6/15/20151 Business Strategy Tutorial for MSFA students in Alliances & Acquisitions Dave Garten

What is a Strategy? “plan of action designed to achieve a particular goal” – Wikipedia Strategy statement – 2 parts The objective + the “how” Fictional examples for Nissan Market: Achieve #1 market share in electric vehicles by 2012 by introducing the “Leaf” and selling 500,000 units. Financial: Achieve positive operating margin on the Leaf by 2012 by driving down battery cost to $200/watt. 6/15/2015Dave Garten – Business Strategy2

6/15/2015Dave Garten – Business Strategy3 Strategy Development External Analysis “Basis of Competition” Internal Analysis “What we have” Mission Strategy R & D Supply Mftg Sales Mktg Coordinated action (tactics) “Translation of Strategies” Frequency

6/15/2015Dave Garten – Business Strategy4 External - Industry Structure Source: Derived from Barney, Gaining & Sustaining Competitive Advantage Strategy Flexibility High Low Degree of Competition Low High Profitability Monopoly Oligolpoly Monopolistic Competition Pure Competition

6/15/2015Dave Garten – Business Strategy5 External - Industry Structure Innovators Early Adopters Early Majority Late Majority Laggards Emerging Features Mature Quality & reliability Declining Price Product innovationProcess innovation Growth service

6/15/2015Dave Garten- Business Strategy6 External–Trends/Environment - “PESTAL” Political Telecom, deregulation, govt ownership, trade barriers, subsidies, free speech, etc. Economic Income, spending, interest rates, GDP, stock mkts, etc. Sociocultural Demographic, psychographic, education, etc. Technological New standards, new processes, new features, etc. Environmental International pressure groups, env. laws, waste regulations Legal Intellectual property, antitrust, etc.

6/15/2015Dave Garten- Business Strategy7 External - Structural Opportunities Fragmented -> consolidation Emerging -> TTM, locking up resources, tech switching cost “Network” -> standards, n**2 Mature ->incremental innovations, service Declining ->shakeout leadership, niche, divest Source: Derived from Barney, Gaining & Sustaining Competitive Advantage

6/15/2015Dave Garten- Business Strategy8 External - Industry Structure Threats - Applying Porter’s 5 Forces 1.Threat of Entry  Economies of scale (production, distribution), Product differentiation (brand, switching costs), other cost advantage (know-how, patent, access to raw materials, location), contrived deterrence, govt 2.Threat of Rivalry  # of competitors, size/influence of competitors, industry growth rate, level of differentiation (vs. price), step function of capacity 3.Threat of substitutes  Deliver the product/service in a different way? 4.Suppliers  Bargaining power, # of companies, level of differentiation, threat of vertical integration, threat of substitutes 5.Customers  Mirror image of suppliers Vertical Horizontal Source: Derived from Barney, Gaining & Sustaining Competitive Advantage

6/15/2015Dave Garten- Business Strategy9 Internal – Strength/Weakness Value chain analysis – varies by firm… Customer Service Distribution Sales & Marketing Manufacturing Development Research

6/15/2015Dave Garten- Business Strategy10 Internal - Core Competence Defined: What can a company do w/its core competence? Delivery of new products, services, alliances Expand into related products and businesses Shape future markets Examples: Canon, HDTV, 3M, Honda Source: derived from The Core Competence of the Corporation, by C.K. Prahalad and Gary Hammel, HBS, c collective learning that coalesce around individuals who coordinate a comprehensive set of diverse skills & integrate multiple streams of know-how

6/15/2015Dave Garten- Business Strategy11 Core Competency and Success Core Step 1 (38%) Step 2 (26%) Step 3 (7%) Diversification (<1%) Source: Bain, October 2003

6/15/2015Dave Garten - Business Strategy12 Core Strategies - Differentiation “increase in perceived value relative to the perceived value of other firms” - Barney “If you can’t differentiate yourself in this world, you get commoditized instantaneously. So we are constantly driving for more innovation, more differentiation and more technology.” - Jeffrey R. Immelt, Chairman and CEO, GE

6/15/2015Dave Garten - Business Strategy13 Core Strategies - Differentiation Why differentiate? Ways to differentiate Organizing for differentiation Better chance to be profitable Preference -> loyalty -> stickiness -> profitability (basis for monopolistic competition) Brand, features, services, bundled solutions, timing, location, distribution, customization, technology

6/15/2015Dave Garten - Business Strategy14 Core Strategies - Cost Leadership Manufacturing businesses Conventional: High MSS -> High accumulated volume  low unit cost -> high profitability Experience curve (learning), know-how, IP, specialization, improvements Service businesses Know-how; experience curve applies Cost structure Labor, capital, land, raw materials, geography, use of technology, government policy Organizing for cost leadership Source: Derived from Barney, Gaining & Sustaining Competitive Advantage

6/15/2015Dave Garten - Business Strategy15 Core Strategies - Vertical Integration Degree of control over value chain Forward integration  toward customer Backward integration  toward R&D Flexibility Market efficiency Focus on CC Market Governance Vertical Integration Alliances Control Supply certainty Dilution of CC Antitrust Secrecy

6/15/2015Dave Garten- Business Strategy16 Strategy Evaluation Tool SWOT & Strategy Development Opportunities (O) Threats (T) Strengths (S)Weaknesses (W) SO Strategies ST Strategies WO Strategies WT Strategies Use strengths to take advantage of opportunities Use strengths to avoid threats Overcome weaknesses by taking advantage of opportunities Minimize weaknesses and avoid threats Source: Strategic management by Fred R. David

6/15/2015Dave Garten – Business Strategy17 What is Good Strategy? How do you know a good strategy when you see it? Will have many of these qualities: X