Lecture 1

Chapter 1: The concept of strategy:

Common elements in successful strategies: Example Queen Elizabeth Lady Gaga
1. Goals that are consistent and long term:
Both display a focused commitment to career goals.
2. Profound understanding of the competitive environment:
The way in which both pursue their careers reveal a deep understanding of the external environment in which they
operate.
Queen Elizabeth: Alert to the changing political environment of monarchy and the mood and needs of the British
people.
Lady Gaga: Awareness of changing economics of music business, the marketing potential of social networking and the
needs of the generation Y.
3. Objective appraisal of resources:
Both have been adept at recognising and deploying the resources at their disposal, being aware of the limits of those
resources and drawn upon resources of others. (Recurrir a los recursos de otros).
Queen Elizabeth: Her family, royal household and network of royal supporters
Lady Gaga: Variety of talents in her Hous of Gaga (stylist, designer, photographer, manager, etc.).
4. Effective implementation:
Without effective implementation, the bestlaid strategies are of little use.

Successful Strategy
Key components
of the analysis of
Business
Strategy

Effective Implementation

Clear, Consistent
Long-Term Goals

Profound
understanding of
competitive
environment

Objective appraisal
of resources

The basic Framework for Strategy Analysis:

The 4 elements of a successful strategy are recast into 2 groups: (Strategy form a link between the 2)
o The firm environment: 3 of these elements
Goals and values (Clear, consistent long-term goals)
Resources and Capabilities (Objective appraisal of resources)
Structure and systems (Effective implementation)
o The industry environment: 4th element
Firm relationship with competitors, customers and suppliers (Profound understanding of
competitive environment)
THE FIRM:
- Goals and Values
- Resources and
Capabilities
- Structure and
Systems

Strategy

THE ENVIRONMENT:
- Competitors
- Customers
- Suppliers

A 2-way classification of internal and external forces is superior to the 4-way SWOT framework. Why is it better?
o The key issue is whether it is sensible and worthwhile to classify internal factors into strengths and
weaknesses and external factors into opportunities and threats. In practice such distinctions are difficult and
arbitrary.
o What is important is to carefully identify the external and internal forces that impact the firm, and then analyse
their implications.
o Example: Is global warming a threat or an opportunity for the automobile producers?
By encouraging higher taxes on fuels and restrictions in car usage its a threat.

By encouraging consumers to switch to fuel-efficient and electric cars its an opportunity for new sales.

Strategic Fit:

Refers to the consistency of a firms strategy first with the firms external environment and second with its
internal environment (particularly with goals, values, resources and capabilities).
A major reason for the decline and failure of some companies comes from having a strategy that lacks consistency
with either the internal or the external environment:
o NOKIA: Decline attributed to a strategy that failed to take into account a major change in its external
environment: the growing customers demand for smartphones,
The concept of strategic fit also relates to the internal consistency among the different elements of a firms strategy.
o This notions if internal fit is central to Michael Porters conceptualisation if the firm as an Activity System.
o Strategy is the creation of a unique and differentiated position involving a different set of activities.
o The key is how these activities fit together to form a consistent, reinforcing system.
o RYANAIR: Their strategic position is to be Europes lowest-cost airline providing no-frills to budget-conscious
travellers. This is achieved by a set of activities, which fit together to support that positioning.
Contingency Theory:
o There is no single best way of organising and managing. The best way to design, manage and lead
organisations depends upon circumstances, particularly upon the characteristics of each firms environment.

What is strategy?

Broadest sense: Strategy is the means by which individuals or organisations achieve their objectives.
All definitions have in common the notion that strategy us focused on achieving certain goals, involves allocating
resources and that it implies some consistency and integration of decisions and actions.
Conception of strategy has changed over the past 50 years
As the business environment becomes more unstable and unpredictable, so strategy becomes less concerned with
detailed plans and more about guidelines for success:
o Shift from Strategy as Plan Strategy as Direction
o The more turbulent the environment, the more must strategy embrace flexibility and responsiveness.
o It is under these conditions where strategy becomes more important: when the firm is buffered by threats and
where new opportunities appear. Strategy is the compass to navigate the firm through stormy seas.

Why do firms need strategy?

This transition from strategy as plan to strategy as direction raises the question od why firms need strategy.
Strategy assists the effective management of an organisation:
o Enhancing quality of decision making
o Facilitating coordination
o Focus organisation in the pursue of long-term goals
1. Strategy as Decision Support:
o Simplifies decision making by constraining the range of decision alternatives considered and acts as a
rule of thumb that reduces the search required to find an acceptable solution to a decision problem.
o The strategy-making process permits the knowledge of different individuals to be pooled and integrated.
o It facilitates the use of analytical tools
2. Decision as Coordinating Device:
o Strategy acts as a communication device to promote coordination.
o Statements of strategy are a means by which the CEO can communicate the identity, goals and
positioning of the company to all the organization members.
o Strategic planning process acts as a forum in which views are exchanged and a consensus is developed.
3. Strategy as a Target:
o Strategy is forward looking.
o Not only concerned with how the firm competes now, but also what the firm will become in the future.
o Set aspirations that can motivate and inspire members of the organisation.
o US companies that are sector leaders (Disney, IBM, Ford) have all generated commitment by setting Big,
Hairy, Ambitious goals.
o Inspirational goals are found in organisations statements of vision and mission.
Where do we find strategy?

1.
2.
3.
4.

Most companies see value in communicating their strategy to employees, customers, investors and business
partners.
There are 4 types of statements in which companies communicate their strategies:
o Mission, Vision, Values and Competitive game plan
Mission statement: Describes the organisational purpose. Why do we exist?
Values and Principles statement: What we believe and how will we behave.
Vision statement: What we want to be.
Companys Competitive Game Plan: Objectives, business scope and advantage:
a. Business Scope The products in which and the markets where the firm operates.
b. Advantage How it competes.
Ultimately, strategy becomes enacted in the decisions and actions of the organisations members.
Checking strategy statements against the actual decisions and behaviours is essential to close the gap between
rhetoric and reality. It is useful to ask:
o Where is the company investing its money? Detailed breakdowns of capital expenditures by region and
business segment,
o What technologies is the company developing? Identify patents
o What new products have been released? Major investment projects initiated

Corporate and Business Strategy:

Strategic choices can be divided into two basic questions:
Where to compete? Corporate Strategy
How to compete? Business Strategy
Corporate Strategy:
Defines the scope of the firm in terms of the industries and markets in which it competes.
Include choices regarding diversification, vertical integration, acquisitions, the allocation of resources between the
different businesses of the firm and countries or localities where it operates.
Business Strategy:
Concerned with how the firm competes within a particular industry or market.
If the firm is to prosper within an industry, it must establish a competitive advantage.
INDUSTRY
ATTRACTIVENESS
RATE OF PROFIT
ABOVE THE COST
OF CAPITAL:
How do we make
money?

Corporate Strategy

Which business
should we be in?

COMPETITIVE
ADVANTAGE

Business Strategy

The sources of
superior
profitability
Coca-Cola
example p.21

How do we
compete?

Describing firm Strategy: Competing in the present, preparing for the future:
STRATEGY AS POSITIONING:

STRATEGY AS DIRECTION:

Where are we competing?

-Product market scope
-Geographical scope
-Vertical scope

What do we want to become?

-Vision Statement

How are we competing?

-What is the basis of our
competitive advantage?

What do we want to achieve?

-Mission Statement
-Performance Goals
How will we get there?
-Guidelines for development
-Priorities for capital expenditure
-R & D
-Growth modes: M&A, alliances

Should managers seek to

formulate strategy through a
rational systematic
process? Or is it the best
approach in a turbulent
world to respond to events
while maintaining some
sense of direction in the
form of goals and
guidelines?

Competing for the present

Preparing for the future

Design vs. Emergence MINTZBERG:

Intended Strategy:
o Strategy as conceived of by the top management team
Realized Strategy:
o The actual strategy that is implemented
o Only 10-30% of intended strategy is realized
Emergent Strategy:
o The decisions that emerge from the complex process in which individual managers interpret the intended
strategy and adapt it to changing circumstances.
o Emergent approach permit adaptation and learning through a continuous interaction between strategy
formulation and strategy implementation in which strategy is constantly being adjusted and revised in the light
of experience.
In most of the companies, strategy making combines design and emergence Planned Emergence
The balance between these two depends greatly upon the stability and predictability of the organisations environment.
As the business environment becomes more turbulent and less predictable, so strategy making becomes less about
detailed decisions and more about guidelines and general direction

The Role of Analysis in Strategy Formulation:

Whether strategy is formal or informal, deliberate or emergent, systematic analysis is vital input into strategy
development.
Concepts, theories and analytical tools are complementary, and not substitutes for intuition and creativity.
Their role is to provide frameworks for organizing discussions, processing information and developing
consensus.
Strategy analysis does not offer solutions to problems.
It does not offer algorithms or formulas to get to the optimal strategy to adopt, because strategic questions that
companies face are just too complex to be programmed,
The purpose of strategy analysis is not to provide answers but to help us understand issues.

Summary:

Strategy is a key ingredient for organisations success.

Successful strategies tend to embody 4 elements These 4 elements are the Primary Analytic Components:
o Clear, long-term goals
o Profound understanding of the external environment
o Astute appraisal of internal resources and capabilities
o Effective implementation.

Strategy is no longer concerned with detailed planning based upon forecasts.

Its increasingly about direction, identity and exploiting the sources of superior profitability.

To describe the strategy of a firm we need to recognise:

o Where the firm is competing Corporate Strategy
o How it is competing Business Strategy
o The direction in which it is developed

Developing a strategy for an organisation requires a combination of: (Design vs. Emergence)
o Purpose-led planning Rational Design
o Flexible Response to changing circumstances Emergence

The principles and tools of strategic management have been developed primarily for business enterprises; however,
they are also applicable to guiding the development and decision making of non-for-profit organisations,
especially those that inhabit competitive environments.

Lecture
Chapter 3&4: Industry Analysis / Further Topics in Industry and Competitive Analysis
Chapter 3: Industry Analysis
From Environmental Analysis to Industry analysis:

The business environment of a firm consists of all the external influences that impact its decisions and its performance.
How can managers monitor environmental conditions?
They need a framework for organising information
Effective environmental analysis Distinguish the vital information
For creating value the firm needs to understand its:
o Customers
Industry environment
o Suppliers
o Competitors
It doesnt mean that macro-level factors such as economic trends, demographics, technology and social or political
forces are unimportant for strategy.
The key issue is how these more general environmental factors can affect the firms industrial environment.
National/International
Economy

The natural environment

THE INDUSTRY
ENVIRONMENT:

Technology

Demographics

Customers
Suppliers
Competitors
Government and Political
forces

Social Forces

Strategy is about identifying and

exploiting sources if profit
The starting point for industry analysis is the question: What determines the level of profit in an industry?
The profits earned by firms in an industry are determined by 3 factors:
o The value of the product to the customers
o The intensity of competition
o The bargaining power of industry members relative to their suppliers and buyers
Industry analysis brings all 3 factors into a single analytic framework.

Analysing Industry Attractiveness:

The level of business profitability is neither random, nor the result of entirely industry influences.
It is determined by the industry structure. Different industries supply different products and have different structures,
Theory of how industry structure determines industry profitability is provided by IO (Industrial Organisation)
economics:
o Theory of Monopoly: Monopolist can appropriate in profit the full amount of the value it creates.
o Theory of Perfect competition: Rate of profit falls to a level that just covers firms cost of capital.
In the real world, industries fall between these 2 extremes.
Most manufacturing and service industries are oligopolies: dominated by a small number of major companies.

Concentration
Entry/Exit Barriers
Product differentiation

Perfect Competition
Many Firms
None
Homogeneous product (Commodity)

Oligopoly Duopoly Monopoly

A few
2
1
Significant
High
Potential for product differentiation

Information availability

No impediment to information flow

Imperfect availability of information

Porters 5 forces of Competition Framework:

4 structural variables influencing competition and profitability
Porters five forces framework views the profitability of an industry as determined by 5 sources of competitive pressure.
Profit = Rate of return on capital relative to its cost of capital.
3 Horizontal competition sources: competition from substitutes, entrants and established rivals
2 Vertical competition sources: Power of suppliers and power of buyers
SUPPLIER POWER:
- Buyers price sensitivity
- Relative bargaining power

THREAT OF ENTRY:
- Capital Requirement
- Economies of Scale
- Absolute Cost Advantages
- Product differentiation
- Access to distribution
- Legal Barriers
- Retaliation

SUBSTITUTE
COMPETITION:
INDUSTRY RIVARLY:
- Concentration
- Diversity of competitors
- Product differentiation
- Excess capacity and exit
barriers
- Cost Conditions

- Buyers propensity to
substitute
- Relative process and
performance of substitutes

BUYER POWER:
Price Sensitivity
- Cost of product relative to total cost
- Product differentiation
- Competition between buyers
Bargaining Power
- Size and concentration of buyers relative to
producers
- Buyers switching costs
- Buyers information
- Buyers ability to backward integrate

1. THREAT OF ENTRY:
If a firm earns a return on capital in excess to its cost of capital, it will act as a magnet to firms outside the industry.
If the entry of new firms is unrestricted, the rate of profit will fall toward its competitive level.
Barrier to entry: Any advantage that established firms have over entrants.
The height of a barrier is measured as the unit cost disadvantage faced by the possible entrants.
The principal sources of barriers to entry are:
Capital Requirements:
o The capital costs of becoming established in an industry can be so large to discourage all but the largest
companies.
o Example: Duopoly of Airbus and Boeing is protected by the huge capital costs of establishing R&D, production
and service facilities.
o In other industries, entry costs can be modest: Open a Pizza Hut or a McDonalds.
Economies of Scale:
o In industries that require large, indivisible investments in production facilities or technology or research or
marketing, cost efficiency requires amortizing these costs over a large volume of output.

o
o

The problem is that new entrants enter with a low market share and are forced to accept high unit costs.
Example: Airbus A380 costs 18billion to develop and the company must sell 400 planes to break even.

Absolute cost advantages:

o Established firms may have advantage over entrants, result of the acquisition of low-cost sources of raw
materials.
o Economies of learning: established companies dominance of the market derive from their wealth of
experience.
Product Differentiation:
o In an industry where products are differentiated, established firms posses the advantages of brand recognition
and customer loyalty.
o New entrants need to spend disproportionately heavily in advertising and promotion to gain levels of brand
awareness similar to those of established companies.
Access to channels of distribution:
o For many new suppliers of consumer goods, the principal barrier is to gain distribution.
o Limited capacity within distribution channels (e.g. shelf space), risk aversion by retailers, and the fixed costs
associated with carrying an additional product result in retailers being reluctant to carry new manufacturers
product.
o The battle for supermarkets shelf space between the major food processors disadvantages new entrants.
o The Internet allow new business to overcome this barrier.
Governmental and Legal Barriers:
o Taxicabs, banking, telecommunications and broadcasting, entry usually requires a license from a public
authority.
o In knowledge-intensive industries, patents, copyrights and other forms of intellectual property are major
barriers of entry.
o Regulatory requirements and environmental and safety standards.
Retaliation (Represalias):
o Possible retaliation by established firms.
o Retaliation against a newcomer may take the form of aggressive price-cutting, increased advertising, sales
promotion or litigation
The effectiveness of barriers of entry:
o Industries protected by high entry barriers tend to earn above-average rates of profit.
o Capital requirements and advertising are particularly effective.
o The effectiveness of barriers of entry depend on the resources and capabilities that potential entrants
possesses.
o Barriers that are effective for new entrants can be ineffective for established companies that are diversifying
2. RIVALRY BETWEEN ESTABLISHED COMPETITORS:
In most industries, the major determinant of the overall state of competition and the general level of profitability is
competition among the firms within the industry.
In some industries firms compete aggressively (Price competition)
Others focus on advertising, innovation and other non-price dimensions.
The intensity of competition between established firms is the result of interactions between 6 factors:
Concentration:
o Seller concentration: Number and size distribution of firms competing within a market.
o Measured by the concentration ratio: The combined market share of the leading producers
o In markets dominated by 2 companies (Coca-Cola and Pepsi), prices tend to be similar and competition focus
on advertisement, promotion and product development.
o As the number of firms supplying a market increases, coordination of process become more difficult and it is
more probable that one firm will initiate price-cutting.
Diversity of competitors:
o The extent to which a group of firms can avoid price competition in favour of collusive (secret agreement)
practices depends on how similar they are in their origins, objectives, costs and strategies.
Product Differentiation:

o
o
o

The more similar the offerings among rival firms, the more willing are customers to change between them and
the grater the inducement for firms to cut prices to boost sales.
When products are not differentiated, they become a commodity and only compete on price, leading to price
wars and low profits.
When products that are highly differenced, price competition tend to be weak, even if they are many firms
competing.

Excess Capacity and Exit Barriers:

o They key is balance between demand and capacity.
o Unused capacity encourages firms to offer price cuts to attract new businesses.
Cost conditions, Scale economies and the Ratio of fixed to variable costs:
o When excess capacity causes price competition, how will process go?
o The key factor is cost structure:
o Where fixed costs are high relative to variable costs, firms will take on marginal business at any price that
covers variable costs.
o Scale economies may also encourage companies to compete aggressively on price in order to gain the cost
benefits of greater volume.
3. COMPETITION FROM SUBSTITUTES:
The price that customers are willing to pay for a product depends, in part on the availability of substitute products.
The absence of close substitutes for a product means that the customer are insensitive to price (Demand is inelastic
with respect to price)
The existence of close substitutes means that customers will switch to substitutes in response to price increases
(Demand is elastic with respect to price)
4. BARGAINING POWER OF BUYERS:
The firms in an industry compete in 2 kinds of markets: Inputs and Outputs:
Inputs: Firms purchase raw materials, components and financial and labour services
Outputs: Firms sell their goods and services to customers
The strength of buying power that firms face from their customers depends on 2 set of factors:
Buyers price sensitivity (Output markets):
The extent to which suppliers are sensitive to the process charged by the firms in an industry depends on:
o The greater the importance of an item as a proportion of total cost, the more sensitive buyers will be about the
price to pay.
o The less differentiated the product, the more willing the buyer to switch suppliers on the basis of price.
o The more intense the competition among buyers, the greater their eagerness for price reductions from their
sellers.
o The more critical an industrys products to the quality of the buyers product or service, the less sensitive are
buyers to the prices they are charged.
Relative Bargaining Power
Bargaining power rests on the refusal to deal with the other party. The key issue is the relative cost that each party
sustains as a result of the transaction not being consummated.
Factors that influence the bargaining power of buyers relative to that of sellers:
o Size and concentration of buyers relative to suppliers: The smaller the number of buyers and the bigger
their purchases, the greater cost of loosing one.
o Buyers information: The better-informed buyers are about suppliers and their process and costs, the better
they are able to bargain.
o Ability to integrate vertically: In refusing to deal with other party, the alternative to finding another
supplier/buyer is to do it yourself.
Example: Heinz and Campbells manufacture their own metal cans.
5. BARGAINING POWER OF SUPPLIERS:
Because raw materials, semi-finished products and components are often commodities supplied by small companies
to large manufacturing companies, their suppliers usually lack bargaining power. Commodities suppliers look to boost
their bargaining power through Cartelization.
The suppliers for technically sophisticated or complex components may be able to exert considerable bargaining
power.
Labour unions are important sources of bargaining supplier power.

Applying Industry Analysis to Forecasting Industry profitability (Case study wireless):

Once we understand how industry structure derives competition, which in turn determines industry profitability, we
can apply analysis to forecast industry profitability in the future.
Identifying Industry Structure:
Identify key elements of the business structure
Identify who are the main players (Producers, customers, input suppliers, producers of substitute goods
Forecasting industry profitability:
It is critical that we are able to predict what level of returns the industry is likely to offer in the future.
Current profitability is a poor indicator of future profitability.
If an industrys profitability is determined by the structure of that industry, we can use observations of the structural
trends in an industry to forecast the likely changes un competition and profitability.
Changes in industry structure tend to be the result of fundamental shifts in customer behaviour, technology and firm
strategies.
To predict the future profitability of an industry, the analysis is:
1. Examine how the industrys current and recent levels of competition and profitability are a consequence of its
present structure.
2. Identify the trends that are changing the industrys structure. Are new players seeking to enter?
3. Identify how these structural changes will affect the five forces of competition and resulting profitability of the
industry.