Strategy

What is Strategy?

“What business strategy is all about is, in a word, competitive advantage”- Kenichi Ohmae

The simplest way of thinking about a firm’s strategy is to assume that:

firms begin operations with a well-developed strategy

that the market provides a test of that strategy

And that management makes adjustments to that theory to improve its ability to generate competitive advantage

Strategy is OE+ Strategic Positioning and Industry analysis

Flawed concepts of strategy:

Strategy as an action

Strategy as an aspiration

Strategy as a vision

The elements of strategy in an organization are:

There are 3 levels of strategy:

It’s a company’s goal to earn a return on capital above the cost of capital. There are two routes to achieve that return:

1. The company can decide to enter an industry where favorable conditions are shown and where it is possible to earn a rate of return above the competition’s level- Corporate Strategy (Which industry should we be in?)

2. They can achieve a position of advantage in comparison to their competitor within an industry- Competitive Strategy (How should we compete?

Corporate Startegy:

This strategy defines: What type of company we want to be; What business we want to be engaged in; What is the weight we want to give each of our business units’?

Contains : o A vision: area of activity, quantitative objectives and unique featureso the configuration of the company: what business activities to operate in,

what business to get into or out of, and the level of vertical or horizontal integration

o the distribution of corporate resources: how we intend to support the company’s position in each business

Types of decisions : enter in a new sector and how (internal growth, alliances, acquisitions?), divestments.

Competitive Strategy:

Defines: How the company will compete in each business (hence the name).o Each business should have its own competitive strategy, since the

industry structure, competitive behavior and business dynamics are different in each case.

o it is crucial to identify distinctive competencies and building competitive advantages.

Includes: an analysis of the opportunities and threats of the environment, along with a study of the company’s strengths and weaknesses in relation to its rivals.

The Goal : to give each business unit a positioning that will allow it to strengthen, develop and exploit competitive advantages that benefit the corporation as a whole.

Functional Strategy: is the approach that the different business areas (Marketing, Human resources, etc) take to achieve corporate and business unit’s objectives and strategies.

Why is Corporate Strategy (CS) important?1. Involves the entire organization2. Survival of the business as a minimum objective and the creation of

value added as a maximum objective3. Covers the range and depth of the organisation activities4. Directs the changing and evolving relationship of the organisation

with its environment5. Is central to the development of sustainable competitive advantage6. CS development is crucial to adding value.

Moving from Competitive Strategy to Corporate Strategy

A corporation is a portfolio of value chain activities

Corporate advantage exists if portfolio performance exceeds the sum of performances of individual activities.

Portfolios

1. Portfolio composition: Which value chain activities should we be in?

a. Horizontal scope: Diversification

b. Vertical scope: Outsourcing & Offshoring

Objectives:

- analyze the behavior of costs, the determinants of relative cost positioning, and the way firms can gain a sustainable cost advantage (or minimize their cost disadvantage)

- identify the cost of differentiation, and the way differentiated competitors can lower costs in the areas that do not undermine their differentiation

- analyze supplier and buyer cost behavior, for cost position and differentiation

a. Horizontal Scope: DiversificationValue Chain: Activity-based theory of the firm (Porter); A general framework to analyze strategically the activities involved in any business and addressing their relative cost and role in differentiation.

It is comprised of primary activities and support activities Primary activities contribute to the physical creation of the product, its sales,

and distribution, and after-sale service Support activities assist the primary activities and the other support activitie

Value Chain analysis: To assess a company’s overall business processes and identifying where

that company actually adds value to a product or service. The total margin of profit will be the value of the product or service to buyers,

less the cost of its production, as determined by the value chain. Value chain analysis attempts to identify a competitive advantage by

deconstructing the various “changes” a company’s business processes perform on a set of raw materials or other inputs.

How to do something different and unique? Use different resources!!

Differentiation:

Key Stages in Applying the value chain to the Cost analysis:

b. Vertical Scope: Outsourcing and Offshoring:Vertical integration involves an extension of the stages of production and distribution in which a firm operates.

If it’s too costly:o Think of alternative solutions: o Outsourcing: buying the product / service from the marketo Outsourcing decisions must be based on two sets of considerations:

- Competitive (dis) advantage: Will I lose competitive power if I do not produce this inside my company?

- Transaction costs: It’s cheaper to make it or to buy it?

Why Outsourcing can be Valuable?

2. Portfolio Change

: How should we expand our

portfolio of value chain activities?

a. Internal development vs. external development,

b. Alliances,

c. Acquisitions

a. Internal development vs. external development,o Vertical integration involves an extension of the stages of production and

distribution in which a firm operateso A firm might consider producing materials currently purchased from suppliers

outside the firmo Or the firm might consider distributing its own products or increasing the

amount of finishing done in-house

b. Strategic Alliances:o Refer to cooperative agreements between potential or actual competitors (but

not only!)o From formal joint ventures (in which two or more firms have equity stakes), to

short term contractual agreements (particular task, such as develop a new product)

Why to Make an Alliance?

o A strategic alliance can strengthen both companies against outsiders, even if it weakens one partner vis-à-vis the other

o BUT companies must beware of HOW to use collaboration to avoid and prevent transferring their skills and knowledge to ambitious partners, and not give away more than they gain.

Golden Rules for Successful Partnerships:

• Collaboration is only a different form of competition

• Harmony is not the most important measure of success

• Cooperation has limits. Companies must defend against competitive compromise

• Learning from partners is paramount

Conditions for successful alliance:

• The partners’ strategic goals converge, while their competitive goals diverge

• The size and market power of both partners is modest compared with industry leaders

• Each partner believes that it can learn from the other and at the same time limit access to proprietary skills

c. Mergers and Acquisitions

• Merger : transaction that forms one economic unit out of two or more previous ones.

• Acquisition : transaction where one company buys a part of another company (part has to be big enough for the acquirer to gain control over the purchased company).

• They can be means to enter new lines of activities: M&As are considered to be the fastest way for building a sizeable presence in a new market.

M&A’s: Complex and Important Problem:

o The causes of M&A are manifold and complex

o M&A deals may involve a lot of problems

o It is an increasingly important phenomenon, especially at the international level

Causes of M&A’s:

a. Rational motives: To create synergies : Operational synergies, Financial synergies, Managerial

synergies “To build an empire”: Increase size for compensation of managers;

Conglomerate to decrease risk For monopoly motives: Increase market share; Deter entry For tax related motives

b. Outcome of a “process”: Corporate will, funding, a conducive economic environment.

c. Result of macroeconomic phenomena: M&As are found to occur in cycles and waves.

The fundamental Trade-off between Alliances and M&A:

3. Portfolio Organization: How should we organize our portfolio of value chain activities to gain corporate advantage?

a. Corporate parenting: Parenting advantage

b. Restructuring

Portfolio Organization:

Most in use

Based primarily on diversification through acquisition.

Parent acts as banker & reviewer

The acquired units are autonomous, and the teams that run them are compensated according to unit results

When does Diversification Create Shareholder Value?

Attractiveness test: The industries chosen for diversification must be structurally attractive or capable of being made attractive.

In the long run:

- Return from competing in an industry = f (underlying industry structure)- Diversification cannot create shareholder value unless new industries

have favorable structures that support returns > Cost of capital- Or gain a sustainable competitive advantage that leads to

returns > industry average

à An industry has not to be attractive before diversification

Reasons for ignoring this test:

- “Vague” belief that there is a fit between new activities and core mainstream

- à Comfort zone!! You need a CLOSE fit that gives you a substantial competitive advantage

- Low entry costs

- à Choice between greenfield and acquisition

- It is worth to enter/buy in a new industry if: Market pays price > earning prospects of unit

- Using wrong proxies for evaluating the target industry's attractiveness

Cost-of-entry test : The cost of entry must not erase all future profits.

Better-off test : Either the new unit must gain competitive advantage from its relationship with the corporation, or vice versa

a. Parenting Advantage:

• A corporation must bring an advantage to the unit (e.g. shelter, access to more resources like capital, greater network etc.)

• Or the unit must bring an advantage to the corporation (e.g. access to new market, new customers, patents, entrepreneurial spirit etc.)

• If you don’t have benefits, don’t buy it, or sell it if you own it!

• à Diversification is something shareholders can do themselves. Why should a company do it?

• It should be a by-product, a side-effect of corporate strategy, not a prime motivator

b. Restructuring:

• The new businesses are not necessarily related to existing units. All that is necessary is unrealized potential.

• The restructuring strategy seeks out undeveloped, sick, or threatened organizations or industries on the threshold of significant change. The parent intervenes, frequently changing the unit management team, shifting strategy, or infusing the company with new technology.

• Risk: Companies find it very hard to dispose of business units once they are restructured and performing well.

Transferring Skills: Need to capture the benefits of relationships between businesses

The value chain defines the two types of interrelationships that may create synergy:

• A company’s ability to transfer skills or expertise among similar value chains,

• A company’s ability to share activities.

Transferring skills lead to competitive advantage only if the similarities among businesses meet three conditions:

• The activities involved in the businesses are similar enough that sharing expertise is meaningful.

• The transfer of skills involves activities important to competitive advantage.

• The skills transferred represent a significant source of competitive advantage for the receiving unit.

Sharing activities: We mean sharing activities in the value chains among business units.

Sharing often enhances competitive advantage by lowering cost or raising differentiation.

Following the shared-activities model requires an organizational context in which business unit collaboration is encouraged and reinforced.

BUT there are costs of coordination!!!

A company will create shareholder value through diversification to a greater and greater extent as its strategy moves from portfolio management toward sharing activities.

Action Plan:

• Identifying the interrelationships among already existing b-units.

• Selecting the core businesses that will be the foundation of corporate strategy.

• Creating horizontal org. mechanisms to facilitate interrelationships among the core businesses and lay the groundwork for future related diversification.

• Pursuing diversification opportunities that allow shared activities.

• Pursuing diversification through the transfer of skills if opportunities for sharing activities are limited or exhausted.

• Pursuing a strategy of restructuring if this fits the skills of mgmt or no good opportunities exist for forging corporate interrelationships.

• Paying dividends so that the shareholders can be the portfolio managers.

Formulation of a strategy:The First step towards Corporate Strategy:

Plan of action that may include:

Positioning the company so that its capabilities provide the best defense against the balance of the forces through strategic moves, thereby improving the company's position;

Portfolio Mngm

Sharing Activities

o See the industry as given and match the company's strengths and weaknesses to it.

o Strategy as building defenses against the competitive forces or as finding positions in the industry where the forces are weakest.

o Knowledge of the company's capabilities and of the causes of the competitive forces will highlight the areas where the company should confront competition and where avoid it.

Influencing the Balance:

o A company can devise a strategy that takes the offensive. This posture is designed to do more than merely cope with the forces themselves: it is meant to alter their causes.

o For example, innovations in marketing can raise brand identification or otherwise differentiate the product.

Anticipating shifts in the factors underlying the forces and responding to them, with the hope of exploiting change by choosing a strategy appropriate for the new competitive balance before opponents recognize it.

o Industry evolution brings with it changes in the sources of competition industry.

o In long-range planning the task is to examine each competitive force, forecast the magnitude of each underlying cause, and then construct a composite picture of the likely profit potential of the industry.

The fundamental unit of competitive strategic analysis is the industry: Defining the relevant industry a company competes in is essential to strategy

Company economic performance results from two distinct causes, and strategy must encompass both:

Formulation of a competitive Strategy:

Defining the Value Proposition:

The implementation of firm’s strategy will have one of three implications for the competitive position of the firm:

A good Value Proposition can Expand the Industry!

Strategy Audit:

An examination and verification of a company's strategy.

Financial Health vs. Strategic Health The financial health concerns only about the financial tools, like profits,

cashflow, shareholder value, growth rates, etc The Startegic Health analyses factors that refer to a company’s strategy, like:

costumer’s satisfaction and loyalty, Market Share, employee’s motivation, staff turnover, product quality, distributor and supplier feedback, etc.

The Toolkits to a Strategy Audit:

There are 3 Toolkits:

1. Toolkit1: The Business Model:It is very important to specialize your business model to do something other than what competitors do.

WHO: who is our client? (customer segments- one or many?, geographic regions) WHAT: What do we sell them? (products and services: Produce at lower cost

vs. offer more benefits ;Are there any product features/values that you can dramatically reduce, or eliminate? which enable you to dramatically

increase on others, or create completely new ones?) HOW: How do we do business? (how do we get our products to customers,

distribution channels; What activities are necessary to support a business model? Which ones are we performing well (or poorly)? )

To evaluate the How we can use the value Chain:

The value chain links the value of the activities of an organisation with its main functional parts and the analysis of the model evaluates how each part contributes towards the generation of value in the company and how it differs from competitors.

Strategic positioning:

Operational effectiveness (OE) means performing similar activities better than rivals perform them.

In contrast, strategic positioning means performing different activities from rivals' or performing similar activities in different ways.

You need a Strategic Positioning; OE is insufficient!! Few companies compete successfully on the basis of operational effectiveness over an extended period, and staying ahead of rivals gets harder every day. The most obvious reason for that is the rapid diffusion of best practices.

Strategic positions emerge from three distinct sources.

These are not mutually exclusive and often overlap.

1. Variety-based positioning Positioning can be based on producing a subset of an industry's products or services.

It is based on the choice of product or service varieties rather than customer segments.

Variety-based positioning makes economic sense when a company can best produce particular products or services using distinctive sets of activities.

2. Needs-based positioning It serves most or all the needs of a particular group of customers.

It arises when there are groups of customers with differing needs, and when a tailored set of activities can serve those needs best.

A variant of needs-based positioning arises when the same customer has different needs on different occasions or for different types of transactions.

3. Segmenting customers : Customers are accessible in different ways.

Segmentation is a function of customer geography or customer scale-or of anything that requires a different set of activities to reach customers in the best way.

Whatever the basis positioning requires a tailored set of activities because it is always a function of differences on the supply side; that is, of differences in activities. However, positioning is not always a function of differences on the demand, or customer, side, i.e., Variety positioning, do not rely on any customer differences.

But a strategic position is not sustainable unless there are trade-offs with other positions.

o Trade-offs occur when activities are incompatible. o A trade-off means that more of one thing necessitates less of another.

o Tradeoffs make a strategy sustainable against imitation by established rivals

Trade-offs arise for three reasons:

1. Inconsistencies in image or reputation : : When a company known for delivering one kind of value delivers another kind or attempts to deliver two inconsistent things at the same time.

2. Activities: Different positions require different product configurations, different equipment, different employee behavior, different skills, and different management systems. Many trade-offs reflect inflexibilities in machinery, people, or systems.

3. Limits on internal coordination and control: By choosing to compete in one way and not another, senior management makes organizational priorities clear.

Companies that try to be all things to all customers, in contrast, risk confusion also in day-to-day operating decisions.

Positioning choices determine

Which activities a company will perform and how it will configure individual activities

How activities relate to one another.

Principles of Strategic Positioning: A unique value proposition compared to other organizations A different, tailored value chain Clear tradeoffs, and choosing what not to do Activities that fit together and reinforce each other Strategic continuity with continual improvement in realizing the strategy

Strategic FIT:

Strategic Fit locks out imitators by creating a chain that is as strong as its strongest link. It’s fundamental to have and maintain competitive advantage.

There are three types of fit (not mutually exclusive):

First-order fit is simple consistency between each activity (function) and the overall strategy.

o Consistency ensures that the competitive advantages of activities cumulate (and do not erode or cancel themselves out) à strategy easier to communicate to customers, employees and shareholders, and improves implementation.

Second-order fit occurs when activities are reinforcing.

Third-order fit goes beyond activity reinforcement: optimization of effort.

2. Toolkit2: The Five Forces of Porter

Whatever their competitive strength, the corporate strategist's goal is to find a position in the industry where his or her company can best defend itself against these forces or can influence them in its favor.

The worst error in strategy is to compete with rivals on the same dimensions.A company should compete to be Unique!

The Five Forces:

a. Threat of New Entrants: The level of the threat of new entrants is defined by the barriers presented and by the reaction the existing competitors will have to a new entrant.If barriers to entry are high and a newcomer can expect sharp retaliation from the entrenched competitors, obviously the newcomer will not pose a serious threat of entering.

o Major sources of barriers to entry:i. Economies of Scale: the entrant either come in on a large scale or

will have a cost disadvantage. → Large Economies of scale: High Barriers

ii. Product differentiation: Brand identification → Product Differentiation: high Barriers; Superior Access to products: High Barriers

iii. Capital requirements: The need to invest large financial resources in order to compete → High Capital requirements: High Barriers

iv. Cost disadvantages independent of size: Existing competitors may have cost advantages not available to potential rivals. These advantages can stem from the effects of learning curve, proprietary technology, access to the best raw materials sources, assets purchased at pre-inflation prices, government subsidies, or favorable locations. →Threat of Retaliation: High Barriers

v. Access to distribution channels: The more limited the wholesale or retail channels are, the more existing competitors have these

tied up. →Superior access to channels of distribution: High Barriers

vi. Government policy: The government can limit or even foreclose entry to industries → Legal and regulatory barriers: High Barriers

b. Bargaining Power of Suppliers: A supplier group is powerful if:o It is dominated by a few companies and is more concentrated than the

industry it sells to.o Its product is unique or at least differentiated, or if it has built up

switching costs.o It is not obliged to contend with other products for sale to the industry.o It poses a

credible threat of

integrating forward into the industry's business.

o The industry is not an important customer of the supplier group.

c. Bargaining Power of Buyers: A buyer group is powerful if:

o It is concentrated or purchases in large volumes. o The products it purchases from the industry are standard or

undifferentiated.o The products it purchases from the industry form a component of its

product and represent a significant fraction of its cost.o It earns low profits, which create great incentive to lower its purchasing

costs.o The industry's product is unimportant to the quality of the buyers'

products or services.o The industry's product does not save the buyer money.o The buyers pose a credible threat of integrating backward to make the

industry's product.

A company can improve its strategic posture by finding suppliers or buyers who possess the least power to influence it adversely. Most common is the situation of a company being able to choose whom it will sell to—in other words, buyer selection.

NOTE: Analysis of Supplier and Buyear are symetric!

d. Rivalry Amongst other Competitors: A potential rival is likely to have second thoughts if:

o Incumbents have previously lashed out at new entrants.o Incumbents possess substantial resources to fight back, e.g. excess cash

and unused borrowing power, productive capacity, or clout with distribution channels and customers.

o Incumbents seem likely to cut prices because of a desire to keep market shares or because of industry-wide excess capacity.

o Industry growth is slow, affecting its ability to absorb the new arrival

Rivalry among existing competitors fights for a position—using tactics like price

competition, product introduction, and advertising. The extent to which industry profitability is affected by aggressive price competition (Intense Rivalry)depends on the factors:

i. Large Number of Players: or are roughly equal in size and power.ii. Low industry growth rates: Industry growth is slow, precipitating fights

for market share that involve expansion-minded members.iii. Product Differentiation is low: The product or service lacks

differentiation or switching costs, which locks in buyers and protects one combatant from attacks on its customers by another.

iv. Capacity is normally augmented in large increments. v. Excess capacity and exit barriers are high.

vi. The rivals are diverse in strategies, origins, and "personalities."vii. Cost conditions

1. Extent of scale economies are high2. Ratio of fixed to variable costs is high: Fixed costs are high or

the product is perishable, creating strong temptation to cut prices.

e. Threat of Substitutes:Price:

o By placing a limit on prices that can be charged, substitute products or services limit the potential of an industry.

o The more attractive the price performance trade-off offered by substitute products, the firmer the lid placed on the industry's profit potential.

o Substitute products also reduce the benefits an industry can reap in boom times.

Differentiation:

o Unless it can upgrade the quality of the product or differentiate it somehow, the industry will suffer, with the substitutes, in earnings and possibly in growth.When/which:

o Substitute products that deserve attention strategically are those that are:

i. Subject to trends improving their price-performance trade-off with the industry's product, or

ii. Produced by industries earning high profits. iii. Substitutes often come rapidly into play if some development

increases competition in their industries and causes price reduction or performance improvement.

Extent of competitive pressure from producers of substitutes depends upon:

Buyers’ propensity to substitute (switching costs)

The price-performance characteristics of substitutes.

Spectrum of industry structure:

Consequence of competition? Margins go to zero!

How to reduce the forces?

How to reduce Customer Power?

How to reduce Supplier power?

How to prevent new entrants from coming in?

How to reduce available substitutes?

How to reduce rivalry with competition?

3. Toolkit3: VRI:Valuable, Rare, difficult to Imitate or substitute

Valuable:

does the resource give you more money than it cost you?

• It won’t be a source of competitive advantage unless it gives you more money than it cost you

Can the firm capture the value from the resource, or does the resource appropriate the full value for itself?

Always take into account opportunity costs!

COMPETITIVE ADVANTAGE:

The objective of a company is to achieve:

i. Sustainable competitive advantage:

o Occurs when a firm implements a value-creating strategy and other companies are unable to duplicate it or find it too costly to imitate.

o Normally is can be sustained only for a certain period, that period is determined by the competitor’s skills to imitate the value creating strategy.

ii. Above-average returns:

o Understanding how to exploit a competitive advantage is important for firms to earn above-average returns

o They are returns in excess of what an investor expects to earn from other investments with a similar amount of risks

o Returns are often measured as ROA, ROE

Competitive Advantage: A firm experiences competitive advantage when its actions in an industry or market create economic value and when few competing firms are engaging in similar actions.

Ex: Disney and Wal-Mart have all been successful in implementing strategies about how to compete that have lead to important competitive advantages for these firms. But this doesn’t mean they will be successful in the future.

Competitive Parity: A firm experiences competitive parity when its action create economic value but when several other firms are engaging in similar actions

Ex: When Honda entered the U.S. motorcycle market by trying to sell large motorcycles, its strategy to compete successfully in the U.S. motorcycle market was the same as the sued by the other major manufacturers, it could only give them competitive parity.

Competitive Disadvantage: A firm experiences competitive parity when its action fail to create economic value, these actions can also be seen as destroying economic value

Ex: Yugo attempted to implement a strategy in the U.S. automobile industry market that was inconsistent with the actual economic processes in operating in this market. Its performance and safety were perceived unacceptable.

A company’s Competitive advantage depends on:

• In the short-term : the price/performance attributes of its current products.• In the long-term: the company’s ability to build, at lower cost and more speedily

than competitors, the core competencies that spawn unanticipated products

Competitve and Corporate Advantage:

A closer look at “resources” and how they create corporate and competitive advantage:

• “FIRM RESOURCES include all assets, capabilities, organizational processes, firm attributes, information, knowledge, etc. controlled by a firm that enable the firm to conceive of and implement strategies that improve its efficiency and effectiveness”

(Daft, 1983; Barney, 1991)Ex: Tangible resources (ex: financial), Intangible Resources (ex: technology, reputation), Human Resources (ex:: skills, communication)

- RBV- Resources Based View: is an “inside-out” process of strategy formulation

We start by looking at what resources the firm possesses. Next, we assess their potential for value generation and end up by defining a strategy that will allow us to capture the maximum of value in a sustainable way.

Sources of Competitive Advantage:

a. Key Success Factors:• The critical task for managements is to create a company capable of creating

products with irresistible functionality, or – even better – products that customers need but have not yet imagined.

• Few companies are capable of doing so, because they need to:a. Shift patters of customers’ choice in existing marketsb. Enter new marketsc. Invent new markets

b. Core Competencies:• The collective learning in the organization, especially about how to coordinate

diverse production skills and integrate multiple streams of technologies.

• Do not diminish with use

• Unlike physical assets, which deteriorate over time, they are enhanced as they

are applied and shared

• Fade quickly if they are not used: so they need to be nourished and protected

• Bind together different businesses

• The engine for new business development

• CC do not mean outspending competitors on research & development• CC do not mean sharing costs across business units or sharing a common

component

How to Loose CC’s:

o Build leadership in more that 5 or 6 fundamental competencies

o Have a competitive product line up but be a laggard in developing core competencies

o Have an intelligent alliance or sourcing strategy but don’t make a choice about where you will build competence leadership

o Lose forgoing opportunities to establish competencies that are evolving in existing businesses

The trap of the business unit structure:

Underinvestment in developing CC: When a company is the sum of several business-units and none of these feels responsible for a viable position in core products and the necessary investments

Imprisoned resources: When a business-unit believes it is and has to be the unique owner - within the company – of some CC

Bounded innovation: When CCs are not recognized and business-units only pursue those innovation opportunities that are close at hand, such as marginal product-line extensions or geographic extensions

Companies should develop a corporate-wide strategic architecture that establishes objectives for competence building.

A strategic architecture is a roadmap of the future that identifies which CC to build and their constituent technologies.

Can CC be Core Rigidities?

Environmental Analysis

An integrated understanding of the

external and internal environments is essential for firms to understand the present and predict the future.

Firm’s external environment is divided into three major areas:

1. General Environment: It Is composed of dimensions in the broader society that influence an industry and the firms within it. (PESTEL- Political, Economical, Sociological, Technological, environmental and legal)

o Firms cannot directly control the general environment’s elements

o Successful firms gather the information required to understand each segment and its implications for the selection and implementation of appropriate strategies.

o For instance, most firms have little individual effect on the EU or the US economy…. Although those economies have a major effect on their ability to operate and even survive.

FOCUS: Analysis of the general environment is focused on the future

2.Industry Environment: It is the set of factors that directly influences a firm and its competitive actions and competitive responses:

o Are the well known 5 forces of Porter and the interactions among those five factors determine an industry’s profit potential.

o The challenge is to locate a position within an industry where a firm can favorably influence those factors or where it can successfully defend against their influence.

FOCUS: Analysis of the industry environment is focused on the factors and conditions influencing a firm’s profitability within its industry.

4. The Competitor Environment: How companies gather and interpret information about their competitors is called competitors analysis.

FOCUS: The analysis of competitors is focused on predicting the dynamics of competitors’ actions, responses, and intentions.

Performance improves when the firms integrate the insights provided by analysis of the general environment, the industry environment, and the competitor environment.

Why study the general environment?

o Identify opportunities: an opportunity is a condition in the general environment that, if exploited, helps a company achieve comp. advantage

o Identify threats: a threat is a condition in the general environment that may hinder a company’s efforts to achieve competitive advantage.

The POLAROID Case:

SWOT Analysis:

Strengths: attributes of the organization that are helpful to achieving the objective.

Weaknesses: attributes of the organization that are harmful to achieving the objective.

Opportunities: external conditions that are helpful to achieving the objective.

Threats: external conditions that are harmful to achieving the objective

SWOt Analysis:

It shows how the opportunities can be performed in a time manner.

Situational Analysis:

To be executed at an internal level and an external level to identify all opportunities and threats of the new strategy

The aim of any SWOT analysis is to identify the key internal and external factors that are important to achieving the objective

Generic Strategies for Competitive Analysis:

1.Cost Leadership Strategy:

- Relatively standardized products- Features acceptable to many customers- Lowest competitive price- Enables to obtain more returns than competitors at the same price.- Option to offer the best price.

Main Idea: Constant effort to reduce costs through: Relatively standardized products

How to obtain a cost advantage?

1. Determine and control cost drivers

2. Reconfigure the Value Chain as needed (ex: Alter production process, Change in automation, New distribution channel, New advertising media, Direct sales in place of indirect sales, Forward/Backwards integration)

Effective cost leaders can remain profitable even when they five forces appear unattractive: Threat of entry: can frighten off new entrants, Threat of buyers: can mitigate buyer power, Threat of suppliers: can mitigate supplier power, Threat of substitutes: firms with a cost strategy are well positioned relative substitutes, Threat of rivalry: competitors avoid price wars with cost leaders

Major Risks of Cost Leadership Strategy:

o dramatic technological change could take away your cost advantage

o competitors may learn how to imitate you value chain

o focus on efficiency could cause cost leader to overlook changes in customer preferences

o Customers may decide that the cost of “uniqueness” is too great

o Competitors may learn how to imitate value chain

o The means of uniqueness may no longer be valued by customers

2.Diferentiation Strategy

o To create a product or service perceived as premium in the marketplace. (service, quality, style, exclusivity).

o Defendable position: loyalty to the brand. Lower price sensitivity.

o Organizational skills : R&D, design, advertising, marketing. Key issue: creativity, product innovation.

o Risks: imitation, too much cost difference, decrease in influence of the differentiating factor.

Requirements:

Constant effort to differentiate products through: Developing new systems and processes, Shaping perceptions through advertising, Quality focus, Capability in R&D and Maximize human resource contributions through low turnover and high motivation

Create Value by:

- Lowering Buyers’ Costs- Raising Buyers’ Performance- Creating Sustainability through: Creating barriers by perception of uniqueness

and creating switching costs through differentiation

Examples of drivers of differentiation: Unique product features, Unique product Performance, Exceptional services, quality of inputs, exceptional skills, etc

3 & 4. Focused Strategies

Focused business level strategies involve the same basic approach as Broad market strategies

o To serve only a part of the market with certain characteristics (segment) trying to be leader in cost or differentiation.

o Competitive advantage: to serve the segment more effectively than the companies competing without focusing. (closer to the client, more specialized)

o Bigger margins must compensate volume loss.

However, Opportunities may exist because:

Large firm may overlook small niches

Firm may lack resources to compete industry-wide

May be able to serve a narrow market segment more effectively than industry wide competitors

Focus can allow you to direct resources to certain value chain activities to build competitive advantage

Risks:

o Firm may be “outfocused” by competitors

o Large competitors may set its sights on your niche market

o Preferences of niche market may change to match those of broad market

The firms stuck in the middle will most likely have low profitability because it loses the high volume customers who demand low prices and Loses high-margin business.

Sources of Organizational Inertia:

o Cognitive: Mental Models and Commitment (Escalation o Commitment)o Structural: Organizational Rigidity, Core Rigidity

Mental Models: we all have mental models that are developed over time and are shaped by our background and experience, reinforced by success. They process information for us and determine what we see and hear

mental models have both good and bad characteristics:

o Good: they enable us to learn, improve, decide & act quicklyo Bad: they make us passive thinkers, rejecting information that does not fit

Commitment: You need to commit to a strategy, but commitment is a double-edged sword. If you have invested a lot (time, energy, capital etc.) in something, you may be reluctant to let it drop, or to change to something else .

TCE Theory: Transaction Costs Economics:

Why do Firms exist? AKA the theory of Firm Boundaries

Characteristics of transaction:

o Asset specificity (Physical, site, human, temporal, dedicated, brand name)

o Uncertainty

o Frequency

Discriminating Alignment: 2 independent variables:

Applications to vertical Contractual Relationships:

Vertical integration: Backward into manufacturing, Forward into marketing and distribution

Vertical restrains: E.g. resale price maintenance, territorial restrictions

Price discrimination

Labour market contracting

Finance

Agency Theory:

Assumptions:

o Bounded rationality

o Opportunism

o Information asymmetry

Agency relationships occur when one partner in a transaction (the principal) delegates authority to another (the agent) and the welfare of the principal is affected by the choices of the agent

Essential sources of agency problems:

o Moral hazard

More of the agent’s actions are hidden from the principal or are costly to observe

o Adverse selection

The agent posseses information that is unobservable or costly to obtain for the principal

o Risk aversion

As organisations grow managers become risk averse (they would like to protect their position, managers would like to max. chance of success by projects that have already brought success, managers build structures to increase their chances of control)

The delegation of decision-making authority from principal to agent is problematic in that;

1. The interests of principal and agent will diverge

2. The principal cannot perfectly and costlessly monitor the actions of the agent

3. The principal cannot perfectly and costlessly monitor and acquire the information available to or possesed by the agent

These constitute the agency problem - the possibility of opportunistic behaviour on the part of the agent that works against the welfare of the principal

Game Theory:

- Game theory is a branch of applied mathematics that is often used in the context of economics. It studies strategic interactions between agents.

It can be applied to mathematics, military, computer science, biology, economics, psychology, daily situations etc

Key Elements: Players, strategies, payoffs, Information, rationality

Lessons:

- Look at the situation from the perspective of all others’ involved

- Look for win-win, not just win-lose opportunities

- Look for opportunities to “change the game” for the better

CO-Opetition: Businesses must both cooperate to create value, even while competing to divide this value among themselves

Competition and Cooperation:

Value is Captured by: Shareholders, Employees, Supplier, Customers, Competitors, Government (taxes minus subsidies)

CAGE:

GLOBALONEY = Friedman “The world is flat”, e.g. “old” Coke

Distance represents an important complement to the managerial tools used in country market portfolio.

The CAGE distance model is intended to help managers meet the international challenge.

What is usually underestimated?

Distance

Costs

Threats

Differences

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Cultural Distance: Different languages, Different ethnicities, Different religions, Different social norms

Administrative Distance: Absence of colonial ties, Absence of shared monetary political association, Political hostility, Government policies, Institutional weakness

Geographical Distance: Physical remoteness, Lack of a common border, Lack of sea or river access, Size of country, Weak transportation, Differences in climates

Economical Distance: Differences in consumers incomes, Differences in costs and quality of: natural resources, financial resources, human resources, infrastructure, information / knowledge

Cross Border functions:

• REPLICATION: capitalizes on similarities or proximity among countries.

• ARBITRAGE: capitalizes on differences among countries. Ex: cultural arbitrages, economical arbitrages, price arbitrage (buy cookies in the supermarket and sell them in the school canteen)

For a long time, firms’ international activities were apparently motivated entirely by considerations of arbitrage

Replication emerged as a significant component of international economic activity only towards the end of the 19th century and is often treated, at least implicitly, as what “modern” or “true” multinationals do.

Arbitrage and replication are distinct functions, and their cross-border potential varies from context to context.

Differences between the two functions mainly: what to target? Where to locate? How to organize?

Discovery driven planning:

Ventures are inherently risky: The probability of failure simply comes with the territory

CAGE

But many failures could be prevented or their cost contained if managers approached ventures with the right planning and control tool

Discovery-driven planning is a practical tool that acknowledges the difference between planning for a new venture and planning for a more conventional line of business.

The process to follow:

• Reverse income statement: models the basic economics of the business

• Pro forma operations specs: lays out the operations needed to run the business

• Key assumptions checklist: used to ensure that assumptions are checked

• Milestone planning chart: specifies the assumptions to be tested at each project milestone.

Key Question from the Business Plan: What do you need from your business?

Reverse Income Statement

Aspirations: income and wealth

Target profits to reach income and wealth

Estimate required sales

Calculate unit sales

The emergence of Global Institutions:

Institutions created over the past half century include: the General Agreement on Tariffs and Trade (GATT), the World Trade Organization (WTO), the International Monetary Fund (IMF), the World Bank, the United Nations (UN)

The Role of the Direction:

The role of managers:

Mgmt team performance depends on three dimensions:

o interaction

o direction

o renewal

One reason for the difficulty of improving a team's performance is that interaction, direction, and renewal are interdependent.

Mgmt teams need to go forward simultaneously on all three fronts to make real progress.

The role of the Board:

The role of the board is largely advisory and not of a decision making nature.

Management manages the company, and board members serve as a source of advice and counsel to the management.

The board is to serve as some sort of discipline for managers.

The board is to be available in the event of a leadership crisis.

The board has to collaborate in the determination of the objectives of the company.

The board should ask discerning questions about strategies, and major policies.

The board legal responsibility, as trustee of the corporation's assets, to ensure its long-range growth and stability.

Another critical role for the board is helping management to identify and resolve strategy and performance issues.

In Conclusion: The board of directors (BOD) role is to formulate, ratify, evaluate, and change corporate strategy.

Ex: Nestle:

Board of Directors - Board Regulations

The Nestlé Board of Directors Regulations define the organisation, operation and the powers and responsibilities of the governance bodies of Nestlé, as well as the principles for the governance of the Nestlé Group.

The board doesn´t even come in the company’s organigram, it comes separated from the rest of the company.

Committees:

Companies can set up committees, Each to focus on one task

Putting it all together: