Strategic Management I (2015)

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Universidad Universidad Pompeu Fabra (UPF)
Grado Ciencias empresariales-Management - 2º curso
Asignatura Strategic Management I
Año del apunte 2015
Páginas 89
Fecha de subida 20/01/2015
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    Contents:   • • • • 1.
Introduction   What  is  strategy   Components  of  strategy   Levels  of  strategy   INTRODUCTION  TO  STRATEGIC  MANAGEMENT  I   1.1.
Introduction     Environmental  analysis  =  Analisis  externo   Opportunities  &  threats  =  oportunidades  y  amenazas   Strengths  &  weaknesses  =  fortalezas  y  debilidades   SWOT   Analysis   =   FADO   analysis   =   DAFO   (Fortalezas,   amenazas,   debilidades   y   oportunidades)   Strategic  Analysis  Framework                   Elements  of  successful  strategy     Successful   Strategy   =   Strategy   defines   what   a   company   does...and,   maybe   more   importantly,  what  it  does  not!     External  environment:  Levels     The  early  days   “Initially  strategos  referred  to  a  role  (a  general  in  command  of  an  army).   Later  it  came  to  mean  ‘the  art  of  the  general‘,  which  is  to  say  the  psychological  and   behavioral  skills  with  which  he  occupied  the  role.   By   the   time   of   Pericles   (450   BC)   it   came   to   mean   managerial   skill   (administration,   leadership  orientation,  power).   And   by   Alexander‘s   time   (330   BC)   it   referred   to   the   skill   of   employing   forces   to   overcome  opposition  and  to  create  a  unified  system  of  global  governance“   1.2.
What  is  strategy?   The  word  strategy  is  derived  from  the  Greek  word  “strategtia”  which  was  used  first   around  400  B.C.  This  connotes  the  art  and  science  of  directing  military  forces.
It  is  a  plan  for  achieving  purpose     Concept  of  military  strategy  during  the  time  of  the  ancient    Greeks.  (Strategos)     Spread  to  diplomatic  and  business  contexts.     Strategy  results  from  careful  analysis     Strategies  may  change  according  to  environmental  changes     Thinking  strategically:  The  three  big  Strategic  Question   1. Where  are  we  now?   2. Where  do  we  want  to  go?   a. Business(es)  to  be  in  and  market  positions  to  stake  out   b. Buyer  needs  and  group  to  serve   c. Outcomes  to  achieve   3. How  will  get  there?   a. A  company’s  answer  to  “how  will  we  get  there?”  is  it  strategy   The  Process  View:  Competitive  Strategy  as  a  Sequence  of  Steps  that  may  overlap               1.2.1  Strategy  definition:   A  strategy  is  a  set  of  rules  that  enable  the  company  to  make  many  decisions  over  a   period  of  time.  Such  that  the  company  or  organization  can  realize  as  long  as  possible   superior  results  that  sustain  and  improve  the  value  of  the  company  or  organization.   A  few  simple  illustrations:   • A  strategy  of  differentiation  (Nespresso  and  Apple)   -­‐ Offer   products   that   are   perceived   as   different   from   those   of   competitors   because   they   are   manufactured,   marketed,   distributed   and  sold  in  different  ways.   • A  niche  strategy  (Bank  van  Breda)   -­‐ • A  branding  strategy  (Boss)   -­‐ • Products  for  well-­‐defined  and  narrow  customer  groups   Offer  different  products  under  one  brand  to  the  market   A  global  format  strategy  (Starbucks)   -­‐ Offer  similar  products  in  different  countries  in  the  same  way   Examples:   The  strategy  is  based  on  unique  activities….   Competitive  strategy  means  to  be  different!   Secondary  Airports  (=no  transfers,  etc)   Short  distances  (=  homogeneous  fleet  of  737)   Ryanair,  vueling,  easyjet   Self-­‐service   Display   Easy  to  assemble   Delivery…  Right  now!!   Ikea   Two  generic  strategies:   Cost  leadership   Differentiation  strategy   Another  definition  of  strategy   In  business  parlance,  there  is  no  definite  meaning  assigned  to  strategy.   A  few  definitions  stated  below  may  clarify  the  concept  of  corporate  strategy:   Peter  Drucker:  The  Practice  of  Management,  1954.   Strategy  is  the  answer  to  the  following  questions:   What  is  our  business?  What  is  our  activity?   Where  should  we  take  our  business?   Alfred  Chandler:  Strategy  and  Structure,  1962   He  described  strategy  as:   The  determination   of   long-­‐term  goals  and  objectives,  the  adoption  of  courses   of  action  and  associated  allocation  of  resources  required  to  achieve  goals;  he   defined   structure   as   the   design   of   the   organization   through   which   strategy   is   administered.   Changes   in   an   organization’s   strategy   led   to   new   administrative   problems   which,   in   turn,   required   a   new   or   refashioned   structure   for   the   successful   implementation  of  the  new  strategy.       IGOR  ANSOFF  (1965)   Explained   the   concept   of   strategy   as   “the   common   thread   among   the   organizations,   activities   and   product   markets,   that   defines   the   essential   nature  of  business  that  the  organization  was  or  planned  to  be  in  future”.   The  definition  stressed  on  the  commonality  of  approach  that  exists  in  diverse   organizational  activities.   HENRY  MINTZBERG  (1987)   Explains   that   “strategies   are   not   always   the   outcome   of   rational   planning.   ………….a   pattern   in   a   stream   of   decisions   and   actions.   The  definition  makes  a  distinction  between  intended  strategies  and  emergent   strategies.   ANSOFF  (1984)   “Basically   a   strategy   is   a   set   of   decision   making   rules   for   the   guidance   of   organizational  behavior.   This  definition  has  changed  drastically  what  Ansoff  had  said  earlier  in  1965.   Johnson  and  Scholes  (Exploring  Corporate  Strategy)  define  strategy  as  follows:   “Strategy   is   the   direction   and   scope   of   an   organization   over   the   long   term,   which   achieves   competitive   advantage   for   the   organization   through   its   configuration   of   resources  within  a  changing  environment,  to  meet  the  needs  of  markets  and  to  fulfill   stakeholder’s  expectations”.   From  the  definitions  discussed  above,  we  can  identify  the  following  elements:   It  is  a  plan  or  course  of  action  or  a  set  of  decision  rules.   It  is  derived  from  its  policies,  objectives  and  goals.   It  is  related  to  pursuing  those  activities  which  move  an  organization  from  its   current  position  to  a  desired  future  state.   It  is  concerned  with  the  requisite  resources  to  implement  a  plan.   Video  about  what  strategy  is  by  Michael  Porter   http://www.youtube.com/watch?v=ibrxIP0H84M&feature=related   (More  videos  at  page  11  –  introduction)   The  domain  of  strategy   The  organization  as  a  whole   • Integrates  marketing,  operations,  research,  customer  service   The  organization’s  general  direction   • Vision,  mission,  goals,  objectives,  broad  courses  of  action   Performance  for  all  measures  and  time  horizons   • Financial  measures,  social  measures;  short-­‐term,  long  term   All  stakeholder  interests   • Employees,  customers,  communities,  regulators,  investors   Competition   • Innovation,  imitation,  resources,  skills,  competitive  advantage   The  strategist   Strategist  as  GENERAL   • Battle  plans,  troops,  weapons,  enemies,  tactics,  positioning   Strategist  as  ARCHITECT   • Design,  creativity,  function,  blueprints,  negotiation,  execution   Strategist  as  CHESSMASTER   • Analysis,  problem-­‐solving,  moves,  advantages,  contingencies   Strategist  as  ORCHESTRA  CONDUCTOR   • Coordination,  improvisation,  fit,  harmony  in  diversity   Strategist  as  EXPEDITION  LEADER   • Map,  destination,  compass,  milestones,  adversity,  experience   What  strategy  is  not   Distinguishing  strategy  from  tactics:   • • Strategy   is   the   overall   plan   for   deploying   resources   to   establish   a   favorable   position.   Tactic  is  a  scheme  for  a  specific  maneuver.   Characteristics  of  strategic  decision   • • • Important.   Involve  a  significant  commitment  of  resources.   Not  easily  reversible.     Strategy  is  about  firm  uniqueness!     The   main   area   of   study   is   firm   heterogeneity   and   the   implications   of   that   to   firm   performance     What  cause  superior  performance?   Total  profit   Profit  rate  (ROA,  ROS  =  return  on  sales)   Total  revenue   Market  share   Growth   Shareholder  returns   Market  capitalization   Stakeholder  satisfaction   Employment   Social  contribution     1.3.
Components  of  strategy   1.3.1  Corporate  strategy   The   term   “Corporate   Strategy”   is   gaining   importance   in   the   era   of   privatization,   globalization   and   liberalization.   A   few   aspects   regarding   the   nature  of  strategy  are  as  follows:   Corporate  strategy  is  related  mostly  to  external  environment.     Corporate   strategy   is   being   formulated   at   the   higher   level   of   management.   At   operational  level,  operational  strategies  are  also  formulated.     Corporate   strategy   integrates   three   distinct   and   closely   related   activities   in   strategy   making.   The   activities   are   strategic   planning,   strategic   implementation  and  strategic  evaluation  and  control.     Corporate  strategy  is  related  to  long  term.   It  requires  systems  and  norms  for  its  efficient  adoption  in  any  organization.     It  provides  overall  framework  for  guiding  enterprise  thinking  and  action.     It   is   concerned   with   a   unified   direction   and   efficient   allocation   of    organization  resources.     Corporate   strategy   provides   an   integrated   approach   for   the   organization   and   aids  in  meeting  the  challenges  posed  by  environment.     1.3.2  Components  of  corporate  strategy   The  major  components  of  corporate  strategy  are:     Purpose  and  objectives,     Vector,   Competitive  advantage,   Synergy,   Personal  values  and   Aspirations  and  social  obligations   Objectives:   Corporate  objectives  should  be  stated  in  such  a  way  so  that  they  may  provide  a  clear   idea  about  the  scope  of  the  enterprise’s  business.   Objectives   give   the   direction   for   which   action   plan   is   formulated.   Objectives   are   open  -­‐  ended  attributes  denoting  a  future  state.   A  few  specific  aspects  about  objectives  are  as  follows:     The  objectives  should     Have  time  frame     Be  attainable   Be  challenging     Be  understandable     Be  measurable  and  controllable   Competitive  Advantage   Corporate   strategy   is   relative   by   nature.   In   the   formulation   of   corporate   strategy,  the  management  should  isolate  unique  features  of  the  organization.     However,   when   we   formulate   corporate   strategies,   we   cannot   ignore   competitors.   If   an   organization   does   not   look   at   competitive   advantage,   it   cannot  survive  in  a  dynamic  environment.     This   aspect   builds   internal   strength   of   the   organization   and   enhances   the   quality  of  corporate  strategy.     Synergy   Synergy   means   measurement   of   the   firm’s   capability   to   take   advantage   of   a   new   product  market  move.  If  decisions  are  made  in  the  same  direction  to  accomplish  the   objectives   there   will   be   synergic   impacts.   The   corporate   strategy   will   give   the   synergy  benefit.   The   term   "synergy"   is   derived   from   the   Greek   word   sunergos,   meaning,   "working   together."   Positive   synergy   is   sometimes   called   the   2   +   2   =   5   effect.   Operating   independently,   each   subsystem   can   produce   two   units   of   output.   However,   by   combining   their   efforts   and   working   together   effectively,   the   two   subsystems   can   produce  five  units  of  output.   Synergy   is   the   benefit   that   results   when   two   or   more   agents   work   together   to   achieve  something  either  one  couldn't  have  achieved  on  its  own.  It's  the  concept  of   the  whole  being  greater  than  the  sum  of  its  parts.   Ex:   Mercedes   (class   A   and   B   model)   and   Renault   share   engine.   Strategic   Alliance.   Ex:   Volkswagen   group   shares   engine,   platform   between   their   different   brands  (Audi,  Volkswagen,  Seat  and  Skoda).   It   is   practiced   in   the   automotive   industry   to   reduce   the   costs   associated   with   the   development   of   products   by   basing   those   products   on   a   smaller   number   of   platforms.   This   further   allows   companies   to   create   distinct   models   from   a   design   perspective  on  similar  underpinnings.   Strategy  &  tactics   Essentially,   strategy   is   the   thinking   aspect   of   planning   a   change,   organizing   something,   or   planning   a   war.   Strategy   lays   out   the   goals   that   need   to   be   accomplished   and   the   ideas   for   achieving   those   goals.   Strategy   can   be   complex   multi-­‐layered   plans   for   accomplishing   objectives   and   may   give   consideration   to   tactics.   Tactics   are   the   meat   and   bread   of   the   strategy.   They   are   the   “doing”   aspect   that   follows   the   planning.   Tactics   refer   specifically   to   action.   In   the   strategy   phase   of   a   plan,  the  thinkers  decide  how  to  achieve  their  goals.  In  other  words  they  think  about   how   people   will   act,   i.e.,   tactics.   They   decide   on   what   tactics   will   be   employed   to   fulfill  the  strategy.   The  tactics  themselves  are  the  things  that  get  the  job  done.  Strategies  can  comprise   numerous   tactics,   with   many   people   involved   in   attempting   to   reach   an   overall   goal.   While   strategy   tends   to   involve   the   higher   ups   of   an   organization,   tactics   tend   to   involve  all  members  of  the  organization.   The  strategy  and  tactics  by  Clausewitz   The  tactics:  using  the  army  to  win  the  battle.   The  strategy:  using  the  battles  to  win  the  war.   Strategy  vs  Tactics  -­‐  What  Is  The  Difference  Between  the  two?   http://www.youtube.com/watch?v=64gwUSL  YWN4&feature=related   A  lot  of  confusion  between  strategic  and  operational  problems.   Strategic  Management   Operation  Management   Ambiguity,  complexity,  non-­‐routine  decisions   Simple  models,  and  routinized  decisions   Organization-­‐wide   Operationally  specific   Fundamental,  and  significant  change   Small-­‐scale  change   Environment  or  expectation  driven   Resource  driven       Strategy  firm  and  the  environment       The  first  mentions  of  “business  strategy”       Alfred   Sloan   (chief   execu1ve   of   General   Motors   from   1923   to   1946   devised   a   strategy  that  was  explicitly  based  on  the  perceived  strengths  and  weaknesses  of  its   competitor,  Ford       In   the   1930s,   Chester   Barnard,   a   top   executive   with   AT&T,   argued   that   managers   should   pay   especially   close   attention   to   "strategic   factors,”   which   depend   on     "personal  or  organizational  action.”     Economic  theory  &  strategy     Then  a  war  came...  and  portfolio  analysis                               The  Boston  Consulting  Group   Market  share  is  important-­‐ish…   “Market   Share   and   profitability   are   strongly   related.   Business   units   with   very   large   market   shares   –-­‐   over   50%   of   their   served   market   -­‐-­‐   enjoy   rates   of   return   more   than   three   times   greater   than   small-­‐share   strategic   business   units   (those   that   serve   under   10%   of   their   markets).”           Strategy  as  a  quest  for  value      •  The  (stakeholder  approach     The  firm  is  a  coalition  of  interest  groups  –  it  seeks  to  balance  their    different   objectives        •  The  shareholder  approach     The  firm  exists  to  maximize  the  wealth  of  its  owners       =  max.  present  value  of  profits  over  the  life  of  the  firm     •  For  the  purposes  of  strategy  analysis  we  assume  that  the  primary  goal  of  the   firm  is  profit  maximization.   –  Rationale:     1. Boards  of  directors  legally  obliged  to  pursue  shareholder  interest     2. To  replace  assets  firm  must  earn  return  on  capital  >  cost  of  capital    (difficult   when  competition  strong)   3. Firms  that  do  not  max.  Stock-­‐market  value  will  be  acquired     Hence:   Strategy   analysis   is   concerned   with   identifying   and   accessing   the   sources  of  profit  available  to  the  firm     Different  measures  of  performance   Profitability  ratios                                 But  don’t  forget  about  options     In  an  uncertain  world,  strategy  is  increasingly  about  creating  and  managing   options     Two  major  types  of  option:     o  Growth  options:  Small  investments  to  create  opportunities  for  bigger     o Flexibility  options   Investments     Valuing  options:       1.  Black-­‐Scholes  formula  for  valuing  financial  options  can  also  be  applied  to   real  options  (e.g.  option  value  rises  with  greater  volatility,  more  time,  higher   project  value,  higher  interest  rates   2.   Binomial   pricing   model   creates   an   event   tree   for   a   project   that   can   be   converted   into   a   decision   tree   which   allows   project   value   to   be   calculated   subject  to  options  to  abandon  the  project     Three  fundamental  questions   Strategy  formulation   1. Where  do  we  compete??   2. How  do  we  compete?   a. What  unique  value  do  we  bring?   b. What  resources  and  capabilities  we  utilize?   c. How  do  we  sustain  unique  value?   Strategy  implementation   3.  How  do  we  execute?   1.4.
Levels  of  strategy   Strategies  exist  at  several  levels  in  any  organization  (big):     Strategy  at  Different  levels  of  Business   Strategies   exist   at   several   levels   in   any   organization   -­‐   ranging   from   the   overall   business  (or  group  of  businesses)  through  to  individuals  working  in  it.   Corporate   Strategy  -­‐   is   concerned   with   the   overall   purpose   and   scope   of   the   business   to   meet   stakeholder   expectations.   This   is   a   crucial   level   since   it   is   heavily   influenced   by   investors   in   the   business   and   acts   to   guide   strategic   decision-­‐making  throughout  the  business.  Corporate  strategy  is  often  stated   explicitly  in  a  "mission  statement".   Business   Unit   Strategy  -­‐   is   concerned   more   with   how   a   business   competes   successfully   in   a   particular   market.   It   concerns   strategic   decisions   about   choice   of   products,   meeting   needs   of   customers,   gaining   advantage   over   competitors,  exploiting  or  creating  new  opportunities  etc.   Operational   Strategy  -­‐   is   concerned   with   how   each   part   of   the   business   is   organized  to  deliver  the  corporate  and  business-­‐unit  level  strategic  direction.   Operational   strategy   therefore   focuses   on   issues   of   resources,   processes,   people  etc.   Describing  Strategy:  Current  Positioning;  Future  Direction     SRATEGY  AS  POSITIONING     Where  are  we  competing?   Product  market  scope   Geographical  scope   Vertical  scope   How  are  we  competing?   What   is   the   basis   of   our   competitive   advantage?                COMPETING  FOR  THE  PRESENT     STRATEGY  AS  DIRECTION     What  do  we  want  to  become?   Vision  statement   What  do  we  want  to  achieve?   Mission  statement   Performance  goals   How  will  we  get  there?   Guidelines  for  development   Priorities  for  capital  expenditure,  R&D   Growth  modes:  organic  growth,  M&A   COMPETING  FOR  THE  FUTURE   The  M-­‐form  Corporation                   The  <<  organization  chart>>   Hierarchy   Clear  division  of  labor   Enable  organizations  to  cope  with  all  expected  situations   à  “Managers  develop  a  science  for  each  element  of  a  man’s  work,  which  replaces  the   old  rule-­‐of-­‐thumb  method”.  (Taylor  1911,  p.39)   The  <<  Process  >>  view   Company  as  a  “black  box”   Precise  rules,  procedures  and  practices   Relationships  with  the  external  environment  (competitors,  stakeholders,  the   State…)   à   "In   essence,   the   job   of   the   strategist   is   to   understand   and   cope   with   competition”   (Porter  2008,  p.79)   The  social  view   Collection  of  rights,  privileges,  obligations  and  responsibilities   Conflict  resolution  and  stress   Power   and   knowledge   within   an   organization   (communities   with   different   interests)   à   “   In   firms   it   exists   a   competitive   cooperation   between   actors   who   are   mutually   dependent   for   the   solution   of   a   common   problem,   which   they   cannot   solve   by   themselves”.  (Friedberg  1997,  p.122)   Implications  of  this  exercise   Companies  can  be  depicted  in  various  ways:   • Rational  à  How  to  control?   • Systemic  à  How  to  organize?   • Social  à  How  to  implement?   Different  <<  images  >>  of  an  organization   à  “  Organizations  are  machines,  organisms,  brains,  cultures,  political  systems,  psychic   prisons,  flux  and…  instruments  of  domination  “.  (Morgan  2006,  p.10)   An  interesting  quote     “I   will   build   a   motor   car   for   the   great   multitude...It   will   be   so   low   in   price   that   no   man  making  good  wages  will  be  unable  to  own  one  and  to  enjoy  with  his  family  the   blessing   of   hours   of   pleasure   in   God’s   great   open   spaces...When   I’m   through,   everyone  will  be  able  to  afford  one,  and  everyone  will  have  one.”     Henry  Ford       Pitfalls  of  Pursuing  Financial  Targets:  The  Paradox  of  Value     Empirical   research   shows   that   firms   which   are   most   successful   in   creating   long-­‐term  shareholder  value     o Have  a  mission  –  They  give  precedence  to  goals  other  than  profitability   and  shareholder  value     o Have  strong,  consistent,  ethical  values       •  Examples:     A) “Visionary”   companies   studied   by   Collins   &   Porras,   e.g   Merck,   Wal-­‐Mart,   Proctor  &  Gamble,  Disney,  HP     o Boeing         -­‐  Focus  preb1996:  “To  build  great  planes”,  weak  financial  controls,     yet  high  profitability       -­‐  Focus  1997-­‐2003:  “Creating  shareholder  value”.  Outcome:  loss  of     market  leadership,  declining  profitability     •  Lesson:     o Profit  is  created  not  by  pursuing  profit  but  by  pursuing  the  factors  that  create   profit     Mission  and  vision   A   Mission   Statement   defines   the   company's   business,   its   objectives   and   its   approach  to  reach  those  objectives.     A   Vision   Statement   describes   the   desired   future   position   of   the   company.   Elements  of  Mission  and  Vision  Statements  are  often  combined  to  provide  a   statement   of   the   company's   purposes,   goals   and   values.   However,   sometimes   the  two  terms  are  used  interchangeably.     Typically,   senior   managers   will   write   the   company's   overall   Mission   and   Vision   Statements.   Other   managers   at   different   levels   may   write   statements   for  their  particular  divisions  or  business  units.     Mission   Specific   business   (es)   in   which   firm   intends   to   compete   and   customers   it   intends  to    serve     More  concrete  than  the  vision     Deals  more  with  product  markets  and  customers     – The   mission   of   the   company   formulates   what   it   hopes   to   realize   and   how   this   will   help   in   contributing   to   the   ambitions   of   all   the   stakeholders  of  the  company.     – “What  is  our  business?”       Ford’s   mission:   We   are   a   global   family   with   a   proud   heritage   passionately   committed   to   providing   personal   mobility   for   people   around   the   world.   We   anticipate   consumer   need   and   deliver   outstanding   products   and   services   that   improve  people’s  lives.       Declares  the  firm’s  reason  for  being   Vision   Picture  of  what  the  firm  ultimately  wants  to  be/achieve An   effective   vision   statement   is   the   responsibility   of   the   leader   who   should   work  with  others  to  form  it The  vision  is  the  foundation  for  the  mission   v Differences  in  vision  will  lead  to  different  missions  and  strategies v Boeing   vision:   Air   transport   will   go   from   point   to   point   and   air   space   will   not  have  congestion.
v Airbus   vision:  Air  transport  will  go  from  hub  to  hub  and  will  become   congested.
v Ford   vision:   To   become   the   world’s   leading   consumer   company   for   automotive  products  and  services Research  results  are  mixed,  however,  firms  with  formal  mission  statements  -­‐-­‐   2x  average  return  on  shareholder’s  equity     Positive  relationship  to  company  performance   30%  high  return  on  certain  financial  measures   We   can   see   on   the   webpages   examples   like   The   Cocacola   Company,   Abertis,   Mastercard  about  mission  and  valor.     When  should  a  strategy  be  reviewed  or  changed?   The  results  of  the  strategy  are  disappointing  and  that  is  not  due  to  a  slower   development  of  the  market  or  the  technology.     The  existing  resources  and  capabilities  of  the  company  are  underutilized.     Important   changes   are   taking   place   in   the   market,   the   technology   or   at    the   competitors.     The  competitive  advantage  or  strength  is  threatened.     Substantial  investments  have  to  be  made.     Some   opportunities   arise   and   it   is   not   certain   that   they   fit   the   current   strategy.     Top  management  of  the  company  is  replaced  by  a  new  team.     Shareholders  impose  different  objectives  on  the  firm.    !  Firm   is   taken   over   by   strategic  partner,  PE  investor  or  is  listed  on  the  public  market.                   Ideology   Core  Values         A  few  3  to  5  enduring,  guiding  principles       o o o o Being  a  pioneer;  elevating  Japanese  culture;  doing  the  impossible  (Sony)   Acting  as  a  learning  nation  (Singaporean  Ministry  of  Education)   Freedom  of  choice;  winning  a  good  fight;  individual  initiative  (Philip  Morris)   Sincerity;  imagination  and  dreams;  fanatical  attention  to  detail  Disney       Core  Purpose     The  organization’s  (non-­‐financial)  reason  for  being     o o o o To  solve  problems  innovatively  (3M)   To  preserve  and  improve  human  life  Merck   To  provide  high  quality  health  care  accessible  to  every  Kenyan  (KMH)   To  experience  the  emotion  of  winning  and  crushing  competitors  (Nike)   Intention   Strategic  intent   Definition  of  the  enterprise   o We   produce   and   distribute   chocolates   and   confectionaries   globally   (Hershey,   1965)   o We  are  an  integrated  global  food  provider  (Hershey,  1985)   Large,  inspiring  stretch  goals   o To  end  poverty  worldwide  (Oxfam)   o Become  number  one  or  two  in  every  market  we  serve  (GE)   Mission   Vivid  description  of  achieving  the  goal   o We  will  be  the  first  Japanese  company  to  enter  the  U.S.  market.  We  will   succeed  with  innovations  where  U.S.  companies  have  failed,  such  as  the   transistor  radio.  Our  brand  will  be  known  around  the  world,  and  will  signify   innovation  and  quality  that  rival  the  world’s  best.   Made  in  Japan  will  mean  something  fine,  not  shoddy.  (Sonny,  1950s)     Strategic  goals       NASDAQ:   “To   build   the   world's   first   truly   global   securities   market.   A   worldwide   market   of   markets   built   on   a   worldwide   network   of   networks,   linking   pools   of   liquidity  and  connec1ng  investors  from  all  over  the  world,  assuring  the  best  possible   price  for  securities  at  the  lowest  possible  costs.”     Canon:  “Beat  Xerox”     Blur   Studios:   “To   work   on   cool   projects,   with   cool   clients   and   cool   employees,   not   political  and  corporate  bullshit”     Amstrad:   “Pan   Am   takes   good   care   of   you.   Marks   and   Spencer’s   loves   you.   Securicor   cares.    At  Amstrad,  we  want  your  money.”       “The   best   way   to   maximize   shareholder  value  is  not  to  shoot  for  it  directly:  if  you  go   out  to  be  happy,  you  probably  won't  be.  I  think  the  way  Whole  Foods  does  it  is  going   to  be  the  way  everyone  does  it  in  20  years."   John  Mackey,  Founder  and  CEO,  Whole  Foods  Market         2. ENVIRONMENTAL  ANALYSIS   1.5.
Strategic  Management  Framework                         Definition  environment:     The   environment   is   everything   that   is   around   the   company   and   may   affect   the   company’s   decision.   There   are   different   kinds   of   environment   and   each   one  can  affect  the  sector,  the  industry  and  companies  differently.   Environment  analysis:           Environment:  Features                         Uncertainty  =  incertidumbre     Dynamic  of  change  =  Dinámica  del  cambio     Complexity  =  complejidad     Simple  static  low  =  Simple  estática  baja     Simple  dynamic  moderate  =  Simple  dinámica  moderada     Complex  static  moderate  =  Complejo  estática  moderada     Complex  dynamic  high  =  Complejo  de  alta  dinámica   The  mix  of  3  variables  can  define  all  the  possible  environments.   Uncertainty  of  the  variables.   The  number  of  variables  that  define  an  environment.   The   dynamic   change   of   variable.   The   variable   changes   very   quickly.   The   rhythm  of  changes.  The  speed  of  change.   What   does   uncertainty   mean?   You   do   not   know   the   variable   evolution.   It’s   quite   impossible  to  predict.     In  turbulent  environments:     Breakdown  between  experience  and  trends   More  complex,  more  relevant  variables   Relevant  variables  change  faster         What’s  the  External  Environment   External  environment  is  composed  of  three  major  areas     1. The  General  Environment   Deals   with   dimensions   in   the   broader   society   that   influence   and   industry  and  the  firms  within  it   2. The  Industry  Environment     Deals  with  the  industry  (e.g.,  the  group  of  firms  producing  products  that   are  close  substitutes)   3. The  Competitor  Environment     Deals  with  the  direct,  indirect  and  potential  future  competitors  of  the   firm   Understanding   the   external   environment   is   essential   for   firms   to   understand   the   present  and  predict  the  future     Knowledge   of   the   external   environment   and   internal   environment   helps   inform   our  vision/mission,  our  strategy,  and  how  we  implement  the  strategy     The  external  business  environment   In  our  analysis  we  can  distinguish  two  types  of  environment:   STEEP:  more  general,  more  macro   Competitiveness   analysis:   closer   to   an   economy   sector.   This   includes   competitors  (rivalry),  customers,  suppliers,  entrance  barrier  and  substitutes.   External  environment:  Levels                     PESTEL  FRAMEWORK   The  framework  primarily  involves  the  following  two  areas   1. The  environmental  factors  affecting  the  organization   2. The   important   factors   relevant   in   the   present   context   and   in   the   years   to   come   1.6.
External  Environment:  The  General  Environment   Five  environmental  segments  within  the  general  environment   1.
2.
3.
4.
5.
Political/legal   Economic     Socio-­‐cultural/Demographic     Technological   Ecological/environment   What  environmental  factors  are  affecting  the  organization?   Which  of  these  are  the  most  important  at  the  present  time?  In  the  next  few  years?   STEEP  ANALYSIS   STEEP  is  a  strategic  tool  that  helps  us  to  understand  what’s  happen  or  will  happen   in   the   macro   environmental.   At   the   end   of   that   analysis   we   will   detect   the   opportunities  and  the  threats.   The  STEEP  model  (which  is  an  updated  version  of  the  original  PEST  model)   encourages   you   to   take   a   step   back   from   your   business,   and   look   at   the   big   picture.   It’s  a  tool  to  help  you  think  about  the  wider  issues  that  have  an  impact  on  the   industry  or  service  area  as  a  whole,  taking  five  main  categories  into  account.   STEEP   is   an   acronym   for   Socio-­‐cultural,   Technological,   Economic,   Environmental  and  Political  factors.   1.  The  General  Environment:  Political/Legal   •Political   factors   are   how   and   to   what   degree   a   government   intervenes   in   the   economy.  Specifically,  political  factors  include  areas  such  as:   Tax  policy,   labour  law,   Environmental  law,   Discrimination  law   Health  and  safety  law     Trade  restrictions,     Tariffs,  and     Political  stability.   Political  factors  may  also  include  goods  and  services  which  the  government  wants  to   provide   or   be   provided   (merit   goods)   and   those   that   the   government   does   not   want   to  be  provided  (demerit  goods  or  merit  bads).   Furthermore,   governments   have   great   influence   on   the   health,   education,   and   infrastructure  of  a  nation.   Concerned  with  how  firms  try  to  influence  government  and  how  government   influences  firms   –  Political  action  and  regulatory  changes   EPA   laws   create   opportunities   to   start   firms   that   help   other   firms   comply   with  environmental  laws  and  regulations   Non-­‐smoking  legislation  in  Ohio  and  other  states  (Spain,  Switzerland..)     Legalization  of  gambling  in  some  states     Periods  of  war/conflict       EPA:  http://www.epa.gov/lawsregs/     EEA:  http://www.eea.europa.eu/themes  http://www.eea.europa.eu/       High  Condition  (Orange).  A  High  Condition  is  declared  when  there  is   a  high  risk  of  terrorist  attacks.   Source:   US   Department   Homeland  Security         of     ”The   controversy   over   airport   body   scanners   has   created   a   crop   of   entrepreneurs  ...  that  promise  to  keep   parts   of   your   body   from   showing   up   on  the  images  ...  agents  see.”   Source:  Cnn.com,  2011           Noticia  de  internet                 2.  The  General  Environment:  Economic   Economic  factors  include:     Economic  growth,    Interest  rates,     Exchange  rates   Inflation     Fuel  costs     The  inflation  rate.   These  factors  have  major  impacts  on  how  businesses  operate  and  make  decisions.   For   example,   interest   rates   affect   a   firm's   cost   of   capital   and   therefore   the   rate   at   which  the  business  grows.   Exchange   rates   affect   the   costs   of   exporting   goods   and   the   supply   and   price   of   imported  goods  in  an  economy   Economic  Trend:  Fuel  Prices   “The   national   average   retail   price   for   regular   gasoline   could   exceed   $4.00   in   2011   (U.S.  Energy  Information  Administration,  2011).   Electric  Bikes  Provide  Greener  Commute   “The  surging  cost  of  gasoline  and  a  desire  for  a  greener  commute  are  turning  more   people   to   electric   bikes   as   an   unconventional   form   of   transportation.   ...   They’re   flying  off  the  shelves...”   Source:  Cnn.com,  2008   Chrysler,  EPA  develop  new  hybrid  technology   “Chrysler   has   teamed   up   with   the   Environmental   Protection   Agency   to   commercialize  a  unique  hybrid  vehicle  technology.”   Source:  Wall  Street  Journal,  2011   Economic  Trend:  Teen  Affluence   2002:  teen  shoppers  spent  over  $170  billion     2007:  teen  shoppers  spent  $163  billion     Analysts  project  teen  spending  upswing  by  2013   Source:  Mintel  Oxygen,  2011   What  are  the  three  biggest  industries  where  teens  spend  their  money?   1) Clothing     2) Music     3) Movies   http://oxygen.mintel.com/display/600658/?highlight=true                     3.  The  General  Environment:  Socio  cultural  demographic   Concerned  with  society’s  lifestyles,  attitudes,  and  values   Social  factors  include  the  cultural  aspects  and  include:   health  consciousness,     population  growth  rate,     age  distribution,   Income  distribution,     Career  attitudes  and   emphasis  on  safety.   Trends   in   social   factors   affect   the   demand   for   a   company's   products   and   how   that   company  operates.   For   example,   an   aging   population   may   imply   a   smaller   and   less-­‐willing   workforce   (thus   increasing   the   cost   of   labor).   Furthermore,   companies   may   change   various   management   strategies   to   adapt   to   these   social   trends   (such   as   recruiting   older   workers)   Examaple:  Socio  cultural  Trend:  Health  conscious  Consumers                     Demographic  Trend:  Aging  Population   Technology  Needs  of  Seniors         The  General  Environment:  Socio  cultural   These preferences often related to demographic, economic, political/legal and technological changes Family/work  patterns  impact     o Childcare   o Scheduling   Increasing   diversity   in   the   workplace     o Training   Globalization  of  industry     o Transportation     o Taxation   o Regulatory  compliance     o Online  shopping         Focus   on   health   care   and   fitness     o Weight  management     o Trainers     Technology   and   technology   adoption   o Hardware/software/traini ng     o Websites     o Telecommuting     New  forms  of  entertainment   o Video  games     o DVR/online  entertainment     o Laser  tag     o Fantasy  sport  teams     Sociocultural  Trend:  Tween  Market   Kiddie  calls  are  on  the  horizon  for  the  growing  'tween  market   “’Tweens  [ages  8-­‐12]  constitute  a  lucrative  retail  market  ...  23  million  members  ...   Retail  studies  say  this  demographic  is  on  the  leading  edge  of  the  most-­‐consumer-­‐ oriented   generation   in   history.   They   increasingly   have   disposable   income,   and   their  voice  now  factors  heavily  into  family  purchases.”   “   ...   when   they   shop   for   themselves,   ‘tweens   ignore   toys   ...   preferring   clothes,   video   games  and  electronics.”   “  The  world's  No.  2  toymaker  [Hasbro,  Inc.]  is  going  after  the  ...  'tween  market  with   a  walkie-­‐talkie-­‐like  device  that  resembles  a  mobile  phone.”   Source:  St.  Louis  Tribune,  February  12,  2005   Example:  “Social  Trend:  Tween  Market”             4.  The  General  Environment:  Socio  cultural  demographic   Concerned  with  institutions  and  activities  involved  with  creating  new  knowledge   and  translating  knowledge  into  new  outputs,  products,  processes  and  materials   Technological  factors  include  technological  aspects  such  as:   R&D  activity,   Automation,   Technology  incentives  and   The  rate  of  technological  change.     o Basically,   new   technologies   affect   current   and   future   business   operations     o Industries  have  emerged  due  to  technological  advances   § Computer  industry,  Internet,  biotechnology,  digital  photography   Then,  technologies  can  pose  the  potential  for  firms  to  form  new  strategies  to  take   technology  to  higher  level   Real  Networks  was  started  to  add  video  capability  to  the  Internet     Massively  Multiplayer  Online  Role  Playing  Games  (MMORPG)     29   o o o o  EverQuest   World  of  Warcraft   Phantasy  Star  Online     Second  Life   They   can   determine   barriers   to   entry,   minimum   efficient   production   level   and   influence  outsourcing  decisions.   Furthermore,  technological  shifts  can  affect  costs,  quality,  and  lead  to  innovation   Technological  Trend:  Computers   Virtual  Gaming  and  the  Economics  of  MMORPGs   “...supply-­‐and-­‐demand   market   exists   for   virtual   items   ...   that   it   crosses   over   with   the  real  world.  [This  includes:]  ...  (Castronova,  E.,  2005)   • The  purchase  of  in-­‐game  items  for  real-­‐world  currency     $1.6  billion  in  sales  in  2010  (The  New  York  Times,  2010).   • Exchanges  of  real-­‐world  currencies  for  virtual  currencies   Virtual  Crimes  on  the  Rise     Dutch  teenager  was  arrested  for  stealing  virtual  furniture  (BBC  News,  2007)     “Virtual  killer  faces  real  jail  after  murder  by  mouse”  (McNeill,  2008)         5.  The  General  Environment:  Socio  cultural  demographic   Environmental  factors  include  ecological  and  environmental  aspects  such  as:    weather,     climate,  and     climate  change,   which  may  especially  affect  industries  such  as  tourism,  farming,  and  insurance.   Furthermore,   growing   awareness   of   the   potential   impacts   of   climate   change   is   affecting   how   companies   operate   and   the   products   they   offer,   both   creating   new   markets  and  diminishing  or  destroying  existing  ones.   Macro  environment  influence  –The  Pestel  Framework.  Summary:     30     External  factors:  STEEP         Objective of Analyzing the General Environment Firms  can  anticipate  changes  and  trends   Changes   and   trends   should   inform   initial   strategy   choices   and   implementation  decisions   Changes   and   trends   should   be   monitored   by   existing   firms   to   allow   them   anticipate  changes  in  strategic  decisions   http://www.trendwatching.com/trends/minitrends/   http://oxygen.mintel.com/index.html   http://www.springwise.com/   Examples  for  the  students:     31   One  way  of  compiling  a  PEST  analysis  for  your  business  is  to  take  a  LARGE   sheet   of   paper.   In   the   top   left   corner,   put   the   heading   Political;   in   the   top   right   corner,   Economic;   bottom   left   =   Sociocultural;   bottom   right=   technological.     For  each  heading,  think  of  every  factor  that  could  possibly  have  an  impact   on   your   business.   Think   laterally   -­‐   just   because   something   seems   unlikely   does  not  mean  that  it  will  not  have  an  influence  in  the  future.     Having   compiled   a   list   of   key   factors,   think   of   inter-­‐relationships   between   factors.   For   example,   the   rise   of   the   Internet   (technological   factors)   is   likely   to   influence   consumer   purchasing   (social   factors)   -­‐   while   an   awareness   of   prices   in   other   markets   through   electronic   commerce   may   lead   to   a   narrowing  of  cross-­‐border  price  differences  (economic).   Connect  up  all  inter-­‐related  factors.  You  will  find  that  some  areas  have  more   connections   than   others.   These   are   often   the   areas   that   will   have   the   greatest  potential  impact  on  your  company.  These  are  the  aspects  that  you   most   need   to   be   aware   of,   in   your   marketing   planning   -­‐   and   represent   future  opportunities  and  threats.   The  final  stage  in  a  PEST  analysis  is  to  use  the  results.   Prepare   contingency   plans   for   any   threats   identified.   If   there   are   factors   that  lead  to  business  opportunities,  then  include  these  in  your  planning.  For   example,   your   target   customer   group   may   be   growing   faster   than   other   sectors.  This  is  an  opportunity  to  increase  production  to  take  advantage  of   more  potential  customers.         32   1.7.
STAKEHOLDERS   Stakeholders  are  those  individuals  or  groups  who  depend  on  an  organization  to   fulfil  their  own  goals  and  on  whom,  in  turn,  the  organization  depends.   Stakeholders  of  a  company     Stakeholder:  Power/interest  matrix         1.8.
Scenarios   The  principles  of  scenario  planning   “  Too  many  forces  work  against  the  possibility  of  getting  the  right  forecast  ...  accept   uncertainty,  try  to  understand  it,  and  make  it  part  of  our  reasoning.”  Pierre  Wack   (Harvard  Business  Review  1985)   What  is  a  scenario?     33   “An   outline   of   future   development   which   shows   the   operation   of   causes.”   Chambers  English  Dictionary   Describes  a  possible  future  business  environment,  but  it  is  not  a  prediction     Explores  the  extremes  which  challenge  the  existing  business  model     Engaging,  interesting,  challenging  and  credible     Hypotheses  that  describe  a  range  of  possibilities  for  the  future-­‐not  predictions.     Logically  consistent  with  the  known  facts     A  set  of  scenarios  describes  a  range  of  possible  futures     Ideally,  develop  no  more  than  four  scenarios,  or  it  becomes  difficult  to  manage   them     Scenarios   can   be   presented   in   many   different   forms,   such   as   in   a   script   or   a   timeline,  or  within  a  discussion     Scenarios  overcome  the  tendency  to  oversimplify  the  future         Applying  Scenario  Planning  to  key  business  Problems:     34   Scenario  planning  can  greatly  enhance  an  organization’s  ability  to  tackle  a  diverse   set  of  strategic  business  problems,  many  of  which  have  become  more  challenging   as  the  business  climate  becomes  ever  more  complex,  dynamic,  and  uncertain.   The  applications  of  Scenario  Planning   Creating  More  Sustainable  Long-­‐Term  Strategy   Making  Strategic  Decisions  Under  Conditions  of  Uncertainty   Continuously  innovating  in  Anticipation  of  the  Market   Developing  Organizations  That  Can  Think  Flexibly  and  Creatively   Aligning  Key  Stakeholders  in  Support  of  a  Shared  Vision   The  process  of  scenario  planning   This  diagram  shows  our  basic  process  for  scenario  planning.  We  work  within  this   framework  to  tailor  solutions  to  suit  our  clients’  needs.     Example                       35   Scenario   planning   is   a   discipline   for   rediscovering   the   original   entrepreneurial   power  of  creative  foresight  in  contexts  of  accelerated  change,  greater  complexity,   and  genuine  uncertainty.   Pierre  Wack,  Royal  Dutch/Shell,  1984   Example:  scenarios  at  shell  from  –  www.shell.com  (I)   Scenarios   are   carefully   crafted   stories   about   the   future   embodying   a   wide   variety   of   ideas   and   integrating   them   in   a   way   that   is   communicable   and   useful.   They   help   us   link   the   uncertainties   we   hold   about   the   future   to   the   decisions  we  must  make  today.     When  we  reflect  on  situations,  we  see  the  world  through  our  own  frames  of   reference.  The  purpose  of  scenario  work  is  to  uncover  what  these  frames  are,   respecting  differences  rather  than  aiming  for  a  consensus  that  puts  them  to   one  side.     Good   scenarios   are   ones   that   explore   the   possible,   not   just   the   probable   –   providing  a  relevant  challenge  to  the  conventional  wisdom  of  their  users,  and   helping  them  prepare  for  the  major  changes  ahead.     _    Shell  has  been  using  scenarios  for  30  years.  Many  people  express  interest   in  our  scenarios,  and  in  how  they  are  produced.  You  can  access  information   about  Shell’s  scenarios  and  approaches  on  this  site.     "At  times,  the  world  can  look  so  complex  and  unpredictable  that  it  becomes   hard  to  make  decisions.  Scenario  building  is  a  discipline  for  breaking  through   this  barrier."  -­‐  Ged  Davis     Energy  Needs,  Choices  and  Possibilities  -­‐  scenarios  to  2050   People  and  Connections  -­‐  Global  scenarios  to  2020   In  a  more  interconnected  world,  which  people  and  connections  will  be  most   powerful  and  influential  in  shaping  the  future?   This   is   the   question   explored   in   the   scenarios   People   and   Connections,   completed  by  Shell  in  mid  2001.   Energy  Needs,  Choices  and  Possibilities  -­‐  scenarios  to  2050   We   appear   to   be   entering   a   particularly   innovative   period   in   energy   against   a  background  of  concerns  including  climate  change,  opening  up  a  wide  set   of  possibilities  for  energy  development.     Shell’s   new   long   term   energy   scenarios,   Energy   Needs,   Choices   and   Possibilities,   explore   how   the   world’s   energy   systems   may   develop   in   the   first  half  of  the  21st  century     http://www.authorstream.com/Presentation/Reinardo-42587- Environmental-AnalysisManagement-1-2-Marketing-Finance-Production-a- Education-ppt-powerpoint/  http://www.slideshare.net/ZafarIqbal74/5th-lecture-industry-competitive- analysis-mahmood- ahmed   36    http://www.slideshare.net/jagangowda/sm2environment_ http://wenku.baidu.com/view/8fca8f d784254b35eefd34ce.html   Competitive  Analysis   Strategic  Management  Framework       External  environment:  Levels     Industry  analysis:  the  drivers  of  the  attractiveness  of  a  market  and  an  industry   We  will  discuss...   What  an  industry  is  and  why  it  is  important  to  a  company.       37   How  an  industry  should  be  defined  and  how  a  market  and  an  industry   can  be  different.   What  attractiveness  means.     Drivers  of  industry  attractiveness     Six  reasons  why  companies  need  to  analyze  their  industry   Identification   of   threats   and   opportunities   in   the   industry.   q   Better   understanding  of  the  strategic  territory  in  which  the   Company  has  to  compete.   Evaluation  of  expansion  opportunities.   Fit   between   chosen   strategy   and   the   conditions   in   the   industry.   Identification  of  Key  success  factors  (KSF).   Capabilities  and  resources  required  to  compete  successfully  in  industry.   Industry   What’s  the  Industry  Environment?   The  industry  environment  has  a  more  direct  effect  on  the  firm’s  strategic   competitiveness  and  above-­‐average  returns  than  the  general  environment     Industry:   a   market   containing   a   group   of   firms   producing   products/   services  that  are  similar       The  industry’s  attractiveness  (e.g.,  it’s  profit  potential)  is  a  function  of  the  five  forces   of  competition     Definition  of  an  Industry:   Identify  the  relevant  business  system  (often  the  term  value  chain  is  used  although   this   concept   should   be   reserved   for   activities   within   the   firm,   see   later   in   this   course)     Determine  the  international  scope  of  the  industry:     Local  industry     Global  industry     Interrelation  ships  with  other  industries.   Industry:  A  group  of  companies  that  makes  products  that  are  close  substitutes  for   each  other.   Industry  features:   Market  size     Scope  of  competitive  rivalry     Market  growth  rate     Number  of  rivals  and  relative  size     Customer  Number  and  relative  size     Degree  of  Vertical  Integration     Easy  /  difficulty  of  entry  and  exit  of  the  industry       38   Technological  innovations     Product  Features   There  are  economies  of  scale  in  prod  /  mark  /  dist   Capital  requirements   Profitability   Industry  is  a  product  technology  combination   Industries can converge as products and technologies become similar. For example: Televisions and computers, PDA’s and GSM’s, camera’s and GSM’s, MP3’s and GSM, banking and insurance Convergency   Examples:   PC  as  a  TV?   Insurance  that  provides  financial  product  (Bank  that  sells  insurance)   Mobile  and  Internet   La  Caixa  distributes  Apple  products   An  example:  The  industry  of  LCD  screens     Industries  are  different  from  markets       39   An   industry   typically   serves   many   markets.   A   market   can   be   served   by   several   industries.       The  business  system:     Sometimes  referred  to  as  Value  Chain,  although  that  term  should  be  reserved  for   activities   within   companies,   see   later   and   see   Michael   E.   Porter;   Competitive   Advantage     An  example  from  the  PVC  window  industry     An  example  from  the  travel  industry     The  business  system:  An  example  from  the  PC   An  example  from  the  Computer  industry             40   Some of the strategic implications of the business system Strategic  moves  by  which  companies  acquire  or  control  businesses  closer  to   end  user  of  the  products  or  services  are  called  forward  integration.  Moves   in  the  other  direction  are  called  backward  integration.       o Historical   evidence   suggests   that   moves   forward   in   the   business   system,   forward   integration,   have   been   more   popular   and   successful   than  backward  integration.  (see  Alfred  D.  Chandler:  Scale  and  Scope)     Business   systems   are   continuously   changing.   They   develop   more   intermediate   steps   or   the   steps   become   integrated.   Some   of   the   most   important   strategic   moves   by   companies   involve   redesigning   the   business   system.       o Dell  redesigned  the  selling  of  PCs  and  peripherals     o Amazon   first   redesigned   the   selling   of   books   and   some   of   other   products     o The  Ipod  from  Apple  was  designed  to  reorganize  the  selling  of  music     Profit  pools  are  those  activities  in  the  business  system  where  most  profits   are  being  made     o An   interesting   example   is   the   PC   business   where   the   chip   manufacturers   such   as   Intel   and   the   software   companies   such   as   Microsoft  have  earned  historically  most  profit.     Porter’s  Five  Forces  Model       The  results  of  our  Porter’s  Five  Forces   analysis   tell   us   if   the   industry   is   attractive   (e.g.,   how   likely   it   is   that   firms   competing   within   the   industry   will  capture  long-­‐term  profitability).   Firms   should   pursue   strategies   that   lessen  the  effects  of  negative  forces.     Five  forces  of  competitive  intensity:   what   drives   the   return   in   an   industry?     41     This   analysis   should   be   done   at   the   level   of   the   industry   not   at   the   level   of   the   business  or  company!!!   http://www.youtube.com/watch?v=mYF2_FBCvXw     http://www.youtube.com/watch?v=_oHa5u2GJcA  (1.37)   Michael  Porter:  Creating  Shared  Value   http://www.youtube.com/watch?v=z2oS3zk8VA4     Why  is  a  sector  profitable?  
 How  and  why  does  the  industry  change  its  profitability?   3.2.1  Porter’s  Five  Forces:  The  power  of  Suppliers   Determined  by  five  factors:  
   Suppliers’  industry  dominated  by  a  small  number  of  firms     Suppliers  sell  unique  or  highly  differentiated  products     Suppliers  are  not  threatened  by  substitutes     Suppliers  threaten  with  forward  integration     Firms  are  not  important  customers  for  suppliers   The  higher  power  of  suppliers,  the  more/less  attractive  the  industry?   3.2.2  Porter’s  Five  Forces:  The  power  of  Buyers   Determined  by  four  factors:     Number  of  buyers  is  small   o Because   there   are   few   buyers,   they   can   have   more   power   over   those   providing  the  goods.  Large-­‐volume  buyers  are  also  powerful.   Products  sold  to  buyers  are  undifferentiated  and  standard     o If  the  goods  are  commodities,  buyers  can  find  alternative  products     42   Buyers  are  not  earning  significant  economic  profits     o If  buyers  are  not  earning  high  economic  profits,  they  are  1)  likely  to   be  Price  sensitive,  and  2)  their  simple  ability  to  afford  higher-­‐priced   goods  is  low.     Buyers  threaten  backward  (vertical)  integration   o If   buyers   can   easily   backward   integrate   (e.g.,   produce   the   goods   or   perform  the  service  themselves)  this  gives  them  power   The  higher  power  of  buyers,  the  more/less  attractive  the  industry? 3.2.3  Porter’s  Five  Forces:  Threat  of  Substitutes   Substitutes  are  products/services  from  other  industries  that  viably  serve  the   same  function  as  products/services  in  the  focal  industry     Determined  by:   o The   availability   of   substitutes   from   other   industries   (e.g.,   in   the   auto    manufacturing   industry,   substitutes   come   in   the   form   of   public   transportation,    bicycles,  flying,  walking,  etc.).     What  are  substitutes  for  the  USPS  (United  States  Postal  service)?     o What’s   its   purpose   (e.g.,   what   need   does   it   serve   or   problem   does   it   solve)?     What  are  substitutes  for  libraries?     o What’s  its  purpose?       The  higher  threat  of  substitutes,  the  more/less  attractive  the  industry?   Pressure  from  substitute  products   Firms   in   an   industry   are   also   affected   by   competition   from   related   markets.   The   availability   of   substitutes   influences   the   ability   of   a   firm   to   raise   prices,   or   to   change  the  attributes  of  its  products     Identify  possible  substitute  products  by  asking:     “What   set   of   products   constrains   the   ability   of   firms   in   this   industry   to   substantially  increase  prices?“   Substitute   products   become   particularly   important   in   times   of   rapidly   increasing   demand,   and   in   industries   with   few   competitors   (making   it   difficult  to  increase  supply  quickly)   3.2.4  Porter’s  Five  Forces:  Threat  of  New  Entrants   Determined  by:   Barriers  to  entry:   Economies  of  scale     Product  differentiation     Capital  requirements     Switching   costs   faced   by   customers   if   they   were   to   switch   to   another   supplier  of  the    good     Access  to  distribution  channels  (e.g.,  if  the  entrant  cannot  secure  a  way  to   distribute    it’s  product,  it  is  a  barrier  to  their  entry)       43   Cost  advantages  independent  of  scale  (e.g.,  other  cost  advantages  other  than    capturing  economies  of  scale)     o Proprietary  technology:  secret  or  patented  technology     o Managerial  know-­‐how:  tacit  knowledge     o Favorable   access   to   raw   materials:   low   cost   access   to   critical   raw   materials     Government  regulation  of  entry     The  higher  threat  of  new  entrants,  the  more/less  attractive  the  industry?   3.2.5  Porter’s  Five  Forces:  Intensity  of  Rivalry   Determined  by  five  factors:   Large   number   of   competing   firms   that   are   roughly   the   same   size   §   This   leads  to  price  competition   Slow  industry  growth   Lack  of  product  differentiation   High  exit  barriers   o Specialized  assets     o Fixed  costs  of  exit  (e.g.,  labor  agreements)     o Strategic  interrelationships     o Governmental  and  social  restrictions       Large  production  capacities     o In   a   sector   where   scale   economies   are   required,   if   the   demand   decreases,   companies   can’t   stop   producing   big   amounts   and   they   must  cut  prices...           Higher  intensity  of  rivalry,  the  more/less  attractive  the  industry?   FIVE  FORCES  ANALYSIS:  KEY  QUESTIONS  AND  IMPLICATIONS   What  are  the  key  forces  at  work  in  the  competitive  environment?     Are  there  underlying  forces  driving  competitive  forces?      Will  competitive  forces  change?     What   are   the   strengths   and   weaknesses   of   competitors   in   relation   to   the   competitive  forces?     Can   competitive   strategy   influence   competitive   forces   (eg   by   building   barriers   to   entry  or  reducing  competitive  rivalry)?     The  importance  of  the  five-­‐force  model     44   In   each   of   its   businesses,   the   firm   faces   an   industry   structure   that   shapes   the   rules   of   competition   it   must   respond   to   or   try   to   influence,   and   that   is   the   basis   and   motivation  for  a  unique  strategy.     One  way  to  organize  information  about  an  industry  is  the  FIVE  FORCES  model  that   helps  to  explain  why  one  industry  is  profitable  while  another  is  not     The   strategist‘s   goal   is   to   find   a   place   in   the   industry   where   the   firm   can   best   defend  itself  against  the  forces,  and  influence  them  in  its  favor.     What  to  do…?   1. .  Positioning  :  accept  competive  structure  as  given  and  match  yourself  to  it:     ..  build  defenses  against  competitive  forces     ..  identify  positions  where  forces  are  weakest   2. Take  the  offensive:  Influencing  the  Balance     ..  identify  key  factors  driving  competition  that  you  can  control     ..  influence  those  costs  that  yield  the  greatest  payoff   3. Exploiting  Change   ..  understand  which  trends  affect  the  sources  of  competition,  and  forecast  the   magnitude  of  each  trend  and  underlaying  cause   ..  construct  a  picture  of  the  likely  profit  potential  of  the  industry     4. Set  and  evaluate  diversification  potential       Porter’s  Five  Forces:  Conclusion/Outcome  Analysis   Based  on  your  analysis,  rate  each  force  from  -­‐5  (really  bad,  poor  profit  potential  to   +5  (great,  excellent  profit  potential)     Scores   between   +10   to   +25   à   Generally   Attractive   and   High   Profit   Potential  Scores   between   -­‐6   to   +9   à   Generally   Moderately   Attractive   and   Moderate  Profit  Potential     45   Scores  less  than  -­‐6  à  Generally  Unattractive  and  Low  Profit  Potential   Porter’s  Five  Forces:  Conclusion/Outcome  Analysis  Example   Based  on  your  analysis,  rate  each  force  from  -­‐5  (really  bad,  poor  profit  potential  to   +5  (great,  excellent  profit  potential)     Scores  between  +10  to  +25  à  Generally  Attractive  and  High  Profit  Potential   Scores  between  -­‐6  to  +9  à   Generally   Moderately   Attractive   and   Moderate   Profit   Potential     Scores  less  than  -­‐6  à  Generally  Unattractive  and  Low   These   results   would   suggest   that   the   industry   is   not   attractive   and   prospects   for   long-­‐term  profitability  for  the  industry  are  low.           Barriers  to  entry/exit  and  profitability     Rivality  Tools     46     Reaction  time  competitors     Impact  on  the  income  statement  and  Benefits     EXAMPLE  GRAFT     47             48       Rivalry  or  Internal  Competition:  What  are  the  drivers?   Determinants  of  rivalry  or   internal  competition       Impact  on  rivalry   Concentration   High  concentration  can  reduce  competition   Product  differentiation   Creates  customer  loyalty  and  less  competition   Market  growth   Increases  company  sales  without  changes  in  market  shares   Costs  structure   High  fixed  costs  can  lead  to  price  competition   Capacity  adjustments   Disturbs  market  equilibrium   Overcapacity   Puts  pressure  on  market  behavior   Exit  barriers   Slows  down  restructuring  of  industry   Competition  policy   Increases  competition     49   Some  definitions   Concentration     o C4  is  the  combined  market  share  of  the  largest  4  players  in  the  industry   o Is   influenced   by  the   number   of   players   and   their   relative   importance   in   the  industry   o Depends   on   economies   of   scale   and   on   differences   in   efficiency   and   strategies   Product  differentiation     o Perceived   and/or   real   differences   between   products   create   customer   loyalty  and  switching  costs.   Cost  structures     o The  share  of  fixed  costs  in  total  costs   Exit  barriers     o The  costs  for  the  business  or  company  to  leave  the  industry   Overcapacity:  causes  and  consequences   Causes   Changes  in  technology     Errors  in  market  forecasts     Investments   require   minimal   commitment     Avoidance  of  taxes     Strategic  moves   o Deter  potential   competitors     o Exploit  competitive   advantage     o  Close  gap  with  bigger   competitors     Irrational  behavior     Exit  barriers       Consequences   Impact   on   intensity   of   competition  in  the  future   Increases   the   risks   of   a   price   war   Disturbs   normal   market   behavior   Increases  power  of  buyers   Stimulates   mergers   and   acquisitions           50     Competition  and  market   The  immediate  environment  is  formed  by  competing  firms.   We  analyze  the  competitive  position:   1. Competitive  analysis     2. Strategic  group  analysis     3. Market  attractiveness  and  business  strength     1  COMPETITIVE  ANALYSIS   Strategic  Group:   Grouping  of  organizations  with  similar  strategic  characteristics     Market  segments:   Consumer  groups  with  similar  needs.   Strategic  groups  and  competitor  analysis  What  companies  should  know   about  their  competitors   We  will  discuss...   What  competitive  position  does  company  hold  in  its  industry?     Who  are  direct  competitors?     What  strategies  do  competitors  follow?     How  are  competitors  affected  by  changes  in  industry  evolution  and   industry  structure?     What  strategic  moves  will  competitors  make?     How  will  competitors  respond  to  moves  made  by  our  company?     Who  are  direct  competitors?   Companies  with  similar  strategies,  with  similar  competitive  advantages.   Companies  which  can  initiate  and  implement  changes  in:     o o o o Evolution  of  industry   Market  segmentation     Industry  structure   Value  chain  of  the  industry*   *  for  definition  of  concept  of  value  chain  see  further     What  strategies  do  competitors  follow?     51   Identify   the   competitive   advantages/disadvantages   of   the   various   competitors   Analyze  the  coherence  of  the  strategies  of  the  competitors.     o Where  is  competitor  most  vulnerable?     Evaluate  the  drivers  of  the  performance  of  the    competitors.     Draw  a  strategic  map.     2  STRATEGIC  GROUPS   Identify  the  key  strategic  characteristics  of  the  industry   Position  competitors  along  these  characteristics   Create  strategic  map:   -­‐ Focuses  on  competitor  analysis   -­‐ Clarifies  the  strategic  differences  between  competitors     -­‐ Facilitates  the  prediction  of  competitive  moves     -­‐ Helps  in  identifying  strategic  options   Strategic  differences  can  come  from...   Business  level    Product  mix  en  segment  mix     Quality  level  of  products     Distribution  channels     Pricing  policy     Cost  level     Product  differentiation     Technological  capabilities     ...Corporate  level   Financial  structure     Ownership     Management  and  organization   Size  Vertical  integration   Diversification   52     Mapping Strategic Groups in the U.S. Restaurant Chain Industry   Examples  of  strategic  groups       53   Example: Strategic Group Map of Selected Retail Chains   Strategic  Groups  in  the  automotive  industry     Why  companies  make  different  strategic  choices   Differences  in  strategic  capabilities  and  visions     Uncertainty  and  lack  of  consensus  about  the  development  of  the  industry     Uncertainty  about  he  likely  moves  of  competitors     54   Consequence:  companies  follow  different  strategies   Some  explanations  for  performance  differences  in  an  industry   Accounting  differences  continue  to  exist  despite  increased  standardization   via  International  Accounting  Standards  and  IFRS     Differences  in  fiscal  rules       Heterogeneous  industry     o Textiles     o Projectors     Temporary  disturbances  in  industry  equilibrium       Companies  make  different  strategic  choices     Differences  in  competitive  advantages  between  companies     What  moves  will  competitors  make?   What  are  objectives  of  competitors?  Do  they  aim  for:     o  Profitability?   o Growth?       o Market  share?   Who  sets  objectives?     o Owners?   o Holding  company?       § Managers?  How  are  manager’s  incentivized?   Are  objectives  consistent  with  performance?       o If  not,  how  long  will  it  take  to  correct  performance  gap?   § Long  time:  Alitalia     § Short  time:  stock  exchange  listed  companies       Are  available  assets  fully  utilized  by  competitors?     o Is  this  a  likely  take-­‐over  target?     Did  management  change  recently?       o Management  changes  are  likely  to  lead  to  strategic  changes     GE/McKinsey  Matrix   In   consulting   engagements   with   General   Electric   in   the   1970's,   McKinsey   &   Company  developed  a  nine-­‐cell  portfolio  matrix  as  a  tool  for  screening  GE's  large   portfolio  of  strategic  business  units  (SBU).   This  business  screen  became  known  as  the  GE/McKinsey  Matrix     55   The   nine-­‐box   matrix   provides   decision   makers   with   a   systematic   and   effective   framework   for   a   decentralized   corporation   to   make   better   supported   investment   decisions   and   for   developing   strategies   for   future   product   development   or   new   market  segment  entries.   Instead  of  looking  solely  at  each  unit's  future  prospects,  a  corporation  can  adopt  a   multi-­‐dimensional   approach   based   on   two   components   that   will   indicate   how   well   the  unit  will  perform  in  the  future.   The  two  components  used  to  evaluate  businesses,  which  also  serve  as  the  axes  of   the   matrix,   are   the   'attractiveness'   of   the   relevant   industry   and   the   unit's   'competitive  strength'  within  the  same  industry.   Each  axis  is  then  divided  into  Low,  Medium  and  High.                           3.  Market  attractiveness  and  business  strength   Internal  factors  that  affects  Competitive  strength  of  a  SBU:   Market  share   Strength  of  assets  or  competencies     Relative  Brand  Strength  (marketing)   Market  share  growth     Customer  loyalty     Relative  cost  position  (cost  structure  compared  with  competitors)     Distribution  strength  and  production  capacity   Quality   Access  to  financial  or  other  investment  resources       56   Management  Strength   External  Factors  that  affects  the  Market  attractiveness   External  Factors  that  affects  the  Market  attractiveness:     • Market  size     • Market  growth  rate   • Market  profitability     • Pricing  trends     • Entry  barriers     • Opportunity  to  differentiate  products     • Technology  development     • Market  Regulation     • Demand  variability     McKinsey  matrix  /  Portfolio  analysis  model   The   GE   matrix   /   McKinsey   matrix   is   a   model   to   perform   a   business   portfolio   analysis  on  the  Strategic  Business  Units  of  a  corporation.   A   business   portfolio   is   the   collection   of   Strategic   Business   Units   that   make   up   a   corporation.   The   optimal   business   portfolio   is   on   that   fits   perfectly   to   the   company’s  strengths  and  helps  to  exploit  the  most  attractive  industries  or  markets.   A   strategic   Business   Unit   (SBU)   can   either   be   an   entire   mid-­‐size   company   or   a   division   of   a   large   corporation,   that   formulates   its   own   business   level   strategy   and   has  separate  objectives  from  the  parent  company.   The  aim  of  a  portfolio  analysis  is:   1. Analyze   its   current   business   portfolio   and   decide   which   SBU’s   should   receive  more  or  less  investment  and   2. Develop   growth   strategies   for   adding   new   products   and   businesses   to   the   portfolio   3. Decide  which  businesses  or  products  should  no  longer  be  retained.               The  plotted  circles  convey  the  information  in  the  following  way:       57   The  size  of  the  circle  represents  the  market  size  of  the  SBU     The  share  owned  by  the  SBU  is  expressed  as  a  pie  slice  with  its  relative  percentage   inside   The  expected  future  direction  of  the  SBU  is  represented  with  an  arrow      The   circles   representing   SBUs   are   then   placed   within   the   matrix.   As   a   result,   the   executives   of   the   corporation   will   have   a   clear   and   powerful   analytic   map   for   understanding   and   managing   their   entire   multi-­‐unit   business.   The   units   that   fall   above   the   diagonal   indicate   the   investment   and   growth   to   be   pursued;   the   units   along   the   diagonal   require   a   thorough   analysis   and   individual   selection   for   investment;   finally   the   units   below   the   diagonal   might   indicate   divestments   are   necessary   or   otherwise   that   businesses   can   be   kept   only   for   cash   reasons.   The   placement   of   the   units   within   the   matrix   is   a   necessary   first   step   before   the   analysis  phase  that  requires  human  judgment  can  begin.  For  example,  a  strong  unit   in   a   weak   industry   is   in   a   very   different   situation   than   a   weak   unit   in   a   highly   attractive  industry.                         Example  GE/McKinsey  Matrix     58                           THE  BOSTON  CONSULTING  GROUP  MATRIX                4.  The  Industry  Life  Cycle     59   The   industry   life   cycle   is   not   the   same   as   the   product   life   cycle,   because   within   an   industry   there   is   a   constant   updating   of   products.   For   example   TV   manufacturers   first   produced   monochrome   TVs,   then   colour   TVs   and   subsequently   home   entrainment  systems.  Within  the  colour  TV   segment,  the  screen  technology  has  evolved   from   cathode   ray   displays   to   flat   screens   such   as   plasma   screens.   Recently   the   first   3D  TVs  and  Internet  enabled  TV  sets  appeared  on  the  market.   However,   eventually   some   industries   may   contract   sharply   and   even   disappear.   For   example   passenger   sea   transport   (other   than   cruising)   has   been   replaced   by   air  travel;  photo-­‐chemical  photography  has  been  replaced  by  digital  photography;   video  rental  shops  are  being  replaced  by  digital  downloads  or  video  on  demand.   Industries   evolve   over   time,   both   structurally   and   in   terms   of   overall   size.   The   industry   life   cycle   is   measured   in   total   industry   sales   and   the   growth   in   total   industry   sales.   The   industry   structure   and   competitive   forces   that   shape   the   environment   in   which   businesses   operate   change   throughout   the   life   cycle.   Therefore   a   business's   strategy   must   adapt   accordingly.   It   is   useful   to   consider   the   evolution  of  the  industry  life  cycle  in  the  context  of  Porter’s  5  Forces.   Life  Cycle  industry  Chart                 60     Topic  4:  Internal  analysis   Strategic  Management  Framework                           Strategic  Management  process     Elements  of  successful  strategy     61     External  environment:  Levels     Context  for  Analyzing  the  Internal  Organization   Context  of  Internal  Analysis:   ‘Global  mind-­‐set’     Study  internal  analysis  in  ways  that  do  not  depend  on  the  assumptions  of  a   single  country,  culture,  or  context       Important  because  of  increasing  global  competition     Analyze  firm’s  portfolio  of  resources  and  bundles  of  heterogeneous  resources  and   capabilities       Understand  how  to  leverage  these  bundles  to  create  the  most  value     An   organization's   core   competencies   creates   and   sustains   its   competitive   advantage     Analyzing   the   Internal   Organization:  Using   Resources   to   Create   Value   for   Customers   Creating  Value   By   exploiting   core   competencies   or   competitive   advantages,   firms   create   value   Value  is  created  by  innovation  and  taking  advantage  of  firm  resources  and   capabilities   Key:   to   be   effective   and   take   advantage   of   resources   _   firms   must   understand  what  customers  value     62     A   competitive   advantage   occurs   when   firms   offer   value   to   customers   that   is   greater  than  the  value  competitors  provide   Pets.com   misread   what   customers   valued  and  failed       The   Lieutenant   Commander   Geordi   La   Forge   got   sad   because   Pets.com   didn’t   deliver   his   food   expeditiously.   As   a   result,   he’s   decided   to   shop   exclusively   at   PetSmart  for  all  of  his  dietary  need   Resources,  Capabilities,  and  Competitive  Advantage:  The  Basic  Relationships     Analyzing   the   Internal   Organization:  Resources,   Capabilities   and   Core   Competencies   The  Foundation  of  a  Competitive  Advantage     Resources   Capabilities     Core  Competencies             63               Resources:  TwoTypes   Tangible  Resources:  Assets  that  can  be  seen  and  quantified   Financial   Cash;  capacity  to  raise  equity;  borrowing  capacity   Physical   Modern  plant  and  facilities;  favorable  manufacturing  locations;   access  to  raw  materials   Technological   Stock  of  technology  like  trade  secrets;  innovative  production   processes;  patents,  copyrights,  trademarks   Organizational   The  firm’s  formal  reporting  structure,  formal  planning,   controlling,  and  coordinating  systems   Intangible  Resources:  Assets  rooted  in  the  firm’s  history  and  that  have  accumulated     over  time   Knowledge,  trust,  employee  experience  and  skills;  organizational   Human   routines   Innovation  &  Creativity   Ideas,  scientific  skills;  innovation  capacities   Reputation   Brand  name;  quality  and  reliability  reputation;  supplier  relations     Combining  Resources  to  Create  Capabilities     • Capabilities   exist   when   resources   are   purposely   integrated   to   achieve   a   specific  task  or  set  of  tasks.     • Example  1:  Wal-­‐Mart  uses  tangible  resources  from  its  distribution  centers  +   its   MIS   infrastructure   to   create   capabilities   in   distribution   and   inventory   management  (Mercadona)     • Example   2:   Southwest   uses   it   intangible   resources   of   HR’s   organizational   routines   +   physical   resources   of   planes   and   landing   gates   to   create   a   logistics   management  (Ryanair)     Defining  Organizational  Capabilities   64   Organizational   Capabilities   =   firm’s   capacity   for   undertaking   a   particular   activity.   (Grant)   Core   Competence   =   capabilities   that   are   fundamental   to   a   firm’s   strategy   and   performance.  (Hamel  and  Prahalad)   When  Capabilities  become  Core  Competencies   Core   competencies   are   capabilities   that   serve   as   a   source   of   a   competitive   advantage  for  a  firm  over  its  rivals     Firms   should   have   no   more   than   3-­‐4   core   competencies   around   which   strategic  actions  can  be  framed     Two  tools  to  help  firms  identify  and  build  core  competencies     1.  Barney’s  Four  Criteria  of  a  Sustainable  Competitive  Advantage  (VRIO)     2.  Porter’s  Value  Chain     Competitive  advantage  can  come  from  two  sources...   … What  the  business  has:   Examples:   Structure  of  the  industry     Patents     Brand  names  and  reputation     Locations     Position   in   industry   and   business   system     Access   to   and   ownership   of   unique   resources  and  assets       •   Rapid   response   to   specific   customer  needs     Supply   and   delivery   at   expected   product  and  service  quality     Purchasing   of   correct   inputs   at   good  prices     Capabilities     • Rent  creating  factors     ...What  the  business  can:   Examples:   Manufacturing   and   supplying   at   low  costs     Rapid   product   development   and   fast   new   product   introductions   (NPI)       65       Creating  a  competitive  advantage Customer   oriented   strategies   require   careful   customer   segmentation.   Segmentation  has  become  essential  in  the  development  of  competitive  advantage   and  business  strategy.     Competitive   advantages   more   and   more   depend   on   the   combination   and   integration  of  products,  activities  in  service.     -­‐ The  example  of  Nespresso     Too  much  of  innovation  is  product  driven.       Tool  1:  Barney’s  Four  Criteria  of  a  Sustainable  Competitive  Advantage   Capabilities  that  meet  the  four  criteria  are  core  competencies  that  can  generate  a   sustainable  competitive  advantage   –  The  four  criteria  are:   1. Valuable:   Does   the   capability   enable   a   firm   to   exploit   an   environmental   opportunity,   and/or   neutralize   an   environmental   threat   thereby   creating   value  for  customers?   2. Rarity:   Is   a   capability   currently   possessed   by   only   a   small   number   of   competing  firms?   3. Inimitability:   Do   firms   without   the   capability   face   a   cost   disadvantage   in   obtaining  or  developing  it?  [is  what  the  firm  doing  difficult  to  imitate?]   4. Nonsubstitutable:  Does  the  capability  lack  a  strategic  equivalent?     Barney  resources  and  capabilities:     http://www.youtube.com/watch?v=-­‐KN81_oYl1s   http://www.youtube.com/watch?v=3tQTTUnhFKs   Competent  Leader  -­‐  Steve  Jobs   http://www.youtube.com/watch?v=tAdih-­‐bnjBQ   •  What  is  Good  Corporate  Strategy?   http://www.youtube.com/watch?v=43kZDnyDXOc   Professor  Richard  Rumelt  says  its  simply  the  focus  of  resources  on  business   objectives.   Tool  2:  Porter’s  Value  Chain  Analysis 66         Allows   a   firm   to   understand   the   parts   of   its   operations   that   create   value   and   those   that  do  not     Used   to   understand   a   firm’s   cost   position   and   identify   the   how   to   implement   a   business-­‐level  strategy     Analysis  is  broken  down  into  two  types  of  activities:     1. Primary   activities:   deal   with   the   physical   creation,   sale,    distribution,   and   servicing  of  a  product/service       2. Support  activities:  provide  assistance  for  the  primary  activates  to  take  place     •   Key:   Create   additional   value   without   incurring   significant   costs   while  doing  so  and  to  capture  value  that  has  been  created       How  Business  Models  Emerge:  Porter’s  Value  Chain   The  Value  Chain:  proposes  that  each  activity  can  either  add  or  subtract  value  for   the   firm.   Activities   supported   by   capabilities   that   are   core   competencies   should   be   value  adding  and  completed  internally.  Activities  that  require  capabilities  that  are   not   core   competencies   of   the   firm   generally   subtract   value   and   should   be   outsourced.   Analyzing  the  value  chain* Estimate   the   importance   of   the   specific   activity   for   the   creation   of   a   competitive   advantage     Identify  the  interdependence  between  activities     Examples:     67         – Quality   of   products   depends   on   operations   but   also   on   sourcing,   product   design  and  logistics       – Cost  depend  on  manufacturing  (operations)  but  also  on  logistics     Identify  the  scale  advantages  in  the  separate  activities     Identify  coordination  needs  across  activities       *  For  more  information  see  Michael  Porter:  Competitive  Advantage       The  Porter  Value  chain                 The  Porter  value  chain  is  often  simplified The  value  chain  is  changing   Rethinking  value  chain  is  key  for  competitive  advantage:  outsourcing  and   relocation  of  activities.   Identifying  a  Company’s  Capabilities  and  Value  Chain Identifying  a  Company’s  Capabilities   68         Functional  Area   Corporate  head  office   Management  information   Capability   Example       Capability  in  basic  research   Ability  to  produce  innovative  products   Speed  of  new  product  development   Research  and   development   Manufacturing   Product  design   Marketing   Sales  and  distribution     e.g.,  IBM,  AT&T,  Sony..   • 3M   • Canon         Source:  Robert  M.  Grant,  Contemporary  Strategy  Analysis  ,  Basil  Blackwell,  1991   Is  Messi  a  barça’s  competitive  advantage??? Select  a  Business-­‐level  Strategy External  environment  à  provides  information  on  what  a  firm  might  choose  to  do     Internal  environmentà  provides  information  on  what  the  firm  can  do     • The   cumulative   results   of   these   analyses   provide   the   firm   with   the   information   required    to   select   a   business-­‐level   strategy   that   will   help   it   reach  its  vision  and  mission     Business-­‐level  strategies  will  be  discussed  next  week  in  Chapter  5         69         6. Advanced  competitive  strategies:  Blue  ocean   Quote  of  the  day…   “Don’t  compete  with  rivals:  Make  them  irrelevant”   ο ο ο ο 2005   Over  2  million  copies  sold   Translated  into  over  41  foreign  languages  –  a  world  record   Taught  as  the  major  theory  of  strategy  at  leading  business  schools         What  is  the  Blue  Ocean?   “Break   out   of   the   red   ocean   of   bloody   competition   by   creating   uncontested   market   space  that  makes  the  competition  irrelevant”   Industries  not  in  existence  today   Untapped  market  demand   Unknown  market  space     Blue  Ocean  Strategy  suggests  that  an  organization  should  create  new  demand  in  an   uncontested  market  space,  or  a  "Blue  Ocean.
The  metaphor  of  red  and  blue  oceans  describes  the  market  universe.
Red   oceans   represent   all   the   industries   in   existence   today   –   the   known   market   space.   In   the   red   oceans,   industry   boundaries   are   defined   and   accepted,   and   the   competitive  rules  of  the  game  are  known.  Here  companies  try  to  outperform  their   rivals  to  grab  a  greater  share  of  product  or  service  demand.  As  the  market  space   gets   crowded,   prospects   for   profits   and   growth   are   reduced.   Products   become   commodities   or   niche,   and   cutthroat   competition   turns   the   ocean   bloody;   hence,   the  term  red  oceans http://www.blueoceanstrategy.com/about/concepts/red-­‐vs-­‐blue/   Blue  oceans  denote  all  the  industries  not  in  existence  today  –  the  unknown  market   space,  untainted  by  competition.   In  blue  oceans,  demand  is  created  rather  than  fought  over.   70         There  is  ample  opportunity  for  growth  that  is  both  profitable  and  rapid.   In   blue   oceans,   competition   is   irrelevant   because   the   rules   of   the   game   are   waiting   to   be   set.   Blue   Ocean   is   an   analogy   to   describe   the   wider,   deeper   potential   of   market  space  that  is  not  yet  explored Red  Ocean  Strategy                                  VS                                        Blue  Ocean  Strategy   Compete  in  existing  market  space   Create  uncontested  market  space   Best  the  competition   Make  the  competition  irrelevant   Exploit  existing  demand   Create  and  capture  new  demand   Make  the  value-­‐cost  trade-­‐off   Break  the  value-­‐cost  trade-­‐off   Align  the  whole  system  of  a  firm’s  activities   Align  the  whole  system  of  a  firm’s  activities   with  its  strategic  choice  of  differentiation  or   in  pursuit  of  differentiation  and  low  cost   low  cost     Examples  of  “Blue  Ocean”  Companies   Cirque  Du  Soleil  (entertainment) Yellow  Tail  (wines) Nintendo  Wii  (games) Accor’s  Formule  1  (hotels) Invenio  (education) The  strategy  canvas   Central  diagnostic  and  action  framework  for  BOS The   horizontal   axis   captures   the   range   of   factors   that   the   industry   competes   on   and  invests  in The  vertical  axis  captures  the  offering  level  that  buyers  receive  across  all  these  key   competing  factors.
Very high             71         Two  main  purposes: 1. Captures  the  current  state  of  play  in  the  known  market  space.  This  allows  you  to   understand   where   the   competition   is   currently   investing   and   the   factors   that   the  industry  competes  on.
2. Propels  you  to  action  by  reorienting  your  focus  from  competitors  to  alternatives   and  from  customers  to  noncustomers.
The   value   curve   is   the   basic   component   of   the   strategy   canvas.   It   is   a   graphic   depiction   of   a   company's   relative   performance   across   its   industry's   factors   of   competition.
The  key  is  focus,  divergence  and  a  compelling  tagline.
4  Actions  for  the  creation  of  Blue  Oceans   Raise What factors should be raised well beyond the industry standard? Eliminate Create What factors should be eliminated that the industry has taken for granted? What factors should be created that the industry has never offered? Reduce What factors should be reduced well below the industry standard?     Example:  Nintendo  Wii     72             • • • • Eliminated:   Movie   Playing.   PS3   plays   Blu-­‐Ray   disks.   The   XBox   360   plays   HD-­‐DVD.   Both   play   DVD's.   The   Wii   plays   only   games.   High-­‐resolution   movie-­‐playing  adds  cost  that  doesn't  align  with  the  added  consumer  value.
Reduced:     Graphics  &  Physics.  The  Wii  has  good-­‐enough  graphics:  they're   fine.  But  not  an  excess  in  quality Raised:    Game  library,  Fun.   Created:    Magic  wand  (based  in  an  accelerometer)   Example:  A  highly  competitive  Industry:   The  American  Wine  Industry Wine  sector:  What  the  industry  offers?   Premium  Wines  ç  Polarised  strategic  groups  è Budget  Wines         Massive  Choice         American  Wine  Industry   • • • • 3rd  largest  in  world:    worth  $20  billion   Californian   makes   66%   -­‐   the   rest   is   from   Italy,   France,   Spain,   Chile,   Argentina,  Australia   Exploding   number   of   new   wines   –   new   vineyards   in   Oregon,   Washington,   New  York   31st  in  the  world  in  per  capita  consumption!     • • • • Top  8  producers  had  75%  of  the  market;  1600  had  the  remaining  25%   $  Millions  spent  in  marketing  -­‐  Titanic  battles  –  intense  competition   Sever  price  pressure   The   dominant   growth   strategy   was   towards   premium   wines   –   more   complexity,   better   image,   more   prestigious   vineyards,   number   of   medals   won  at  wine  festivals.   73         Premium  Wines     Premium  and  budget  wines     What  people  said  about  wines   “It  is  too  confusing  and  complex”   Wine  descriptions  and  terminology   The  shopping  experience   The  lack  of  clear  guidance  on  what  to  buy  and  drink   74         Thus,   massively   intimidating   for   ‘noncustomers’   (the   large   majority   of   the   US   population  who  were  not  wine  drinkers)       Yellow  tail  created  a  blue  ocean     Example:  Yellow  tail   Only  2  types  initially  –  Chardonnay  and  Shiraz   Fruity,  soft  on  palette,  sweetish  –  great  for  those  who  had  not  drunk  wine   before   Same  bottle  for  red  and  white  –  low  logistics  costs   Simple  vibrant  packaging  –  lower  case  letters/kangaroo   Un-­‐intimidating   They  were  selling  “The  essence  of  a  great  land  …  Australia”  –  ie.  they  were   not  selling  the  wine   Australian   clothing   for   the   retail   staff   –   they   enthusiastically   promoted   a   wine  they  could  understand.   Example:  Yellow  tail  strategy   Eliminated:   Oenological   terminology   and   distinctions,   Aging   qualities,   Above  the  line  marketing   Reduced:    Wine  complexity,  Wine  range,  Vineyard  prestige   Raised:    Price  versus  Budget  Wines,  Simplicity  of  retail  store  environment,   Enthusiasm  of  Sales  People   Created:    Easy  drinking,  Ease  of  selection,  Sense  of  fun  and  adventure   Yellow  Tail  Strategy  Canvas   75           Results   No  1  imported  wine  (outsells  France  and  Italy)     Fastest  growing  imported  wine  in  the  history  of  the  USA  industry   o New  consumers  of  wine   o Jug  drinkers  trade  up   o Premium  wine  drinkers  trade  down   Industry  criticizes  them  mercilessly  at  first   Now  wine  press  blurb  gives  it  a  “best  buy”  for  value;  winning  wine  awards.             Example:  Accor’s  Formule  1   76             Summary     Industry   Assumption   Strategic   Focus   Customers   Assets  &   Capabilities   Product/   Service   Offerings   Conventional  Logic   Blue  Ocean  Logic   Industry  conditions  are  given   Industry  condition  can  be  shaped   Build  competitive  advantages  to   beat  the  competition.   Retain  and  expand  the  customer   base  through  further  segmentation   and  customization.   Think  in  terms  of  embracing   customer  differences.   Think  in  terms  of  a  company’s   existing  assets  and  capabilities.   Create  a  quantum  leap  in  buyer   value  to  dominate  the  market.   Go  for  the  mass  of  buyers  and   willingly  let  some  existing   customers  go.    Think  in  terms  of   embracing  key  customer  value   commonalities.   Think  free  from  a  company’s   existing  assets  and  capabilities.   Build  on  what  it  has.   Ask,  what  if  we  start  anew?   Think  in  terms  of   products/services  offered  by  the   industry.    Seek  to  maximize  the   value  of  these  offerings.   Think  in  terms  of  buyers’  solution   even  if  that  transcends  the   industry.    Seek  to  solve  buyers’   major  bottlenecks/chief   compromises  in  using  the   products/services  of  the  industry.   77             7. Advanced  competitive  strategies:  Activity  Maps   Hypercompetition:   Jack  Welch,  the  chairman  of  General  Electric,  called  the   frenzied   competition   of   the   1980s   a   “white-­‐knuckle   decade”  and  said  the  1990s  would  be  worse.   In   this   new   context   of   “hypercompetition”   the   traditional   sources   of   competitive   advantage   can   no   longer  be  sustained.   A  company  must  fundamentally  shift  its  strategic  focus.   Shows   how   firms   move   up   “escalation   ladders”   as   advantage  is  continually  created,  eroded,  destroyed,  and   re-­‐created   through   strategic   maneuvering   in   four   arenas  of  competition.   http://www.youtube.com/watch?v=fNbIWLT_HV4   Strategic  Competitive  Advantage     78                     Innovation  as  source  of  new  strategies       Strategic  networks  (=Activity  maps)   To   build   a   strategic   network   of   unique   activities   that   are   connected   with   customer   needs:   Requires  a  lot  of  work   Innovation  capacity   Talent  of  the  Management  team   79         Entrepreneurs,  not  only  managers   Capacity  of  breaking  with  the  "tradition"     What  is  a  strategic  network  /  map  ?   Porter  calls  them  “strategic  activity  maps”   Consists   in   a   series  of  innovations  in  all   aspects  perceived   directly   or   indirectly   by   the  customers,   in   a   way   that  reinforce   each   other  and   result   in  a  highly  differentiated  offering  to  the  market,     This   networks   are   very  difficult   to  copy   and   can  be  effective  for   5  to   10  years       Examples:   Mercadona   Ikea   Wal-­‐Mart   Zara   Southwest  Airlines   1.  Layout  of  IKEA  stores   Second  floor           Ground  floor   80                               81               STEP  1:  START  FROM  A  SWOT     STEP  2:  ANALYZE  THE  INDUSTRY  LIFECYCLE   82           STEP  3:  REFINE  ANALYSIS  OF  CUSTOMER  NEEDS   Look  for  “growing  budgets”     o Example1:  Some  of  the  budgets  used  by  ZARA     • Fashion  only  for  one  season   • Fashion  for  kids   • Home  complements   • Personal  complements  (bags  à  higher  margin)   o Example  2:  You  can  buy  new  glasses  paying  from  different  “budgets”     • Health   • Sport   • Fashion   STEP  4:  IDENTIFY  THE  BASIC  COMPETITIVE  ADVANTAGE  (CORE  BUSINESS)     STEP  5:  IDENTIFY  DRIVERS  (COST)   83           STEP  6:  DRAW  THE  VALUE  CHAIN     STEP   7:   IDENTIFY   INTERNAL   STRENGTHS   THAT   FIT   WITH   CUSTOMER   NEEDS   (MAINSTREAM)   84           STEP  8:  DEFINE  MAIN  AREAS  OF  THE  STRATEGY     Example:  Zara  (Agile  Supply  Chain)     85           STEP  9:  ADD  SECONDARY  ACTIVITIES,  FIT  AND  IMPROVE     Exercise:  Build  Zara’s  activity  map     EXAMPLE:  ZARA’S  STRATEGIC  NETWORK   86             ALTERNATIVE  WAY  (BALANCED  SCORECARD)   STRATEGY  MAP     SCORECARD   87                                                 ALTERNATIVE  WAY  (BALANCED  SCORECARD)   88             89         ...