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External Environment
Agenda
Introduction to Strategy
1 2 3 4 5 6 7 8 9 Course Overview and Strategy Concept Economics of Strategy Shareholder Value External Environment Internal Environment Competitive Positioning Diversification Mergers & Acquisitions Global Strategy
Business Strategy
Corporate Strategy
Strategy Process
10 Organizational Structure and Control 11 Strategic Leadership
2007 Prof. Dr. Bernd Venohr
Agenda
Introduction to Strategy 4 External Environment
- General environment analysis - Industry analysis - Summary and Outlook next Session
Economics of Strategy
3 Business Strategy 4
External Environment
Shareholder Value
Corporate Strategy 7 8
Diversification Global Strategy
Internal Environment
Competitive Positioning
Strategy Process 10
Organizational Structure and Control
11 Leadership
2007 Prof. Dr. Bernd Venohr
Strategic
Technological Institutions and activities that effect knowledge creation Translation of new knowledge into new products and processes Economic Nature and direction of macro economy
economic
hom e econom y situation hom e econom y trends overseas econom ies and trends general taxation issues taxation specific to product/services Seasonality / w eather issues m arket and trade cycles specific industry factors m arket routes and distribution trends Custom er / end-user drivers interest and exchange rates com peting technology developm ent research funding Associated / dependent technologies replacem ent technology / solutions m aturity of technology m anufacturing m aturity and capacity inform ation and com m unications consum er buying m echanism s / technology technology legislation innovation potential technology access, licencing, patents intellectual property issues
social
technological
Source: Robert M. Grant, Contemporary Strategy Analysis: Concepts, Techniques, Applications (5th edition, Blackwell, 2004)
2007 Prof. Dr. Bernd Venohr
Agenda
Introduction to Strategy 4 External Environment
- General environment analysis - Industry analysis - Summary and Outlook next Session
Objectives of industry analysis Explain and predict the average long-term profitability of the companies in a particular industry: empirical results show substantial and sustained differences in profitability among industries Gain understanding of profit differences among competitors in the same industry (= relative performance): empirical results show that they are very often large and longlived. Industry attributes shape such within-industry differences and enable companies to pursue strategies
Source: Robert M. Grant, Contemporary Strategy Analysis: Concepts, Techniques, Applications (5th edition, Blackwell, 2004) Michael Porter, Industrial Organizaition and the evolution of concepts for strategic planning; Michael Porter, Toward a dynamic theory of strategy
2007 Prof. Dr. Bernd Venohr
Define industry boundaries Identify the participants Highlight the drivers of long term industry profitability (= five forces) Identify the factors that drive each force Assess the strength of each force Conclusion: Assess industry profitability potential
Source: Robert M. Grant, Contemporary Strategy Analysis: Concepts, Techniques, Applications (5th edition, Blackwell, 2004)
2007 Prof. Dr. Bernd Venohr
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Advantage
Competitive position
In
a re c
sin
u et r
ns r
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Porter Framework: Competitive Position determines profits differences vis-a-vis direct competitors (= relative performance versus competitors)
Holding industry constant, some firms do better because of their relative competitive position, or competitive advantage, within the industry Basic economics of strategy: a company cannot earn superior returns unless it achieves either lower average costs or higher average prices than its competitors. The gap between a firms profitability and industry average profitability can be composed in cost and price components
Source: Michael Porter, Industrial Organizaition and the evolution of concepts for strategic planning; Michael Porter, Toward a dynamic theory of strategy; Pankaj Ghemawat, Strategy and the business landscape
2007 Prof. Dr. Bernd Venohr
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Porter Framework: There are two basic types of competitive advantage = price - cost to increase , a firm must either : Decrease cost below its competitors Cost leadership Increase price above its competitors Differentiation
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Porters five forces framework brings three new aspects to economic analysis
Relax assumption of both large numbers of competitors / buyers and homogeneity (oligopolistic rivalry instead of perfectly competitive market in which behavior of market participants will be immaterial to one another, need for strategy) Along vertical dimension shift from two-stage vertical chains consisting of a supplier and a buyer to three-stage chains made up of suppliers, rivals, buyers Create new horizontal dimension: account for potential entrants and substitutes
Source: Michael Porter, Industrial Organizaition and the evolution of concepts for strategic planning; Michael Porter, Toward a dynamic theory of strategy; Pankaj Ghemawat, Strategy and the business landscape
2007 Prof. Dr. Bernd Venohr
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Porters Five Forces of Competition Framework: the collective strength of the five forces determines an industrys long-term profitability and potential for value creation
SUPPLIERS
Bargaining power of suppliers INDUSTRY COMPETITORS POTENTIAL ENTRANTS Threat of new entrants Rivalry among existing firms Threat of SUBSTITUTES substitutes
BUYERS
Source: Michael Porter, Competitive Strategy
2007 Prof. Dr. Bernd Venohr
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Industry Boundaries: Before one can analyze an industry one must define it
Key challenge: standard statistical definitions only partly relevant official statistical definitions (SIC codes; NACE codes) are mostly based on technical input considerations (=e.g. metal manufacturer) that rarely correspond to competitively relevant industry conditions (=e.g. car components manufacturer) it is rare that a company is in direct competition with every company statistically defined as being in its industry; on the other hand it is likely that the firm competes with many companies outside the industry Company perspective important: who are my competitors? substitution on demand side: competitors that offer products or services that are close substitutes substitution on supply side/ technological substitutability: can know how and production equipment be cross-utilized between two product lines?
Source: Robert M. Grant, Contemporary Strategy Analysis: Concepts, Techniques, Applications (5th edition, Blackwell, 2004) Michael Porter, Industrial Organizaition and the evolution of concepts for strategic planning; Michael Porter, Toward a dynamic theory of strategy
2007 Prof. Dr. Bernd Venohr
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Geographic: across local / regional / national boundaries (are physically separate markets treated as being served by the same industry or different industries?)
Source: Robert M. Grant, Contemporary Strategy Analysis: Concepts, Techniques, Applications (5th edition, Blackwell, 2004) Michael Porter, Industrial Organizaition and the evolution of concepts for strategic planning; Michael Porter, Toward a dynamic theory of strategy
2007 Prof. Dr. Bernd Venohr
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The concept of value proposition helps to define the horizontal scope (=substitution products from the customer perspective)
What Customers? Which Needs?
What end
users?
What
channels?
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The concept of value chain helps to define the vertical scope of an industry
Separate value chains One Integrated value chain
M a r g i n
Source: Michael M. Porter; What is strategy? World Business Forum, June 6, 2006
2007 Prof. Dr. Bernd Venohr
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The degree of integration of value chains across boarders helps to define the geographic scope of an industry
Local Separate local value chains Regional National CrossNational Global Integrated global value chain
Support Activities
Technology Development
(e.g. Product Design, Testing, Process Design, Material Research, Market Research)
M a r g
Procurement
(e.g. Components, Machinery, Advertising, Services)
Inbound Logistics
(e.g. Incoming Material Storage, Data Collection, Service, Customer Access)
Operations
(e.g. Assembly, Component Fabrication, Branch Operations)
Outbound Logistics
(e.g. Order Processing, Warehousing, Report Preparation)
After-Sales Service
(e.g. Installation, Customer Support, Complaint Resolution, Repair)
i n
Primary Activities
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Source: Robert M. Grant, Contemporary Strategy Analysis: Concepts, Techniques, Applications (5th edition, Blackwell, 2004)
2007 Prof. Dr. Bernd Venohr
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A strategic group is a group of firms in an industry following the same or similar strategy
Identifying strategic groups: Identify principal strategic variables which distinguish firms Position each firm in relation to these variables Identify clusters
Source: Robert M. Grant, Contemporary Strategy Analysis: Concepts, Techniques, Applications (5th edition, Blackwell, 2004)
2007 Prof. Dr. Bernd Venohr
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Strategic Group Mapping: Firms in same strategic group have two or more competitive characteristics in common
Sell in same price/quality range Cover same geographic areas Be vertically integrated to same degree Have comparable product line breadth Emphasize same types of distribution channels Offer buyers similar services Use identical technological approaches
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PRODUCT RANGE
NATIONALLY- FOCUSED, SMALL, SPECIALIST PRODUCERS e.g., Bristol (U.K.), Classic Roadsters (U.S.), Morgan (U.K.)
Narrow National
2007 Prof. Dr. Bernd Venohr
PERFORMANCE CAR PRODUCERS e.g., Porsche, Ferrari (ow ned by Fiat) Maserati, Lotus
GEOGRAPHICAL SCOPE
Global
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Source: Robert M. Grant, Contemporary Strategy Analysis: Concepts, Techniques, Applications (5th edition, Blackwell, 2004)
Porters Five Forces of Competition Framework: the collective strength of the five forces determines the average profitability of an industry
SUPPLIERS
Bargaining power of suppliers INDUSTRY COMPETITORS POTENTIAL ENTRANTS Threat of new entrants Rivalry among existing firms Threat of SUBSTITUTES substitutes
BUYERS
Source: Michael Porter, Competitive Strategy
2007 Prof. Dr. Bernd Venohr
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Porters guiding question: what happens to the potential profit or value created by a product or service?
Is it bargained away by the suppliers? Or by customers? Is it dissipated in rivalry? Is it appropriated by new entrants? Is it limited by the existence of substitutes?
Source: Michael Porter, Competitive Strategy
2007 Prof. Dr. Bernd Venohr
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Force 1: Rivalry among existing competitors usually the most powerful of the five forces
Strategic rivalry, not perfect competition in perfect competition behavior of market participants would be immaterial to one another rivalry: the purposeful behavior of one firm in a market is substantially affected by the purposeful behavior of another firm in the same or a related market Strategic rivalry creates several issues for managers: who are the my rivals? how will they be affected by my actions? how will they react to my actions? how will I react to their reaction? Main objective is not to engage in rivalry but to develop mechanism that allow firm(s) to avoid rivalry and its profit destroying effects Three main groups of structural determinants number and relative size of competitors industry-basic conditions behavioral determinants
Source: Michael Porter, Competitive Strategy
2007 Prof. Dr. Bernd Venohr
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Unit Costs
Entry Point
Source: Michael Porter, Competitive Strategy
2007 Prof. Dr. Bernd Venohr
MES
Volume
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THREAT OF SUBSTITUTES
LOW no substitutes (Changing as managed care encourages generics)
Rivalry is strong Entry barriers are low Competition from substitutes is strong Suppliers and customers have considerable bargaining power
Rivalry is moderate Entry barriers are high Good substitutes do not exist Suppliers and customers are in a weak bargaining position
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Implications of five forces framework for strategy: Coping With the Five Competitive Forces
In a world of no competitive advantage, a firm is stuck in the pricedriven world of pure economic competition, selling commodity - like goods in direct competition with many similar firms The best industry a company can be in is one in which its position is so unique that it has virtually no competition near monopoly category of one
Source: Michael Porter, Industrial Organizaition and the evolution of concepts for strategic planning; Michael Porter, Toward a dynamic theory of strategy; Pankaj Ghemawat, Startegy and the business landscape
2007 Prof. Dr. Bernd Venohr
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Implications of five forces framework for strategy: key task of strategy is to create a competitive advantage
Competitive strategy is about taking action to create a defendable position against the 5 forces Position the firm so its capabilities provide the best defense against the existing competitive forces Influence the balance of forces Anticipate shifts in key factors underlying the forces and respond so as to exploit the changes The strongest force or forces become crucial for strategy formulation
Source: Michael Porter, Industrial Organizaition and the evolution of concepts for strategic planning; Michael Porter, Toward a dynamic theory of strategy; Pankaj Ghemawat, Startegy and the business landscape
2007 Prof. Dr. Bernd Venohr
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What is more important: industry (picking the right horseor company (the skill of the jockey) ?
When an industry with a reputation for difficult economics meets a manager with a reputation for excellence, it is usually the industry that keeps its reputation intact.
Warren Buffet
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For most businesses, competitive position has a far greater impact on profitability than industry attractiveness: Industry effects explain only about 10 20% of the variation of a firms economic profitability
Percentage of variance in firms return on assets explained by: Industry effects 19.6% 4.0% 18.7% 8.1% Firm-specific effects 0.6% 44.2% 31.7% 35.8% Unexplained variance 80.4% 44.8% 48.4% 52.0%
Schmalensee (1985) Rumelt (1991) McGahan & Porter (1997) Hawawini et al (2003)
Source: Robert M. Grant, Contemporary Strategy Analysis: Concepts, Techniques, Applications (5th edition, Blackwell, 2004)
2007 Prof. Dr. Bernd Venohr
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Agenda
Introduction to Strategy 4 External Environment
- General environment analysis - Industry analysis - Summary and Outlook next Session
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Appendix
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Choose attractive industries Largely focuses on industry structure or attractiveness rather than internal firm characteristics
Source: Michael Porter, Industrial Organizaition and the evolution of concepts for strategic planning; Michael Porter, Toward a dynamic theory of strategy
2007 Prof. Dr. Bernd Venohr
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Source: Michael Porter, Industrial Organizaition and the evolution of concepts for strategic planning; Michael Porter, Toward a dynamic theory of strategy
2007 Prof. Dr. Bernd Venohr
Structure-conduct-performance
Industry Structure Number of buyers and sellers Degree of product differentiation Barriers to entry Cost structures Vertical integration Alliances
Source: Michael Porter, Industrial Organizaition and the evolution of concepts for strategic planning; Michael Porter, Toward a dynamic theory of strategy
2007 Prof. Dr. Bernd Venohr
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Business level: Develop strategies to outperform industry averages; better understanding of intra-industry profit differences to develop better matches between internal resources and industry environment Corporate level: Decisions to enter/exit particular industries; allocation of resources and evaluation of performance across portfolio of businesses
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20
Operating margin
15
Leasing
10
Auto insurance
100%
Source: Robert M. Grant, Contemporary Strategy Analysis: Concepts, Techniques, Applications (5th edition, Blackwell, 2004)
2007 Prof. Dr. Bernd Venohr
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Assign firms that fall in about the same strategy space to same strategic group
Draw circles around each group, making circles proportional to size of groups respective share of total industry sales Variables chosen as axes should expose big differences in how rivals compete Variables do not have to be either quantitative or continuous Drawing sizes of circles proportional to combined sales of firms in each strategic group allows map to reflect relative sizes of each strategic group If more than two good competitive variables can be used, several maps can be drawn
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Define the boundaries where competitive advantage can be established and sustained (business battlefield)
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Demand and/or value chain differences lead to cost barriers and/or customer value barriers which create a separate business arena
Low Separate Business
Cost barriers
High
One Business
Low
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