Strategy Lecture Notes PDF

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Summary

Introduction (Lecture 1)Definitions:  Strategy means making clear-cut choices about how to compete (Jack Welch, former CEO of General Electric).  Competitive strategy is about being different. It means deliberately choosing a different set of activities to deliver a unique mix of value (Porter, st...

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Introduction (Lecture 1) Definitions:  Strategy means making clear-cut choices about how to compete (Jack Welch, former CEO of General Electric).  Competitive strategy is about being different. It means deliberately choosing a different set of activities to deliver a unique mix of value (Porter, strategy scholar).  Strategy is the determination of long term goals and the adoption of courses of action necessary for carrying out these goals (Alfred Chandler, strategy scholar).  A company’s strategy represents a managerial commitment to pursue a particular set of actions (Thompson et al).  Without a strategy the organisation is like a ship without a rudder (Consultants Joel Ross and Michael Kami).  Strategy derives from stratos (army) and agein (to lead) from Ancient Greece. Pericles: “A strategos needs to know what must be done and be able to explsin it. A man who has the knowledge but lacks the power clearly to express it is no better off than if he never had ideas at all. There is often no more logic in the course of events than there is in the plans of men. This is why we blame our luck when things happen in ways that we did not expect.” Key Elements:  Involves deliberate intentional effort or plan.  Choice of certain actions rather than others.  Aimed at long term goals such as competitiveness.  Managerial commitment to a course of action.  Gives sense of direction. An extended strategy framework: strategy as a link between the firm and its environment.

Things to note: What textbooks say:

What reality teaches us:

Firms care mostly about profit and should therefore aim for profitability.

Firms have multiple goals and concerns and often they are not very profitable at first so they aim for survival and legitimacy.

Firms should develop a distinctive competitive advantage.

Most firms do not have a competitive advantage but mainly aim to mimic peers and keep up with competition.

Strategy as Positioning Vs Strategy as Direction

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Strategy as Positioning

Strategy as Direction

Where are we competing?  Product market scope.  Geographical scope.  Vertical scope. How are we competing and what is the basis of our competitiveness?

What do we want to achieve?  Vision statement.  Mission statement.  Performance goals. How will we get there?  Guidelines for development.  Priorities for capital expenditure.  Research and Development.  Growth modes: organic growth, M&A, alliances.

Prescriptive and Emergent Views on Strategy  Prescriptive View: The objective and main elements are developed before the strategy is implemented.  Emergent View: The final objective is unclear and the elements are developed as the strategy unfolds. Strategic management is about:  Co-ordinating activities, staffing and leadership and developing processes and structures towards certain goals or objectives.  Assisting strategy making: analysing situations, identifying options, making choices, planning for certain actions or scenarios, adapting to new situations, improvising, allocating resources, co-ordinating decision makers and evaluating actions.  Managing stakeholders in the strategy. Strategy as design versus process (planned on the left, emergent on the right):

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Evolution of strategic management:

Roles of strategy analysis:  Strategy analysis improves decision processes but doesn’t give answers/  Strategy analysis assists us to identify and understand the main issues.  Strategy analysis helps us to manage complexity.  Strategy analysis can enhance flexibility and innovation by supporting learning. Role of Strategy Analysis

Organisations in competitive contexts that charge users.

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Organisations in competitive contexts providing free services.

Organisations (often public) sheltered from competition.

Examples

Royal Opera House Guggenheim Museum Stanford University

Salvation Army Greenpeace Linux & Doctors Without Borders

Analysis of goals and performance

Identifying mission, goals and performance indicators and establishing consistency between them is a key area of strategy analysis for all nonprofits.

Analysis of the competitive environment

Main tools of competitive analysis are the same as for for-profit firms.

Analysis of resources and capabilities

Identifying and exploiting resources and capabilities critical to design strategies that help organisations survive and make it competitive.

Strategy implementation

The basic principles of organisational design, performance management and leadership are common to all organisational types.

Competitive analysis applies to funding strategies and recruitment strategies.

Ministry of Defence European Central Bank NYC Police Dept.

Less important. However, agencies compete for public funding and people. Analysis of resources and capabilities essential in determining priorities and designing strategies.

The role of stakeholders:  A stakeholder is a person, group or organisation that has an interest or concern in an organisation and in what it does.  Stakeholders can affect of being affected by an organisation’s actions, decisions, objectives and policies.  Critical stakeholders are seen as those actors on whom the survival and success of an organisation depends.  Critical stakeholders can be more or less obvious. Barclays considers doing the entire tech support without human operators. Stakeholders include:  Shareholders  Government  Customers  Employees  Media/NGOs  Suppliers  Community  Competitors  Greenpeace teams up with Greta Thunberg to launch a worldwide campaign against deforestation for palm oil:  Governments  Palm oil buyers  Greta fans  Consumers  Greenpeace supporters  Palm oil producers  Nature  Summary:  Strategy links goals, planning, action and commitment.  The term strategy originates from the military context.  Strategy combines prescription and emergence.  Strategy analysis can be applied in various contexts.  Stakeholders are important in assessing strategy.

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External Strategic Analysis (Lecture 2) Geographical Levels of Analysis

Some definitions:   

The external environment consists of two major levels of analysis: the macroenvironment and the industry context. ‘A company’s macro-environment includes all relevant factors and influences outside the company’s boundaries; by relevant, we mean important enough to have a bearing on the decisions the company ultimately makes.’ Thompson, 2007. Industry can be defined as: o Sector of the economy (primary, secondary, tertiary). o Set of firms producing similar products/services, competing for same/similar customers, depending on same/similar resources. o Industry concept increasingly rivaled by ecosystems: sets of organisations providing complementary products/services.

STEEP (PESTEL) Analysis  identifies key influences of the macro-environment and their impact on industries and organisations.  Identifies drivers of change for industries and firms.  Identifies opportunities and threats for industries and firms. o Social Factors o Technological Factors o Economic Factors o Environmental Factors o Political/Legal Factors Social Factors  Demographics  Income distribution  Social mobility  Lifestyle  Attitude to work/life  Consumerism Technological Factors  Information technology

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Levels of education Values/beliefs Changes: social movements, migration, aging population, urbanisation.

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Technology transfer

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Alternative technologies Product innovation rate Government spending Research infrastructure

Economic Factors  Purchasing power  Income distribution  Interest rates  Currency exchange rates  Inflation  Investments Environmental Factors  Energy consumption  Pollution  Soil fertility  Climate  Land use Political/Legal Factors  Political stability  Labour law  Environmental protection  Taxation  Funding programmes

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Academic research Changes: discovers/innovations, failing technologies, changes in funding, new standards.

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Unemployment Energy costs. Changes: economic growth, financial crisis, recession, system change and global shifts.

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Physical geography Water access Changes: climate change, resource scarcity, land grabbing and disasters.

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Visa policies Changes: new government, revolution, new treaties, lobbying efforts.

Scenario Planning

Scenario planning is the development of multiple plausible scenarios about the future and use them to make decisions. Scenario planning:  Combines realism and imagination.  Typically assists long term planning.  Increases readiness while maintaining flexibility.  Focuses on plausibility (what could happen) rather than probability.  Consensus not required for scenario planning to work.

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Combines well with external strategic analysis (STEEP).

Steps: 1. Set agenda, question, time horizon, identify stakeholders. Define the above, identify a champion and important stakeholders. 2. Identify, rate and rank plausible changes/drivers. Drivers/changes should be relatively concrete and question related. Uncertainty is not probability; the uncertainty is high if probability in unknown and uncertainty is low probability is known. Impact focuses on the material/financial effect on organisation and the total will be the combination of uncertainty times by impact. 3. Develop scenarios. Scenarios need to be plausible, distinctive, consistent and challenging rather than convenient. 4. Identify warning signals, strategise and evaluate. To what extent are we prepared to respond and what do we need to put in place to better respond to each scenario. 5. Revise/return on demand. Profitability of Different US Industries

Uses of Industry Analysis     

To understand how industry structure drives competition, which determines the level of industry specific profitability. To assess industry attractiveness as incumbent and new entrant. To use evidence on changes in industry structure to forecast future profitability. To understand ways of affecting industry structure. To identify key success factors.

Industries can be defined as:  A sector of the economy (primary, secondary or tertiary).  Sets of firms producing similar products/services.  Sets of firms competing for the same/similar customers.  Sets of firms depending on the same/similar resources.

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Sets of firms competing in the same geographical territories

The Coffee Value Chain

Porter’s Five Forces

Bargaining Power of Buyers  High bargaining power of buyers makes industry less profitable.  Determines to what extent buyers can apply price pressure.  Increases if client population is highly concentrated.  Increases if products are

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standardised/undifferentiated. Increases if products are not very important to buyers. Increases if buyers find it easy to switch. Increases if buyers are sensitive/under cost pressure. Industries with high buyer bargaining power: coffee farming, printing, key copies.

Bargaining Power of Suppliers  High bargaining power of suppliers makes industry less profitable.  Determines to what extent suppliers can apply price pressure.  Increases if supplier firms are highly concentrated.  Increase if sourced products are unique.  Increases if switching costs are high.  General threat if suppliers intend forward integration.  Increases if industry is unimportant client for suppliers.  Industries with high supplier bargaining power: PC makers, train/bus services. Threat of New Entrants  High threat of new entrants makes industry less profitable.  Determines how easy new firms can enter the industry.

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     

Low if profitability depends on economies of scale. Low if profitability requires brand recognition. Low if distribution or supplier channels are hard to establish. Low if governments limit entry (a high barrier to entry). Low if high capital requirements. Industries with high entry barriers: pharmaceuticals, operating systems.

Threat of Substitutes  High threat of substitutes makes industry less profitable.  Determines whether clients can satisfy demand differently.  New technologies may make focal industry obsolete.  Affected by changing or flexible consumer preferences.  Other products/services provide better price performance.  Substitutes are different from just ‘product varieties.’  For example cars can be travel substitutes for planes  Industries with a high substitute threat: bookstores, watches. Rivalry Among Competitors  High rivalry makes industry less profitable.  Increases with number of competing players.  Increases with maturity of the industry.  Increases with standardisation of products/services.  Decreases with a high degree of differentiation.  Increases with high exit barriers (sunk costs).  Rivalry is affected by co-location.  Industries with strong competition: airlines, phones, clothing. Limitations of Porter’s Five Forces  It can be difficult to define a particular industry. o Analysis might change dramatically depending on definition.  Analysis looks at industries in an isolated manner. o It may be more/less profitable to operate across industries.  Porter’s Five does not account for location differences. o Business profitability may depend a lot on location.  Porter’s Five is rather static. o Industries and profitability change over time.  Focuses on mature industries. Industry Life Cycles

Introduction

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Growth

Maturity

Decline

Demand

Low number of buyers; early adopters

Growing demand / increase in market penetration

Repeat buyers, increasing price sensitivity

Decreasing demand

Technology

Competing technologies; rapid product innovation.

Standardization; rapid process innovation

Diffused know how; incremental knowledge

Little innovation

Products

Wide variety of features and designs

Design & quality improve; dominant design emerges

Commoditization; brand differentiation

Differentiation difficult

Competition

Few rivals

Growing number of rivals

Shakeout and consolidation Mergers & Acquisitions

Price wars and exit

Trade

Production and sales shift from advanced to emerging economies

Product and Process Innovation - Changes Along the Life Cycle  Technology intensive industries (pharmaceuticals, semiconductors, computers may retain features of emerging industries.  Other industries (especially those providing basic necessities (food processing, construction, apparel) reach maturity but do not decline.  Industries like TVs and motorcycles may experience life cycle regeneration.  Life cycle models should not be applied deterministically - industries also change unpredictably: external shocks, new entrants, regulation etc.  David Teece (2014) “The concept of ecosystem might now substitute for the industry of performing analysis.” The Role of Complementarity: Products A and B are complementary when using or making more of A makes B more valuable. For example having coffee in the library may add value to spending time in the library. Complementarity is particularly in technology. For example apps and app platforms have unique complementarity in the sense that the app does not function without the platform and as the presence of apps increases so does the value of the platform.

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The Formation of Ecosystems Ecosystems are networks of organisations and individuals that co-evolve their capabilities and roles and align their investments so as to create additional value and/or improve efficiency (Williamson and Demeyer, 2012). Ecosystems are interacting organisations bound together by the non-redeployability of the collective investment elsewhere (Jacobides, 2018).

Where Ecosystems Emerge

Being Successful in Ecosystems  To what extent are our products and services complementary to others?  To what extent can we benefit from complementary products and services?  To what extent would our product add value to other products our customers already use?  To what extent will our success depends on the willingness of complementary services to cooperate?

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Porter’s Five Forces and Complements Summary  Macro-environment can be assessed with STEEP.  Scenario planning adds value to external analysis.  Porter’s Five Forces helps assess industry profitability.  Industry life cycle adds dynamic element to analysis. Ecosystem view emphasizes role of complementarity.

Internal Strategic Analysis (Lecture 3) Mission Vs Vision Statements Mission Statement

Vision Statement

Who are we?

Where are we going?

What do we do?

What do we want to accomplish?

In what way do we do it?

How do we imagine ourselves in the future?

What is our understanding of ourselves today?

What will be our market focus?

Mission statements typically reflect the current identity, business purpose and values.

Vision statements typically relate to the strategic goals, focus and direction for the future.

Eg: “To bring inspiration and innovation to every athlete in the world.” - Nike.

Eg: “Our vision is to be the world’s best quick service restaurant experience. Being the best means providing outstanding quality, service, cleanliness and value, so that we make every customer in every restaurant smile.” McDonalds.

Desired Qualities of a Statement

Typical Flaws of a Statement

Forward looking.

Not forward looking.

Distinctive/specific.

Too vague.

Source of identity.

Too broad/too general.

Easy to remember/communicate.

Too little firm specific.

Direction and focus.

Easily replaceable.

Inspiring.

No source of identity/inspiration.

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Core Values are also important. An example: Virgin who’s core values are supportive, respectful, proud, adventurous, passionate and creative. Core values address:    

Shareholders Customers NGOs/Media Competitors

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Community Suppliers Employees Government

Objectives  Example: “Increase sales to 4.2 million cars and trucks by next year.” Nissan  Typical qualities: quantifiable and measurable (how much of what), deadline for achievement (by when), can be short term and longer term.  Split into financial and strategic objectives.  Financial objectives are financial performance goals such as revenue growth, earnings per share, dividend increase, profit margins and ROCE.  Strategic objectives talk about performance in the market. For example, market share, sales, product innovation, overtaking competitors and brand reputation. Porter’s Firm Value Chain

Resources (assets, endowments)

Capabilities (ability to leverage resources)

Purchasing

e.g. locations, access to suppliers, licenses

e.g. managing supplier relationships

Operations

e.g. machines, staff, IT infrastructure

e.g....