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21.855 Strategic Management I FORMULATION

Year 2019-2020 Ainhoa Crespán Martínez

The process of Strategic Management: 3 Phases Internal Analysis Mission Vision Values

Basic orientation of the company And basic strategical orientation

External Analysis

Analysis and Diagnosis

SWOT / CAME

Phase I: Phylosophy and Analysis Ainhoa Crespán Martínez

Design Of the Strategy Competitive (or Business) and Corporative Strategies And Mechanisms

Phase II: Formulation

Evaluation and Selection Of the Strategy

Adequacy Feasibility Acceptability

Impleme ntation

Strategic Control

Organization al support, planning and functional strategies

Review of the strategic decision process

Phase III: Implementation 2

AFI STRATEGY FRAMEWORK: ANALYSING FORMULATING IMPLEMENTING

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LEVELS OF STRATEGY

The strategic decisions are different for each level

Corporate Level Corporate strategies answer the questions Where we want to compete (in what markets?) and with What Portfolio (with what products?) Business Unit Level Competitive Strategies or Business Strategies answer the question How do we want to compete (Cost or Differentiation). Looking for the competitive advantage

Functional Level Functional Strategies answer the tactics and operations of each department (financial actions, marketing actions, …) Ainhoa Crespán Martínez

Corporate Business Functional

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FORMULATION

BUSISNESS STRATEGIES

CORPORATE STRATEGIES

HOW AM I GOING TO COMPETE

WHAT BUSINESS WHERE to compete? Mechanism: HOW TO ENTER

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BUSINESS STRATEGIES or COMPETITVE STRATEGIES

Competitive Strategies or Business Strategies answer to the question: How am I going to compete?

Looking for

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The Competitive Advantage

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Formulating Business Strategies

Competitve advantage

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Where do I look for it

? 7

Formulating Business Strategies External factors:

Competitive advantage

As the market is irregular, there are constant changes in the environment, it is important to anticipate competition, with the ability to observe, detect, react and take advantage of opportunities quickly.

Internal factors: Take advantage of our resources and capabilities to reduce costs and / or increase product differentiation, in order to increase the profitability of the company.

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Formulating Business Strategies

Origin

Factors Efficiency

Generic Competitive Advantages

(use of less sources)

Quality Sources and Capacities

Low Costs Competitive advantage

Innovation Differentiation of products Capacity to satisfy the client

Navas y Guerras (1998, p.227)

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Formulating Business Strategies

Creating competitive advantages is not enough.

Competitive advantage

We have to keep that COMPETITIVE ADVANTAGE How can we maintain it? Luck can cause a COMPETITIVE ADVANTAGE but luck will hardly help us to keep it.

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Formulating Business Strategies

FACTORS THAT HELP TO MANTAIN COMPETITIVE ADVANTAGE

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Barriers to imitation

Look for obstacles that prevent competitors reproduce Competitive Advantage: hiding information, protecting know how (patent), corporate culture, image, experience…

Competitors Capacities

Discourage competitor to imitate Competitive Advantage: hiding information, threating with reprisals, make it difficult to access to sources and capabilities..

Industry dynamism

The more dynamic is the industry, the faster are the changes, the less long lasting is the Competitive Advantage Need to look to matain C.A or look for a new C.A. 11

Formulating Business Strategies Mechanisms that help us maintain a COMPETITIVE ADVANTAGE (Hills and Jones) 1. Barriers to imitation: obstacles that prevent other competitors from reproducing C.A."Isolation mechanisms" such as: examples: causal ambiguity (prevents knowing why), protected knowledge (trademarks and patents), accumulated experience, possession of unique assets, corporate culture, external image, administrative concession, preferential information ... 2. Ability of the competition to imitate: the possibility of the competitors to imitate the C.A. of who owns it. To reduce imitation capacity we should: • Difficulty identifying the profitability (hiding info.) • Discouraging competition (anticipating imitation or reporting future reprisals) • Make it difficult to diagnose the source of the Competitive Advantage to competitors • Difficulty acquiring resources and capabilities (eg transferability, imitability and substitutability of intangible resources and organizational routines) 3. Industry dynamism: the more dynamic the industry (more changes appear, innovations accelerate, the life cycle shortened), the more difficult it is to maintain a C.A. (C.A. tend to be more transient) Ainhoa Crespán Martínez

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Formulating Business Strategies

PORTER GENERIC BUSINESS STRATEGIES COMPETITIVE ADVANTAGE Costs Differentiation Industry wide Scope of the market chosen F

Cost Leadership

Differentiation

Segmentation or focused

Porter (1982, p.60) Segmentation is not going to be considered as an independent competitive strategy because it is just one or another strategy (LC or DF) applied to a segment instead of the industry

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COST LEADEARSHIP STRATEGY

WHEN IS A COST LEADERSHIP STRATEGY ADEQUATE?

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COST LEADEARSHIP STRATEGY

COST LEADERSHIP Averrage market price MARGIN OF COST LEADER

COST OF COST LEADER

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MARGIN OF RIVAL

COST OF RIVAL

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APPLICATION OF THE COST LEADERSHIP STRATEGY

WHEN IS A COST LEADERSHIP STRATEGY ADEQUATE?

1. When competition in prices is intense and this is a factor of success in that industry

2. When the product is standardized and there are many suppliers 3. When there are few forms of significant differentiation 4. When customers have a lot of bargaining power because of their large size of providers or because the cost of switching providers is low

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SOURCES OF THE COMPETITIVE ADVANTAGE IN THE COST LEADERSHIP STRATEGY WHERE DOES THE COMPETITIVE ADVANTAGE OF COST LEADERSHIP STRATEGY COMES FROM? Efficiency, Quality, Innovation,… 1. Economies of scale: specialization and division of labor 2. Effect Experience: Incremental improvements in coordination and organization 3. Production Techniques: Savings through the mechanization and automation of processes. 4. Product design: Redesign of products that help automation, save material costs. 5. Favorable access to raw materials: cheaper costs 6. Favorable company location: savings in transportation, wages, taxes, etc. 7. Relations with suppliers and customers: utilizing vertical links of the value chain. 8. Strict cost controls on all functions of the value chain. 9. Capacity utilization 10. Cost of inputs 11.Different business model

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Cost Leadership Sources of competitive advantage in cost Cost Key Drivers 1 ) Economies of Scale and Scope • Economies of Scale Average Production Costs Raw Material Costs Labor costs Distribution Costs Admin costs per sales Marketing costs per sales, Etc … • Economies of Scope (the cost of sharing is less than doing it separate) Sharing centralized functions for different brands Cross selling Flexible manufacturing, Etc …

Cost Leadership Sources of competitive advantage in cost An Example: US Soft Drinks

Advertising Expenditure ($ per case) 0.02 0.05 0.10 0.15 0.20

Economies of Scale in Advertising

Schweppes SF Dr. Pepper Tab Diet Pepsi Diet 7-Up Diet Rite Fresca Seven Up Sprite

Dr. Pepper

Pepsi 10

20

50

100

200

500

Annual sales volume (millions of cases)

Coke 1,000

Cost Leadership Sources of competitive advantage in cost 2) Learning and experience curve • • •

“Learning by Doing” Individual & Organizational level Experience curve

The more experience a firm has producing a particular product, the lower its costs

• • • •

Different slope for different products Cost reductions from experience are not automatic! They have to be managed Correlation ≠ Causation Innovation

Cost Leadership Sources of competitive advantage in cost 3) Process Technology • • • •

New process technologies Process Innovation Re-thinking processes Production Profitability • • • • • •

LEAN PRODUCTION Just in time scheduling Total quality management Continuous improvement Team work Supplier partnership etc.

Cost Leadership Sources of competitive advantage in cost

TOYOTA Production System

Cost Leadership Sources of competitive advantage in cost 4) Product Design • Designed for Production and the Supply Chain (SCM)

• • • • •

•

Pallet occupation Truck occupation Secondary packaging Rotation -> Inventories Manipulation & Reposition

Don’t overlook functionality & aesthetics

Cost Leadership Sources of competitive advantage in cost 5) Favorable access to raw materials: lower costs

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Cost Leadership Sources of competitive advantage in cost 6) Favorable location (saving in transport, salaries, taxes, etc…)

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Cost Leadership Sources of competitive advantage in cost 7) Relationship to suppliers (cost, delivery time, design, quality, etc..) and clients (price, delivery time, design, quality, after sale service, etc..).

we

clients

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supplierse

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Cost Leadership Sources of competitive advantage in cost 8) Strict cost control in all activities (see more later) •

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Cost Leadership Sources of competitive advantage in cost 9) Capacity Utilization • • •

Under capacity Over capacity Cyclical vs Structural

• • •

Adapt to “demand” process Manufacturing flexibility Adjustments before changes in demand

Cost Leadership Sources of competitive advantage in cost 10) Cost of inputs Location contingent Control over low cost sources Bargaining power (5 Forces) Coopetition with suppliers Economies of Scale Outsourcing

• • • • • •

• • •

All firms in an industry not necessarily pay the same for the same inputs Corporate Social Responsability Long term relationships

Cost Leadership Sources of competitive advantage in cost 11) A different business model • • • •

Frontier of optimal operation Eliminate activities in the value chain Perform different activities altogether Elimination of organization slack

Cost Reduction and Value Chain Analysis

Stages of the analysis: 1. Identify the main value chain activities 2. Allocate total costs between value chain activities 3. Identify the cost drivers at each stage of the value chain 4. Identify linkage between activities 5. Identify opportunities for cost reduction

Cost Leadership and Value Chain Analysis Sources of competitive advantage in cost

BARRIERS TO THE IMITATION OF A COST LEADERSHIP STRATEGY HOW CAN WE PROTEC T THE COMPETITIVE ADVANTAGE IN A COST LEADERSHIP STRATEGY?

If the sources of competitive advantage are limited 1. If effect experience doesnt exist 2. Access to raw materials is difficult 3. Location of the company hard to copy 4. Relationship to suppliers is hard to copy 5. Hard to copy the sources and capacities of the cost leader…

6. ….

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RISKS OF THE COST LEADERSHIP STRATEGY

WHAT RISKS ARE IN A COST LEADERSHIP STRATEGY? 1. Requires permanent cost control 2. If the experience effect is used in excess, with sustained growth to gain market share, it can lead to standardization that provokes inflexibility in the face of D change (example of Ford's failure with the T model) 3. Appearance of substitute products when the base of a C.A. It's experience effect 4. Quick learning or imitation of competitors 5. Inflation of costs could mean that the company can not maintain a sufficient price differential. 6. Companies that act in a certain segment (eg only baby clothes) can achieve lower costs than a company that acts at the level of industry (textile)

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DIFFERENTIATION STRATEGIES

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DIFFERENTIATION STRATEGIES WHEN IS A DIFFERENTATION STRATEGY ADEQUATE?

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DIFFERENTIATION STRATEGIES DIFFERENTATION OF THE PRODUCT

Priceof the differentiated product Price of the Non differentiated product

MARGIN OF DIFFERENTI ATED

MARGIN OF RIVAL COST OF COST DIFFEREN TIATED

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COST OF RIVAL

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APPLICATION OF THE DIFFERENTIATION STRATEGY

WHEN IS A DIFFERENTATION STRATEGY ADEQUATE?

1. When there is complexity in products and complexity in the tastes of consumers 2. When aspects such as quality are important to the consumer 3. When there are few competitors differentiating with the same criteria 4. When distinctive features are difficult to imitate

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DIFFERENTIATION STRATEGIES

Important to know :

• Who are our customers? • How do we create value for them? • How do we do it more effectively and efficiently than others? ✓ Range of differentiation depends on the product ✓ Understand every interaction with customers ✓ Supply side ✓ Demand side ✓ Uniqueness

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SOURCES OF THE COMPETITIVE ADVANTAGE IN THE DIFFERENTIATION STRATEGY WHERE DOES THE COMPETITIVE ADVANTAGE OF DIFFERENTIATION STRATEGY COMES FROM? 1. Characteristics of the product or service •

Tangibles: Observable characteristics (packaging, color, flavor ...),

•

performance (reliability, safety, durability),

•

product complements (pre-post sale)

2. Market Characteristics:

•

Intangibles: Considerations of social, emotional, psychological, etc.

3. Better adaptation tastes and needs of the consumer. Important for medical sector, education,. 4. Characteristics of the company: business conception, reputation, values and principles, prestige, etc.

5. Others: time and social responsibility

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Differentiation Sources of competitive advantage in differentiation 1) Product Features • Better job • Unique job • More jobs • Design • User friendly • etc.

Differentiation Sources of competitive advantage in differentiation 2) Superior Quality & Reliability • Consistency • Safety • Durability • Innovation • etc.

•

Differentiation extends to the complementary products & service

Differentiation Sources of competitive advantage in differentiation 3) Convenience • Easy to find and purchase • Selection • One-stop shop • Capillarity • Etc.

Differentiation Sources of competitive advantage in differentiation 4) Brand image • Social & Emotional aspects • Customer perception vs Technical Features • Complex needs

Differentiation Sources of competitive advantage in differentiation 5) For most products consumers buy much more than a product function. It is also about these needs: Social Emotional Aesthetics Values

Understand what the product is about!

Differentiation What does differentiation imply? About differentiation:

• All this implies knowing the consumer very well. What benefits the client is looking for. •

The differentiation is linked to a perception by the consumer of exclusivity of covering his/her needs.

• Usually linked to greater brand loyalty • Usually there is little alternative in the supply with which the consumer is less sensitive to the price and allows higher prices, thus giving greater margin

• Costs while important are NOT the main objective

What are the BENEFITS of a product or a service?

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WHAT ARE FEATURES AND WHAT ARE BENEFITS?

Excercise: Read the following cards and identify which ones are Features of the product or service and wich ones are Benefits for the client.

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The only ones in the market to offer substitute car when you have a break down

I don't have to spend money in a taxi to go to work

Investment plan that combines profitability and security

I will never lose my money

We have the most trained and expert professionals

I can rely on the advice I receive

The manufacturing process follows the highest quality standards

It is highly unlikely that the product will go wrong

Engine 3,5 cm3

I can react to an unexpected situation: my life and the life of mine it's protected

It has the highest resolution on the market: 1,500 pixels

Watching films at home is like being at the movies…

Telematic management of the process

I save time that I will invest in whatever I like

9 am to 9 pm service

I have freedom to choose when to call

We have offices all around Spain

Wherever I am I will be able to solve my problem

No pesticides have been used

I contribute to conserve the environment

Differentiation and Value Chain Analysis

How to create more value?

Stages of the analysis: 1. Identify strengths: where the firm has more potential for differentiation 2. Identify linkage among activities 3. How sustainable is the differentiation? 4. Identify linkage between value chain of the company and the value chain of customers (to understand how we can increase the value perception of the product or service

Differentiation and Value Chain Analysis How can the firm create more value?

Cost Leadership and Differentiation

Always relate cost, differentiation advantages to specific resources & capabilities (not easily imitated by competitors!)

Generic Strategy

Key Strategy Elements

Resource and Organizational Requirements

Cost Leadership
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