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Leg Zero. Wrap up Leg Zero. The compass of Strategy.

Hi to all of you!!!!

I hope you are happy, happy, happy with this weekend arrival. We are going to start with the Volvo Ocean Race this weekend. In Alicante. I wish I could have wings and travel there, but given my economic constraints as an entrepreneur,  I have to delay my wishes to travel to Alicante to see this big event.  So far, one day I hope to be there with my beloved Alex Guillermo Lozano Artolachipi. My best wishes to all the 7 teams. ¡Y que gane el mejor!

Let´s go back to business modeling writing. We have finished the Leg Zero of our Strategy Race. We finished with Porter´s Industry Analysis. Yes! we did it!. We are so excited about the awesome starting of the Volvo Ocean Race 2017-2018, and before sailing fully, I would like to remind you of the route schedule. The Volvo Ocean Race starts on Sunday (Alicante time), which is 8 hours ahead of San Salvador, where I live.

 Volvo Ocean Race Strategy Ride

Leg One is between Alicante and Lisbon. The teams expect to race 1450 nautic miles and they hope to arrive in 7 or 8 days. Our next strategy topic to be developed during the Leg One is Core Business Fundamentals.

Today, I would like to Wrap Up Porter Industry Analysis.

Why is it important to do a Porter Industry Analysis? Let´s answer this question. When we decide to allocate money, personnel, new projects or any other type of resources, we have to do a forecasting analysis. We can´t just jump into the water and let the waves guide us. First of all, we must have a business model (as I explained it 4 months ago). Secondly, we perform a strategic analysis. And third, we validate economically with our financial model, financial projections, and economic valuation. The profits potential and economic returns of any company or capital investment projects are based on the “assumptions” to make realistic forecasts. This financial forecasting is based upon anticipated returns five to ten years ahead. The “assumptions” are inputs taken from the strategy analysis.

We can´t do a financial analysis and valuation without a strategic analysis. Let´s think about the strategy analysis as our compass. For sailors, the compass is like breathing. A company without a strategy is like an abandoned boat in the sea without a compass.  All the teams at the Volvo Ocean Race never lose their compass (in whatever format) in order to be faster and win with their strategy, their team spirit cooperative coordination and “the compass”… Oh my God, how important is the compass

To think 10 years ahead is a complex task. We need to predict changes in turmoil and crazy waves. But we have to try. According to Professors Palepu, Healy and Bernard,  “A company´s value is determined by its ability to earn a return on its capital in excess of the cost of capital”. Our bank, capital markets, and our external investors determine the cost of capital (debt or equity). Nevertheless, “the profit potential is determined by our strategy analysis, and we need to do strategic choices. Which choices?”

  1. “The choice of an industry or a set of industries in which the firm operates” (the industry analysis we developed during Leg Zero).
  2. “The manner in which the firm intends to compete with other firms in its chosen industry or industries” (competitive advantage analysis)
  3. “The way in which the firm expects to create and exploit synergies across the range of business in which operates (corporate strategy analysis).”
  4. The way your company operates with your people, resources and capabilities. This is the internal analysis of your firm.

The whole strategy analysis involves an (1) Industry analysis, (2) a competitive strategy analysis, (3) a corporate strategy analysis and (4) an internal analysis of your firm. And after you have finished with these 4 analyses, do not think we are done.  The whole strategy analysis is not complete until it is validated with two more sections:

  1. Creation of Shared Value (CSR) Analysis: The creation of Shared value for the community is a basic validation of any business model and strategy. Without it, we are not creating beautiful companies.
  2. Ethical and Integrity Analysis: This is the final “cherry on top of our whipped cream” analysis: The value added of ethics and integrity into our companies has to be included if we want to create a legacy of long-term value creation and strategic fit for our “beautiful businesses”.

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If you wish to download the slides in PDF format, click here: Eliescalante Compass Strategy 2017-2018.

We already finished understanding the industry profit drivers, which come from the Porter´s Industry Analysis. When we apply this model, we are able to identify the variables, the economic factors or determinants that drive the industry profitability. Moreover, each of the five Porter´s forces influences an industry´s average profit potential and our beautiful company financial projections too. For more than a month, we covered each of Porter´s five forces, and we dedicated time for each key determinant factors or structural variables. We shared extensive amount of examples for each of them:

  1. The degree of rivalry among existing competitors,
  2. The threat of entry: the  ease with which new firms can enter the industry,
  3. The availability of substitute products,
  4. The power of buyers and
  5. The power of suppliers.

Now, let´s do not lose perspective. The industry analysis is just a little tiny piece of our strategic analysis. Remember this. Our compass can´t be lost during the race. We are just getting started.

Source References:

http://www.volvooceanrace.com/en/route/leg-1.html

http://www.volvooceanrace.com/en/news/8266_The-secret-to-speed.html

http://www.sail-world.com/USA/Volvo-Ocean-Race–Tightly-grouped-fleet-in-a-drag-race-to-the-Azores/98330?source=google.sv

https://www.plastimo.com/en/news/8/iris-50-compass-the-champions-choice-in-the-volvo-ocean-race.html

http://www.hbs.edu/faculty/Pages/profile.aspx?facId=6527

http://www.hbs.edu/faculty/Pages/profile.aspx?facId=6475

http://www.wiley.com/WileyCDA/WileyTitle/productCd-1119120845.html

 

Note: All the pictures and videos shown on this blog do not belong to me. I do not own any of the lovely photos posted unless otherwise stated.

 

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