Topic 4: Strategic Management

Contents:
Business Strategy and Competitive Advantage The Strategic Planning Process Strategy formulation: Mission and Vision Environment analysis: S.W.O.T. techniques Porters Five Forces Model Corporate Strategy Generic Strategies Firm growth and development Differentiation Strategies Vertical Integration Globalization Primary Reference:
Robert M Grant, Contemporary Strategy Analysis, 3rd Edition, Blackwell Publishers.
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What is Strategy?
Strategy has its origins in warfare. Strategy is the overall plan for deploying resources to establish a favourable position. Tactics: A tactic is a scheme for a specific action. Tactics are concerned with maneuvers necessary to win battles whereas strategy is concerned with winning the war. Sun Tzu (Art of War, 500 B.C.)
Know the other and know yourself: Triumph without peril. Know Nature and know the Situation: Triumph completely.

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Some definitions of Strategy

Strategy is a detailed plan for achieving success in situations such as war, politics, business, industry or sport, or the skill of planning for such situations (Cambridge Dictionary) Strategy. The art of war, especially the planning of movements of troops and ships etc., into favourable positions; plan of action or policy in business or politics, etc. (Oxford Pocket Dictionary) The determination of the long-run goals and objectives of an enterprise, and the adoption of courses of action and the allocation of resources necessary for carrying out these goals. (Alfred Chandler, Strategy and Structure) What business strategy is all about is, in a word, competitive advantage The sole purpose of strategic planning is to enable a company to gain, as effectively as possible, a sustainable edge over its competitors. Corporate strategy thus implies an attempt to alter a companys strength relative to that of its competitors in the most efficient way. (Kenichi Ohmae, The Mind of the Strategist)
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Some definitions of Strategy

In the business world, a Company MUST design an appropriate strategy to win battles against its competitors and eventually achieve final victory in the war. Outdoing the competitors means:
More business volume higher profits and returns more market share better image or reputation ubiquitous brand names

& in general .. more SUCCESS !!!

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Nature of Strategic Decisions

Strategic decisions are important.

They define the path the company will take in the future.

Strategic decisions involve a significant commitment of resources. They are not easily reversible.
Hence, it is very important to get the strategy right.

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Common elements of Successful Strategy

Goals that are simple, consistent and long-term
A strategy is formulated for the longterm and not the short-term
Successful Strategy

Profound understanding of the competitive environment.

Understanding the business in which the company is, its competitors, industry structure, etc.

Effective Implementation

Objective appraisal of resources

Knowing the strengths and weaknesses and how to fill the required gaps.

Simple, consistent and long-term objectives

Objective appraisal of resources Profound Understanding of the competitive environment

Effective Implementation
Most critical.
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Analyzing Business Strategy

A firm/company embodies three sets of key characteristics:
Its goals and values Its resources and capabilities

Its organizational structure and systems

External environment
Comprises the whole range of economic, social, political and technological factors that influence a firms decision and its performance. For most strategy decisions, the core of the firms external environment is the industry
Relationships with customers, competitors and suppliers.

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Analyzing Business Strategy

Most strategy frameworks consider strategy as the link between the firm and the external environment
THE FIRM THE INDUSTRY ENVIRONMENT

Goals and Values Resources and Capabilities Structure and Systems

STRATEGY

Competitors

Customers
Suppliers

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Competitive Strategy, Competitive Advantage

Competitive Strategy: The planning and implementation of
utilization of scarce resources of a company (both financial and human), in order to obtain results that are superior to those of competitors.

Competitive advantage: The distinguishing feature of a

company that differentiates it from its competitors and allows it to reach a position of sustainable superiority in the market.
In order to maintain that competitive advantage, the company needs to continuously review its strategy in order to adapt it to the changing environment. Hence the importance of studying the environment.

The ultimate goal of any Corporate Strategy is the achievement of a Competitive Advantage that is sustainable over time.
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The strategic management process: planning

External Analysis Evaluation & Selection of Appropriate Strategy

Mission & Objectives of the firm

Internal Analysis

Design of Strategic Options

Implementation In Practice

Control

Basic orientation of the firm

Diagnosis: Weaknesses, Strengths, Threats and Opportunities

Corporate And Competitive Strategies

Adequacy, feasibility, acceptability

Support, Planning & Functional strategies

Review of strategy

STRATEGIC ANALYSIS

STRATEGY FORMULATION

STRATEGY IMPLEMENTATION

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Corporate Mission & Objectives

Mission: Strategic vision of what the organization intends to do and become in the long term.
Must be consistent with the culture (values) of the company.

Core purpose is the reason that the firm exists, an idealistic reason for being
What do we do? Where do we go from here? Binds the various activities of the firm

The mission & purpose are specific in the short to medium term.
Objectives & Goals: commitments of efforts made by management in order to achieve concrete results in a bounded time period. This is communicated to all levels of the firm.
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Strategic Analysis Tools: 1. SWOT Analysis

Simple but very useful and effective method to choose the best strategy and action plans of the company. Introspective (internal) analysis of strengths and weaknesses within the company. Externally, analysis of threats and opportunities presented by the market & environment
STRENGTHS
Patents Strong brand names Good reputation Proprietary know-how Favorable access to distribution networks

WEAKNESSES
Poor brands Bad distribution Lack of skills Low customer loyalty Customer claims: High level Poor management

OPPORTUNITIES
Unfulfilled customer needs Arrival of new technology Loosening of regulations Removal of international trade barriers

THREATS
Shifts in consumer tastes from the firm products Emergence of substitute products New regulations Increased trade barriers

How is it done?: For internal analysis, it is necessary to know the resources and capabilities of the company
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2. Business Portfolio Analysis Tool

BCG Growth-Share Matrix Graphically depicts the situation of need (cash/funds requirement) versus generation of resources (funds, cashflow) by different products or business portfolios in the company
Model developed by The Boston Consulting Group to analyze the management of a portfolio of different strategic business units (SBU) or major product lines The products may change their position in accordance with the business life cycle

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2. BCG Growth-Share Matrix

HIGH

STARS

MARKET GROWTH RATE (Cash Usage)

QUESTION MARKS

CASH COWS

LOW

DOGS
HIGH LOW

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2. BCG Growth-Share Matrix

Type of Business/Product Cash Cow
Business Unit (BU) or product with large Market Share (MS) in a mature, slow growing industry that requires little investment and generates cash that can be invested in other BUs

Star
BU or product with large MS in a fast growing industry. Will a Star generate cash? It may generate cash but, because of the market growth, it requires investment to maintain a leading position. Eventually, it will become a cash cow.

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2. BCG Growth-Share Matrix

Type of Business/Product Question Mark
BU or product with small MS in a high growth market. It requires resources to grow MS but the outcome is uncertain as it may become either a star or a dog depending on other factors.

Dog
BU or product with small MS in a mature industry. It may not require substantial cash but it ties up capital that could be deployed elsewhere. It should be liquidated unless it serves some other strategic purpose.

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3. Analysis tools for specific industry environment: The five competitive forces model (Porter)
Perfect competition model implies that risk-adjusted rates of return should be constant across firms and industries. In reality, different industries can sustain different levels of profitability, partly explained by industry structure. Porters 5 forces model helps in the analysis of an industry in order to know the potential benefit in the industry in terms of profitability in the medium and long terms. Can be considered as a basic instrument to analyze the threats and opportunities present in the sector in which the company is located. The interaction of the 5 forces determines the profitability of the industry and the distribution of value creation between the different actors. This model can be used by business managers to:
Better understand the industry context in which the firm operates to try and develop an edge over competitors Analyze attractiveness of other industries when searching for new business opportunities
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Competitive Analysis: Porters five forces Model

POTENTIAL COMPETITORS Existence of barriers to entry EXISTING COMPETITION IN THE SECTOR SUPPLIERS Bargaining power of Suppliers Bargaining power of Buyers/consumers BUYERS/ CONSUMERS

Intensity of Rivalry
Threat of substitutes Products or Services SUSTITUTES

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Analysis of the five competitive forces a) Intensity of Existing Competition:

It is one of the most important of the five forces and is determined by the following factors:
Growth Rate of Industry: A slow market growth causes firm to fight for market share Extent of fixed costs in the total value of business : High fixed cost produce economies of scale and more rivalry Degree of product differentiation: Low product differentiation increases the intensity of rivalry Concentration and balance among competitors: A large number of firms increases rivalry, as they compete for the same customers and resources. Product characteristics: Highly perishable products intensify competition for customers and increases rivalry Supplier switching costs: Low costs increase intensity of rivalry. The contrary happens with brand identity. Exit barriers: High exit barriers increases the intensity of existing competition.
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b) Potential Competition: Threat of Entry

The entry of new firms in the industry creates changes in supplier capacity, market shares, changes in profit margins, etc ... The degree of threat depends on entry barriers. For their part, companies that are within the industry will react to their defense. The existence of barriers to entry defines the possibility of high profits
TYPES OF BARRIERS TO ENTRY Economies of scale Experience and learning effect Customer Loyalty Need for specific technologies Capital requirements Access to distribution channels Government Policies Tariffs and trade restrictions
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b) Potential Competition: Threat of Entry (continuation)

Barriers, that can be created or exploited to enhance a firm position of advantage, arise from several different sources:
Government regulatory actions: utilities, telecommunications Patents and proprietary knowledge: pharmaceutical industry Specificity of capital assets
Large investment in highly specialized plants and equipment is needed Aircraft manufacturing

Existence of economies of scale: MES (minimum efficient scale) of production is high. Unit cost decreases with volume until such high levels that deter the entry of small, start-up business Cost Advantages:
Established firms have cost advantages simply because they have entered earlier, cost of learning access to cheap raw materials
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b) Potential Competition: Threat of Entry (continuation)

Barriers, that can be created or exploited to enhance a firm position of advantage, arise from several different sources:
Product differentiation
Advantages of brand recognition and customer loyalty New entrants have to spend heavily on advertising, building awareness, etc.

Access to channels of distribution

Limited capacity within distribution channels (lack of shelf space) Retailers who are risk averse Fixed costs associated with carrying an additional product

Retaliation
Entrants expectations as to possible retaliation by established firms Aggressive price cutting Increased advertising and sales promotion and litigation The likelihood of retaliation is also influenced by the scale of entry

Barriers to entry may not work with firms that are diversifying and those that have access to lot of resources and that use different strategies.
Dell computers (direct access to customers).

Barriers to exit work similarly to barriers to entry, though the impact is opposite
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b) Potential Competition: Threat of Entry (continuation)

TYPES OF REACTION OF BUSINESS TO A NEW COMPETITOR

Faced with the threat of a new competitor a firm can react to preserve its competitive position in the following ways:
Passively: no reaction, the company expects and see what happens in the industry before starting a particular action. Threatening Moves: taking steps that threaten the consolidation of the new competitor, as lower prices or improve products and services. Defensive Moves: from an established position, increased advertising, etc.

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c) Threat of Substitute Products

Substitutes are those products/services in different industries that perform a similar function or satisfy the same needs
Car, train, airplane transportation, Iberia Shuttle and AVE between Madrid / Barcelona Aluminum cans, glass bottles and plastic containers Traditional versus on-line encyclopedia

The intensity of the threat depends on the price relative to the benefits and costs of change:
Consumers compare prices and services, changes may be favorable to the new product. Switching costs may come from the necessary training, acquisition of additional equipment, technology costs, sociological and time.

The threat of substitutes exist when

Switching cost are low Buyer inclination to substitute is high Price-performance trade-off of substitutes is similar

The extent of substitution on the basis of price differences will be lower if:
Complex needs are being fulfilled Difficult to discern performance differences.
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d) Bargaining Power of Buyers

If buyers enjoy significant bargaining power in the industry, they can force down prices or demand better quality services. The circumstances that make buyers into a powerful group with much bargaining power are:
High concentration
DOD & Defense contractors

When there is no differentiation between products & volume purchased by the buyer is high
Coca-Cola and bottle manufactures

Low switching costs for changing supplier Real threat of backward integration of the buyer
Large automobile companies and tire manufacturers

Availability of reliable and complete information (about the market and suppliers)

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e) Bargaining power of suppliers

Factors that contribute to strengthen the suppliers:
The customers that they serve are numerous and loosely organized collectively They are concentrated
Chip manufactures vs. PC manufacturers/ assemblers

Sell their products to different sectors They provide an essential product, with no replacement Offer differentiated products High costs of switching
Microsoft relationship with PC manufacturers

Threat of forward integration by suppliers Suppliers are weak if: Product is standardized: many competitive suppliers and commodity products Credible backward integration threat by purchasers
Timber producers relationship to paper companies

Purchasers are concentrated or purchase in high volumes

House appliances manufacturers and Corte Ingls
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Criticisms of Porter's five forces model

There are substantial differences in the level of profitability of competing firms in a given industry. Porter's analysis is based on industry structure
The industry structure analysis also needs to be complemented with capacity of each company to allocate its resources and develop its skills.

All industries are not alike. Different forces have different levels of impact and importance depending on the industry. To apply the model appropriately, one has to take into account the importance that each of the five forces has for a particular industry. This cannot be done mechanically. It is not enough to perform a static analysis, because the very structure of any industry is dynamic in nature.
Needs to be complemented with estimates of trends.
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The management function: management levels : Who decides on the strategy to adopt?
Responsible for guiding the company, setting targets and the main strategies

STRATEGIC LEVEL

TACTICAL LEVEL MIDDLE-LEVEL MANAGEMENT OPERATIONAL LEVEL

Senior & middle management related to supervision of operational level

Are in direct contact with workers doing the productive work of the company

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The management function: types of decisions

Senior management of the company High degree of Uncertainty Long-term effects Affects the basic objectives of the company

STRATEGIC DECISIONS

TACTICAL OR STRUCTURAL DECISIONS

Middle-level management and staff departments Less uncertainty than strategic decisions Long-term and medium term Affects the means of achieving the basic objectives of the company
Supervisors of line functions Low uncertainty- routine decisions Short-term and medium term impact Affects the day-to-day use of the means to achieve business objectives

OPERATIONAL DECISIONS

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The strategy: levels of implementation

The business strategy should be based on the resources and capabilities of the company. Implementation is at three levels:
1. Corporate strategy (business development strategy): The business that a firm should be in and its objectives
identifies the Strategic Business Units (SBUs) analyzes and evaluates the business portfolio, and opportunities the ultimate goal is to maximize the value of the whole firm

2.

Business strategy (strategy and competitive advantage): how a particular firm competes within a particular industry or market
analysis of the company's competitive position how to achieve sustainable competitive advantages in the industry

1.

Functional Strategies: a level of individual business functions (Sales, Production, Information Systems, HR, R&D, ....) that supports the achievement of competitive advantages for the business unit, the company etc.

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Corporate and Business Strategy

How can a firm make profits?
Select an industry where favourable industry conditions result in the industry earning a rate of return above the competitive level. Within an industry, attain a position of advantage over the rivals so as to make above average profits in the industry. INDUSTRY ATTRACTIVENESS

RATE OF PROFITS ABOVE COMPETITIVE LEVEL How do we make money?

Which industries should we be in?

CORPORATE STRATEGY

COMPETITIVE ADVANTAGE How should we compete?

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BUSINESS STRATEGY

Strategic Levels in a Diversified and Complex Firm

Level 1 Level 2

Corporate Division B
Strategic Business Divisin C Divisin B Units

Corporate Strategies

Division A

Division C
Strategic Business Divisin C Divisin B Units
Business Strategies

Level 3

Strategic Business Divisin C Divisin B Units

Functions Level 4

Functions

Functions

Functional Strategies

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Strategic Options
Corporate Strategy (Strategy for the development of business):
Diversification: Related and Vertical Integration Geographical growth / globalization (internationalization) Possible realization of the development strategies through partnerships

Business Strategy (Strategy and Competitive Advantage):

Cost Leadership
Differentiation Maybe applied to the whole market or to just specific business segments

Functional Strategies:
Commercial (leader, challenger, follower) Production Information Systems HR, etc.
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Diversification Strategies: Choice of the Business Portfolio

The company produces new products and / or enters new markets other than its own. Expands its portfolio of businesses
Types of diversification
Related: horizontal (common technology, market, etc.) and vertical Unrelated

Why diversify?
Strengthen competitive position (by exploiting resources and capabilities of the company)
search for synergies (economies of scope) economies of scale

Reduce overall risk for the firm Traditional market saturation (growth possible in other markets) Invest surplus funds or seeking attractive investment opportunities

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Example of related and unrelated diversification

Ovens
Cookers
Marine/Boats Engines

Lawn Mowers

Dish-washers

Electric saws

Electrical Energy

Air Transport

Toys

Childrens clothing

Fertilizers

Baby Strollers

Technology
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Market

Strategy for related diversification

The company enters into a new business related to those that it already has Types of related diversification
Horizontal Vertical (vertical integration)

Horizontal diversification
Enters into complementary products or services or substitutes May use the same distribution channels, profitable new brand
Ex 1: Grupo Pascual (initially: dairy products, at present, increased revenue by: juices, cereals, mineral water, pasteurized eggs, ...) Ex 2: Grupo Planeta (first was Editorial Planeta. Today, also in business of communication (Antena 3, Onda Cero), produces TV serials, training ...)

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Vertical Integration Strategy

Entry of a company in new activities that are related to its own value chain (production / marketing of products or services), thus performing the function previously performed by its supplier or customer
Types of vertical integration
Backward or upstream (assuming the activity of your supplier.) Forward or downstream (assuming the activity of the customer)

Advantages of vertical integration:

a) Control inputs and / or distribution, b) increased profitability by reducing transaction costs, taxes, etc. c) greater independence from market fluctuations, d)improvement in competitive position, e) protection of confidential information

Disadvantages:
a) Increased global risk, b) loss of flexibility, c) loss of benefits of specialization, Vertically adjacent activities are in very different types of industries: manufacturing and retailing, d) increased administrative costs, e) diverts attention, developing new competencies may compromise existing ones.
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Vertical Integration Strategy

Raw Materials Raw Materials Intermediate Manufacturing Assembly Raw Materials Intermediate Manufacturing Assembly

Intermediate Manufacturing Assembly

Distribution

Distribution

Distribution

End Customer
Backwards Integration

End Customer

End Customer
Forward Integration

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Strategies for Globalization

The internationalization strategy leads the company to enter into a product market for customers in a foreign country Two types of international businesses:
Exporting company
Production in the home country Only marketing may be internationalized, but may be done from home country

possibility of exporting through another organization

Multinational Company
Direct presence and investment in the country of destination Control of business through affiliates or subsidiaries that may be engaged in marketing, manufacturing or R & D Subsidiaries: can be created by the firm or by acquisition of existing companies
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Business Strategy Formulation

Business strategies based on Competitive Advantage
Search for leadership on the market two ways:
Offering lower prices: cost leadership Better meet customer needs: Differentiation
In addition, the ability to maintain this position over time (sustainable competitive advantage)

Two types of Strategies:

1. Cost Leadership Strategy: based on competitive cost advantage.
Production occurs at lower costs, higher efficiency, firm can sell at equal or lower prices as compared to competition, and can have higher margin

2. Product differentiation strategy: based on the competitive

advantage of differentiation: to better meet customer needs, it can be successful only if the firm achieves perceptible product differentiation.

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The two strategies can be applied to an entire market, or may focus on a particular market segment created by applying market segmentation strategy.

Cost leadership strategy: sources of cost advantage

1. Economies of Scale
In an industry there exists economies of scale when the production costs decreases with an increase in the volume produced. The origin of economies of scale can be:
1.1. Technology 1.2 High fixed costs: cost-sharing 1.3 Specialization and division of labor

2. The experience curve

The unit costs decreases for any process in proportion to the production experience. In general, it has been estimated that the costs reduce by between 15 to 35 % for every doubling of the production volume. The main causes may be:
2.1 Increased skills in routine tasks 2.2 Increased capacity of coordination 2.3 Improvement in administrative organization
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Cost Leadership Strategy: Sources of Cost Advantage (II)

3. Production Techniques
Production techniques employed in a company can generate cost advantages. Its origin can be due to:
3.1 Mechanization, Automation 3.2 Greater efficiency in the use of raw materials 3.3 Achieve a reduction in product defects, increase in quality and production accuracy ... ..

4. Product Design (Design for Manufacture)

The design cost advantages can come from:
4.1 Design that facilitates mechanization and automation 4.2 Design that allows for economic use of materials
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Cost Leadership Strategies: The Underlying Threats

Focus on cost reduction may induce certain risks:
1. Less focus on the product quality 2. A misperception of the sources of cost advantage. 3. Focus on only production and neglecting other important activities. 4. Offer an inadequate product or poor service.

5. Imitation by competitors.
6. Stiffness or lack of flexibility induced by economies of scale. 7. Drastic changes in the market.

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The Strategy of Differentiation

Actions carried out by a firm to design and implement a set of significant product or service features such that the market perceives it differently from those of the competitors

Competitive Advantage
Competitive advantage due to differentiation lies in:
Tangible or intangible characteristics of the product And / or characteristics of the company that manufactures or distributes the product

The best differentiation : to exceed client expectations.

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Differentiation Strategy: requirements

1. Select those needs that buyers value the most 2. Meet the requirements better than competition by having clear priorities and adding appropriate characteristics to the firms product / service 3. The customer must perceive the difference between before and after the strategy has been implemented 4. The added cost for the differentiation must be less than the increase in customer value, which the customer is willing to pay
The importance of perceived value (is the one that meet expectations)
VALUE RECEIVED: set of benefits received by customers when buying a product or service PERCEIVED VALUE: A set of benefits that the customer perceives when he/she purchases a product or service
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Types of Differentiation
A) By Product:
Price format, presentation, style, design Additional features Quality level: low, medium, high, higher Uniformity, durability, reliability, repairability

C) By the employees of the company:

Competent, courteous Credible, honest, responsible Communicative, helpful

B) By Service:
Delivery and installation Initial training and / or after sales consulting services Post-sale repair Financing, payment Distribution, sales channels

D) By the image (of the product or those associated with the firm):
Logos, colors, symbols of the company and its products Newspaper ads, TV, cinema, radio, posters ... Atmosphere /environment of sales or production Sponsored events

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Business Creation: Steps

1. From a business idea
Observe unmet needs or business opportunities Source of Information
Close business circles Specialized sources Existing businesses (transfers, franchisees ...)

2. Develop business plan

Analyze feasibility of the business idea
Analyze environment, stage of market, demand for the product

Create implementation plan

Marketing Plan: range, price, distribution channels Production plan: investment required HR Plan: Number of employees, profiles, training, compensation Financial Plan: Capital needs and availability

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Choice of the legal form

Creation of a Business (II): steps

3. Obtain Funds
If equity funding is insufficient then apply for loans or grants.

4. Legal Proceedings
Enrollment with the Companies Registry Treasury: Request for CIF Deposit appropriate capital in bank Sign notarized deed of incorporation Settle the taxes for transfer of property Register at the Treasury

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Creation of a Business (III): Factors of success and Failures

Business factors
Business Strategy & Direction

Personal factors
Motivation:
Desire for independence or self-improvement Search social recognition Self-employment

Attributes:
Psychological: self-confidence, risk, creativity, innovation Skills and Abilities: motivation, organization, negotiation

Institutional factors
Business incubators (state schools of promotion of business)
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