Strategy Dynamics Essentials
Kim Warren
© Strategy Dynamics Ltd. All rights reserved.
www.strategydynamics.com
Chapter 1: Building performance over time
© Strategy Dynamics Ltd. All rights reserved.
www.strategydynamics.com
What does Strategy Dynamics do?
E.g. product replacement for a medical device
Problem:
• License for current product will be lost – new, better product has zero brand awareness
• TOTAL loss of old product sales will drop approx €25 million turnover
• Current strategy unlikely to be financially justified
Solution:
• Intense demonstrations of new product to specialists (KOLs) to build awareness quickly
• Benefits disseminated to 10,000 doctors in training events, run by specialists over 9 months
• Training + 50 sales-force campaign shifts doctor preference quickly
• Total cost = 5 x current planned strategy, about €10million – pays back almost in year 1
Blockbuster Inc.’s Performance History
Figure 1.1
Contrasting questions for strategy to answer
Industry-based strategy
question:
‘How do we get a good profit
“position”?’
“How can Starbucks achieve margins of 11.5% vs
9.5% … and keep them at 8% in tough times?”
Firm-centred strategy question:
How do we drive sustained
profit growth?
“How can Starbucks deliver sustained profit
growth of 15% p.a. … and not fall back in tough
times?” [strictly ‘free cash flow’]
Strategic ‘positioning’: e.g. the Southwest Airlines
activity system
True, and useful, but …
• unchanged in >30 years
• replicated by numerous rivals
Analysis of the company’s value
chain would also prove distinct from
that of full-service airlines – also
true and useful, but also unchanged
and replicated.
So what has ‘strategic management’
been doing since 1975?
[CEO Herb Kelleher was winner of the 2003
life-time achievement award by the Strategic
Management Society.]
Michael Porter, 1996, What is Strategy?, Harvard Business Review, Nov/Dec, 61-78.
Strategic ‘positioning’: e.g. the Southwest Airlines’
value curve
True, and useful, but …
• unchanged in >30 years
• replicated by numerous
rivals
W Chan Kim & Renée Mauborgne, 2005, Blue Ocean Strategy, Harvard Business School Press: Boston MA.
The industry value-chain, e.g. an airline
Businesses at each stage try constantly to ...
1.
cut costs (their own, or from upstream suppliers)
2.
persuade those downstream to buy more, or pay more
How does all this affect the profitability of airlines generally?
... and how can we do better than others?
8
The “five forces” that affect industry profitability ...
Rivalry between
competitors
Power of
suppliers
Threat of new entrants
Profitability of
the industry
Power of
customers
Availability of
substitutes
What effect do these forces have?
9
Amazon.com operating profits and cash flow, 1997–
2008
Figure 1.4
Generalized strategy life cycle, illustrating extensions
and strategic-change events
Figure 1.2
Illustrative profitability distribution among firms in an
industry
Figure 1.3
Starbucks’ profit history and alternative futures
One-off costs
Figure 1.6
Starbucks—Hypothetical profit history and alternative
futures
Figure 1.7
Starbucks: 2011 update
Pushed prices up
+2% margin = $200m/yr
Would investors have preferred
this trajectory + saving $300m?
Added 530 too many
stores : cost >$300m
WHY? … investor [analyst?] pressure
for unsustainable performance.
NOTE: there is no requirement in the professional training for investment
analysts to learn about the link from strategy to performance.
Growth in users and call traffic for Skype’s VoIP service
Figure 1.8
History and alternative futures for the number of cases
of poliomyelitis worldwide
Figure 1.9
Functional, business-unit, and corporate levels of
strategy
Figure 1.10
Five-year history and plausible objectives for low-fare
airline Ryanair
Figure 1.11
Class 1: Try it yourself
Each class applies the same tasks to both the restaurant case, and a case
chosen by your group …
Use Worksheet 1 for the restaurant case to choose Principal and
Supporting Objectives for the early start-up period
Choose an appropriate time-scale
Set a numerical scale, and draw out the time-chart(s)
Use Worksheet 1 for a case you know or can find out about
An organisation you have worked for, or a well-known company (Pick a
simple organisation, focused on one main activity)
Specify a Principal Objective for this organisation and (optionally) a
Supporting Objective essential to achieving the Principal Objective
Be sure to set an appropriate time-scale, including history
Set a numerical scale, and draw out the time-chart(s)
Worksheet 1, example
Using the Sysdea software
You must be registered with Sysdea to do this, then log in to Sysdea at
https://app.sysdea.com/
Watch the Tour on how to use the software (button at top-right)
To set strategic objectives for the restaurant case:
click here to get the Sysdea Worksheet 1 template model
when the model opens, click “Shared Simulation” at top-left
give the model a name, such as “Joe’s restaurant, Worksheet 1”
click the two Principal Objective variable, set a Min and Max valuescale, and sketch a time-chart to reflect your chosen aims
repeat for your choice of a suitable Supporting Objective
Save the model !
Repeat for your group’s chosen case.
Sharing your Sysdea models
Setting a model to be shared
lick the tool icon
under Sharing click ‘Share Model’
copy the link that appears
send the link to others
save your model !
Receiving a shared model
log in to Sysdea
click the link sent by the person sharing their model with you
the model opens in ‘Run’ mode (you can’t edit it)
to save an editable copy to your own account, click ‘Shared Simulation’
and accept the invitation to save your own version
Chapter 2: How resources drive performance
© Strategy Dynamics Ltd. All rights reserved.
www.strategydynamics.com
Ryanair: plausible objectives, from 2009
25
Causal Structure of Ryanair Profits for Year Ended March
2009
Figure 2.1
Explanation of Ryanair Profits, 2005–2009, and plausible
future to 2014
Figure 2.2
How customers drive sales for Ryanair
Figure 2.3
How resources drive Ryanair’s costs, e.g., routes
Figure 2.4
Resources driving service performance in a voluntary
organization
Figure 2.5
Standard categories of tangible resources
Demand-side
Tangible
resource
Chipmaker
Law firm
Final customers
PC buyers
Clients
Intermediaries
Computermakers
Airline
Consumer
brand
Charities
Customers
Consumers
Beneficiaries
Retailers
Resellers
Supply-side
Capacity
Stores
Staff (examples)
Production
staff
Professional
staff
Suppliers
Product range
Chip-types
Legal services
Cash
Cash
Cash
Aircraft
Production
plant
(Physical
assets)
Service staff
Sales force
Volunteers
Airports
Routes
offered
Brands
offered
Services
offered
Cash
Cash
Cash
Table 2.1
Class 2: Try it yourself
For the restaurant case
identify and define tangible resources (fewer than the airline case!)
use Worksheet 2 to link your Principal Objective back to these
Resources – you may need to include your Supporting Objective in this
causal structure
sketch time-charts in each Variable or Resource in this structure, setting
appropriate Min and Max values
try to set up a Formula in each variable, giving a definition of how its
value depends on the items linked into it
For the case you chose for class 1
define the resources that drive performance
use Worksheet 2 to draw out the connections from the Principal
Objective for this organisation, back to the Resources driving that
performance (identified in your Table)
optionally, try to define a Formula for each item to make the model
work
Tangible resources for the restaurant (not all may be needed,
or significant)
Tangible
resource
Demand-side
Final customers
Intermediaries
(optional)
Supply-side
Capacity
Staff (examples)
Suppliers (optional)
Product range
Cash
Other (define)
Define these resources
in your case
Scale today
Target by ……
(date)
Tangible resources for your case (not all may be needed, or
significant, or you may need 1-2 more)
Tangible
resource
Demand-side
Final customers
Intermediaries
(optional)
Supply-side
Capacity
Staff (examples)
Suppliers (optional)
Product range
Cash
Other (define)
Define these resources
in your case
Scale today
Target by ……
(date)
Using the Sysdea software for either the restaurant or
your own case
Add your performance objectives into Worksheet 2:
click here to get the Sysdea Worksheet 2 template model
when the model opens, click “Shared Simulation” at top-left
give the model a name of your own, such as “My Restaurant Worksheet
2” or “My Company Worksheet 2”
open your previous model of Worksheet 1
select your Principal and Supporting Objectives and Copy them (Ctrl-C)
in Worksheet 2, check the time-scale matches Worksheet 1
delete the Principal and Supporting Objectives, and paste in those you
copied from Worksheet 1 (Ctrl-C),
To draw out the links from performance back to resources:
follow the steps in this class to complete the causal links between the
Objectives you pasted in and the resources that drive them
delete, add, or re-arrange items as necessary to do this
Save it !
Worksheet 2
Replace the Objectives here with copies from Worksheet 1
Stick to the discipline in your model
Make sure your definitions of resources and all other variables are
specific and measurable
Put numbers on everything, even if you have to estimate (but say so if
this is the case!)
Make sure all links are rigorous – if B and C link to A, then it must be
possible to calculate or estimate A, given values for B and C
If possible, add calculations to make sure this is correct
Tasks: Day 1
A.
Carry out steps 1 and 2 for the restaurant case
1.
sketch out realistic objectives for the first 20 weeks of the business
2.
lay out the causal relationships from resources to performance, including
how those resources might grow over time
… and try to add equations for those relationships
B.
C.
Carry out steps 1 and 2 for your own case
1.
sketch out realistic objectives for an appropriate time-scale, including
history
2.
lay out the causal relationships from resources to performance
Read Chapters 3 and 4, and consider how they work for your case