W 3 S

Establishing a strategy
for value creation

IBUS 6013 Week 3
Presented by
Shanie Atkinson
International Business
The University of Sydney
Page 1
Why do businesses pursue growth?
What are we seeking to grow?
Page 2
Our aim
To identify strategies that will deliver increased value to

shareholders
Realise above market returns on the funds employed in
the business
There are always alternative investment opportunities

Shareholders are investing in the the business and its management
Page 3
Aim 1: To identify strategies that will deliver

increased value to shareholders
How do we value a business?
Net present value of future cashflow
Market based multiples of earnings
Net asset value
Page 4
Aim 2: Realise above market returns on the

funds employed in the business
Reasons why firms out perform
Industry or market based view superior firm performance is
a result of industry structures
Porter (1980, 1990), Bain (1951, 1956, 1968), Mason (1939)
Resource based view a firm is made up of resources and

capabilities, superior performance is as a result of a unique
mix of resources and capabilities
Barney (1991), Prahalad & Hamel (1990), Prahalad & Bettis
(1986), Wernerfelt (1984), Penrose (1959)
Page 5
ORGANIZATION
ENVIRONMENT
Industry
Suppliers
Customers
Competitors
Substitutes
Economy
Government
Society
Technology
Nature
Tools:
PESTEL
Porters 5 forces
Structure conduct performance
SWOT
Industry value chain
Positioning
The
University of Sydney tools
STRATEGY
Strategy
needs to fit
Resources
Capabilities
Goals
Architecture
Structure
People
Systems
Culture
Leadership
Tools:
Resource and
capabilities analysis
- VRIO
Firm Value chain
Cashflow analysis
Page 6
From the past.

What has been the rate of growth?
What has been the industry conditions?
What position have they taken in the industry?
Has growth been successfully achieved?
What are the resources and capabilities that have
developed within the firm?
What are the challenges to growth going forward?
Page 7

!#

#

+!
)(((
Page 8
Attachment 1: Oil + Gas / Mineral Resources Value Chain - 2000
Major contractors
can provide total
project solutions
Fabricators,
Construction
Contractors
(Elephants Dancing)
Very large Asian
contractors (eg.
Hyundai) can provide
total oil + gas platform
solutions
In resources, some
construction companies
(eg.Leightons) will
provide a complete
project package
(including engineering)
directly to the client.
Engineering
Service
Providers
(Few Players)
Globally, significant
mergers
Some significant players
have disappeared
through major project
disasters
Fewer, bigger global
players (Kvaerner, Flour,
Wood, Technip, Amec)
Less willingness to take
on project risk (some big
failures in the past)
Global players have not
succeeded much in
Australia / S.E. Asia projects too patchy.
Oil + Gas,
Resource
Companies
(Significant Restructuring)
Majors are merging (eg
Mobil-Exxon, BP-Amoco,
BHP-Billiton, RTZ-CRA,
etc) to form mega majors
As they increase in size,
tendency is to outsource
functions, including
engineering
Second-tier companies
pick up smaller assets and
they have limited inhouse
engineering capability
Search for new energy
solutions and use of
technology (BP)
Oil + Gas /
Resource
End Demand
(Strong Demand)
Continuing demand for
oil, gas, and resources
particularly in the region
because of China and
Asia growth
Shift towards bigger and
sometimes more difficul
projects as easy
reserves are depleted
Many significant
resources (particularly
gas) in the region
Page 9
1. What are the dynamics of the Oil and Gas Engineering

Industry in Australia and South East Asia? Complete a Porters
5 forces analysis and draw conclusions. Looking forward what
do you expect will occur in the industry?
2. What resources and capabilities does Worley currently have?
Do any of these provide a competitive advantage?
What value does Worley provide to their customers?
Page 10
&!" *!$$
!
!

Industry:

%
Has the structure of the industry competitors
been changing? Concentrating or
&*$
fragmenting?
Strength of Forces:
Which if the 5 are the critical forces?
Increasing intensity or decreasing? Is the
industry more rivalrous?
Future: Which of the 5 forces will be
important in the future? What is the likely level
of rivalry in the future?
& !
Bargaining power
of suppliers
Competitors:
Who have been the most successful
competitors in the industry? What strategies
are they pursuing? On what basis do they
compete? Any aggressive competitors?
Future: Who are the important competitors in
the future? On what basis are they likely to
compete? Who wont survive?
"$" "!
Future: will there be fewer or more

competitors in the future? What is the likely
structure of the industry?
Threat of new entry
Industry
Competitors
Bargaining power
of buyers
Rivalry among
existing firms
&* !
Threat of substitute products or

Emerging and future industry competition
services
&!$"&"!
and profitability:
What has been the emerging trend in
industry profitability? What has been limiting or
constraining the industry?
Future: How will the changes to structure
impact future profitability? Is the future
Page 11
industry profitability likely to be higher/lower?
Simple Industry Value Chain
Suppliers
Industry
competitors
Customers
FFinal consumers
Consider the value creating activities in the path from raw materials to final
consumer.
Where are the strengths (and therefore profits) in the chain?
Future outlook:
Is there any structural change occurring in the chain?
Do participants compete in more than one link?
What will the industry value chain look like in 3 to 5 years? And beyond?
Is the chain fragmenting or consolidating?
Page 12
&!" *&

Are their any significant
changes in the industries
that supply?
Will our suppliers be
able to command more
power over the value
chain in the future?
Will the availability of
key resources be of
increasing importance in
the future?
Industry
competitors
How is the industry

structure changing?
Is the industry
becoming more or less
competitive?
How are key
competitors changing?
Which competitors are
succeeding? Why?
Which arent? Why?
Is the value proposition
offered by the industry
changing?

FFinal consumers
What are the important

shifts for channels,
distributors and direct
customers? Which are
becoming the more
important source of sales
and profitability?
What do they want from
us and our competitors?
Is the structure of the
channels changing? Which
channels will become more
important? Are they gaining
more power? Is this a
threat to our future?
What will be the

growth in demand over
the next 35 years?
What are the underlying
drivers of growth?
Which are the growth
segments?
What are the
important shifts for endconsumers/customers?
How are their
preferences changing?
Derived from Robert Bruce (2005)

Page 13
Forces in the industry value chain
Potential
Entrants
Push
Suppliers
Industry
competitors
Substitutes
Pull
Customers
FFinal consumers
Growth?
Value shifts?
Major product/
market shifts?
Page 14
3 Horizons of Growth
Horizon 1
Extend & defend
current businesses
= profit growth
Horizon 2
Build new
businesses
= revenue growth
Horizon 3
Create viable
options for future
businesses
Page 15
Consider Worleys current business activities (exclude growth

options for now) as at 2000:
Complete Worleys 3 horizons of growth analysis
What conclusions can you draw?
Page 16
Growth Options for Worley

1. Saudi Arabia and the Middle East
2. Houston
3. Mining and minerals
4. General Infrastructure (e.g., roads, bridges, water, etc.)
5. Commercialise software technology
6. Minor project development
Page 17
Options for growth matrix
New or Modified
Products
Existing
Products
PRODUCT
DEVELOPMENT
DIVERSIFICATION
MARKET
PENETRATION
MARKET
DEVELOPMENT
BASE
Existing Market/
Customers
New Market/
Customers
Options for Growth Model, Igor Ansoff, 1965, Corporate Strategy, McGraw-Hill New York, p.109
Page 18
Risk matrix
New or Modified
Products
Existing
Products
PRODUCT
DEVELOPMENT
DIVERSIFICATION
MARKET
PENETRATION
MARKET
DEVELOPMENT
BASE
Existing
Customers
New Market/
Customers
Source: Day (2007) Is it real? Can we win? Is it worth doing? Harvard Business Review
Page 19
The Market Axis position
Page 20
The Product Axis position
Group exercise
Refer to the Product Market Risk Matrix
(discussed in G. Days paper)
Plot each of the growth options
on the matrix. Refer to the
questions in Days paper to
help you plot the position of
each option on the matrix.
Based on the analysis what
options do you recommend
Worley pursue?
Page 21
Growth Options
1. Saudi Arabia and the Middle
East
2. Houston
3. Mining and minerals
4. General Infrastructure (e.g.,
roads, bridges, water, etc.)
5. Commercialise software
technology
6. Minor project development
Page 22
Portfolio Analysis
Page 23
Resources based view of the firm
Firms are a bundle of productive resources and capabilities

Different firms possess different bundles of resources and
capabilities (assumes firm heterogeneity and uniqueness)
Differences in resources and capabilities in firms bring about
performance differences between firms
Competitive advantages are derived from unique resources and
capabilities (assessed by VRIO framework)
Page 24
Tangible Resources and capabilities

Technological
examples: possession of patents, trademarks and copyrights
Financial
examples: ability to generate internal funds or to raise
external capital
Physical
examples: location of plants, offices and equipment; access
to raw materials and distribution channels
Organisational
Examples: formal planning, command, and control systems;
integrated management information systems
Source: Peng, M. Foundations of Global Strategy 2006
Page 25
Intangible Resources and capabilities

Human
examples: knowledge, trust, managerial talents,
organisational culture
Innovation
examples: A supportive atmosphere for new ideas; research
and development capabilities; capacity for organisational
innovation and change
Reputational
Examples: perceptions of product quality, durability, and
reliability among customers; reputation as a good employer;
reputation as a socially responsible corporate citizen.

Page 26
Steps in Internal Analysis
1. Identify firm resources and capabilities

2. Determine strategic value of resources and capabilities (VRIO)
3. Identify any linkages between resources and capabilities
4. Determine implications for strategy
How can they be exploited further
Overcome weaknesses by development and acquisition
Page 27
Assessing resources and capabilities
Consider the firm value chain and how the business adds value across the
chain by applying the business resources and capabilities
R&D
Procurement
Production
Distribution
Advertising
Sales
Service
Pricing
Undertaking
Syndication
Placement
Trading
Site
selection
Purchasing
Staff
education
Supervision
Store
mgmt
Distribution
Advertising
Store merchandising
Manufacturing
Financial
Fast food
restaurant
Retail
Product
development
Business
Concept
planning
Product
development
Advertising
Restauranttype
development
Buying
Selling
Sales
promotion
Service
Page 28
. !& !$! '

$$''"!",
Valuable?
Rare
?
Costly to
imitate
?
Exploited by
organisation
?
Competitive
implications
Firm
performance
No
No
Competitive
disadvantage
Below average
Yes
No
Yes
Competitive parity
Average
Yes
Yes
No
Yes
Temporary
competitive
advantage
Above average
Yes
Yes
Yes
Yes
Sustained
competitive
advantage
Persistently
above average

Page 29
$* "&$!" !& !-$!-

"
*!"! !!
&$&!!!!.
Value Chain Activities
Inbound
Logistics
Technology
Operations
Sales and
Marketing
Distribution
Service
Business A
The image
cannot be
The image
cannot be
The image
cannot be
The image
cannot be
The image
cannot be
The image
cannot be
The image
cannot be
The image
cannot be
Business B
Business C
Business D
The image
cannot be
Business E
Opportunity to combine purchasing activities to gain more leverage with suppliers
Opportunity to share technology, transfer technical skills, combine R&D
Opportunity to combine sales & marketing activities, use common distribution
channels, leverage use of a common brand name, and/or combine after-sale service
No sharing opportunities
Page 30
BCGs Growth-Share Matrix

High
Industry
Growth
Earnings: low,
unstable, growing
Cash flow: negative
Strategy: Evaluate
Horizon: 3
Earnings: low,
unstable
Cash flow: neutral
or negative
Strategy: Divest
?
Dog
Earnings: high
and growing
Cash flow: neutral
Strategy: Invest for
growth
Horizon: 2
Earnings: high, stable
Cash flow: high, stable
Strategy: Harvest
Horizon: 1
Cash cow
Low
Low
Relative Market Share
High
Page 31
Attractiveness of the industry

!* #" )
Protect
Protect
position
position
Medium
Build
Build
selectively
selectively
Selectively
Selectively
manage
manage
for
for
earnings
earnings
Build
Build
selectively
selectively
Harvest
Harvest
Low
High
High
Invest to
Invest
build to
build
High
Medium
Build
Build
selectively
selectively
Limited
Limited
expansion
expansion
or Harvest
or Harvest
Harvest,
Harvest,
divest
divest
Low
Business units ability to compete within the industry Page 32

Business units ability to compete within the industry

!* #" )
Industry attractiveness
Market growth rate
Market size
Demand variability
Industry profitability
Industry rivalry
Global opportunities
Macroenvironmental factors
Ability to compete
Market share
Growth in market share
Brand equity
Distribution channel access
Production capacity
Profit margins relative to
competitors
Page 33
Parents ability to extract value
Is there the ability to create value thru

synergies with existing resources &
capabilities?
(
Natural
Owner
(High)
One of
the pack
(Low)
High
Medium
Low
Measures of industry
attractiveness:
Market size
Industry growth rate
Cyclicality
Barriers to entry
Threat of new entrants
Threat of substitutes
Supplier power
Buyer/customer power
Intensity of rivalry
Business units value creation potential as a standalone enterprise

Industry attractiveness & competitive position
Page 34

(
someone else.
Parents ability to extract value
Is there the ability to create value thru

synergies with existing resources &
capabilities?
Divest structurally attractive businesses if they are worth more to

Retain structurally mediocre (or even poor) businesses if you can coax
more value out of them than other owners could.
Natural
Owner
(High)
Give top priority to business units that lie toward the far left of the
matrix - either by developing them internally if you are their natural
owner or by selling them as soon as possible if someone else is.
Consider improving a business unit and selling it to its natural owner if
you are well equipped to increase the value of the business unit through
One of
the pack
(Low)
internal improvements but not in the best position to run it once it is in

top shape.
High
Medium
Low
Business units value creation potential as a standalone enterprise

Industry attractiveness & competitive position
Page 35
Case Part A: Worleys strategic direction

In groups:
Analyse the growth options using the GE McKinsey & MACS frameworks to
evaluate Worleys growth options
Note: For the MACS framework
1. Evaluate stand alone attractiveness
2. Evaluate Worleys ability to extract value using value chain of
activities and identify opportunities to leverage existing resources
for each of the growth options
3. Combine the above 2 steps to map the growth options on the
MACS matrix
Assume you are appointed as a corporate advisor to Worley, advise John
Grill about which growth options to pursue (be able to support your
recommendations with your analysis) based on all of your analysis
Page 36
Stand alone attractiveness of Worleys

existing businesses and growth options
Worley
Oil & Gas in Australia
Oil & Gas in SE Asia
Saudi Arabia & Middle East
Houston
Mining & Minerals
General Infrastructure
Software
Minor Project development
Stand-alone attractiveness
(High, medium, or low)
Measures of industry
attractiveness:
Market size
Industry growth rate
Cyclicality
Barriers to entry
Threat of new entrants
Threat of substitutes
Supplier power
Buyer/customer power
Intensity of rivalry
Page 37
Readings
Creating Corporate Advantage, Collis, D and Montgomery, C.,
Harvard Business Review, May-June 1998
Staircase to growth, Baghai, Coley & White, McKinsey Quarterly
(in Learning Resources on BlackBoard)
MACS: The Market Activate Corporate Strategy Framework,
McLeod & Stuckey, McKinsey Quarterly (in Learning Resources on
BlackBoard)
Assignment 1 is due in 2 weeks: Work on your research for your
individual presentation
Page 38

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Establishing a strategy

for value creation

The University of Sydney

Why do businesses pursue growth?

What are we seeking to grow?

The University of Sydney

To identify strategies that will deliver increased value to

There are always alternative investment opportunities

The University of Sydney

Aim 1: To identify strategies that will deliver

The University of Sydney

Aim 2: Realise above market returns on the

Resource based view a firm is made up of resources and

The University of Sydney

From the past.

The University of Sydney

The University of Sydney

Attachment 1: Oil + Gas / Mineral Resources Value Chain - 2000

The University of Sydney

1. What are the dynamics of the Oil and Gas Engineering

What value does Worley provide to their customers?

The University of Sydney

Future: will there be fewer or more

Threat of new entry

Threat of substitute products or

The University of Sydney

Simple Industry Value Chain

How is the industry

What are the important

What will be the

Derived from Robert Bruce (2005)

The University of Sydney

Forces in the industry value chain

The University of Sydney

The University of Sydney

Consider Worleys current business activities (exclude growth

The University of Sydney

Growth Options for Worley

The University of Sydney

Options for growth matrix

The Market Axis position

The Product Axis position

The University of Sydney

The University of Sydney

Resources based view of the firm

Firms are a bundle of productive resources and capabilities

The University of Sydney

Tangible Resources and capabilities

Intangible Resources and capabilities

Source: Peng, M. Foundations of Global Strategy 2006

Steps in Internal Analysis

1. Identify firm resources and capabilities

The University of Sydney

Assessing resources and capabilities

The University of Sydney

   . !& !$! '

Source: Peng, M. Foundations of Global Strategy 2006

$*  "&$!" !& !-$!-

BCGs Growth-Share Matrix

Relative Market Share

The University of Sydney

Attractiveness of the industry

Business units ability to compete within the industry Page 32

. !& !$! '

$* "&$!" !& !-$!-