1.1 Strategic Management

2. Internal Analysis (SW)External Analysis (OT) Value chain PESTEL VRINE 5 Forces Corporate value Game theoryArenas Staging Vehicles&EconomicM&A Logic Pacing 4C Differentiators ImplementationStrategy Business planPeople SymbolsStructure Resource allocation RewardsProcesses Organizational design/3Strategic Management 3. 4 Strategic Management 4. Decomposition of Variation in Profit Rates for Business Units of Diversified CompaniesCorporate parent effect4% UnexplainedBusiness-unit variation effect 43% 32% Year effect Industry effect 2%19%Source: McGahan & Porter (1997 Strategic Management Journal)5Strategic Management 5. Aldi invades Badger territory Bargain hunting Whats different about Aldi? Implications for rivals Competitive advantage & internal analysis What resources/capabilities lead tocompetitive advantages? When are advantages sustained over time?6Strategic Management 6. Owns discount-supermarketgiant Aldi Sud, one ofGermanys (and Europes)dominant grocers. 1,000 U.S. stores in 29 states. Estimated sales: $37 billion. Brothers split ownership in61; Karl took southernGermany, U.K., Australia &the U.S. Theo got northernGermany and the rest ofEurope. Brothers transformedmothers corner grocerystore into Aldi. Fiercely private: little knownother than he apparentlyraises orchids and plays golf.7Strategic Management 7. Value proposition: Did you save money? Nature of Competitive Advantage? Prices are typically 20-40% lower, yet Karl & Theo havedone ok. Why is their cost structure lower? Recent news: Shoppers Stretch Dollars, Skipping big names (WSJ, 10/4) Wal-Mart retreats from Germany since Aldi has lowerprices. Now Aldi is pushes into the U.S. (WSJ, 1/09) Wal-Mart Loses Edge: Perception that retailer no longerhas best prices (WSJ, 8/11) Sustainability? Can rivals catch up?8 Strategic Management 8. Strengths Weaknesses V aluable R are I nimitable Non-substitutable E xploitableOpportunitiesThreatsEconomic Socio-Cultural EntryBarriersPolitical Supplier PowerRivalryBuyer PowerTechnological SubstituteProducts LegalEnvironmental9 Strategic Management 9. Technology Development Integration Human Resource Management Procurement procurement Purchasing & Infrastructure (accting, finance, etc.) Store ops/ Mktng/ Service Inbound Operations Mktng/ Service Logistics Inventory AdsSales10 Strategic Management 10. Valuable: When are resources strategicallyvaluable? Rare: Why might resources be scarce? Inimitable: What prevents rivals from imitating? Non-substitutable: What strategic substitutesmay eliminate rivals need for the focal resource? Exploitable: What may hinder firms from utilizingor capturing the gains from resources?11Strategic Management 11. VRINE FrameworkResource/Capability Attributes Inimitable & Non- Exploitable Competitive Valuable? Rare? substitutable? by the Firm? Outcome: No No NoNoDisadvantageCompetitive Yes NoNoNo ParityPotential YesYesNoNo AdvantageTemporary YesYesNoYesAdvantageSustained YesYesYes YesAdvantageSource: Barney, Strategic Management & Competitive Advantage12 Strategic Management 12. Firm-Specificity: assets arent applicable to rivals Knowledge of Genzymes proprietary research program for an orphan disease may not be applicable to a firm that cannot serve that niche. Causal Ambiguity: Unclear what leads to success eHarmony: what makes a good match? Cask-backwards -- Winemaking skills are so tacit that rivals cant imitate the process. Complexity: embedded in teams/networks/assets IDEO relies on social ties to leverage learning from past design projects. Brokers control 95% of clients (if you keep them).13 Strategic Management 13. 14 Strategic Management 14. Imitate or substitute? What policies cant be copied? Are there strategic substitutes? Teams 1-3/12-14: Copps, Metcalfes, or Hy-Vee Teams 4-5/15-16: Wal-Mart, Sams Club, Costco, Woodmans Teams 6-7/17-18: Cub Foods or Pick-N-Save Team 8-9/19-20: Whole Foods, Trader Joes, Fresh Madison Mkt, or Willy St. Coop Team 10-11/21-22: PDQ, Stop-N-Go, Stop-N-Shop, Quick Mart Repositioning? In response to Aldi. Should your client change anything? In response to other rivals shifting positions?15Strategic Management 15. 49% 50% 45% 45% 40% 35% 30% 25% 20% 15% 10%5% 5% 1% 0% Very easily Somewhat easily Somewhat difficult Very difficult16Strategic Management 16. Technology Development Integration Human Resource Management Procurement procurement Purchasing & Infrastructure (accting, finance, etc.) Store ops/ Mktng/ Service Inbound Operations Mktng/ Service Logistics Inventory AdsSales17 Strategic Management 17. 18 Strategic Management 18. Prices 30% - 50% less than full svc grocery chains Limited choices for Aldi customers 1400 items (vs. 25,000 in supermkts) & 1 pkg size/category. 90% private label, but comparable quality to top brands. No bakery, fresh meat/seafood, deli, preparedfoods, florist, pharmacy, greeting cards, magazines. Stores are < 1/3 the size of average supermarket. Limited services for Aldi customers No cart collecting: Shoppers pay 25 (refunded upon return). Shoppers bag their purchases: Can bring bags, or buy(5=paper or 10=plastic). 10 employees/store, including manager (3 at a time). No advertising/coupons & unlisted phone numbers. No shelf stocking: Merchandise sold from crates. Open 9am - 7 pm & closed Sundays. No checks, credit cards or coupons. Stores located near rival supermarkets.19 Strategic Management 19. Introducing Join the Club20 Strategic Management 20. 22 Strategic Management 21. 45%42% 40%37% 35%33%32% 30%26% 25%24%21% 20%17%14% 15%11% 10% 5% 0%24 Strategic Management 22. Cost/differentiation trade-off seen as either/or: Delivering higher value to customer costs more. So, cannot deliver superior value & be low-cost leader. Companies that dont commit to being one or theother wind up being neither Not differentiated enough to avoid price war. Not cost-efficient enough to win price war.Stuck in?the middle ? Low-cost Differentiatorleader25 Strategic Management 23. Stuck in middle trap is a risk if the firm lacks focus (all things to all people). But Cost/differentiation is a trade-off only if the firm does the same set of activities as rivals. However: a different set of activities may be better and cheaper. Revolutionary business models offer create value through distinct value chain activities (e.g., Southwest, Dell, Vanguard, Wal-Mart). Business units with both cost & differentiation advantages have > ROI (Miller & Dess, 1996) 8 12% higher than those with only one advantage, and 25% higher than units with neither advantage.26 Strategic Management 24. Internal capabilities. While market opportunities & firm capabilities are both key, competitive advantages often arise in unattractive industries. Systematic analysis. Resources and capabilities can be identified and analyzed systematically using the value chain and VRINE frameworks. Strategic Factor Markets. Many strategic moves occur in markets for capabilities. How can firms acquire capabilities at a bargain in such markets?27 Strategic Management