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): 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-price buyer value delivered 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 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, 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 STRATEGYSTRATEGY Values of Managers Values of Shareholders Objectives Drivers Internal Environment External Environment References: Andrews, 1971; Hofer and Schendel, 1978

Craft a Strategy to Achieve Objectives Craft a Strategy to Achieve Objectives Set Objectives Set Objectives Develop a Strategic Vision and Mission Develop a Strategic Vision and Mission Implement and Execute Strategy Implement and Execute Strategy Improve/ Change Revise as Needed Revise as Needed Improve/ Change Recycle as Needed Task 1Task 2Task 3Task 4Task 5 Monitor, Evaluate, and Take Corrective Action Monitor, Evaluate, and Take Corrective Action Strategic Management Tasks

Assets/ Core Competencies Inputs, Raw Material Product/ Service Offering Channels The Customer The Traditional Value Chain Start with Assets, Core Competencies Customer Priorities ChannelsOffering Inputs, Raw Material Assets/ Core Competencies The Modern Value Chain Start with the Customer Redefining the Value Chain (Slywotzky, Morrison, 1997)

Customer Priorities ChannelsOffering Inputs, Raw Material Assets/ Core Competencies Truly Understanding the Customer The Modern Value Chain (Slywotzky, Morrison, 1997) Decision-Making Process Purchase Occasion Preferences Buyer Behavior Power over decision Customer Anger (against existing products) Functional Needs Purchase Criteria

Porter’s (1980) Five Forces Model of Competition Threat of Substitute Products 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

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

Bargaining Power of Suppliers Suppliers exert power in the industry by:  Threatening to raise prices 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 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 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 of each other

Threat 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 High, Risky Returns Entry Barriers Exit Barriers High Low HighLow Low, Stable Returns High, Stable Returns Low, Risky Returns

Future Objectives How 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 Strategy How 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 Objectives How do our goals compare to our competitors’ goals? Where will emphasis be placed in the future? What is the attitude toward risk? Current Strategy How 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 Response What 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

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