Stephanie McCoy

1. WHAT IS STRATEGY Stephanie McCoy March 2010

2. What is Strategy? • What is Strategy? “Strategy is about being different” --Michael Porter

3. What is Strategy? • Elements of Strategy: • Mission: Who the Firm wants to be • Strategic Intent: What the Firm wants to achieve • Competitive Advantage: How the Firm can achieve its strategic intent

4. Strategic Vision: Mission • Mission defines WHOthe firm wants to be • Defines purpose • Timeless and visionary

5. Strategic Vision: Mission Examples Whole Foods, Whole People, Whole Planet Nike brings inspiration and innovation to every athlete* in the world *If you have a body, you are an athlete Meritage delivers superior investment returns by combining equity and expertise to build successful communications businesses

6. Strategic Vision: Strategic Intent • Strategic Intent: WHAT the firm wants to achieve

7. Strategic Vision: Strategic Intent “If there’s a fork in the road, take it” -Yogi Berra

8. Strategic Vision: Strategic Intent THE APOLLO PROGRAM: “I believe that this nation should commit itself to achieving the goal, before this decade is out, of landing a man on the moon and returning him safely to Earth.” --President John F. Kennedy, 1962 Why did the Country get so excited?

9. Strategic Intent Characteristics • Defines the “what” not the “how” • Very Long Term • Captures the essence of winning • Implies “stretch” not “fit” • Motivational and directional • Tool for empowerment, not a tool for centralization • Think the unthinkable

10. Strategic Intent Examples Six Hondas in a two-car garage Maru-C (translation: Encircle Caterpillar) To put a Coke within ‘arm’s reach’ of every consumer in the world 1975: A computer on every desk and in every home 1999: Empowering people through great software anytime, anyplace, and on any device

11. Competitive Advantage • Competitive Advantage is HOW the firm will achieve its strategic intent • Doing something unique and different that customers value

12. Competitive Advantage Economic Engine COMPETITIVE ADVANTAGE Core Competencies Customer Segmentation Value Proposition

13. Customer Segmentation • Strategic selection of a sub-segment of an addressable market to create or enhance a competitive advantage Segment Definition Customers not consuming any product or consuming only in inconvenient settings NONCONSUMERS Customers who consume a product but are frustrated with its limitations; they display willingness to pay more for enhancements along dimensions most important to them UNDERSHOT CONSUMERS Customers who stop paying for further improvements in performance that historically had merited attractive price premiums OVERSHOT CONSUMERS

14. Customer Segmentation Company Customer Segmentation Nonconsumer: In creating a bazaar without borders, eBay allowed an exchange of goods without dependency on geography NONCONSUMRERS Nonconsumer: Pioneered the creation of the MP3 with legal content in a revolutionary digital format Apple Undershot : Wealthy, health conscious consumer who values organic environmentally friendly products UNDERSHOT CONSUMERS Undershot : Uber wealthy urban females seeking unparallel shopping “experience” Overshot: Frequent mid level business traveler (i.e. salesperson) who wants low prices and on time flights. OVERSHOT CONSUMERS Overshot: Initially rural customers and later inclusive of price sensitive urban shoppers. Value low prices, will tolerate sub par customer service, quality and store amenities

15. Competitive Advantage Economic Engine COMPETITIVE ADVANTAGE Core Competencies Customer Segmentation Value Proposition

16. Neiman Marcus, Whole Foods, Apple Wal-Mart, Southwest Airlines, IKEA Value Proposition • Profitability benefit of Value Proposition Industry Average Competitor Premium Differentiated Competitor Low-Cost Competitor Sales Price Costs

17. Competitive Advantage Economic Engine COMPETITIVE ADVANTAGE Core Competencies Customer Segmentation Value Proposition

18. Venture Capital Value Chain VALUE CREATION INVESTMENT SELECTION INVESTMENT SOURCING EXITING FUNDRAISING Value Chain & Core Competencies Value Chain • A value chain is a template that breaks down a company’s entire activity set • Represents steps that must be taken to deliver and support a product/service to end user

19. Core Competencies Core Competency • A core competency is a business activity in which a firm can be BEST IN WORLD • Three tests of a core competency • Provides potential access to a wide variety of markets • Makes significant contribution to perceived customer value and benefits • Difficult for competitors to imitate • Must support the value proposition • Consider outsourcing activities that aren’t core competencies

20. Core Competencies • Premium Differentiated Core Competency Profile MERCHANDISING and MARKETING CUSTOMER SERVICE PROCUREMENT SALES Core Competency Description MERCHANDISING & MARKETING •High quality products displayed in unrivaled storefronts to create a luxurious shopping environment •Full-time art curator and custom designed chairs in the cosmetics department •Intentionally limits expansion to maintain elite image •Best in class marketing through luxurious catalogs, interactive website and customer loyalty programs CUSTOMER SERVICE •Career track for sales associates: full time employment with 200 hours of new hire training and 160 hours of annual recurring training •Commission-based compensation •InCircle frequent shopper program provides luxurious gifts for consumers spending in excess of $5,000 annually

21. Core Competencies • Low Cost Company Core Competency Profile CUSTOMER SERVICE DESIGN MANUFACTURING DISTRIBUTION MERCHANDISING SALES Core Competency Description DESIGN • Modularly designed furniture • Easily warehoused • Easy assembly • Modern sleek look • Less expensively transported MERCHANDISING • •Furniture displayed in full room settings • •In house daycare • Store locations near airports on huge real estate plots

22. Competitive Advantage Economic Engine COMPETITIVE ADVANTAGE Core Competencies Customer Segmentation Value Proposition

23. Economic Engine • Economic Engine is a single financial measure of the competitive advantage • Profit per X • If you could pick one and only one ratio – profit per X – to systematically increase over time, what X would have the greatest and most sustainable impact on your business?

24. Economic Engine Key Economic Shift Competitive Advantage Impact Profit per Commentary CUSTOMER Shift from profit per DIVISION to profit per CUSTOMER Note exploiting core competency in blade technology to their advantage Analyzing profit per customer enabled the ‘razors and razor blade’ model whereby Gillette sells razors at a loss to lock-in customers to its highly profitable recurring revenue stream from disposable razor blades. CUSTOMER VISIT Shift from profit per STORE to profit per CUSTOMERVISIT Required Walgreens to create core competencies in real estate and product placement After initially avoiding high real estate costs, Walgreens shift to profit per customer visit led to the strategic insight to pay a premium for high profile store locations with multiple entry ways EMPLOYEE Shift from profit per LOAN to profit per EMPLOYEE Did not change the low cost value proposition, but required new core competencies in technology to increase employee productivity and encourage online banking Wells Fargo’s profit per employee engine created a lean cost structure well-equipped to face the economic reality of banking commoditization in the face of deregulation.

25. Leveraging Core Competencies • When a Company is seeking growth and diversification, it must leverage existing core competencies: • Example: Honda Honda Core Competencies Small Engine Design Moderate Scale Assembly with Outsourcing Creative Distribution Business Opportunities that leverage core competencies Compact Business Jets Motor-cycles Misc. Pumps Gener-ators Out-boards Lawn Mowers Snow Blowers Small Cars

26. Appendix

27. Strategic Analysis • Industry Analysis • Competitor Analysis • Company Analysis • Critical Issues

28. Industry Analysis – Five Forces • Michael Porter’s Five Forces framework analyzes an industry’s attractiveness based upon five elements • Enables a company to devise appropriate plan of action • Position the company to provide the best defense against the most threatening competitive force(s) • Influence the balance of forces through strategic moves • Anticipate changes in underlying forces and choose strategy before others recognize change

29. Industry Analysis – Five Forces THREAT OF ENTRY Intense Rivalry Exists when: Sources of Barrier to Entry • Numerous competitors with equal size/power • Slow industry growth • Lack product differentiation • Low switching costs • High exit barriers • Rivals are diverse in strategies, origins and personalities • Economies of Scale • Product differentiation • Capital requirements • Cost disadvantages independent of size’ • Access to distribution channels • Government policy COMPETITIVE RIVALRY POWER OF SUPPLIERS POWER OF BUYERS • Supplier group powerful if: • Dominated by a few companies • More concentrated than industry it sells to • Limited competition in supplier products • Credible threat of forward integration • Industry is not important to supplier group • Buyer group is powerful if: • Concentrated or purchases in volume • Purchases standard/non-differentiated products • Earns low profits • Industry’s product unimportant to quality of buyer’s product/service • Credible threat of backward integration SUBSTITUTES Products that a buyer can choose in place of your offering

30. Industry Analysis – Five Forces • Five Forces Analyses -- Airlines Airline industry highly unattractive Neutral Positive Negative

31. Industry Analysis – Five Forces • Five Forces Analyses – Pharmaceutical Industry Pharmaceutical industry highly attractive Neutral Positive Negative

32. Competitor Analysis – Smart Bombing • Process of identifying all significant current and future competitive threats • How could the competition crush you? How can you crush the competition? • Example: Starbucks Smart Bomb Analysis Competitor: McDonald’s

33. Competitor Analysis – Smart Bombing Competitor: Specialty Coffee Houses

34. Company Analysis - SWOT Minimize Maintain Overcome Take Advantage Of

35. Critical Issues • What Can Make the Company Widely Successful? • What Can Put the Company Out of Business? • Typically limited to 5-7 items

36. WHAT IS STRATEGY Stephanie McCoy March 2010