lecture #4 - business strategy

8/13/2019 Lecture #4 - Business Strategy

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Introduction toAdministrative StudiesADMS1000

Petrenko Anton, PhDOffice Hours: By appointment

E-Mail: [email protected]


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In this lecture, we will discuss the topic of strategic management and some of the

challenges the business faces in the process. We will focus on the models thathelp business managers to analyse the internal and external environments of the

firms with a view to developing business and corporate strategies.

Lecture Objectives

1. Describe the nature of strategic management

2. Identify the key forces within industry environment

3. Explain the role organization of resources and capabilities play in firms

performance

4. Describe generic business strategies

5. Explain the nature of corporate strategies


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Strategic Management

Strategic management is the ongoing process of

analysis, decisions, implementations, and

evaluations of outcomes that a firm undertakes tocreate and sustain its competitive advantage.

Strategy can be defined as the plans

and actions taken by the firm in aneffort to obtain its intended purpose.

ANALYSIS

DECISIONS

IMPLEMENTATIONS

EVALUATIONS

Strategic

management

Strategy analysis, the first stage of strategic

management, involves the examination of the

firms external and internal environments. We

will consider them in turn.

For a public company, these goals

are normally understood as being

the maximization of the

shareholders returns.


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Analyzing External Environment: Five Forces Model

Industry can be defined as a group of

organizations that share similar

resource requirements, such as raw

resource materials, labour, technology,

or customers.

The five forces model proposes that the relationship between five forces and the

incumbent (existing) firms determines the attractiveness of the industry environment.

Analysing this relationship allows a company to make strategic decisions on how topositions itself within the industry so as to maximize its chances of achieving its goals.

5. RIVALRYAMONGEXISTING

FIRMS

2. SUPPLIERS

(Bargaining power

of suppliers)

1. POTENTIALENTRANTS

(Threat of newentrants)

3. BUYERS

(Bargaining power

of buyers)

4. SUBSTITUTES

(Threat ofsubstituteproducts)

The interaction of the five forces

(substitutes, suppliers, new entrants,

buyers, existing firms) affects the

attractiveness of the industry (externalenvironment).


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Five Forces Model:1.Threat of New Entrants

When new companies enter a given industry, they

aim to gain a market share. As a result, the profits of

the incumbent (already present) firms can beaffected. To protect its positions, incumbent firms

aim to create entry barriers for the newcomers.

Economies of Scale. Spreading the cost of production over the number

of units produced creates economies of scale for incumbents that

newcomers lack. This increases the cost of entry and lowers its risk.

Capital Requirements. In some industries high capital requirements

(mining/airlines) creates barriers for new entrants, reducing risk of entry.

Switching Cost. High switching costs (buyers psychological or monetary

cost of changing suppliers) creates additional entry barriers, reducing risk.

Distribution Channels. Low access to distribution creates another barrier

to entry. Incumbents control over distribution reduces risk of new entry.

Other Costs. Costs independent of scale, such as patents, proprietary

products, legal and government policies also create barriers to entry.

BARRIE

RSTOENTRY




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Five Forces Model:2. Bargaining Power of Suppliers

Suppliers provide raw materials, technologies, and skills to incumbent

firms within the industry. The bargaining power of suppliers has direct

effect on the industry profitability and firms performance becausesuppliers can demand higher prices or threaten to reduce the quality

of products and services.

POWER OF SUPPLIERS

1. When the raw materials the supplier

provides are critical to the incumbent inthe industry, the supplier has greater

power over the firms in the industry and

can demand higher prices.

CRITICALITY OF

RESOURCES

NUMBER OF

SUPPLIERS

2. When the number of suppliers availablerelative to the number of incumbents is

low, the suppliers have greater power of

the firms in the industry and can demand

higher prices.

2. SUPPLIERS

(Bargaining powerof suppliers)


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Five Forces Model:3. Bargaining Power of Buyers

Buyer power is the power that individuals or organizations

purchasing the goods and services have over the firms

providing them. Buyers can affect profitability by playingcompetitors against each other, demanding lower prices

or better quality product.

Undifferentiated Products. When incumbents provide similar products,

the buyers choose among them on the basis of price, increasing price

competition.

Importance of Products to Buyers. When products or services are critical

to buyers, the power of buyers is diminished.

Number of Incumbents. The higher the number of incumbent firms, the

higher the power of the buyers and vice versa.

BARGAININGPO

WEROFBUYE

RS Switching Costs. The bargaining power of buyers increases as the

switching costs decreases (buyers can easily switch to competitor)

3. BUYERS

(Bargaining powerof buyers)


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Five Forces Model:4. Threat of Substitutes and 5. Rivalry among the Existing Firms

Profitability and the general environment of

the industry is affected by the level of

rivalry among the incumbent firms that

exist within the industry.

RIV

ALRYAMONGEXISTINGFIRM

S

Lack of Differentiation and Switching cost. When products and services are

undifferentiated and cost of switching is low, the rivalry among firms is high.

Numerous or Equal Competitors. When there are many competitors, thelikelihood of maverick strategic action is high. Also, similar competitors

target similar market niches, increasing close competition.

High Exit Barriers. High exit barriers are strategic or emotional factors that

prevent firms from withdrawing from competition (e.g. visible fixed cost,

social pressure, management and government commitment).

The availability of substitute products and

services in other industries affects the

profitability of a given industry.

4. SUBSTITUTES

(Threat of

substituteproducts)


FIRMS


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Who might find this

model useful?


FIRMS

2. SUPPLIERS

(Bargaining powerof suppliers)



3. BUYERS

(Bargaining powerof buyers)

4. SUBSTITUTES

(Threat of

substituteproducts)

Five Forces Model

What are some of

the limitations of this

model?


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Analyzing Internal Environment

How a firm organizes its resources and capabilities plays a crucial role in how well it

performs within the industry environment. To do so effectively, the firm needs to know

its resources and capabilities. This is why it is important to complement the analysis ofthe external environment with the assessment of the internal environment of the firm.

1. Financial resources include debt,equity, retained earnings, etc

2. Physical resources include the machines,

production facilities, plants, and buildings

3. Human resources include the experience,knowledge, judgement, risk-propensity, and

wisdom of individuals associated with the firm

The internal environment of the firm includes the

following resources and capabilities:

4. Organizational resources include the firms history, relationships,

trust, reporting structure, organizational culture, management control

systems, and compensations policies


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Analyzing Internal Environment: VRIO Model

VRIO Model: To achieve sustainable competitive advantage, the managers must

assess their resources and capabilities by raising the questions about their value, rarity,

imitability, and organization. Managers should aim to maximize these parameters.

SustainableCompetitiveAdvantage

Question ofValue

Question of

Imitability

Question ofOrganization

Question of

Rareness

Question of Value: Do firms resources and

capabilities add value to the goal of capturing market

share?

Question of Rareness: Are the firms

resources and capabilities rareenough to provide it a competitive

advantage other firms lack?

Question of Organization: Is the firm

organized to exploit effectively the rare and

valuable resources and capabilities it has?

Question of Imitability: How quickly

other firms can imitate the rare andvaluable resources and capabilities

the company has?


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SWOT AnalysisStrength, Weaknesses, Opportunities, and Threats

The two models discussed (VRIO and Five Forces Model) are complementary: They

provide a picture of the presence of threats and opportunities within the externalenvironment as well as the picture of the firms internal strengths and weaknesses to

deal with these challenges.

VRIO ANALYSIS

Strengths

Weaknesses

FIVE FORCEMODEL ANALYSIS

Opportunities

GeneralEnvironmental trend

Threats

GeneralEnvironmental trend

Firms that strategically usetheir internal strengths to

exploit environmental

opportunities and neutralize

environmental threats, while

avoiding internal weaknesses,

are likely to increase marketshare, sales, and profitability

than other firm.


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So, now we have an idea

how to analyze the external

and internal environment of

the firm using the two

models and SWOT.

But how should we

approach developing andimplementing strategies to

pursue our long term goals?

ANALYSIS

DECISIONS

IMPLEMENTATIONS

EVALUATIONSStrategic

management

Managers can pursue strategiesfor long-term performance at two

levels: Business Level andCorporate Level. We will consider

them in turn.


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1. Business Level Strategies

Business level strategies are strategies aimed at competing in a given market. They

can be roughly divided into three generic strategies: (1) cost leadership; (2) product

differentiation; and (3) focus.

Product Differentiation aims to gain competitive advantage

by increasing the perceived value of their product/services

relative to that of competitors either by varying product

features or by improving its brand perception. Firms can

better deal with new entrants, competitors, suppliers, and

substitutes, but must ensure lasting value.

Cost Leadership aims to gain competitive advantage by

reducing economic cost below the cost of competitors

through economies of scale, learning economies, or access

to low cost resources. This enables high profit margins and

flexibility in dealing with the five industry forces.

Focus strategy aims to gain competitive advantage by

focusing on a particular, narrow market and serving its

needs better than the competitors. This could be achieved

either by differentiating the product for this group or

lowering costs in serving it.

THREEBUSIN

ESSLEVELST

RATEGIES


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So, if Business Level

strategies assist us in making

strategic decisions on how todevelop in a given market,

then what does Corporate

Level strategies do?

Corporate Level strategiesassist us in making decisionson what market to compete inand how these markets can be

managed to create synergiesfor high performance.


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What are some of the

examples of diversifications

that achieve Economies ofScope?

Bell Canada provides cell phones and

internet services through its retail stores.

Roger does the same for cable, cell, and

internet services.

Second Cup sells its coffee in

coffee houses and other stores

(Swiss Chalet)
http://www.torontoplace.com/directory/Telecommunications/Rogers/15-126-0.htmlhttp://www.torontoplace.com/directory/Telecommunications/Rogers/15-126-0.html


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2. Corporate Level Strategies: Types

Related Diversification: When a firm expands into a related market, integrating

horizontally across related businesses, it can enjoy the benefits of the economies

of scope, lower costs, and higher revenues due to synergies. It also provides

competitive advantages and greater leverage with suppliers.

There are three types of diversification: related, unrelated, and vertical.

TYPES

OF

DIVERSIFIC

ATION

Unrelated Diversification: When a firm expands into unrelated market, it

experiences few benefits from synergies (holding companies). Firms pursue

unrelated diversification believing that synergies will be achieved through sharing

of competence in corporate office management skills (restructuring, finances)

Vertical Integration: When a firm pursues expansion of its value chain activitiesby integrating preceding (e.g. suppliers) or successive (e.g. retail) processes in

achieves vertical integration. This can secure raw materials and distribution

channels, control their costs and quality, reduce supplier/retail dependence, or

increase revenues (if they are profitable). But this also can make management

more complicated.


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examples of related

diversification?


examples of unrelated

diversification?


examples of vertical

integration?

P&G creates synergies by leverages its

marketing skills to promote relatedproducts. Lowes leverages its core

competence to expand into Canada.

ONEX holding is

involved in electronics,

logistics, health-careinsurance, and

transportation

Both Ben& Jerrys and Apple sells its

product and services through independent

retailers and its own stores.

2 C L l S i M


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2. Corporate Level Strategies: Means

Internal Development: Firms can achieve diversification through internal

development (e.g. new products). Although this allows to control the process

and capture all revenues, it also requires extensive resource commitment and

time to develop relevant competence (risk).

There are a number of ways to achieve diversification, each with its own

advantages and disadvantages. They are (a) internal development; (b) mergers

and acquisitions; (c) strategic alliance.

MEANS

OFDIVERSIFICA

TION

Mergers and Acquisitions: Firms can achieve fast diversification through mergeror acquisitioneither merging with another firm under a new identity or buying a

majority stake in the other firm. Although this can save costs and give fast access

to new skills and materials, mergers present administrative difficulties related to

joining companies with distinct organizational cultures (e.g. employee turnover)

Strategic Alliance: Firms can achieve diversification through forming strategicalliances to work together for a common goal. When firms work together on the

basis of a contract it is called a non-equity alliance. When one firm has a partial

ownership of the other, it is an equity alliance. Finally, when firms contribute

resources to forming a new independent entity, it is called joint venture. Although

alliances allow sharing of share risks and quick access to resources/skills, they

also lead to shared profits and risks partner selection.


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lecture #4 - business strategy

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