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Master in International Trade Business

Madrid
Barcelona
Valencia
Strategic management
www.esic.edu

Sevilla
Zaragoza
Málaga
Galicia
Pamplona
Bilbao
Granada
D. Fernando Flores Bas AA: 2019-2020
Classes outline

1. The concept of strategy


INDEX
2. Managing strategy tools

3. Analysis of competitive advantage

4. Digitalisation; a key part of the strategy

5. Strategy formulation

6. New values in strategic innovation

7. Strategy implementation

8. Organisation structure alignment

9. Board of directors role within the strategy

2
Managing strategic tools
Initial assessment

T
H
E Environment analysis • Business &
corporate
P strategies
R
Strategy formulation
O
C
E
S Strategy implementation
S Tools
• BCG matrix
Monitoring and results
evaluation • GE – Mckinsey matrix
• Internal – External matrix
• Porter´s generic strategies
• Ansoff matrix
• Corporate type of strategies
• Evaluation strategy test

3
Strategy formulation
Competing in the present, preparing for the future…

Strategy as positioning Strategy as a direction

• Where are we competing? • What do we want to become?


• Product market scope • Vision statement
• Geographical scope
• What do we want to achieve?
• Vertical scope
• Mission statement
• How are we competing? • Performance goals
• What is the basis of our
competitive advantage? • How we will get there?
• Guidelines for development
• Priorities for capital
expenditure, R&D, etc.
• Growth modes: organic,
alliances, M&A, etc.

4
Strategy formulation definition

● Method to design the firm strategy, both at corporate level and for each single
type of business

– Business unit strategy: how the firm competes within a particular industry or market. Is
concerned with establishing competitive advantage and the source of the competitive
advantage/s in a business

– Strategy at corporate level: where a firm competes; decisions over the scope of the firm´s
activities, including product scope, geographical scope, decisions regarding diversification,
acquisitions, new ventures, etc. and allocation of resources among them

● But before, a proper strategic analysis of the current situation is required…..


– Corporate portfolio analysis (assessment or pre – strategy formulation)

5
BCG matrix
● Used to evaluate the strategic position of a firm´s brand portfolio, SBUs, business lines or
customers and determine its potential

● The matrix considers industry attractiveness and competitive position


– Market growth (industry attractiveness)
– Market share (competitive position)

● The general purpose of the analysis is to help understand, which brands the firm should invest
in and which ones should be divested

High

MARKET
GROWTH Medium
RATE

Low
Low Medium High
MARKET SHARE RATE

6
BCG matrix

High

MARKET
GROWTH Medium
RATE

Low

Low Medium High

MARKET SHARE RATE

7
BCG matrix
Cash flow generation

High

Large negative Cash consumer


MARKET cash flow Cash neutral
GROWTH Medium
RATE

Cash consumer Large positive


Modest cash flow cash flow
Low

Low Medium High

MARKET SHARE RATE


Disaster sequence
Successful sequence

8
BCG matrix
Dilemma
– High growth market but low market share
High – Consume large amount of cash and do not
generate much cash
– No consolidation has been achieved in a very
competitive, but growing market
MARKET – Potential to gain market share and become a
star for a later move to cash - cow
GROWTH Medium
– Because of the high growth environment they
RATE can be seen as a “cash sink”

Low

Low Medium High

MARKET SHARE RATE

9
BCG matrix

High
Star
– High market share in a fast-growing market
MARKET – Require high investments to maintain
competitiveness and leadership
GROWTH Medium
– Re-invest profits to gain consumers (cash
RATE generators and cash users)
– Marginally profitable but as they reach a
mature status, returns becomes more
attractive
– Expected to become cash-cows and
Low positive cash flows
generate

Low Medium High

MARKET SHARE RATE

10
BCG matrix
Cash cow
– High market share in a slow-growing
industry
– Generates cash in excess of the amount of
cash needed to maintain business
High
– As the market matures, the need for
investment reduces
– Loyal customers and low distribution cost

MARKET
GROWTH Medium
RATE

Low

Low Medium High

MARKET SHARE RATE

11
BCG matrix
Dog
– Low market share in slow growth market
High – May well have been cash cows
– In general, they are not worth investing in
because they generate low or negative cash
– Often they enjoy misguided loyalty from
management, although some dogs can be
MARKET revitalised
GROWTH Medium – Profits are, at best, marginal
RATE

Low

Low Medium High

MARKET SHARE RATE

12
BCG matrix highlights

CHARACTERISTICS CASH COW DOG DILEMMA STAR

Weak
MARKET GROWTH Growth
Declining Fast expansion Fast expansion

MARKET SHARE High Weak Weak High

PRODUCT Provides Consume Demand


High investment
CHARACTERISTICS profitability resources resources

Low, unstable, Low, stable,


EARNINGS High, stable Low, unstable
growing growing

Invest for
Invest (to Invest (if
Liquidation or growth (will
STRATEGIC OBJECTIVES maintain current
divestment
potential) or
replace cash
level) or harvest divestment
cows)

13
BCG matrix; advantages and disadvantages

● Advantages
– Simple variables and fast analysis
– Businesses, products, channels, brands or clients can be graphically represented
– Provides priorities despite the enormous amount of information
– Good starting point for a further detailed analysis

● Disadvantages
– Centred in a coupled of variables and the use of “high” and “low” to form four categories is too simplistic
– Assumes that market share and profitability are directly related
– Considers every business as independent: ignores interdependence and synergies
– Many businesses are positioned in the middle of the matrix
– Considers the product or business in relation to the largest player only; ignores the impact of small
competitors whose market share is rising fast

14
BCG matrix exercise

% of Largest Brand´s Market


Revenues Relative
Brands corporate competitor´s market growth
(000´s) market share
revenues market share share rate

1 $ 500 50% 20% 20% 1.00 2%

2 $ 300 30% 30% 7% 0.23 10%

3 $ 100 10% 45% 25% 0.55 15%

4 $ 100 10% 10% 1% 0.10 17%

15
GE/Mckinsey matrix

● Maps the business units on a grid of the industry and its strategic position in that industry
A 4 3 2 1
T
T High
Invest and
Invest and grow Hold and maintain
I R grow
(Strong) (Opportunistic)
(Selective)
N A
D C 3
U T Invest and grow
Hold and
Medium maintain Harvest or divest
S I (Selective)
(Selective)
T V 2
R E
Y N Hold and
Harvest or
maintain Harvest or divest
E (Protection)
divest
S Low 1
S Strong Average Weak
COMPETITIVENESS POSITION

● The GE matrix, however pretends some improvements


– Industry attractiveness: market growth, profitability, size, pricing policies, accessibility, competitors penetration...
– Business unit strength or competitiveness: market share, trade marks, technology, distribution..

16
GE/Mckinsey matrix
● Used to establish three main recommendations
– Growth, maintain or harvest

A 4 3 2 1
T
T High
Invest and
Invest and grow Hold and maintain
I R grow
(Strong) (Opportunistic)
(Selective)
N A
D C 3
U T Invest and grow
Hold and
Medium maintain Harvest or divest
S I (Selective)
(Selective)
T V 2
R E
Y N Hold and
Harvest or
maintain Harvest or divest
E (Protection)
divest
S Low 1
S Strong Average Weak
COMPETITIVENESS POSITION

● Subjectivity and certain risk due to the number of criteria

17
GE/Mckinsey matrix; attractiveness assessment
● Select the elements or components to compare: business units, products, brands, etc.

● Define key industry factors – criteria – that are relevant to determine the industry
attractiveness

A 4 3 2 1
T
T High
Invest and
Invest and grow Hold and maintain
I R grow
(Strong) (Opportunistic)
(Selective)
N A
D C 3
U T Invest and grow
Hold and
Medium maintain Harvest or divest
S I (Selective)
(Selective)
T V 2
R E
Y N Hold and
Harvest or
maintain Harvest or divest
E (Protection)
divest
S Low 1
S Strong Average Weak
COMPETITIVENESS POSITION

18
GE/Mckinsey matrix; attractiveness assessment
Possible key factors for industry attractiveness

● Market factors ● Competitive factors


– Size of the market – Type of competitors
– Growth rate – Competitors structure
– Potential growth – Competitors power
– Life cycle – Market share
– Potential differentiation – Risk of product substitution
– New entrants to the market – Ability for switching suppliers
– Bargaining power – ………..
– Entry/exit barriers ● Financial and economic factors
– Profitability – Margin
– Market stability – Margin evolution
– …………. – Economies of scale and experience
– Utilisation of capacity
● Technological factors – ………..
– Investment requirements ● Social factors
– Technology maturity – speed of change – Social tendencies and attitude
– Access to raw materials – Laws and regulations
– …………. – Unions, consumers associations
– …………….
19
GE/Mckinsey matrix; attractiveness assessment
RATING WEIGHTED a. Select key attractiveness factors
ATTRACTIVENESS FACTORS WEIGHT (*)
1–5 SCORE

Size 0.15 4 0.60 b. Weigh each factor in terms of relative importance in


achieving corporate objectives (0 – 1.0 and total will
Rate of growth 0.10 3 0.30 be equal to 1.0)
Pricing 0.05 3 0.15
Market accessibility 0.05 3 0.15 c. Rate the attractiveness of the industry on these
factors
Competitive structure 0.05 3 0.15
a. 1 = very unattractive
Differentiation possibilities 0.15 3 0.45 b. 5 = very attractive
Customers concentration 0.10 5 0.50
Industry profitability 0.20 3 0.60 d. Calculate weighted score

Inflation vulnerability 0.05 3 0.15


(*) Some criteria may be a GO/NO GO type. For example
Energy impact 0.05 3 0.15 many firms would decide not to invest in industries that
are viewed negatively by the society, even if they were
Social GO 4 - both, legal and very profitable

Environment GO 4 -
Legal GO 4 -
Human 0.05 4 0.2
TOTAL 1 3.4
20
GE/Mckinsey matrix; competitiveness assessment

● Define key success factors that are relevant to determine the (strength) competitive
position of a firm within a market

A 4 3 2 1
T
T High
Invest and
Invest and grow Hold and maintain
I R grow
(Strong) (Opportunistic)
(Selective)
N A
D C 3
U T Invest and grow
Hold and
Medium maintain Harvest or divest
S I (Selective)
(Selective)
T V 2
R E
Y N Hold and
Harvest or
maintain Harvest or divest
E (Protection)
divest
S Low 1
S Strong Average Weak
COMPETITIVENESS POSITION

21
GE/Mckinsey matrix; competitiveness assessment
Possible key success factors for the firm competitive positioning

● Market positioning ● Capabilities


– Market share – Experience and skills

– Segments market share – Distribution effectiveness

– Range of products and services – Differentiation from the competitors

– Pricing, advertising, promotions – Customer service levels

– Customer service fulfilment – Organisation and management

– Customer´s quality perception – Market characteristics knowledge

– …………….. – ………………

● Economic and technology positioning


– Margins
– Cost positioning
– Production capacity
– Leadership in technology and know – how
– Patents
– …………..
22
GE/Mckinsey matrix; competitiveness assessment
RATING WEIGHTED a. Identify key factors for success in the industry
KEY SUCCESS FACTORS WEIGHT (*)
1–5 SCORE

Market share 0.10 5 0.50 b. Weigh each success factor in terms of its relative
importance to profitability or achieving corporate
SBU growth rate 0.10 3 0.30 objectives (0 – 1.0 and total will be equal to 1.0)
Sales distribution effectiveness 0.20 4 0.60
Key account advantages - 4 - c. Rate the SBU / product strength competitive
positioning on each factor
Price competitiveness - 3 -
a. 1 = very weak competitiveness
Advertising & promotion b. 5 = very strong competitiveness
0.10 4 0.40
effectiveness
Facilities location 0.05 4 0.20 d. Calculate weighted score
Capacity and productivity - 3 -
Experience curve effect 0.15 4 0.60 (*) For any particular industry, there will be some factors
that, while important in general, will have little or no
Raw materials cost 0.05 4 0.20 effect on the relative competitive position of firms within
that industry. It is better to drop such factors from the
Relative product quality 0.15 5 0.75 analysis than to assign them very low weights

Research and development


0.05 4 0.20
position
General image/reputation 0.05 5 0.25

TOTAL 1 4.0
23
GE/Mckinsey matrix
4 3 2 1

A 4 ● Businesses with high ratings in both


T WINNER Invest WINNER QUESTION MARK parameters do have excellent
High and grow Invest and grow Hold and maintain profitability expectations and should
T (Strong) (Selective) (Opportunistic)
I R INVEST AND GROW
N A 3
D C
U T
WINNER AVERAGE LOSER ● Businesses with low ratings in both
Medium Invest and grow Hold and maintain
Harvest or divest parameters do have negative
S I (Selective) (Selective)
T V expectations and should be
R E 2 HARVEST OR DIVEST
Y N PROFIT
Low PRODUCER LOSER LOSER
E
Hold and maintain Harvest or divest Harvest or divest ● Businesses within the other situations
S (Protection)
should be HOLD AND MANTAINED
S 1
Strong Average Weak

COMPETITIVENESS POSITION

24
IFE/EFE matrix
● IFE matrix (internal factors evaluation) is an strategic tool to evaluate how a company is
performing in regards to identified internal strengths and weaknesses

● Steps
‒ List internal factors; strengths and weaknesses (10 factors max.)
‒ Assign weights according to the relative importance of the factor to being successful in the firm´s
industry. Weights are industry based
‒ Rate factors on the scale from 1 to 4. Rating captures whether the factor represents a major weakness
(rating = 1), minor weakness (rating = 2), minor strength (rating = 3) and major strength (rating = 4)
‒ Weighted score; adding the weighted scores for each factor to construct the IFE matrix

● A real understanding of individual factors included in the IFE matrix is still more important
than the actual numbers

25
IFE matrix
WEIGHTED
Key internal factors WEIGHT RATING 1 – 4
SCORE
Strengths
iTunes platform is a good revenue stream 0.10 4 0.40
Customer loyalty that makes the customer price insensitive 0.10 3 0.30
No debts means Apple capacity of investing in other
0.15 4 0.60
sectors
Existing products are of high quality while compared to
0.10 3 0.30
competing products in the markets
Strong brand that is quite popular among customers 0.15 4 0.60
Apple products are hard to imitate 0.15 3 0.45

Weakness
Apple is too much dependent on product launches 0.15 2 0.30
Poor relations with other key players like Microsoft 0.05 1 0.05
Strong presence only limited to few countries 0.05 1 0.05
TOTAL 1 3.05

26
IFE/EFE matrix
● EFE matrix (external factors evaluation) is an strategic tool to visualise and prioritise the
opportunities and threats that the industry is facing

● Steps
– List external factors; opportunities and threats (10 max.)
– Assign weights according to the relative importance of the factor to being successful in the firm´s
industry. Weights are industry based
– Rate factors on the scale form 1 to 4. Rating indicates how effective the firm´s current strategies respond
to the factor. Respond is poor (rating = 1), respond is below average (rating = 2), respond is above
average (rating = 3) and respond is superior (rating = 4)
– Weighted score; adding the weighted scores for each factor to construct the EFE matrix

● Factors to be included should be those coming from political, economic, social, technological,
environmental and legal variables

27
EFE matrix

WEIGHTED
Key external factors WEIGHT RATING 1 – 4
SCORE
Opportunities
Increase presence in other countries 0.10 3 0.30
New product development 0.20 2 0.40
Increase virus and worn attack protection 0.10 3 0.30
Government crackdown on illegal downloading sites 0.10 3 0.30
Threats
Various existing illegal file sharing websites 0.05 3 0.15
Economic downturn 0.10 2 0.20
Competition from established competitors 0.15 2 0.30
Perception that Apple´s product are not compatible 0.10 2 0.20
Very few suppliers 0.10 3 0.30
TOTAL 1 2.45

28
IE/EFE matrix
4 3 2 1
High
WINNER
WINNER QUESTION MARK
Invest and
Invest and Grow Hold and maintain
Grow
(Selective) (Opportunistic)
(Strong)
E
F 3
E
WINNER AVERAGE
LOSER
Medium Invest and Grow Hold and maintain
S (Selective) (Selective)
Harvest or divest
C
O 2
R
E PROFIT
PRODUCER LOSER LOSER
Hold and maintain Harvest or divest Harvest or divest
(Protection)
Low
1
Strong Average Weak

IFE SCORE
29
IE/EFE matrix strategies
4 3 2 1
High Market penetration, market
development and product development
Grow and build
Backward integration, forward
E integration, horizontal integration
F 3
E
Market penetration and
S Medium Hold and maintain
product development
C
O 2
R
E Revitalise business or
Harvest or exit
aggressive cost management
Low
1
Strong Average Weak

IFE SCORE
30
Strategy formulation definition

● Method to design the firm strategy, both at corporate level and for each single
type of business

– Business unit strategy: how the firm competes within a particular industry or market. Is
concerned with establishing competitive advantage and the source of the competitive
advantage/s in a business

– Strategy at corporate level: where a firm competes; decisions over the scope of the firm´s
activities, including product scope, geographical scope, decisions regarding diversification,
acquisitions, new ventures, etc. and allocation of resources among them

31
Types of competitive strategies

Competitive advantage
M. Porter model
Low cost Uniqueness

Broad market scope Cost leadership Differentiation


Targeted market Concentration Concentration
Narrow market scope
(costs) (differentiation)

● Cost leadership: manufacturing efficiency or process efficiency

● Differentiation: product perceived as unique in the market

● High segmentation: specialisation in a group of consumers

The key is to be different from competitors

32
Types of competitive strategies

● Cost leadership: product or services cheaper than those offered by competitors


– Wal-Mart, Ryanair, Southwest Airlines, Tata Motors, etc

● Differentiation leadership: involves the creation of products or services that are perceived
by customers (and even suppliers) as unique

– Lexus, Bang & Olufsen, TAG Heuer, Mckinsey & Co., Miele, BMW, etc.

33
Types of competitive strategies
● Cost leadership: product or services cheaper than those offered by competitors
– Wal-Mart, Ryanair, Southwest Airlines, Tata Motors, etc

● Characteristics
– Product with a weak consumer implication
– Massive distribution
– High inventory turnover
– High purchasing volume
– Efficient manufacturing: economies of scale, standardisation and production technology, capacity of
utilisation, learning curve, etc.
– Tight cost control and low level of general expenses
– Part of the economies of scales are transferred to the customers or consumers
– Manufacturing plants located in countries with low purchasing power

34
Types of competitive strategies
Using value chain in cost analysis
Approach to perform a value chain analysis depending on the
competitive advantage a company wants to create

Cost advantage Differentiation advantage


Organisation competes on costs and want to understand The firm that strive to create superior products or services
the sources of their cost advantage or disadvantage and use differentiation advantage approach
the factors driving those costs

Step 1 – Identify customer´s value – creating


Step 1 – Identify primary and support activities
activities

Step 2 – Establish the relative importance of each Step 2 – Evaluate the differentiation strategies
activity in the total cost of the product for improving customer value

Step 3 – Identify the best sustainable differen-


Step 3 – Identify cost drivers for each activity
tiation

Step 4 – Identify links between activities

Step 5 – Identify opportunities for reducing costs

35
Types of competitive strategies
Automobile manufacturing company that competes on cost advantage
Infrastructure: corporate strategy, planning, finance, information systems, legal services
Using value chain in cost analysis
Technology, research and development

Human resources, operations management, general management

Purchasing Assembly
Design and Sales and Distribution and
materials testing and
Step 1 engineering marketing dealer support
& components quality control

Step 2 $ 164 M $ 410 M $ 534 M $ 384 M $ 230 M

Advertising
AVG
expenditure ratio Number of dealers
Step 3 Sales per model purchases per Capacity utilisation
versus sales or sales per dealer
supplier
volume

1. High quality assembling process reduces testing and control activities; 2. Locating plants near suppliers
Step 4 or dealers reduces purchasing or distribution costs; 3. Fewer model designs reduce assembling costs; 4.
Higher order size increase warehousing cost

1. Create just one model design for different regions to cut cost in design and engineering, to increase
Step 5 order sizes, simplify assembling and quality control and to lower marketing costs;
2. Manufacture components inside facilities to eliminate transaction costs of buying them in the market
and to optimise plant utilisation

36
Types of competitive strategies
● Differentiation leadership: involves the creation of products or services that are perceived
by customers (and even suppliers) as unique
– Lexus, Bang & Olufsen, TAG Heuer, Mckinsey & Co., Miele, BMW, etc.

● Characteristics
– Product with high consumer implication
– Selective distribution
– Intensity of marketing activities
– Design and technology
– Quality, product/service guarantee, brand image, complementary services, etc.
– Skills and experience of employees
– High level of investment in the development of new products, new features for current products and
services, location (retail stores)

37
Types of competitive strategies
Using value change to identify differentiation

IT that supports fast Training to support Unique product features


response capabilities customer service excellence Fast new product development

Infrastructure: corporate strategy, planning, finance, information systems, legal services


ACTIVITIES
SUPPORT

Technology, research and development, design

Human resources, operations management, general management

Procurement, Warehouse and


ACTIVITIES
PRIMARY

Inventory mgment, distribution


Sales and Distribution support
materials Operations
marketing and customer service
(Outbound
(inbound logistics) logistics)

Quality of Defect free Fast delivery, Customer support,


components and products, Building brand consumer credit,
efficient order reputation
materials wide variety processing after-sale service

Differentiation adds cost


38
Types of competitive strategies
Cost leadership Differentiation leadership

Advantages: Advantages:
● Barriers to entry with economies of scale and ● Differentiation acts as a barrier entry
experience ● Creates customer loyalty
● Strong positioning in front of competitors and also ● High prices and margins
customers and suppliers
● Bargaining power with customers and suppliers

Disadvantages: Disadvantages:
● Product and processes obsolescence in case of lack ● Usually, difficulties to obtained high market share
of investments ● Attracts imitators – followers
● Substitute products developed by competitors ● Very sensible to consumer preferences
● Technology changes could have substantial impact ● Price and differentiation could be imbalanced
in economies of scale and experience
● Changes on costs might be sensible to profitability

39
Business strategy growth
Ansof Matrix

MARKET PRODUCT
M Current
A PENETRATION DEVELOPMENT
R
K
E
T MARKET
DIVERSIFICATION
S New DEVELOPMENT

Current New
PRODUCTS

40
Business strategy growth

Market penetration Increase sales of current products in current markets:

● Increase market share


M MARKET PRODUCT ● Increase usage or consumption of current products:
A Current
PENETRATION DEVELOPMENT ‒ Frequency of use: shower gel, toothpaste, etc.
R
K ‒ Increase per–capita consumption: Danone yogurts, campaign
E
MARKET
“consume Spanish wines”, etc.
T
New DIVERSIFICATION
‒ New product applications: instant soups, baking soda as a fridge
S DEVELOPMENT
deodorizer, cotton swabs, etc.

Current New
● Attract new users: margarine consumers to butter, wine consumers to
beer, banking products
PRODUCTS

Market penetration strategy is the least risky since it leverages many of the firm's existing resources and capabilities. In a
growing market, simply maintaining market share will result in growth, and there may exist opportunities to increase market share if
competitors reach capacity limits. However, market penetration has limits, and once the market approaches saturation another
strategy must be followed if the firm is to continue to grow

41
Business strategy growth

Market development Introduce current products in new markets:

● New market segments: Coffee, water, sport drinks, milk, cars, etc.
M MARKET PRODUCT ● Geographical expansion: regional, national, international
A Current
R
PENETRATION DEVELOPMENT ● New distribution channels: a strategy between market penetration and
market development
K
E
MARKET
‒ Pharma “traditional” products (cosmetic products, oral care)
T through hypermarkets, supermarkets and convenient stores
New DIVERSIFICATION
S DEVELOPMENT
‒ Books through new-stands, airports, , etc.
‒ Sandwiches, drinks, chocolates in vending machines, convenient
Current New
stores or petrol stations
PRODUCTS
‒ Internet, eCommerce

Market development options include the pursuit of additional market segments or geographical regions. The development of new
markets for the product may be a good strategy if the firm's core competences are related more to the specific product than to its
experience with a specific market segment. A market development strategy typically has more risk than a market penetration strategy

42
Business strategy growth
Develop new products for current markets:
Product development
● Additional features: ABS, Airbag, hybrid...
● Enlarge product range: Gillette – female depilation range of products; Coca –
MARKET PRODUCT
M Cola with the launch of “Zero”, Mars confectionary, Mars ice – cream, Mars
A Current drinks, etc.
PENETRATION DEVELOPMENT
R
K ● Improve quality: courtesy car when the vehicle is under repair, all inclusive
E price of some cars – i.e. Lexus, car pick – up and/or delivery when checking is
MARKET
T needed
New DIVERSIFICATION
S DEVELOPMENT
● New flankers or product refreshment: new packaging for beers, ice –
creams, etc.
Current New ● New products: tablets, smart – phone, voice service devices, etc.
PRODUCTS
● New services: private houses for tourists, freelance drivers… under a market
place model

Product development strategy may be appropriate if the firm's strengths are related to its specific customers rather than to the specific
product itself. In this situation, it can leverage its strengths by developing a new product targeted to its existing customers. Similar to the
case of new market development, new product development carries more risk than simply attempting to increase market share

43
Business strategy growth

Ansof Matrix

Market penetration

MARKET PRODUCT Market development


M Current
Product development
A PENETRATION DEVELOPMENT
R
K
E
T MARKET
DIVERSIFICATION
S New DEVELOPMENT
Internal
diversification

Current New
PRODUCTS

44
Business strategy growth

Diversification ● Basis for a diversification


‒ Superior profit potential of the industry to be entered or..
M MARKET PRODUCT ‒ Ability to create a competitive advantage in the new industry
A Current
PENETRATION DEVELOPMENT
R
● Why diversification for a firm?
K
E ‒ Growth (traditional markets saturation)
MARKET
T
S
New DIVERSIFICATION ‒ Reduce global risks
DEVELOPMENT
‒ Opportunities to invest excess of cash
Current New ‒ Reinforce current competitive position
PRODUCTS ‒ New technologies with potential further usage in current businesses

Diversification is the most risky of the four growth strategies since it requires both product and market development. Going into an
unknown market with an unfamiliar product offering..., lack of experience in the new skills and techniques required…., significant expanding
of human and financial resources, which may detracts focus, commitment and sustained investments in the core business….. Diversification
may be a reasonable choice if the high risk is compensated by the chance of a high rate of return

45
Mergers and acquisitions
● Diversification occurs also when a firm looks outside of its current operations and buys
access to new products or markets

– Mergers: two or more firms combine operations to form one corporation, perhaps with a new
name. This requires the agreement by the shareholders of the two companies. These firms are
usually of similar size. One goal of a merger is to achieve management synergy by creating a
stronger management team

– Acquisitions: or takeover is where one company purchases another. The purchased


corporation loses its identity. The acquired company and its assets may be absorbed into an
existing business unit or remain intact as an independent subsidiary within the parent company.
○ Acquisitions usually occur when a larger firm purchases a smaller company and can be friendly or
unfriendly when the board of the targeted firm are opposed

● Justification for mergers and acquisitions


– Acquiring tangible or intangible resources, organisation capabilities, cost economies, market power,
geographical extension and it is the predominant mode of diversification for firms

46
Competitive advantage from diversification
● Economies of scope
– Efficiencies when using a resource across multiple activities; uses less of that resource than
when the activities are carried out independently

● Economies of scale
– Economies of scope are cost economies from increasing the output of multiple products
– Economies of scale are related to cost economies from increasing output of a single product

● Economies from internalising or externalising transactions


– Are economies of scope better exploited internally or within the firm through diversification or
externally through market contracts with independent firms

47
When diversification will truly create shareholder value
Porter´s test

1. Attractiveness test: industry attractiveness or capacities to make it attractive


The industry that has been chosen has to be either attractive or capable of being made attractive. An
attractive industry will yield a high return on investment, but entry barriers will be high, customers and
suppliers will have only moderate bargaining power and there will be only a few substitute products. An
unattractive industry will be swamped by a range of alternative products, high rivalry and high fixed costs

2. Entry cost test: should not jeopardise future business profit


The cost of entry must not capitalise all future profits. If the cost of entry is so high that jeopardise the
potential return on investment, profitability is eroded before the game has started

3. The better–off test: the new business must obtain a competitive advantage that do not exit at
corporate level
The new business must either gain competitive advantage from its link with the corporation or vice-versa.
How will the acquisition provide advantage to either the acquirer or the acquired?

48
Strategy formulation definition

● Method to design the firm strategy, both at corporate level and for each single
type of business

– Business unit strategy: how the firm competes within a particular industry or market. Is
concerned with establishing competitive advantage and the source of the competitive
advantage/s in a business

– Strategy at corporate level: where a firm competes; decisions over the scope of the firm´s
activities, including product scope, geographical scope, decisions regarding diversification,
acquisitions, new ventures, etc. and allocation of resources among them

49
Types of corporate strategy
● Comprises all businesses that belongs to the firm, markets and industries in
which business is developed with appropriate distribution of resources

– Concentration: Boeing – centred on aviation manufacturing activities; Coca – Cola centred in


soft drinks

– Vertical integration: Heineken (Cruzcampo) – Tavern´s franchising “Gambrinus” ; L´Oreal and


The Body Shop

– Horizontal integration: Jaguar acquisition by Tata Motors, Santander and Abbey

– Concentric diversification: Nestea (alliance with Nestlé); Google acquisition of Motorola;


Microsoft acquisition of Nokia

– Conglomerate diversification: Mitsubishi – banks, chemical, automobile, electronic, air


conditioned, industrial automation, industrial visual information systems, elevators, hotels,
aluminium, etc.

50
Types of corporate strategy

Ansoff Matrix
Products Technologically Technologically
related non related
Customers
M MARKET PRODUCT N
A Current PENETRATION DEVELOPMENT E
R W Same type Horizontal Diversification
K
E
T MARKET M
Same type
S New DIVERSIFICATION
A Supplier – Customer
Vertical Diversification
DEVELOPMENT
R
K
New Similar type Concentric Diversification
Current E
PRODUCTS
T
S
Concentric Conglomerate
Different type
Diversification Diversification

NEW PRODUCTS

51
Types of corporate strategy
● Concentration strategy – most of the turnover comes from a primary line of business
– McDonald's – centred in fast food - burgers
– Boeing – centred on aviation manufacturing activities

● In a concentration strategy a firm directs all or most of its resources to a single market
(business), to a single product or a single technology

● In this strategy, a company chooses to pursue a large share of one or a few markets
(businesses)

● An inherent risk for this kind of strategy occurs when the demand in the market
suddenly drops or if a strong competitor enters the same market

52
Types of corporate strategy
● Vertical integration strategy – the degree to which a firm owns its upstream suppliers
and its downstream buyers
– Expansion of activities downstream is known as forward integration and expansion upstream is
known as backward integration

Industry Level of integration


value chain Forward Backward Balanced

Raw materials

Intermediate goods

Manufacturing

Marketing & Sales

After-sales services

53
Types of corporate strategy
● Vertical integration strategy – the degree to which a firm owns its upstream suppliers
and its downstream buyers
– Expansion of activities downstream is known as forward integration and expansion upstream is
known as backward integration

Level of integration
Industry
None Partial Full
value chain

Raw materials

Intermediate goods

Manufacturing

Marketing & Sales

After-sales services

54
Types of corporate strategy
● Vertical integration strategy – the degree to which a firm owns its upstream
suppliers and its downstream buyers
– Expansion of activities downstream is known as forward integration and expansion upstream
is known as backward integration

● Avon – its primary line of business has been the selling of cosmetics door–to–door. Avon achieved a
backward form of vertical integration by entering into the production of its cosmetics

● ESPN is a key element of Disney’s operations within the television business. Rather than depend on
outside production companies to provide talk shows and movies centered on sports, ESPN created its
own production company achieving a backward integration

● Levi Strauss & Co – traditionally a manufacturer of clothing, has diversified forward by opening retail
stores to market its textile products rather than producing them and selling them to another firm to retail

● Apple ownership of its own branded stores. Apple stores are popular in part because store employees
are experts about Apple products. The opening of Apple stores in relevant cities all over the world is a
forward integration
55
Types of corporate strategy
Benefits of vertical integration
● Technical economies from the
physical integration of processes
Vertical integration is effective when:
Value chain for steel cans – Few distributors/suppliers are available in the industry
– Suppliers/distributors or retailers have high profit margins
Iron ore
mining Market
– Suppliers/distributors are unable to meet firm´s needs

Steel
contracts
– Industry is expected to grow significantly
production Vertical – Pricing instability
integration
Steel trip – There are benefits of stable production and distribution
production
Market
contracts
– The firm has enough resources and capabilities to manage the
Can making integration
Vertical
integration &
market
Canning of contracts
food, drinks,
oil, etc.

The sources of transaction


cost in vertical exchanges
56
Types of corporate strategy
Issues

Value chain for steel cans


– Differences in optimal scale between different stages of
production; i.e. FEDEX to build its own vehicles?

Iron ore – Developing distinctive capabilities; i.e. IT specialists in


mining Market manufacturing or distribution are distinctive to their business
contracts
Steel – Managing strategically different businesses; i.e. manufacturing
production Vertical and retailing require different capabilities
integration
Steel trip
production – Incentive problems; i.e. vertical integration changes the incentives
Market
contracts
between vertically related businesses and the priorities..
Can making
Vertical – Competitive effects; i.e. the risk of damaging the competitive
integration &
market
position of its original business
Canning of contracts
food, drinks, – Flexibility; i.e. Apple or Microsoft products manufactured by
oil, etc.
contract manufacturers
The sources of transaction
cost in vertical exchanges – Compounding risk; i.e. problems at one stage of production might
threaten production and profitability at other stages. A strike is a
good example

57
Types of corporate strategy
Smartphones Industry Automotive Industry

Design Raw materials


Apple, Huawei, HTC, ArcelorMittal, Baosteel,
Sony, Nokia, Samsung POSCO, Nippon Steel

Software Components
Apple, Google, RIM, Denso, Bosch, Aisin,
Microsoft & others Seiki, Continental,
Hyundai, Magna
Value chain
Manufacturing integration...
Flextronic, Foxconn, HTC, Assembly
LG, Samsung & others Ford, GM, Hyundai,
Nisan, Toyota, VW

Marketing & Sales


Importing & Exporting
Apple, Huawei, HTC,
Ford, GM, Hyundai, Nisan,
Sony, Nokia, Samsung
Toyota, VW

After-sales services
Verizon, Telefónica, China Marketing & Sales
AT&T, Mobile, Vivo, Ford, GM, Hyundai,
Vodafone, etc. Nisan, Toyota, VW

58
Types of corporate strategy
Informal
Low supplier/ Vertical
customer Integration
relationships
Supplier/
customer
partnerships
Formalisation

Spot Joint Trends


sales/ Ventures
purchases • Collaborative vertical relationships (high-
tech or microelectronics)
• Network of firms sharing knowledge,
Different types of vertical relationships product development and R&D activities
• Equity stakes and profit sharing

Agency • BtoB hubs (Covisint for auto-parts)


agreements • Outsourcing; simple to complex models
Long Franchises (i.e.; virtual corporation)
term
contracts
High

Low Degree of commitment High

59
Types of corporate strategy
● Horizontal integration strategy – the acquisition of additional business activities at
the same level of the value chain
– Horizontal growth can be achieved by internal expansion or by external expansion through
mergers and acquisitions of firms offering similar products and services

● An automobile manufacturer's acquisition of a sport utility vehicle manufacturer: Jaguar


acquisition by Tata Motors

● Disney-Pixar: Mickey and Nemo, Pinocchio and “Toy Story”, “Cinderella” and “Cars”… The
merger of legendary Walt Disney and Pixar was a match made in cartoon heaven. Disney
had released all of Pixar’s movies before, but with their contract about to run out after the
release of “Cars,” the merger made perfect sense. With the merger, the two companies could
collaborate freely and easily

60
Types of corporate strategy
● Horizontal integration strategy can be effective when:
– Organisation competes in growing industry
– Competitors lack of some capabilities, competencies, skills or resources
– Economies of scale with significant impact
– High industry concentration is allowed by governments
– Organisation with enough resources to manage M&A

● Horizontal integration examples (acquiring and acquired)


– Porsche and Volkswagen
– Kraft Foods and Cadbury
– Glaxo Wellcome with SmithKline Beecham
– Mittal Steel with Arcelor
– British Airways and Iberia
– RBS and ABN - Amro

61
Types of corporate strategy
● Concentric diversification strategy – expansion through the set – up or acquisition of
new businesses related with the core business
– Microsoft – operating system, soft. tools, security, antivirus, media, web, etc.
– AT&T acquisition of cable companies to control communication distribution

● Technological similarity between the industries which means that the firm is able to leverage
its technical know-how to gain some advantage
– A manufacturer of an industrial adhesives might decide to diversify into adhesives to be sold via
retailers. The technology would be the same, but marketing effort will have to change; i.e. 3M

● Achieve strategic fit since allows an organisation to achieve synergies


– Avon´s move to market jewellery and fashions through its door – to – door sales force involved
marketing new products through existing channels of distribution
– UPS acquired Overnite to diversify its packaging business into the trucking business

62
Types of corporate strategy
● Conglomerate diversification occurs when a firm diversifies into areas that are unrelated
to its current line of business managing a portfolio of businesses not related to each other
– Mitsubishi – banks, chemical, automobile, electronic, air conditioned, industrial automation, industrial
visual information systems, elevators, hotels, aluminium...
– Union Pacific – railway industry, gas and oil, mining, optic fibre, etc.

● The firm operates in the market with products and/or services that have no technological or
commercial synergies between them, but which may appeal to new groups of customers

● Main reasons of adopting such a strategy

– Improve the profitability and the flexibility of the company

– Get a better reception in capital markets as the company gets bigger

– Even if this strategy is very risky, it could if successful, provide increased growth and profitability

63
Types of corporate strategy
● Alliance: a collaborative agreement between two or more firms, that decide to act
together in order to obtain future common benefits

● Why an alliance?
– Fast and frequent technological changes
– Share know – how: R&D, customers, market knowledge, distribution channels, etc.
– Creation of a network of inter-firms relationships (Zara, Toyota, Benetton)
– Risks in product development (In petroleum most upstream projects are joint ventures)
– Access to new markets
– Share financial support and costs

● Examples
– Star Alliance, Oneworld
– Nissan, Daimler – Benz and Renault
– Google and NASA developing Google Earth
– Starbucks JV with Tata Beverages to break into the Indian retail market
– Nike with Apple to offer real biometric data to an iPhone
– Bulgari Hotels and Resorts; a JV between Marriot and Bulgari
64
Types of corporate strategy
PEUGEOT

and 7% ownership
Joint development
AVTOVAZ
SAAB

10% owned; co-production FIAT


SUZUKI
GM
GM´s network of
international alliances
ISUZU 60%
FUJI
with other automakers owned

40% investment
IBC Vehicles
Ltd. (UK)
SAIC
(Makes vans in UK)

New United Motor DAEWOO


TOYOTA
Manufacturing Inc.
50% owned

(Makes cars in US)

65
Types of corporate strategy
STRATEGIC ALLIANCES

TYPE OF ALLIANCES EXAMPLES

Operating alliances (cooperation) ● Common interest: sector, professional, lobbies, ...

● Marketing budgets (co – branding)

● Branding and know – how

Operating alliances (sharing resources) ● Commercial structure and investments

● Purchasing agreements (buying groups)

● R&D, offices, people, infrastructure, etc.

Strategic alliances (capital investment) ● Joint venture (50/50, minority, management control)

Strategic alliances (M&A) ● Buying a firm, merger of different BU´s, etc.

66
Types of corporate strategy
Fast
1. Market development
Market development Grand
1. Market penetration
M 2. Market penetration Strategy
A 2. Product development
3. Product development
3. Forward integration Matrix
R 4. Horizontal integration
K 4. Backward integration
5. Divestment
E 5. Horizontal integration
6. Liquidation
T 6. Concentric diversification
Medium

G 1. Retrenchment 1. Concentric diversification


R 2. Concentric diversification 2. Horizontal integration
O 3. Horizontal integration 3. Conglomerate diversification
W 4. Conglomerate diversification 4. Joint ventures
T 5. Divestment
H
Slow 6. Liquidation

1 2 3 4

Weak Average Strong


COMPETITIVE POSITION
(Could be measured by an IFE – Internal Factor Evaluation)
67
Evaluation strategy test
● Best formulated strategies have no value if an implementation plan is not effectively put in
place – evaluation strategy test

1. Superior and sustained results

2. External coherence – respond to key success factors as an answer to the market environment

3. Internal coherence – between strategic design and operating design; between execution of activities
and the mission

4. Organisation structure – resources, control and follow – up of objectives and action plan

5. Cooperation structure – alliances with suppliers and customers

68
Evaluation strategy test
● Best formulated strategies have no value if an implementation plan is not effectively put in
place – evaluation strategy test

6. Management leadership – their words and personal example do have significant influence on the
behaviours, thoughts and feelings of those working with them

7. Corporate entrepreneur and innovation – provides a competitive advantage if:


– It is difficult to imitate
– Implementation cost is very expensive for competitors
– Customers perceive the value added
– There is a time – frame to exploit a competitive advantage
– The firm is capable to distribute the product/service

69
Classes outline

1. The concept of strategy


INDEX
2. Managing strategy tools

3. Analysis of competitive advantage

4. Digitalisation; a key part of the strategy

5. Strategy formulation

6. New values in strategic innovation

7. Strategy implementation

8. Organisation structure alignment

9. Board of directors role within the strategy

70
Blue ocean versus red ocean strategy

Business problems Red ocean Blue ocean

Competitiveness Bleeding Innovation

Strategy Beat competitors Make competitors irrelevant

Procedures Continuous improvement Differentiation

Market Standing Create new markets

Improve the service to existing Redefine the customers


Customers
customers and create new customers

Comparison only Comparison with


Benchmarking
with competitors other industries

Products Sale same products Create new products

Use variables that Increase, decrease,


Methods
defines de industry create, eliminate variables

71
Blue ocean versus red ocean strategy

Re-inventing the circus

Indicators Status per year

Audience + 15 million spectators

Global presence + 200 cities over the world

Productions 20 different shows

Revenue $ 1,000 million

Profitability High – 15%/20%

72
Blue ocean versus red ocean strategy

Productions

73
Blue ocean versus red ocean strategy

Business problems Red ocean Blue ocean

Competitiveness Bleeding Innovation

74
Blue ocean versus red ocean strategy

Business problems Red ocean Blue ocean

Make competitors
Strategy Beat competitors
irrelevant

75
Blue ocean versus red ocean strategy

Business problems Red ocean Blue ocean

Procedures Continuous improvement Differentiation

76
Blue ocean versus red ocean strategy

Business problems Red ocean Blue ocean

Market Standing Create new markets

77
Blue ocean versus red ocean strategy

Business problems Red ocean Blue ocean

Improve the service to Redefine the customers


Customers
existing customers and create new customers

78
Blue ocean versus red ocean strategy

Business problems Red ocean Blue ocean

Comparison only Comparison with


Benchmarking
with competitors other industries

79
Blue ocean versus red ocean strategy

Business problems Red ocean Blue ocean

Products Sale same products Create new products

80
Blue ocean versus red ocean strategy

Business problems Red ocean Blue ocean

Use variables that defines Increase, decrease, create,


Methods
de industry eliminate variables

81
Blue ocean versus red ocean strategy

Business problems Red ocean Blue ocean

Competitiveness Bleeding Innovation

Strategy Beat competitors Make competitors irrelevant

Procedures Continuous improvement Differentiation

Market Standing Create new markets

Improve the service to existing Redefine the customers


Customers
customers and create new customers

Comparison only Comparison with


Benchmarking
with competitors other industries

Products Sale same products Create new products

Use variables that Increase, decrease,


Methods
defines de industry create, eliminate variables

82
Blue ocean versus red ocean strategy

Other examples of blue ocean strategies

83
Blue ocean strategy; shifting the focus

● Implementing the new value in innovation..

– Create uncontested market spaces

– Make the competition irrelevant

– Create and capture new demands – looks for serving “non–customers”

– Break the relationship between value and cost

– Align the organisation with its strategic choice

○ Differentiation and low cost when possible

84
Blue ocean strategy; where to look for inspiration

• Look across other industries/sectors

• Look across services or complementary • Long term focus


technology

• Divergence

• Rethink the functional/emotional orientation


• Compelling message to
customers/consumers
• Between the present and the future (trends)

85
Blue ocean strategy; innovation tools

● Innovation tools helps to…..

– Establish an innovation culture that involves the whole organisation

– Discuss innovation opportunities within different areas of the organisation

– Differentiate between technological innovation and real innovation of value

86
Blue ocean strategy; innovation tools
Four actions framework tool (ERRC grip)

Raise Raise the determining factors that


the industry provokes to the
consumers of its products

Factors that today are What factors should be


considered but have no raised well above the
value actually
industry's standard?
Eliminate Create

What factors that the What factors should


A new
industry takes for be created that the
value
granted should be industry has never
eliminated?
curve offered?

New sources of value capable


to generate a new demand and
What factors should be a new strategy for establishing
prices
reduced well below the

Factors that have been


industry's standard?
oversized in the current
race to beat competitors
Reduce 87
Blue ocean strategy; innovation tools
Strategic canvas tool

High National circus


Differenciation

Regional
circus
Low cost

Low

• When the curve of value converges with competitors curve, we are in the middle of a red ocean
• If the curve shows a high positioning among all factors, that implies high level of investments and
therefore we should ask ourselves if a high return for the investment is reflected
• A zigzag curve should rise some question marks about the coherence of the strategy or the
existence of contradictions (high levels in some of the factors and the ignorance of other factors)

88
Blue ocean strategy; differentiation and low cost?

What factors should be Costs Cost savings from


eliminating and
eliminated that the industry
reducing
takes as granted?

What factors should be


reduced well below the
industry standards? Cost advantages
Value from high volume
innovation

What factors should be raised


well above the industry
standards?
Differentiation by
raising and
What factors should be
creating
created that the industry has
Consumer utilities
never offered?

89
Thank you very much
for your attention
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