CH1 What is Business Strategy? What is business strategy? Business strategy is defined as a company’s dynamic plan to gain and sustain competitive advantage in the marketplace Based on the theory its leaders have about how to succeed in a particular market Unique value: the reason a firm wins with customers or the value proposition it offers to customers, such as a low cost advantage or differentiation advantage or both Apple – music download business = iTunes store 1. 2. 3. 4. Where to compete How to offer unique value relative to the competition in the targeted markets What resources or capabilities are necessary to deliver that unique value How to sustain a competitive advantage once it has been achieved Competitive Advantage The scoring is measured by looking at the profits generated by each firm A firm has a competitive advantage when it can consistently generate above-average profits Above-average profits are profit returns in excess of what an investor expects from other investments with a similar amount of risk Universities, hospitals… measure success using tangible outcomes such as the number of degrees granted, patient health and satisfaction measures… Toyota’s advantage in automobiles has come primarily from its manufacturing operations (known as the Toyota Production System) The Strategic Management Process Strategic management process: the process by which organizations formulate a plan and allocate resources to achieve competitive advantage that involves making four strategic choices (1) Where to compete (2) How to offer unique value relative to the competition in the targeted markets (3) What resources or capabilities are necessary to deliver that unique value (4) How to sustain a competitive advantage once it has been achieved - External analysis: examining influence industry attractiveness, including opportunities and threats that exist in the environment Internal analysis: analysis of a firm’s resources and capabilities to assess how effectively the firm is able to deliver the unique value that it hopes to provide to customers [strategy formulation] [Figure 1.2] - - - Markets Industries Apple used to be in the computer industry before iPod – iPhone Unique value Try to achieve a competitive advantage Cost advantage: an advantage that a firm has over its competitors in the activities associated with producing a product or service, thereby allowing it to produce the same product at lower cost Differentiation strategy: advantage over competitors by making attractive Apple’s unique value is offering iPod (music players), iPhone (smartphones) and iPads (tablets) Starbucks – offering multiple blends of high-quality coffee in convenient locations Both low price and a differentiated product turns out to be a powerful source of competitive advantage Resources and capabilities - Perhaps the most critical role of the strategist is to figure out how to build or acquire the resources and capabilities necessary to deliver unique value Starbucks – retail store locations, recipes… The strategy implementation plan involves the company developing a set of processes (capabilities) within each function that align with the unique value the company hopes to offer Walmart – low price – focused on how it can perform its activities at the lowest possible cost Sustaining Advantage Prevent competitors from easily imitating its products and services What Information and Analysis Guides Strategy Formulation? Analysis and strategy made within the context of the company’s mission Mission A company’s mission outlines the company’s primary purpose and often specifies the business or businesses in which the firm intends to compete or the customers it intends to serve Mission to refer to the primary purpose of the organization Starbucks – offers higher-quality coffee than traditional coffee shops and included many varieties at a premium price “to nurture and inspire the human spirit – one person, one cup, and one neighborhood at a time” When they grow and develop, statements often define the core values that a firm espouses External Analysis 1. An examination of the competition and the forces that shape industry competition and profitability 2. Customer analysis to understand what customers really want External + Internal analysis = SWON analysis = Strengths, Weaknesses, Opportunities, and Threats Industry Analysis Software, soft drinks, pharmaceuticals > airlines, steel – profitability Customer Analysis Price sensitivity: the degree to which the price of a product or service affects consumers’ willingness to purchase the product or service Segmentation analysis: dividing up customers into groups or segments based on similar needs or watns External analysis should enlighten managers about the competitive forces that influence the profitability of particular market and industries, as well as opportunities and threats Internal Analysis Focus on the company itself Resource-based view of the firm: determining the strategic resources available to a company Assumes that each company is a collection of resources and capabilities that are deployed to deliver unique value Resource allocation How Are Strategies Formulated? Involves selective which actions the company will take to gain and sustain competitive advantage Corporate strategy: decisions about what markets to compete in, made by executives at the corporate level of an organization Business unit strategy: decisions about how to gain and sustain advantage, made at the manager level for each standalone business unit within a company / typically have their own profit and loss responsibility Functional strategy: decisions about how to effectively implement the business unit strategy within functional areas like finance, product development, operations, information technology, sales and marketing, and customer service Strategy Vehicles for Achieving Strategic Objectives Strategy vehicles: activities and strategic choices – such as make versus buy, acquisitions, and strategic alliances – that influence a firm’s ability to enter particular markets, deliver unique value to customers, or create barriers to imitating its product Strategy vehicles include diversification, acquisitions, alliances, vertical integration, and international - expansion Ex) Apple acquired Siri [figure 1.3] Strategy Implementation Strategy implementation: the translation of a chosen strategy into organizational action so as to effectively implement the activities required to achieve strategic goals and objectives Requires following: 1. The functional strategies within the company 2. The organization’s structure, systems, staff, skills, style, and shared values are designed to facilitate the execution of the strategy To ensure successful implementation, the organization should have clear metrics, or ways to measure whether or not the plan is being implemented Who is Responsible for Business Strategy? Strategic leaders: organizational leaders charged with formulating and implementing a strategy with the objective of ensuring the survival and success of an organization Formulate, explaning Deliberate strategies: a plan or pattern of action that is formulated through a deliberate planning process that is then carried out to achieve the mission or goals of an organization Emergent strategy: a plan or pattern of action that develops and emerges over time in an organization despite a mission or goals Apple music industry grows up because of iPod and iPhone Who Benefits from a Good Business Strategy? Stakeholders: those who have a share or an interest in the activities and performance of an organization 1. Capital market shareholders 2. Product market shareholders 3. Organizational stakeholders 4. Community stakeholders Shareholders: owner of the company CH2 Analysis of the External Environment: Opportunities and Threats - One of the key threats a strategist must understand and cope with is competition Customers, suppliers, potential entrants, and substitute products Determining the Right Landscape: Defining a Firm’s Industry Select the industry, and market in which it will compete 1. Industry 2. The product and geographic markets With many large firms choosing to compete in several at the same time Understanding customer needs can be very helpful in defining the boundaries of an industry Five Forces that Shape Average Profitability Within Industries 1. Rivalry: competition among firms within an industry. Typically this involves firms putting pressure on each other and limiting each other’s profit potential by attempting to gain profits and/or market share 2. Buyer power 3. Supplier power 4. Threat of new entrants 5. Threat of substitute products Ex) in the semiconductor industry, the threat of substitutes is almost nonexistent, while in the carbonated soft drink industry it is a significant threat Careful analysis of the five forces is a powerful way for firms to discover the threats and opportunities in their environments Rivalry: Competition Among Established Companies Different types of move increase rivalry [figure 2.2] - Following seven factors are critical to understanding the intensity of rivalry in an industry 1. The number and size of competitors Industry with a lot of competitors a fragmented industry 2. Standardization of products Different features or better quality, tend to engender loyalty in customers because they meet customer needs in unique ways 3. (Low) Costs to buyers of switching to another product Switching costs: barriers that help keep buyers using the same supplier by imposing extra costs for switching suppliers The lower to switching costs, the easier it is for competitors to poach customers, thereby increasing industry rivalry 4. (Slow) Growth in demand for products When demand is increasing rapidly, most firms can grow without taking existing customers from competitors 5. (High) Levels of unused production capacity Unused production capacity is expensive When more is produced than is demanded in the market, firms often have to drop their price or risk having unsold product 6. High fixed costs and highly perishable products (and High Storage Costs) If there’s few passengers, do the discount and fill as many seats as possible Fruits or vegetables can get easily spoil, so grocery chains often steeply discount it rather than lose the sale completely If firms have an oversupply and are forced to store the product, they may discount the price to avoid storage costs 7. The difficulty for firms of leaving the industry (High Exit Barriers) They stay because they have made investments in specialized equipment that can’t be used in any other industry Buyer Power: Bargaining Power and Price Sensitivity In two situations, buyers have more power 1. Buyers hold a stronger bargaining position than sellers 2. Buyers are price-sensitive Buyer Bargaining Power Four key factors influence the degree to which buyers have bargaining power over their suppliers
