Strategic Management ZF PDF

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Dörnberg...

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Strategic Management Herr Professor Freiherr von Dörnberg

Summary – 6 important points - Porters tools

Most important slide:  you need something to differentiate from others, you want to be the number one, if you are number two forget it, you don’t get the job (as an employee)  we have monopoly but it is not legal to have one (e.g. Telekom)  Airline industry we have many companies 

When and Why do we need a strategy? 1. first reason: rivalry among existing firms (e.g. fitness studio) strategy needed 2. second: threat of new entrants (think of German Rail system: what was liberalized in Germany flix bus; flix bus as an entrant of the airline markets (flix buses are driving from Frankfurt to Paris); Whatsapp Calls) 3. threat of substitute products or services (videoconferencing instead of flying; Airbnb, couchsurfing instead of hotels, food delivery instead of Rewe) (you need a litte income to live!—> weiß nicht so genau was er damit meinte) 4. bargaining power of buyers   bargaining power of buyers: in our daily life such as supermarketsmean of bargaining power (he could ask that means?: = width choice of products (cheese, butter) possibility create a brand: Rolex prestige, status, can be an investment  for all markets this is true (weiß nicht so genau, was er damit meint) 5. bargaining power of suppliers (all companies need suppliers; (airline: beautiful flight attendant)  bargaining power of suppliers?: if the supplier is the only one, we have to buy by him, leads to he can set the price as high as he want to 1

Boeing or airbus have a lot of power, that’s why all buyers buy airplanes from both, kerosene also)  big jet- how many suppliers? – he said that they do a cartel we have to think how can we replace the suppliers e.g. OPEC: it is over, nearly killed, what happened? – fracking - When can we live without a strategy? - If you are the only one, don’t have competitors Monopoly (Deutsche Post, Deutsche Bahn  Flixbus)  don’t have to be innovative - So on the other hand side: when do you need a strategy? - when there is competition  remember we have 5 driving forces! (exam: give examples for the 5 driving forces) necessary for strategy (kommt also in Klausur) we have to think about some businesses e.g. Telekom: what is happening in the future

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these are three strategies, we do not have more only three generic strategies (differentiation, focus, cost leadership) strategic target, strategic advantage

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so solution?: build another brand from scratch (Lufthansa zum Beispiel  Eurowings)  other low cost leaders: Aldi, Lildl, characterized by a small choice

2. solution: Flug Frankfurt: New York: so many flights conducted by different companies: What can you do us Lufthansa?  high prices would be the “dead”  create a unqiue perception (safer flight) differentiation: to be different is always good uniqueness perceived by the costumers, nothing do to with the real world, perception is reality  it doesn’t need to be true!  examples: everyone think Lufthansa is so safe, but during his time two accidents happened  people think that polo shirt is better quality, but Dörni told us that it`s made it the same factory than other shirts -

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 offer better service (Miles& More)  other example uniqueness perceived by the customer: in some way they have a better services (or customer think that they have better services  e.g. call you with your name)  e.g. BMW and Mercedes do (almost) not compete with each other because they have this uniqueness differentiation: which university has a better culture -

second possibility: we can pull back from a highly competitive market segmentation to different target groups, but also on different services and products  e.g. Ruf Jugendreisen (they know that the young people always want to be online)

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first mover advantage: there could be copy and page follower generic we have only 3 strategy, we get the novel price for economics consumer behavior, consumer attitude is changing, we have to follow this, how do it change?  demographic changes: all the five senses is down, solution airport Bremen: the sign pose are bigger, announcements are loader  solo traveler  all the big companies have stabilized, remember we talk about shareholder  he had the balance report with him, with the stakeholder approach  4 pillars (he said that we had that last semester) 1.sustainable environment 2. people/ social: we have to focus today on diversity, focus on female (open kindergarten; flexible working hours) 3.profitable, you have to be economical sustainable on the long run 4. corporate citizenship (Ehrenamt: I engage myself for the community, Schwarz Stiftung,)  these 4 pillars are integrated in all strategies nowadays Exit barriers Low

High

Low

low, stable returns

low, risky returns

High

high, stable returns

high, risky returns

Entry barriers

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Porter analyze the Market entry conditions e.g. Ella and the prof are opening a travel company: her computer, she has skills of the Computer and he the know-how, so they can start a travel agency, no license needed 5 % of TUI: these are low, stable returns (because there are no barriers to enter the market and to exit the market)  less return aber auch nicht schwer reinzukommen

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we want to start an Airline, we need Airline, which are costly and we need an Airline Operating Certificate (AOC)  high entry barrier

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2. Bsp: Dörni is a doctor but he can’t be a medical doctor  he needs an approval of the state 3

high, risky return: Nuclear power plant they have high return but it is very costly to get in the market (billions for one power plant) + if we then want to leave the market: there are high exit barriers ( we have to pay too) - another example: GeneralMotors owned Opel: they wanted to close the factories in Germany  they would have needed to pay each worker a monthly wage (“Sozialplan” not as in the USA where you just can hire and fire)  und müssten Maschinen etc. in Firmen abbauen)  Klausur: - könnte er uns über examples fragen -

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“stuck in the middle”: means you could decide for such or such strategy, good example: air Berlin: low cost airline (leisure carrier) , he told the press years ago, that this can’t work, the end of Air Berlin is sad for the German Market because now domination of Lufthansa, prices are going up large market share: scale effect, economies of scale: decrease cost in the long term  then he asked about a cost category: fix costs we try to do a flexibility with fix costs, fix cost we don’t like them/ most important cost category we have to manage, we would like to turn them in variable costs, e.g. terror attack hotels are empty fix cost are running costs they are always there  economies of scale means decrease fix costs decreasing fix costs means putting more passengers on an airplane (because airplane is based on fix costs) 4

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economies of scope: attract more markets with the same product  young ladies have all the same jeans (jeans with holes: no matter where they are from - more difficult with books: Germans have to write a bestseller in order to sell their books to different markets) small specialized companies: e.g. Bugatti im Elsass (auf englisch Alsace), no manufacturing line, a Bugatti cost 2 million (meine Notiz: wird nicht auf Masse produziert) in life you always have to have the aim to be number one, to have a profile, a unique selling preposition in order to get a job, “ there are millions with a bachelor degree, millions with a Master degree” people look at you like a T shape: siehe Blatt Abbildung von T-shape (er hat zuerst das T normal aufgemalt und dann gesagt ok wenn ihr dann noch Chinesisch sprechen könnt, ein internship bei google gemacht habt, dann sieht eure T-shape so aus)

Preference strategy: he does not like it, better perception we try to put our products in the relevant set of people, relevant set= mind, so think of cars, immediately you think of Mercedes physical quality can play a role: luxury in hotel business, shower in the first class of Emirates (nobody else has a shower on the aircraft) 5

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buyer’s communication: your product is superior we can have the first mover advantage: sometimes really good, because we can have market share, but maybe then the followers can avoid mistakes that you made or do copy and paste differentiation: USP: unique selling p. means differentiation (so that’s why I think he does not like it) everything by perception (back to Lufthansa story: people think it is safe because German engineering is behind)  you have to differentiate in order to be number one

experience curve: also related to productivity: if you do sth. very often, you do it better, with better quality we are faster and better just because of our experience cost advantages: by bigger volume efficient capacity: assembly line for automobile industry people ask for these brands

preference strategy means brand buyers: people think brands stand for a higher quality, nothing to do with reality - brand is expensive; some brands are not interesting for everyone, “Ruf Jugendreisen” for example is only interesting for young people and parents because children can’t buy it themselves (you are not the target group if you do have no kids, or kids already left the house) brands are not for everyone ; brand difficult to manage, you have to keep the costumer’s perception of you on a high level tendency: end of 90s people looking for wide labeled products now: chance again: people looking for brands 6

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Why no brands? - cheaper - basic of it? what do they mean? typical wide label products - to drive a car you need petrol: What is petrol? How do we call this product? If we run an airline, 6 competitive airlines: these are commodities: the basic products are the same, we make it special (we are the safest airline, or we have a restaurant in the air)  we have to differentiate our product by communication: because it’s always the same basic product (flight from A to B)  now question: how to position themselves?  Medium: you not aiming to the highest quality  practical packaging: definitely no brand, because this cost a lot of money: AXA French company, many famous German subsidiaries; investment of billion euros to create this brand  low price strategy is one of your options;  don’t mix up low price and..?

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Porsche is selling the biggest volume to the US even if 75 is the highest you can drive Why are they even though so interested in driving a Porsche? :nothing to do with speed, it’s a lifestyle, can be status, massage in my peer group: I can afford this car, I made it (I am successful) Low-cost leadership  The approach is based on being the overall low-cost provider in the industry. Example airline: Ryanair Niche  The approach is based on concentrating on a narrow buyer segment and out-competing rivals by offering a customized product or service that meets the requirements of the customers better than the other competitors. Example airlines: Aloha Air (geograhic niche), Concorde (customer niche) and Chalk (product line niche)

Differentiation  This approach seeks to provide a difference to the product in the industry, a difference for which the public is willing to pay extra. Example airline: Singapore Airlines What are the competitive strengths of a low-cost leadership strategy? - Rival Competitors: Better positioned to compete offensively on basis of price. Buyers: Better protected from negotiating power of large customers. - Suppliers: More insulated than competitors from powerful suppliers. - Potential Entrants: Low-cost provider’s pricing power is a significant entry barrier. - Substitutes: Better positioned to use low price as a defense against substitutes. When a Low-Cost strategy works best - Price competition among rivals is a dominant competitive force. - The industry’s product is a commodity-type item readily available. - There are few ways to achieve product differentiation that have value to buyers. Most buyers have similar needs/requirements. - Buyers incur low switching cost changing sellers. 7

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Buyers are large and have significant bargaining power.

(rain shower he loves that) commodity type: if there is a comm. situation then of course low-cost strategy work the best: we are looking for the lowest price too while flying looking for a hotel room for one to B, for us as Millenniums it is important the price for other people, for him it is not: he needs or wants more comfort, wants more prestige most buyers have:… transportation A to B switching costs: the real costs to get from one product to another  e.g. it cost you money to buy a new cover of the new iphone How can you force customers to stay with you? -if you put the switching cost, pretty high, you can force customers to stay with you: - buyers are large and have a significant bargain power

What are problems with a low-cost leadership position?  Technical breakthroughs can negate the low-cost leadership position, because they make cost reductions available for other players in the industry, negating a low-cost provider’s efficiency advantages. If the leadership position is not grounded in a sustainable advantage, rivals can find it relatively easy or even inexpensive to imitate the costing methods used by the low-cost leader. Sometimes the low-cost provider becomes so intent on keeping costs low that it is blind to the changes in the buyer’s requirement for added quality or features. The low-cost provider fails to see new developments in related or substitute products and fails to notice that buyer sensitivity to costs no longer exists.     

problems of cost: Ryanair pilots and flight attendants ask for higher paysthen: lower productivity, higher cost, challenge for Ryan Air  risk: that they lose their low-cost advantage in the next months,  sometimes you can lose your cost advantages if everything is going up (the prices), then we have the same differences, but it is not a strategic issue, it can only be that we lose some customers you need a sustainable advantage: some cost drivers not in your balance sheets, if you can avoid this e.g. Telekom: they have been low cost, but then WhatsApp was introduced, for Telekom less revenues, so you have to find an answer for that substitute products: flixbus Frankfurt- Paris: there you have high speed trains, but now flix bus too

What are the competitive strengths of a differentiation strategy? - Rival Competitors: Buyers develop loyalty to brands they like. - Buyers: Bargaining power of larger buyers is not important since other products are less attractive. Suppliers: May be in a better position to withstand efforts of suppliers to raise prices because buyer is willing to pay premium. - Potential Entrants: Buyer loyalty is a significant entry barrier. - Substitutes: Better positioned against substitutes because the buyer likes the differentiation of the product. JetBlue Airways’ Differentiation strategy approach - Superior service: DIRECTV. - More for the customer’s money: Leather seating and additional leg room. - Engineering and design performance quality: Excellent safety record. Top-of-the-line image: Brand new fleet. - Technological leadership: Paperless cockpit. - On-time guarantees: On-time performance.

When a differentiation strategy works best

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If there are many way to differentiate a product and the buyer perceives these differences to have value. - Buyer’s needs are diverse. - Use of product is diverse. - Few competitors are following a differentiation strategy. What are the problems with a differentiation strategy? - Trying to differentiate on features that either do not lower the operating costs for the buyer or enhance their well-being. - Over-differentiating to the point that it exceeds a buyer’s needs. - Charging a price premium that buyers perceive is too high. - Failing to hit the target on what buyers actually consider to be of value. -

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charge a price premium: Lufthansa they charge 5-7%, in Stuttgart: you have the choice to fly via Amsterdam, Frankfurt… they charge a price premium and if they would charge 10 or 15 % people would maybe leave them  is possible bei einer differentiation strategy problem if consumer thinks the price is too high: people will stay away from your brand, picture was half shredded women who paid 1 million, kept the picture  what is the real value?, another example: people are willing to pay 100 million for picture of Picasso  we as students have to ask us: “So what” important for us to think what is value

When a focus strategy works best - When it is cost prohibitive for a larger, more diverse rival to serve the specialized needs of a smaller market. - No other firms are concentrating on this market or include this market as a major market segment. The firm does not really have the resources to be multi-segmented. - There are many segments in the industry What are the competitive strengths of a niche strategy? - Rival Competitors: Rivals do not have the ability to specialize enough to meet the needs of the target market. - Buyers: Because the company focuses so closely on the unique needs of the market, the bargaining power of the larger rival firms is diminished. - Potential Entrants: Because the niche competitor generates a core competency for that market, it acts as a barrier. - Substitutes: Core competencies serves as a barrier to substitutes.       

focus: on own sector if you really be keen, then a focus strategy really works best any examples for focus strategy? focus: here wine management, IBIS,… we have to find some examples for focus strategy e.g. hotels just for women, why hotels only for business women?  sitting on the bar normally at a bar: men are coming to you,  so hotels that business women can be relaxed, respected at the starting point, first mover advantage: you get the market share of course some can copy your model

What are problems with a niche position? - The niche firm is operating on a small scale, which often makes it difficult to keep costs low. - Technological changes can affect the niche market because smaller firms might find it difficult and even cost prohibitive to implement. - There is always the chance of a larger competitor, and more lucrative, infringing on the niche market by offering similar products and service.

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problem: definitely small scale, you never reach cost advantage  scale situation for them is bad scale advantage means decreaing the costs, means decrease the fix costs, if we are assets heavy (means own hotels..), asstes light (computer company: only computer), TUI has its own aircrafts, Robinson.. and assets heavy means a lot of fix costs always possible that large competitor comes in: because he has the money

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Other analytical tools „sweat & tears“

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