Strategy and Industry analysis

What is Strategy?

“Strategy can be defined as the determination of the basic long-term goals and objectives of an enterprise, and the adoption of course of action and the allocation of resources necessary for carrying out these goals.”

Chandler, 1962,

“to fight and conquer is not supreme excellence . . ;

. . . supreme excellence consists in breaking the enemy’s

resistance without fighting . . . ” Art of War - Sun Tzu Bingfa (350 BC)

What is Strategy?(Porter, M.E. (1996), “What is Strategy,” Harvard Business Review,

74(12): 61-78.

• Rivals can easily copy your improvement in quality and efficiency. But they shouldn’t be able to copy your strategic positioning--what distinguishes your company from all the rest.

• Strategy is the creation of a unique and valuable position, involving a different set of activities.

• Strategy require you to make trade-offs in competing--to chose what not to do.

• Strategy involves creating “fit” among a company’s activities.

Operational Effectiveness is not Strategy

• What is operational effectiveness?

• Why is it not strategy?

• Why both operational effectiveness and strategy are important?

Productivity Frontier(state of best practice)

lowhigh

low

high

Relative cost position

Non

-pric

e bu

yer

valu

e de

live

red

Operational Effectiveness is not Strategy

• Operational effectiveness means

performing similar activities better

than rivals perform them.

• Strategic positioning means

performing different activities from

rivals’ or performing similar activities

in different ways.

• Operational effectiveness and strategy

are both essential to superior

performance, which is the primary

goal of any enterprise.

Operational Effectiveness Tools

• Total quality management (360 Degrees)

• Benchmarking

• Outsourcing

• Partnering

• Reengineering

• Change management

Strategy Rest on Unique Activities

Competitive strategy is about being different.

• What are the sources of differentiation?

• How valuable is the differentiation to the buyer?

• How much of this differentiation is tactical , how much is strategic?

• What is the buyer’s reservation price for this difference?

• How much of this difference is “jnd”

Sources of Strategic Positions

• Variety-based positioning

• Needs-based positioning

• Access-based positioning

“a clever combatant imposes his will

on the enemy but does not allow the

enemy’s will to be imposed on him”

Create focal points that make dominant strategies yield maximum

payoffs

Create focal points that make dominant strategies yield maximum

payoffs

Art of War Art of War

Strategy is about Being Different

• Air Deccan– Low Price– Short / Medium

Routes– No frills

• Jet Airways – Premium Price– Short & Long

routes– Frills (Jet kids

pack for kids etc..)

Defining the Business

Customer Needs

Customer Groups

Technology

Reference: Abell, 1980

Variety-based positioning

Customer Needs

Customer Groups

Technology

Reference: Abell, 1980

- Different types of soaps for different women groups

Beauty Skin

Working

Non - Working

Dove

Needs-based positioning

Customer Needs

Customer Groups

Technology

Reference: Abell, 1980

Television screens are 29inch , 25 inch and 14 inch for different drawing room dimensions

Access-based positioning

Customer Needs

Customer Groups

Technology

Reference: Abell, 1980

Mainframes require different processing speed as compared to a personal

PC

Strategic Management & SWOT

Strengths&

Weaknesses

Opportunities&

Threats

STRATEGYSTRATEGYSTRATEGYSTRATEGY

Valuesof

Managers

Valuesof

ShareholdersObjectives

Drivers

Inte

rnal

Env

iron

men

tE

xternalE

nvironment

References: Andrews, 1971; Hofer and Schendel, 1978

Craft aStrategy

to AchieveObjectives

Craft aStrategy

to AchieveObjectives

SetObjectives

SetObjectives

Develop aStrategic

Visionand

Mission

Develop aStrategic

Visionand

Mission

Implementand

ExecuteStrategy

Implementand

ExecuteStrategy

Improve/Change

Revise asNeeded

Revise asNeeded

Improve/Change

Recycleas Needed

Task 1 Task 2 Task 3 Task 4 Task 5

Monitor,Evaluate,and Take

CorrectiveAction

Monitor,Evaluate,and Take

CorrectiveAction

Strategic Management Tasks

Assets/ Core

Competencies

Inputs, Raw Material

Product/ Service Offering

ChannelsThe

Customer

The Traditional Value ChainStart with Assets, Core Competencies

Customer Priorities Channels Offering Inputs, Raw

Material

Assets/ Core

Competencies

The Modern Value ChainStart with the Customer

Redefining the Value Chain

(Slywotzky, Morrison, 1997)

Customer Priorities

Channels OfferingInputs, Raw

Material

Assets/ Core Competencies

Truly Understanding the Customer

Truly Understanding the Customer

The Modern Value Chain

(Slywotzky, Morrison, 1997)

Decision-Making ProcessDecision-Making Process

Purchase OccasionPurchase Occasion

PreferencesPreferences

Buyer BehaviorBuyer Behavior

Power over decision Power over decision

Customer Anger(against existing products)Customer Anger(against existing products)

Functional NeedsFunctional Needs

Purchase CriteriaPurchase Criteria

Porter’s (1980) Five Forces Model of Competition

Threat of Substitute Products

Threat of New Entrants

Threat of New Entrants

Rivalry Among Competing Firms in

Industry

Bargaining Power of Buyers

Bargaining Power of Suppliers

Cutthroat competition is more likely to occur when: Numerous or equally balanced competitors

Slow growth industry

High fixed costs

Lack of differentiation or switching costs

High storage costs

Capacity added in large increments

High strategic stakes

High exit barriers

Diverse competitors

Intensity of Rivalry Among Existing Competitors

Intensity of Rivalry Among Existing Competitors

High Exit Barriers are economic, strategic and emotional factors which cause companies to remain in an industry even when future profitability is questionable.

Specialized assets

Fixed cost of exit (e.g., labour agreements)

Emotional barriers

Government restrictions

Strategic interrelationships

Intensity of Rivalry Among Existing Competitors

Intensity of Rivalry Among Existing Competitors

Bargaining Power of SuppliersBargaining Power of Suppliers

Suppliers exert power in the industry by:

Threatening to raiseprices or to reduce quality

Powerful suppliers can squeeze industry profitability if firms are unable to recover cost increases

Suppliers are likely to be powerful if: Supplier industry is dominated by a few firms

Suppliers’ products have few substitutes

Buyer is not an important customer to supplier

Suppliers’ product is an important input to buyers’ product

Suppliers’ products are differentiated

Suppliers’ products have high switching costs

Supplier poses credible threat of forward integration

Threat of New EntrantsThreat of New Entrants

Barriers to Entry

Economies of Scale

Product Differentiation

Capital Requirements

Switching Costs

Access to Distribution Channels

Cost Disadvantages Independent of Scale

Government Policy

Expected Retaliation

Bargaining Power of BuyersBargaining Power of Buyers

Buyer groups are likely to be powerful if:

Buyers are concentrated or purchases are large relative to seller’s sales

Purchase accounts for a significant fraction of supplier’s sales

Products are undifferentiated

Buyers face few switching costs

Buyers’ industry earns low profits

Buyer presents a credible threat of backward integration

Product unimportant to quality

Buyer has full information

Buyers compete with the supplying

industry by:

Bargaining down prices

Forcing higher quality

Playing firms off ofeach other

Threat of Substitute ProductsThreat of Substitute Products

Products with similar function limit the prices firms can charge

Products with improving price/performance tradeoffs relative to present industry products

For Example:

Keys to evaluate substitute products:

Electronic security systems in place of security guards

Fax machines in place of overnight mail delivery

5 Forces correlation

Business power

Power of the Five forces

• Power of forces are mutually exclusive of each other-

(Any collinearity occurring should be excluded for

purposes of calculation)

• Their combined power inverses the power of the

business

• Their probability of occurrence and power the power

of their impact change over time (By function they are

hetroscedastic )

• They determine the relative bargaining power of the

business and the businesses ability to augment its

market share and or its profitability

Effects of Entry Barriers and Exit Barriers on Industry Profits

Effects of Entry Barriers and Exit Barriers on Industry Profits

High, Risky Returns

Entry Barriers

Exit Barriers

High

Low

HighLow

Low, Stable Returns

High, Stable Returns

Low, Risky Returns

Future ObjectivesHow do our goals compare to our competitors’ goals?

Where will emphasis be placed in the future?

What is the attitude toward risk?

Competitor Analysis

What Drives the competitor?

What is the competitor doing?What can the competitor do?

Current StrategyHow are we currently competing?

Does this strategy support changes in the competitive structure?

Competitor Analysis

What does the competitor believe about itself and the industry?

Do we assume the future will be volatile?

Are we assuming stable competitive conditions?

What assumptions do our competitors hold about the industry and themselves?

Assumptions

Competitor Analysis

What are the competitor’s capabilities?

What are my competitors’ strengths and weaknesses?

How do our capabilities compare to our competitors?

Capabilities

Competitor Analysis

Future ObjectivesHow do our goals compare to our competitors’ goals?Where will emphasis be placed in the future?

What is the attitude toward risk?

Current StrategyHow are we currently competing?

Does this strategy support changes in the competition structure?

Do we assume the future will be volatile?

Are we operating under a status quo?

What assumptions do our competitors hold about the industry and themselves?

Assumptions

ResponseWhat will our competitors do in the future?Where do we have a competitive advantage?

How will this change our relationship with our competition?

Capabilities

What are my competitors’ strengths and weaknesses?

How do our capabilities compare to our competitors?

Competitor Analysis

End of Deck