Table of Contents
ENGM90014 - The World of Engineering Management
Introduction to strategy
Strategy seeks to create a competitive advantage that generates superior and sustainable financial/non-financial returns over the long run. It also seeks to provide a direction for an organisation by specifying its objectives, developing a plan to achieve those objectives, and allocating resources to implement the plan. It can be summarised into two questions:
- Where should we compete? Corporate strategy
- How should we compete? Business strategy
The strategy is usually encapsulated by the mission, vision and value statements.
Strategy can operate on three levels:
- Corporate Direction, composition and coordination of various single business units and product lines that make up the corporate entity
- Business Operation and direction of the Strategic Business Unit (SBU) or product line
- Functional Refers to individual business functions and processes within the SBU
In order to create a competitive advantage, we require a fit or consistency with the firm's external and internal environments. Practically we need to understand the business landscape and we need to choose a position in the business landscape with respect to the target market and value proposition. An industry analysis can utilise Porter's Five Forces model:
- Bargaining power of customers
- Threat of new entrants
- Threat of substitute products
- Bargaining power of suppliers
- Competitive rivalry within an industry
The ultimate objective of the analysis is to determine if a profitable and defensible position exists within the industry. Porter suggested that there are three generic strategies on which companies compete:
- Low cost Offering the same product at a lower price
- Differentiation Offering a product perceived to be better in some way than the alternatives, increasing willingness to pay
- Dual competitive advantage Offering a better product at a lower price than competitors
The target market is defined by the scope:
- Broad/mass-market
- Narrow/niche
The ultimate objective is to maximise the wedge between the willingness to pay and company's costs. The low cost competitor tries to reduce costs, the differentiated competitor tried to increase differentiation and the dual competitor tries both (very hard).
We want to ensure external consistency in the strategy. This can be with an acid test, asking if unique and valuable products/services are being offered to stakeholders. If so, you have likely achieved internal and external consistency, if not, you likely need to change the value proposition, target market and/or business landscape.
Formulating strategy
Formulating strategy is complex but necessary. Strategy can serve as a decision support (addressing the issue of rationality, simplifying decision making and limiting search costs) and as a coordinating device (providing an internal framework for buy-in, monitoring and measuring).
Strategy can be planned (top down) or emergent (bottom up). Most realised strategy is emergent. Planned strategy is deliberate and linear, whereas emergent strategy is iterative and constantly developed.
Strategy is a constantly evolving field with changing foci. Contemporary strategy is about creating sustainable competitive advantages that generate superior and sustainable returns in the long run. In practice, emergent strategies prevail but analytical frameworks provide the initial momentum.
Strategic frameworks
Frameworks provide a set of criteria for structuring information. A business strategy framework helps develop a effective business strategy by providing a system for gathering and analysing business information based on a set criteria with the purpose of developing business goals and an integrated plan for long term comparative advantage. Strategy frameworks differ in their focus on sources of competitive advantage, and can be used individually or in combination with each other as there is no singularly accepted model. Despite positive performance impacts, only 20% of firms have a formal strategic planning process.
SWOT analysis
SWOT stands for:
- Strengths
- Weaknesses
- Opportunities
- Threats
These can be assembled into a matrix of positive and negative against internal and external traits. SWOT is popular because it can be done quickly, buy can be expanded on after the initial draft. It is also easy to understand which can be useful for communicating to professionals who aren't trained in management.
PESTLE analysis
PESTLE stands for:
- Politics
- Economy
- Social
- Technology
- Legal
- Environment
PESTLE is an external environmental analysis tool, and is usually used as inputs to O and T in SWOT analysis. It is low cost and simple, but may be too simple and cause “paralysis by analysis”. Both SWOT and PESTLE can be useful starters in analysis.
Diversification strategy
Diversification is moving into a new line of business. The business can be:
- Related
- Unrelated
Diversity can create more value from the firm's existing capabilities but comes at a (bureaucratic) cost.
There are three tests to know if shareholder value will increase:
- Attractiveness test Is the industry structurally attractive or capable of being made attractive?
- Entry costs test Will the cost of entry capitalise all future profits?
- Better off test Will the new business unit gain synergy and competitive advantage from its link with the corporation or vice versa?
The value chain consists of the business activities. Backward integration is moving into activities previously done by suppliers. Forward integration is moving into activities previously done by buyers. Internalisation of activities can reduce costs and/or improve offerings, but must be weighed against bureaucratic overhead.
Boston Consulting Group (BCG) Matrix
Organises business units on two dimensions, (industry) growth rate vs market share. It assumes that the firms with the largest market share would have the largest profit margin (due to economies of scale and experience effects). Market growth is used as a measure of a market's attractiveness. Strategic planning is determined by the interplay of both factors. There are four possible strategies that can be proposed:
- Build market share
- Hold
- Harvest
- Divest
The matrix can be split into four quadrants:
| High market share | Low market share | |
|---|---|---|
| High market growth | Stars | ??? |
| Low market growth | Cash Cows | Dogs |
Stars are the rapid growth and expansion units. The ??? are new ventures, they can be risky but can become successful. Cash cows provide the ability to find stars and ???. Dogs should consider divestment.
This framework is useful for companies with multiple lines and business units. It can help to compare the internal business units. It is also simple and accessible. It neglects synergies between businesses. The assumption that market share and profitability may not be correct. It ignores other indicators of market attractiveness.
Porter's Competitive Forces Model
The competitive forces model consists of:
- Five forces framework
- Generic competitive strategies
- Value chain analysis focusing on long term competitive advantage
Five Forces
The five forces are:
- Threat of new entry
- Time and cost of entry
- Specialist knowledge
- Economies of scale
- Cost advantages
- Barriers to entry
- Supplier power
- Number of suppliers
- Size of suppliers
- Uniqueness of service
- Your ability to substitute
- Cost of changing
- Buyer power
- Number of customers
- Size of each order
- Differences between competitors
- Price sensitivity
- Ability to substitute
- Cost of changing
- Threat of substitution
- Substitute performance
- Cost of change
- Competitive rivalry
- Number of competitors
- Quality differences
- Other differences
- Switching costs
- Customer loyalty
The basic premise is that some industries earn consistently higher profits than others. This can be due to systematic differences in “industry structure”. Industry analysis involves understanding these forces that determine the intensity of the rivalry and inherent profit potential of each industry, which involves understanding:
- The underlying drivers of each force and their collective strength
- That the collective strength of these forces determine the profit potential of an industry
Hence, the basic premise of the model is: strategy requires understanding the structure and dynamics of your industry and aligning your organisation with this environment.
It can be difficult to make money when all of the forces are strong. However, not all forces are of equal importance to every industry. It can be possible to carve out a defensible position by mitigating or influencing forces.
Generic Strategies
Industry analysis reveals two ways of competing:
- On cost The low cost provider's efficient cost structure allows pricing below the industry average, which may put average competitors out of business in the long run
- On differentiation Differentiation involves offering unique product attributes that the customer values and for which a customer is willing to pay a premium
This yields three generic strategies or positions for competing:
- Cost leadership
- Differentiation focus
- Niche (specialised) focus
It is important not to get stuck in the middle, trying to pursue cost and differentiation.
Value Chain Analysis
Value chain analysis is focused on sustainability. It involves holistically analysing the value chain and looking for places to:
- Cut costs
- Differentiate
- Widen the V-C gap
The goal is to optimise performance, coordinate along the value chain and provide a consistent fit that locks out competitors. It seeks to maximise the difference between WtP (or value to customers) and cost to customers to provide a sustainable competitive edge.
The value chain consists of:
- Primary activities
- Inbound logistics
- Operations
- Outbound logistics
- Marketing and sales
- Service
- Support activities
- Firm infrastructure
- Human resources
- Technology development
- Procurement
The whole chain seeks to maximise margin.
Use of framework
The strategy development begins with a question. It requires analysing the five competitive forces, defining the industry and players and analysing their influence on profitability. The organisation needs to be positioned appropriately to create a competitive advantage, which required finding opportunities or influencing the forces. An appropriate competitive strategy needs to be formulated to counter the forces, choosing a generic strategy to implement. Finally, the strategy needs to be implemented in the organisation, with a holistic value chain analysis.
The framework faces criticism as it:
- Ignores some important players (government, unions, lobbyists)
- Is a static model and doesn't show how industry profitability can be impacted by dynamic changes
The framework doesn't explain why some firms perform better than others in the same environment.
Core Competencies and Capabilities
Created in response to Porter's externally focused paradigms. It is internally focused on a firm's core competencies and capabilities. The main idea is that the focus on competencies enables firms:
- To new and seemingly unrelated markets
- To create unique, integrated systems that reinforce internal fit among diverse technology and production skills
- To sustain long term competitive advantage but only through ongoing strategic investments in core competencies
Core competencies are an organisation's collective learning about how to coordinate production skills and integrate technologies. There are three tests to identify core competencies:
- Provides potential to access a wide variety of markets
- Makes significant contribution to end user value
- Difficult for competitors to imitate
The capabilities are more broadly the entire value chain of management expertise.
Firms have a portfolio of core competencies which exist across SBUs. This encourages inter-firm learning, collaboration and communication. The product portfolios and core products should be based on the core competencies. There should be continuous investment in core competencies and embedded skills to sustain the long term advantage. Incremental acquisition of core competencies helps safeguard against core rigidities, imitation and substitution.
This framework is criticised for being too internally focused and ignores market forces.
Resource Based View (RBV) Model
Attempts to combine internal and external perspectives on strategy. The main idea is that competitive advantage comes from a firm's ownership of valuable internal resources as determined by external market forces. This allows firms to build at lower cost and/or produce better quality products quicker than competitors. It motivates firms to focus on core business identified as sources of long term competitive advantage. Resources and capabilities are the interface between the firm and the strategy. Competitive advantage arises from ownership o:
- Valuable resources
- Physical
- Intangible
- Organisational
- Valuable capabilities (competencies)
- Management systems
- Social interactions
Resource heterogeneity is when no two companies have the same set of resources. Resource immobility is when the differences among firms tend to be long lasting as often time and costs are large to develop new resources.
The five external market test of value are:
- Inimitability Low if the resource is physically unique, a consequence of development activities, causally ambiguous or costly to imitate
- Durability
- Approachability By customers, company, distributer, suppliers, etc.
- Substitutability
- Competitive Superiority
To present a strategy with a RBV:
- Appraise the industry dynamics
- Identify the firm's capabilities
- Find the potential sustainable CA and appropriability of returns
- Select the strategy that best exploits the firm's resources and capabilities relative to external opportunities
- Identify resource gaps which need to be filled
Problems with strategy impliemnation
- Impliemnation slower than originally planned
- Unanticipated major problems
- Ineffective coordination of activities
- Competing activities - distracted attention away from impliemnation
- Insufficient capabilities of the involved employees
- Low levels employees inadequately trained
- Uncontrollable external environmental factors
- Inadequate leadership and direction by departmental managers
- Poor definition of key implementation tasks and activities
- Inadequate monitoring of activities by the information system
There tends to be poor communication between the strategy and those implementing it. Closing this gap by engaging people at all levels of the organisation is important in successfully executing strategy.
A balanced scorecard can be used to close this gap. It provides a framework that can translate a company's vision and strategy into a coherent and linked set of performance measures including outcome measures and performance drivers. It incorporates four perspectives:
- Financial
- Customer
- Internal business
- Learnings & Growth
This tries to balance measures of:
- Short and long term objectives
- Financial and non-financial measures
- Lead and lag indicators
- Internal and external perspectives
Strategy is central to all of these, and their analysis can give insight into the strategy.
Entrepreneurship, innovation and leadership
Entrepreneurship
Entrepreneurship is the process if designing, launching and running a new business by orgainising the necessary resources and assuming the necessary risks and rewards. A entrepreneur is a person who organises and manages any enterprise with considerable initiative and risk. There has been a recent boost of entrepreneurship due to:
- Corporate downsizing/layoffs and outsourcing
- GLobalisation with advances and falling prices in technology
- New opportunities and market niches
- Rapid expansion of middle class in rapid-growing economies
Entrepreneurial personality traits consist of:
- Social vs solo
- Motivated
- Integrity
- Creative
- Inquisitive
- Willing to fail
- Self-confident
- Competitive
Entrepreneurs tend to be suspicious of market research and the use of predictive information. There is the use of effectuation (future is unpredictable but can be shaped) over causation (predictibility of the future), which can be useful in the unpredictable start-up phase to reduce risks. Five principles forming effectual logic:
- Start with your means rather than pre-set goals
- Set affordable loss versus targeting a return and minimising risk
- Leverage contingencies versus avoiding surprises
- Form partnerships versus perpetual competitive approach
- Control, don't predict versus belief in the inevitable
To set up an entrepreneurial firm, you need:
- Develop an idea or goal to pursue
- Develop a business plan
- Choose a legal structure
- Arrange financing
Despite this, the failure rates for new companies are high.
Innovation
Innovation is doing things that are new. Intrapreneurs are the leaders of innovation and new idea generation development within firms. There are two types of innovation:
- Quantum technological change (radical change) Fundamental shift in technology that revolutionises an industry
- Incremental technological change (incremental innovation) Technological change that represents a refinement of some base technology
It is important to balance between exploration and exploitation.
- Exploration Creating or changing a firm's current competencies
- Exploitation Retaining a firm's current competencies
The exploration trap is when companies focus too much on exploration and exhibit too many underdeveloped ideas and too little distinctive competence. The exploitation trap is when companies focus too much on exploitation and find themselves in sub-optimal sable equilibria. A balanced organisation is referred to as ambidextrous.
Exploration is possible in a culture which supports:
- Autonomy
- Innovativeness
- Risk taking
- Pro-activeness and persistence
- Competitive aggressiveness
People who are good intrapreneurs:
- Circumvent orders
- Do what it takes to make the project work
- Are true to their goals
- Keep learning and reject irrelevant assumptions
- Work underground as publicity triggers the corporate immune system
To create the climate for exploration:
- Provide rewards for embracing risk, experimentation and failure
- Use bottom-up approach to encourage the continual flow of ideas from lower levels
- Encourage workplace heterogeneity
- Encourage cooperation
- Horizontal linkages among departments to encourage learning and innovation
- Multi-functional teams resourced and empowered to accomplish and accelerate product development
- Physical layout planned to encourage small team and informal communication
- New venture teams for exploring and developing new innovations
- Skunkworks/idea incubator as an informal group of intrapreneurs kept apart from the rest of the organisation
- Open innovation by looking for new ideas and implementations beyond the boundaries of the organisation or industry
Leadership
Leadership is the ability to influence people towards the attainment of organisational goals. Effective leadership can:
- Drive sustainable, optimal performance outcomes
- Shape corporate culture
- Motivate and inspire employees
- Encourage learning & internal/external networking
- Act as courageous change agents
A leader differs from a manager.
- Manager
- Planning & budgeting
- Orgainsing & staffing
- Controlling & problem solving
- Produces a degree of predictability and order
- Key to meeting current commitments
- Leader
- Establishing direction
- Aligning people
- Motivating & inspiring
- Produces change
- Key to moving the company into the future
Different theories of leadership exist, and try to characterise different aspects of it.
- Trait theories Focuses on characteristics that differentiate between leaders and non-leaders
- Behavoural theories Set of theories proposing that specific behaviours differentiate leaders from non-leaders
- Contingency theories Represent models of leadership that describe the relationship between leadership styles and specific organisational situations
Likewise there are different approaches to leadership.
- Charismatic A charismatic leader has the ability to motivate employees to transcend their expected performance
- Transactional A transactional leader clarifies subordinates' roles and task requirements, initiates structure, provides rewards, and displays consideration of followers
- Transformational A transformational leader has the ability to bring about innovation and change by creating an inspiring vision, shaping values, building relationships and providing meaning for followers
- Servant A servant leader transcends self-interest to serve others
- Athentic An authentic leader refers to people who know and understand themselves and maintain higher-order values
In order to succeed at innovation, we need to:
- Ensure high level business strategy fits the specifics of the innovation strategy
- Make sure that the new stream and the mainstream are configured to get the best overall result
- Set up, select and monitor the portfolio of innovation activities
- Ensure that every project is well managed and performing to its objectives
- Set up the cultural and behavioural elements of the organisation to support and fit the innovation strategies
- Measure the right innovation parameters
- Symbolically setting high standards of innovation “from the top”
Innovation leadership characteristics include:
- Formulation of innovation strategy
- Influence and inspire
- Determination and courage
- Goal and performance oriented
- Customer oriented
- Knowledge focused
- Leader as team builder
- Technological literacy
- Longer term commitment and values
- Smart with “complexity IQ”
- Open mindedness
- Personal behaviour and role modelling
Teams and conflict management
A team is a unit of two or more people with complimentary skills, regularly interacting and working toward a common goal. Teams can enhance performance and employee benefits. Teams can also lower costs and enhance the organisation. Teams also can have downsides, such as: unclear expectations, conflicts, insufficient information sharing and work duplication.
Teams form in five stages:
- Forming Getting to know every member, lots of uncertainty
- Storming Conflict and disagreement
- Norming Unity, consensus and team cohesion
- Performing Production, problem solving and task accomplishment
- Adjourning Team closure on task accomplishment
Conflict is normal and can be productive. There are two types of conflict:
- Task conflict Can lead to better decision making, decision acceptance, problem solving and greater commitment
- Relationship conflict Often counter-productive with negative outcomes
The team leader's role is to air and resolve conflict. Conflict can arise from:
- Clash of cultures
- Goal differences
- Lack of sensitivity to diversity
- Poor people skills, especially communication
- Volatile, fast-changing workspaces
- Limits on resources
Operations and supply chain management
There are four key management practices:
- Leadership
- People management
- Customer focus
- Quality
Businesses are built on strategy informing operating practices, which intern flow through measures of performance, rewards and recognition, behaviour and culture and back to operating practices. Operational excellence can be defined as: Delivered In Full On Time (Efficiency), In Spec (Quality and Effectiveness), being DIFOTIS. A high DIFOTIS (90%+) and excellence in customer focus and value creation leads to wealth creation. Effective competition requires compromise in offerings, as a more specialised firm will be able to out compete a more general firm in some cases, finding a niche.
- Law of Variability
- Law of Bottlenecks
- Law of Scientific Methods
- Law of Quality
- Law of Operations Focus
There are some fundamental laws in operations management: Supply chain management supports inspecting the entire supply chain, beyond the company's processes, in analysing the company. Improving parts outside the company can still improve the company. The collaborative value chain is a buyer and seller working together to increase value. It is becoming the dominant supply chain method.