MPAcc 801
Business Environment and
Strategy
Internal Analysis III
(Activity Analysis of Industrial Firms)
01 June 2010
Agenda 01.06.10
• Feedback on Part I Strategy Projects
• Feedback on Half-way Survey
• Internal Analysis III (Activity Analysis for
Industrial firms)
– Value Chain Analysis (read ‘Creating competitive
advantage’ RP, review Chp 5 ‘Creating business
strategies’ RP, plus review articles on BB)
– JetFighter Competition
• Please practice making planes prior to class to
get full benefit!
MPAcc 801 Spring 2010
Dr. Norman T. Sheehan, Ph.D, CGA, CMA
Half-way Student Feedback
• What do you like best about the course?
– Interactivity, in-class exercises, hands-on nature,
discussions – 33
– Group work and presentation practice – 7
– Strategy focus, strategic thinking – 6
• What would you change?
– Feedback on first presentation before second – 10
– Less readings/content – 9
– All is good – 6
– Cheaper book – 4
MPAcc 801 Spring 2010
3
Dr. Norman T. Sheehan, Ph.D, CGA, CMA
Half-way Student Feedback
• I like it when the instructor:
– Informs class of current events relating to strategy
– 38
– Uses humor effectively – 9
– Facilitates discussions – 5
• I dislike it when the instructor:
– Lectures – 2
– Is the board – 1
MPAcc 801 Spring 2010
4
Dr. Norman T. Sheehan, Ph.D, CGA, CMA
Half-way Student Feedback
• Most helpful assigned reading thus far:
– Porter’s What is strategy? – 9
– Magretta’s What is Management? – 8
– Oil Patch Banker – 5
– Why companies fail – 3
– Are you sure you have a strategy? – 2
• Least helpful assigned reading thus far:
– OSC Governance Principles – 8
MPAcc 801 Spring 2010
5
Dr. Norman T. Sheehan, Ph.D, CGA, CMA
Half-way Student Feedback
• Main concerns thus far
– None – 9
– Applying knowledge to UFE – 8
– Too many assignments in next two weeks – 7
– Time pressure on presentations – 2
MPAcc 801 Spring 2010
6
Dr. Norman T. Sheehan, Ph.D, CGA, CMA
Agenda 01.06.10 – Cont’d
Next class Fri, 04 June
• Blue Ocean Strategy and Innovation (read ‘Blue
Ocean strategy’ BB, ‘The path to growth’ BB, ‘Using a
value creation compass to find “blue oceans”’ BB,
review Magretta Chp 7)
• ‘Good Hands Healthcare’ case presentations,
discussions, board Q&A
– Groups 4,5,6 present the case (15 min), while
groups 1,2,3 hand-in the case and act as the
board/provide peer critique
MPAcc 801 Spring 2010
7
Dr. Norman T. Sheehan, Ph.D, CGA, CMA
Good Hands Healthcare
Case Assignment (04 June)
1.
2.
3.
Use concepts from the articles ‘Why do strategies fail?’ and ‘When growth
stalls’ as well as any other relevant course readings to explain why Good
Hands Healthcare is under-performing relative to its rivals. As part of this
analysis, use Hambrick and Fredrikson’s (2005) strategy evaluation criteria
(#1-5) from Table 1 (pg. 61) ‘Testing the Quality of Your Strategy’ to critique
its current strategy. (50 points)
Outline the key opportunities and risks for Good Hands Healthcare and
then develop a new strategy for Good Hands that takes into account its
strengths and weaknesses, changes in its environment, and its aspirations.
(50 points)
Critique Good Hands Healthcare’s current governance practices and
propose changes to bring its governance up to 2010 NYSE governance
standards. As part of your critique of and recommendations to improve
Good Hands’ governance, propose what the Board should do with its
current CEO, George Jackson, and discuss why. (50 points). You will be
presenting to Good Hands Healthcare’s Board.
MPAcc 801 Spring 2010
8
Dr. Norman T. Sheehan, Ph.D, CGA, CMA
JetFighter Exercise
• Your team is the senior mgmt group of the small and
financially challenged JetFighter company. Your
company has just won an important Government jet
fighter contract that needs to be fulfilled immediately.
In order to win the contract, your firm agreed to
produce at least 5 planes each period.
• The Gov’t inspector will buy all the jet fighters that
exactly meet the Gov’t Purchasing Criteria laid out on
last page of JetFighter Instructions
• We will have three teams – two groups will build the
Basic Training Plane, one group the Deluxe Combat
Plane
MPAcc 801 Spring 2010
Dr. Norman T. Sheehan, Ph.D, CGA, CMA
JetFighter Exercise
• Base Plane Price=$5M, Deluxe Plane Price=$10M
• Raw materials cost varies by type of plane and
amount purchased (see hand-out)
• Your team goal is to earn most profit:
Revenue
–
Cost
(Planes Passed*Sales Price) – (Planes Bought*purchase cost)
• Planes purchased but not completed or
approved in Period 1, cannot be used in Period 2
as they become obsolete
• There may be small problems with the raw
materials, but there are no refunds (sorry)
MPAcc 801 Spring 2010
Dr. Norman T. Sheehan, Ph.D, CGA, CMA
Steps in JetFighter Part I
1. Organizing, Planning & Training – 15 min
•
Develop vision/mission, decide strategy, organize
production, calculate break-even point and decide
how many planes to produce, practice making
planes…
2. Production Period 1 – 5 min
3. Instructor inspects/buys planes, calculates
profit for each firm – 10 min
4. Review of Value Chain and Analysis and
Discussion of how to improve your Period I
results
MPAcc 801 Spring 2010
Dr. Norman T. Sheehan, Ph.D, CGA, CMA
Steps in Activity Analysis
1. Identify how the firm creates value – transformation,
mediation, problem-solving
2. Use the correct template to break-down the firm and
its competitors into its value creating activities
3. Analyze activities and look for ways to reduce cost
•
•
Analyze activities
Analyze critical drivers for each key activity
4. Analyze activities and look for ways to increase buyer
willingness to pay
•
•
Analyze activities
Analyze critical drivers for each key activity
5. Goal is to drive the largest ‘wedge’ between the
buyers’ willingness to pay and total cost to produce
MPAcc 801 Spring 2010
Dr. Norman T. Sheehan, Ph.D, CGA, CMA
Step 1 – Identify the Correct
Value Configuration
•
Firms compete/create value differently:
– Industrial firms (such a Ford) transform inputs into
outputs – use value chain analysis (covered
today)
– Knowledge intensive firms (such as consulting
firms) solve clients’ problems – use the value
shop (covered 18 May)
– Network firms (such as mobile phone companies)
connect customers – use the value network
(covered 18 May)
MPAcc 801 Spring 2010
Dr. Norman T. Sheehan, Ph.D, CGA, CMA
Step 2 – Break-Down Firm into
Key Value Creating Activities
•
Support
activities
The value chain template has generic activity
labels
Infrastructure
Human resource management
Technology development
Purchasing
Primary In-going
activities Logistics
Production
Out-going Sales&
Service
Logistics Marketing
Need to allocate the firm’s actual activities to the correct categories
MPAcc 801 Spring 2010
Dr. Norman T. Sheehan, Ph.D, CGA, CMA
Activities of a PC Manufacturer
Infrastructure – Planning, Organizing, Gov’t relations, Quality
Human resource mgmt – Recruiting, Training, Compensation
Technology development – Design of product or process
Purchasing – Acquiring the raw materials
In-going
Logistics –
Handling
Raw Mats,
Inspection,
Inventory
Production –
Assembly,
Operation of
Plant,
Testing,
Maintenance
MPAcc 801 Spring 2010
Out-going
Logistics –
Storing,
Order
Process,
Shipping
Sales &
Marketing –
Advt,
Promotion,
Mgmt of
Salesmen
Service –
Technical
Support,
Repairs,
Service
Reps
Dr. Norman T. Sheehan, Ph.D, CGA, CMA
Step 3 – What are Drivers?
•
Drivers are those contextual factors (e.g.,
where the activity is performed, how many
time the activity has been performed, how
the activity is performed, etc.) which explain
why the cost of an activity is higher/lower
than competitors or the value generated by
an activity generates is higher/lower than
competitors
MPAcc 801 Spring 2010
Dr. Norman T. Sheehan, Ph.D, CGA, CMA
Step 3 –
Identify Key Drivers (Porter, 1985)
–
–
–
–
–
–
–
–
When was the activity started? (Drivers – Learning & Timing)
How large are the activities compared to competitors (Driver – Scale)
How large is the capacity of the activity relative to what is being used?
(Driver – Capacity Utilization)
How is the activity is related/coordinated with other activities in the firm
or or activities in sister units or activities of suppliers/ buyers (Drivers Linkages and Interrelationships)
Strategic choices regarding product features, variety, complexity of mfc
processes, buyers served, etc (Driver – Policy Choices)
Where is the activity performed relative to suppliers, customers, etc?
(Driver – Location)
Who performs the activity – is it done in-house or outsourced? (Driver –
Integration)
Gov’t regulations impacting an activity (Driver - Institutional Factors)
MPAcc 801 Spring 2010
Dr. Norman T. Sheehan, Ph.D, CGA, CMA
Key Cost Drivers in Value Chains
Scale Driver
Learning Driver
Unit
cost
Unit
cost
Time
Quantity
Capacity Utilization
Capacity
Linkages Driver
Supplier
Producer
Buyer
Units
Made
Jan Apr
MPAcc 801 Spring 2010
Jul Oct
Dr. Norman T. Sheehan, Ph.D, CGA, CMA
Step 4 – Compare to Competitors
•
Performance is relative!
•
Two Level of Comparison:
– First Cut
• Compare activity sets
– Second Cut
• Compare at level of drivers
• If more than one driver use 80/20 rule to
narrow it down – which driver causes 80% of
the difference in the activity’s cost/value?
MPAcc 801 Spring 2010
Dr. Norman T. Sheehan, Ph.D, CGA, CMA
Step 5 –
Improve Your Firm’s Position
Generic
Strategy
Key Strategic
Success Factors
Low Cost
Strategy
•Economies of scale
•Transfer of best practices to
sister units
•Economies of scope
•Superior low cost production
technologies
Differentiation •Unique styling/superior
product design
Strategy
•Customization
•Speed
•Convenient access
•Unusually high quality
•Premium brand image
MPAcc 801 Spring 2010
Key Threats
•Inferior product quality
•Rivals adopt newer, lower cost
production technologies
•Social, economic and political
risks of outsourcing production
to low cost countries
•Buyers do not perceive diff. or
unwilling to pay higher prices
•The cost of differentiation
exceeds buyer willingness to pay
•Over-fulfill buyer needs
•Lower cost firms successfully
imitate the diff. offering
Dr. Norman T. Sheehan, Ph.D, CGA, CMA
Step 5 –
Improve Your Firm’s Position
•
Look for ways to lower the firms’ cost or
increase the level of differentiation offered
(i.e. try to drive a larger ‘wedge’ between the
buyer’s willingness to pay and the total cost to
produce the product/service)
MPAcc 801 Spring 2010
Dr. Norman T. Sheehan, Ph.D, CGA, CMA
Steps in Jet Fighter Part II
1. Planning for Period 2 – 20 min
2. Production Period 2 – 5 min
3. Instructor inspects/buys planes, calculates
profit for each firm – 10 min
4. Declaration of a winning group – who earned
the most profit?
Winners of 2nd Round get a 10 for the day!!
5. Wrap-up discussion – see Discussion Questions
MPAcc 801 Spring 2010
Dr. Norman T. Sheehan, Ph.D, CGA, CMA
JetFighter Discussion Questions II
•
•
•
•
Did you fulfill your mission/vision? Why or why
not?
Why did the winning firm win? What are the
key success factors?
Outline what you would do to improve your
team’s performance in Round 3?
What are the pros and cons of value chain
activity analysis?
MPAcc 801 Spring 2010
Dr. Norman T. Sheehan, Ph.D, CGA, CMA
Issues with Value Chain Analysis
• Value chain does not fit with every firm
• Data intensive
• Complicated and time-consuming analysis,
especially at the level of drivers
• Hard to get information
MPAcc 801 Spring 2010
Dr. Norman T. Sheehan, Ph.D, CGA, CMA
Key Questions in Activity Analysis
• Which of the firm’s activities create value (i.e.
what do the customers really pay for)? Can this
be increased?
• In which activities are the costs incurred? What
affects costs? Can costs be reduced without
impacting buyer value?
• Which activities should the firm do itself? What
can the firm outsource?
• How are the activities organized? Can it be done
more efficiently and/or effectively?
MPAcc 801 Spring 2010
Dr. Norman T. Sheehan, Ph.D, CGA, CMA
Link to Strategy Project II
1. Identify how the firm creates value –
transformation, mediation, problem-solving –
choose the correct value configuration
2. Use the suggested template to break-down the
firm into its value creating activities
3. Analyze critical drivers for each key activity
4. Do steps 2&3 for each of firm’s competitors
•
•
First Cut Analysis – compare at activity level
Second Cut Analysis – compare at driver level
5. Revise Strategy to increase the ‘wedge’
MPAcc 801 Spring 2010
Dr. Norman T. Sheehan, Ph.D, CGA, CMA