesses. And while we think we may know the business, we can use a sought to deepen our understanding of what it's doing. But I'm also conscious of the fact that intellectual such as this, I'm barely going to scratch the surface. I'm trying to highlight some of the issues which the SWOT framework allows me to compartmentalize. But I am conscious of the fact that this is a relatively superficial analysis of the Amazon business. If we start with strengths, the starting point for Amazon is of course its enormous scale. And this gives it a tremendous scale advantages in terms of its cost leadership in its markets. Its ability to differentiate vary widely, but at the same time it focuses on a range of different businesses, such as online retail, such as the video business, such as Amazon Web Services. And it competes very successfully in those niches. Its IT systems, of course, are phenomenal and a major source of competitive advantage which few competitors can match its grasp of artificial intelligence, it's ability to match recommendations when you buy something. Other people who bought that, bought this, this sort of thing. The IT and AI systems behind the Amazon online Meetup platform are incredibly complex. And as a consequence, there is something that very difficult for a competitor to replicate. The companies to logistics and distribution systems in combination with the free delivery for customers signed up to Amazon Prime, provide the basis for a real sustainable competitive advantage. Free same day or next day delivery, which is very easy to say, but extraordinarily difficult to deliver at scale. And yet Amazon succeeds in doing it. Almost. Epithelial see, I'm still amazed when I buy something on Amazon, it tells me I can have it the same day. And that is something which would have been unthinkable even a few years ago. If we turn our attention to weaknesses, and Amazon has developed a very wide range of businesses. Now some of these are outside is traditional layer of core competence. And one might be concerned that it's spreading itself too thin. I'm struggling to have the detailed insight and knowledge to know which businesses are strong or weak. But this is definitely a risk when the company is trying to do too many things. The free shipping option in may, of course, erode profit margins potentially. Although Amazon doesn't seem to be too concerned about profit margins because it's always invested in its growth. But nonetheless, it comes with a cost, some of which only some which is offset by the Amazon Prime subscription every month. Amazon's online focus may be a weakness in the light of other retaining opportunities, particularly in developing markets. Now I throw that out there, but then caveat it by saying, well, the pandemic has shown that high street retail is much more exposed and Amazon has thrived during lockdown. Amazon is also starting to move into brick and mortar stores. It's acquired a fresh food business in the US. It recently opened a tildes retail store, brick-and-mortar store in London, which is a pilot for the first of many. So it's even now growing away from its online focus. But this is a criticism which may be raised even if it may not be substantiated. And Amazon has consistently reinvested its profits and cash flow into its business. But as a consequence, it has a very weak profit history. That being said, it has an extremely strong share price and therefore market capitalization. The business itself could be criticized for its financial performance. But I think it's a rather superficial criticism. As you can see, I'm struggling to find weaknesses. With opportunities though. Again, there are probably more opportunities than I can even begin to imagine, but let's try and cover a few of them. Amazon has an amazing payment gateway, one-click payment. It's secure, it's highly trusted by consumers. It holds the credit card details for hundreds of millions of its customers. And it makes it therefore very easy for people to buy on Amazon. But not only that, it makes it very easy for people to buy other services and other products from them. So for instance, when I'm watching a film on Amazon Prime and I want to buy a movie, I can do it with one click. I don't have to go back to my computer to sort it all out. The whole payment gateway integrates. Amazon has also taken over direct selling of thousands of products. Because it has the insights onto in its own IT systems, it can see which products sell really well. And it is a direct competitor to its own customers in the sense that if you're selling on Amazon, you will also likely to be selling against Amazon as a competitor. And guess who has all the information about pricing? And guess who has the ability at the literally a switch or a diode to adjust its pricing to keep the control of the Bible. It has the ability to identify the most profitable opportunities which products to sell, and then the ability to control the IT systems to sell those products at the best prices. There is considerable scope for Amazon to continue to grow its profit, profit or product offerings, including away from online retailing and the Amazon Prime Video Platform is a good example, and Amazon Web Services is a good example. An Amazon Web Services is where because of its phenomenal computing capacity and all the data sensors, it has, its turn that in its own right into a multi-billion dollar business for Amazon. And of course, it still has considerable escape to expand geographically into more markets. The threat side, well, cybercrime is growing and this is a direct threat to farmers and both in terms of fraud where people are buying things fortunately on the platform, but also lack of customer trust. Although hitherto, they've done very well with their security, It's coming under increasing pressure to combat its market power through legal means and regulation. Because companies can find a funny at more and more difficult to compete against it economically. It's being accused of anti-trust behavior, of monopolistic behavior, and people are trying to resort to the courts, it's competitors and governments are trying to resort to the courts to compete with it because they can't compete with it in the usual way. The other side of that coin is that local online retailers should be able to be more agile and compete against Amazon and their local markets. Something which Amazon's scale doesn't itself provide an advantage against. You can see a swot analysis of such a complex business is difficult and in fact, it could be carried out at a much more detailed level if you took it one business at a time. So if you just focused on the online retailing, you just focused on Amazon Web Services, you just focused on Prime Video. We haven't discussed the impact of the pandemic, which of course, provided amazon and continues to provide Amazon with a tremendous global market opportunity, which it was already beautifully, perfectly positioned to exploit. And this has already been seen in major sales growth in 2020 during the pandemic. Amazon is also led by a charismatic leader and major shareholder, Jeff Bezos. And he could be the subject of a SWOT analysis in his own right, discussing the strengths, weaknesses, opportunities, and threats relating to have to him as the leader of the business. As you can see, I'm I trying to show you how to apply the SWOT analysis to Amazon. It's a very complex business. I can't really do it in a five-minute video, but at the same time, you've seen how we've been able to identify strengths, weaknesses, opportunities, and threats, and highlight them in the context of Amazon and its business. 33. 34 Michael Porter and Business Strategy Analysis : It's time to take a look at one of the most influential of all business strategists, Michael Porter. And we're going to examine some of the models that he brings to the table. He is probably the most influential business strategist, I think in the world. I think there's any question about that. He's a Harvard professor. I've been studying his work certainly since I did my MBA in the early nineties. And we're going to cover some of his most important business strategy modals to help you to want to understand them and secondly, to actually use them yourself. The first of these is going to be the competitive forces model, or what is known as Porter's five forces model. Where we can examine the competitive forces in an industry. In the light of these five forces which are competitive rivalry, supplier power, buyer power, threat of substitution and threat of new entry. Will then move on to examine his generic forces model, which addresses the strategic response to the five forces. Having identified the forces in the market, this helps you to evolve a strategy, to formulate a strategy which actually addresses the challenges of the five forces. And then finally, we'll take a look at his value chain. This enables you to optimize your business internally to make the inflammation implementation of the strategy you've identified in the generic model more effective. So that's why the three of them may hear and that's how the three of them tie in together. Now I've also provided you with templates for the five forces model and the value chain model so that you can conduct your own analysis in your office with your colleagues and you just simply download them and print them off. It's very easy to do. Now these three models are undoubtedly amongst the most widely used in business strategy. It's important that you know how to use them, but I also believe you'll get a lot of value from them once you understand their capabilities and how you can implement them. So that's just a quick introduction to Michael Porter and business strategy analysis and what we're gonna cover in this section. 34. 35 Industry Analysis and Introducing Michael Porter : We're going to continue our discussion of industry analysis. And we're also going to, for the first time, start talking in detail about the thoughts, models, and frameworks of Michael Porter. If there is one name in business strategy which is synonymous with the word business strategy. It's Harvard business professor Michael Porter. Now, this is a chap whose writings have been monumentally influential. And he's somebody you absolutely have to get your mind around. Particularly when it comes to three or four of his core models and frameworks, which is what we're going to do in this section of the course. We're going to continue our industry strategy by delving deeply into Michael Porter's five forces. Then we're also going to take a look at some of his other landmark contributions to business strategy. Because I firmly believe these are core frameworks for your business strategy toolbox. Now, so far we've been examining the internal and external environment of a firm. And this has helped us to develop our initial view of our industry. The three main models for industry analysis, swot, which we've covered in detail. The pest or pastel or the broad factors analysis, which we've also gone through in detail, and the seminal competitive forces model from Michael Porter. Let's move on to this. The competitive forces model, otherwise known as, you'll hear the spoken about this very often. Michael Porter's five forces model was introduced in 1980. He wrote an excellent book which I strongly recommend you read. I have read it cover to cover. I did that when I was taking my MBA at Cass Business School. It's entitled competitive strategy techniques for analyzing industries and competitors. Analyzing misspelled, sorry about that. The model helps affirm, understand the risks and competitive challenges in its industry and helps to formulate strategies to respond to this competition. Now we've seen this already when we were looking at the swot analysis, but this is the right time to start looking at it in detail. So the five forces are the intensity of rivalry or competitive rivalry. The threat of potential new entrants, the bargaining power of suppliers, the bargaining power of buyers, and the threat of substitute products. Let's have a look at these in a little bit more detail. Industry rivalry. Here we're talking about the competitive forces within an industry. So if industry rivalry is high and there's intense competition between firms, this leads to lower prices and reduce profits. If we think about a particularly competitive industry, let's say the car manufacturing industry where there's a huge amount of competition between car manufacturers to sell their cars. And this means that there forever offering sales, offering finance, offering extra features to their cause in order to attract you to dry with them, they spend huge amounts of money on their marketing and on their advertising campaigns. And of course, all these things negatively impact their profitability. The threat of entry. Now here we're talking about effectively barriers to entry. How easy is it for a new competitor to enter the market? Are barriers to entry high or low? Because low barriers to entry means that it's easy for new entrance to come into the market, which means it's easy for these people to compete. You get greater competition and lower profits. Firms typically try to raise that barriers to entry to make it more difficult for competitors to enter the market. Now they do this in a number of different ways. It's not always just with their products and technology. Very often they'll try to bring in regulatory hurdles or legislative hurdles which can make it more difficult for new entrants to come in. Particularly if they're coming in from abroad where you get terrorists or protectionism coming in. So if you think about it in any industry, how easy is it for somebody to compete? So if I'm in the house building industry and I want to set up a to be a volume house builder. How difficult is this? What it actually, it's quite difficult because I need to assemble all the skills that can build a house. And I defined substantial land banks, which will enable me to build out estates of houses to sell. The consequences of that is that actually it's very difficult to get started at industry because those two barriers to entry, the skills necessary to buy the house and the land banks on which to build the houses are barriers which make it difficult to enter the market. The bargaining power of suppliers, and we're really talking about suppliers of raw materials here can lead to problems as well for a firm. So if your firm is dependent on a small number of suppliers, it means that you, when you negotiate your war material prices with them, they will know that you have few options. You can't go to somebody else, which means they can drive a harder bargain with you and charge you more for those raw materials. If you're buying from one of ten different suppliers, then you have the power. You can play them off against each other and you can get lower prices. So the bargaining power of suppliers can force a firm to accept higher prices for their raw materials, which of course leads to lower profits. And any industry where there is a shortage of core war materials. So when you get into things like rare earth metals, where you need them for making things like lithium batteries, then there's a very limited source of supply. The people who control those sources of those supplies have a considerable amount of power against their customers, and they can pretty well demand prices that they want. The bargaining power of buyers is the other side of the coin here it's where you have relatively few customers. So you have high customer concentration, which is not a good thing for a firm. You need to have a diverse base of customers. So if you are dependent on one or two customers, those customers will be aware very quickly that they are there. They are your major customer. And as a consequence, they're either demand higher quality or they'll demand lower prices for their products. Hey, look, we're buying all these things in bulk from you. Surely we can give us a good discount. So if you go to somebody, let's say you are a major multinational firm and you want to go and buy, let's say, 10 thousand laptops from a relatively small laptop manufacturer. You can go to them and say, Look, this is gonna be the big store to you've ever had, but I want a big discount or I want you to pre-load it with lots of software. I wanted to give you. It can be a very high specification. And these things all force the firm to basically either up their quality or reduce their prices. And of course, that affects, negatively affects their profitability. The threat of substitutes is a factor which needs to be considered. And the question is really about switching costs. Is it easy for a customer to switch from one product to another? For instance, I've got a Mac computer. Is it easy for me to switch to a Microsoft computer? Well, no, there's quite a lot of cost involved. It's a very expensive purchase to make it. I then go to learn a whole lot of new types of software and get used to them. They Makkot, the Microsoft operating system. Again, those are quite high switching barriers, which made me very reluctant to do it. If it's easy for buyers to switch to an alternative product, then they will this or if they feel like it. But this four forces the firm to then have to respond to that pressure. And they would normally do it by trying to lower their prices to make themselves competitive and try to prevent this. But of course, this negatively affects profits. This is the five forces model. In summary, although it was primarily designed for manufacturing businesses, it works just as well with technology and services businesses. So it's a really useful model for discussing a whole range of issues around the firm and understanding its industry environment. We're going to look at this because it's so important in more detail in subsequent lectures. That's an evolution, if you like, of our industry analysis so far. And I'm very keen to bring Michael Porter into the discussion because his frameworks and models are so useful. But they're also so prevalent that you really absolutely need to understand what they are. 35. 36 Competitive Forces Model Porter’s Five Forces : If I wanted to go deeper now into the competitive forces model, otherwise known as Porter's Five Forces. In the last lecture, we introduced Michael Porter's Five Forces and you got a broad outline of the issues and the factors involved in that model. Now I want to take a closer look at each of these five forces in turn to give you a more in-depth and better understanding of the model. The first of these is the intensity of industry rivalry, which is right at the center, otherwise known as competitive rivalry. The number of firms competing in an industry is a measure of the level of competitive intensity. So it's easy to assess quite quickly how competitive and industry is. But you still need to dig a little bit deeper. If we look more closely, we need to try to identify the significant factors which can impact competitive competitive intensity. The first of these is the concentration of competitors, which is effectively what we've alluded to. How many competitors are there in the industry? The next factor is low switching costs, because if it's easy for a customer to switch to a competitor, then it's easier for those competitors to compete in the market. The issue of excess or overproduction capacity means that firms are likely to utilize their capacity and bringing products into the market with making it more competitive equally, this capacity might be intermittent or only in evidence for short amount of time. And if there are low barriers to entry, then firms can move products into that market for awhile, increase the competition, and then back out when it's not. So that can be a big issue. Brand loyalty at high rivalry, when brand loyalty is low, you've only got to think of Apple. Apple has got such an amazing brand and something of an Apple fan boy, as you probably have already gathered. Their brand loyalty is such that it makes it very difficult for competitors to compete against them. Network effects is an interesting one. What it means is is that an additional product being brought into the market has a positive effect on the value of that product. That makes it a very attractive market to enter. Because the more you sell, the more value your product has. The normally cited example of this is the fax machine. If you are the only person in the world with a fax machine, frankly, it's useless. If everybody around you has a fax machine and you can prankster lots and lots of people. It has a high value to you. And that's the network effect. If you've talked about the internet and there's only one person on the internet, which is you, then having a search engine isn't really going to be much use. If everybody is on the Internet, then a search engine benefits vary materially from the network effect because it can then help you to search and access vast numbers of different sites. So that's network effects. So having a positive network effect makes the industry more attractive to entrance. Other issues are exit barriers. When exit barriers are low, are either cost of going out of an industry is low. It makes it easier and less risky for firms to enter and exit the market. They're more prepared to take a risk on coming into the market because they know it's going to cost them a huge amount of money to get out if they are fixed costs and high value-added. Well, if you've got high fixed costs to go in, you're going to be reluctant. But if there's high value-added on the product, you'll be motivated to go into the market and increase the rivalry because the profit levels will be high until the rivalry increases and then the dynamic changes against you. Industry growth is an important factor when markets are growing rapidly, there's plenty of the pie, if you like, if the market pi to share around everybody. But as market growth slows and markets become saturated, the levels of competitive rivalry increase. When product differentiation or homogeneity, homogeneity is low, then you have high rivalry and when you have highly differentiated products, you have low rivalry. So again, if you look at the, the computer industry, I, Apple's products are highly differentiated. It makes it difficult for people to convince, compare, compete against them. But if you look at some of the generic laptop manufacturers where there's nothing to choose between the different laptops, then they have a high degree of rivalry in that segment of the market. The diversity of rivalries. Is also important. If companies are highly diverse, then it's much easier for them to build their own competitive advantages and therefore to compete, which reduces rivalry. If companies are relatively similar to one another. If you talk about the milk industry and people producing milk, milk is a relatively commodity product or the company is doing it are the same. There's a very high degree of competitive rivalry there because you can't differentiate yourself as a milk producer. Corporate stakes is an issue if there's a lot of investment and people are taking positions in the market, It's more likely to keep rivals in the market and therefore increase rivalry. If firms are relatively independent, IEEE they're not externally finance, then they may not be so well able to sustain losses or low margins and therefore stay in the industry. Moving onto the threat of potential new entrance, the ability for new entrants to enter a market are effective by the factors you see here. We've talked about brand loyalty and note how some of these factors overlap between the different factors. That is not a coincidence. That is because they affect more than one of these five forces. Something I'll allude to at the end. So high brand loyalty, apple, it makes it more difficult for people to come into the market and compete against Apple. Cost advantages from economies of scale means it's easier to enter a market when these can be achieved. If you can go into a market at high volume, it makes it much easier for you to do that because you can get the advantages of your mass production. When switching costs are low, it's easier to entry, to enter a market. When network effects are high, it's more attractive to enter a market. When government regulation or strict regulation is high, it's more difficult to enter a market. If you think about things like the drugs market, where people are trying to develop new drugs. There's a very, very high regulatory barriers to entry there, which makes it takes a long time because you have to do all these clinical trials and it's very expensive to enter the market. When barriers to exit are low, it makes the market more attractive and high exit cost makes it less attractive. So if I know I've got a write-off, a huge amount of CapEx by I'm unsuccessful in entering a market. I will think twice before doing so. Then covers things like high CapEx and special occurs equipment. It would be a high exit cost. It's also a high entry costs, high fixed costs if you're having to set up with property and equipment are big office and all the rest of it that is a barrier to entry and therefore makes it less attractive for new entrance. If you need specialized skills, such as in the tech sector. The bargaining power of buyers. This is your customers and how they buy from you. And we're looking at when they have high power. And therefore they can force you to give them a better prices are higher-quality when they are concentrated or very large companies, it's more difficult for you as the firm when they purchase a high percentage of your volume, which is customer concentration for you. If you're selling seventy-five percent of your output to one customer, then they have bargaining power over you. Bias have good market information about product pricing and demand. They can negotiate between different sources of product. To your disadvantage. When there are many industry competitors, There's obviously more scope for your bias and negotiate with them to get lower prices. When there are many substitutes available. When switching costs are low, when buyers are indifferent, which firm they buy from. And when product differentiation is low, high product homogeneity, which means that basically they're trying to decide which laptop to buy and they're all very similar. They're not really going to worry about it too much if they only want to buy Apple products. And that's what they're gonna look for. The bargaining power of suppliers. So this is your suppliers of raw material is high when these industry market conditions exist, when suppliers are concentrated. So there are relatively few suppliers when suppliers can credibly threaten forward integration from the industry. So they basically a threatening becoming and compete alongside you. When rivals purchase small percentages of the suppliers volume. When there are few alternative suppliers, which is back to split concentration. When few substitute war materials are available, you have to buy in. You can only buy these raw materials and therefore you have to buy them from those suppliers. When switching costs are high for purchases, if there's a high cost for you to go to another supplier, then your stick with your existing supply even if they raise prices against you. The threat of substitute products is a limit to profit potential because products can come in and replace your products in the market. Switching costs are low, means that it's very easy for your customers to switch between products when substitutes have a superior pricing to existing products, or they have better characteristics or performance than existing products. That means that there are threats to substitute products coming in and competing against you. As you can see from this analysis, some industry character characteristics impact more than one of the five forces, each ILO product differentiation. When a firm can identify which forces are at work within an industry, then they can start to formulate strategies to counter those competitive pressures. Now, we are next going to take a look at the most basic of these strategies using Porter's generic strategies model. And I'm also then going to show you how it ties in to the five forces model. That's a deeper dive into Porter's Five Forces. I deliberately wanted to give you lots of detail about the factors that affect the five forces, because that's absolutely key to understanding how this model works. 36. 37 Full List of Porter’s Five Forces Factors: I thought it would be helpful to provide you with a full detailed list of Porter's Five Forces factors. The idea behind this is that although I didn't have time in this course to go through each one of these factors in detail. Lot of them are self-explanatory. And what I wanted to do is provide you with the list and you can then use it as a checklist if you like, with your colleagues when you're having a strategic discussion about your own business and you're talking about Porter's five forces model. Now you can download this spreadsheet as a PDF, this slide deck as a PDF. But I've also provided an easy to print two-page PDF of the list of the foot Five Forces. So you can also print that out as well. So this is the list. Obviously there are five groups of them and you can see them here on the screen. I'm not going to read them to you if you want to read them in detail, just pause the video and have a look through them. That's the new entrance. This is the power of suppliers. And you can see there's plenty to go with there. You can see the bargaining power of buyers and there's a few to talk about there as well, and the threat of substitute products or services. The list is here. The final one, rivalry amongst existing competitors. And there's the list of some of the things for you to talk about. I hope you find the detail of this helpful in your discussions. It's not always the role of this course to give you all the granularity detail. I'm trying to hit it at a detailed enough level so that you get all the lessons. But if you do want to dive more deeply and I strongly recommend, worth a read, go back to Porter's original books. Get them, you can get them from the obvious online bookstore and you can read them. They're an easy well, they're not a difficult read. I've read several of his books, but there's a lot of detail in there and it helps them for the lessons and the idea is to sink in as well. I'd strongly recommend you doing that as an addition to this course. That's a full list of Porter's Five Forces factors. I hope that granular detail will help you in your discussions with your colleagues. 37. 38 Five Forces Template: Created this Five Forces templates to enable you to conduct your own five forces analysis on your business. To recap, the five forces model or false at Porter's Five Forces Framework focuses on the competitive forces in an industry. Competitive rivalry, supplier power, buyer power, threat of substitutes and threat of new entry. You can use this template to brainstorm the competitive forces which affect your business or product. You can conduct this analysis at any level within your organization. But remember, ask yourself, what is your generic strategy? Is it cost or differentiation? If it's going to be broad, It's either cost or differentiation. But then if it's focused, you have to decide whether it's focused costs or focused differentiation. Then ask yourself for each of these areas, what are the implications for your business and what strategies can you devise to counteract these competitive pressures? You can see that for each of the five forces, you've got a sheet which you can then click on. You can then write on to brainstorm the forces which are affecting your business. And that'll help you then to start to discuss with your colleagues how you're gonna create strategies to compete or to handle these forces. That's my five forces template. I hope you find it a useful tool for conducting your own analysis. 38. 39 CASE STUDY EXERCISE PORTERS FIVE FORCES Global Aviation Industry: It's time for you to undertake your next case study exercise. And in this case study, I would like you to look at Porter's Five Forces and do some thinking about the competitive forces in the global aviation industry. This is an opportunity for you to now apply what you've learned about Porter's five forces using the template I've just provided for you and conduct your own five forces analysis of the global aviation industry. Focus on each factor in turn and consider how the external conditions of the industry have contributed to the Competitive Five Forces. What conclusions you come about to about each of these five forces? And what's the overall impact then on the global aviation industry of the balance of these forces. I think that's what makes this analysis so fascinating. Now, I prepared my own Five Forces case study for you. You can watch it in the next lecture and you can download the PDF slide deck of that as well. I hope once you've given this some thought, you would enjoy seeing what my viewpoint is. And perhaps you can compare those and see how you compare to my ideas about the Five Forces. Of course, there is no correct answer to this. It's all subjective and evaluative. Give it some thought, make your notes. I'm sure there are gonna be some issues that you identify that I miss and I'd love to hear what they are. And I hope you enjoy the exercise, so good luck with your analysis. So this case study is all about studying Porter's five forces for the competitive forces within an industry by looking at the global aviation industry. 39. 40 Case Study Porters 5 Forces Global Airline Industry: I wanted to take a look now at Porter's Five Forces in a case study, taking a look at the global airline industry. Now, my word, this is a rich photo to plow and I've gone into quite a lot of detail in some areas, but I'm doing my best to keep it to a sensible length because there's so much one can talk about. The purpose of the case study then is to review the global airline industry for passenger services. Using Porter's five forces model. By understanding the competitive forces, will be better able to understand the profitability in the industry. Or indeed, the main problem, which is the lack of it. We start with competitive rivalry and there's a lot going on here. We're gonna cover several slides. It's a highly intensive industry where rivalry is concerned and this has been only accentuated, made only more competitive following deregulation, which I guess is the point of deregulation in the first place. The buildup of capacity is hard to reverse because of the length of aircraft leases and the capital investment. And this means that prices are under downward pressure. Fleet sizes and commitments to roots for up to six months at a time, reduce operational flexibility and price adjustments can put pressure on profitability. One consequences that airlines require too much capacity and focus on them just covering their marginal operating costs, but not the capital costs which have already been incurred. We go on. Transportation is in effect a perishable product. It's available while the flight is there and in the air, but after the flight is landing, that's it, it's gone. This means that you have to do your best to put as many people on the aircraft when it's flying, which of course increases the level of discounting the similarity of products as an issue because it's very difficult to differentiate to any extent. And part of this has been restricted by safety standards. But also if you introduce new features such as flat beds or clever entertainment systems, these are easily and quickly copied. The if you have to go for a major refit in order to try to differentiate your product. This takes aircraft out of service, but it makes it extremely expensive because the costs of having the aircraft out of service or not flying are considerable. Frequent flyer programs have been widely introduced to develop customer loyalty and they do have some impact on business customers. However, infrequent leisure flyers have little interest in collecting small packets of air miles. They may never be able to convert the future flights. So this doesn't work particularly well. The low marginal cost structure is an issue. The fixed cost of an aircraft, of course, is very high, but the marginal cost of having an additional passengers on board is low. This makes it more attractive to discount because you give it costs you a little amount of money to have one more passenger and you can get another fair, then you're keen to get it even at a relatively low marginal cost. Marginal value. Variable costs per aircraft, of course, have been increasing, particularly with the increases in fuel costs that works against the airlines. And although large aircraft have lower operating crafts, these drive route density, which encourages the feeder hub structure. And then the larger aircrafts. Because there we're back to the low marginal cost issue, then offer lower prices to passengers because they need to fill the aircraft. And so discounting is reinforced again. The cost of exiting the industry is high. In less than 1% of airlines exit the industry in a typical year. The reduction in capacity or companies exiting the industry, which are two normal competitive adjustments really don't work in the airline industry because aircraft can easily be redeployed to different markets. And banks and leasing companies are available with an excess of funding. Airport infrastructure gates and slots are highly fungible. You've got to have a gate and a slot that's just about putting the aircraft at the airport and then getting it off the ground where the aircraft then goes is entirely flexible. And that has an impact then on the competitive rivalry. Threat of new entrance is surprisingly high. Now, over 1300 new airlines were established in the past 40 years. That's an average of 30 a year. A significant proportion of these businesses have ultimately failed. Now, most entrance our existing airlines entering new markets, new geographies. And for that there were very few barriers. They've already got all the infrastructure for running the airline, adding on a few more aircraft and sending them to a different destination is very easy for them to do. Access to distribution channels. Ea, customers and tickets is easy for new entrance because of aggregator websites and travel agencies. Secondary trading of airport slots, which could be a barrier if the incumbents controlled or the take-off slots. But the secondary trading of these thoughts makes market entry easier. While substantial capital is required to enter the market. This is why they available from banks and leasing companies and because the airlines don't have to buy the aircraft outright, but they can take them on operational leases. Then they effectively delay The upfront capital cost and spread it and match it to the operational income they get from operating the aircraft. And of course, the last one is that customers switching costs between airlines is low. And that makes it very attractive for new entrance to come in. The bargaining power of customers is high and rising. Channels have become more concentrated and you need to differentiate here. Doctor friends, you need to consider both channels and customers. The channels have become more concentrated and travel agencies more aggressive in protecting the interests of the passenger. Aggregator websites have concentrations consumers buying power, including comparison websites, which make price transparency greater and therefore competition greater as well. Air travel, of course, is a significant discretionary spend item, and this increases price sensitivity only partially offset by loyalty programs. Although loyalty programs create higher switching costs, it really only impacts business travelers, travelers who fly more frequently. And of course, the COVID pandemic has completely reset customer by customer buying power metrics beyond certainty of being able to travel the traffic, traffic light travels systems for which countries you can go to and which countries you can't coming on and off and changing all the time. The extensive elements of cancellation rebuking have added huge and Cezzane to the market and only accentuated the power of customer buying, buying power. The buying power of suppliers is high for several critical imports as well. Aircraft manufacturers are highly concentrated globally. They're effectively oligopolies. And this gives them high bargaining power against the airlines. Switching barriers are relatively moderate, but adding new air frames and engines can have incremental costs because you've got to have completely retrained engineers. You've got to retrain your pilots. It may be completely different systems for engineering maintenance. Aircraft manufacturers have significant alternative markets for incidence defense. The aircraft manufacturers, as a consequence, have been able to shift most of the risks associated with aircraft purchases to the airlines. You hear airlines announcing big purchase orders for 102030 aircraft. But there then tied into those purchases, which the airlines knee because the manufacturers need, because they need to be able to plan that highly complex and highly expensive build programs. But it does put the risk very much in the position of the airlines rather than the manufacturers. When it comes to staffing, airlines are very dependent on their skilled employees, particularly their pilots and their engineers. They are typically, or certainly the incumbents typically have highly unionized workforces who have the power to implant significant disruption, even with a relatively few number of people. That unions are local monopolies. And there are different unions for different functions, which adds complexity to the negotiation and makes it easier for the unions to create a disruption in this disruption has a high consequential cost for the airline. Now, new entrance often have lower unionization, but that tends to be a temporary function till the unions Get, getting there and get the workforce unionized. Historically, the impact of this as being the employees have been successful in capturing much of the value created by the airline industry with high salaries and writes. Airports have buyers bargaining power as well, many of which are local monopolies, giving significant pricing power to the major hubs. And since privatization and deregulation, airports have become more aggressive in their pricing. For airlines, switching costs between airports are high. If it's for an app, an airline to move all it's engineering or audits servicing him, say Heathrow, Gatwick, or from JFK to another US Air or app board up. I'm not an expert on US airports is a very high switching costs. What's interesting though is the fact that airports are generally only marginally more profitable than airlines. And this suggests that their pricing power has been limited. But also in my opinion, reflects the overall lack of profitability in the industry. When it comes to the threat of substitutes, the most powerful substitute to air travel is not an alternative mode of transport, but the decision not to travel. Travel alternatives include things like high-speed trains, which have been developed in Europe. They exist for a one in Japan. And of course, private jets. During the COVID pandemic, the long-term impacts on business travel have yet to be seen. However, Zoom has emerged as a significant substitute to the airlines the ability to web conference effectively on a global basis, I'm sure, will challenge the need for people to travel for business in the future to a much greater extent than has been in the past. Significant real cost reductions in air travel have strengthened the industry's position in terms of getting more people coming in to the market and giving, I'm the opportunity for customers to choose between them. So again, the substitutes continue to be a major issue for the anion industry. Let's try to summarize our conclusions. There's a lot of detail there. I want to hit you with a few bullet points on each of these five points to try to coalesce the argument. When it comes to competitive rivalry or competitive rivalry is high. It's a high-growth industry, but the market conditions are being heavily volatile with lots of aircraft, with lots of airlines going bust. Air transportation is a perishable product. There is limited product differentiation. Airlines suffer high sunk costs per aircraft, but low marginal costs per passenger, encouraging discounting. There are very limited economies of scale and significant exit barriers. And there are multiple direct and indirect rivals within the industry. Threats of new entry are high now this is not just new airlines coming in, but existing airlines are moving to new geographies and new roots. So this gives limited advantages for existing companies. Low switching costs, some demand side benefits of scale, but they have easy new entrance, have easy access to distribution channels. Buyer power is highly concentrated through aggregator websites, which also increases trends or price transparency. Travel agents have been focusing on the rights of passengers not looking after the airlines. There are low switching costs between airlines for most travelers. And price sensitivity is high. It's a discretionary spend. But the, there's no real differentiation between the products and travel is perceived as a standardized product. When it comes to supplier power, this is also high. There are powerful labor unions. Aircraft manufacturers are concentrated, concentrated oligopolies. Airports are local monopolies with significant power and airports switching costs are high for airlines. Finally, the threat of substitution. Well, the biggest one we've seen in the last 18 months is the web conferencing technology. Zoom has proven and effective substitute during lockdown, I think will have a major impact on the airline industry going forward. Fast trains are beginning to compete. There are less security issues and travel can be delayed or canceled easily. So that's the alternative to traveling, is sometimes just not traveling. That is a case study of the global airline industry using Porter's Five Forces. And you can see how when you start to concentrate on these forces and think about the issues around each one in turn, throws into focus a great deal of very useful and interesting information about industries. And in this particular case, it goes a long way to explaining why the global airline industry has such low profitability. 40. 41 Generic Strategies and Industry Forces: Let's take a look now at generic strategies and industry forces. As we've seen with the five forces model, every firm faces competitive pressures from all sides. And the Five Forces models, yardstick for industry attractiveness is profitability. When we examine each of the five forces, we were determining whether the force in question positively or negatively affected the profitability of the firm. This then becomes the measure of industry attractiveness. The response of the firm to these pressures can determine how successful and how profitable firm is. This brings us to the question of industry positioning. What strategy does the firm adopt to best defend itself against the five forces? Michael Porter's answer to this question is his generic strategies model. Even in an industry with relatively low profitability, affirm that positions itself well, can make above average returns. And it does this by playing to its strengths. Porter argues that these strengths or competitive advantages are either cost advantage or differentiation. By applying these to either abroad or a narrow scope, three generic strategies emerge. The first is cost leadership, the second is differentiation, and the third is focus. These strategies are generic because they can be applied to any product or service. And two organizations at any scale. Cost leadership, no frills, lowest cost producer. And a good example of that is the budget airlines. So you're getting for the absolute minimum levels of service or product features and trying to deliver something at the lowest price and sell it at the highest volume. Differentiation is where you create uniquely attractive products and services, such as Apple. Focus is where you have specialized services in a niche market. Porter splits focus into two parts. Cost focus, which is cost minimization within a focused market, or differentiation focus, which is strategic differentiation. Again, within a focused market. Cost leadership can be achieved in two ways. You can either increase your profits while reducing costs and charging industry average prices. So you are the lowest cost producer, or you increase your market share by charging lowest prices, but still making a reasonable profit due to your lowest cost. Either way you can tackle this strategy. The focus, however, is on minimizing the cost to the organization, not to the customer, which is a completely separate issue. Low-cost producers are open to competitive pressure from other low-cost producers, potentially resulting in a race to the bottom. Before embarking on this strategy, firms need to be confident of success. They need to make sure they have access to capital so they can invest in technology in order to bring their costs down. They must make themselves as efficient as possible, all the way through the supply chain, through the value chain and including the inbound and outbound logistics. They must have as lower cost space as possible with labor, raw materials, etc. If these are not unique to the firm than other competitors, may be able to replicate your low-cost strategy. One way to keep costs continuously low is the Kaizen philosophy of continuous improvement, which again shows how these models can link into one another. Differentiation is about making your products unique to provide them with a competitive, competitive advantage. This can include unique features or functionality, durability, after-sales support, or even branding that your brand values and your brand image in the market. Successful differentiation strategies require good R&D and innovation. Again, think about Apple, how they innovate all the time with their products, high-quality products and services. Again, Apple comes to mind and effective sales and marketing communication of the benefits of the differentiated products, which is absolutely critical to getting the message out to your customer segment. Focused strategies address specific niche markets. Here you must, you must understand the market dynamics. You must also have a very strong grasp of the customer needs and wants. And you need to build your brand loyalty because this discourages competitors. You still have to decide whether you're going to pursue a cost leadership or differentiation. Now Porter cautioned against trying to hedge your bets and try to follow more than one strategy at a time. To a degree, these strategies are mutually exclusive because they appeal to different customer market segments. Cost leadership has an internal focus on minimizing the cost of the firm. Whereas differentiation has an external focus with creative and communication, marketing and branding. The do nothing strategy means that your business will end literally end up stuck in the middle and competed against firms all around you who are all pursuing one of the three generic strategies against you. Now there is a strong connection between Porter's Five Forces and his generic strategies. For each of the five forces affirm needs to ask which strategy gives them the best chance of mitigating the impact of the five forces. If we start with competitive rivalry, cost leadership is better able to compete on price. If you're pursuing differentiation, your brand loyalty creates a competitive advantage. If you're adopting a focus strategy, competitors cannot address the needs of the customer. Who is differentiation focus, aii, the customer who wants a highly differentiated, very character fall and functionality. Rich. Products which are your competitors will find difficult to match. Entry barriers, provide costs leaderships, firms with price cutting weapons that they can use against potential entrance. With differentiation, It's about customer loyalty, creating a barrier to new entry. With focus, it's the combination of core competencies which enabled you to build a competitive advantage which is hard to compete with. Buyer power. Again, we look at cost leadership and it's the ability to offer lower prices to strong bias because you can, um, for to sell at such a low price point because you have the volume and you've got the lowest costs. With differentiation, there are a few, there are few close product alternatives which reduces the ability of biased and negotiate price against you. With focus, few alternatives means that there is less ability, again, to negotiate or to switch. With supplier power, cost leadership. Volume sales enable protection from powerful suppliers because you're such an important customer to them. You, I'm selling large volumes of your products and therefore you're buying large volumes of raw materials. If you're differentiated, your volumes are much lower, but you're better able to pass on the supplier prices to customers. And if you've ever focus approach, then suppliers do have power due to your lower volumes, but your differentiation in the market enables you again to pass on price increases to customers. And because they are focused on your differentiation, they're going to be less price sensitive. With the threat of substitutes, cost leadership enables you to offer low prices, which makes your market as a whole less attractive and less competitive to substitutes. With differentiation, customer's desire, additional functionality and characteristics which makes your products more defendable. With focus, this specialization of your products and your core competencies increases your competitiveness against the risk of substitutes. That is a run-through Porter's generic strategies, really important cornerstone model for your toolbox. And I've also shown you how his two models, generic strategies and five forces, can be tied together and used in conjunction, which as we've seen, always makes these models and these frameworks much more valuable. 41. 42 Value Chain Analysis: We're going to take a look now at Michael Porter's value chain analysis. Michael Porter introduced this model in the 1980's as a tool to help businesses formulate competitive strategies. Value chain encompasses all of the activities and processes in a firm which contribute to the creation of value. A firm can either increase value for customers or it can lower costs. These are generic strategies which we've already looked at. You either go for low cost differentiation or you go for focus, but it's focused with low cost or differentiation. I'ii just addressing a market segment. The value chain analysis helps firms to focus on the strategies which address these two issues. The primary functions of the firm, which we can see here, our inbound logistics operations, outbound logistics, marketing and sales and service. So just to quickly go through those in a bit more detail so you understand what we're talking about. Inbound logistics involves receiving, storage, and distribution of raw materials, basically anything the firm needs in terms of inputs in order to create his products and services. Here, of course, supplier relationships are key, so we're now tying into the power of suppliers when it comes to the five forces model, operations, transform raw materials into products and create services which are then sold to customers. Now, process improvements and product innovation in this area can create value. Outbound logistics is the delivery and distribution of products and services to customers. Marketing and sales promotes the products and services to customers, making them aware of the competitive advantages of those products and services produced by the firm. And then finally, service or any activities which maintain or add to the value of the product after it's sold, for instance, after sales service. There are also secondary activities which support the primary activities. The firm infrastructure, human resource management, technological development and procurement. When you put them together with the support activities on the top, in this case, the primary activities on the bottom, you create a value chain. Each primary activity has secondary activities associated with it. There is then a three-step process for conducting the analysis. First of all, you identify the secondary activities associated with each primary activity. And these are direct activities, indirect activities and quality assurance. Let's be a little bit more detailed. Direct activities are those which are specifically helped to create value. Sales and marketing. For instance, indirect activities help the direct activities function more smoothly, smoothly. Hr and accounting. Quality assurance ensures that direct and indirect activities meet the expected standard. The next step is to identify the secondary activity for each support activity. And support activities such as HR and accounting provide value to primary activities. You see then there are connections then within these, the whole organization between all the different activities. Then you need to identify these connections, the connections between all the activities, between the primary activities and their secondary activities and between the support activities. Identify all the links between all the activities. And it's these connections which are the secret to finding ways to create competitive advantage. So which activities across the value chain would benefit from additional investment in time or money to improve the product or save cost, you need to identify activities as well which put the formatted disadvantage when compared to its customers. You have to then scope the priority of the activities. Which strategies can you develop for these key activities? Which can then be implemented to build sustainable competitive advantage. Is your strategy going to be focused on cost or differentiation, which ties us back to Porter's generic strategies. So let's just ask the question, what do we mean by competitive advantage? Because this term is used an awful lot. And I just wanted to be very clear. Competitive advantage involved creating products or services whose price and value are similar to those found in other products to the market. However, if you go for a cost advantage, you're producing the same quality of product with the same customer value at a lower cost. If you're going for a differentiation strategy, you're creating a product or service at the same price, but which is unique, it has more value, more functionality, more sustainable or durable characteristics than competing products. And of course, it must align with customer wants and needs. Value chain analysis breaks down the steps and links in the firm and enables the identification of opportunities to redu, reduced cost or increase value. You can optimize processes, eliminate waste, improve profitability, identify areas to differentiate and therefore create competitive advantage. Ultimately, the aim of this analysis is to minimize costs while maximizing the value created for customers. That is Porter's value chain analysis. It is a relatively easy and this is the great thing about Porter. It's relatively easy to expect, explain. It gives you a logical framework which you can then use as a blueprint to put on your own business. And then start to understand how your business works. Understand how the processes and the activities connect. And then you can start targeting some of those processes and activities to optimize them to create sustainable competitive advantage. 42. 43 Value Chain Template: And to briefly introduce you to this template that I've created for you so that you can do your own value chain analysis. You need to focus on identifying all the tasks in your firm which relate to the creation of your product or services using Porter's primary and secondary activities. You then need to create the linkages between those activities. Once you've understood the linkages, you need to ask yourself which of these linkages create value? And which of these linkages can be improved either to reduce costs or to improve value, increased value through differentiation. Devise strategies to improve your primary activities, your secondary activities and your linkages between them. And focus on adding value and reducing costs. But bear in mind, you need to understand for your own business, are you going down a cost strategy or a differentiation strategy, referring back to Porter's generic strategies. So the templates are here, here's the overall view of the value chain template. And then you have a template here which you can print out, which is why I've given it a white background to list all the tasks which apply to these primary activities. Or you can simply use it as an aide memoir. And then with the support activities, you can list all the tasks which apply to these secondary activities. Then the challenge is for you to work out how you're going to connect and find the connections and the linkages between these primary and secondary activities. That's the value chain template. You'll find it downloadable in a PDF format so that you can use it. You can print it out or you can create your own. But it gives you the template that you need for creating your own analysis of the value chain for your business. 43. 44 Boston Consulting Group (BCG) Matrix: Let's take a look now at the Boston Consulting Group, or BCG matrix. The BCG matrix looks at the mix of products and polio within a business. To evaluate the strategic position of each business unit or product. It was developed by BCG founder Bruce Henderson and is probably one of the most widely used. The strategic matrices you're going to look at Jupiter Sandy during this course. The whole purpose of the BCG matrix is to enable a firm's product portfolio. R&d investments and business units would be managed strategically. The idea is to allocate resources to the businesses most likely to benefit from them. It provides a logic for the redistribution of cash, essentially from cash cows to business units with higher growth potential. It's a framework, if you like, for allocating resources amongst other business units. So this allows firms to maximize their competitiveness, the value and sustainability of their businesses by allowing them to get the right balance between the exploitation of their mature businesses and investment in new businesses to secure future growth. Here we can see the BCG matrix. On the horizontal axis, you can see monkey share or relative market share, which is a proxy for competitiveness. And on the vertical access, you can see the growth rate, which is a proxy for the relative attractiveness of the market in which these products or services operate. You have four quadrants. And it's really looking at the balance between market growth and market share. So high-growth and high market share means that the product is a star. High-growth, low market share means the product is a question mark. Low growth and high market share means it's a cash cow. And low growth and low market share means it is a dog. Euphemistically. You can think about Apple's product range in perhaps in this category. And really consider where you might put some things. So things like the iPhones are probably stars. They've got a high market share, relatively speaking, and they continue to do very well. Perhaps some of the older products may be into this lower market share areas. And then you have question marks, perhaps over some of the laptops, it's very difficult to see, but you need to think through each product and try and position it in terms of its growth and its market share. And then see where you go. You might argue actually that because the, the Samsung phones have been so successful with the Google operating system, possibly. Iphones are not in the category with high market share. So they might be a question about, there's certainly not dogs and they certainly need investment to stay where they are. The model assumes that an increase in market share means an increasing profitability and cashflow. Argues for the products or business units benefiting from economies of scale and cost advantages over rival firms. Stars, which to remind you, have high growth and high market share. Market leading products, they require substantial investment to maintain their position. So they consume cash and they generate cash. As the market matures and market growth slows down, they're more likely to migrate to cash cows. Question marks which have high growth and low market share. Consumed cash, they require management time and resources, and they're financed from cash cows. Their potential is to move to become stars. But if they fail to do this and they don't move across to the left, become stars. They're likely to fall to the bottom category and turn into dogs. Cash cows have high market share, but they have relatively slow growth. They have market leaders, but they require little further investment as they are in mature markets. Don't forget the market growth is about the market, not about the growth of the business in the market. So they throw off cash because they require little further investment. And these help to finance stars to keep styles where they are and to put money into question marks to hopefully turn them into stars. Dogs in the low growth, low market share category are asked to. Self-sustaining. Fact can be cash generative, but they will never become stars. And they're likely to be phased out unless they're contributing in some competitive or strategic way to the firm. The BCG matrix are really useful framework for looking at your product portfolio, making judgments about resource allocations. But it does have its limitations. It's basically a four-quadrant matrix. So you either have high or low growth, high or low market share, but it doesn't really account for medium. So what do you do if businesses are on the line between quadrants? The market itself is not clearly defined in the model, which does leave some ambiguity. And high market share does not always lead to high profits because it often requires high continuous investment to maintain that position. The growth rate and relative market share are not the only indicators of profitability. And this model doesn't really take into account any others. Dogs can help other businesses game competitive advantage, and they can also be cached genitive, so they're not necessarily automatically a bad thing. And it really sort of throws up the question is a four celled approach too simplistic? Nonetheless, it's a very useful and very helpful model and it's a great framework for getting you to at least start thinking about the relative positions of your business units or your products within your firm. That's the Boston Consulting Group, BCG matrix, a very useful framework looking at the growth of your business. When you're looking at trying to make decisions, strategic decisions about where you're going to invest in the future. This helps you to prioritize which products or business units should receive that investment. 44. 45 BCG Matrix and the Life Cycle: It will become apparent in this lecture There's quite a close connection between the BCG matrix and the lifecycle. And I just wanted to spend a few minutes with your exploring that relationship. Because as you know, I'm very keen on making connections between different models. One of the main themes you've seen consistently through this course is how we're trying to connect different models and show how they relate to one another and how they can be used together to make them even more effective. Well, the BCG matrix and the product life cycle are an excellent example of this. In fact, the two models are very closely related. And here you can see the standard BCG matrix. If you apply it then to the product life cycle. And you can see the four stages of the lifecycle, air, launch, growth, maturity, and decline, then your early and young products. The question marks, which are in fast-growing markets, but they still have a small market share. The question marks the high-growth markets with large market share or the stars, the mature markets with the declining. But it was saturated markets with the Southside is declining sales, no longer growing sales or the cash cows and markets in decline or the dog. So you can see that the BCG matrix and the lifecycle or overlay each other quite well. If you remap this back onto the BCG matrix, you get exactly what I've shown you on the other slide, but simply highlighting the different stages of the lifecycle in the quadrants of the BCG matrix itself. Most products start as question marks after their launch. And it's a quite a big question mark, is, will they succeed? Will they move to become stars? Or if they fail to do that, then they'll rapidly become dogs and will either be closed down or divested. Successful products that are stars will remain so as long as the market growth rate continues to be high. And with the investment, they can maintain their high market share. But as their markets mature, they then evolved into cash cows. The cash cows themselves will gradually turn into dogs as their markets decline, become more saturated and then the products themselves come to the end of their natural life. That's a quick look at the relationship between the BCG matrix and the lifestyle. And it shows you how these two models are really closely interrelated. 45. 46 BCG Matrix Advantages and Disadvantages: If you want to take a further sounding more detailed look at the advantages and disadvantages of the BCG matrix as a model. It's worth reflecting on these because in any model or framework you have to be aware of the limitations and particularly useful characteristics of the model. And you should also be prepared to be critical of the model and think how you can get more out of it and understand where you are, the shortcomings zone. It's worth reflecting on these in this lecture. On the plus side, the advantages of the BC model, BCG Model enabled you to take a high level review of product positioning. It sort of gets your way from the forest and the trees. It gives you the helicopter perspective. It's also an excellent resource, an excellent methodology for resource allocation. You can use it to prioritize between the different products or business units on a fairly simple and straightforward set of criteria. This enables you to balance your product portfolio. You may realize that you have too many dogs and not enough question marks or you need to have more cash cows in order to sustain your stars. However, the balance works out. And of course, you need to keep an eye on this over time. And the greatest thing about the matrix is it's very simple to use, easy to understand, and it's fairly straightforward to explain. So you can use it as a framework to communicate with your colleagues about the positioning of products or business models but his business units within your business. The disadvantages, however, are that market growth rate is being used as a proxy and it's not a very good proxy for measuring market attractiveness. There are quite a lot of other factors which you could take into consideration. Equally. There's no real direct link between market share and cashflow generation. Dogs can be profitable. Stars can operate in a very low margin business segment. So you have to understand the limitations there. It's a shorthand if you like. They also disadvantages also include the fact that the model doesn't take into account external factors. Now, this is where you have to use another model and this is where I love these frameworks and models and overlapping them. So the pest model and the PESTEL model, obviously, pastels and extension of pest can be used in conjunction with BCG to get a very detailed understanding of the external environment of the firm. The model is also fixed in the present. It's a snapshot in time. It's a bit like a balance sheet and there's no future forecasting element in it. Now if you want to build that in, then a McKinsey Matrix model would be a better model to use. Again, a fairly quick run through, but I want you to remain and continually be critical of these models. Just don't take them on face value. Always be asking questions of them. And the more you look into them and more you develop your understanding of their pluses and minuses, then the better you will understand them and the more value you will get from them. 46. 47 Adapting the BCG Matrix: One of the most valuable things about these frameworks and models is how you can adapt them, evolve them for your own strategy purposes. And the BCG matrix model is a very good example of this. And I wanted to give you a couple of examples of how you can play around with the axes in order to get more out of the model. So it's possible to use the BCG framework to determine priorities for other parts of your business. So we're gonna take a look at, for instance, are they an example where we're going to look at the portfolio of customers in a hypothetical business. So here we have the standard model, but what we're gonna look at is creating a list of the customers that we've got. So we pull all that out of the database and we want to look at the profit margin per customer and some sort of estimate or measure of the sales growth. So how much is the sales gross growth been in the last, say, 12 months? So we can see the sales growth per customer and the profit margin by customer. And if we apply this to the BCG model, we then get customers with high sales growth and high-margin. Who are the stars? Customers with high sales growth but low margins? Who are the question marks? Customers with low sales growth but high margins? Who are the cash cows? And customers with low sales growth and low margins? Who are the dogs? Obviously, when you've got a group of dogs in your customer list, then you should consider refocusing your sales and marketing strategy away from them to stars or to your question marks. You can also add a time dimension to the access by repeating the exercise, say every six months or annually to see how the picture is changing. Which directions are the customers moving in? Because you might have a customer who was a star and it might then appear to move down to a cash cow. If it's moved across to a question mark, you need to start asking detailed questions about really what's going on. The objective obviously is to keep your focus and most of your marketing spend on your profitable customers who have the strongest growth potential. But what have? We wanted to use our BCG matrix to assess our digital marketing strategy? How would that work out? Well here on the vertical axis, we've got return on investment in our marketing channels. So how much are we having to spend and what are we getting back? Then the effectiveness is measured on the horizontal axis. How many leads are we getting or what's the sales volume being from it? If we apply this, then let's take some examples. Google ads might be a star, a question mark might be Instagram, your cash cows could be a YouTube ads and your dogs might be LinkedIn promoted posts. Let's take a closer look. If we say Google ads or a star. There, very high reach. And the cost-per-click because of the scale of the platform is relatively low, particularly if you get your marketing right. This enables you to target audiences really well based on SEO and also on the fantastic data that Google has behind their Google Analytics. And this enables you to focus on intent, which results in engagement with your audience, so you get a great return on your investment. Instagram marketing, however, is a less-developed platform, but it's still growing very fast. So it may not be as profitable, and it may frankly still be unclear whether more investment will return higher marketing engagement. Hence, we put it down as a question mark. Youtube ads well, YouTube's are very well established platform. In fact, it's the second largest search engine, but it's not growing as fast as it was. However, you get good returns from investing on that platform. Therefore, you don't need to put a lot of money into it and you get a higher return, which makes it a very useful cash cow in your marketing portfolio. Then if we look at LinkedIn promoted posts will. Linkedin isn't really a selling platform. So there's not a lot of growth there. There's a lot of return on investment. And because the focus of the platform really isn't advertising directly to audience, says, and the audience doesn't respond well to promoted posts, you get a low volume of leads and a low return on your investment. So the recommendation there is, well, we should discontinue it because it falls into the Dogs category. Again, another example of how you can take these models and make more of them. And really with something like the BCG matrix, the options are as wide as you can imagine them to be. If you have two axes you can create, you can use this framework in very many different ways to help you develop your strategic thinking. 47. 48 Boston Consulting Group (BCG) Matrix Template: Here I have prepared for you a template that you can use to do your own BCG matrix analysis. Just to remind you, the Boston Consulting Group Matrix is a framework to enable you to assess the value of products in terms of growth, which is their market share and competitive advantage. So on the one side you're looking at, at the growth of the market that the products and services operate in. And on the other axis, you're looking at the market share that the product or service or business unit has. The question you're trying to answer is which product or business units are worth further investment of resources and finance. So you have the four categories, which are the stars, these are the most profitable, have the largest market share there in the markets with the highest growth rate. You want to invest in these products and business units. They may require further investment in order to maintain their position, but they nonetheless are highly profitable products and business units in your firm. Question marks have the potential to increase their market share, but they're currently not very profitable, although they are in high growth markets and they will require investment if they are to become stars. Cash cows have high market share in low growth market. So their cash generative because you don't need to invest any further major investment in them. So they throw off cache. This cache can be redistributed strategically to other products or business units, hopefully to turn question marks into stars. Don't have low market share and are in low growth market, So they have little potential. They may have cash generative products. They may also be strategically useful to help other products and services in their markets. However, the long-term future is not positive. They're probably not worth further investment and divestment. Divest divestment or closure is the likely long-term answer for these products or business units. So here you can see the matrix. You've got the stars on the top left. You have the question marks, top right, high market share and low growth. You have the cash cows and then the low market share with low growth you have the dogs. What I've done is I've provided you with this template which you can very easily print out and use. And basically brainstorm where you think your business units and your products fall. So that's my little matrix template for you. I hope you find it a useful tool. As you can see, it's printed on white paper, so it's very easy to print out. And I hope it's going to help you when you conduct your own BCG matrix analysis, which is well-worth doing. 48. 49 CASE STUDY EXERCISE BCG MATRIX Facebook: And now I have a case study exercise for you and I'd like you to conduct BCG matrix case study exercise on Facebook. This, the aim of this exercise is for you to use the BCG matrix template I've just provided for you and conduct an analysis of Facebook's product portfolio, at least some of its products using the BCG matrix. Now think about Facebook's portfolio. Businesses select unlimited number of them because the idea of this is to learn how to use a matrix rather than it becoming an expert on Facebook. And see where these individual businesses fit in to the BCG growth market share matrix and which stars, which are question marks, which cash cows, which adults. Now, I prepared my own BCG matrix case study on Facebook, which you can watch and have the PDF slide deck to in the next lecture. But before you do that, I'd like you to give some thought to the exercise. Of course, as there's no correct answer to this. Make your notes and then compare them with the points I come up with. And I'm sure you're going to identify issues and companies that I have not considered and I have points that I've missed. And I'd be fascinated to know how you get on. So good luck with your analysis. It's a useful exercise. The idea is for you to become familiar with applying the BCG matrix to a real life business. That's the case study exercise for this particular exercise is the BCG matrix analysis of Facebook. 49. 50 BCG Matrix Case Study Facebook: Is take a look at a BCG matrix case study. In this particular case, we're going to look at Facebook. Now the Facebook obviously is a very complex business. And all I want to do is to simplify things in a very straightforward manner. We're just going to take a look at four of Facebook's main applications, if you like, and use them to characterize the different aspects of the BCG matrix. The four applications. We're gonna take a look at our Instagram, Oculus Rift, which is the virtual reality headset, WhatsApp and Messenger. And we want to see what the BCG matrix matrix can tell us about these four applications. The star in this case is Instagram. Instagram has been a great success. It's been growing very fast. I think it's up to about 700, maybe it's more than 700 million monthly users. It has a very high market share in its market, and it continues to grow very quickly. Now it's done this by remaining focused, but there has been considerable investment in new capabilities, things like direct stories and Instagram TV. So it has all the characteristics of a star. It's in a fast-growing market and it's holding a large market share, but it requires considerable investment to retain its position. The question mark is Oculus, which is this virtual reality hardware and software platform. Facebook bought this for over a billion dollars in the first place. And it really is still hanging out there waiting to realize its potential. It will need considerable R&D investment to continue to grow. But the market as a whole has not taken off in quite the way it was envisaged when it was acquired. So that's really the key to the question mark. But there is still a massive potential for VR. And indeed, Facebook have indicated they're planning to invest $3 billion in oculus. Now this is a clear sign of a question mark where there's a strategic intent to move it from a question mark into a star with very considerable investment. And the idea is he wants to capitalize on a faster growing market, but at the same time, it'll probably contribute significantly to the growth of that market. And in doing so, we'll take a leading market share. Whatsapp is the cash cow. Great application, but growth has leveled off. But it's still retains a very large market share in its application area and has few direct competitors. This means that little further investment other than keeping it up-to-date and keeping the technology current is required. But it has the classic cash cow characteristics of having the very large market share, albeit in a slower growing market. And therefore it should be throwing off cash. The dog is messenger now, since being overtaken by WhatsApp as a Communications app, it has a much lower market share with little growth potential. It really survives because it adds functionality, some competitive advantage to the Facebook platform as a whole. Otherwise it wouldn't have a role and it shouldn't be it should have been closed down because it's been overtaken by WhatsApp, but because you continue to be able to use it as a function of the Facebook platform. It has a strategic value to Facebook, which is why it's survives. So very simple little case study, but it just goes to show if you look at any particular application or any particular product in a product suite and you ask these questions about its market share. And it's the growth of the market. It you start to find it's straightforward to place the products, the services, the applications, whatever it is, into the appropriate BCG matrix box. 50. 51 CASE STUDY EXERCISE BCG MATRIX Apple: In this second case study exercise, I would like you to apply the BCG matrix to Apple. Now Apple is one of my favorite companies as you probably have gauged. And I really enjoy their products. I love the way they compete. I think what they do is truly amazing. And what I want you to do is to think about Apple's product portfolio and use the BCG matrix template that I've provided for you to conduct an analysis of Apple. So think about Apple's portfolio businesses, you don't need to include them or just sec tick, tick 3456, whatever you want to do. C, way you think they fit in the growth share matrix and start thinking about the characteristics of those businesses as to why they go where they go in the matrix. Now I prepared my own BCG matrix case study on Apple. And you can watch this case study of mine, my solution if you'd like to the case study. The next lecture. And I've also provided the PDF for you to download in the usual course as well. There is a course as over, no correct answer to this. You'll have your thoughts, I have mine. Make your notes and then compare them in mind. How many issues have you identified that I have missed as ever, always happy to hear from you and good luck with your analysis. So this case study exercise is to apply the BCG growth share matrix to Apple. 51. 52 BCG Matrix Case Study Apple: I wanted to take a look at Apple as a BCG matrix case study. Again, we only keep this fairly high level and fairly simplistic, but it does make the point as to how you can use it when putting the BCG matrix on top of a real business. So we're gonna look at some of the main products in Apple's portfolio and evaluate them with the matrix. Of course, this is a major simplification. Apple has a very complex multi-billion dollar business, but I'm just using Apple as an example to illustrate how to apply the BCG matrix to a business. And here you can see on the screen, we've picked out five products. The iPhone, the iWatch, the iPad, the MacBook, and the iPod. And we're going to interpret them in the light of the matrix. The iPhone is a star. It has a high market share in a growing market. And although it's been doing very well for the last whatever has been 15 years since it's been out, you question whether in 2021 the market is moving towards maturity and market saturation? Or is it because these, these smartphones continue to evolve at such a rapid pace that actually they're still remaining in that style category because the market still remains high growth. Can the continuous investment and innovation keep the market growing and the iPhones market share. Of course, you have as well different markets globally at different stages of development. And whilst the market in the US for iPhones may be relatively saturated, and in the UK, there's certainly huge potential for the iPhone to sell in China, in India, and in other emerging parts of the global economy. The iPad and the MacBook, cash cows. In terms of this model, they have a high market share in mature markets, they require little major capital investment. The products continue to evolve, but essentially they are very profitable products and they produce cash for other parts of the product portfolio. The iPod is the portfolio dog. In a shrinking market with low market share, the iPod had OUT used its useful life. And with live streaming of music moving onto smartphones, this has accelerated the decline of the market for iPods, and in fact, the product was discontinued. The iWatch is the question mark here. It's an interesting, I mean, I've got one, I actually love it. It has the potential to become a star. It's increased functionality, particularly the health monitoring capabilities, may help it to grow its market share and for the overall market for smartwatches to grow as well. But it does continue to require investment for the foreseeable future. And Apple will have to continually monitor its performance very carefully. So you can also look as a further evolution of the BCG model as at products sales when you're doing these case studies to see how they can give you more information about the performance of your business. And by using circles which are proportionally sized to the level of relative level of sales. We can see which are the really important products and which are the less. So. You can see here that the iPhone has this great market share. Very high sales, but compared to the iWatch. And clearly the strategy with the iWatch is to grow that circle to make it larger, which will then pull it across into the Stars category. The iPod, equally, a small and declining sales base, and therefore the circles very small. Using these proportionally sized circles enables you to get another dimension of information out of the BCG matrix model. So that's the Apple case study. Again, useful to use real life examples. You can understand the products and you can see how straightforward it is to place them on the quadrant squares of the BCG matrix. 52. 53 CASE STUDY EXERCISE BCG MATRIX Unilever: In this third case study exercise with the BCG matrix, I want you to look at the fast-moving consumer goods business Unilever. This is another BCG exercise. Use the matrix template provided. And I want you to think about the products that Unilever has because products has an enormously wide product portfolio, I think over 400 different products. But think about why it has all these products and what it's doing for them. And the BCG matrix isn't absolutely ideal tool for looking at a business like this, which has got such a wide range, such a diverse range of products. Now of course, you don't have to look at all of them, just considered a limited subset, but start thinking about why they have this large portfolio and how they manage them and see how the businesses that you identify fit into the growth market share matrix. Now, I prepared my own case study on Unilever, which you can watch and have the slide deck to the lecture immediately following this one. But what I really want you to do is spend a little bit of time thinking about Unilever, thinking about a fast-moving consumer goods business which has got such a wide portfolio of products. And think about how that product property is managed in the context of the BCG market growth share matrix. Now of course, as ever, there is no correct answer to this. Make some notes of your own, give it a little bit of thought, and then watch my solution to the exercise and see how the two compare and see what you have come up with that I've missed and maybe you'll get some ideas from my solution as well. So I hope you enjoy the exercise or good luck with it. And this is all about applying the BCG matrix to fast-moving consumer goods business Unilever. I hope you find it profitable, enjoyable, and have a lot of fun with the exercise. 53. 54 BCG Matrix Case Study Unilever: In this case study, we're going to take a look at Unilever, one of the world's largest fast-moving consumer goods companies in the context of the BCG matrix. Now, unilever has over 400 different brands and making it, I think it's the third largest FMCG business in the world. Its top 14 brands have sales of over a billion dollars each. So the question is, why does Unilever retain the other 380 plus brands and not just focus on the 14? Well, the answer is because he's managing a portfolio and it continually needs to get businesses coming through to become the stars of tomorrow. And that's why the BCG matrix becomes so useful in understanding its product portfolio and how it operates its business. The star example we're using here is Lipton Tea. Now Lipton is one of the most successful brands of t in the world. And it has very high market share and also it's in growing markets. Unilever continues to invest both in marketing but also in product innovation. It launched a new T processing technology, which in the space of two years added 5% to sales. So it shows the investment in leptons continues to keep it and to keep it being a high market share, highly profitable business, and therefore a star in the portfolio. Marmite, which is not everybody's taste, is a cash cow mites in a mature market, but it still has a high market share in its market segment. It requires little further product development. And the surplus cash flow from it can be in reinvested than to bring through other portfolio products. It exists in a mature market in which it has significant market share, which is almost the definition of a cash cow. And investment is limited really to only advertising campaigns. The question mark is T2. Now T2 is a fast-growing premium brand in Australia, so it's a newly launched brand, relatively young. It's still requires investment in order to grow its market share, but it's in a fast-growing market segment for premium t. And this opposite, the future market potential and the future potential to move from being a question mark, two, big, big star in the portfolio. The dog example is slim fast. Now this, these are dead end products where market changes have made the product less attractive. So moving from dieting products to things like the 52 diet and different dieting strategies has meant that slim fast has really had its day. Now the cashflow purposes for Marmite, I bet you're invested in T2 rather than trying to support slim fast and it's declining market segment. And in fact, unilever sold slim fast to capital to enable it to focus on other brands. With such a large product portfolio, universe, Unilever needs to be constantly monitoring its portfolio. It needs to be making acquisitions of young brands or developing new products of its own for emerging and fast growing market segments. And this keeps the product life cycle of new brands developing to ensure that its future question mark brands turn into the stars of tomorrow. This case study also throws up some interesting points. Firstly, Unilever's scale and market power may distort a market. Its investment in a brand might stimulate the growth to the extent that leptons may appear to be a star when in fact, in a mature market is actually a cash cow. Because unilever operates globally, the stages of market development are likely to differ in different geographies. So developed markets may be ahead of less developed markets. The US may be ahead of Australia for completely different reasons. The UK may be behind the US product, which may be a star, a star or a cash cow in one market, may only be a question mark in a less advanced market. Advanced in the sense of the market development in a different geographical market. That's a quick look at Unilever as a BCG matrix case study. And again, it illustrates how you can take very complex product portfolios and distill them down to these four quadrants to enable you to understand what's going on inside the business. 54. 55 Competitive Advantage Deriving Strategy from Inside the Firm: I want to turn our attention now to competitive advantage. In this section, we're gonna look at how we derive our strategy from inside the firm rather than from being influenced by external forces. Sustainable competitive advantage on this basis derives from the internal resources and capability of the firm. This resource-based view, RBV, of the competitive advantage contrasts to the study of the externalities of a phone, a firm, as exemplified by Porter's five forces. On the other hand, it's complimentary to Porter's value chain analysis. If we are honored to identify successful strategies, we need to be able to focus them around strategic capabilities of the firm where it has definable and identifiable, sustainable competitive advantage. We start with an understanding of what we mean by core competency. How resources can be turned into capabilities, which in turn enable a firm to create a sustainable competitive advantage. Otherwise, a core competency. Because if it's not a core competency, but it's still a very valuable capability. It has only tactical value, or strategic value is capability. It isn't a core competency of the firm. And this will be explained, will then use ratio analysis to identify which capabilities are core competencies through defining whether or not they create sustainable competitive advantage for the firm. When we do this, by asking the four questions related to VRIO analysis, whether they're valuable, rare, inimitable, that and copyable, or their organization wide. We use this to help define and understand which capabilities are core competencies and which are not. I will then bring in an Apple case study to illustrate capabilities which are core competencies. And some capabilities which, although still valuable, do not meet all the VRIO criteria and therefore are not core competencies. The end of the session, I want to wrap up with a discussion on the unique selling proposition, the USP. And this enables us to define the key characteristics of our products that are most important to our customers. And ensure that these become the focus of our marketing message as well as our growth strategy. So as you see, we're turning the whole emphasis now on the strategy to looking inside the firm, looking at the resources, the capabilities, and defining the core competitive advantage in the core competency of the firm from within. And this gives us a better understanding of what we can achieve with the firm where we should be competing. And this can be then used to influence the strategic direction of our business. 55. 56 Core Competency: I want to take a look now at core competency. Core competency was introduced by CK Prahalad and Gary Hamel. And in 1990, Harvard Business Review article, the core competence of the corporation. I can remember when I did my MBA, which is between 19911993. This is one of the really hot topics that we looked at when we were discussing business strategy. They defined core competency as a harmonized combination of multiple resources and skills that distinguish a firm in the marketplace. These comprise the foundations of the firm's core competency. Core competency has three characteristics. It provides access to a wide variety of markets. It makes a significant contribution to the perceived customer benefits of the end product, and it's difficult to imitate by competitors. Now, a core competency of Federal Express, for instance, is logistics management. Prahalad and Hamill demonstrated the core competency leads to the ability to create core products, which in turn are the basis for many other products. Now we're gonna look at this in terms of Apple in a case study, in a lecture or two's time. But these core competencies are developed by continuous improvement rather than, than by a single major breakthrough. And if you think about some of Apple's products which have evolved and been continually built upon over many years. You can understand where that's coming from. Prior Ladin hand more defined core competency as the engines for the development of core products and services. Core competency analysis is the process of identifying a firm's core competence. It helps you to develop strategies that grow market share profitability, and innovation. When you're trying to identify core competence, you have to start with resources and capabilities, which are the building blocks on which core competencies are built. Resources are the inputs to affirm in the production process. These can be human, financial, technological, physical, or organizational. The more unique these resources are, the more likelihood the firm will have core competency. And resources should reinforce the firm's strengths and mitigate its weaknesses. Capabilities are the result of the organizational system, process and controls applied to resources. They are intangible. The firm should be creating strategies to develop new resources and new capabilities all the time. You then have to ask yourself the question, does a capability create a sustained competitive advantage? If the answer is yes, then it's a core competency. And if the answer is no, then it's a strategic capability. And that's the difference. Core competencies may include technical superiority, such as Google in their search engine. Customer management, where Zappos had the most amazing customer service and efficient processes such as Toyota, where it's just in time system developed by Kenichi Ohmae in the 1960's. Each firm has a specific area which it does better than its competitors, and which it's very difficult for its competitors to copy. Now, core competencies connected to Porter's value chain, as core competencies are a subcategory of the primary activities. In contrast to Porter's five forces, where the emphasis is on the external forces on the firm, rather than looking at the internal competencies. Core competency focuses on internal capabilities of the firm is the strategic driver. And this is a very important distinction because a lot of the external analysis that we've looked at has all been looking at the factors around the firm. These factors for understanding how the firm can develop sustainable competitive advantage come from within the internal resources and capabilities of the organization itself. And to this extent, external forces are largely excluded and ignored. So the focus remains on the internal. That's an introduction to core competency. It's a really important part of how firms build sustainable competitive advantage. And we're going to develop this, this idea through this section. 56. 57 VRIO Resources to Competitive Advantage: In order to further develop our thinking about core competency, I wanted to introduce you to the VRIO framework. Vrio, where we're gonna look at how resources contribute to competitive advantage. The VRIO framework takes an internal perspective on the creation of competitive advantage. In contrast, as we've already said to Porter's Five Forces, which focuses on external factors. Now this approach is also referred to as the resource-based view, RBV, which argues that the resources and capabilities of a firm are essential to its competitive advantage. We've seen this diagram in the previous lecture. How does the firm make the most of organizational resources? These are all its assets, capabilities, organizational processes, firm attributes, information and knowledge. And we saw these aligned up and we argued the question for how you defined capabilities which derived from resources as either core competencies or strategic capabilities. Now resources pacified in many ways, but here's an attempt to cover some of them. They can be tangible. Things such as equipment, machinery, land, buildings, even cash. They can be intangibles such as trademarks, brand reputation, patents, patents, licenses. They can be physical, human, or organizational. Now in order to transform these affirm needs for attributes. And this is the VRIO framework. These resources need to be valuable to the firm. They need to be rare, they need to be inimitable, which means they are very difficult to copy or imitate, and they need to be organization wide. These characteristics can be used when critically evaluating Porter's value chain. For instance, in order to enhance your perspective of a firm's strengths and weaknesses, you apply those four criteria, questioning criteria when you're looking at the elements that primary activities particularly, but also the secondary activities in Porter's value chain. Let's take a look at these one-by-one and understand how all four of them need to apply in order for the resource to be truly source of competitive advantage. The first question is, is the resource valuable to the firm? Well, if the answer's yes, Well, that's great. It's a strength. But if it's no, then you need to go and find other resources that are valuable. Because if you already have non valuable resources, then you're going to be at a competitive disadvantage to your competitors. So the second question is, is it rare if the resource difficult for your competitors to acquire? If the answer is yes, then it's both valuable and strength. If it's no, it may be valuable, but it's common and it's easy to acquire. Therefore, at best, it provides you with competitive parity. Is the resource inimitable? Is it difficult or expensive to imitate? If it's yes, then it's valuable and it's a strength. But if it's no, although it may be valuable and rare, it's easy to copy, affording only temporary competitive advantage. The fourth question is, is it organization-wide? Does your firm exploit this resource? If the answer is yes, then the resource creates a sustainable competitive advantage, which is at the bottom. If it's no, then although the resources valuable, rare, and inimitable, it's unused. This means that your firm is not organized to take advantage of something that it has, which could give it sustainable competitive advantage. The advantages of the RHIO model are that they're easy to apply. And you can, you can use the model to identify unused competitive advantages, which can then be used to create sustainable competitive advantage. Great. But there are some disadvantages for, Firstly, in smaller firms and startups, they may not have sufficient resources to be able to identify any sustained competitive advantage. Secondly, the world is changing very rapidly, particularly in the technology sector. And it's actually hard to argue that a competitive advantage is sustainable. You have to work so hard to keep it. The model does not consider factors such as marketplace changes. So external factors which affect the potential benefit. That's the RHIO model. Helping you to understand how resources have to meet the Rio criteria in order to provide the firm with sustainable competitive advantage. And this provides you with a framework which you can use to add, analyze, and apply to whether a particular resource within a firm is truly providing sustainable competitive advantage and it's a strategic asset. 57. 58 CASE STUDY EXERCISE Core Competency & VRIO Apple: Now I have another case study exercise for you, and I want you to use the core competency framework combined with the VRIO matrix. And take a look at Apple. This is an exercise for you to use what we've just been talking about in terms of the core competency analysis. And overlay it with the Rio framework to conduct an analysis of Apple and see if you can evaluate how they create their core competencies and what these are. Now if you remember, you've got the combination of resources and capabilities, which when put together in a unique way, can create a core competency or maybe not, maybe it only concur, creates a strategic capability. That judgment is really down to you. You need to evaluate how they harness their resources and capabilities to create core competencies. As we discussed in the lecture. This analysis can then and should then be reinforced with the VRIO analysis. Understanding what is valuable, rare, inimitable, difficult word to say, and organization wide. And if it meets all those four criteria, then it counts as a sustained competitive advantage and a core competency. I've prepared my own apple core competency stroke Rio case study, which you can watch in the following lecture. And also be able to download the associated slide deck with it and see how it compares to the thoughts and ideas you came up with when you were doing your analysis. Of course, as ever, there is no correct answer to a case study, but make your notes and then see how many issues you have identified that I didn't pick up on. So good luck with your analysis. I hope you find it enjoyable. It's a great way to learn these frameworks is to actually do a little bit of thinking about what they're trying to tell you. And then by providing you with a case study, so-called solution, it will help you to reinforce their learning lessons and take that framework onboard. 58. 59 Core Competency Case Study Apple: In order to better understand core competency and to tie in the Rio analysis, we're gonna look at a case study involving one of my favorite firms, Apple. Understanding a firm's core competency will enable you to understand where the firm can introduce and develop new products, which is the dimension of the Ansoff Matrix. You see how I like tying in these models. What processes to outsource, how to build competitive advantage in terms of cost or quality, which is one of Porter's generic strategies. And how to create new markets or enter emerging high-growth markets. Let's take Apple as an example. Apple's core competencies are focused around design, the design applied to all their amazing products. Technology. They have differentiated products which are produced through innovation and continuous improvement. Just think about the evolution of the iPhone, which was highly innovative when it came in, but it's continually being improved on ever since it was probably produced. And it's now on an annual cycle of improvement. Their marketing, which is essentially done while they have an advertising cabinet Pam campaign. Greatest marketing is done virally and through customer satisfaction and word of mouth. Brand positioning with superior price and placement. And they're secrecy about new products, they're launches. You'll recognize some of these characteristics and Apple. But let's have a look at the Rio analysis and see how this applies to our apple. If you recall, we're talking about applying for test criteria to a resource, to his decide whether it provides sustainable competitive advantage and therefore is a core competency. These four criteria are, is the, the resource valuable, Is it rare, inimitable, and is it organization-wide? Now if we apply these criteria to Apple's business, we find that all four criteria applied to the fact that it's a globally popular premium brand. That they have systems to create rapid innovation. They have an ecosystem of complimentary products within a closed garden. So they have their own operating system. They don't rely on other people and you can't use a Microsoft computer within Apple operating system. They have access to user information. If you think about all the information they have in the ice store and iTunes, they have artificial intelligence capabilities which enhance their ability to make use of that information. And of course, they have a global distribution and sales network. Now the VRIO criteria applied to all of those points. However, some of Apple's other competencies meet some, but not all of the criteria and therefore are not core competencies. Their business process automation is valuable, but it's common in the industry. They are competitive. Employee compensation package is important to maintain a skilled workforce, but similar packages are available at Google and Microsoft. Their HR capabilities which supports their innovation, are common in other firms. And the diversity of their product mix is an important business strength, but it's not a core competence. It's a strategy to reinforce that sustained competitive advantage, but it's not in its own right, a core competence. Microsoft has the same strategy. So the consequence of Apple's core competency has been that it's developed a very loyal customer base who are highly unlikely to switch to a competitor's products. That's one of its core competencies is loyal fanbase. However, Apple uses its brand and its capacity to rapidly innovate, and this helps it to counter the aggressive competition from firms such as Samsung, Huawei, and algae. Diversification on the ion it is strategy which reinforces that long-term sustainability of its market position by our enabling it to identify new opportunities where it can apply its core competencies. Things such as the development in the rollout of the iStore. It's advances in artificial intelligence and its possible foray into self-driving cars. That is an example of the Apple case study where we've looked at some of the attributes of Apple which are core competencies. And we've tested them against the VRIO criteria. And we've looked at some other competencies which are not core competencies and source of sustained competitive advantage because they don't meet the VRIO criteria. 59. 60 Defining the Unique Selling Proposition: Let's talk now about defining the unique selling proposition. Building on core competencies, competency and VRIO analysis, we can find a way to defined the unique features of a product which enable that product to differentiate the firm from its competitors. Can we define the unique selling proposition of the product and of the firm? Well, the answer is yes, we can. The unique selling proposition in the USP is defined as the key feature or perceived benefit that differentiates a product from other competitors. If we consider the product life cycle in the early stages, USPS are important. But in a fast-growing market when there's plenty of space to grow and the competition isn't that intense. Usps may not be absolutely critical, but as markets mature and growth slows and the competition intensifies, the USP becomes an essential differentiator to protect sales from the competition. There are four steps to defining a USP. First of all, step one, consider what his valuable to your customers. What do your customers find the most important factor when making a purchase? Price, quality, functionality, service. Step to rank these criteria in a list and include your competitors products in the list and rank them alongside your products. This will enable you to evaluate where your product ranks in the market for each of the criteria against your competition. Step three, determine the strengths of your organization. Which criteria do you excel at? Which criteria do you execute better than your competitors? Which criteria do you not execute better? How can you communicate these excellence criteria to your customers through your marketing channels? Then the step four, which is normally called defend your turf, is to take the appropriate defensive action, whichever criteria define your USP. How can you take steps to ensure that you maintain that competitive advantage? And of course, you have to monitor this on a continuous basis. Here's another way to look at defining USPS. Step one, we list the outstanding criteria or the product. You've got the circle at the top. Step two, you analyze your competition. Then in step three, you define your customer's needs and wants. Then you work out where the three sets of criteria overlap. This defines four key areas. The winning zone where you can see the green tick, which is where your products critically meet the customer's needs. And once the losing zone is where your competitors out-compete you, that's shown with the red cross. The risky zone is where you lack differentiation from your competitors and you don't want to be there, then the who cares zone are the common areas which do not meet customer needs. So don't worry about them. Refocus your efforts on those areas, those criteria that do meet customer needs. If we look at the types of USPS, we can follow Porter's generic strategies and we can compete on price or on product differentiation. Price, of course, does not necessarily mean cheap, but it does put the emphasis on value. Differentiation is where you can differentiate on quality, superior features, functionality, durability, etc. But you can also offer other differentiating factors such as service, as we've already seen with Zappos. Usp brings our search for resource-based value full circle. We started out by looking at core competency to help us understand what we do best. The real analysis helped us analyze our firm's capabilities to identify those which create genuine competitive advantage from the resources and capabilities inside the organization. And then the USP enables us to identify those unique Creek criteria when compared to our competition and be able to communicate them to our customers. So the USP helps you to focus in on the criteria which absolutely critical, which you will be able to better understand having done the core competency and the VRIO analysis. 60. 61 ADL Matrix Understanding Your Competitive Position: I want to take a look now at the ADL metric matrix, which helps a firm understand its competitive position in the market. The ADL metrics is a framework to help businesses clarify their competitive position in the market. There are two critical factors on the axes. The amount of influence the business has in the market and the age of the industry. A firm's position in the matrix can help management decide then on the appropriate strategy for the business. The ADL metrics combines the industry life cycle model with the strength of the firm's strategic position. And we're gonna go through these step-by-step when we're looking at the life cycle and you'll be familiar with this. The industry maturity is defined as embryonic growth maturity and aging. When we talk about embryonic, we're talking about new markets which have got very innovative products. And they're at a very early stage. So there are relatively few competing firms. There's rapidly growing customer demand and products sell at a high price. As the lifecycle progresses, we move into the growth stage where industry is more established, the market is larger and still growing. Of course, as a result, there are more sales opportunities, but this then attracts more market entrance, which increases competition. But at this stage, prices are still fairly strong because there's plenty of market growth to accommodate the new competition. As the market moves into maturity. We have a well established industry with stable market conditions and established customer basis. There's less R&D required typically, which means that businesses are cash positive and profitable. However, because of the stability of the market, I either lack of growth. Nonetheless, competitors trying to grow their market share prices or come under pressure because of the competition. And people start competing on either cost or differentiation. And the competition intensifies, the prices decline. You can see how the market is evolving. In the final stage, industry maturity is defined as aging. Now the industry is in decline, the demand for products and services is falling. Customers are moving away from these products into more current, more up-to-date, newer, more innovative products. And organizations. The firms in the market are either consolidating or exiting. We can then consider the competitive position of the firm which is on the vertical access. The first of these is dominant. Now this is a rare position and it's generally not sustainable. The firm will be a market leader, but it might have monopoly position or indeed protected technology. At this point there is little or no competition. Products may be brand new or simply unknown. And the firms are price gives us they are setting the price and the price can be high because they can basically charge whatever they want. If the market is profitable and barriers are low, new entrance will begin to appear. In a strong market position. The firm has a large customer base. There are other firms in competition, but the firm's position is not influenced by these competitors because of its strength. It has competitive advantage, unique selling propositions, and these enable the firm to maintain his position in the market. It has significant freedom of action when choosing go-to-market strategies. As strength of opposition declines. Now we can describe it as only favorable. We're operating in a competitive, fragmented market with no clear market leader. Firms definitely rely on either differentiation or price value to maintain a stable market position. And they have limited control over the market. When they have a tenable position, which is even weaker, they have a market, minority market share, and almost certainly a niche market position. They are adopting a focus strategy in a narrow market. It tends to be highly competitive. Firms will strive to either differentiate or to be the low-cost producer, but they will still be doing it on a narrow basis. And they will depend on a limited set of USPS to hold onto the share of the market that they do have. Finally, in a weak position, a firm is too small to compete effectively. It is suffering consistent declines in market share and probably has limited to no profitability. The firm has to make the decision whether to remain in the market. When you put these on the grid, it's fairly straightforward to see how it works. First of all, you identify the maturity for each stage of the business. Then you assess the competitive position of each business or product. And then you can plot that position of the matrix. The ADL matrix does have its limitations. The length of a life cycle of a product or business does have a finite span, but it's not set. It can be long or it can be short. And this is influenced by a number of factors, including the firm's competitors and the level of innovation in the market, the competitive position of the firm. In addition to this, is a subjective assessment. So there's no quantifiable way of measuring this. However, the model is a great starting point for evaluating the competitive position of the firm. The model can be used at any level in the firm and on a product by product or service by service basis, thereby creating a map of the competitive position of the portfolio of the firm's offerings. That's the ADL matrix. This takes evaluation of competitive strategy to another level. We are able to understand how to be competitive. But now we can actually map and see where of competitive, how strong up as competitive position is in the market and relative to the life cycle of the market. 61. 62 ADL Matrix Template: They have prepared this ADL matrix template for you so that you can download it and conduct your own ADL matrix analysis. To refresh the ADL matrix enables a firm to assess its competitive position in the market. There are two axes, the industry maturity, which is the lifecycle model, and the strength of the market position. The model can be used to evaluate how a firm can retain or improve its market position and better understand the competitive forces around IT. Industry maturity is defined as embryonic growth, maturity or aging or decline. The strength of the market position is described as dominant, strong, favorable, tenable, or weak. And the exercise is to position your product, services, or business units on the grid. And then discuss and devise the appropriate strategies for each given its competitive position and market maturity. So this is the template that you need to work with. And in each square, for each unit, I suggest you start to make a note of some of the business strategies you can apply to that business unit or product. And of course, you can use one page to position all your business units or all your products so you can see what your product or business unit portfolio looks like. That's my matrix ADL matrix template for you. I hope you find it useful. Certainly do the exercise and see what strategic insights you can derive from during the study using this framework. 62. 63 Ansoff Matrix How to Grow Your Business: Let's talk about some business strategies you can implement to grow your business. And to do this, we're going to look at the Ansoff Matrix. The Ansoff growth matrix, as it is properly known, was first introduced in the Harvard Business Review in 1957 by mathematician Igor Ansoff. It's also known as the product market matrix. It shows the strategic opportunities for growth available to an organization. This is what the matrix looks like. It looks at existing products and new products and existing markets and new markets. And from this, it identifies four possible strategies. Market penetration using existing products and markets, which is essentially growth by market share increase. Market development where you're taking existing products to new markets. Product development, where you're introducing new products to your existing markets. And diversification, which is growth by taking new products into new markets. The more the firm moves away from its existing products and markets, as you see with the red arrows on the screen, the greater the risk in the strategy. So if we look at each of these strategies in turn and we can expand on some of their characteristics. We'll start with market penetration, which is selling more of the existing products to your existing market. So you're looking at increasing your market share. Now you can do this by cutting prices, by improving the distribution network, by investing in your marketing, by increasing your production capacity, or by acquiring a competitor effectively consolidating the market. A good example of this is Coca-Cola, which invests heavily in marketing to further penetrate existing markets. It also seeks to grow its channels by doing distribution deals with supermarkets, restaurants, stadiums, etc. Product development may involve adding new features to an existing product or launching new products alongside an existing product range. So you do this by investing in research and development. So you can develop new products. You can acquire a competitor's product and use it to develop new products. You can setup strategic partnerships with other firms to gain access to each other's distribution channels or brands. Now a good example of this is Apple, where it is continually updating its iPhone every year and there's a new iPhone comes out that continues to evolve and become more and more appealing and complex. And also you see pharma companies all the time investing in R&D to develop new drugs. The third option is market development, where you can sell an existing product to new markets. This is most successful when the firm owns proprietary technology which can be labored into a new market. Where consumers in the new market have disposable income and where consumer behavior in the new market is not too far away from the existing market. Now strategies include catering to a new customer segment, expanding into a new domestic market, i e ae, regional expansion or entering an overseas market, international expansion. Ikea started off in Scandinavia and then exported its business model into new geographies, including the Middle East and the far east. New markets and new products means diversification, and this is often unrelated to existing products. But there are three types of diversification. You can have concentric or horizontal diversification where a new product is still somewhat related to an existing product. Conglomerate. Diversification is where the products are completely unrelated. Vertical diversification is you're moving backwards or forwards in the value chain to take over activities previously controlled by third parties. That's a look at the Ansoff Matrix. It sets out the four generic strategies for business growth. And again, it's a useful framework to think about how you're going to grow your business in the markets that you want to operate in. 63. 64 Organic vs Inorganic Growth: While we're taking a look at growth strategies, Let's look at a comparison of organic versus inorganic growth. Another perspective on growth strategies is consider these two options, either growing a business organically or growing it inorganically. But what do we mean by that? Well, organic growth occurs when a business grows its sales and profits using its own resources without recourse to external assistance, notably, through mergers and acquisitions. The main focus of organic growth are the existing core competencies of the firm. Although these can be stretched when some of the Ansoff Matrix growth strategies are applied, as we found in the previous lecture. Inorganic growth involves merges and acquisitions. This enables growth to be accelerated by taking over another company. And it can also help companies who are in financial distress as they can be acquired and refinance buy solvent competitors. If a company is focusing on market penetration than organic growth may be sufficient. But of course, market share can be increased through the acquisition and consolidation of a competitor. If any of the other three and soft strategies, growth are being followed, then growth by acquisition may mitigate some of the risks of entering new markets or selling new products by acquiring a company which is already active in that area. Conglomerate companies, of course, often expand through acquisition and make a virtue of acquiring a portfolio. Businesses which may have very few common market or product characteristics, which is effectively the bottom-right option in the Ansoff Matrix. However, bigger is not always better. And merges and acquisitions themselves carry their own execution and implementation risks. And of course come with financial costs. How often have much vaunted earnings enhancing M&A deals lead to a business combination which subsequently makes smaller profits. That's a quick look at organic versus inorganic growth. It's certainly a perspective to consider. And of course, when you're building out your growth strategies, it's another dimension to how those objectives could be achieved. 64. 65 Internal and External Growth Strategies: I want to delve further and deeper into the discussion of internal and external growth strategies. Because it's absolutely pivotal to this whole strategic discussion and the strategic options which companies face. As we've seen, the Ansoff Matrix identifying for growth strategies, market penetration, market development, product development, and diversification. As we saw, as you move into a new quadrant and further away from where you are, the level of business risks that you face increases. You have a range of options. With market penetration, you're selling more of the same existing products to existing markets. With market development, it's more existing products to new markets. With product development, you're selling new products to existing markets. And then when it comes to diversification, new products to new markets and soft identified three types of diversification. Concentric stroke, horizontal diversification, where you enter a new market with a product which is somewhat related to accompanies existing products. Amazon's are very good example of this conglomerate diversification where you enter a new market with a new product which is completely unrelated to accompanies existing product. Essentially, this is a company which buys a group of unrelated companies forming a conglomerate. Vertical diversification, which is a move backward or forward in the value chain by taking control of activities that used to be outsourced to third parties suppliers. Now within the context of the Ansoff Matrix, we can take the discussion further. Because growth can be either external or internal. You can apply those criteria to each of the four quadrants. This therefore connects these two concepts and you have to overlay them and think about growth strategies through the prism of both dimensions, through both factors. You need to look at the Ansoff Matrix, but you need to overlay it. And for each of the quadrants, ask about the impact of internal or external growth strategies. Let's take a look at a bit more detail at what we mean by internal growth. With internal growth, a firm expands using its own internal resources, capabilities, and finance. Now, we can identify the assessment of core competencies and current resources using the VRIO analysis. Or they could even start a business from scratch using Greenfield investment. That's all around internal growth because the company identifies its core competencies and then builds on those. The advantages of internal growth. All that knowledge improvement comes through direct involvement in a new market or products, and therefore it stays within the business. The investment in this growth is made gradually over time. Unlike an acquisition where you have to put a lot of money down right up front. This reduces risk and enables a strategic response to adverse market conditions. Or if something goes wrong with the business that's being developed. There are no availability constraints. And by this I mean, there's no lack of partners or acquisition targets. It doesn't matter because you're developing everything internally. This strategic independence is maintained. And in that sense, if you have an alliance partner, they may want to put strategic constraints on you in the future. If you do everything internally, that never happens. And finally, there's no cultural issues because all the culture stays within the side of the business. It's all comparable and compatible so you don't get a culture clash in the new operations. However, internal growth can be slower and it can be very time-consuming for management in both in terms of time and resources. And of course, if it's not properly managed, there's a degree of business risk associated with it as well. Now, external growth strategies offer a range of options which can be attractive to firms, particularly those in highly competitive markets. These split between M&A mergers and acquisitions and partnership strategies. Mergers and acquisitions, starting with those, offer a range of advantages. Business extension, both geography, products and market coverage. This enables market entry using an existing business which already has customers, products, services, revenues and profits. Consolidation can reduce competition while increasing market share to companies competing in the same industry combine and they become stronger. Duplicate functions can be eliminated, such as to head offices. This reduces costs. These are typically known as synergies. And of course, the larger firm has an improved market position. If you think about Porter's five forces, the larger firm has a stronger power with suppliers and with buyers. It is more resilient to the threat of new entrance, etc. So you can see that consolidation has his exam and its advantages. Technology and teams. Now an acquisition may enable a company to acquire a new technology and the expertise to develop it. If you look at the deals that have been done in Silicon Valley, particularly, you can see the major companies, Google, Amazon, Apple, Facebook, consistently acquiring new technologies and their engineering teams. And a very good example of this is Facebook and the acquisition of Oculus in order to get into virtual reality. Finance. Now a wealth finance company can acquire weekend companies often at good prices. This has a number of benefits. Clearly it creates value for the acquiring company shareholders. But the combined company will also have the resources to continue to invest in grow, which the weekend company may not have been able to do on its own. Tax efficiency. Now I'm not a tax expert, but I think this is gonna be relatively straightforward one to explain. The cross-border transfers of profits and cash flows can be made more tax efficient. Without trying to explain it technically, you only have to look at the complex tax affairs of companies such as Apple and Amazon. And I'm not implying they're doing anything wrong, they're just taking advantage of the regulations. But you see how little corporation tax they pay to understand the benefit that says because they managed to transfer their profits into areas with low taxation regimes such as Ireland, Luxembourg, etc. And of course, both companies are highly acquisitive and they've been growing like this, but making their whole corporate structure highly tax efficient. Now, strategic alliances can also provide avenues for growth. This is where companies share resources and cooperate rather than compete. Now you can split these into two categories, equity alliances and non-equity alliances. Equity alliances is where the two companies form a new CO in which they both have an equity interest, and the new CO then moves forward. Non-equity alliances are more contractually based for sharing resources and capabilities, and they split into franchising. And McDonald's is a very good example of this and licensing which it came where Coca-Cola is a very good example of this. Because Coca-Cola are basically licenses its recipe to local firms who then basically make the Coca-Cola, bottle it and distributed locally. And Coca-Cola is basically, although it's a global brand, it is also global licensing operation. Now there are four types of strategic alliances which companies enter into scale alliances where businesses combined to achieve the necessary scale to compete. Access alliances where the combination provides access to skills and capabilities. This might be a cross border or just within technologies within an industry. Complementary alliances where businesses combine to share resources which they can then compete more successfully together. And if you think about Renault and Nissan, nissan base strong in the Far East, renovate strong in Europe. Individually, they weren't competing very well with firms like Volkswagen, firms like General Motors and firms like Toyota. But by combining, they were able to compete more effectively. And collusive alliances, which are secret arrangements to increase market power, such as cartels, which of course are frequently discouraged by regulators. The main advantages of external growth through acquisition and alliances are faster access to new products or markets. Instant market share, increased market power, economies of scale. D, a decrease in the competition, largely through consolidation, acquisition of intangible assets, things like intellectual property brands, trademarks patterns, overcoming barriers to entry to new markets, and taking advantage of deregulation in an industry or a market. To summarize, the Ansoff Matrix opens up the discussion on strategic growth options. The framework enables much deeper analysis, which then enables you to identify the best route to growth, taking into account speed, risk, and strategic importance. So that is a deeper dive and I think it's important to go deeper into this. So we're taking the Ansoff Matrix and showing how it opens up a whole discussion about the opportunities for strategic growth. 65. 66 CASE STUDY EXERCISE Growth Strategy Analysis Amazon: Now I want you to take a look at growth strategy and analyze Amazon's approach to its markets. In this case study, we're gonna take a look at several different models to see how we can bring them together to better understand Amazon's growth strategy. Perhaps start with the core competency model to try to identify Amazon's core competencies. You can overlay this as ever with the VRIO analysis. Check to see if these core competencies that you've identified meet the criteria. A valuable, rare, inimitable, and organization-wide. You can of course, use the Ansoff model to see which strategic approach Amazon has taken. And c, evaluated its products, its businesses, and try to identify which quadrant or quadrants you think Amazon best fits into. And of course, there's Porter's generic strategies. Can you use this framework to interpret Amazon strategic approach to its markets? Now, I prepared my own Amazon strategic growth case study, which you can watch in the video after this one. And of course it has a PDF you can download as well. And as ever, there is no correct answer to any of these case studies. You have your thoughts. I will present some of mine. And the challenge to you is, how many issues can you identify that I have not brought out in my case study and I can assure you there will be lot. So good luck with your analysis. I hope you enjoy the exercise and the hope you'll get a lot from it. And this will show how you can use these models and frameworks in combination to make them even more effective than they would be on a standalone basis. That's a little case study exercise. It's a growth strategy analysis of Amazon, and I hope you get a lot from it. 66. 67 Case Study Analysis of Amazon's Growth Strategy: It spend a few minutes taking a look at Amazon's growth strategy and trying to relate it to some of the frameworks and models we've discussed in this course. Amazon is the world's largest online retailer. There's no news in that, but it's grown extraordinarily successfully from its origins as a small online bookstore store started by Jeff Bezos and his garage. It's also expanded geographically through a combination of national online portals and globalized delivery and logistics. Amazon has exploited its core competency in technology to build sustainable competitive advantage. And of course, as it grows, it continues and increasingly benefits from economies of scale. In terms of the Ansoff model, Amazon's growth strategy particularly can be described as concentric diversification. They consistently enter new markets and they consistently introduce new products. Now in the terms of the products, I'm not just talking about the products sold on the platform, but I'm also talking about things like their streaming service, amazon Prime, web services, all the other different services associated with Amazon that you can tap into if you go into your Amazon account. And there are dozens of them, they're entering new markets and they're attracting new customers segments across all sorts of different segments, in all sorts of different geographical markets. But while they do this, they ensure that they leverage the expertise gained from operating in adjacent markets to those they enter. If you'd like, it's like an onion growing from the inside and continuing adding new layers on the top. But the layers that are added gain from the knowledge and the expertise are on the layer below. In terms of Porter's generic strategies, Amazon has unquestionably followed a cost leadership model. It focuses on providing maximum customer value for the lowest cost. And the focus is not narrow, but it's broad. It's aiming to address all the customers online shopping needs and wants and indeed mole. The cost leadership strategy is fueled by discounts and free delivery for Amazon Prime members, efficient and timely delivery. Passing on cost-savings benefits to customers to keep prices low. And a relentless focus on putting the customer first, often to the detriment of their own sellers who in Porter's Five Forces terms have little power as suppliers. It's Amazon's way or the highway. Competitive advantage comes from it's technology, it's data analytics and AI artificial intelligence capabilities analyze and predict consumer behavior and buying patterns. If you think about it when you go online onto your Amazon store, they're showing you recommended products. They have you're buying history. They show you customers who bought this, bought that. They're continually using that data and that information to predict and to recommend to you what you should buy and of course, the impact of that as you buy more. Another thing they've been doing is starting subscription services because they know that subscription services means repeat buying. That just increases the sales on the platform and increases customer loyalty. There is no attempt to differentiate on a product level. Most of its products can be found elsewhere. But it's the buying experience, the customer trust, the rapid delivery that mean that competitors really struggled to match these factors that give Amazon a competitive advantage. Frankly, it's more convenient to buy from Amazon online, then go to a brick-and-mortar store. And of course, the pandemic over the last 12 months has meant the lockdown of traditional rate high street retail. And this is only reinforced Amazon's position as the unmarked online market leader. What do we conclude about the Amazon model? While the capitalization of the businesses sword, it is focused on reinvestment and growth rather than profits. It is adapted its global business model to focus on a local delivery and logistics model. It continues to look at ways to improve this. We're using its own network of drivers and innovating with drones. So it's continually trying to make its logistics and delivery more and more efficient. Scale and market leadership, of course, now make it a very difficult business to challenge. Its potential is to be able to sell anything to anyone. And I would add that to anywhere. It's relentless focus on being the cost leader and building competitive advantage through technology, make this a very real possibility. That's a quick case study on Amazon's growth strategy. And you can see how you can interpret what a company like Amazon is doing with the models we've been studying. And of course, this means this helps you to understand the models and their application so that when you come across another business that you want to study, you can look back to examples like this and then be able to interpret that business with the models we've been using. 67. 68 Blue Ocean Strategy: Is take a look now at Blue Ocean Strategy. Welcome to the world of market saturation, maturity and industry decline. Blue ocean strategy is all about leaving your competitors far behind in those dying markets. Bluish and strategy was published as a book by W Chan Kim and Renee Mauborgne. It was blue ocean strategy, how to create uncontested market space and make the competition irrelevant. A wonderful dream if you're in a saturated and declining market when faced with markets like that, which are mature and saturated, this strategy focuses on how to create an uncontested new market by creating a leap in value for your customers. Now we're going to discuss in the case study both the iPhone and the iPod. But every time I talk about this, I want you to have Apple annual mind because they are the absolute masters at doing that. This, they've done it with the iPhone, they did it with the iWatch. Even the iMac was a jump forward when the jobs produced his new funky blue space age designs. The iPad came out of nowhere and every thought, the whole market was impossible to crack. So they have time and time again shown how blue ocean strategy can work so effectively. A Blue Ocean Strategy eNobe enables a firm to move from a highly contested red ocean and more on that in a subsequent lecture to a market where demand is created as the market and the competition did not yet exist. Blue Ocean markets are characterized by high growth and high profits. Why? Because there's no competition. It's not only about creating the pie, but also expanding it and growing our sales to fill it as fast as possible before your competitors wake up to the fact of its even existence. Implementation. Implementation is not of course, easy. It can help to consider these four questions. What problem does the industry take for granted which we should eliminate? Which aspects by industry should be reduced below the industry standard, and which aspects of our industry should be promoted far above the industry standard? How can we restructure the industry to our advantage? And what should be offered that the industry has never offered. The focus is addressing on meeting customer needs rather than competing with competitors. And indeed almost anticipating customer needs, coming up with something that the customer needs and wants. Even though the customer hasn't realized it yet. Six blue ocean principles to help creation Blue Ocean marketplaces are one, recreate market boundaries by searching for commercially viable Blue Oceans. Redefine your market too. Focus on the big picture, not on the detail. Don't worry about the trees. Didn't get lost looking at the trees because of the forests, you need to look, get above the forest and look at the big picture of the whole thing. Don't think about the existing customer demand. Think beyond it. Think about what the customers would demand if they could have it. Think about strategic sequencing. Focus your efforts on building a strategy which, which requires long-term growth. Thinking about how the iPhone started off and then was gradually evolved and continually updated and innovated since become the incredible instrument that it is today. Overcome organisational hurdles. Finally, embed execution into the strategy, build employee motivation, and use their competencies to execute the strategy. You just have to think for the last two about jobs working at Apple in the early days when he was rolling out the Macintosh. And he had all the resistance to the Macintosh in the organization. So he set up a Macintosh division and he basically motivated, or the Pirates and the Macintosh division to really drive the project forward, even though it was seen at the time as being probably unachievable, it was very, very difficult to do. And that created a blue ocean. It created a, a PC, we're on a PC. It created the Mac, which was a computer, a personal computer, unlike anything that had really preceded it, that's blue ocean strategy is really about how you are basically completely reinventing your markets because your existing markets mature, saturated, and in decline. 68. 69 Blue Ocean Strategy Case Study Apple: Let's take a look at a blue ocean strategy in action and there's no better place to go than Apple. One of the best blue ocean strategies that I can think of is the Apple, iPhone. And Apple have done this time and time again with new products where they have created a market which did not exist. If you go back to the pre iPhone days, the handset market was saturated with a whole range of me to mobile phones. Yes, they might be little bit quirky and they had clam handsets and that sort of thing. But essentially, they didn't really do very much else other than basically make telephone calls. Rumors that Apple were entering this market was met with disbelief, predominantly because it was argued that the handset market, the mobile phone market, had such different market characteristics to the computer market. Handset manufacturers were much more dynamic. There were new handsets coming out. They supposedly knew they didn't have much more in the way of functionality almost every week. And also there was this very strong relationship between the handset manufacturers, people like Nokia, and the existing cellular networks in all the major networks. And the relationship was very much controlled and in the favor of the cellular networks. Handsets in fact, was subsidize through the monthly calling plan and the cellular networks were taking a profit out of that. Now Apple's response was to completely redefine the market. The iPhone was brilliantly designed and had so much more functionality with the introduction of apps, it provided a product that customers wanted, even if that demand that from the knee from the customers wasn't apparent until the product was launched. And then customers were suddenly prepared to pay upfront for a phone at a premium price, and that completely turned the market on his head, completely restructured the market. Now the networks, the cellular networks had to come to Apple to ask to stock It's much in demand. New phone. And Apple originally set out and would only do one deal in one market with one cellular network. And that, of course, created tremendous competitive pressure between the networks to fight for that contract with Apple, it was a 180 degree turnaround in the negotiating position that existed before the phone was launched. But Apple did something similar with the iPod. People probably remember, you probably remember. Steve Jobs at the launch of the iPod was talking about a thousand songs in your pocket. And up to that point, these MP3 players, as they were known, were very difficult to operate. They had really portable screens. They were a great idea, but they were so difficult to use and navigate that they weren't that interesting. And then along comes the iPod with its scrolling wheel on the front, and it completely changes everything. Brilliant design overcame the limitations of poor screens, important navigation. And of course, this changes the whole dynamic. Music publishers, it had to come and do deals with Apple on Apple's terms in order to get their music onto the iPod. And that changed the dynamic of the industry. Of course, what Apple learned about music streaming, it then applied to creating the iStore for apps, for the iPhone. And that created yet another blue ocean. In this case, the blue osha was also ring fenced and protected from competition. So again, Apple is such a master at doing this. And if you look at any of its new product introductions, in every event, it is effectively created a blue ocean because it's created such a new product that it totally side swipes and removes the competition. And it has a market and a market position and a product that simply isn't competing with the existing, hitherto highly in demand products in the market. And Apple replaces it with a stroke with an iPhone. And everybody wants iPhones. And ultimately our Nokia went out of business. The Blue Ocean Strategy case study, the apple, predominantly the iPhone, but basically the iPod in pretty well. Every new product launch that Apple has done shows blue ocean strategy thinking and their masters at it. 69. 70 Comparing Red and Blue Ocean Strategy: Having talked about blue oceans, it would be remiss not to talk about red oceans. In this lecture, we're going to discuss and compare red and blue ocean strategy. We've discussed the Blue Ocean Strategy and understood what it means to try to create a new market. But what do we mean by red ocean strategy? If blue oceans are new markets which do not yet exist, red oceans are all the existing markets that currently exist. In 2 thousand smartphones were blue ocean. Today they're very much red ocean. The red refers to the metaphorical competitive bloodbath. In highly competitive markets. Red oceans have the following characteristics. They are existing highly competitive marketplaces. They focus in the marketplace is on competition, trying to get as much of the existing limited market share as possible. To do this, the strategy is a value cost trade off. More value at a higher cost or a reasonable value at a lower cost. And this reminds me of Porter's generic strategies and it should you to exploiting existing demand is really the only thing that companies can do. And the way to try and to do this is to focus on trying to be more efficient. In a red ocean. Then firms are forced to choose between one of Porter's three generic strategies, differentiation or low cost. They either produce more features at a higher cost or less features at a bed value. If you look at Aldi and Lidl supermarkets in the UK food retailing market, they've adopted a no-frills low cost approach. In fact, they only stuck around 10% of the SKUs. This separate items of a capacitor like Tesco, which makes their whole supply chain and their whole business much simpler to run. If we compare then a red ocean and a blue ocean strategy. This is what we see. In a red ocean. You're competing in an existing market. You're trying to beat the competition. You're trying to grow your market share of existing customers. And your strategy is dependent on a value cost trade off. In a blue ocean, you are creating a new market. The competition has been made irrelevant. You're creating new demand effectively from scratch. And by doing that, you'll completely resetting the value cost trade off and being able to create the value and the cost on your own terms without having to keep an eye on what your competitors are doing. The red ocean advantages are you are operating in an established, possibly mature market. You know, there is demand there. The customer demands and needs are clear and can be then addressed. However, the disadvantages are that you're competing normally against a well-established market leader. Try going into the search market for on computers competing against Google. You're also competing with niches who are trying to adopt the focus strategy from Michael Porter's generic strategies and carve out small niches of market share, which leads the rest of the market left for everybody else, which results in high levels of competition. While competing in a red ocean is difficult. Attempting to launch a Blue Ocean, of course, is not without its risks. If you think about the firms that try to enter a tablet computer market before Apple, including Microsoft. And all of these failed with that blue ocean approach until the iPad finally succeeded. So that is what Red Ocean Strategy is about and that's the comparison. So you can juxtapose, you can put one side-by-side and understand the differences between a red ocean and a blue ocean strategy. 70. 71 How to Survive in an Over Fished Ocean: While we're talking about oceans, I want to talk to you about the concept of overfished oceans and how to survive in them. So today's oceans markets are highly competitive and like the real oceans, they're being overfished. And this means that businesses have to adapt their strategies to survive. But what am I talking about? Well, the first issue is the supply side with a reduction in the availability of resources. And predominantly we're talking here, raw materials. This has led to a real price increase in the prices of raw materials over the last ten or 20 years. And you can see this name will closely than in the limitations on the availability of things like rare earth minerals where these minerals are needed for technology, hardware, and yet their suppliers very limited, which makes them extremely expensive. The first strategic, strategic response to overfished red oceans is to adopt a Blue Ocean Strategy. You get out the red ocean, you go across to a blue ocean. But this is not without risk and it doesn't actually solve the raw material problem. The next response is to transform linear business strategy and make it circular. And this, as you'll see, we'll have a double benefit. The linear strategy, which is what we've predominantly see today is companies produce something, consumers consume it, and then it's discarded and goes to landfill or whatever. But the circular strategy is where companies produce something, consumers consume it, and then it's recycled and reused by the businesses to get the raw materials out. Of course, this has the double advantage of not only recycling the raw materials, but it greatly reduces the impact of waste on the planet. So literally the circularity involves the recycling of the old products. This then turns a scarcity into a competitive advantage. And the competitive advantages and just financial in terms of the raw materials, it's competitive advantages in terms of reputation, in terms of everything to do with sustainability, which is then appreciated by consumers who then will want to buy that brand instead of somebody else who's not doing this. So companies can consume less in terms of their raw materials and products by synergizing things like carpooling, encouraging people to share cars rather than each by their own. Renting, not buying in all sorts of scenarios and things like music streaming as opposed to purchasing CDs. Although I have to make a lot of these are not driven by any conscious effort on the part of companies to try to derive a response to the overfished ocean strategy. But you can see the whole trend is heading this way. And companies needs to respond to the real challenges of excess waste and the increasing price of raw materials. If you'd look at BMW and I can speak from experience recently we had to replace the engine in my wife's Minnie, and we had to buy a new engine from BMW. And we found to our surprise that the new engine came with a surcharge and the surcharge was applied and was refundable. If we return to the old engine to BMW, who could then presumably recycle the materials. So that is a very simple specific example of BMW giving us an economic incentive to return the used engine to them so that they could look after its recycling and disposal. In a world where resources are becoming scarcer and more expensive. Smart business strategies are addressing the issue and creating competitive advantage. Other businesses are just trying to pass on higher costs to their customers in higher prices, which of course makes them less competitive than they were before. This brings us then back to Porter's value chain. If you are adopting of the value chain and you focus on each step of the value chain with a resource saving and cost-saving focus. Then you can start to see how you can use less materials and how you can then bring in recycling strategies. How can we produce more with less? And essentially you are having to produce blue ocean thinking. This is thinking outside the box. This is creative, imaginative thinking to Red Ocean strategies in order to make them more efficient in an overfished ocean. So it's a little discussion of effectively about the current market conditions we face today using the metaphor of the overfished ocean. But essentially, it is increasingly strategic approach that businesses, if they want to remain competitive, will have to consider adopting for their own value chain, for their own products and addressing it with their customers. 71. 72 How to Create a Competitive Analysis on a Page: If I want to show you in this brief lecture how you can draw some of this information together and create a competitive analysis. On one page, we've examined the external environment of a firm. And this lecture is going to focus on creating an analysis of how our business compares to our direct and actually our indirect competitors. This information is going to be useful, particularly when you're considering how to outcompete these firms. Direct competitors are businesses which essentially offer the same products or services as your phone. Indirect competitors offer different products, but they can still satisfy the needs of your customers. So you need to see what they're doing because indirect competitors could very easily move and become direct competitors. So we will need to consider direct competitors and potential direct competitors who include current indirect competitors across a range of competitive factors. Now these are Company highlights, market information, product information, and swot. But note that the swot here has got an extra T, which you can see on the screen on the right. I will come to that in a minute. So in terms of the company highlights, you need to put a profile of your business together. Keep it short. But the key thing you need then to include, what are your key competitive advantages? And you need to make a note of those. Secondly, you need to look at your market information. What is your target market? What is your market share, and what is your marketing strategy? You need to make a note of product information, the products and services you currently offer, your pricing of your key products and services and your direct and indirect distribution channels. Remember, keep this fairly high level because what you're trying to do is to focus as you'll see in a minute on the contrast. So then we have the SWOT analysis with the extra T, the strengths, weaknesses, opportunities, and threats you are familiar with strengths, current capabilities, sources of core competency, weaknesses, resources and capabilities which are underperforming Opportunities, Future external factors which might be exploited, threats, future factors which might negatively affect your business. And then the final t trends. And here I want you to take account of prevailing market trends, which may end up being either opportunities or threats. Then next, of course, you've noticed these factors for your factor, for your business, you need to repeat the process for each of your direct and indirect competitors. With this lecture, I provided a downloadable template in Excel format, which you can use for this exercise. And you can see the factors we've covered on the left. And you can put your own company factors in. And then you can include and analyze your main and you can extend the lines as the columns as many as you want. Your main direct and indirect competitors. That's a little exercise how to create a competitive analysis on a page. It's taking advantage of a lot of the information we've covered in the course in terms of understanding these factors. And it gives you the opportunity to, in quite a short, neat and easy to digest format, create this competitive analysis. 72. 73 Making the Connection between Strategy and Finance: Let's take a look now at how we make the connection between strategy and finance. Up to this point, we've focused on strategic thinking, but businesses run on the numbers. So we have to connect our strategic thinking with the financial side of our business. So let's go back to the goal setting. What are your long-term goals to grow sales by 5% year, 10%, 20 percent, to double your business in three years or five years. Well, if you're historic growth rate has been much lower than this, then your strategic analysis may have devised ways to do this. But are your strategies financially viable? Let's ask a few questions. Can you achieve your forecast growth organically? You will have applied the Ansoff Matrix, which we see on the right here, to decide on your strategic approach. And you may be able to take a guess, but you weren't really know unless you do the numbers. If your ambitions are greater than, you may need external non-organic growth to achieve them. Well, this mean you'll need external finance. Do you need to make acquisitions? You will need an integrated financial model for either of these. But growth brings its own challenges. Working capital requirements need to be evaluated. How much organic growth can your business afford? What are the capacitor, what are the capacity constraints? How much can you existing resources deliver? There are five key questions you need to answer using financial modelling to understand whether your strategic options makes sense. Firstly, revenue. Now on the right-hand side, I've illustrated some of the models we covered in the course that relate to these questions. So you can see how the strategy and the finance tied together. Looking at the first one, revenue, you need to understand how your business revenues again, it'd be generated. Who will buy your products, how often? How soon, at what price and at what cost, and how much profit, sales revenue are you going to get from each customer? I'm not gonna read the bid the models on the right-hand side. You can see them and you'll be familiar with them. Now, we'll just focus on these five steps. Step two is the question of gross margin. How much revenue will be left after you've paid the direct costs of what you have sold, the cost of goods sold, COGS. You might need to look at the business model canvas or the value chain analysis. In step three, we're looking at our operating model other than cogs. What else must you spend to support yourselves? So this is all the SG&A or the additional support costs, things in the secondary activities in the value chain. The working capital model has to be understood. How early can you get customers to pay you? How long is your cash tied up in your inventory? How can you delay paying our suppliers to get as much credit as possible? These are all critical questions. The investment model asks, how much investment do you need in your business to get to the point where your sales and profits cover your operating costs. That's particularly important obviously for a startup. Fundamentally, these questions can all be answered by constructing an integrated financial model. Let me stress though that this is not a modelling course. I'm gonna say this more than once in order to work out how you can deliver growth and how your business can financially survive and sustain your growth. You need to work closely with the numbers. This is what this section is all about. In the next lecture, we're going to take an initial look at an integrated financial model and why you need it to finalize your strategic planning. That is the connection you need to make between strategy and finance. You need to make your strategy fit into your model. And you need to understand the outputs from your model to know whether or not your strategy makes sense and indeed, whether it's deliverable at all. 73. 74 What is an Integrated Financial Model?: So we're talking about all this financial stuff, but what are we talking about? What is an integrated financial model? Financial model is built in Excel to forecast the financial performance of a business in the future. It's typically based on the income statement, the balance sheet, and the cashflow. And these are linked together, which is why the model is called integrated from this and that analysts can derive more advanced models such as discounted cashflow models, are leveraged by our models and valuation models. The primary purpose of evaluation model. Our primary purposes are capital raising for debt or equity, making acquisitions, evaluating organic growth, selling or divesting business assets or divisions, budgeting and forecasting something that we've been talking about a lot in this course. Capital unlike allocation, which projects to invest in. Financial statement brackets, ratio analysis and management accounting. Now the typical three statement financial model has the following key segments, assumptions and key drivers. The income statement, the balance sheet, and the cashflow statement, supporting schedules, valuation, sensitivity analysis charts and graphs for strategic planning purposes, the evaluation sheet is not essential. To enable our strategy planning to connect to our financial model. We need to make sure that we design our model drivers or assumptions so that we can use these to drive our financial projections and then understand the impact of our strategic options. Our strategies would need us to make operating decisions. What happens if we reduce prices? What happens if we get more customers? If we want to enter a new market? Maybe we want to update an existing product or device, a new product, or buy some new machinery to work in the factory, or simply borrow more money from the bank. All of these operating decisions can't be made in on a standalone basis. You need to understand the financial impact, the overall impact on your business of making decisions of this nature. We need a financial model to be able to see how these decisions affect the business. Will they add profit and value? What other implications will they have on the capacity of the firm? The need to hire more staff, an increase in capital expenditure, the requirements for more working capital. You'll have to decide on the time periods you present in the model. Maybe it'll be annual, which is useful for discounted cashflows. Quarterly, which is common inequity research, monthly, which is project financing, restructuring, and even weekly, which if you're in a stress situation and cash-flows critical is a very useful tool. My advice is that if the information is available, I E from the management accounts, create a monthly model. You can consolidate time periods to create quarterly and annual outputs later if you need them. But you cannot do reconsolidate an annual model bank to monthly. Think about a financial model as a mathematical representation of how your company works. You input your Strategic assumptions about sales, staffing, product sales mix pricing new products and markets. The model tells you the impact on your business, as well as the implications for other factors, such as debt, equity and shareholder returns. For a management team, the financial model can provide information about the direction the company is traveling in. It reveals the main business drivers. It helps you to provide insight, insights about where things are going wrong or not conforming to budgets, strategic goals, objectives, and plans. It's also an important tool for investors who can demonstrably see that the management have a grip on their business. They can assess the assumptions being made and make a judgment about the quality of their management and their strategies? The answer is not just to find a template financial model, but in my view, to custom build a model that fits your business. This can be done with a specialist financial modelling expert, but it must be under the supervision and control of the CFO who must himself or herself understand it back to front. Most importantly, our financial model will tell you what is happening to the cash in your business. And ultimately, that is the key to success or failure. You can run out of cash either by doing badly or by doing too well. It's called overtraining. You should always be able to answer the question, where do the numbers come from? In the next lecture, we'll take a look at the ten simple steps to building an integrated financial model. So you get an idea how it gets put together and how some of these integrations and these connections work. So that's an introduction if you'd like to in a financial model, but I hope it gives you more detail, more background and more understanding about why you need a financial model tied into your strategy to actually work out whether your strategy makes sense. 74. 75 Key Drivers of an Integrated Financial Model: Let's take a look now at the key drivers of an integrated financial model. In order to understand how our integrated financial model relates to strategy models and planning, we need to understand the key drivers of the model. So in this lecture, I'm trying to show you the connections between the financial, the strategic models that we've been discussing through this course and the elements of the financial model that they most impact. But I'm sure you'll appreciate this as a subjective discussion and each business is going to be different. I want you to be aware that there are these connections and as you make changes to your Strategic assumptions and when you're selecting strategic options, do you grow organically, do grow by acquisition, that these will impact different parts of the assumptions in your model and the schedules in your model, and then flow through into the results of your model. Our starting point, or one starting point is the balance sheet at the end of the most recent historical period. And as we've seen, the main calculations take place in the three financial statements. So what I'm trying to explain now is what happens in the middle. The starting point for this is of course, revenue and the drivers of revenue, our unit prices, volumes and inflation. And of course, we also need to understand the customer base, which customers are buying, what products at what prices. Revenue then ties into a large number of our strategic models. So if you think about it, the revenue will change at different points in the life cycle. The, It'll be affected by impacts in the external environment, hence the pest analysis. Your strengths, weaknesses, opportunities and threats we're probably impact on it. You'll have to look at the BCG matrix for the growth own share it, and so on and so on. You see how each of these needs to be considered. And likewise, when you're making your strategic evaluations using these models, you need to be thinking about how it's impacting on revenue. The cost of goods sold. It's supposed to be COGS. Cogs is the cost of inventory that has been sold to customers. This is impacted by supplier prices and our relationship with suppliers. And efficiencies can be a change through value chain analysis. Clearly, the supply relationship will be effective by Porter's five forces. So if we have a, we have power over suppliers will get better prices. If they have power of Russ will get worse Prices. The external conditions of the firm will also be significant. So you have to look at past and pastel. And if you look at the product market mix, it's gonna be an issue. So you need to look at Ansoff and also the BCG matrix to see how it's going to impact on your cost of sales. Operating expenditure covers all operating costs other than costs of goods sold. This is all the operating expenditure below the gross margin. And we need to consider the business structure of our business, which brings us back to the business model canvas. The decisions that we take about growth and the product market mix, all impact on the cost in our business, particularly labor and indirect expenses. Capital expenditure reflects the investment in fixed assets needed to produce our products and services. Of course, this addresses one of the limiting factors of growth. If you have a capacity constraint in your business, you can't grow beyond that capacity constraints. So you have to work out what investment you're going to have to make in order to create more capacity. Focusing on our growth strategies will help determine our investment requirements. The business model canvas design. The helps to design the delivery of products and services. Our product lifecycle helps us with capex. And that of course, varies over time through the lifecycle. With the swot analysis, we have to look at where we've made investments to give a strengths. Where do we need to make investments to offset weaknesses? Of course, Porter's Five Forces. Investment can help us to create barriers to entry. If we look at the value chain, you need to think about how we're going to invest to optimize the primary and secondary activities. And the BCG matrix helps, it helps us to decide which balance of products we should invest in, which ones we should she invest in which ones we should harvest from? Of course, the Ansoff Matrix helps us to evaluate growth options. Where should we invest in products or in markets? You can see how all these models can feed into the thinking. The inventory consists of our physical goods created for resale. Of course, this is a current asset to the business and requires funding. Of course, as well as sales grow stocks need to grow with them. And this becomes part of the world working capital and this needs to be financed. So all these assumptions about how much you're going to sell, therefore, how much inventory you need to hold has a financial implication. Debtors represent the amount owed to a business. Customers who have purchased products and services but not yet paid. Creditors are the amounts owed by the business, primarily to suppliers as part of the cost of goods sold. So you need to think about how this is going to impact if you put this together with inventory, this is that these are the main elements of working capital. Fixed assets are the tangible resources needed for the business to create economic benefit for his customers, which have been created by the capital expenditure we looked at earlier. They are significant in the discussion of core competency and the resources used to create sustainable competitive advantage. They also need investment and maintenance. So there is a significant ongoing financial commitment. Managing tax, of course, is a critical element of the business as this is absolutely the one credit who must be paid under all circumstances. Taxation includes sales taxes, payroll taxes, as well as cooperation taxes. And taxes can be significantly, significantly affected by strategy decisions, particularly when entering new markets. Note as well that very large corporations like Google, Apple, Facebook, spend a huge amount of time and effort trying to legitimately minimize their taxes. And that's another factor to bear in mind. The last two factors, debt and equity are critical to the funding of the business. So it's important from a growth perspective, but it also if a firm decides to grow by acquisition or partnership, external finance will almost certainly be required, probably of both debt and equity. So you have to think how all these models and how all our strategic thinking is going to impact our financing requirements. I've tried to illustrate how the component drivers of the integrated model are sensitive to do to stitch two strategic decisions. When planning or considering strategic options, the financial model should be used as a tool to evaluate the quality of the, of the option, not just to measure the results after the fact. I hope that helps you to think about how the main drivers in your integrated financial model are impacted by the strategic models and frameworks that we've been discussing through this course. 75. 76 Model Structure: Fewer new to financial modelling. I just want to give you a simple, straightforward overlook of the model structure. Remember the purpose of the model is to enable you to forecast the impact of your strategic decisions based on the historic and current performance of the business. Now I recommend that you create a monthly model starting with three years historic, taking the information from the management accounts of the company and then forecasts forward five years monthly in terms of the future. And of course you remember you can consolidate for your output reports, the monthly periods into annual periods, which will make the reporting very concise. But the monthly periods in the model enabled you to have a very sensitive model. And you can pick up things like seasonality and look at the detail of the cash flows, which can be very important. We start with three years historic income statements, and I recommend that you use the management accounts for these and take the information month by month. And this provides the basis or historic revenues and expenses. Now we need to have an opening balance sheet for our model. And to do this, we take the last historic balance sheet, which provides us with historic asset liability and equity balances. These then feed into our forecasts schedules will cover these in detail in the next lecture. And this enables us to customize our schedules in our model depending on the strategic options being evaluated. And these are predominantly driven by the revenue line and everything else flows from that. And the relationship of the revenue to the rest of the business is set by the historic income statements and the current opening point for the balance sheet. The forecasts schedules then create the future forecasts and our three financial statements, they feed into the revenue expense and revenue and expense items in the income statement. They forecast the asset liability and equity balances in our forecast balance sheets, and they forecast the items in our cashflow statement. So the simple outline of the model looks like this. You have the historic income statements and the last available balance sheet. On the left. You have all your schedules in the middle where you handle both the calculations and the assumptions for the inputs. For Strategic assumptions predominantly driven by input areas in the revenue schedule. Then these feed into the income statement, the balance sheet and the cashflow statement. And the relationships between those are the standard relationships you find, but you have to make sure that they all connect to each other correctly. I'll cover that as well in a minute. They cover it. They connect with each other correctly so that when you make changes to your revenue, the changes flow through to the three statements in the right way and the balance sheet still balances. That's a quick overview of the model structure. If you're new to financial modelling, I hope you'll find that helpful. 76. 77 Model Schedules: Is take a more detailed look now at the schedules that help to build the forecast based on the assumptions which feed into the financial statements. As we've seen, the model includes a series of schedules which enable us to forecast and model the detailed line items for all three financial statements. These model assumptions largely cascade from the main drivers, which are sales and revenues. Our starting point at which which ties into the sales department. Of course, this is where you sit down and you do some serious budgeting with your sales director. And this is a detailed customer analysis which enables you to create forecasts and budgets for future sales. And this, I think, is probably the critical starting point. You need to look at which products you're selling to which customers at what unit price and with what unit costs. And of course, you can tie this information into the primary activities of the value chain and into Porter's five forces model. The revenue then is a function of unit prices, unit costs, volume, sales, and of course, inflation. This is all based on our customer analysis sales assumptions. And don't forget when you're building your model and you're doing a strategic analysis, think about the business model canvas, about how this all fits together and how this contributes to the whole. From the revenue figure, we can then forecasts the cost of goods sold and the gross margins. This relationship is largely based on our historic data. But as well, of course, if you are looking at the value chain, you are trying to work out ways of making it more efficient. It may be that you can reduce your costs of goods sold and therefore you can increase your gross margins. Then we can focus on all our operating costs. And this includes salaries and wages. Now the operating expenditure is all the expenditure CS GNAS, or the expenditure below the gross margin. We need to have a detailed schedule on salaries and wages because there's also tax in there. You have to make allowances for holiday pay for all sorts of entitlements which employees have and their benefits. And this has to be calculated very carefully. There's also the other revenue and expenses and any intangibles CapEx. Once we have our revenue and expense forecasts, we can use this information to impact, to forecast then the impact on working capital. The working capital tells us how much capital we are going to need to finance the level of operations being forecasts. This information then also flows into the balance sheet. We're looking at the debtors, creditors, and the inventory, and the inventory payables, those four largely make up the working capital. Then you need to make a note as well of employment provisions and any capital payables, which is basically money owed to camp eggs, will then need schedules to track movements in assets including a fixed asset register, an intangible asset register. The tax fixed assets where you've got tax assets which you can benefit from an tanks, intangible assets. These are all asset schedules that you have to track the movement on. That makes up the assets area of the model. Of course, we'll need to track both the debt and the equity of the farmers. This is the means by which much of the financing for the business is provided other than in the working capital. So you need to track the debt or the debt levels and all the different classes of debt and all the different classes of equity that you have in your business. Of course, taxation is critical as we cannot afford not to pay the tax man. But this means tracking both corporate tax, which is your corporation tax on profits, payroll and the entitlement and benefit taxes which are associated to do with your staff and then goods and services taxes that you have to pick up for the government, which is basically the sales taxes. Where you're acting as the tax man for the government, as what you're acting as the agent for the government to collect sales taxes, we need to track our cash interest earned. Now, this is a critical item in one respect, but it's normally the cause of circularity in a model and you need to work out how you break that circularity. There are ways to do it, but I'm not teaching you modelling, I'm just teaching you the structure here. There are always other financial items that don't fall into the main categories as well. So you'll have other balance sheet items to be included in this schedule, and these can be tracked in separate schedules if you wish. And the variety of these other punishing items really does depend on the type of business you're running. These schedules allow us to transparently calculate the inputs to the three financial statements. The advantage of having all these schedules is that you can see where all the calculations are being done. You can see where all the assumptions are being made. If you try to build formulas into the three financial statements, you end up with a horrendously complicated model, which is almost impossible to audit. And if there's a problem in it, you'll never find it. So of course, you need the three financial statements, which are the income statement, the balance sheet, and the cashflow. So these all have flows going in, but because they are integrated, all three also have foes going out and we're gonna look at those in more detail shortly. So the model schedules help the model to be created and you start with your customer analysis, which creates your revenue expenses from the revenue and expenses based on the historic relationship in the business, you can then start to populate your working capital, your asset registers, your capital I in CapEx and your, your debt and equity, your taxation and then your other financial items. And these at all levels then flow into the three financial statements. I hope those schedules help you to understand why you need to have separate schedules to do all the hard work in your model and not to put them into the financial statements. And it's also a little checklist for you to make sure you haven't missed any critical areas. 77. 78 Chart of Accounts: They want to provide for you a chart of accounts for the three financial statements to assist you with your understanding of what we're discussing in this particular section of the course? The chart of accounts provide the structure, the line by line items for each of the three financial statements. Now, I provided these in a spreadsheet with three separate spreadsheets, which you can download from this lecture in Excel format so that you have this information. Now if you're working on your own business, you probably won't need these. But if you're working on a standalone basis, then download them. Because in the next lecture we're going to talk about the detailed inputs and outputs. And I'm going to provide you with a, another spreadsheet which matches into this. And it'll help you to understand how the financial model interconnects in detail. So you'll need the chart of accounts to do this. That's the income statement chart of accounts, which is very straightforward. I'm sure you're familiar with most of the line items. If you have any experience with financial accounts at all, the balance sheet items are here. Note that the balance sheet, the two lines in pink, the balance sheet must always balance. When you're modelling, ensure that you do and you might even put a check area to take one from the other and check that it comes up at 0 all the time. The net assets must always balance with total equity. Here's the cashflow statement, line items and again, lots of detail, but really important, particularly when you're trying to tie in all these different strategic options to make sure that you completely understand what is happening with the cash in your business. That's the chart of accounts, but very straightforward lecture, this one, but I'm providing you with the information so that you've got the detail you need to understand what's coming up next. 78. 79 Financial Statement Inputs and Outputs: Now I want to take you to the lowest detailed level of our modelling and I want to show you the financial statement inputs and outputs so you can see how all the detail connects up. When constructing your model, you need to make sure that the interconnections between your schedules and your financial statements are correct. To help you with this, I've created a checklist of inputs and outputs. These are available to download from the resources section of this lecture in an Excel format. And you'll also have the PDF of this slide deck as well. But if you want to see the granularity of each one that they spreadsheet is probably the better one to download. So to summarize, the inputs and outputs help you to ensure that your input as an assumption schedules feed into the financial statements correctly. And this means that everything drives each other quickly. It also, the outputs from the financial statements populate the appropriate other parts of the model. Some of them flow into the other financial statements, some of them flow into reports. The income statement inputs look like this. I'm gonna go through them fairly quickly. I'm not gonna go through them in detail, but you can see you have a category of input which is a broad, It's like the schedule. And then you have an item input, which is the line item that is feeding into the income statement in this case. Then here you have the category output. So you can see that the income statements, similarly summary feeds into some of the other schedules as well as some of the other financial statements. This is the balance sheet opening balance sheet inputs. So this is where you take on your historic balance sheet to get your opening balances for your items. So this is a standalone balance sheet from the lowest recent ended financial period, which creates a lot of the opening entries in your balance sheet. You'll also need other balance sheet inputs from other schedules which are listed here. And then you can see there are four balance sheet outputs which flow out of the balance sheet. The cash flow statement inputs, not surprisingly, very detailed. You can see the categories and the schedules from which they come. And then you can see where, which line items they flow into. And then the cashflow statement outputs. Again, you can see the categories and the output items. These schedules are available in an Excel spreadsheet with the lecture and will help you to make sure that when you're building your model, you've covered off every item. And this all ties into the schedules we've been discussing earlier. I hope you find this this checklist helpful. The whole purpose is to assist you to get the detail of the integration of the financial model, correct. 79. 80 10 Steps to Building an Integrated Financial Model: If you're not familiar with financial modelling, I wanted to take you through ten steps to building an integrated financial model. This is not Excel training. This is just for you to understand the process of putting one of these models together. The process for building a model is iterative rather than linear. As you'll see, we'll jump around a little bit. One of the factors you do need to bear in mind is that circularity can be an issue, particularly where interest and cash calculations occur. So you must be on the lookout for this. But here are the main steps. Step one, start by inputting three years of historical information into your spreadsheet. The time periods should match your main model yearly, quarterly, or monthly. I recommend normally building a monthly model because you can consolidate yearly or quarterly. Reverse engineer from the historic data. The main drivers such as revenue growth rate, gross margins, variable costs, accounts receivable payable, and inventory days. You're using the historic data to set the main drivers of the, if you like, the do nothing scenario. Step two, you use the forecasts assumptions to calculate the top part of the income statement. So the revenue, the cost of goods sold, the gross profit, and then all the operating expenses, it down to EBIT da. The third step you start to fill in the balance sheet, calculate the accounts receivable and the inventory, both of which are functions of revenue and costs of goods sold, as well as the accounts receivable and inventory days. Then fill in accounts payable functions of cogs and accounts payable days. Step four, build the supporting schedules. Now these will include the capital assets, property, plant and equipment, PP&E, use historical balance sheet data and adjust for capital expenditures and depreciation with the debt and interests. Start with the historic balance sheet and increases in debt and subtract We payments. And then the interest you should calculate based on the average debt balance. In step five, now complete the income statement and balance sheet. The income statement linked linked to depreciation to PP&E schedule and the interests to the debt schedule. Calculate the earnings before tax taxes and net income on the balance sheet. Link the closing PP&E balance and closing net debt balance from the schedules and the shareholders equity can be completed by using the historic numbers, adding net income and capital raised and subtracting dividends or shares repurchased. In step six, you build the cashflow statement. Start with net income, add back depreciation, and adjust for non-cash working capital changes. This gives you cash from operations. Then you can look at the cash used in investing, which is a function of capital expenditure in the PP&E schedule. And cash from financing, which is a function of the assumptions we make about raising debt and equity. In step seven. At this point, if you want a discounted cash flow evaluation sheet, then this is the time to create it using the free cash flow unleveraged and discounted back to the present day value using the firm's cost of capital. This can be helpful when you want to evaluate the net present value of different strategic options. In step eight, you add sensitivity analysis and scenarios. These will help you to evaluate the impact of changes to assumptions on your financial outcomes. So as you make assumptions in the model and you want to run scenarios, you can find out which scenario works best. This is particularly helpful for looking at the impact of different strategies, particularly when covering downside risks. Step nine, now you can build out the charts and graphs to illustrate the outcomes of your model. These will be very helpful with presentations and they're much better for communicating the messages in your model. That endless lists of tables. Step ten and most importantly, stress test your model and audit it. Check to see if the model does what it's supposed to when you change assumptions. Get a colleague to check your formulas. And always check when you put any inputs or changes or make any different assumptions that your balance sheet continues to balance. That is the introduction to the financial model and ten steps to show you how to put it together. And I hope you find that a helpful guide to getting some idea of what these four for financial models consists of and how the different parts of them integrate. 80. 81 Summary of the Strategic Analysis Process: While it may seem strange to start a section with a summary, I want to start at a fairly high level to talk to you about the strategic analysis process. To try to draw together the various parts of this course. Strategic analysis and the process of strategic analysis, is designed to be a logical framework to make what may appear to be a complex process, simple to understand. Now, we start off by having a set of goals and objectives for the firm. And we then also need to consider the three levels of strategy within the firm, corporate, business, and functional. So we've addressed that, but that's our starting point, is goals and objectives. We then have considered the external factors, EEG, the pest, the PESTEL, and the five forces. So we understand how to analyze these and they take that bulks. We've also discussed internal factors, core competency, competitive advantage, and the value chain. The external and the internal factors obviously effect current strategy. But we've also looked at the marketing environment of the firm and its challenges. Sought to Taos saw five forces. We're looking at the current strategy, but we're also looking at the environment of the firm around it. Then this leads us to consider how to generate strategic alternatives to our current strategy based on the information that we've gathered, things like the Boston Consulting Group Matrix and the Ansoff matrix. Then this enables us to generate a strategy, or at least generate strategy recommendations which are consistent with our initial goals and objectives of the firm and achievable in the light of the factors that we've analyzed. That's, if you like, is a fairly straightforward box and an analysis of the strategic analysis process. It sets out the sort of the key steps in areas. Whilst a lot of these models interact. And it is a complex approach. If you understand some of these building blocks like this, it becomes easier to understand. And more importantly, it'll be easier for you to explain what needs to be done when you're discussing this with your colleagues. 81. 82 Understanding the Strategic Planning Process: The purpose of this lecture is to talk to you about understanding the strategic planning process. And what I mean by that is I want to try to step-by-step take you through the components we've covered in this course to show how they all build towards creating a strategic planning process and how they all tie in together. So strategic planning is a process of analysis, synthesis, and execution. We analyze our business if we synthesize our strategy from the options created by our business analysis and then we implement the chosen strategy. Now in this course, we've defined strategy and set our goals and objectives, and that's where we started. And the essence of that is this is where we are and this is where we want to be in the future. The issue, of course is then, how do we get them? In our analysis, we've attempted to identify how our business can achieve a sustainable competitive advantage. The whole point about the strategy, rather than just bumbling forward, is to work out how to best compete in our market. Now to do this, we've gone to a number of models and frameworks created by eminent business strategies. These enable us to cut away a lot of the complexity and to think clearly about the key issues. And that's why these frameworks and these models are so important and so valuable. Now, we employed the Business Model Canvas to help us understand the component parts of our business and how each contributes to the whole. We've also examined how lovely and Martin's five sets, five steps strategy model can help us formulate strategy and how Hambrick and Frederickson get help us with the key process of strategy design. The life cycle model helps us to understand the timeline of products and markets and how these change over time. Now the time dimensions really important, but it's often not part of many of these frameworks because to include it would increase the complexity of the analysis of the model of the framework. And therefore possibly make it unworkable. For a lot of the models and frameworks is better to fix them in a point in time and just focus on what's going on around them at the time. But the lifecycle model tells us it's very important to continually reassess what's going on. Because overtime, all the market conditions and the competitive conditions change. The pest and pastel models have enabled us to analyze the external environment in which the firm operates and helps us to accept the limitations placed on the firm by the forces which are outside of our control. We've used swat, discuss the internal and present, and contrast it with the external and future. We further develop this thinking by looking at the Taos analysis, the source analysis, both of which are derivations and extensions of swot. We then turned to external forces over which we can have some influence. And we've looked at things like Michael Porter's five forces model to help us understand these. The better of Michael Porter's model, better explains the competitive conditions of the market in which our business operates. Michael Porter's value chain enables us to look sideways from an internal perspective in both directions to see how we can optimize our firm's processes to create competitive advantage. So, to summarize, we've looked externally, internally and sideways at our business and its competitive position. The BCG matrix, the Boston Consulting Group matrix, helps us to understand our strategic options when we want to consider how we're going to grow our business from where we are today. We've also looked at core competency, the VRIO analysis, and unique selling propositions to see how we can adapt our business and focus on the areas where we can compete and can create competitive advantage. Understanding that we're dependent on our core competencies to do this shows us how to use them and as well how to protect them in the future. We then turned our attention to business growth. How the product market matrix designed by Anton off and solve the options of organic versus inorganic growth can show us route to growing our sales and our profits. In a crowded competitive market. We've also looked at the option of completing a completely new market with the blue ocean strategy. And consider the strategic challenges faced by businesses in today's overfished ocean conditions. This brings us to the point where we're ready to define our strategy. This means we need to spend some time considering the strategic planning process so that we can put our analytical framework to good use. This is where we are going to focus on this, what we're going to focus on in this section, understanding the strategic planning process. We've got all the building blocks now, we just need to have a little bit of understanding about what we have to do next in order to turn those building blocks into something concrete that we can actually recommend to our colleagues, to our senior colleagues into the board and also execute and implement. So I hope that helps you understand how the components of this course fit together, how they contribute to understanding a strategic processes. Teaching analysis, which then enables us to bring it all together in the strategic planning process itself. 82. 83 Four Step Strategic Management Process: Now I want to take a look at a four steps to teach IT management process. Because I want to start to explain to you the processes in which strategic management is carried out and therefore how strategic analysis fits into that to enable you to define and implement a strategy. Strategic, strategic management process is the process of organizing the strategy of the firm. We looked at all the analysis to understand how to devise strategies. This is about how to actually apply those strategies to a business. You must see strategic management as a continuous process. It evaluates your business, it assesses your competition, it sets goals and objectives, and then it continuously riff, assesses those factors. The four steps are environmental assessment, strategy formulation, strategy implementation, and then strategy evaluation. For the environmental assessment. And we've gone through this internal, external sideways, you collect your strategic information on the firm's external environment. But you're also looking for developments and trends in the market. But you need to understand the forces on your business. You need to understand the internal conditions. You need to understand how you're creating your competence. So all these factors, then you have to decide in your strategy formulation from all this analysis, what is the best strategy consistent with meeting the goals and objectives of the firm? This is where you're looking at your strategic options. You need to consider the structure of the firm, your resource allocation, staffing, finance, decision-making. So this is where you sit down. You say, well, what can we do given where we want to be and the resources at are available to us. Strategy evaluation then praises the internal and external factors on which the current strategies are based, but also measures performance and makes adjustments and takes remedial action where required, where you have implemented the strategy, you need to continually be critical of it and to challenge the assumptions you made when you set it up in order to make sure that your strategy continues to evolve as the market and the business conditions around you evolve with it. So strategic management is a continual process. Each step is mutually dependent on an effected by the others. While this is set out here in a linear model, it requires a holistic approach. You need to have all these four factors in mind and be continually understanding how they affect each other and how that impacts the strategy and the performance of your business and what changes you need to make. The four-step Strategic Management process gives you a framework to think about strategic management. But I encourage you to look at those four factors almost all the time from all angles, rather than just taking them as a linear progression. 83. 84 Strategy Formulation in Six Steps : Spend a little bit of time having a look at strategy formulation in six steps. Strategy formulation is the process of choosing the most appropriate strategy for the organization based on the analysis we've been carried out now as an aside, when I was serving in the army, we used to have to do an appreciation before deciding on a course of action and then formulating a plan and then giving orders to execute the plan. The military has a system for doing this as well. And it's important that you spend quite a lot of time basically appreciating Situation, which means that you go through all the analysis in a corporate sense, the things we've been covering in this course to make sure you understand exactly where you are and what the options are open to you. The danger with this is always that you don't depreciate your situation, but you situate your appreciation. What that means is that instead of formulating a logical process, you decide at the beginning what you're gonna do and then you find reasons to justify that decision. And that's the trap you mustn't fall into. With strategy formulation, we have this process to help you to follow a logical process in order to then end up with an appropriate strategy. There are six steps here. The first of this is setting goals and objective in the military sense. That's the target that we want to attack and capture from the enemy. Evaluating the environment is a question of understanding of the ground, understanding the capabilities of the enemy, which is the external environment, and then can't get understanding the resources you have available. Which are basically the capabilities every ONE troops in order to deploy to capture the target. You then have to set quantitative targets. In the business sense, that's very straightforward. You need to coordinate the strategy levels. That's all about command and control and making sure everybody knows what they're doing at every level. And then you need to have some sort of performance analysis to make sure that you can make sure the numbers add up to that. And you're gonna be able to measure what you're going to achieve, and then you choose an appropriate strategy, setting goals and objectives. This has been covered a number of times. It's the core part of the first part of the course. And we look at the long-term goals and objective where the company wants to be. And of course, if you know where you are now and you know where you want to be in the future, then devising a strategy, a roadmap to get that is much easier that you have to define that endpoint strategy objectives. Critical to enabling you to identify these routes to achieve your long-term objectives, your elbows and the you have to obviously bear in mind the resources and the capabilities required to do that. And in some cases, if you set really ambitious objectives, then you're going to have a resource or capability shortfall. And then you have to address that in your strategic planning as well. Evaluating the environment. There's been lots of analysis in this course, things like the external environment, pastel, industry competitive forces from Porter's five forces, your competitive position and your competitors position. We've looked at that. The products and services that you have available, both qualitatively and quantitatively while you can use the value chain for that. Then understanding the strengths and weaknesses of the organization. So you've got swot towers and saw analysis for that. Setting the quantitative targets means that you need to have specific financial goals that you need to match to business goals and objectives. And that should also go down to products and services and customer contributions. Now we haven't talked very much in this course about financial modelling. And I'm trying to stay out of that because otherwise the course could be another two or three hours long in its own right. But clearly when you're doing your financial modelling, which is a way of measuring your performance and seeing how your performance evolves over time. Then clearly, all the assumptions you make, even down to the pricing of individual products will then feed through and you can see how that works. So you need to set some of those goals upfront. Coordinating the strategy levels is important because you have to remember the strategy happens at different levels in the organization. At the strategy has to be consistent, but the execution of it will vary depending on what level in the organization you are talking about. Whether it's the business level, division level, product level, or even lower. You need to make sure that everything is lined up if you'd like. I'm pointing in the same direction. Performance analysis is essentially the gap between understanding the gap between your current performance and your future performance. Now, we go back to the financial modelling. If you have your historic record, which you will have and you understand where you are today, you will have a trend analysis based on the past. If you model your future performance, you'll be able to see how those trends evolve. And you'll be able to evaluate the resources and capabilities required to achieve your goals. And clearly, if you're trend is, is on a nicely rising curve and your goals continue that nicely rising curve, that's great. But if you want to triple or quadruple the size of your business in the next five years. Then instead of a nice see, rising curve, you've got a very steeply rising curve. And then you have to evaluate the resources and capabilities you're going to need to actually achieve that type of performance. Of course, that then leads you to the decisions about the how you're going to achieve these goals, and what strategies you're going to adopt. So you have to consider your objectives, your strengths, your resources, your capabilities, or the things we've been talking about. But you have to be aware of the external limitations and the external opportunities. They all distills down at the end of the day to what course of action is the company going to take? There's plenty of content in this course to help you make those evaluations and reach those decisions. That's a, a framework for strategy formulation which fits in, I think very comprehensively with the content that we've covered it in the course. 84. 85 Mintzberg’s Five Configurations: I want to introduce you to Mintzberg's five configurations of an organization. Because I think it will help you to understand how strategy implementation, particularly AT, can be impacted by types of organizations. So Henry Mintzberg proposed a five configurations approach to strategic management. And he argued that the interactions between those parts determine the strategy of the organization. And I'm hopefully I'm gonna be able to explain it. The five parts are the operating core, the strategic, apex, middle-level managers, Techno Structure, and support staff. We're gonna take a look at each one of these in detail. The operating core frankly, is where all the work gets done. It's the working base. It's where all the workers do the work to produce the goods and services produced by the organization. This is common to all firms. There has to be some operating element put in place to get the work done. These are the primary activities in Porter's value chain. In the military contexts, these are the infantry, the armband units who go and do all the really difficult groundwork. The strategic apex comprises the senior managers and business leaders. These provide the vision, the mission, the command and control. They set the direction, the goals, the objectives, and the strategy of the firm. These are the senior military officers in the military context, and I think they speak for themselves. The middle-level managers are the sandwiched layer. They are the sandwich between the apex and the core. They take orders from above, they pass instructions, manage and supervise those below there, the junior officers in the military context. And they are the people who are, if you like, implementing and interpreting the goals and the objectives and strategy which are set for them. The Techno Structure part of the model comprises the planners, the analysts, and the trainers who performed the intellectual work, but otherwise don't actually do any. They provide advice for other parts of the organization, but they don't do any of the productive work in the sense of products and services. They function solely in an advisory capacity. In the military contexts, these are the staff elements in a military headquarters. The support element are those who provide the supporting roles for the other element. These are Porter's secondary activities in his value chain. In the military there the support units such as the logistics, the engineers, the medical. They're the people who provide additional support to make the rest of the organization able to function. So things like HR accounting, that sort of thing. Now you can use these configurations to predict the structure of any organization. If you think about service organizations, they tend to have very fluid structures with more interchangeability between The roles at the apex and middle and the bottom, senior management are more likely to get directly involved. Middle managers are more likely to blend with the core because they're all putting, putting together a service offering. Manufacturing tends to have a dominant tetanus structure because they tend to be very bureaucratic, very process-driven. The business, if you like, functions like a machine. And you can see this in the public sector and in governmental organizations as well. In the military context as no plan ever survives first contact with the enemy, as the famous saying goes, armies with a high degree of flexibility in the middle and core functions do better and in battle than those which are inflexibly controlled at the apex. To give you another example of how you can apply this model. The model can be used to evaluate the communication and the implementation of strategy. And if you interpret a business in terms of these five configurations, then you start to understand the internal dynamics of the business. This will help you to understand the strategic approach the businesses like it's take, and the style and effectiveness of its implementation of strategy. I think it's a really helpful model. That's Mintzberg's five configurations. It gives you a model by which you can interpret how an organization is run, which elements of it dominate, and therefore, how any plans or strategy are likely to be devised and implemented. 85. 86 Course Summary and Wrap Up: Now we've come to the course summary and wrap up. The first thing I have to do is to congratulate you on completing the course. Well done. I sincerely hope you found it stimulating and informative. And I can't wait to hear how you apply the lessons of the course to your own business. Definitely let me know. Before closing. Let's do a quick revamp of what we've covered in the course. Now the main structure of the course was very straightforward. It was to take you through the business strategy process where we set objectives. We did the company and market analysis. We evaluate his strategic options. We confirmed our strategies with financial analysis, and then we're in a position to formulate our strategy. But the core sections were slightly more complex than this because I wanted to put lots of details, lots of frameworks, lots of models into the course for you. We looked at what is business strategy. We looked at how you go about designing a business strategy, the impact of the time dimension on strategy, because that's very often left out of a lot of the financial models and frameworks that we discussed in the course. There was then several sections actually which covered the company a market analysis, because this is where you have to do the real nitty-gritty detailed work on understanding exactly where the firm is positioned. And from that, you're able then to evaluate your growth options. Putting a competitive analysis in at that point to understand how you are positioned with your competitors is important. We then went through the financial modelling and then finally the strategic planning process. So we've discussed a lot in the course and I've used a lot of models and frameworks. The starting point was discussing the definitions of business strategy and then taking a look at how you design a business from the ground up that will fit and meet your strategic goals and objectives. And for that, the main model there was the business model canvas. We talked about the different types of lifecycle models, business product industry and funding, which helped to bring the time dimension into strategic analysis. We looked, as you can see here extensively at company analysis, the environment the company operates in, the industry at the company operates in. The two are slightly different. We turn to a range of classic models and frameworks to help us with this. We've also discussed sustainable competitive advantage and core competency, which are the keys, the keys to to strategic strategy. Then we, we then discuss sustainable competitive advantage and core competency, which are the keys to successful strategy. Then we examine the options for strategic growth and we framed our discussion around the Ansoff Matrix and whether we can achieve our goals organically or whether we have to resort to external resources, that is to say inorganic growth. One of the most important parts of the course was where we connected strategy and finance in our discussion of the role of the integrated financial model in strategy formulation. The final steps of the course we're all about implementation and evaluation. We looked at processes for formulating strategy, and we considered men's, considered Mintzberg's five configurations to understand the interactions within the firm and how they contribute to strategic implementation. Well, I hope you enjoyed doing the case studies. I would love you to share your results with me. Just message me and tell me how you got on what ideas and thoughts you came up with that I didn't pick up in my case study solutions. And of course I brought in the quizzes. Now, the quizzes had a serious purpose, which was to help you with the learning lessons of the section. But I also hope you found some of my answers may be just a little bit of Reverend and a bit of fun. I'm showing you didn't get tripped up by them. Don't forget if you have any questions or issues. Just reach out to me here and I will do my best to help. I always try and get back or within a day or two to any questions that get asked. And of course, don't forget to check out my other business courses which cover strategy, finance and investment banking. And of course, I look forward to seeing you again very soon, hopefully. And one of my courses, That's the course summary and wrap up bringing everything together that we've been covering in this course. I hope you found it helpful and constructive and I wish you huge success with your business strategy. 86. Business Strategy Course Project: This is the business strategy course project video where I'm going to explain to you exactly how you can complete the course project. As you can see, this course has a large number of models associated with it, which of course gives you plenty of opportunity to put into practice what we've been covering in the course. However, I know you love a good project to round off your learning experience. So here it is. I've created for you a multiple choice quiz. Now there are over 40 questions covering the whole range of the lectures in this course. The question numbers are in the questions relate to the lecture numbers that they come from. So you can cross-reference those very easily. There are three documents you will need to download, but whatever you do, don't cheat at all. These documents can be found in the project area. So they are the business strategy and multiple choice test questions. The business strategy multiple choice choice test, dot XLS, which is the spreadsheet, which is the self scoring spreadsheet, and then the business strategy multiple choice tests answers. And this provides you with detailed answers and explanations to each of the questions if you want to go through those. So here's how it works. First of all, download the business strategy multiple choice test questions, document. This has all the questions and excitingly has no answers in it. So you'll be able to read all the questions without the temptation of thinking about cheating. Also open the spreadsheet, the business strategy, multiple choice tests spreadsheet. Now, this has two sheets in it. The first cheat sheet, Questions and inputs, and the second sheet is answers and scores. And you should not look at this until you have finished the test. Now the question is, is it inputs sheet looks like this. So you can see, you've got the lecture, refers to the question and the green squares. The green squares show you how many options there are for each question, or you have to do is to decide having looked at the list of questions and the document, whether your answer goes into a, B, C, D, E, F, or G, wherever it happens to be. When you've decided what the correct letter is for the answer. Typo one into whichever square you think represents the correct answer to the question. These questions, as you can see often, the company valuation course, I've deliberately left them in. So there was no temptation to get any heads up on what the questions were that were coming up. Now, do this as you answer every question in the quiz, but don't look at the scores in the spreadsheet until you finish your if your answer is correct, the answers and schools sheet will automatically mark and calculate your score for you. How easy is that? If you'd like a detailed explanation for every question as to why it's right or wrong. Then once you have completed the quiz, open the business strategy multiple choice test answers document, which is also in the project section, where this is all set out for you. I really hope you enjoy the project. It's a bit of fun, but it will definitely reinforce the learning lessons in this course. So let me know what you think of it. Just leave a comment in the comment section. So this is the course project for the business strategy course, and I hope you have a lot of fun with it.