FW1 - Mental Imagery
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30 days before opening.
Strategy is the art to combine all your means to achieve goals. According to economics laws, the best strategy is the movement that goes from the back to the top along the value chain. What is more, a long term strategy must take Ethics in account.
Lesson: 1 hour
External readings: 1 hour
Do it yourself: 0
Total: 2 hours
Our objectives are to give you
-Long range advices for piloting your business in the future.
-Ethical advices for surviving in some difficult areas.
1-ASSESS YOUR BUSINESS
There are many fads about strategy. Some of them looks like good jokes! They have just been invented to provide high priced consultancies!
In the modern world, your company goal is to maximize the value you bring to your customers. As a result , you will increase the long term value of your business.
11-Focus on the value chain
What is the value added by your company and where does it come from?
For example, lets suppose a corporate that constructs and sells cars; Its value chain looks like that:
1-You buy steel: Cost of steel bought:---------- 200
2-You employ machines and workers: Cost of workers and
depreciation machines:------------------------- 700
3-You employ trucks and stores: Cost of Depreciation:
4-You have a retailer network Sales force:------ 300
5-Administrative Costs of the lobbies:----------- 200
Of course, you have to make a profit. Due to competition, you cannot sell your cars above $2000. Now, you must determine where is this profit coming from?
Obviously, it does not come from operation 1: Anybody could buy steel. It does not come from operation 3 and 5 because anybody is able to own or manage stores and too much people pay already useless money for luxurious lobbies, idle secretaries and ineffective executives!
In fact, value comes from operations 2 and 4: Of course, machines and workers do not produce value by themselves but their combination involves creativity, and knowledge. That is this skill which brings the value. On the other hand, anybody is not able to sell cars: brands, trademarks, sales channel, sales force are very strong assets and provide a great value.
If you refer to the costs, you can see that your profit (500) is coming from the productive process: 500*700/1000=350 and from the sales force: 500*300/1000=150.
12-Strengths and weaknesses
Now, you could reason like that: Since my value comes from 2 and 4, how can I increase the share of these operations in my global cost (1500)?
The best way is to fill up a matrix where you note with A (very good) to D (very bad) the main departments of your enterprise.
-Staff: Remind that human resources are the key asset of any modern business. You have to realize a close inventory of skills, motivations and knowledge. Higher the knowledge, higher the note.
-Productive capacity: What is the quality of the machinery, what does it require in maintenance? If the machinery is updated, you put a D.
-Systems: Are all the procedures focused on the customer? Accounting, data base, information system have to be comprehensive.
-Intangibles: Patents, trademarks, brands, sales channel are very important assets and must be carefully graded.
-Structure: The structure is the whole organization. Does this structure focus on the customer or simply enjoy trade unions?
According to your business, you can investigate other fields: For example, a famous guru, Thomas Peter recommends the seven S model ( Structure, system, skills, style, staff, super ordinate goals, strategy). It looks nice! Of course, when all these elements work together the company is a success story.
Now, you know yourself. Time is coming to enter in the battlefield!
2-THREATS AND OPPORTUNITIES
Once again there are five key points:
Competition including new entrants is the law of free trade. If you fear new entrants, do not enter in business. In fact, you can protect yourself with brands. But brands follow fashion and they disappear and appear every year on the world market.
Nevertheless, when you observe a bulk of new entrants, it means that you have lost your competitive advantage and that you have certainly some movement to prepare!
-The power of buyers is the rule in a free economy: You have not to contest it, you have just to play with it. Never forget: the customer is always right! Analyze the customers needs; hear the sale force, look at the business press. Every morning, when you get up, put your feet in the customer shoes!
-The power of suppliers is a threat because they can increase their prices but we have seen that in the case of the oil producers, this power did not work. In fact, suppliers are also in competition. What is more and thanks to technical progress, customers get the opportunity to use substitutes.
-The threat of substitutes (For instance synthetic rubber) must be carefully evaluated: So, you have to analyze technical progress trough the scientific press. As substitutes appear every day, you have to determine if they can offer a competitive price.
For example, there are substitutes to fuel such as solar energy but insofar as their prices remain higher than fuel, the oil business can be quiet. Anyway, when a substitute exists there is a real threat that it will get quickly a competitive price. In our opinion, substitutes are a real threat for existing business and reciprocally the best luck for new business!
-State regulations represent undoubtedly the worst threat and a serious cause of bankruptcy for any business: For example, tobacco industry has been seriously affected by increasing regulations.
Some politicians seem to confuse an enterprise with some vacation resorts, hospitals, or mental clinics! In fact, when you are faced with such a situation, the only way is to get away from the game and to start your business in another country.
Now, you have the elements that enable you to act.
The value chain provides a ground for strategic movements. There are mainly three strategic movement both adapted to a defensive or to an expansion strategy.
You buy the steel 200 and you know that the steel plant makes a profit on you evaluated to 40. So, if you mine and transform the steel, you will add 40 to your value chain. In this case, there is a vertical integration.
As it operates, at the beginning of the value chain (the mine in this example) it is a backward integration. Now, lets suppose you do the same, with distribution, in being retailer by yourself, it would be then a forward integration because you move to the end of the value chain.
Now, focus on the strategic reasoning: If you produce your own steel, you add 40 to the value chain and you have to invest 500. In investing only 1000 in the car process you already add 350. Obviously, with your backward integration, you could weaken your global productivity and it does not look as a good idea.
Be very careful about vertical integration: When you go backward, toward raw materials and agricultural products, you will probably become impoverished. Inversely, when you go forward, you incorporate more knowledge into the product and consequently you get more value (remind economics)
When you have determined that building car is the best way to add value, a good idea to raise your profit is to acquire the competitors who do the same thing.
For example, you buy a foreign competitor who constructs the same type of car for another market. It is an horizontal integration and an expansion strategy since there is a new market.
When you do not change the market, the horizontal integration just enables you to get a bigger share of the market. That is called a penetration strategy.
When opportunity exists, horizontal integration is a good way to expand or to penetrate quickly: Instead of investing by yourself, you will benefit from the existing investment.
Nevertheless, it is not always the best way: Maybe, the existing investment is outdated. In this case, you have rather to invest by yourself than to acquire obsolete technologies. Moreover, in investing by yourself, it will be easier to standardize the product, to realize economies of scale and to get low costs, than with an horizontal integration.
Many mergers have failed because this important aspect had been forgotten.
Now, lets suppose you are in the steel business. As we have seen, steel does not add much value because it is a primary technology with many new entrants from the far east Asia. With the money you have accumulated along the years, you have rather to create a bank than to invest more money in the declining steel business. For this reason you see many conglomerates that are appearing.
That is a diversification. It is a related diversification, when you change the product but you keep the same market and a unrelated diversification when you change both the product and the market.
In the globalization context, a diversification often means relocation. When you move to new activities requiring more knowledge, you free the place for less advanced countries that are happy to produce steel.
As these new entrants produce at low prices, the money the customers save can be spent for new activities requiring high technologies. These new activities recruit the guys who have lost their job in the steel industry and finally every people benefit from this diversification.
The ability to diversify requires different conditions:
-Firstly, your initial business must be a cash cow. It means a business which has a large market share in a low growth industry. Thanks to the cash this business provides, you do not need bank loans to invest in a new sector.
Otherwise, if your initial business is a dog, that is to say an out dated business with a small market share, the move to diversification presents more risks than in the former situation.
-Secondly, you must have a new business in high growth sector. A business with a small market share in such a sector is a question mark. A business with a potential big share ( because its possible to cut cost) is called a star. Everybody wants to own a star. For example, on line education is a star.
-Thirdly, a diversification needs a very articulated staff since it is difficult to manage, in the same time, a steel plant and a biotech start-up. To day, conglomerates have lost the favor of investors because they think that when you have no more core business, time is coming to leave the competition.
34-The knowledge movement
In our opinion, the best strategy is to move from the back to the top along the value chain. It is that we call the knowledge movement because it implies to acquire more and more knowledge both in the process of production and in the final product by itself
The main arguments are the following:
-In moving along the value chain, you keep the same basic skills: to construct cars for example. You just improve the quality of your product or the effectiveness of your sale force. So you remain on your core business and in upgrading constantly your products, you keep the new entrants at bay.
-In improving technologies, you can use more and more capital rather than labor. It means that you will reduce your costs and consequently your selling prices.
-As you have moved to the top of the value chain and to the tertiary services, you will find here a growing demand. Thanks to this demand, a cost strategy can work. It means that your market will increase in proportion of the reduction of your costs because the elasticity of the demand is very high for such products or services ( for example computer and compact disks)
You must take notice that a cost strategy is only adapted to products including knowledge. If you sell wheat or barley, the effect of low prices will not automatically increase your market share!
Finally, the best strategy is:
-to include more knowledge in the product in order to reach a growing demand (see economics)
-to include more knowledge in the productive process in order to reduce the costs ( new technologies instead of labor)
Of course this ability depends on the quality of the staff. More you go to the products including knowledge, more you need educated people.
Remind that you have learnt in former chapters: The only worth raw material is located beyond your ears! In other words, knowledge is the road to success.
Down earth advice:
Remind that the value chain is your north pole! It will prevent you to go on the bad side of the analysis. There are here some usual mistakes:
-"I make a vertical integration because I want to take the control over my sector". That is a common saying in European business, maybe a nostalgia from feudalism! Your job is not to get power and fame but to add value for the customers!
-"I make an horizontal integration because I want to get a complementary activity". Why ? Does this complementary activity add value?
-We have kept the best for the end: "I make a diversification to procure jobs in a rural area".
When you hear a guy saying that, you have better to sell all the stocks you own in his company! The goal of a company is not to procure jobs but to provide with goods the customers.
Ethics has become a part of business curriculum because corporate's must be aware of their social responsibilities. Today, Ethics cannot be separated from strategy.
In fact, you have to consider two situations:
Your business is located in a liberal Democracy: As we say in global philosophy, liberal Democracy is the frame of happiness and so of good. In a liberal Democracy, to do good means to obey to the laws. There is no more to say.
Your business is not located in a liberal Democracy: In this case, your business will face every day with some ethical dilemmas.
1-To solve them, you can use a stakeholder analysis that describes harms and benefits for people affected by a business decision: Environmental groups, local communities, political interests, children, animal rights and so one.
As there are no laws or regulations, you have to make up your mind and to refer to that would be permitted or forbidden in a liberal Democracy. This analysis is a good practice to avoid trouble with your neighborhood.
2-In general, you must follow some strong principles: Never be involved in some traffic or rotten bargains. More precisely, be very clean about every kind of bribery. Do not accept gifts. Never give bribes. Bribery can put the trouble among your own staff and will surely expose you to blackmail. Remind that it is better to lose a contract than to be involved in some monkey business!
What is more, if a civil servant asks you a bribe, report it to your embassy and to international organizations. Bribery is a plague for free trade. Fight it!
3-In foreign countries, try to understand the host culture but do not copy it: With globalization, business behaviors tend to be the same everywhere. Keep close to the best practices and every people will understand and respect you.
Do good and you are sure to do well!
Go to www.transparency.org . It's a prestigious and honorable site dedicated to the struggle against corruption.
Lesson summary and farewell!
It's now up to you!
One final piece of advice: You are going to come across unforeseen difficulties, just like anybody else.
Whenever you have a problem, whenever you're feeling disheartened:
Look back at the visioning course and do the specified exercises. Always keep focused on your vision!
Have confidence in your vision and you will succeed!
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