Lecturer: Gianluca Vaganani
Contemporary Strategy analysis - Robert grant 4th edition
Look at the homepage: download syllabus and buy the book and look up readings.
https://web.uniroma1.it/dip_management/node/5629
Read case studies!
Lectures 1 Notes:
The concept of strategy:
More specific in this classs
Achieving long rim formals
An euqal persistent ritual over a time.
Achieved goals:
Positioning
Aquire ressources
Managing growing change
These three things depend on each other
See the big pitcture !
1.1 Position
First Example:
Discography of Madonnas hits
Natural Talent vs. strategic ( career) management?
One point of view: you need both !
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How is it possible that without talent Madonna was so successful?
Good management, image, responded to the market.
Offered something new on the market
She adapted to the different period.
Positioning resources
She positioned herself in the mainstream.
Able to position her product correctly into the market.
Relationship with distribution channels
ABILITY TO CHANGE
Managing - change - growth
MATRIX OF SUCCESS:
POSITIONING
RESOURCES & CAPABILITIES
ORGANISATION
ELEMENTS OF STRATEGY:
Change
Growth
What is strategy?
• Creating a persistent ritual
• Persistent rituals: showing continuous success over the time.
• Persistent strategy: whatever you do, you do it successful
• Important for strategy:
• Introducing products which are successful.
• Everytime apple introduces a product, the peace is successful.
Slide 22
Our goal
unified, comprehensive toolkit,
a robust framework to analyze or design the enterprise.
Assessing a company’s strategy:
• AS A CONSULTANT
• AS AN ANLYST OR INVESTOR
• MANAGER, POTENTIAL EMPLOYEE: knowledge changing the strategy as required
Developing Strategy, design:
• As a Consultant, Manager, Entrepreneur
What to focus in case study:
• Understanding strategy applied
• How to develop strategy for a company
Course Aim: Assessing and developing a strategy.
SECOND EXAMPLE: NESPRESSO
• What do you think of Nespresso?
• It is just instant coffee.
• Idea: creating something NEW ( instant coffee on high quality )
Nescafe VS Nespresso:
Speaking to different markets
Using different distribution channels
Product
Target
Idea
Representing quality
Nescafe
Instant coffee (
packages, you only need
hot water, quick)
Mass market
Nespresso
Instant coffee
( requires a machine, on
high quality, represents
HQ)
High class
The coffee and
capsules, selecting the
best kinds of coffee (
supply chain), choosing
the right supplier.
Technology of the
machine ( pressure )
Key ingredients:
machine and coffee
used
Organisation of the
business
Choice of partners
Countries
Success?
Advertising
Building relations,
create joint ventures
Nestle chose only SME
as partners
Japan, France, Italy
Nestle was successful or
not? (read the case
study)
Just sold 50 % to the
target, less then
expected,
No expected growth,
growth rate was slower
then expected.
Distribution effects
freshness. Mentainance
of the machine was
difficult and expensive
for the company
Problems
Think you were the
manager of the
product.
Suggestion
You as a manager
Shareholder
Distributionchannel,
Maintainance,
Guarantee of Quality
Changes:
Distribution channels.
Change advertisement.
Relationship with
clients.
Influences the
perception of
customers.
Sell the company
Need to convince why
not so sell the company.
Improve / get rid of
problems. Fasten the
transport, improve
machine, change the
market.
Profit, cashflow, no
involvement, wants to
be guaranteed more
profit in the future
Guarantee high quality for the high class?
How can I distribute my product?
SLIDE 29
Financial health versus Strategic health
Losses from one year to another doubled.
Imagine you are shareholders of this company:
You do not see any profit in the product.
Waste of money?
I wanna see profit, money, returns not the POTENTIAL instead PERFORMANCE
Performance is important, people (like shareholders) do not look at the strategy.
Success represents performance.
Profit can be seen, potential for the future NOT.
Potential is intangible and something in the future, Profit can be seen and felt.
Performance: made of different elements.
Strategy: potential of generating profits.
Financial health
Profit
Cash flow
Shareholder value
Growth rates
Strategic health
Customer satsfaction
Customer loyalty
Market share
Empliyee morale
Staff turnover
Employee communication
New product pipelines
Product quality
Quality of management
Distribution and supplier feedback
MINI LECTURE
SLIDE 29
WHAT IS A STRATEGIC CHOICE ?
How might we have figured out the Nespresso strategy at that time?
Not a strategic choice: COMMON KNOWLEDGE
As for example: advertisement, training, investment in improvements
STRATEGY:
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External portion
Design internal organization
Amidts inevitable change and dynamics
See the big picture to make sense of everything at once
Business function that guides decision making at the business level to establish super performance
How to start?
Understanding the nature of the problem
What is the problem?
Nespresso: machine, customer, distribution
Step one: realize problem
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solve the problem, consider the concept of complementaries
Economic returns to one decision depend on others
Coherent system of decision. Change of something effect other elements of the
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strategy ( organization structure, product design)
nteraction of different variables
Key implication of interacting variables:
A) Multiple possible solution, there is no such thing of one best way. There are many possible solution
to a single problem. They might be all equally good.
B) Many wrong non - complementary combos. You are blind
Step two:
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Complexity
Organisation made of tons of decisions:
Integrate array of interlocking decision
which are key?
How do they interact
Best combination
Different in every case
Every case is specific
Not soluble but simple models, recipes of formulas
vision, mission, passion
Strategy is giving something up.
Lecture 2 I 21. September 2018
Solution Nespresso: (presentation by student)
Small target group, High quality ( coffee, machine)
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Problems: Distribution channels, maintenance
Problem Areas:
Ressources:
positioning: small group but not enough on the long run
Main Approach: changing the company
Needed someone to lead the change
Adapt to household market
Back to Nespresso
Financial help: about now, about money, about giving back money to shareholders.
Strategic help: future
1989 I 1990
not achieving in getting the target, Nespresso produced losses, Nespresso that time had huge
potential that was for nothing,
Performance at that time indicated changes are necessary
Problems
Choices
Low reliability of
the machine
Modifying machine:
Cream on top: great drink experience
investing into better quality and
technology
adjust parts of machine: perfect
temperatures, pressure, taste combination
But how?
Modify the capsules: make them recyclable,
design
Change supplier:
Better experienced.
Or invest into expertise.
Using better material.
To make decision data could help.
High cost of
maintenance
service
Better quality may reduce
maintenance services
Free machine when someone picks up your
machine - service advantage!
Train the customer in concerns of usability
High no. of
defective parts
Distributors
missed the target
sales
Changing the target.
Work with different testimonials
to advertise
Change the selling points: own
shop
Create experience, partnerships, Nespresso
club: loyalty program = customer relation.
In Stores test the machine
Direct marketing promotions in store
Opinion leaders
Delays in the
distribution of the
capsules
Differentiation’s (in tastes,
design, color, diversification,
individuality) in order to react
onto different taste
Changing the transport company,
direct marketing, own shop: not
sold in every shop to make it
exclusive and serve
communication and presentation
, personal attention
Slogan: „What else“represented by G.
Clooney
Machines returned
after a trial time
The problem is
making the
machine working!
General notes:
Investing in technology, more
user friendly,
Create a standard and agree with
the supplier - TESTING !
EXPERTISE
People like to see a product.
They started as a B-to-B.
Strategy is to give something up.
If you wanna sell directly, you need your own salesforce.
The club is callcenter, 24 hours service.
A club where you can solve the problems.
Targeting: your brand needs to be recognised.
From SME to high class families.
Would you first fix machine problem and then change the target or vise versa?
Find decision that is complement with
other parts.
Movie notes:
Nespresso is unique I distribution decision
Position on the market
Established a separation of responsibility of the capsule and the machine.
Problem with machine: supplier is responsible
If sold as a bundle both is interconnected.
Strategies adopted:
Training, communications, handling guidelines
Worldwide implication of philosophy…
Sales partners must be strict selection of
Partnerships benefits
Ambassador concept:
Merchandising support
Training programs
Tastings in store: you do not try the machine, you experience the coffee.
(influence decision)
Classic product of direct marketing
400 promotional days
Airline coffee machine
Acquisition: Nespresso club
Provides exclusive benefits
Shops:
Reinforces presentation
Connected with shipping center
Order by call : special trained employees, ongoing training, are accomplished to
capitalized on their skills,
Tasting in the ambassador stores
Each coffee specialist - responsible for 5000 customers
Personalized customer contact
Specially trained call center service
Interactive relationships
Computer program for customer services = rapid problem solution, avoids
returns and contains customer satisfaction.
Every customer has a continual updating file.
Different selling channels
400 promotional days
Airline promotional platform
Choice of machine partners based on certain criteria:
Their position on the market
26. September:
Distribution policies handled by Nespresso head quarter, puille Switzerland
Termination of targets, criteria etc handled by the head office
Key players of the success:
Standards
Own selection requirements -
top resellers
Ambassadors
Espresso is classic product for direct marketing
Strategy of privileges for customers / club members
Links
Who
https://www.nestle-nespresso.com/asset-library/documents/nespresso%20%20history%20factsheet.pdf
Before
offices, small companies
After
Notes
Maybe the problem is
that customers are not
satisfying,
Offices are expensive to
be targeted - special
salesforce
What
How
System: coffee capsules
and machine (offering a
bundle)
Joint venture with solba
to sell the product
through direct sales
forces plus machine
produced with Turmix
Lets switch: starting to
serve another customer
group
Now we sell a bundle
but what if we change:
separate that.
Can I keep my venture
with Sobal or not?
Households I cannot
contact by walking
there and knock on the
door- I need shops on
the street to stay on the
street.
Need to fix problem
with the machine:
otherwise problem is
multiplied: change value
proposition
TASK:
write down the new business model that comes out from the video you saw.
Scatch out new business model.
Goal: understand business model before and after.
Examining Nespresso´s Business Model:
Before
1970 Invented
1976 Patented
1986 Launched
1988 Nestle
Sold as complete solution (bundle)
Machines & coffee for a per cup price
To restaurants and offices
Offered to maintain
After
1989 New Commercial Director Jean Paul Gaillard
He changed the business model
Separate machine from coffee (sep. products)
Machines produced/maintained by 3rd party
Sold through independent retail stores
Delivery and stocking by manufacturer
Key activities ( distribution, stocking) outsourced
Kept control of the marketing
Train sales stuff - to deliver the right sales massage
Selling point: in store, via phone, app
You have to join the club = buy a machine and a
membership = ongoing relation ship
As market matured - branded hard ware ( machines)
Bundle of products
All key activities performed by one company
Separate product
Key activities a performed by different companies
Different selling points using technology
Coffee farms / suppliers and partners
Who What Why tool
WHO: group of segments, geography
WHAT: Product, Service , VALUE PROP
HOW: Production processes, distribution channels
*The WWH is the business model. From an analytical perspective it is useful to think of Strategy as
choosing (+refining the design of) the business model.
Lezione 3
Strategy is about the future
Measurement: Return on assets ROA ( Targets), Return on Assests, Revenue
CHART SLIDE 39:
STRATEGY CHANGE
Change postioning, ressources, target
Key core decisions of the company
Who is my customer: segments, geographic regions.
In terms of how to get the products to the customers
Activitites to which the product is distributed to customers
Business model TOOL
Before:
WHO: offices, SME
WHAT: a system machine & coffee
HOW: joint venture with sola to sell the product through direct sales force plus machine
produced by Turmix
EITHER SELL THE COMPANY OR CHANGE SOMETHING
After:
WHO: high end household (Top 10 % of the household) in selected countries.
WHAT: Superior cup of coffee, different flavors, coffee experience , innovation
HOW: cub, direct marketing, call service, direct marketing, education, suppliers handle
distribution and maintenance of the machine , market penetration by entering the air industry.
His solution:
WHO : individuals, household in selected countries
WHAT: coffee capsules, experience
HOW: subcontract with manufacturers of the machine to a prestigious OEM, focus on the
product of high quality castles sell the machine through prestigious retailers, sell the coffee
capsules direct through the Nespresso Club.
Customer club:
Database to encourage research, understanding customer, individualization, simplify order
process, direct selling ( is about value proposition) freshness of the product and direct selling =
faster / so I do not have to stock the product for ages, database shows which varieties are
preferred,
Machine maintenance: solving problems with the machine
Discussion
Problem in targeting everyone?
• Premium coffee so they would not walk their talk .
• For targeting mass market I would compete with myself.
Nesscaffe is for mass-market Nespresso for the high class.
• Target a specific country ( Geography )
• Not worldwide - would be a waste of money ( call center due to language, to be consistent
with the ideas, to be very specific, keep quality of logistics
HOREBA = Hotel, Restaurants, Bar
To sell the product to hotels and restaurants
Change in the Business Model
HOW: You need to change your how - your sales force
Problems: the customer would not know, that they drink Nespresso
Selling the product on airlines
Different sales forces
Sale only in the first class ( marketing my product, create awareness)
Why not sell the product in grocery stores?
Again the mass market problem, and logistics
Achieve the goal to have my product around - distributed to the mass - without losing my
image of being a premium product:
• Coffee corners to present, taste
• Franchise with a set of standard
Why George Clooney as a testimonial?
It is consistent with the idea
Rich, single, travels, great experience
Nespresso never stop to updating their strategy:
Example advertisement of Nespresso
they introduced a lady into their advert saying that coffee is not only for men also for women,
rich women. ( in history only men went to bars/ coffees)
From 0 to 55 direct competitors in just 5 years.
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Similar names
Similar product
Sales will be affected by them
In which direction should Nespresso improve?
Moving towards maintain ! Within the business model.
Making product even more superior
Use protection - change lawsuits - make imitation more difficult
New advertising campaign - with Humberto
Focus on the quality of the product
Be environmental friendly
Idea of over community = we are together
What does a good business model entail?
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making choices = doing something and giving something up
difficult choices
A set of mutually reinforcing choices
Choices need to be coherent with each other
TOOL:
Who what how
Internal consistency (content of the last lessons, Stand 26 Sept. 18)
External consistency
Fit between element of a business model
In practice it is difficult to ANALYZE if one element is consistent with others.
Slide 51: Does strategy making actually work …?
Strategy is about rational decision making
use strategy as a rational model it is a consistent guideline
Planning school:
Learning to plan - planing to learn
Set ends, develop means to achieve ends - constitently
Learning school:
A) a strategy is an incremental process - decisions taken day by day - today I change price,
tomorrow I introduce a new program etc.
B) in fact planning can Mae you rigid
Brews and Hunt:
Let´s look at fires in different environments
Hypothesis: in stable environment - planing
Hypothesis: in unstable environment - incrementalism
Measure:
ends and means specificity, environmental stability, firm performance, planning flexibility and
duration
Result
A) planning never made firms rigid
B) Planning always had a positive effect on performance.
Strategy is like a map, a co-ordinate advice, focus attention of the entire organization to reach
a target the end guided by the strategy. Changing, taking day to day activities. Strategy is
changeable, adaptable, adjustable.
It is important to understand successful case studies :
Learn from failures, Get insights
This week.
1.
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3.
1.
Financial versus strategic health
Indicators
Logic
What is a business model
Making a set of difficult, reinforce choices
Tool: who, what, how
The role of planning and learning in making strategy
The complement each other
TASK 26. September
Business model — confront with your competitors
Redesign the business model of Nespresso
Value proposition
Using the old business model
Freshness
NEW MODEL according to Humberto:
WHO upper class families, wealthy single household
WHAT premium eco friendly coffee and capsules
HOW paying a fair amount to the coffee farmers, supporting projects eg. With each capsules
you buy 10 % is given to the farmers kids for education , or with each membership you are free
to decide to pay a dollar / euro which supports another social project or the protection of the
rainforest, offer to take back the capsules to recycle these, investing into smart agriculture.
Promote recycling by introducing certain benefits for members who take part actively eg. A
certain number of recycled capsules is equal to a free package of coffees or any other present.
Marketing which provokes emotions.
Lezione 5
Change customer - change value proposition - change the how
One component leads to the change in another component.
Session no. 2 - positioning „Industry analysis“
Financial vs. strategic health
backwards vs. forward looking; different indicators
Learning to plan and planning to learn
panning and incrementalism are complements; one facilitates the other
Assessing a company´s business model
making genuine choices
a consistent set of choices which are mutually reinforcing
Tool who what and how
Course structures
Growth and Change - Mc. Kensey
Oticon
Sabena
Positioning
1.Nespresso
2. African Communication Group
4. Fairmont Lake Louise3. James and Noble vs. Amazon
5. Swiss Watch Industry
Resources
African communication Group
Tansania - little telecommunication infrastructure
Money needed for telephone cells, telecommunication system etc. the Telecommunication
company ACG asks us to invest. Would you invest or not? If you where a VC would you invest in
ACG?
When you invest money what do you want to know? ROI, let me see your numbers:
Returns, Costs, Revenues
1. Financials
• Are revenues greater then costs? Revenues must be greater then costs = economic
Equilibrium. Revenue - cost = profit. The higher the revenue the lower the cost the better
the company is
• Are returns positive? Return is a profit from investment = an absolute number, this is an
indication on capital invested. Returns tells you how much you can get back. The higher
the returns the better the company is
• When? By How much
• Cashflow - cash in / out- enough money to pay expenditure? To pay my investment
• Must not run out of cash at any point!
• When does it start to pay for itself
Example of what you might looked at:
Return on assets, timing to positive cash
Financial Statement :
First look at net income BOTTOM LINE (start at the bottom then go up)
First year negative, second and third year + it is positive
Second: Return on assets (you pay 100% and get back 68 % as return on assets ROA )
COST are they high or low?
Increasing depreciation is an indicator of investments on assets.
Net revenues : 3 times higher ( 300 %increase), very high grow rate.
Operating expenses grow but not on the same rate.
How Is it possible that revenues grow 300 % but operating cost only 75%?
What to look at on the balance sheet: 1- 4
1.
2.
3.
4.
Net income
Asset
Net revenues
Operating expenses
Slide 20
Revenues > costs, breakdown of expenses makes sense:
Efficiency keeps cost lower.
Understand the % of each category of cost.
Total operating expenses
Market research
In developing countries telecommunication is very important.
*phone booth
Demand side assumptions Revenues ( see Exhibit 5)
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Number of calls ?
3 min calls / booth? = revenue
Cards consumed/booth/year?
Pricing (margin)
Market research:
3 scenarios:
low
Base Case
High
Investment risk in this case:
Although investment is promised to be returned back quick there is a high risk in other points:
Cost of administration, staff, maintenance.
Distribution of assets results high maintenance costs.
Maintenance costs are often underestimated.
EG sharing bikes: first put only a view - works out well. But as soon as there are more, vandalism
increases so costs increases too.
Read case study ACG end of case study there are Exhibits
*Venture Capitalist = VC
Lezione 5 28th September 2018
Case Study Tansania
If you were a VC would you invest in ACG?
PROS
Developing country
Low competitors
Regulation of the TLC
Taxes advantages / benefit
Commercial activities
Inflation
Unmet demands (Capital city)
Current phone booth
CONS
Riots and destruction of phone booths
Lack of infrastructure
Currency , if it changes the coins are not suitable
anymore
Maintenance
Violence
Poor country
Corruption (allows competitors to enter)
Exhibit 3:
This country is not just growing there is also a dynamic in export and import.
Exhibit 7 year 5 :
Step 1
No of booth:
Formula
Phone booths =
(phones booths year 1 x 1000 Weil es in tausend angegeben wird) /Equipment costs base year
Step 2
Net revenue per booth: = Net Revenue * 1000 / No of phone booth
Implicit number of call 0.50 margin, 350 days a year
Step 3
Card costs booth :
Implicit number of cards consumers 0.20 a car
*Calculating according to market research
So you cannot rely on the assumption !
My assumption Is slightly lower on the base scenario but I can rely. The number is okay
Calculation
Step one
Phones booths 1824x1000 / 5100 = 357
Year 1:
Net Revenue per booth = ( 2 033 x 1000 ) / 357 = 5,793
Year 2: 6217*1000/ (380+357) = 8141
Year 2:
Net Revenue Y2 / (phone booth produced in second year + phone booth prod. In second year)
Year 3: 8629*1000/(380+357*194) = 9268
Year 3:
Net Revenue Y3 / (phone booth produced in second year + phone booth prod. In second year + phone
booths produced in y3 )
Net Revenue x Phone booth = 4
Net Revenue = Calls x Operating day x margin
Business Strategy
Who
Business men or people from high income households, government organization,
residential subscribers, Geographical focus: big city Dar es Salaam = the urban population
of Tanzania who have a high income and purchasing power.
Urban population of Tanzania
Who do not have access to subscription phone
Need to make international calls
Purchasing power
What = Value
proposition that
distinguishes you
from your
competition
How
In 1997 that is about 6m 19% of the pop.
High quality (reliable, available) phone service
Paging and voice mail in the future
Customer purchases cards from retail stores dukes for between 1-35
Wireless single Lin models ( customized, capital intensive ) + satellite system ( expensive
but copper lines get stolen)
• 5-1ß phone booths connected to outstanding copper wires
• Outstation transmits to ACG HQ
• ACG HQ aggregate call volume
• Sent on to TTCK through single links
Phone booths located near business centers and with few TLC options
Discussion questions:
Why not target the entire population of Tanzania?
Due to educational differences - targeting uneducated population who are not aware of the technology
would be a waste of time
Why not combine the customers consumer and business?
The businesses may have the phone already.
Needs are different, outgoing situation concerning facilities is different.
I am offering services to individuals.
Where in the case study do you see if there is enough demand from the target to sustain the business?
Page 1, 2 = information about demand and current state of art.
The strategy is obviously coherent with the strategy
Indication for the what:
Non working phone booths, bad connections, etc.
How reasonable is the ACG business model?
Discussion questions:
A. Have they made genuine who what how choices?
B. Internal consistency are the choices mutually reinforcing as a set?
C. External consistency - the number test ( do the choices involve reasonable assumptions about
demand and supply)
Decision
Target business men
Solution
Phone booths near business
Intention
Reliably, high quality phone calls
Pay phones
centers
Cards on different values
Urban population
Pay phones
Paging and voice mail in the
future
Sell in retail shops ( dukas)
Wireless radio system
Choices
*numbering choices
External influence
and interlinking is a
very good way to solve
the case study !
1. Business men
2. Urban
population
3. High quality
and service
4. Wireless signal
5. Location
6. Dynamic
pricing
E1 Inflation
E2 order backlog
for fires lines
E3 Vandalism
E4 Int.
Development
E5 Corruption
E6 unskilled
labour
Not everybody has the same need
concerning calls ( some
international others just urban rural), no need for subscription
more flexible, dynamic pricing
Purchasing power, different kind
of needs
To support these services at Lowe
incremental cost
Relation of choices / consistency
Choice 3 interlinked with choice 1 positively
6-4 positive relation
6-3 negative relations
2-6 = negative, because change in price can be annoying to
customers.
1-5 = positive relationship
External Influence
Inflation - dynamic pricing + ( cards in a fixed price base are
inserted ) I Corruption negative influence on technological
change I International development positive increases demand I
Vandalism negative for quality and service whereby the wireless
innovation prohibits vandalism as no more copper cables are
used. I unskilled labour is negative for maintenance and quality
knowledge is needed. Order of backpack - because location
might not be as quickly delivered as others.
E7 developing
country
Lesson 10th of October
Repetition
• Value Creation = demand and offer
• Value Capture = is about 5 forces, competition is complex, vertical components and horizontal
components (competition is bad for profitability)
• Industry = group of firm, does not consider a single firm
• If talking about 5 forces we talk about buyers, suppliers, substitutes of an INDUSTRY
Assess the strength of the five forces in act
Equipment Suppliers
Proprietary tech, Long term contracting possible,
Equip Suppliers do not want to ruin reputation with
buyers
TTCL
Tied to government / rule maker, wants traffic ( +
marginal), competitors in payphones, substitute in
wireline, Crony/Corruptive organization, control over
network
No big incentives to use market power
NOTES:
TTCL used to be a monopoly, when you want to make
business in the country you need to work with TTCL
(if you want to work in telecommunication business)
Is it a problem or not? Is a big issue, Monopolist
supplier, high market power, state owned. Incentive to
enter other business (mobile phones e.g.) may have
different roles.
New Entries
Regulatory, license,
Uncertainty of local
environment need for
local knowledge, Large
fixed investment to
achieve scale
Not a. Big problem,
Market power only in
theory once you have
phone that’s it
Rivalry
Scope for differenciations,
Small under sourced
incentives to government
to compete
Substitues
Walky - talking (constraint by technology) is
dominant solution, but not one that will strategically
challenge payphones, Fixed network of low quality
Not a big problem
Okay no big threat
Merchants
Many small (want to do
business, but no
purchasing power because
they are very small)
Want the business
NOTES
Biggest Threats:
Inflation and TTCL Monopoly
Okay no big threat
End Users
Few options
Small
Highly price sensitive ?
(low income, inflation)
?
DISCUSSION:
Are these factors good or bad for ACG?
ACG must consider these cost, the value creation part shoes gaps concerning the company’s strategy.
VALUE CREATION IS IMPORTANT:
What kind of decision is infected within my business model by TTCL? What kind of components of my
decision strategy are going to be affected by TTCL?
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Creating technological problems
Technical problems which will imply higher costs then expected
As TTCL I can start a company and become a new competitor of ACG (which means less rev.
Think of buyers power - the ability of the supplier to change quantity, cost and prices -> TTCL can
affect the price of payphone services why? -> Figure 1.payment for using the infrastructure „ rising the
commission“ - if TTCL wants to increase costs there is no negotiation possible due to monopoly . So
TTCL is capable of squeezing down margin.
How attractive is acg´s position
Given your assessment of the 5 forces
What assumption behind their business model my be questionable?
The business model was highly based on one component - the margin. When changing margin the
financial performance is strongly affected. When they did the business model they underestimated the
Porters five forces. (the strength and impact) They did not estimate the power or TTCL (Consider
Exhibit 7).
Finally: TTCL increased the commission a lot and ACG was bankrupted because they underestimated
their supplier.
Business model and plan must be consistent internally as well as externally.
When we see more competition we see a problem. Introduce five forces and pestle model ( pestle is
the overview of the bigger external environment)
Prepare 10th of october:
Grant Chapter 3
Prepare Amazon.
11 October
Repetition:
Business Model (tool: who what how, narrative test)
• Numbers test (internal ( one component effects the other) & external existence )
• Different from strategy, which deals with competition
• A good business model alone is not enough… consider external facts
Strategic desicion:
Bundles of choice ( you need to take many chances at ones)
Every bundle of decision create peaks on the landscapes, the landscapes is not known for the managers,
so you need to get a greater picture based on data and research. There are many ways to solve a
problem , the difficulty is to make the right decision. In strategy you need to have options and consider
external influences.
• bundle of choices - multiple options - select alternatives and give alternatives up.
Evaluating Strategic decision
INTERNAL CONSISTENCY
• fit the bundles together
• Create a coherence + business model
• One component increases the value of another component ( consistency )
• We learned ACG business model was internally highly consistent
EXTERNAL CONSISTENCY
• decisions must be consistent with the external environment, espeacialy in the industry
• Value creation (WTC+OC) and value Capture (5Forces, Porter´s five forces)
Porters five forces:
What do you think about this model?
Limitations:
• It is not about value creation - it is about value capturing
• Underestimates the relevance of coorporation - it is a model about competition.
• It is a static model - gives a picture of one moment, not concerned with change.
• The forces are not independent but highly interconnected
• Value capture
• Just description of competition but not much description on mechanism of the competition
• Issue of complements which are not considered in one industry: eg consider the relationships between
mobile phone producer and app producer - software is needed to create the final product.
CHAPTER 4 GRANT !!!!!
The five forces:
• Idea is that even in an industry where strength of 5 forces is high company can protect position
• As a manager I should find a way to decrease the forces!
How can I decrease
the five forces to protect my company from these five forces:
Reduce customer power:
• High price sensitivity
• Diversify customer base = devide the market (segmentation),
• Creating switching costs, eg through IT service = for buyer it is difficult to switch from one supplier to
another; lock them in your company. Mobile phone example: learning component = when being
used to android it is difficult to switch to another operating system.
• Create long term relationship
How to reduce supper power?
• Diversify supplier base = use many supplier , you can upstream, vertical integration, create
competition within supplier if you do not rely on one certain supplier
• Standardize your components through product design
• Work with them and provide them expertise = relationship
How to prevent new entrants coming in?
• Barriers of entry ( patents, overcapacity, brand / differentiation)
• Develop reputation of retaliation (careful) = fight with rival with price, marketing
How to reduce available substitutes
• Through advertisement, Promotion
How to reduce rivalry with your comp.?
• Different/ unique
• Low cost
• Construct value chain based on this unique value
The idea it so protect the company from the forces to capture the company!
In positioning you company create and capture value and protect of porters five forces!
*in exam will asked limits of models!!!!
Task: how to protect ACG against five forces
Power of the supplier - TTCL
Highly sensitivity of prices
Barriers to entry (reduction)
Cell phones on the horizon ( substitutes ) = more phone booths, recycle cards (no more payment for card
only charged for the value)
By managing 5 forces in ACG case:
Many red flags - competitive threats. Ways to improve?
Buyers price sensitivity:
• Prepare for difficult marketing exercises
TTCL Work around:
• Was not reliable in making agreement ( refused to pay negotiated commission )
• Vertical integration: build own telecommunication system/infrastructure - but it is expensive and
must be approved by the government
• Build backbone ( own telecom. System)
• Align incetives, commitments, contract, co-investment
• Hier ex government, TTCL, shared board position
• Lobby government for clear framework? Lobby international lending bodies.
Cellphones as substitutes
• Invest into new technologies
Other concerns
• Increasing competitors as market uncertainty reduces -> Create new barriers to entry but how? TTCL
stop licensing problem or make it more difficult to get; make product different, build long term
customer relationship
DYNAMIC CONSISTENCY
*combines Internal / External
Questions to guide our discussion (bookstore case) :
What types of industry change release / create more value?
How has book selling in the US evolved over time ?
What has driven this evolution ? Who has gained / lost the most?
How can firms respond to the threats posed by changing industry dynamics?
Competition and Management 17.10.2018
Due to competition the success of a company cannot perform successful all the time.
*The and high and low performing industries change over time
*Firms - even within a single industry we can recognize heterogeneity.
There are opportunities for company to achieve constant success - there are mechanisms to prevent and
limit competitiors.
Strategies enable persistence of a firm.
Where, When do this impediments come from: ( see slide 7; 3 components)
Components for success:
Position: select customers, value prop, mechanism through which value prop created, mechanism to
protect companies
Resources and Capabilities: assets available to a firm and creating advantages.
Change and growth: over time, changing and growing capacities come from the organizational
systems
Levels of Strategy:
• Corporate
• Business
• Functional
• to establish superior performance = end goal of strategy
Financial vs. Strategic Health:
Why should I consider financial health? If shirt term your financial is not good, strategy is endangered
because shareholders complain. If cashflows are not produced, loans cannot paid back / affect on
customer loyalty. EG Nespresso: huge potential but no financial success so the Manager decided to
change the strategy.
Strategy has to performance superior.
What’s the strategic choice
Slide 11
Rep. first session:
•
•
•
•
Strategic decision are bundles of choices that go together
Bundles = decisions must go together, coherent.
Each bundle can be represent like a peak
Strategic decision represents peaks on a landscape that generate superior performance compared
with other points on the landscape
• Important to generate multiple choices. Guard against tendency to jump into a decision and start
developing rational for it
• Important to select an alternative and give some other alternatives up - trade offs, produce different
options
• Combination of choices - to reach peak - no individual choice
The Who what how tool for the Nespresso case:
The business model did not work - very bad financial performance:
*Coffee machines were unreliable
*distribution channel and capsules
*in who section : wrong targets
*Changed suppliers - very high specialized ,
*direct sales - gather customer information
*control over freshness of the products
*create customer experience
What does a good business model entail?
Making choices
Difficult choices
A set of mutually reinforcing choices
ACG:
Value Prop = highly reliable payphone services, voices, and paging
INDUSTRY
Same customer, value prop, geographic region
Do not define the industry to broad- otherwise comp. is underestimated.
Porter´s five forces ACG
Margin was highly dependent on policies of TTCL, ACG underestimated the strength of TTCL,
Other threats: buyers were highly buy sensitive = increase in bargaining power of buyers, barriers to
enter: high growth rate in company may reduce the barriers to enter the market.
An industry with strong five forces is less attractive
19 October ( VALUE CURVE)
How to reduce rivalry with your competition
• Do something different / unique
• Do it at low cost
• Construct value chain based on this unique value
24 October
Different types of change within an Industry
• 1. power I 2. positioning/specialisation I 3. redefining the industry
• The importance of the underlying resources & capabilities
Industry Analysis 1
*limitations of the 5 Forces model
*Five Forces: also about improving your position within an industry
Industry Analysis 2
*strategic innovation i.e. redefining the industry through:
1. A new way of competing which 2. Increase market space
*tool: value curve
Some issues with the value curves
•
•
•
•
What values should we put in there? = what market research is for
How to distinguish values from activities / resources
Different „whos“ might have different curves = Economics of segmentation: go for majority
Mostly qualitative, it does not tell you about the extent of demand - marketing courses can help make
it quantifiable
DISCUSSION QUESTIONS:
What differences and trade offs inside the firm are implied by the firms business model and its industry
position?
What are the sources of these differences ?
Sources of competitive advantage: GENERIC STRATEGIES (NATURE)
Competitive Advantage
= similar product at lower cost = Cost Leadership
= price premium from unique product = differentiation advantage
Nature of differentiation Definition:
Providing something unique that is valuable to the buyer beyond simply offering a low price. THE KEY IS
CREATING VALUE FOR THE CUSTOMER
26 October
Applying the Value Chain to Cost Analysis.
Stage 3:
Cost drivers= mechanism to which cost decrease and increase, elements to which cost are associated.
Stage 4
Identify activities
Cost per unit - try to analyze cost by linkage
Cost leadership: comes from a way, a company performs activities.
Stage 1: Identify the principle activities
Stage 2: Allocate total costs
Stage 3: Identify cost drivers
Stage 4:
Stage 5:
Value chain analysis!!!!!
Exam question: Key stages in applying value chain to cost analysis
Case Study: Lake Luis Fairmont Hotel
Positioning
Value Chain:
a). Who (Segmentation) What ( Value Curve) How (value Chain)
b). Generic Strategies
Value Capture:
a) Isolating Mechanism
b) Eg: obscure performance, casual ambiguity, uncertain inimitability, scale economies, learning effects,
location advantage, control of key distribution channel/ suppliers, first mover advantage, sunk costs,
perceived risk of retention against competitors, switching costs, managing trade offs, creating synergies
among value chain activities…
Analyzing the strategy of lake Luis Fairmont hotel
Analysis 1) Who What Why
Who
(Segme
Tour group and fully independent
independent travelers
ntation)
group and meeting market
GEOGRAPHIC AREA (LAKE LOUIS) / Source market (broad but mainly from Canada and US),
People with high income (very important)
3 main customer groups, very specific ones (booking behaviors, needs for special facilities and services
)
What
(Value
Prop/
Value
Curve)
How
(Value
Chain)
Notes
P8 Paragraph 3
Good scenery
Mountain area for climbing and skiing
health club, relaxation
privately operated boutiques
range of dining choices
meeting room services and conventions
private room and romantic area for couples
Price, high price but many discount opportunities
transportation services - very important in that area
Purchasing raw materials ( food, rooms equipment)
Purchasing maintenance services
Location
Wholesalers and tour companies / Travel agents - directly via phone
publication and magazines - specialized meeting planners - hotel sales force / offers for family
group meetings. Environment system manager
offers for family or group meetings, dynamic pricing setting mechanism
Purchasing food for restaurant
Hotel management system ( operating system) (maintenance, cleanings, quality check)
Price is a components ( a negative one of the value prop. ) and willingness to pay
Analysis 2) coherence analysis
• Tour group - whole sales and tour companies / travel agents (+) - dynamic pricing (+) - high
end focus may scare other customers(-) - standards (+) - too luxury (- scares off families
because high end customers are expected)
• Mountain area - purchasing materials (suppliers who deliver the service are located further
away, may influence the price)
• Location - activities in the mountain area - offering shuttle services - for groups and
independent travelers
• Good scenery - choice of food - people with high income- outdoor activities and high
standards
• Locations and scenery - opportunity to target different source market
• Hotel management system - provide quality for service and meeting, organization
• Cuisine - access to food supply - locations
• health club(+) - range of choice for dining(+) - food supply / location ( -) - price (high -) - type
of guest ( high end, willing to pay the price+) - ( groups with discount -) - activities (outdoor
+) - scenery (+)
• Luxury experiences - maintenance, high quality ( according to luxury)
• Transportation service (+) for location - full time manager (+)
• Price - expensive (-) - discount (+) - dynamic (+) - different targets - dynamic pricing + and
different sales force +
• Location negative impact on workforce
• relax experience - therefore relax operations are necessary,
• Luxury experience - fine dining - quality - maintenance - hotel manager - facilities - location
Target groups:
Individuals - MICE - groups travelers : different needs
Negative Impacts/relationship:
MICE on individuals - they work, are on the phone disturb the relaxation
Meeting room - not necessary for individuals - „but they are paying for this services“
*many negative relationships Task: read and find the inconsistencies
HOME ASSIGNMENT NOTES
W-W-H TOOL
CONSISTENCY (INTERNAL/ EXTERNAL)
VALUE CURVE
STRATEGIC INNOVATION
VALUE CHAIN
•
•
•
•
•
Tour group market = most important source of customer ( 1998 July)
Seemed to decline
Season: concentrated on summer and skiing holidays
Location: Banff National Park / Rocky Mountains
Location problems: the national park is supposed to preserve the environment while the
tourism would cause unnecessary negative impact
What does the resort offer??
• Luxury hotel resort,497 rooms, lake and mountain view, 5 categories, higher categories
served with additional amenities ( stereo system, newspaper turndown service)
• No internet access yet, plan to wire the entire hotel within two years
• Health club for all guests accessible (pool, steam room, fitness equipment)
• Small spa area
•
•
•
•
•
Shopping facilities 15 boutiques
Range of dining choices, three full service restaurants, two lounges, a deli, a saloon
Victorian room for 650 people
Eight smaller meeting rooms (up to 70 pax)
Total meeting space = 17,500 sq feet
Peak Season : summer months
• 725 employees
• 70 additional to run concessions
* staff residence : 773 bed, 52 additional beds in the nearby village
• outdoor pool that had not been used since 1980 due to high operating costs and
environmental concerns
• Spa area was not promoted actively
Value Creation
WHO should fairmont lake Louis choose?
14th November Lecture
1. Competitive Positioning
2. The link between Positioning and Organization
3. Choosing your who
Value capture
1. The way this choice must be consistent with each other
2. When changing one thing you have to change another
When we talk about competition advantage has a superior advantage.
Session 5 Resource & Capabilities
Rebirth of the Swiss Watch Industry 1980-1992
Questions to our discussions:
• Why do companies fail?
• Why did he Swiss watch industry take so long to respond to the quartz watch?
• How was Swatch able to reverse the decline and recover?
How could the cheap digital watch compete with expensive, elegant watches? It is a gadget,
with new features, cheap, for students, cool.
S T R AT E G I C I N N O VAT I O N D E F I N I T I O N
Offering something new and opening new market spaces = strategic innovation
The question is why it took so long for them to realize that something must be changed?
• They could have developed technology but why the did not?
• On the one hand there is available technology on the other the consistency with the business
model. Now there is the difficulty to change.
• Maybe they need a synergy
• Underestimate the relevance the competition from Japanese producers.
Changing is not an easy task, cognitive problems: difficulties for a company to adapt to a
change.
As the CEO of the company what would you do?
• Sell or stay in the business?
• Clearly if sells decline you must change something ( sell, change strategy?) What kind of
component would you change??
•
Consistent would be to produce the plastic watch and get rid of the other.
Do you think Swiss watches can copy the business model?
• The Japanese digital watch, firs movers, put patent on chips to create barriers.
• Labour cost in Switzerland is higher
• Know how missing in Swiss employees
Sources of organization inertia
1.Structural Inertia: organisational rigidity
In terms of
• Value chain activities and capabilities - organization of the supply chain
• The infrastructure of the value chain worked well in the past, but might obstruct the firm’s
activity in the future ( or slow down its response)
A company that is successful becomes more complex and becomes simpler:
Think of la Quinta hotel, serving just one type of target, just one thing they focused on. They
only had one task changing therefore would be be hard.
2. Structural inertia: vested interests
• There are investments in the organization that are made with an expectation of a return
•
Includes financial capital but also social capital (i.e. politics)
• Although extracting a return on investments ROI made is important, under new
circumstances you might need to reconsider !
• It can help:
• If a fixed investment generates positive cash flows in every time period (e.g. every year), the
more time periods, the greater the cash flows
• It can hinder
• But trying to prolong the extraction of revenue from a past investment can block
management from considering new sources of revenue that might be even more
profitable (fear of cannibalisaiton )
• But the new exposes the firm to the uncertainty of revenues /cost. You do not know what
happens in the future.
NO economies of learning with new products. Usually there is economies of learning from
products that exist longer, before.
Not to adapt is rational, to keep the old business model.
3. Structural Inertia: vested interests (cont)
• Often a new, disruptive technology, business model induced by a new entrant rather than an
incumbent:
•
•
•
•
Personal computers (APPLE) vs mainframes (IBM)
Citybikes HONDA vs motorbikes HARLEY
Low cost airlines vs traditional carriers
Amazon vs Barnes & Noble in internet bookselling
• Past specific investments (physical, financial, social) and existing businesses can rationally
influence the returns to new investment choices (focus on core customers needs
cannibalisation concerns - presence of sunk costs.
Sunk costs
is a further impediment to the adoption of changes
4. Cognitive Inertia: mental models
Through which we look at the world
A framework is a mindset, worldview or conceptualization of the business that shapes what we
see(do not see) and biases our decisions.
Known as mental models, cognitive maps, decision frames, some exist because we are human
beings (known as heuristic) many develop through .. slide…
Focus on the tension of a specific issue, make us blind to look on other things, bias our decision
Mental models:
We all have them
Developer over time
Good and bad characteristics
Make easier to decide on reality but the bad thing is they bias our decision.
15 November Lectures
Cognitive Inertia: (escalation of) commitment
EG. Operation „MARKET GARDEN“
Video „A bridge“: search for those information that suggest not to do this operation.
• The general said: are you sure we gonna this, it is very dangerous lots of people and soldiers
gonna die, lot of water in the woods, there are also articles about situation on the ground.
• Despite all the negative information the head officer decided to do this operation. Very
unsuccessful idea to continue with this operation
5. Cognitive inertia: escalation of commitment
What sources of disconfirming information you see in Operation Market Garden?
• experience, article evidencing information, knowledge about the situation, feeling
Information should be given to general!
SLIDE p. 32
SLIDE P. 33, additional Notes:
Success: this kind of actions was successful in the past why not using it anymore. Success may
mislead. Endgoal of a strategy but decreases ability of a company to adapt.
A firm that is trapped by its success, if it was successful once.
Confidence may create problems, too.
Core regities:
Capabilites are key drivers to success.
Core capabilities, activities that firm perform well, better than rival, but may make the fail.
Organizational Inertia example: 34.
Car always the same (chrysler)
Always adapted to platform.
SLIDE 38
If you want a new product you need to build new core capabilities.
To understand product knowledge.
You should give reputation.
Create
Big companies fail, delay adaptation to changes because they stick to their core capabilities.
EG. Kodak example.
SWISS WATCHES Case study
Slide 42 GRAPH
Not just an innovation, the dig. Plastic watch. It was a strategic innovation: not just a peace of
jewelry, but a gadget. A new product and a new market
Position your product in the middle will not be successful so you have to give up, trade offs!
VIDEO
Dream to compete with the plastic watch, from Hong Kong, which served the low end/middle
market.
Slide 44:
What kind of value added (pitcture in the middle):
Introduced a fashion component into wrist watch: not a jewelry anymore, a gadget ,
fashionable, added a component but watch is cheaper compared to traditional watches.
Clear differentiated but not a cost leader. Keep control of cost per unite. The scope was big,
target mass market world wide. Differentiation of product with focus on broad market
SLIDE 47: comparison who what how tool before and after
What kind of customers?
Young people who like technology and fashion to be cool.
Young tech-loading,
16 November: Case study swatch value chain analysis
IDEAS
Infrastructure
Implement a new low priced product according to overall strategy, merging ASUAG &
SSIH, Vertical integration,
Technology
1.engage ideas from
employees
2. copy knowledge
of suppliers
Human
Resource
1.build a good
relationship with
employees
2.hire employees
from suppliers
Primary
Activities
2.create a culture of
creativity
3. Changing supplier
Sourcing
7.creating the new
product (plastic
watch)
11. Automation
15. Creation of a
Swiss
microelectronics in
collaboration with
government and
other watchmakers
15. Creating
exchange of
knowledge
18. Shape
employees (school,
trainings,
apprenticeship )
2.produce
components on
your own,
independence
10. Patents
6. Own the
software,
equipment
12. Market Research
10. Investment in new
technology and creation of
standardization
*revitalisation of
OMEGA
6. Merge with SSIH,
who have marketing
expertise
12. Swiss made
mark put on product
to raise awareness
14 establishing a
network and
keeping a close
contact with market
trends
16. Aggressiv
marketing and
carving out niches
*creating a product for the
low end market
4. Chose the right
distribution channels and
partner
5. Entering a market with
low barriers
3. Enter new markets
through supplier
8.Value added in the in the
final assembly of finished
watches and cases
9.enter Japan when barriers
became weaker
15. Supply other industries
Operation
Marketing &
Service
Distribution
6.development of
employees know
how
*buy the new
product
10. Cannot find a
substitute
WTP(Willingne
ss to pay)
Drivers
Costs Drivers
*safe cost on
experts
1. Long term
employees,
productivity and
efficiency
3. Safe cost to
import, negotiated
well
2.safe material cost
2. Get rid of
transportation cost
11. Cut labour cost
15. High volumes
restrain costs
16. Long term
employees,
knowledge within
company end
engaged
productivity
*people buy omega
again
3. Customers know
and trust on the
suppliers products
6. Convince
peoples´awareness
12. People are
willing to pay more
for local product
14. Convince
customers
16. Respond to
needs
6. No extra cost on a
marketer
12. No need to cut
labour
14. Safe research
costs
*low end market want to
buy the product
4. Buy their products in that
specific store, on that
platform
7. People buy the finished
final product
9. Awareness of Japanese
5.
10. Cut costs
14. Reduce distribution
costs
EXAMPLE:
Branding is the Activity that effect the willingness to pay
NOTES:
Slide „the value chain“ SWATCH presentation from a student (see in the pictures).
• Sourcing: movement, suppliers,
• Vertical integration - economies of scale and economies of learning
• Quality assurance a driver for the WTP
• Colourful and fashion a marketing part impacts willingness to pay
• Automation of the production line ( technology) = (Primary A.) automation of production line
= cost driver
• Brand = activity is the branding = willingness to pay
• Low price policies is about marketing
• Distribution is about bringing the product from company to customer
• An activity need a word YOU DO SOMETHING (create, produce, design, select)
• Select fashionable retailer ( primary activity) = WTP - spontaneous purchase
• Own distribution channel ( Prim. Activity) = creates bargaining power (cost driver) = increased
quality = WTP
NOTES:
Slide 52 The value chain of Swatch
• Economies of scale = is a driver for cost per unit (cost driver)
• Development for microelectronics = making mechanics smaller and smaller(sourcing and
operation)
• Search for low cost material ( sourcing)
• Training (activity for HR for sourcing)
• Quality testing = prim. Activities
• Suppliers flexible capacity if needed more - agreement with suppliers - logistic agreements
(sourcing, operation )
• Automation (automated line dev. ) = technology operations
• Selection of employee ( HR operation)
• Fast design, advertising, no additional services, matter in database for customers ( prim.
Activities )
• Relationships with selected retailers (distr.& mark. )
• Training for employees of fo retailers ( marketing)
Notes 21 November
Firm RESOURCES = what you have
Include all assets, capabilities, organizational processes, firm attributes, knowledge, etc controlled by a
firm that enable the firm to conceive of and implement strategies that improve its efficiency and
effectiveness:
There must be assets that must be controlled by firm and must be useful.
For instance this includes:
• Tangible resources ( financial, physical etc.)
• Intangible (tech, reputation, culture, brand etc.)
• HR( specialized skills, communication abilities, motivation, knowledge)
Controlled by a firm: the HR for the flow of resources, you can never control the person but the flow, the
productivity = very specific
FIRM CAPABILITY = what you can do
Ability of an organization to perform with a minimum level of functional and with repeated, reliable
performance a coordinated set of activities, utilizing organizational resources, for the purpose of
achieving a particular end result.
• Abilities
• Doing something with a min. level of functional = achieving something with min. effort
• Repeated and reliable = to produce a product with a certain level of quality with a given amount,
constant over time
• Object
Resource heterogeneity
Superior productive factor in limited supply in a given industry. This condition is necessary to produce
Ricardian (efficiency) or Monopoly rents (market power)
Difficult for other to process this factor.
Demand higher then the supply of resources = availability is limited
Necessary to produce kind of efficiency or monopoly rants.
Why can the scarce resource not be a competitive advantage ? If we are all the same, if we possess all
the same resources there is no given competitive advantage.
Ex post limits to competition
Reflects imperfect imitability and imperfect substitutability of a firm’s resources i.e. property rights,
information asymmetric, fractions, causal ambiguity). This condition is necessary to sustain the rents
over the long run.
Resources cannot be copied or substituted by others
Resources and capabilities remain in limited supply.
Imperfect resource mobility
Reflects a condition in wich resources are perfectly immobile or they cannot be traded ( no market
where you can buy , exchange this recources) (swithcing costs, co specialized assets, transaction costs).
This condition ensures that the rents are bound to the firm shared by it
Value produced will remain in scope of firm
Very hard for human resources, a firm can never have patent on HR so employees can switch from one
firm to another, while there are methods to bind HR to your company.
If I have a resource, capability in very limited supply you cannot copy. If I can buy this resources on the
market this will be an advantage for my company
Ex ante limits to competition
Condition in which prior to any firm´s establishing a superior resource position, there must be limited
completion for that position. This condition prevents costs of the resource from off setting the rents.
Valuable: SLIDE 62, 21 November
Key consequential input to generation of net value
Consequential: non trivial, large share of value
Net value: If a resource costs you as much as it generates value for your, it cannot be a source of
competitive adbantage
May manifest itself….
Valuable:
Can the firm capture the value from the resource or does the resource appropriate the full value for
itself?
You need to capture value of a resource.
So we introduced idea of opportunity cost = to introduce some value you need to pay some cost
Examples:
Beckham: was he a source of competitive advantage for Manchester or Real Madrid
Star scientists ?
All the value is captured by the resource through the salary.
Cost of acquiring, keeping match the benefits of the source of the resource nothing is left to the firm.
United won many games, but if salary of Beckham was exactly the same as the benefits, the value is
aquired by the resource itself.
Company is increasing revenue, but salary matches the cost of CEO, the resource is not competitive
advantage for the company.
Think about future revenues and future cost.
Rare Resources
Resource in limited supply: restricted access & isolating mechanisms that prevent all players from
gaining access.
Is a fixed phone infrastructure a strategic resource for a firm in Tanzania in 1990?
(ACG CASE STUDY)
Something that is rare is valuable… this is not true!
MUST BE INIMITABLE / UNSUBSTITUTABLE resources
Inimitable = CANNOT BE COPIED
a competition cannot copy my resource
Unsubsitutable
there is not substitute for the product
Addition to VRI(s) Tool:
Source of inimitability:
(Diericky and Cool)
Time compression diseconomies
Asset mass efficiencies (generate first mover advantage)
(Barney)
History dependence (think Amazon) = idea: more assets you have, the more assets you will be able to develop in the future
Casual ambiguity
Social complexity (VRI combination of resources)
Specific resources
Organisation Specific
Value inside > value outside
(Fits within the complementary system)
NOTE:
A) A resource does not need to be S to be a source of profits
B) But unless it is organizational specific , it means that the asset is worth more outside the company.
It should be sold, by definition.
Broad duty of impact on adopting computers and IT in a broad cross section of firms during the last IT
revolution
The idea is the best use possible.
Position advantage:
Strategic positioning
decision on how to compete in an industry
A: POSITIVE FEEDBACK ON SCALE
Scale economies (supply and demand sides)
Learning curves
Switching cost
B: INCUMBENCY ADVANTAGE
Sources inputs locked up
Customer´s relationships
Reputation for aggressive response
C: STRATEGIC AGILITY
Absence of sunkness
Flexible technology
No prior commitment
Creating more values to my customers to contribute to the willingness to pay.
Resources and Capabilities
How to execute and defend a strategic position
Valuable
Rare
Difficult to Imitate or Substitute
Specific
Notes 22 November
POSITION ADVANTAGE
RESOURCE ADVANTAGE
Based on if firms have the same resources, customers, process, one firm mitght has an advantage.
COMBINE PA, RA, AND VALUE CHAIN
THE VRI(S) TOOL: APPLICATION
Create a list of inventory of the resources and capabilities
Discern which are strategic assets, in the sense of sources of uniqueness and thus profitability
Resource
Inventory
Resource1
Resource2
Resource3
Resource4
Resource5
Resource6
Valuable
Rare
Inimitable
Specific
ACTIVITY
PHYSICAL AND TECHNOLOGICAL DINSTINCT SET OF ACTIONS, THERE IS KIND OF
TRANSFORMATION, MUST TRANSFORM AN INPUT INTO AN OUTPUT. ACTION = MOVE ONE
PRODUCT INTO ANOTHER - THROUGH THIS MOVEMENT A VALUE IS GIVEN TO CUSTOMER WHO IS
ABLE TO PURCHASE. TURN INPUT INTO ANOTHER. I MUST BE ABLE TO DISTINGUISH PHYSICAL /
TECHNOLOGICAL WAYS.
RESOURCE
ALL ABOUT ASSETS, KNOWLEDGE, INFORMATION, PROCESS
FIRM RESOURCE ALL THINGS FIRMS HAS = OBJECTS
SOMETHING YOU CAN TOUCH, SEE ( LAPTOP, SOFTWARE, KNOWLEDGE)
THERE IS NO MOVEMENT, TRANSFORMATION, NOR ONGOING ACTIVITY
MUST BE CONTROLLED ON SEMI-PERMANENT BASE (SEMI BECAUSE EG HR YOU CANNOT
CONTROLL TOTALLY, YOU CAN CONTROL IT BY PRODUCTIVITY / ENDRESULTS)
CAPABILITY
ABITLY OF A FIRM TO PERFORM ON A CERTAIN LEVEL
IMPLIES USING RESOURCES FOR PERFORMING ACTIVITY
NOT SOLELY PERFORMING JUST AN ACTIVITY = EG. WRITING - BE FAST AT WRITING IS A
CAPABILITY. THE ABILITY MUST BE REPEATED. CONCEPT OF = REPEATED RELIABLE ABILITY
PERFORMING ACTIVITY WITH CERTAIN LEVEL OF FUNCTIONALITY. Must be constant
VALUE
PRODUCT SERVICE CUSTOMER PERCEIVES AND PAYS A POSITIVE PRICE FOR IT.
PRODUCT ATTRIBUTES THAT PRODUCT, SERVICE OFFERS TO ME AND THE VALUE I AM GONNA
GIVE TO THESE ATTRIBUTES. FIRM VALUES ARE INSTEAD WHAT CONNECT FIRM TO CUSTOMER.
DEMAND SIDE COMPONENTS. OBVIOUSLY THE CAPABILITY OF A FIRM TO OFFER THIS FUNCTION
TO CUSTOMER RELATION OF ACTIVITY / RESOURCES/ CAPABILITY
SLIDE 78:
EXAMPLE DISTRIBUTION
Activity
distributions products via high quality retailers (marketing, type direct) , movement = activity
Resources
Own specialized retailers (tangible) + relationships with selected vendors ( intangible)
EG: Shop ( just a place/object) + contract (intangible resource)
Capability
Speed of distribution (core capability) = eg: product is put on distribution channel within two days
Value
On distribution channels availability of desired product for the customer
What is the value? Not distributing the object fast .. no value but
Value eg. Every time I go to that specific place I know that the product is available there. THIS IS A
VALUE.
Example Design
Activity: design of product(marketing, type direct)
Resource: CAD system(intang.) + own designer (hr)
Capability: fast fashion design of product (core cap.)
Value: fashion, newness = obviously must be perceived by customer
= supply side
= demand side
Here: talking about an industry !
Resources and Capability
Case study: SWATCH
A new strategic position in the market
But for a different position you need different resources
1) What resources did they need ( to develop)
2) What resources make their competitive advantage sustainable
• New resource are necessary, need to understand which are needed, to running the production of this
product.
• Distinguish list of resource
Activity
Resources
Resorce advantage
Val Rare I
Specifi
ue
m c
it
a
bl
e
(d
iff
cu
lt
to
co
py
)
Sourcing (in
/outbound )
logistics
Operation
Marketing
Distribution
HR
Technology
Infrastructure
Agreements with battery suppliers (int.)
Agreements with consulting firms (int.)
Agreements with proof o movements (int.)
Example:
Inputs (example for tangible resource)
Storehouse (to store the items, tangible)
Relationship to partners (capability)
Automated lines
Robots
Electrical engineering
Product engineering
Testing facilities (specific equipment therefore)
Precise mech mfg
CAD systems (design)
Brand Swatch
Fast Fashion design (capability)
Designers
Ultra thin design (CAPABILITY)
Own Marketing department
Own marketing database
Own distribution channels (easy to copy)
Contract with specialized jewelries (Competitors can do the
same so no strategic resource)
Shops / retailers
Automatic ordering system
pratice/procedure for training, selection
HR DEP
Ultra thin technology (Technology but can also be design, at
that time rare, difficult to copy with movement due to some
mechanical things in inside, and hard to copy due to patent)
Patents on ultra thin batters (strategic resource)
Plastic Technology
Swiss made
Centralized production /Vertical integration
Nicole Hayek
Resources are easier to identify compared to Capabilities.
Difficult to associate activity to resource
Idea is to associate resource to main activity.
Inspiration table 5.10 in Grant !!!!!!
x
x
x
x
x
x
x
x
x
x
x
Resource Advantage
Precice mechanical manufacturing
Ultrasonic welding tech
Ultra thin tech (first mover advantage)
Swatch brand
Notes 23 November
SLIDE 86: definitions are in the book
•
•
•
•
1. Activities
2.Operational capabilities
Required for a firm to stay in industries
Necessary for production - to produce an item
Position Advantage
First mover advantage (fashion component in the
what)
Economies of scale ( standardization of assembly
lines )
Learning curve ( linked to first mover adv.)
Locked up specialized suppliers of movement
•
•
•
•
•
2.2. Dynamic capabilities
2.3.Core capabilities
Capabilities to introduce new products
2.4.Distinctive capabilities
3. Resources
Resource or Capability advantage firm must possess a key factor or develop.
Slide 87: What happened…..
A source of threat was switched on to be an opportunity
SLIDE 89: and set industry changes into motion.
SLIDE 90: and set industry changes into motion….
Evolution to smart watch
TASK: value curve for apple watch
Apple Watch:
First of all you can add and remove values.
Trade offs in this case are the higher price and effort to recharge.
The watch can be regarded not solely as a gadget but also as a fashionable jewelry. It is possible to
change bracelets to make it suitable. Other functions concerning technology.
Respond from Switch Watch - personalization! But apple watch exceeded the swatch.
Slide 94: What should swatch do to respond to all these brand new competitors ?
They embraced the idea to make the product more specific to customer. What do you think about it?
I keep the fashionable feature constant
Reduce the price
Increase the lifespan of battery
I am keeping my resource
Use the tools to answer the question, imagine how to change a strategy. The performance of swatch
tells us that their strategy is no longer valuable.
Need to do something really new they might not survive.
Summery
Slide 97: Notes
1) Rigidity and inertia
Inablity of a company to respond to a change
There more successful you are the less able a company is to respond to changes.
2) Resources analysis
Resources must be difficult to copy
Value and Rarity for value creation
I for specificity
3) Strategy Audit
Grant chapter 5
Next week chapter 6
Barney article - for the VR(s) framework optional
Read the Mc.Kinsey & Co case for next session
Strategic Management (23 nov.)
Session 8: growth and change organizational environment
Mc Kinsey case study
Slide 5, Questions to our discussion:
How do firms accumulate strategic resources (VRIS model)
• While making sure these resources stay VRIS? I.e ability to generate and capture the value
generated from them. You need to keep your resources, valuable rare and difficult to copy
• Barnes and noble used resources to go online
• You need to grow resource that are valuable, rare, difficult to copy
What is the role of the organizational environment (as a device to reduce organizational cost) in
the process of accumulating VRIS resources?
• We introduction organizational environment is a tool
• Illustrate in knowledge intensive industry (consulting, other professional services)
• Cost of reproducing knowledge is zero, it will take time to create a chart.
•
Slide 8:
Imagine you are a consultant what do you need?
• Me
• A fine track of records
• Energy, know how
• Good word
• Good contact as first client
Notes 28th November
Key conditions for organizational capabilities
• Specific knowledge to generic knowledge ( transform knowledge and pass it on )
Huma capital to be VRI for the firm must also be S, or equivalent
… Value creators of firm > sum of human capital
…Cannot be as effectively used in outside option, by competitor
…employee cannot wholly bargain for value add
The more strategic resources a firm has the greater is its comp advantage
Notes 6th December
Technology S Curve
As a company it is important to survive the cycle of technological improvement.
Be faster then competitors with resources and capabilities.
Disrupting technology = technological substitution ( develop changing capacity)
Organisationnel change
CASE:
What should Lars Kolind do? Slide 45
Resources(existing):
• Have superior technology still good R&D
• Good reputation with hearing clinics
• Brand name
Define positioning (Who, what how) and resources!
Behind positioning and resources there is the organizational environment - which needs to be changed.
Case study:
What are they trying to accomplish?
a) what has changed? Slide 65
• Remove offices
• Multi jobs
• Spaghetti organisation
• Flexible office
• Paperless
Notes 12 December
Slide 4:
„ We set up our strategy“
• Position
• Decide on resources and capabilities
„intended strategy“= going from A to B
The strategy is the mechanism of going from A to B
• Target customers
„realized strategy“ = state at which a firm will actually arrive
Between intended and realized strategy there is a gap
While implementing strategy:
*facing problems
*dealing with organizational problems
Focus of today’s class on action:
1) How does intended strategy shape day to day action?
Intended strategy -> linked with ACTION -> Realized Strategy
2) How does day to day action shape realized strategy?
Good: correcting strategy through action.
Implementing strategy can be a source of comp.- advantage. Therefore the gap between intended and
realized strategy can be also positive.
Case Study: Sabena
Introduction
• Connected Belgium with colonies in Kongo
• Was able to expand, became a world wide flight company
• Profitabel company
• Deregulation and changing relationship with Kongo, the colony was closed.
• The company almost went bankrupt
• Time to change strategy: Slide 7
• Company known for: Quality, Punctuality = „differentiation strategy“
• For that company cost leader ship was hard, could have been an pontential option, but considering
the industrial environment differentiation strategy is to be implemented.
Why not cost leadership?
Regulation changes a lot,
Financial performance problems - cost leadership is a save strategy
There is deregulation due to competition, as a cost leader you have an advantage to survive
Considering AB strategy - transform intended into realized strategy l
Truly differentiation strategy: perform quality, maintain cost.
Increase level of service to customer, keep constant, reduce cost of reducing the service
Company needs to consider also the cost dimension !
Video:
Focus on constraints important for decisions and constructions:
Mckinsey framework changed too
To Select an action you have to set your goals and objectives!
Same alternative can work but not for the other
Objectives
Solving the problem
Implementing the differentiation strategy
Creating the idea of responsibility
Create trust
Prove myself to the boss
Actions