Strategic Mgmt
Competition Intensity
"The essence of strategy formulation is coping with competition" (Michael Porter) • Competitive position is not a matter of chance, neither is it inevitable • Direct competitors alone do not define industry attractiveness • Competitive analysis positions the firm and shapes the industry • Porter's Five Forces Framework helps to analyze an industry and identify the attractiveness of it in terms of five competitive forces that together constitute an industry's 'structure' Porter's Five Forces is a simple but powerful tool for understanding the competitiveness of business environment, and for identifying strategy's potential profitability • Allows to understand the forces in environment or industry that can affect firm's profitability • Enables strategy adjustment accordingly in all its dimensions Competitive Rivalry: number and strength of firm's competitors. Who are they, and how does their quality and distinctiveness compare with firm's ones ? • Where rivalry is intense, companies can attract customers with aggressive price cuts and high-impact marketing campaigns • In markets with many rivals, suppliers and buyers can go elsewhere if they feel that they're not getting a good deal • Where competitive rivalry is minimal, and no one else is doing what the firm is doing tremendous strength and healthy profits potential Rivalry among established competitors - Concentration: Gillette, Coca-Cola/Pepsi likely to be a winner - take-all outcome - Excess capacity - Economies of scale • Fixed vs variable costs - Product differentiation # price war - Diversity of business models : car industry and Tesla • Supplier Power: how easy is it for suppliers to increase their prices. How many potential suppliers available? How unique is the product or service that they provide, and how expensive would it be to switch from one supplier to another? • The more suppliers are available, the easier it will be to switch to a cheaper alternative • The fewer suppliers and the stronger their position and their ability to charge will be è high risk on company's profit impact Buyer Power: how easy is it for buyers to drive prices down. How many buyers are there, and how big are their orders? How much would it cost them to switch from firm's products and services to those of a rival? Can they dictate terms to the firm ? Buyer Power: how easy is it for buyers to drive prices down. How many buyers are there, and how big are their orders? How much would it cost them to switch from firm's products and services to those of a rival? Can they dictate terms to the firm ? Threat of Substitution: likelihood of customers to find a different way of providing what the firm is doing • Example, if the firm supplies a unique software product that automates an important process, people may substitute it by doing the process manually or by outsourcing it • A substitution that is easy and cheap to make can weaken firm's position and threaten its profitability Threat of New Entry: firm's position can be affected by ability to enter its market. How easily this could be done ? How easy is it to get a foothold in its industry or market? How much would it cost, and how tightly is the sector regulated? • If the company has strong and durable barriers to entry, then it can preserve a favorable position and take fair advantage of it (protection for key technology)
Imperative to benefit from robust barrier(s) to entry, any one of those...
- First mover advantage - High return on capital - Low cost of capital (craft beers = limited capital requirement) - Cost advantage - access to raw materials, vertical integration, lean manufacturing
Market Structures
- Niche Markets: product differentiation, small players, easier profitability - Oligopoly consists of a few companies having significant influence over an industry, strategic interdependence, profitability determined by behavior (cars, airlines ,pharmaceutical, computers & software, Aluminum and Steel, Oil and Gas) - Monopoly: single firm (electric uLliLes) - Start-up ecosystem è the new Tech approach rolled-out in many industries
barriers to entry
- Product differentiation -USP for a lasting brand loyalty - Access to distribution - shelf space: accessibility, visibility - Legal barrier - patent (Nespresso...) - Retaliation power - price cutting, media spendings Barrier to entry contributes to build a competitive advantage
classical 5 steps approach
1. Define Scope - industry, region, years 2. Identify Key Drivers - PESTEL, forecasts, cube 3. Develop distinct scenario stories - name scenarios 4. Identify Impacts - check & adapt strategies 5. Monitor Progress - early warning indicators
Business Strategy - The Tools
1. The Pestel approach 2. The SWOT analysis 3. The BCG Matrix 4. Michael Porter's The Five Forces
Industry Attractiveness
1st strategic decision: which industry should the firm be engaged in ? • Precisely define the relevant industry • Where to draw the boundaries : the risk of strategic myopia short-sighted view and mindset • Theodore Lewitt suggests that « businesses will do better in the end if they concentrate on meeting customers' needs rather than on selling products » • Attractiveness = profit potential • Key element : the competitive structure of an industry determines its profitability • Monopoly or near (duopoly) - Microsoft nearly monopoly in PCs operating systems in 1995/2002 - Cola wars : Coca vs Pepsi • High/Low Barriers to entry - Rapid evolution • Business strategy and environment analysis How to measure industry's potential for profit ? ROE è Return on Equity • Corporate finance: ROE is a measure of the profitability of a business in relaGon to the equity • ROE is a measure of how well a company uses investments to generate earnings growth • ROE = Net Income /Equity Return on Equity • ROE of 20% means that 100 euros contributed by the partners or shareholders generate 20 € of net profit • The more efficient the company is, the higher its ROE is and the more investors it attracts
Relative Positioning
2 concepts about the relative positioning of competitors in the environment and finding new market spaces 1. The strategy canvas compares competitors according to their performance on key success factors (CSF) to establish the extent of differentiation. 2. The 'Blue Oceans' are new market spaces where competition is minimized
Business Models
A business model describes a value proposition for customers and other participants, an arrangement of activities that produces this value and associated revenue and cost structures New entrants with new business models can radically change the dynamics and competition in a market and establish superior positions (e.g. Uber, Spotify) There are 3 essential elements in a business model: •Value creation - a proposition that addresses a customer segment's needs •Value configuration - the way resources and activities are organized to produce this value •Value capture - the way the cost structures and revenue streams create added value for stakeholders. Two points need emphasis: • Business models once established are often taken for granted. Models can become institutionalised and form a 'recipe' for the industry - Notion of standard, comfort zone • Even if competitors share a business model their strategies may still differ. e.g. Airbnb have differentiation advantages based on their size and network effects even though others use the same model Three typical business model patterns are: • Razor and blade - named after the classic Gillette strategy of selling razors cheaply and profiting from sales of high priced blades (mobile phones, ink-jet printers) • Freemium - named by combining 'free' and 'premium'. Basic services are free to attract customers who then upgrade to expensive premium services (Spotify) • Multi-sided platforms - bringing together two or more distinct but interdependent groups of customers (Uber, video games, Google search)
Strategic Alliance
A strategic alliance is a collaborative agreement between 2 or more firms to pursue common goals • Many alliances are not involving equity participation: to pursue certain activities in a limited, well defined scope: IBM and Apple on enterprise mobility Wide variety of alliances - Airlines code sharing (Star Alliance / 28 members, Skyteam / 19 members) - Distribution agreements in pharma
Company's vision
A vision is very often articulated into a Mission, a statement intended for internal and external publics Mission Statement answers 2 types of questions « Why we exist and what we want to be » « What we believe in and how we will behave » • States a position and principles / values = company's culture
What is Business Strategy starting point ?
A vision, an ambition, a business Idea
Strategic Planning
An organization's process to facilitate strategy thinking and reorientation if and when required • It should reconcile corporate management responsibility for shareholders' interest decentralized decision making to fostering flexibility and responsiveness to meet customer expectations •Coordinated by strategic central team and it involves all stakeholders in the firm ie global and local teams Strategic planning plays a key role in Building consensus and alignment Communicating the strategy and its rationale Allocating resources Establish performance goals to guide and motivate
Advantages from firm's Resources and Capabilities
Appraising the relative strength of firm's of resources and capabilities 1. Appropriating -Be the real owner -Ability to appropriate value -Retain value 2. Appraising -Assess how firm measure up vs competitors -Avoid wishful thinking syndrome -Benchmarking: objective and quantitative assessment -Measure gap between average practice and best practice
the AIDA Model
Attention, Interest, Desire, Action The winning strategy • Be different from competitors • Create interest • Create value for customers
Ashridge portfolio display
Based on the concept of parenting advantage • Value-creating potential of a business depends also on the characteristics of the parent • Business Corporate-level capabilities, sharing resources, economizing on transactions costs • 'Feel' measures the fit between each business units critical success factors and the capabilities of the corporate parent. Does the corporate parent have the necessary 'feel', or understanding, for the businesses it will parent? • 'Benefit' measures the upsides, areas in which good parenting can benefit the business (for instance, by bringing marketing expertise). The parent must have the right capabilities to match the parenting opportunities. Diversification strategies can create value as businesses may benefit from being part of a larger group - parenting advantage + Potential benefits − Potential costs −Often additional bureaucratic costs = Ashridge Portfolio Display
The 3 ingredients for a winning strategy
Be different from competitors • Create value for customers • In a durable fashion
Benchmarking
Benchmarking: understanding how an organization compares with competitors or comparables • The Industry/sector benchmarking: performance standards by comparing performance against other organizations in the same industry sector or between similar service providers against a set of performance indicators : retailers and Amazon • The Best-in-class benchmarking compares an organization's capabilities against 'best-in-class' performance. - challenge managers' mindsets on incremental changes in resources or capabilities • Concept of dynamic capabilities, by which he means an organization's ability to renew and recreate its resources and capabilities to meet the needs of changing environments
Strategy starting point
Business Idea Lead innovation with the Big Idea Change paradigm Create value Desire for a future state It is a destination
Capabilities
Capabilities are "Firm's capacity to deploy resources for a desired end result" (Helfat and Lieberman, 2002) • Bundles of tangible and intangible resources • Result form the effort of multiple organizational members (collective) • Tend to be associated at one or more activity of a firm's value chain • Become stronger and more valuable strategically through repetition and practice
Strategy Definition
Choice of the firm's future, its « future state »in the medium to long term and the roadmap to get from current state to desired future state • A unifying theme that gives direction to decisions and actions to get there • Future state : coherent picture of markets and segments, technology, industry, organisation, people antd their capabilities The strategy is a looking-forward process, It aims at designing the road to reach the desired future of the firm This is done in 3 steps 1- Define objectives based on today's situation and vision of the desired future, 2 - Identify key drivers to achieve objectives 3 - Develop capabilities required to support the process
6th Dimension to the Five Forces
Complements
diversitfication
Corporate and the growth strategy • Diversification involves increasing the range of products or markets served by an organization • Related diversification involves expanding into products or services with relationships to the existing business • Conglomerate unrelated diversification involves diversifying into products or services with no relationships to existing businesses Moving beyond both existing markets and existing product, increases the organization's scope • Diversification strategies can create value as businesses may benefit from being part of a larger group - parenting advantage + Potential benefits to an acquired business is that it gains from the reputation of the group and potentially lowers financing costs − Potential costs arise because there are no obvious ways to generate additional value above businesses on their own − Often additional bureaucratic cost of the managers at headquarters who control them - Ashridge Portfolio Display Diversification involves increasing the range of products or markets served by an organization • Related diversification involves expanding into products or services with relationships to the existing business: LVMH and Tiffany • Conglomerate unrelated diversification involves diversifying into products or services with no relationships to existing businesses
GE / McKinsey Matrix
Corporate portfolio planning model to determine potential for profit growth • Industry attractiveness: market size and growth, return on sales • Business Unit competitive advantage: market share, return on sales vs competitors
cost leadership strategy
Cost-leadership strategy involves becoming the lowest-cost organization in a domain of activity • Ryanair pursues a relentless low-cost strategy in the European airline industry • 4 drivers -Input costs -Economies of scale -Experience curve -Product and process design
The BCG Matrix
Created by the Boston Consulting Group • A framework for analyzing firm's products portfolio according to growth and market share. • An overview of the components of company's portfolio to gain insights on which products to capitalize • It leads to : -strategic decisions - selling an SBU, - doing an acquisition, - stopping investments • Point of attention: it may undervalue some of the strategic internal and external environment factors Products or even SBUs can be positioned on the BCG matrix • On two dimensions - relative market share = firm market share / largest competitor share - Industry / market growth perspective • 4 clusters to review strategic options and take strategic decisions .... from Dog to Star Way of visualizing different needs and potentials of all the diverse businesses within the corporate portfolio. • Warns corporate parents of the financial demands of a desirable portfolio of high growth businesses. It also reminds corporate parents that stars are likely eventually to wane.
Development of Strategy
Deliberate strategy - involves intentional formulation or planning, it may take different forms 1. Intentionality of a strategic leader, for example a CEO or the founder of a firm 2. Through a process of strategic planning involving many managers Emergent strategy development -strategies do not always develop on the basis of a grand plan, but may emerge in organizations over time An organization's strategy may be influenced by strategic leaders: individuals or management teams of individuals whose personalities, positions or reputations make them central to the strategy development process • Founder and owner of the organization, often the case in small businesses and family businesses • It may also persist when a business becomes very large • An individual chief executive can play a central role in directing the strategy of an organization Founders are more successful at achieving rapid growth in new, fast-growing markets, by applying what they have learned from their previous experience CEOs that are recruited need more time to build their knowledge and influence but tend to be more successful in complex market conditions Strategic leadership as command: single owner-managed small/medium size firms Strategic leadership as vision: Ingvar Kamprad, IKEA's founder's, vision, 'To create a better everyday life for the many', Bill Gates Strategic leadership as decision making: weigh different views, interpret data, take timely decisions to invest in key resources or markets - most multinationals, Alan G.Lafley at P&G Strategic leadership as the embodiment of strategy: Richard Branson and the Virgin strategy is frequently the public face of the company
Differentiation Strategy
Differentiation strategy - uniqueness along dimension that is valued by customers to allow a price premium: Miele in domestic appliance industry. -Product and service attributes can provide better or unique features than comparable products: the Dyson vacuum cleaner with its unique technology provides customers with better suction performance - Customer relationships : distribution services, payment services or after sales services, Zalando, Europe's leading online retailer for fashion and shoes, offers free shipping to the customer, free return, 'bill-me-later' - Complements can build on linkages to other products or services: perceived value of products enhanced when consumed together with other product or service complements compared to consuming the product alone.
Value Creation: Porter's Essential Tests
Diversification strategy and strategic thinking -3 essential tests to be carried in case of a diversification strategy • The attractiveness test: an opportunity capable of being made attractive, and be even more attractive than any other opportunity in its own industry • The cost-of-entry test: it is the counteract of the attractiveness, it must not capitalize all the future profits (as if real) • The best-off test: are the 2 units put together going to be more profitable? Evaluating the real synergies - Cost efficiency, innovative differentiation
Diversifying Mergers
Diversifying mergers: value creation to be tested with the « essential tests » as defined by Michael Porter: -Attractiveness test: should check that diversification allows more attractive returns than in its own industry -Cost-of-entry test: cost of entry - attractiveness of the new industry - existence of barriers to entry: tech, regulatory, pricing, share of voice -Better-Off test: potential for interaction between the 2 firms, synergies, potential 1+1= 3, competitive advantage may offset lower profitability of the target
Dynamic Capabilities
Dynamic capabilities: ability to build and renew its resources and capabilities to address changing environment while others stagnate or die Capacity to move from good to great (1) sense opportunities and threats (2) seize the opportunities (3) reconfigure competitiveness by redeploying their capabilities accordingly Examples of companies that did not prove sustainability in the long run: Kodak, Polaroid, Saab, Panam, Rowntree Examples of companies that did it: IBM, GE, 3M, Toyota, the mobile telephone industry but with different players
Diversification Drivers and Synergy Effect
Exploiting economies of scope - efficiency gains through applying the organization's existing resources or competences to new markets or services • Stretching corporate management competences ('dominant logics') i.e. applying these competences across a portfolio of businesses • Exploiting superior internal processes • Increasing market power via mutual forbearance or cross subsidization • Synergy refers to the benefits gained where activities or assets complement each other so that their combined effect is greater than the sum of the parts : the '2 + 2 = 5' effect
Exploiting key strengths and managing weaknesses
Exploiting key strengths - From strength to strength: Disney and theme parks roll out - Capture revenues by stretching strengths: image into merchandising supplements: Manchester United, Toys and characters - Handle superfluous strengths: bank branch network today Managing key weaknesses - Upgrade or replace -Outsource, subcontract - Make a weakness a point of differentiation: Harley Davidson and outmoded technology and design
First Mover or Fast Second
Fast second companies may not literally be the second company into the market, but they dominate the second generation of competitors 3 factors to consider in choosing between innovating vs imitating - capacity to capture profit: easy to replicate, issue of weak intellectual property and patent hard to defend - scalability: possession of the assets or resources necessary to scale up the production and marketing of the innovation - fast-moving: markets/technologies moving fast, and where first movers are unlikely to establish a durable advantage
Why are some firms more profitable than others?
Firm's ability to hold a unique/competitive advantage •Firms' ability to sustain competitive advantage rests on their resources, capabilities and competence • Two key factors to consider: 1. Resource heterogeneity: bundles of resources and capabilities differ across firms 2. Resource immobility: resources tend to be "static", not moving easily; capabilities are hard to change and set in motion
innovators, imitators
First-mover advantage exists where an organization is better off than its competitors as a result of being first to market with a new product, process or service • Experience curve benefits accrue to first-movers, as their rapid accumulation of experience with the innovation • Scale benefits are typically enjoyed by first-movers, as they establish earlier than competitors the volumes necessary for mass production and bulk purchasing, • Pre-emption of scarce resources, an opportunity for first-movers, as late-movers will not have the same access to key raw material, skilled labour or components • Buyer switching costs: first-movers locking in their customers with privileged or sticky relationships that later challengers can only break with difficulty First-mover advantage , in theory, creates an initial monopoly position but there are also some disadvantages • Free-riding: late-movers can imitate technological / other innovation at less expense than originally incurred by the pioneers. Research suggests that the costs of imitation are only 65 % of the cost of innovation • Learning : late-movers can observe what worked /what did not work well for innovators. They may not make so many mistakes and be able to get it right first time
Game Theory
Game theory encourages an organization to consider competitors' likely moves and the implications of these moves for its own strategy • Game theory is particularly important where competitors are interdependent • In these circumstances it is important to: - get in the mind of competitors - think forwards and reason backwards Game Theory: a mathematical models of strategic interactions between rational decision-makers. • Game Theory allows to model competitive interactions and framing of strategic decisions • Game theory provides a structure and concepts to describe a competitive situation • Identity of the players • Players' options • Payoffs for combination of options • Cooperation, deterrence Game theory encourages managers to consider how a 'game' can be transformed from 'lose-lose' competition to 'win-win' cooperation. Four principles: • Ensure repetition. • Signaling. • Deterrence. • Commitment
Budget
Implementing strategy requires breaking down strategic plan into short-term, actionable plans • Operating budget: a profit-and-loss format for the upcoming year for each business unit • Usually, the budget is the 1st year of the strategic plan • It includes the key activities - Annual initiatives such as product launches -Marketing plan -Sales plan -Manufacturing plan
Vertical Integration
Increasing the scope of an organization with vertical integration: allows an organization to act as an internal supplier or a customer to itself (an oil company supplies its petrol to its own petrol stations). • The organization may decide to outsource certain activities - to 'disintegrate' by subcontracting an internal activity to an external supplier - as this may improve organizational efficiency. The scope of the organization may therefore be adjusted through growth or contraction: Coke bottler's strategy • Backward integration is movement into input activities concerned with the company's current business (i.e. further back in the value network). For example, acquiring a component supplier would be backward integration for a car manufacturer • Forward integration is movement into output activities concerned with the company's current business (i.e. further forward in the value network). For a car manufacturer, forward integration would be into car retail, repairs and servicing
Innovation Process
Innovation - Initial commercialization of invention by producing and marketing a new good or service or by using a new method of production, Proof of Concept (POC) • Role of early adopters, innovation-oriented people • Not all inventions turn into innovation: many do not find a viable commercial application - scalability •Competition between rival designs and technologies •Industry converging around a dominant design: industry standard • Important lags between knowledge creation and innovation • Innovation cycle speeding up recently
Invention Driving Industry Life Cycle
Invention is the creation of new products and services through the development of new knowledge or from new combinations of existing knowledge Knowledge conversion is a key step of business development: • Moving from craft enterprise based upon individual, tacit knowledge, to industrial explicit, organizational knowledge Henry Ford's Model T
Lean Manufacturing & 5 S
Lean manufacturing: a production method derived from Toyota's 1930 operating model and it consist of 5 principles • The five 5S'are translated as Sort, Set in Order, Shine, Standardize, and Sustain • 5S is a systematic form of visual management utilizing everything from floor tape to operaLons manuals. It is not just about cleanliness or organization, it is also about maximizing efficiency and profit • A framework that emphasizes the use of a specific mindset and tools to create efficiency and value. • It involves observing, analyzing, collaborating, and searching for waste and also involves the practice of removing waste
Negotiation in M&A
Managements need to agree on both the price and the terms and conditions in M&A • Hostile / Unsolicited offer or friendly approach • Offer the target too little, and the bid will be unsuccessful. • Pay too much and the acquisition is unlikely to make a profit net of the original acquisition price (the winner's curse) • Acquirers do not simply pay the current market value of the target, but also pay a 'premium for control' • In the negotiation terms, discussion on the need for organizational autonomy: Danone / Michel&August
Market Development
Market development involves offering existing products tor services to new markets • Market development entails some product development as well, in terms of packaging or service, with potential local adaptations • Market development takes 2 forms: - New users: example of aluminium, whose original users, packaging and cutlery manufacturers, are now supplemented by users in aerospace and automobiles. - New geographies: internationalization, but also include the spread of a small retailer into new towns.
mergers and acquisitions
Mergers and acquisitions are concerned with the combination of two (or more) organizations. • An acquisition is achieved by purchasing a majority of shares in a target company: PSA and Opel - 'Friendly' acquisitions are where the target's management recommend accepting the acquirer's deal - 'Hostile' acquisitions are where the target's management refuse the acquirer's offer • A merger is the combination of two previously separate organizations in order to form a new company: PSA and FiatChrysler
The concept of Industry
Michael Porter defined the term as "a group of companies offering products or services that are close substitutes for each other, that is, products or services that satisfy the same basic customers' needs." • It emphasizes the importance of industry borders and industry's role as a market supplier or producer of goods and service` • It distinguished it from a market, defined as a consumer of goods and services. Industry = activity defined by a group of firms that supply a market • Industry: global sector, broad approach, can cover different markets • Markets or market segments: more specific approach, Own customers, competitors Banking: retail, corporate, investment banking Industry may sometimes be too high a level to provide for a detailed understanding of competition • The industry forces can impact differently on different kinds of players, which requires a more fine-grained understanding • Hyundai and Porsche may be in the same broad industry (automobiles), but they are positioned differently and do not attract similar customers • Industries can be disaggregated into smaller and specific market sections known as segments
Generic Strategy
Michael Porter introduced the term 'generic strategy' to mean basic types of competitive strategy that hold across many kinds of business situations. •Competitive strategy is concerned with how a company, business unit or organization achieves competitive advantage in its domain of activity. •Competitive advantage is about how a company, business unit or organization creates value for its users, both greater than the costs of supplying them and superior to that of rivals. 2 means of achieving competitive advantage • An organization can have structurally lower costs than its competitors • it can have products or services that are differentiated from competitors' products or services in ways that are so valued by customers that it can charge higher prices that cover the additional costs of the differentiation. Porter adds a further dimension based on the scope of customers that the business chooses to serve • Businesses can choose to focus on narrow customer segments, for example a particular demographic group such as the youth market. • Alternatively, they can adopt a broad scope, targeting customers across a range of characteristics such as age, wealth or geography..
Michael Porter's Strategy Concepts
Michael Porter is an economist, researcher, teacher at Harvard Business School He has brought economic theory and strategy concepts to bear on many of the most challenging problems facing corporations. His classic work on competitive strategy is "The Five Competitive Forces That Shape Strategy"
Motives for Mergers
Motives for mergers -Managerial motives -Vision, one step ahead: Jean-Marie Meissier -Building empire, power: Bernie Ebbers at Worldcom -Imitation - industry trend: pharmaceuticals, steel,beer -Financial motives -Stock market undervaluation -debt being cheaper than capital -Strategical motives -Most part is value creation - potential to increase underlying profits of both firms -Risks reduction
The Concept of Rivalry
Objective is to get to unsurpassed postion • Rivals must be outperformed • Only if the company can establish a difference that it can preserve either by delivering greater value, or by creating comparable value at lower cost
The Force of Knowledge Diffusion in the Service Sector
Systematization of knowledge offers massive potential for value creation through replicaNon and deskilling •It has transformed the service sector: replacement of individual proprietorships by international chains, franchise chains development Restaurants: McDonald, KFC, Hotels: Meridien, Marriott Car rental: Hertz, Avis Coffee shops: Starbucks
4 actions framework
Objective: act on the answers to the key strategic questions and create a new value curve Advantages Raise, Eliminate, Reduce, Create • Encourages the simultaneous search for differentiation and cost domination • Sends a signal to firms that are concerned only with strengthening and creating, at the cost of over-engineering products and services • Be understandable by the executives of the company • Encourage the investment of everyone in its implementation • Pushes the company to examine thoroughly all the criteria around which competition is played out
Global Firm perspective
On existing On surviving On long term success of the organization • Involves all areas that can have a lasting effect on the organization Structure, competition, personnel, technology, production, regulation, etc.
PESTEL Analysis
Political Economic Social Technological Environmental Legal
Stuck in the Middle - No Strategy
Porter argues: • It is best to choose which generic strategy to adopt and then stick rigorously to it. • Failure to do this leads to a danger of being 'stuck in the middle' - doing no strategy well. • The argument for pure generic strategies is controversial Porter acknowledges that the strategies can be combined (e.g. if being unique costs nothing)
Primary Activities and Support Activities
Primary activities are concerned with the creation and delivery of a product or service • Inbound logistics: receiving, storing and distributing inputs to the product or service including materials handling, stock control, transport, etc. • Operations: transform these inputs into the final product or service: machining, packaging, assembly, testing, etc. • Outbound logistics: collect, store and distribute the product or service to customers; for example, warehousing, materials handling, distribution • Marketing and sales: provide the means whereby consumers or users are made aware of the product or service and are able to purchase it. This includes sales administration, advertising and selling. • Service : activities that enhance or maintain the value of a product or service, such as installation, repair, training and spares Support activities help to improve the effectiveness or efficiency of primary activities • Procurement: processes for acquiring the various resource inputs to the primary activities. Vital in achieving scale advantages. (Large consumer goods companies) • Technology development: technologies concerned with a product ( R&D, product design), with processes (process development) • Human resource management: recruiting, managing, training, developing and rewarding people within the organization • Infrastructure: formal systems of planning, finance, quality control, information management and the structure of an organization.
post-merger integration
Risk of failure because of poor integration process: - Differences in corporate culture - People's negative reaction -Customers (mis)information - Essential to combine pre-acquisition planning and post-acquisition planning and raise some key questions • Will acquisition products fit into our catalogue • Do customers buy products the same way •Supply chain, production and distribution • Will our team readily service their customers Preservation, Intensive Care, Absorption, Symbiosis
Corporate Strategy
Role of Corporate Management • Managing linkage across businesses to create value - Benefits from accessing, sharing, transferring knowledge, resources and capabilities - Avoiding transaction costs • Corporate management unit: strategic planning, finance and communication • Common corporate shared services: Legal, IT, Research, Human Resources, Buying
2 key dimensions to differentiate high performers from low performers
Scope of Activities Resource Commitment (see image screenshot)
value destroying diversification drivers
Some, often quoted drivers for diversification may actually involve value destruction (negative synergies) Diversifying for the wrong reason(s): • Responding to market decline: counter-cyclical move • Spreading risk: stock-market or risk-averse based decisions • CEO managerial ambition, vision or ego
Focus Strategy
The 3rd generic strategy: Focus strategy - targets a narrow segment or domain of activity and tailors its products or services to the needs of that specific segment to the exclusion of others - Cost focusers identify areas where broader cost-based strategies fail because of the added costs of trying to satisfy a wide range of needs - Differentiation focusers look for specific needs that broader differentiators do not serve so well. Focus on one particular need helps to build specialist knowledge and technology, increases commitment to service and can improve brand recognition and customer loyalty : Ecover for ecological cleaning product - Successful focus strategies depend on at least 1 key factor: -Distinct segment needs - Distinct segment value chains - Viable segment economics
The concept of Market Segment
The concept of market segment focuses on differences in customer needs A market segment is a group of customers who have similar needs, different from customer needs in other parts of the market • Segmentation should reflect an organisation's strategy and strategies based on market segments must keep customer needs firmly in mind 2 strategic paths • Focusing on customer needs that are highly distinctive from those typical in the market is one means of building a long-term segment strategy • Specialization within a market segment can also be an important basis for a successful segmentation strategy: called a 'niche strategy'
Strategy Canvas
The strategy canvas highlights the following 3 features: • Critical success factors (CSFs) : factors that are particularly valued by customers or provide a significant advantage in terms of cost -important source of competitive advantage or disadvantage • Value curves are a graphic depiction of how customers perceive competitors' relative performance across the critical success factors • Value innovation is the creation of new market space by • Excelling on established CSF on which competitors are performing badly • Creating new CSF representing previously unrecognized customer wants
The Strategy Clock
The strategy clock provides an alternative approach to generic strategy which gives more scope for hybrid strategies. It has two distinct features: • It is focused on the prices to customers rather than the costs to organizations. • The circular design allows for incremental adjustments in strategy rather than stark choices è 7 o'clock position of the low-price strategy and 2 o'clock position of the differentiation strategy Differentiation • Strategies in this zone seeks to provide products that offer perceived benefits that differ from those offered by competitors. • There is a range of alternative strategies: - differentiation without price premium (12 o'clock) - used to increase market share. - differentiation with price premium (1 o'clock) - used to increase profit margins. - focused differentiation (2 o'clock) - used for customers that demand top quality and will pay a big premium. Low Price Low price combined with low perceived value. • A standard low-price strategy (9 o'clock) Low prices combined with similar quality to competitors aimed at increasing market share. Needs a cost advantage (such as economies of scale) to be sustainable, e.g. Asda/Walmart in grocery retailing. • A 'no-frills' strategy (7 o'clock) Focusing on price sensitive market segments - typified by low-cost airlines like Ryanair. Hybrid Seeks to simultaneously achieve higher benefits and lower prices relative to those of competitors. Hybrid strategies can be used: • to enter markets and build position quickly • as an aggressive attempt to win market share • to build volume sales and gain from mass production. A classic example is IKEA Non Competitive Increased prices with low perceived product or service benefits. •In competitive markets, such strategies will be doomed to failure. •Only feasible where there is strategic 'lock-in' or a near monopoly position Lock in Strategic lock-in is where users become dependent on a supplier and are unable to use another supplier without substantial switching costs. Lock-in can be achieved in two main ways: • Controlling complementary products or services. An example is razors that only work with one type of blade (Gillette) • Creating a proprietary industry standard. Microsoft with its Windows operating system
Profit Generation
Types and levels of rivalry among established competitors drive profit level Dominant Firm- one large firm and more small firms, pricing leadership, protected competitive fringe (video games, computer operating systems) Perfect Competition- large number of firms, no product differentiation, excess capacity drives most of the time industry's pricing, paper industry, food sectors such as cooked ham, textile, retailers High market share of Private Labels influence industry's profit unless manufacturers are innovation driven - On-going innovation supported by communication of product differentiation to avoid price war - Emergence of new business models : •Smartphones • Tesla vs car industry
The 2 Strategy Levels
Ultimate goal : « generate profit in a durable way» • Corporate level: which industries do we want to be operating in • New product or service • Acquisition • Divestement • Business level: in a given industry, how can we beat competition è competitive advantage The Corporate Strategy aims at identifying in which sectors the firm wants to operate and how to combine all activities to generate the best profitability emergence of Strategic Business Units (SBUs) The Business Strategy aims at creating and maintaining a competitive advantage for the firm in a specific SBU A Strategic Business Unit (SBU) is an activity or a subset of activities that has the following characteristics : • specific clients, • specific markets, • specific distribution networks, • specific competitors, • specific technologies, • specific skills, • a specific cost structure
VRIO
VRIO framework (Jay B.Barney, « Looking Inside for Competitive Advantage »), a business model to analyze resources and capabilities for sustainable growth in a competitive marketplace • It comprises 4 dimensions on the analyzed resources: - Value - Rarity - Inimitability - Organizational support • VRIO analysis helps to evaluate to what extent a company has resources and capabilities that are the 4 dimensions • Analysis helps to distinguish - sustained or temporary competitive advantage - competitive parity - competitive disadvantage • Resources and capabilities meeting all four criteria provide sustainable bases of competitive advantage • How the sequential chain of the activities that the firm undertakes to provide products or service to its customers - the value chain analysis of the company (Michael Porter)
Competitive Advantage
a firm differentiates from competitors when it provides something unique and valuable to buyers in order to obtain a price premium - financial performance achieved by the firm • Competitive advantage is an enabler to deliver in a recurring way company's profit objective • Therefore when a firm sustains long term profits that exceed the average for its industry, the firm is said to possess a sustainable competitive advantage over its rivals • When a firm has profits exceeding industry average, the firm has a competitive advantage over its rivals • Michael Porter: two types of competitive advantage: -Cost advantage: delivering same benefits as competitors at lower cost. - In the automobile industry Toyota has lower costs : lean manufacturing -Differentiation advantage: delivering benefits that exceed those of competing products. - BMW offers more benefits Organizational capability + appropriate strategy = competitive advantage
TOWS Matrix
identifying strategic options coming from a confrontation of both external and internal diagnostics • Crossing the results of the environment diagnostic with the outcome of its own internal diagnostic • Strategic recommendations will emerge from the TOWS analysis
Horizontal M&A
increase profitability by means of increased market power (share) and cost economies: Essilor and Luxottica, car industry with PSA and Fiat-Chrysler, Pfizer and Warner Lambert - industry concentration • Geographical extension mergers: acquiring critical mass and market share rapidly abroad: HSBC (Hong Kong) acquired 17 banks in 12 countries
The Different Market Structures
perfect competition, monopolistic competition, oligopoly, monopoly Perfect Competition: large number of firms, no product differentiation • Niche Markets: product differentiation, localized competition (gas stations, clothing stores) • Oligopoly: few firms, strategic interdependence, profitability determined by behavior (automobiles, airlines, chain retailers) • Dominant Firm: one large firm, more small firms, pricing leadership, protected niches/competitive fringe (computer operating systems) • Monopoly: single firm (electric utilities)
Strategic Groups
same industry/sector, similar strategic characteristics, following similar strategies or competing on similar bases and characteristics • Classify strategic groups on two main, relevant axes - will allow to analyze strategic success factors and regroup competitors - strategic map with clusters -Scope of activities (product range, geographical coverage, range of distribution channels used) -Resource commitment ( brands, marketing spend, R&D spend, extent of vertical integration)
What is Strategy
the art and science of developing and employing instruments of national power in a synchronized and integrated fashion to achieve theater, national, and/or multinational objectives
Vision
what does the company want to become ultimately ? Future state, a dream
SBU combined generic strategies
• A company can create separate strategic business units each pursuing different generic strategies and with different cost structures • Technological or managerial innovations where both cost efficiency and quality are improved • Competitive failures - if rivals are similarly 'stuck in the middle' or if there is no significant competition then middle strategies may work • Hybrid strategy combines different generic strategies Southwest Airlines (USA) famously pioneered low cost air fares but also seeks to differentiate on convenience, frequent departures and friendly service
Firm's value system
• A single organization rarely undertakes in-house all of the value activities from design through to the delivery of the final product or service to the final consumer - specialization of roles • Any one organization is part of a wider value system of different interacting organizations. • The « make or buy » (outsourcing decision) is critical: which activities most need to be part of the internal value chain because they are central to achieving competitive advantage? • Some activities do not generate competitive advantage in themselves, but which the organization needs to control as they enable the exploitation of competitive advantage in other parts of the value chain
Competition from Substitutes
• Competition from substitutes has a direct impact on profit -First: what consumer wants - New benefit or less negative perception (Health benefit or risk reduction) - Availability / switch if substitutes - Price sensitivity - Pressure on prices and profit - Internet vs travel agencies or newspaper • Threat of substitutes occurs when companies within one industry are forced to compete with industries producing substitute products or services • Substitutes limit industry's potential returns by placing a ceiling on the prices that firms within that industry can charge to make a profit è demand is elastic with respect to price • As the price-performance alternative offered by substitutes becomes more attractive, it becomes even more difficult for those firms to make a profit • The internet has provided a new source of substitute competition has proved devastating for many established companies: travel agency, books, telecom providers
Strategic Options
• Corporate strategy: choosing the areas to generate company's growth • Ansoff's product/market growth matrix is a corporate strategy framework for generating 4 basic directions for organizational growth 1. Market Development 2. Market Penetration 3. Diversification 4. Product Development
Industry Profitability
• Industry structure evolution: consolidation, new products, new players - competition intensity • High impact on profitability • Identify how the structural changes will affect the 5 forces of competition and resulting profitability • Example: the wireless handset industry with its amazing growth
Product Development
• Organizations deliver either range extensions (new variant of existing) or new products (or services) to existing markets • Varying degrees of diversification on the horizontal axis of Ansoff's Matrix • Apple, developing its products from the original iPod, through iPhone to iPad involved little diversification: although the technologies differed, Apple was targeting the same customers, using very similar production processes and distribution channels New resources and capabilities • New processes or technologies unfamiliar to the organization - the digital revolution (e-commerce tools) • Restructuring, new marketing capabilities - heavy investments and high risk of project failures. Project management risk • Product development projects - risk of delays and increased costs due to project complexity and changing project specifications over time - Boeing's 787(Dreamliner) : innovative use of carbon-fibre composites and lithium ion batteries, $2.5bn write-offs due to cancelled orders - Boeing 737 Max: 346 dead, regulators grounded all 387 MAX aircraft in service with 59 airlines worldwide, automated system contributed to the crashes
Substitutes and Complements
• Porter framework is very useful for - understanding competition, - predicting profitability changes - guiding strategy formulation. • But considering suppliers of substitute goods and services as a force that reduces profit alone is limiting industry analysis • The concept of complements needs to be taken into account - While substitutes decrease value, complements will increase it - The availability of ink cartridges for printers enhance its value - Numerous cases where customers value the whole system • Lesson learnt : industry structure is not stable- competition, often with tech rapid evolution, may reshape industry and change frontiers - Creating bottlenecks : IOS, iTunes - Relieving bottlenecks: Google and Android - Ikea: transfer of furniture assembly • Products do not have only substitutes but can have also complements • A missing force in Porter's model • Industry boundaries are not unambiguous • Complement can become an industry game changer
New Strategy Positioning to Reduce Rivalry
• Reducing industry rivalry involves finding differentiated positions in the marketplace • W. Chan Kim & Renée Mauborgne (INSEAD) propose a new approach to think creatively about the relative positioning of competitors in the environment and finding uncontested market spaces - empty spaces • Known market space : industries in existence today have defined boundaries and companies try to outperform their rivals to grab a greater share of the existing market -intense rivalry, cutthroat competition, financial loses, turns the ocean bloody red • Unknown market space, unexplored or minimized by competition. Like the 'blue' ocean, it is vast, deep and powerful -in terms of opportunity and profitable growth • The Blue Ocean concept is useful for identifying potential spaces in the environment with little competition -strategic gaps in the marketplace
Strategy and Resources
• Resources are the assets that organizations have or can call upon • Capabilities are the ways those assets are used or deployed ( competences) • Resources are what we have and capabilities are what we do well • Intangible assets as an umbrella term to include capabilities as well as intangible resources such as brands Evaluate the strategic capacity of the Company based • Resources/Skills Analysis • Organizing the resources - capabilities • Implementation of the Organization, company's Value Chain, and identification of Strategic Assets
Resources
• Resources are the assets that organizations have or can call upon • Capabilities are the ways those assets are used or deployed ( competences) • Resources are what we have and capabilities are what we do well • Intangible assets as an umbrella term to include capabilities as well as intangible resources such as brands Strategy is concerned with matching firm's resources and capabilities to the opportuni.es that arise in the external environment • We reviewed interface between the external environment, the industry and strategy • Now, interface between strategy and what happens inside the firm, its internal environment • The resources and capabilities of an organization contribute to competitive advantage and to its long-term survival Major variations between companies within the same environment and industry explained by how they vary in their resources and capabilities Tangible resources = Financial: cash, securities, borrowing capacity Physical: plant, building, land , mineral reserve Intangible resources: technology (patents), brands, relationship Human resources: culture/values, skills/know-how, collaboration, motivation (soft skills)
Driving Top Line Growth Through Innovation
• Strategic choice: innovation is key to generate sales and profit growth thanks to higher consumer demand • 2 components to drive customer demand in the first parts of product life cycle, • Existing demand growth: industry's birth and development based on customer's needs - continuous improvement and marketing strategy (AIDA model) • Creation and diffusion of knowledge - innovation in the form of new technology
market penetration
• The most natural/obvious strategic option: increasing territory/ share of current markets with the current product portfolio • Basis for products improvement to keep customers satisfied and therefore loyal to the brand This strategy • builds on established strategic capabilities • means the organization's scope is unchanged • leads to greater market share and increased power vis-à-vis buyers and suppliers • provides greater economies of scale and experience curve Constraints Retaliation from competitors e.g. price wars Legal constraints e.g. restrictions imposed by regulators Economic constraints e.g. market downturn, public sector funding crisis
Value Chain and Value System
• The value chain describes the activities within an organization which, combined, create a product or service - Primary activities - Support activities • Most organizations are also part of a wider value system, the set of inter-organizational links and relationships necessary to create a product or service • To achieve competitive advantage by delivering value to customers, managers need to understand which activities are especially important in creating that value and which are not • Value chain = the model of firm's value generation
Dynamic Competition and Game Theory
• « The gale of creative destruction » Joseph Schumpeter • Competitive behavior : a determinant of industry's structure • We are moving to hyper-competition: markets are more volatile, leadership more tenuous, time is key, bonus for 1st in the market • Moving from static framework to interacting model
Cooperative Strategies
•Competition can escalate in a dangerous way -too much competition can be damaging. It can be in the self-interest of organizations to restrain competition •Collaboration with some competitors may give competitive advantage over other competitors or even potential entrants
