IB - Module 8

Strategy

what businesses want to achieve, its environment, resources, structure, activities and employees behaviour

Mintzberg's typology of strategies

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

distinction between intentions and what happens in reality

Rational approach

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

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

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

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

tips, tricks, how-to; theory can be put into practice; common in business&management, not in Biology; consultants, management gurus

Descriptive theory

describe, understand, predict real life; theory can be tested & falsified; academics; explore how strategy is actually formed

Behavioral approach

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

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

fit between organisational characteristics and business environment

Macro-environment analysis

SEPTEmber; PESTE

Industry analyses

industry lifecycle; five competitive forces, stakeholder analysis

Market analyses

5 Ps; customer needs, marketing shit

SEPTEmber analysis (PESTE)

Political, Economic, Socio-cultural, Technological, Ecological segments

Political-legal segment in PESTE

political stability, taxation, terrorism, trade regulations

Economic segment in PESTE

income per capita, unemployment, inflation

Socio-cultural segment in PESTE

noticing changes in demographics, education, life expectancy

Technological segment in PESTE

new technologies, e-commerce, energy accessibility

Ecological segment in PESTE

risk of natural disasters, ecological investment, availability of natural resources

Industry lifecycle analysis

4 stages: Initiation, Growth, Maturity, Decline; industry defined around products; industry consists of competitors producing goods and services

Initiation stage of Industry lifecycle

many new entrants, i.e. parcel deliveries by drones

Growth stage of Industry lifecycle

new entrants, demand for the product is still growing

Maturity stage of Industry lifecycle

many companies exit the industry, the peak sales are behind us

Decline stage of Industry lifecycle

sales decrease, profit decrease

Remarks on Industry lifecycle analysis

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

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

Threat of New Entrants; Bargaining Power of Buyers; Bargaining Power of Suppliers; Threat of Substitutes; Competitive rivalry

Threat of New Entrants in Five Forces

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

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

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

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

if suppliers to your industry are powerful, they can charge more, hence reduce the profitability

Bargaining Power of Suppliers is high when

there are few alternatives (concentration); switching costs of industry players are high

Threat of Substitutes in Five Forces

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

substitutes are available; substitutes have better price/performance ratio; switching costs are low

Competitive rivalry in Five Forces

NOT every competitor is a rival&rivalry is not always high; Rivalry drives down profits (players incur costs or reduce)

Rivalry is high when

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

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

Physical, Human, Financial, Organisational

VRIO model - competitive advantage

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

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)

confronts one internal factor (market share) with one external (growth rate of the market for product or SBU)

Cash Cows in BCG Matrix

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

Low Market Share, High Growth Market; easy opportunity to win customers

Stars

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

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

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

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

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

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

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?

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?

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

focus on smaller niche or segment within broader industry

Strategy statement

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

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

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

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