IB - Module 8

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Strategy
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what businesses want to achieve, its environment, resources, structure, activities and employees behaviour
Mintzberg's typology of strategies
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Intended strategy - plan; Unrealised strategy - part of the plan that failed; Deliberate strategy - part of the plan that happened; realised strategy; emergent strategy - not planned, but happened during
plans vs patterns
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distinction between intentions and what happens in reality
Rational approach
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analysis; future-focused; deals with intended strategy; contingency thinking; fit between Strengths&Weaknesses (internally) and Threats&Opportunities (externally); SWOT as a tool, but might be inaccurate
Flexible approach
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managers should have multiple intended strategies: when the environment moves fast, don't work towards single SWOT, be prepared for change by envisioning scenarios; preparing for few scenarios isn't free, not very efficient
Creative approach
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analysis too much based on info that others have as well; analysis paralysis - delay of decisions and action; encourages managers to use their own imagination and vision; rational&flexible approach also require creativity; it is based on some knowledge
Similarities between rational, flexible and creative approach
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they tell you how to get intended strategy; these approaches give suggestion and advice on how to formulate strategy; we call it a PRESCRIPTIVE theory
Prescriptive theory
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tips, tricks, how-to; theory can be put into practice; common in business&management, not in Biology; consultants, management gurus
Descriptive theory
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describe, understand, predict real life; theory can be tested & falsified; academics; explore how strategy is actually formed
Behavioral approach
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describes and predicts that: values, ideology, personality of top managers determine how the environment is perceived and which strategies get picked and implemented; power&politics impact strategy formulation rather than rational analysis
Emergent (incremental) approach
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objectives are constantly adjusted as people figure things out; people learn WHILE doing (not before); predicts that strategies spontaneously happen and emerge; strategy does not concern only top managers
Contingency
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fit between organisational characteristics and business environment
Macro-environment analysis
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SEPTEmber; PESTE
Industry analyses
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industry lifecycle; five competitive forces, stakeholder analysis
Market analyses
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5 Ps; customer needs, marketing shit
SEPTEmber analysis (PESTE)
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Political, Economic, Socio-cultural, Technological, Ecological segments
Political-legal segment in PESTE
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political stability, taxation, terrorism, trade regulations
Economic segment in PESTE
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income per capita, unemployment, inflation
Socio-cultural segment in PESTE
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noticing changes in demographics, education, life expectancy
Technological segment in PESTE
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new technologies, e-commerce, energy accessibility
Ecological segment in PESTE
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risk of natural disasters, ecological investment, availability of natural resources
Industry lifecycle analysis
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4 stages: Initiation, Growth, Maturity, Decline; industry defined around products; industry consists of competitors producing goods and services
Initiation stage of Industry lifecycle
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many new entrants, i.e. parcel deliveries by drones
Growth stage of Industry lifecycle
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new entrants, demand for the product is still growing
Maturity stage of Industry lifecycle
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many companies exit the industry, the peak sales are behind us
Decline stage of Industry lifecycle
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sales decrease, profit decrease
Remarks on Industry lifecycle analysis
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in growing industries, it's easier to find new markets and clients; in mature and declining, finding new clients is difficult; in mature industries, firms on average have lover costs (due to EXPERIENCE CURVE)
Experience Curve
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as a business gains more experience producing a product, costs go down; as an industry gains more experience producing a product, costs of the firms within the industry should on average go down
Porter's Five Forces Analysis
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Threat of New Entrants; Bargaining Power of Buyers; Bargaining Power of Suppliers; Threat of Substitutes; Competitive rivalry
Threat of New Entrants in Five Forces
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it prevents current firms from charging too much - average profitability lowers; this threat is determined by entry barriers; high barriers to entry make the industry more attractive to the current players
Entry barriers
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benefits of scale; economies of scale; industry maturity; customer switching costs are high; capital requirements - sometimes investments are required; access to distribution channels
Bargaining Power of Buyers in Five Forces
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if buyers from industry are powerful they'll pay less, hence reduce profitability; this power is high when the concentration of customers is broad and switching costs are low; bargaining power of buyers becomes relevant when buyers are price-sensitive
Price sensitivity is high when
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generic product is not important; buyers have low margins; industry product gas a large share of customers' cost structure
Bargaining Power of Suppliers in Five Forces
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if suppliers to your industry are powerful, they can charge more, hence reduce the profitability
Bargaining Power of Suppliers is high when
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there are few alternatives (concentration); switching costs of industry players are high
Threat of Substitutes in Five Forces
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substitute performs same or similar function, but is a different product, different industry; if industry product can easily be substituted
Threat of substitutes is high when
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substitutes are available; substitutes have better price/performance ratio; switching costs are low
Competitive rivalry in Five Forces
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NOT every competitor is a rival&rivalry is not always high; Rivalry drives down profits (players incur costs or reduce)
Rivalry is high when
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there are many competitors or competitors are of equal size; industry growth is slow; exit barriers are high - players cannot exit the industry; few opportunities to differentiate and focus on own group of customers
Stakeholder analysis
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it helps to map out most important stakeholders: with a large stake in the company or with power to affect the company
Types of resources
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Physical, Human, Financial, Organisational
VRIO model - competitive advantage
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Valuable - allows to create value; Rare - must be rare, otherwise there's no advantage; Imperfectly imitable - if competitors can imitate, I'll lose my advantage; Organization - we can efficiently and effectively deploy the resource to create value
Confrontation analysis
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confronting, comparing, contrasting internal vs external findings; these confrontations are the tuning point where you go from strategic analysis to formulating strategy
Portfolio analysis (BCG Matrix)
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confronts one internal factor (market share) with one external (growth rate of the market for product or SBU)
Cash Cows in BCG Matrix
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require few investments instead generate cash flow to invest somewhere else; High Market Share, Low Growth Market - strong position, but few investments required
Question Marks
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Low Market Share, High Growth Market; easy opportunity to win customers
Stars
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High Market Share; High Growth Market; best shot at future cash flow; investments are necessary to maintain the lead, but less risky than Question Marks; not all companies have a Cash Cow or Question Mark or Star un portfolio
Dogs
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Low Market Share; Low Growth Market; few opportunities to gain new customers; weak position; if you have a portfolio of products or SBUs, do not invest in Dogs
SWOT analysis
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Confrontation should give rough ingredients or inspiration or input for strategy formulation; for each OT: which SW are relevant and need to exploited or compensated; leads to unique solution - strategy as fit between organisation and environment
Formulating strategy
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Real-life managers are usually not formulating new intended strategies all the time; There are prescriptive approaches that suggest how this can be done - Generic Strategy and Strategy Statement
Generic strategy
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a company with a good generic strategy is less affected by the Five Forces; two ways to gain competitive advantage - 1. Cost Leadership, 2. Differentiation
Cost leadership
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sells at the average price, but can minimise the costs of production (due to economies of scale or going furthest in the experience curve)
Differentiation
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Differentiator can set higher prices, has higher costs, but can deliver a good in a way that the customer perceives more benefits
How cost leader can prevent himself from the effects of Five Forces?
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Rivalry - margin to win the price wars; Threat of entrants - scale economies as an entry barrier; Threat of substitutes - cost leader matches price/perform. ratio; Buyer power - enough margin to deal; Supplier power - less profitable more affected
How differentiators can prevent themselves form the effect of 5 forces?
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Rivalry - only with players on similar dimensions; Threat of Entrants - switching costs; Threat of substitutes - switching costs; Buyer power - switching costs, enough margin to deal; Supplier power - less profitable competitors more affected
Focus
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focus on smaller niche or segment within broader industry
Strategy statement
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simple, clear, succinct statement that everyone can internalise and use as a guiding light for making difficult choices; consists of 3 elements - strategic objective, scope, competitive advantage
Strategic objective
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quantifiable target (sales, sales growth); time bound (in five years, each year etc.); can be used to evaluate; i.e. "to remain the most profitable player in the airline industry"
Scope
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description of product and customers (markets or segments, location); choice for scope is informed by choice for generic strategy; clear description of intended customer group
Competitive advantage
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Value proposition - dependent of choice on generic strategy, it explains why the targeted customer should buy your product; Internal Alignment - how activities, resources, competences are aligned

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