Strategic Management I (2015)Apunte Español
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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.
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 ...