Posts Tagged ‘strategy’

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M&A – Did Kraft pay too much or did Cadbury accept too low a price?

Friday, January 13th, 2012

I have really enjoyed my Mergers and Acquisitions (M&A) elective with our lecturer Scott Moeller. It has been a fascinating mix of strategy and financial analysis.

For our coursework we had to create a presentation that analysed Kraft’s acquisition of Cadbury.  The acquisition was big news at the time as Cadbury is an iconic British brand and the bidder, Kraft was an American company.

We believed that Cadbury’s strategy to the acquisition was to gain as much value for shareholders as possible by negotiating the best possible price.  The Cadbury board did little to try to defend the takeover and retain their independence.

Some people argue that Cadbury was sold too cheaply and some people thought Kraft paid too much.  To us it seemed like a good deal for both parties; Cadbury shareholders achieved almost a 50% takeover premium which is above the typical 20-40%.  Kraft used the acquisition to facilitate the subsequent split into Global Snacks and North American Grocery businesses, that will in theory unlock more value from Kraft shares in 2012.

Perhaps M&A does not have to be a zero sum game…

View the presentation here.

Thanks to Dio, Omar, Richard, Tim and Yaschica who were co-collaborators on this presentation.

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The four stages of IT architecture maturity

Thursday, December 15th, 2011

The MIT Sloan Center for Information Systems Research developed a capability maturity model that defines four stages of architecture maturity. Each stage involves organisational learning about how to apply IT and business process discipline as strategic capabilities.

As companies move through each stage they can realise benefits rangin from reduced IT operating costs to greater strategic agility.

Stage 1: Business silos

In this stage companies focus IT investments on delivering solutions for local business unit or functional needs and have do not utilise technology standards. The role of IT in this stage is to automate or facilitate specific business processes.

  • One off solutions
  • Bottom-up. IT led by local business units
  • Poor integration with other IT systems
  • Poor server utilisation
  • Little shared data

Stage 2: Standardised technology

This stage means moving some IT investments  from local applications to shared infrastructure. Technology standards are now established intended to increase reliability and decrease the number of technology platforms to manage.  Fewer platforms means lower cost (around 15% less) but also less choice, however companies are willing to accept this tradeoff.

  • Rationalisation, standardisation, and consolidation of the IT infrastructure
  • Achieving a reliable, cost-effective IT infrastructure shared services model
  • Focus on quick wins

Stage 3: Optimised core

The next move is from a local view of data and applications to an enterprise view. IT staff eliminate data redundancy by extracting transaction data from individual applications and making it available to all processes. In this stage companies are also standardising business processes and It applications.

  • Standardising core business processes
  • Local managers and units lose control over discretion over processes and IT
  • Consolidating redundant applications into a single global instance of ERP and CRM
  • Rationalisation of processes and applications with the objective of standardising processes and consolidating applications.
  • Build re-usable data and business process platforms
  • Top-down. Business processes and IT investments are made by central IT department

Stage 4: Business modularity

This stage allows strategic agility through customised or reusable modules.  The objective is to create reusable modules that business units can join together a standard interface such as web services.

  • Move from local flexibility to global flexibility

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How to scale professional service firms

Monday, November 14th, 2011

Introduction

My latest report attempts to identify common factors that influence scaling in professional service firms (PSF). The sample draws from small and medium (up to 100 people), UK-based firms who deliver services to UK clients.  We interviewed a sample of professional service firms using a structured list of interview questions and this data was then analysed to discover themes, trends and comparisons made between the companies that scaled and those that did not. Below is a summary of the key findings.

Findings

Our findings corroborate widely-held industry views that successful PSFs scale when they select and leverage resources (particularly people) and intellectual capital for optimal competitiveness and growth.

Based on our finding we developed the Phased Scaling Model which attempts to encapsulate the scaling stages of a Professional Service Firm.

PSF Scaling Phases

PSF Phased Scaling Model

We identified several key factors that determined successful scaling:

  • Human Capital.  This is a firm’s principal asset, which should not be diluted.
  • Management Decoupled from Delivery. Firms cannot grow effectively if management are concurrently deployed on client projects.
  • Management Team. Quality and individuals’ networks are essential for early success.
  • Financial Management. New methods of reducing fixed costs de-risk and support focus.
  • Brand Management. Required to scale beyond known networks and relationships.
  • Differentiation and CVP. Differentiate in saturated markets with low barriers to entry.
  • Building Networks and Relationships. Form the initial sales and reputation-building platform.
  • Industry Diversification. Expanding into new markets to de-risk against an industry downturn and to access a larger customer base.
  • Timing and Luck. Are key factors in either a positive or negative outcome.

Human Capital

All interviewees stated the most important scaling factor was the ability to find and retain key talent. People are a PSF’s main asset and without a continuous pool of talent to match the organisation’s growth aspirations, the business will be constrained.

  • To keep a consistently high quality of hires a template of new hire is required e.g. Employees must have Big 4 experience, a Masters Degree, Prince2 and MSP as a minimum.
  • The mix of fulltime versus associates is also critical.  A 30:70- split between fulltime associates (contractors) and employees enables downsize flexibility if growth is not on plan; fulltime employees give you client consistency and are critical to building culture.

Management Decoupled from Delivery

To coordinate growth senior management should focus on the wider strategic growth issues and should not be involved with the day-to-day operational issues.

  • Senior management focusing too heavily on billable work can restrict growth.
  • In order to facilitate senior management detachment there needs to be an investment in the delivery teams to give senior management confidence to step back.
  • Senior management detachment from operations makes the business more attractive for an acquisition.

Management Team

The chemistry of the management team, their networks and risk profiles have a significant impact on growth.

  • Early customers were won from their professional networks or previous clients.
  • It can be several years before any work is won from pure marketing.
  • This means that scaling in the early years is dependent on the quality and depth of the professional networks and whether previous clients have realised value from the engagements.
  • Managers should have similar tolerances for risk or relationships may become strained.

Brand Management

To scale, the business must move beyond personal networks and attract customers from the wider target market by building a well-regarded brand.  Building a PSF brand involves more than just delivering excellent work and customer service:

  • Targeting industry awards.
  • Hosting thought-leadership events..
  • Hiring a marketing manager early in the firm’s life.

Differentiation and CVP

In a congested Professional Service market with low barriers to entry, differentiation, demonstrating value and successful execution are key.

The firms we interviewed focused on a specialist area of consulting and using a employee template that allowed it to offer ‘Big 4’ quality at much reduced fees. It also proved its CVP with its first clients before it scaled.

Building Networks and Relationships

All of the firms interviewed used relationships to build an initial platform and expand their network.  However, it was the mix of other scaling factors that determined the on-going probability of success.

Building networks seemed linked to the proximity from the end-client’s ecosystem. Locating offices close to the client makes project delivery and account management easier and also means you are close to clients when new projects arise.

Industry Diversification

Most firms start their business by focusing on one industry, as this is where they had the most experience, contacts and knowledge.  This seems intuitive as it gave them the best chance to access early customers and leverage their individual credibility from previous professional engagements.

However once the business model has been tested with early customers the firm needs to quickly duplicate their model into new industries/ markets. This is essential to de-risk their reliance on a downturn in their core market and has the added benefit of increasing the potential customer base to support the rapid growth phase.  However the firm should not dilute their industry competency too widely and should aim to expand to five or six industries.

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How to describe and create a business model

Wednesday, October 5th, 2011

Business models fascinate me; how businesses define, reinvent or change their business model is one of the most interesting parts of business strategy.

I recently read an article called Reinventing Your Business Model by Mark W. Johnson, Clayton M. Christensen, and Henning Kagermann, which in my opinion had an interesting approach to describing a business model.

What is a business model?

A business model consists of four interlocking elements that, taken together, create and deliver value:

  1. Customer value proposition (CVP)
  2. Profit formula
  3. Key resources
  4. Key processes

Customer value proposition (CVP)

A CVP is the way you create value for customers, it’s the way you solve a customer’s problem. This element of the business model is by far the most important. Coke’s CVP focuses on its unique flavour that no one else can copy, where as Dell’s CVP is a low-cost, customised computer direct to your door.

Profit formula

The profit formula shows how you will make profits for your company while still providing value to the customer.

  • Revenue model = price x volume
  • Cost structure = Direct costs, indirect costs and economies of scale
  • Margin model = Given the revenue and cost structure how much profit do we make

Key resources

The key resources are assets such as the people, technology, products, facilities, equipment, channels, and brand required to deliver the value proposition to the targeted customer.  This will heavily influence your cost structure.

Key processes

Successful companies have operational and managerial processes that allow them to deliver value in a way they can successfully repeat and increase in scale.

Complementary decisions

You need to make sure that these four elements are consistent and complementary. For example you shouldn’t have a high service CVP and then not invest in staff training and service processes. Conversely for a low-cost provider having fancy offices and labour-intensive processes is probably not the best approach.

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If you don’t want your unprofitable customers someone else will

Sunday, September 11th, 2011

I am back at lectures today for the start of the second year of my MBA. I am now studying my electives and I have chosen a strategy/ technology track which is where my interests lie.

Today I am starting “Strategies for Fast Track Venturing”, which from the course outline is to study theories and techniques that are reshaping strategic management in fast moving environments. It asks: what are the key factors that determine whether a venture makes money and grows to a significant size?

One of our fist readings is called ‘Bottom Feeding for Block Buster Businesses’. D. Rosenblum, D. Tomlinson and L. Scott (2003). Harvard Business Review March 2003.  There was nothing in the article that most people do not already know but there were some interesting points that I wanted to summarise.

Unprofitable customers are the bane of most companies and a lot of companies actually encourage their worst customers to buy from their competitors.  The authors argue that as customers are scarce this this may be a rash move and that actually you can turn these unprofitable customers into profitables ones.

So how do you go about serving these unprofitable customers? It almost always means redesigning your business model:

  1. Simplify your offering – often a product is unprofitable because it has features that customers don’t want or will not pay for. This also links back to the ‘Reduce/ Eliminate’ from blue ocean strategy which will reduce your costs.
  2. Minimal marketing expenses – serving cost-sensitive customers means you cannot waste money on marketing and should instead rely on word of mouth marketing.
  3. Personal, convenient and pleasant service – often the cost-sensitive/ fringe customers are used to being shunned so good service will be a big surprise. It is also about showing that every customer is valuable.
  4. Careful use of technology – sophisticated technology might not always be the answer, chose the technologies that your customers are familiar with.
  5. Realistic financial targets – low margin businesses require a lot of scale before they are profitable so take a long-term view

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Strategy and the parenting advantage

Monday, July 18th, 2011

The only way an MBA is worth the price is if you apply the teaching to your professional life. I had a superb lecturer for strategy II, Dr Paul Raspin, he created a lot of value with his teaching and I captured that value by charging my clients to put that knowledge into action.

A recent consultancy project required me to analyse my client’s business portfolio. So I applied the corporate parenting framework i.e. which business should you own and why. Corporate parenting is much like parenting children you need to add value, provide support, create resources and make sure you have the right environment to help the business grow.

What is the parenting advantage?

The parenting advantage is creating more value than your competitors would with the same businesses. For example would eBay (previous owner of Skype) or Microsoft (current owner of Skype) create more value owning Skype. Chances are Microsoft will create more value so they would have the parenting advantage over eBay in this case.

It is also about asking following questions:

  1. Which businesses should we own rather than our competition and why?
  2. What is the best configuration, processes or structure to foster superior performance?
  3. Is there a good fit between the skills of the parent and the needs of the business?

The last question is the most important, if you do not have skills or resources that the acquired business needs then there is little point owning it and you are actually more likely to destroy value.

So how does a corporate parent assess which businesses to own?

Step 1: Understand the critical success factors (CSF) of the business, what really makes a successful business. For example in the hotels market one CSF might be product branding or site selection.

Step 2: Assess the parenting opportunities i.e. is there any upside? An inefficient business might have a lot of upside but some businesses will be so well run and financed that there is little opportunity.

Step 3: Understand the characteristics of the corporate parent. Describe theirs skills, experience, structure, processes, and employees.

Step 4: Map these onto the parenting grid.

Understanding the parenting grid

You should focus your attention on businesses in the heartland and possibly those on the edge of the heartland. Edge of heartland business can be moved into the heartland when the parent learns the new CSF over time. The ballast businesses have little upside but can be a reliable source of earnings (cash cow). Those businesses in the alien territory and value trap should be avoided at all costs, as they will be a drain on resources and very distracting!

Remember it is much easier to change the portfolio to match the parent, changing the parent to match the portfolio is much, much harder.

 

Reference: Campbell, A.; Goold, M.; Alexander, M.(1995) Corporate Strategy: The Quest for Parenting Advantage.
Harvard Business Review, Mar/Apr95, Vol. 73 Issue 2, p120-132, 13p

 

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Blue ocean strategy vs. Porter’s five forces

Wednesday, June 8th, 2011

Are you a five-forces disciple or a blue-ocean enthusiast? I.e. Do you try to dominate existing markets or try to create new ones?

Basic economics models state that if an industry is profitable then new companies will enter the market and increase competition, thus driving down profits to marginal cost (where everyone more or less breaks even).

Researchers Andrew Burke, André van Stel, and Roy Thurik looked at entire industries to find out if an innovation strategy or a competitive strategy is best. In the blue ocean approach creating a new market would attract consumers over the long term, industry profits and the number of vendors would both steadily increase. If however, firm profitability went down as the number of firms went up you’d know companies focused on competition would outperform those setting their sights on blue oceans.

The study looked at profits and numbers of vendors for 41 shop types over a 19-year period (1982–2000) and found that evidence that blue-ocean strategy is sustainable. In more than half the shop types, average firm profits and the number of firms were positively related.

Although it would be foolish to dismiss competitive strategy altogether the study shows that competition eventually erodes the profits from innovation, but it is a slow process requiring 15 years or so, which suggests that it takes the better part of a generation for the blue-ocean approach to yield to competitive strategy.

This study suggests that businesses should consider a blend of the two approaches. For instance, by slowing down profit erosion with an effective competitive strategy for an existing market, they can increase the funds available for blue ocean investments and thus their chances of finding an untapped market with plenty of consumers.

 

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How to create blue oceans using value curves

Tuesday, May 24th, 2011

So the first article in the blue ocean series introduced what a blue ocean was and the theory behind it. This one focuses on how you create a blue ocean. Actually there are no hard and fast rules, in my opinion most blue oceans are created by luck, experimentation or through frustration with existing industries, but there are some tools you can use if you want a more formal method.

How to create a blue ocean?

Sometimes companies can create totally new industries, as eBay did with the online auction industry. But in most cases, a blue ocean is created from within a red ocean when a company alters the existing industry boundaries. The classic example is Cirque du soleil who broke away from the highly competitive circus industry and created a new market that blurred the lines between circus and theatre.

If you are going to create a blue ocean from within a red ocean the key tool to use is a value curve.

The value curve is a graphic depiction of the way a company configures its offering to customers. It is drawn by plotting the companies offering relative to other alternatives based on key success factors in the industry. On the right you can see Quicken’s value curve which relates to the time when they first launched the business, you can see that they had a very different profile from the traditional financial software solutions on the market. A value curve is a powerful tool for pin-pointing potential points of difference and creating new market space.

Creating a new value curve

Another way to create a new value curve is to ask yourself the four questions in the graphic on the right.

These questions helped Formule 1 created a totally new product in budget hotels. They realised that the main thing customers wanted was a good night’s sleep so they raised the quality of the beds and the quietness of the rooms way above industry standard while removing features like lounges and restaurants. They reduced the room facilities so that they are only equipped with the bare essentials there are a few shelves and pole for clothing.

This radical approach allowed Formule 1 to capture the market share of budget French customers and now they are expanding into other countries.

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Blue ocean strategy and value innovation

Tuesday, May 17th, 2011

Competing in over crowded industries is no way to sustain competitive advantage. The real opportunity is to create blue oceans of uncontested market space that makes the competition irrelevant.

What are red and blue oceans?

Red oceans represent all the industries in existence today. In red oceans industry boundaries are defined and companies try to outperform their rivals to gain a greater market share. As the space gets more and more crowded, profits are reduced and products turn into commodities, and increasing competition turns the water bloody.

Blue oceans denote all the industries not in existence today – the unknown market space with no competition. In blue oceans, demand is created rather than fought over. There is ample opportunity for growth that is both profitable and rapid.

The classic example of blue ocean creation is Cirque du soleil who broke away from the highly competitive circus industry and created a new market that blurred the lines between circus and theatre.
Creating a blue ocean will allow rapid growth and high profits but eventually the space will invite competitors and erode profitability so  a blue ocean strategy requires that a company continually search for new ways to break away from the crowd.

 

Achieving differentiation and low cost?

Contrary to Porter’s generic strategies blue ocean strategy argues that the simultaneous pursuit of differentiation and low cost is achievable.  A blue ocean is created in the region where a company’s actions favorably affect both its cost structure and its value proposition to buyers. Cost savings are made from eliminating and reducing the factors an industry competes on. Buyer value is lifted by raising and creating elements the industry has never offered. Over time, costs are reduced further as scale economies kick in, due to the high sales volumes that superior value generates.

In my next post I will talk about how to create blue oceans.

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A framework for developing business strategy

Thursday, April 7th, 2011

This week I have been working on the strategy for a new start-up and thought it would be interesting to document the strategy framework that I was taught at business school.

1. Analysis

The first step is hard data and research and this is split into two areas: external analysis (i.e. the market and competitive landscape) and internal analysis (i.e. company resources and competencies). There are many tools you can use I have listed just a few but the key thing is that you have a profound understanding of the external and internal environments.

2. Strategy formulation

Once you have the data from your analysis you can start to develop your strategy. Everyone company has limited resources and imperfect information so you need to take tough decisions when deciding what to do and what not to do. There are many tools to help you take tough decisions such as Porter’s cost leadership vs. differentiation, resource based view, SWOT and following trends (this is what Nokia did when it transformed from Wellington boot maker into a telecoms giant it followed the massive trend growth in mobile phones). What is strategy.

3. Strategy execution

Once you have developed your intended strategy there are many strategic schools of thought on how to execute it. The two that I use are deliberate and emergent strategies.

Deliberate strategy – Once you have allocated resources to an intended strategy you have your deliberate strategy which you then execute. Strategy formulation and execution are separate events. However this approach tends to preclude learning.
Emergent strategy – This is where you formulate and execute at the same time, it is characterised by learning and using opportunities to shape strategy. However this approach tends to preclude control.

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