Strategic Management

Sessions 3 & 4

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 Course Structure
Week 1: Introduction
Week 2: External Analysis and Organizational Competitiveness
Week 3: Internal Analysis and Organizational Competitiveness
Week 4: Functional Level Strategy & Business Level Strategy
Week 5: Business Level Strategy & Industry Environment
Week 6: Midterm 1

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What do you know?

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 You know nothing!

Cognitive biases

•Prior hypothesis bias Decision making

•Escalating commitment tools
•Reasoning by analogy
•Representativeness •Devil’s advocate
•Illusion of control •Dialectic inquiry
•Availability error •Outside view

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 Strategy evolution

Progression:

Military Politics Economics Business

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 Icons

Military: Politics & Economics: Business:

Sun Tzu Chanakya Chandler

Clausewitz Machiavelli Ansoff

Alexander Adam Smith Drucker

Napoleon David Ricardo Porter

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 Business strategy:
Business strategy is a means to achieve expansion.
A transmigration from Adam Smith’s ‘invisible hands’ to the ‘visible hands’ of
managers, and it was brought into effect by vertically integrated, and
multidivisional (M-form) type of organizations.
{from Alfred D. Chandler Jr., 1963}

Sloan devised a strategy that was explicitly based on the perceived strengths and
weaknesses of its competitor, Ford.
{Alfred P. Sloan Jr., CEOof GM . 1923-1946}
The beginning of the SWOT journey.

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 World war II

A vital stimulus to strategic thinking.

Upshots:
1. Zero-sum & non-zero-sum games (game theory)
2. Learning curves (Ansoff, BCG, Industry attractiveness, etc., matrices)

‘Management is not just passive, adaptive behaviour; it means

taking action to make the desired results come to pass.’
-- Peter Drucker

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 1950’s -1960’s
Multinational corporations were forced to consider
global competition as a factor in planning.

Military crossovers:
•Distinctive competence
Harvard University:
•Matching firm’s strategy to competitive
environment

•SWOT {Christensen, et.al., 1961}

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 Distinctive Competence
Firm-specific strengths that allow a company to differentiate
its products and/or achieve lower costs than its rivals.
Requirements:
◦ Firm-specific and valuable resource, and the capabilities to take
advantage of that resource, or
◦ Firm-specific capability to manage resources
◦ Distinctive competency is strongest when a company possesses both

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SWOT – good, bad, & ugly

The good:
i. Simple
ii. Old and stable
The bad:
i. GIGO system
ii. Static (no built-in dynamism)
The ugly:
i. Defunct almost everywhere but here

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SWOT in 3 simple steps - 1
Step 1: Make robust lists
i. Know your SWOT
a. S & W are about you
b. O & T are about the
environment
ii. Everything relevant has to go
in. So, long exhaustive lists of
all things that can possibly
apply
Caveat: DO NOT put things
in the wrong box

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 SWOT in 3 simple steps - 2
Step 2: Simple strategies
i. Combine 2x list matrices and formulate
simple strategies
ii. Use only items in the two lists in
question
a. O/S strategies use strengths to
take advantage of
opportunities
b. O/W strategies overcome
weakness by taking
advantage of opportunity
c. T/S strategies use strengths to
avoid threats
d. T/W strategies minimize
weakness and avoid threats

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SWOT in 3 simple steps

Step 1:
Make the lists (note: relevance & fit)
Step 2:
The ‘two box blind’ rule
Step 3:
The consistency filter

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SWOT practice

NSU’s expansion strategy:

Introduction of new Medical School
Get to work!

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 Andrew’s Strategy Framework

Andrews, 1969

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 Igor Ansoff
Ansoff argued that a firm should first ask whether a new product had a
common thread with its existing products; he argued that sometimes
the customer is erroneously argued as the common thread.

Ansoff ’s Product/Mission Matrix

Ansoff, 1965

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 1970’s & the rise of Strategy
Consultants

The titans:
•Boston Consulting Group (BCG)
•McKinsey

(1st)
BCG Experience Curve
Portfolio Analysis

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BCG ‘Growth-Share Matrix’

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GE, McKinsey, SBU’s & the Business Screen

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 Late 70’s, Oil shocks, & limitation of experience
curves

New understandings: Four Phases of Strategy

Gluck, et. al., 1980

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1980’s: the age of Porter

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 5 Forces: assumptions

1. Industry consists of a set of unrelated buyers, sellers,

substitutes, and competitors that interact at arm’s length

2. Wealth will accrue to players that are able erect barriers

against competitors and potential entrants

3. Uncertainty is sufficiently low that you can accurately

predict participant’s behavior and choose a strategy
accordingly

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1980’s: the age of Porter

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In today’s strategy forums:
•RBV vs. Generic strategies

•Core Competence

•Game Theory

•Dynamic Capabilities

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U.S. industry profitability - 2004
Industry Mean of ROA, ROE,
ROS
1. Home and personal products 22.0%
2. Pharmaceuticals 15.6
3. Mining & crude oil 14.1
4. Medical products 13.7
5. Homebuilding 12.9
6. Consumer food products 12.0

42. Airlines 2.5

43. Forest & paper products 1.9
44. Metals 1.0
45. Packaging & containers -0.4
46. Energy -1.0
47. Semiconductors -1.6
Mean: 47 industries 7.1%
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U.S. manufacturing profit – 1960-99
Industry
ROS
Pharmaceuticals 11.3%
Mining 9.0
Tobacco 6.8
Chemicals 5.5
Computers 5.3
Electronics 4.4
Aerospace 3.5
Rubber and plastic 3.3
Textiles 2.9

All industries 4.9%

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 Five Forces Analysis
Q: Why do some industries outperform others?

A: Industry structures vary. The five forces:

1. Barriers to Entry
2. Competitive Rivalry
3. Power relative to Buyers
4. Power relative to Suppliers
5. Threat of Substitutes

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 An unattractive industry

In the first 100 years of US air

travel (1903-2002) the industry
made exactly zero net profit.
Financial Times, 22/11/03

“If there had been a capitalist at Kitty Hawk,

he should have shot down Wilbur Wright.”
Warren Buffet
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 Porter’s Five Forces
Suppliers

Power relative
to suppliers

Threat of Competitors
new entry
New entrants Substitutors
Rivalry
Threat of
substitutes

Power relative
to buyers

Buyers

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 Barriers to Entry
- High capital costs to enter
- No opportunity for small entry
- Incumbent economies of scale (large MES)
- Incumbent economies of scope
- Incumbent economies of vertical integration
- Incumbent experience/learning advantages
- Restricted access to distribution channels
- Customer loyalty to incumbents
- Restricted access to essential inputs
- Threat of retaliation by incumbents
- Excess capacity

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 Strategies to deter entry

Source: Course textbook

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 Minimum Efficient Scale

A market for two firms

Costs per unit of output

MES Market
demand

Units of output per period

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 Experience Curve

Total costs per unit of producing a good

or service decline by 20% to 30% with every
doubling of cumulative units produced

Source: Perspectives on Experience,

published by The Boston Consulting Group, 1970

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 Experience Curve: Example
Units produced Cost per unit
1000 100.0
2000 80.0
3000 70.2
4000 64.0
5000 59.6
6000 56.2
7000 53.4
8000 51.2
Source: Perspectives on Experience,
published by The Boston Consulting Group, 1970

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 Experience Curve: Example
100.0

90.0
Costs per unit

80.0

70.0

60.0

50.0

40.0
1000 2000 3000 4000 5000 6000 7000 8000
Source: Perspectives on Experience,
published by The Boston Consulting Group, 1970 Cumulative units produced
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 Competitive Rivalry
INTENSE RIVALRY IS CAUSED BY . . .

- Low industry growth

- Commodity products & services
- Low brand loyalty
- Low switching costs
- Excess capacity
- High exit barriers

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 Entry Barriers, Rivalry &
Oligopoly
Oligopoly Oligopoly
(med ROI) (high ROI)
High
Athletic Mining
footwear
Entry
Barriers Fragmented Fragmented
(low ROI) (med ROI)
Low Health clubs Real
estate

High Low

Competitive Rivalry
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 Power re: Buyers
YOUR ORGANIZATION IS POWERFUL IF . . .

- Your product/service is differentiated, unique

- Your product/service is essential to buyers
- Buyers have few sources of supply
- Buyers have high switching costs
- Buyers have no substitutes available
- Your firm can integrate forward
- Your firm is larger than its customers

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 Power re: Suppliers
YOUR ORGANIZATION IS POWERFUL IF . . .

- Supplier’s input is a commodity

- Supplier’s input is inessential to your output
- You comprise large proportion of supplier’s sales
- Supplier has many competitors
- Supplier has few other customers
- You have low switching costs
- You have substitute products available
- You can integrate backward
- You are larger than your suppliers
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 Threat of Substitutes
YOUR PRODUCT/SERVICE IS
VULNERABLE TO SUBSTITUTES IF . . .

- Alternative products or services deliver either:

a. Comparable benefits at lower cost; or
b. Fewer benefits at significantly lower cost
- New technology can make you obsolete
- Customers have low switching costs

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Complementors – the 6th force?
Complementors:
• Companies whose products are sold in tandem with
another company’s products.
• Increased supply of a complementary product
collaterally increases demand for the primary product.

Biriyani Pizza HD TV

BlueRay
Borhani Cola drink DVD Player

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 Star Plot of Industry Structure
Entry
barriers Analysis
High
1. Define the market
Threat of
Substitutes Rivalry 2. Plot positions on each axis
• 3. Join the positions
Low Low
• • - the larger the area, the more
attractive the industry
• • 4. Compare with:
High - 3 to 5 year forecasts
High - other market opportunities
Power re: Power re:
Suppliers Buyers 5. Manage industry structure?
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 Industry Analysis
1. What are the recent trends?
- Competitive, Market, Technological
- Economic, Social, Legal
2. What is the industry structure?
- Five forces
- Key success factors
- Value chain, profit pools
- Value net, complementarities
3. What does the future hold?
- What happens if we do nothing?
- What should we do?
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 Key Success Factors
What are the imperatives for industry success?
- Competitive imperatives
- Technological imperatives
- Financial imperatives
- Marketing imperatives
- Organizational imperatives
- Operational imperatives

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 Identifying Key Success Factors
Prerequisites for success

How does the firm survive

What do customers want?
competition?

Analysis of competition:
•What drives competition?
Analysis of demand: •What are the main dimensions of
•Who are our customers? competition?
•What do they want? •How intense is competition?
•How can we obtain a superior
competitive position?

KEY SUCCESS FACTORS

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 Global strategy consulting
industry
What are the imperatives for industry success?
Competitive – Innovation, Uniqueness, Reputation
Technological – Leading-edge Knowledge, Expertise
Financial – Capital, Pricing, Remuneration
Marketing – Products, Propositions, Customer base
Organizational – Recruiting, Culture, Knowledge
Operational – Client management, Global systems
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Value Chain

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 Value Chain

A set of staged activities from sourcing

through after-sales service

R&D Procure’t Operat’ns Marketing Distrib’n Service

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 The seven steps
1. Define SBUs

2. Identify critical value-creating activities

3. Conduct internal cost analysis

4. Conduct internal differentiation analysis

5. Industry profit pools

6. Vertical linkage analysis

7. Iteration

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 Example: Pharmaceuticals

Product Marketing Customer

R&D Distribution
mgmt. and Sales service

For each link in the value chain:

1. How do we add value?
2. What are the x-factors?
3. How well do we execute?

For the value chain as a whole:

1. What are our distinctive competencies?
2. What is our centre of gravity?

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 Source: C. Fleisher, B.. Bensoussan,
Supplier value Strategic and Competitive Analysis,

Value chains chain

Primary
Prentice Hall, 2002

within activities and

Secondary
industry activities

value system Rare/inimitable

/demand

Vertical linkages

Firm’s value chain

Primary activities
•Inbound logistics Porter’s
Porter’s
Horizontal

•Operations 5 forces

Linkages
5 forces •Outbound logistics
•Marketing and sales
Secondary activities
•Technology development
•Human resource development
•Firm infrastructure

Buyer’s value Rare/inimitable Rare/inimitable Distribution

Vertical linkages
chain /demand /demand value chain
Primary Primary
activities and activities and
Secondary Porter’s Secondary
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activities
5 forces
 Evolving Center of Gravity

R&D Marketing Operations

Revenues

Development Expansion Maturity

Time
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 Profit Pool Analysis

• Revenue along the value chain

• Profit along the value chain

• Center of gravity

• Choke points
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 PC Industry Profit Pool
40%

30%

Profit
margins 20%

10%

microprocessors internal personal computers peripherals

components software services

Adapted from Gadiesh & Gilbert, 1998 Share of industry revenue

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 Automobile Industry Profit Pool
24%

18%

Profit
margins 12%

6%

Rental
Gasoline
Auto mfg. New car Leasing Parts
Used car Auto ins
dealers Loans Warranty
dealers Service
Adapted from Gadiesh & Gilbert, 1998 Share of industry revenue
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 The four steps
1. Defining the pool’s boundaries

2. Estimating the pool’s overall size

3. Estimating profit for each value chain activity in pool

4. Checking and reconciling the calculations

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 The Value Net
Adapted from Co-opetition,
by A. Brandenburger and B. Nalebuff, 1996
Suppliers

Competitors Organization Complementors

Buyers
When customers have the When customers have the
competitor’s product, complementor’s product,
they value your product less they value your product more
(products are substitutes) (products are complements)
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 The Value Net: Sony Playstation

- Component producers Suppliers

- Employees - Electronic Arts
- Buena Vista

Competitors Sony Complementors

- Microsoft (X-Box)
- Nintendo (Game Cube) Buyers - Wal-Mart (retailers)
- Computer gaming - End-users

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Competitors and Complementors

Competitors
- Kodak and Fuji in photographic film
- EA and Buena Vista in video games
- Philips and Samsung in digital TV

Complementors
- Kodak and Fuji in cameras and film
- EA and Sony (Playstation) in video games and consoles
- Philips and BBC in digital TV and digital broadcasts

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 PARTS – the elements of the game
Change the Players
- Coke & Pepsi: Holland Sweetener Company vs. NutraSweet
Change the Added values
- TWA and removal of seats to increase legroom (cut the excess capacity in industry)
Change the Rules
- Southwest airlines and US Airline industry
Change the Tactics
- New York Times vs. Daily News (Rupert Murdoch) - 40c to 50c to 25c to 50c again
Change the Scope
- Nintendo 8-bit vs. Sega 16-bit

Source: B.J. Nalebuff, A.M. Brandenburger, The right game: use game theory to shape strategy, HBR, July-August 1995

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 Value Net: Insights

- Cooperative vs. Competitive strategy

- Every organization is a relationship hub

- Complementors may be a market opportunity

- Competitors may also be complementors

- Managing interdependencies to create value

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Does Industry Matter Much?
Researcher Industry %
Schmalansee (1985) 18%

Wernerfelt (1988) 12%

Rumelt (1991) 8%

Powell (1995) 20%

McGahan & Porter (1997)

Manufacturing 11%
Services 47%
Overall 19%

Average 15.4%

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 Industry Structure & Firm
Performance
Attractive
Uncompetitive Pharmaceuticals
performance
Financial svcs
Industry
structure
Telecomm

Retail Unattainable
performance
Unattractive
Airlines

Low High
Firm performance

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Three ways to Improve Firm
Performance
Develop competitive advantages
- Define unique cost position, differentiation, market segments
- Cultivate firm-specific resources & capabilities

Change industry structure

- Manage the five forces (raise entry barriers, reduce rivalry, …)
- Manage the value chain, profit pools, complementarities

Migrate into attractive industries

- Manage corporate growth; the corporate portfolio
- Diversification strategy; merger & acquisition; synergies

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That’s it for today folks.

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