nekia strategy discussion confidential tel: (802) 296.8200 fax: (802) 296.8300 205 billings farm rd....
TRANSCRIPT
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NEKIAStrategy Discussion
Confidential
Tel: (802) 296.8200 Fax: (802) 296.8300
205 Billings Farm Rd. Suite 2D White River Junction, VT 05001•
• •
November 18, 2005
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2Confidential
Some Departure Questions…
• What is strategy?
• How would you describe your core business?
• What are the critical trends at work in the markets you serve?
• Are you the market leader in your core business, or is one of your competitors? Should you care?
• How do you think about growth in your business?
• What characteristics define the perfect investment?
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3Confidential
Agenda
Important Themes in Strategy Development
The Strategic Value of Market Leadership
A Growth Planning Framework
Questions & Open Discussion
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4Confidential
Defining Strategy
Strategy is the allocation of scarce resources
Strategy is a proprietary set of actions that better serve customers than the competition to build lasting market advantage
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5Confidential
10 Ideas Chief Executives Use all the Time…
1. Businesses must be grown or sold
2. Surplus growth is a central objective
3. Customers always act in their perceived self-interests
4. Real prices fall against a constant unit of customer value
5. Market leaders hold the most potential for superior returns
6. A growing market begets competition
7. All strategic analysis includes the variable of competition
8. Investment in advantaged positions yields superior returns
9. Operational excellence is not the same as strategy
10. Many strategies “implode” from lack of internal consistency or poor execution
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6Confidential
Agenda
Important Themes in Strategy Development
The Strategic Value of Market Leadership
A Growth Planning Framework
Questions & Open Discussion
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7Confidential
A Question…
What does the Educational
Knowledge Market look like?
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8Confidential
Understanding Market Structure
- Important Segments
- Market Size
- Growth Rates
- Competitor Positions
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9Confidential
Market Definition
Same customers Same cost structure
Different customers Different cost structure
One Business
Separate Businesses
Compete in both segments to take
advantage of synergies
Do not compete in both segments
Depends on the degree of
competitive advantage
conferred by sharing
Shared customers and/or
Shared costs
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10Confidential
The Importance of Business Definition
• Companies that define their business incorrectly make poor strategic decisions…
Costs Competitors
Incur unnecessary costs
Forgo opportunities to capture synergies
Do not transfer experience
Underinvest in important R&D initiatives
Overlook relevant competitive threats
Miscalculate “market share”
Set inappropriate performance targets
Overlook relevant capacity changes
Misjudge true cost position
Customers
Neglect profitable customer segments
Over-invest in unprofitable customers
Forgo opportunities to capture synergies
Misjudge relevant market trends
Overlook relevant geographies
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11Confidential
Market Segmentation
Customer
ProductTechnology
ChannelGeography
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12Confidential
Another One
8% 16% 8%Total: $215MM
Other
Coalition of Essential Schools
Direct Instruction
Core Knowledge
Ventures
Galef/DWoKModern Red SchoolHouse
Accelerated Schools
Co-nect
America's Choice
Success for All
Other
Middle Start
ELOB
Modern Red SchoolHouse
Accelerated Schools
Galef/DWoK
Ventures
Turning Points
Co-nect
Success for All
America's Choice
Other
SchoolDevelopmentProgram
ActionLearningSystems
ATLAS
ELOB
CoalitionofEssentialSchools
TalentDevelopmentHigh School
Co-nect
Ventures
High SchoolsThat Work
America'sChoice
Elementary Middle Grades HighSchool
$123MM $70MM $21MM
0
20
40
60
80
100%
Market Growth Rate, Two-Year CAGR:
School Reform Market ’02-03
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13Confidential
The Demand Curve
Talent Development High School
Action Learning Systems
America'sChoice
Eff
ecti
ve S
chools
Co-nect
Gale
f/D
WoK
Mod
ern R
ed S
choo
lHou
se
Nati
onal
Inst
itute
for
Dir
ect
Inst
ruct
ion
Urb
an L
earn
ing C
ente
rs
Successfor All
Turn
ing P
oints
ATLA
S
Talent Development Middle School
Coalit
ion o
fEss
enti
al S
chools
Mid
dle
Sta
rt
Acc
eler
ated
Sch
ools
Ven
ture
s
ELO
B
Integrated ThematicInstruction
Core
Know
ledge
Hig
h S
chools
That
Work
Making Middle Grades Work
Lights
pan
AV
ID RenaissanceLearning
0
50,000
100,000
$150,000
Unit
Pri
ce
Major Competitors Across CSR Award Universe
25% 50% 75%0% 100%
School Reform Market, 2003
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14Confidential
What They Tell Us…
- Aggregate Market Size and Growth Characteristics
- Segment Shares and Growth Rates
- Competitor Scope and Share
- Identities of Market Leaders
- Clues about Competitor Strategies
- Potential Candidates for Partnership/Acquisition
- Occasionally, New Fields of Opportunity
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15Confidential
Another Question…
Why should you care
about market share?
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16Confidential
Another Question for You…
Does Big Co. Lead its Market?
34
2
Big Co.
1
5
2
BigCo.
3
6
7
Big Co.
5
Market1
Market2
Market3
0
20
40
60
80
100% 4671
2
3
5
Big Co.
Markets 1, 2 and 30
20
40
60
80
100%
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17Confidential
Relative Market Share
• Market Share quantitatively measures an organization’s position in its market
• Generally speaking, the higher the share, the better the position. The “Market Leader” has the highest share
• There are two primary ways to calculate…
• The most common is the least useful: Market Share = Revenue / Market Size (expressed as a % of total market)
• This first method is limited because it provides no insight into an organization’s share relative to its competitors. The second method solves that problem
• Relative Market Share = Revenues / Revenues of Most Important Competitor (expressed as a multiple, i.e., 1.0X, 0.6X, 3.4X, etc.)
• Often referred to as RMS
• For the market leader, the most important competitor is the 2nd largest player. For all others, it is the market leader
• Thus, only one organization in a market has an RMS > 1.0
• According to empirical studies across businesses, there is a strong positive correlation between RMS and margins
• Market leaders have the potential to earn the highest margins
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18Confidential
But Why?
The Experience Curve
• This relationship between relative share and profit potential is grounded in an idea called the experience curve
• The experience curve is an observed economic phenomenon which says that it is the nature of prices to decrease predictably as a function of cumulative production (accumulated experience)
• This effect can be observed repeatedly: in rapid growth or low growth businesses, in manufacturing and services, and across different value-added functions (production & marketing)
• The behavior of costs underlies this relationship
• Effect is driven by three major sources: scale, technology, and learning
• Competitors who have the most accumulated experience have the potential for the lowest costs, although poor management can obscure this reality
• Interestingly enough, market share leaders also command the highest prices
• Thus, a point of market share is worth more to a market leader than it is to any other competitor in the industry
• Market share, expressed in relative terms, determines long-term profitability
• Within a company, the relationship between profitability and a business’ competitive position is often dramatic
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19Confidential
A Powerful Relationship
RMS (Log Scale)
Re
turn
on
Sa
les
(%
of
Sa
les
)
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20Confidential
The Sensitech Example
U.S. Temperature Monitoring Market, 1998
Sensitech
B
C D
C
g .5g .8g
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21Confidential
The Sensitech Example
U.S. Temperature Monitoring Market, 2004
Sensitech
Sensitech
D
.5g .3g -
E F
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22Confidential
Relative Growth
0%
20%
40%
60%
80%
100%
0% 20% 40% 60% 80% 100%
Audrey CohenNE Illinois
SchoolDevelopment
ULC
Depaul (Urban)
ELOB
Avid
ATLAS
Modern Red
High Schoolsthat Work
Accelerated SchoolsCore Knowledge
LightspanCo-Nect
America'sChoice
DifferentWays ofKnowing
Coalition of Essential Schools
DirectInstruction
SFA/R&W
Other
Reference$25MM
Design Team Growth 03-04
Wh
ole
Sch
oo
l Re
form
Gro
wth
03
-04
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23Confidential
“Mechanics” vs. “Dynamics”
• As we discussed, market leaders have the potential to earn the highest margins
• Assuming good management, if companies grow at identical rates their margins will maintain constant relationship with one another
• Yet, this rarely happens in nature. In reality, companies grow at different rates
- Companies fail to meet the performance standards they require in new products because they willingly over-invest in weak competitive positions
- In so doing, the companies under-invest in advantaged positions
• When competitors grow at different rates, their market shares and cost positions change
- Share declines lead to lower margins
- Share increases lead to expanding margins
• In the long run, profitability changes are functions of relative growth
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24Confidential
Agenda
Important Themes in Strategy Development
The Strategic Value of Market Leadership
A Growth Planning Framework
Questions & Open Discussion
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25Confidential
A Question…
How do you systematically look
for growth?
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26Confidential
The Paradox of Leadership…
• Each point of market share is worth more to a leader than a follower
• Scale and experience curve economics
• Price premium
• Reinvestment potential
• The better your core business is performing the more likely there is potential for both top and bottom line improvement
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27Confidential
The Starting Point…
Your Core Business
CORE
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28Confidential
Adjacencies
Growth Opportunities That…
• Reinforce or defend the core business
• Leverage core business capabilities and assets
• Add value to customers in the core business
• Provide potential for leadership economics
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29Confidential
Developing New Opportunities
CORE
Technology
Channel
Geography Product / service
CapabilityCustomer /
customer segment
Backward integration
Forward integration
Local
Global expansion
New-to-world
New-to-company
Direct Indirect New segments
Microsegmentation of current segments
Leverage business processes
Knowledge management
Process and systems
Innovation
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30Confidential
The Further from the Core, The Lower the
Odds
Unrelated diversification (<1% success)
3 steps (7%)
2 steps (26%)
1 step (38%)
Core
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31Confidential
So, how do you measure economic
distance from the core business?
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32Confidential
Back to Business Definition…
Core
1 StepAdjacencies
2-3 Step:Adjacencies
Multi-Step Adjacencies
Diversification
Shared Costs
Shared Customers
Shared Channels
Shared Competitors
Shared Capabilities
Shared Technology
Shared Costs
Shared Customers
Shared Channels
Shared Competitors
Shared Capabilities
Shared Technology
Primary dimensionsPrimary dimensions
Full Share
Partial Share
No Share
Full Share
Partial Share
No Share
Full Share
Partial Share
No Share
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33Confidential
Odds of Success Vary by Vector…
FailureSuccess
NewGeography
NewChannel
NewBusiness
0 20 40 60 80 100%
27% average
Source: GE Equity
Forward / BackwardIntegration
New CustomerSegment
New Products& Services
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34Confidential
Opportunity Assessment
HighLowAttractiveness
Relatedness
Low
High
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35Confidential
The Success Loop
GenerateHigh Customer
Satisfaction
Invest inSuperiorProducts
AcquireNew
Customers
ProvideQualitySupport
SustainHigh Customer
Retention
FinancialSurplus
ExpandOrganizational
Resources
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36Confidential
Agenda
Important Themes in Strategy Development
The Strategic Value of Market Leadership
A Growth Planning Framework
Questions & Open Discussion
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37Confidential
Do these ideas relate to your business?
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38Confidential
Magritte’s Caution…
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39Confidential
End of Document
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40Confidential
Blank Chart